<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement / / Confidential, for Use
of the Commission
Only (as permitted by
Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or Section240.14a-12
GROVE REAL ESTATE ASSET TRUST
(Name of Registrant as Specified In Its Charter)
Not Applicable
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box): Not Applicable
/ / $125 per Exchange Act Rules 0-11(c)(l)(ii), 14a-6(i)(l), or 14a-6(j)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: Not
applicable.
(2) Aggregate number of securities to which transactions applies: Not
applicable.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): Not
applicable.
(4) Proposed maximum aggregate value of transaction: Not applicable.
(5) Total fee paid: Not applicable.
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: Not applicable.
(2) Form, Schedule or Registration Number: Not applicable.
(3) Filing Party: Not applicable.
(4) Date Filed: Not applicable.
<PAGE>
GROVE REAL ESTATE ASSET TRUST
598 ASYLUM AVENUE
HARTFORD, CONNECTICUT 06105
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 1997
---------------------
NOTICE IS HEREBY GIVEN that a Special Meeting (the "SPECIAL MEETING") of the
holders (the "SHAREHOLDERS") of the issued and outstanding common shares of
beneficial interest, $0.01 par value per share (the "COMMON SHARES") of Grove
Real Estate Asset Trust ("GREAT") will be held at , local time on ,
, 1997 at the Hartford Club, 44-48 Prospect Street, Hartford,
Connecticut for the following purposes:
1. To approve the consolidation transactions (the "CONSOLIDATION
TRANSACTIONS") proposed to be entered into by GREAT, involving GREAT, Grove
Operating, L.P. (the "OPERATING PARTNERSHIP"), the Property Partnerships (as
defined herein) and certain of the limited partners (the "LIMITED PARTNERS") of
the Property Partnerships, Grove Property Services Limited Partnership (the
"MANAGEMENT COMPANY"), certain companies and individuals which are affiliated
with GREAT which own the Management Company and general and limited partnership
interests in the Property Partnerships (collectively, the "GROVE COMPANIES"),
and the New Equity Investors (as defined herein). References to the "COMPANY" or
"GROVE PROPERTY" are references, on a consolidated basis, to GREAT and its
subsidiaries (including the Property Partnerships and the Operating
Partnership), giving effect to the consummation of the Consolidation
Transactions. To recognize the significant changes in the business and
operations of GREAT resulting from the Consolidation Transactions, concurrently
with the consummation of the Consolidation Transactions GREAT will change its
name to "Grove Property Trust."
In summary, the Consolidation Transactions:
(A) will result in the consolidation of the holdings and/or control of
GREAT, each of the Property Partnerships and certain assets and liabilities of
the Management Company, thereby transforming the Company into a diversified,
fully-integrated, self-managed real estate investment trust that owns and
operates a diverse portfolio of properties, and
(B) will include, without limitation,
(i) the formation by GREAT of the Operating Partnership (which will be
controlled by Grove Property Trust ("GROVE PROPERTY") as its sole general
partner), to serve as the operating partnership of Grove Property;
(ii) an exchange offer by the Operating Partnership (the "EXCHANGE
OFFER") for the tender by the Limited Partners of any or all of the limited
partnership interests of each Property Partnership in exchange for limited
partnership units in the Operating Partnership ("COMMON UNITS", which Common
Units are redeemable, commencing one year after their issuance, for cash
(based on the fair market value of an equivalent number of Common Shares at
the time of such redemption), or, at the Company's option it may exchange
Common Units for Common Shares on a one-for one basis, subject to certain
antidilution adjustments and exceptions), and, in certain circumstances,
cash, and involving the liquidation of certain Property Partnerships;
(iii) the declaration and issurance by GREAT, immediately prior to the
consummation of the Consolidation Transactions, of a stock dividend
aggregating 26,250 Common Shares and the concurrent effectuation by GREAT of
a 1.125 to 1.0 stock split, thereby issuing on a pro rata basis, a total of
95,130 Common Shares with respect to GREAT's 525,000 currently issued and
outstanding Common Shares (the "STOCK SPLIT"). The Company will not issue
fractional shares in connection with the Stock Split, but rather, will pay
cash in lieu of fractional shares;
<PAGE>
(iv) the private placement of equity securities (the "NEW EQUITY
INVESTMENT"), pursuant to which GREAT and the Operating Partnership will
sell to one or more investors (the "NEW EQUITY INVESTORS") Common Shares and
Common Units totaling, in the aggregate, 3,333,333 Common Shares (giving
effect to the exchange of all Common Units in exchange for Common Shares),
for total gross proceeds to the Company of $30.0 million;
(v) the contribution by GREAT to the Operating Partnership of (a)
GREAT's four properties (the "GREAT PROPERTIES") and related assets in
exchange for 620,130 Common Units and (b) the gross proceeds of the New
Equity Investment received by GREAT, in exchange for a number of Common
Units equal to the number of Common Shares issued by GREAT in the New Equity
Investment;
(vi) the contribution by the Grove Companies of certain assets and
liabilities of the Management Company arising from or used in connection
with property management related services and the Grove Companies' general
and limited partnership interests in each Property Partnership to the
Operating Partnership, in exchange for an aggregate of 934,654 Common Units
to be issued to the Grove Companies;
(vii) the Company entering into new credit facilities (together, the
"CREDIT FACILITY") consisting of (a) a three-year secured revolving
acquisition and working capital facility of up to $25.0 million and (b) an
approximately $15.1 million ten-year term mortgage loan; and
(viii) the use by the Operating Partnership of a portion of the net
proceeds of the New Equity Investment and borrowings under the Credit
Facility to refinance the outstanding mortgage indebtedness of certain of
the Property Partnerships and to acquire certain minority interests in
certain of the Property Partnerships.
2. To approve amendments to GREAT's Second Amended and Restated Declaration
of Trust (the "CHARTER") as follows (collectively, the "Charter Amendments"):
(A) To amend Section 6.4(b) of the Charter to delete the existing
requirement that GREAT receive an independent third party appraisal before
purchasing any property the ownership of which is controlled by the executive
officers of GREAT or their affiliates;
(B) To change the name of GREAT to "Grove Property Trust"; and
(C) To amend the "Excess Shares" provisions of the Charter to minimize the
risk that Grove Property could fail to qualify as a REIT for federal income tax
purposes, and to clarify the "Ownership Limit" as it applies to certain
executive officers of the Company and their affiliates.
3. To adopt GREAT's 1996 Share Incentive Plan (the "1996 PLAN") to (i) make
available up to 900,000 Common Shares for grants of stock options and other
incentive awards and (ii) permit performance-based awards to key employees of
the Company, payable in Common Shares, as incentive compensation upon the
achievement by the Company of enumerated goals.
GREAT is seeking Shareholder approval of the Consolidation Transactions
pursuant to certain requirements of the American Stock Exchange, Inc. (the
"AMEX") regarding the continued listing of the Common Shares on the AMEX.
Approval of the Consolidation Transactions is not required under Maryland law,
the Charter or GREAT's Bylaws. GREAT is seeking Shareholder approval of the
Charter Amendments pursuant to Maryland law and the Charter. GREAT is seeking
approval of the 1996 Plan in accordance with certain provisions of the Internal
Revenue Code of 1986, as amended, as well as pursuant to certain requirements of
the AMEX regarding the continued listing of the Common Shares on the AMEX.
Approval of the Consolidation Transactions (Proposal 1), the Charter Amendments
(Proposal 2) and the 1996 Plan (Proposal 3) by the requisite votes of
Shareholders is a condition to the consummation of the Consolidation
Transactions. Proposal 1, Proposal 2 and Proposal 3 are each conditioned upon
the approval of the other and no such proposals may be approved independently of
the other proposals.
2
<PAGE>
The Company has fixed the close of business on , 1997 as the
record date for the determination of Shareholders of the Company entitled to
notice of and to vote at the Special Meeting. Therefore, only the holders of the
Common Shares at the close of business on that date are entitled to notice of
and to vote at the Special Meeting. Each Common Share is entitled to one vote on
all matters.
By Order of the Board of Trust Managers
Damon D. Navarro
Chief Executive Officer
Hartford, Connecticut
, 1997
YOUR VOTE IS IMPORTANT
TO ENSURE THAT YOUR INTERESTS WILL BE REPRESENTED AT THE SPECIAL MEETING,
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE,
SIGN AND MAIL THE ENCLOSED PROXY PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
IT IS IMPORTANT THAT ALL PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO ATTEND
THE SPECIAL MEETING IN PERSON MAY REVOKE THEIR PROXIES AND VOTE IN PERSON IF
THEY SO DESIRE.
3
<PAGE>
GROVE REAL ESTATE ASSET TRUST
598 ASYLUM AVENUE
HARTFORD, CONNECTICUT 06105
------------------------
PROXY STATEMENT
PRELIMINARY COPY
------------------------
SPECIAL MEETING OF SHAREHOLDERS
, 1997
This Proxy Statement is furnished in connection with the solicitation on
behalf of the Board of Trust Managers (the "BOARD") of Grove Real Estate Asset
Trust, a Maryland real estate investment trust ("GREAT"), of proxies from the
holders (the "SHAREHOLDERS") of GREAT's issued and outstanding common shares of
beneficial interest, $0.01 par value per share (the "COMMON SHARES"), to be
exercised at the Special Meeting of Shareholders to be held on , ,
1997 at The Hartford Club, 44-48 Prospect Street, Hartford, Connecticut 06103,
at local time, and any adjournment(s) or postponement(s) of such meeting
(the "SPECIAL MEETING"), for the purposes set forth in the accompanying Notice
of Special Meeting of Shareholders. The principal executive offices of GREAT are
located at 598 Asylum Avenue, Hartford, Connecticut 06105, telephone (860)
520-4789.
This Proxy Statement and the enclosed Proxy Card are first being mailed to
the Shareholders on or about , 1996.
At the Special Meeting, the Shareholders will be asked to consider and vote
upon the following proposals:
1. The effectuation of the consolidation transactions (the "CONSOLIDATION
TRANSACTIONS") proposed to be entered into by GREAT, involving GREAT, Grove
Operating, L.P. (the "OPERATING PARTNERSHIP"), the Property Partnerships (as
defined herein) and certain of the limited partners (the "LIMITED PARTNERS") of
the Property Partnerships, Grove Property Services Limited Partnership (the
"MANAGEMENT COMPANY"), certain companies and individuals which are affiliated
with GREAT which own the Management Company and general and limited partnership
interests in the Property Partnerships (collectively, the "GROVE COMPANIES"),
and the New Equity Investors (as defined herein). References to the "COMPANY" or
"GROVE PROPERTY" are references, on a consolidated basis, to GREAT and its
subsidiaries (including the Property Partnerships and the Operating
Partnership), giving effect to the consummation of the Consolidation
Transactions. To recognize the significant changes in the business and
operations of GREAT resulting from the Consolidation Transactions, concurrently
with the consummation of the Consolidation Transactions, GREAT will change its
name to "Grove Property Trust."
In summary, the Consolidation Transactions:
(A) will result in the consolidation of the holdings and/or control of
GREAT, each of the Property Partnerships and certain assets and liabilities of
the Management Company, thereby transforming the Company into a diversified,
fully-integrated, self-managed real estate investment trust that owns and
operates a diverse portfolio of properties, and
(B) will include, without limitation,
(i) the formation by GREAT of the Operating Partnership (which will be
controlled by Grove Property Trust ("GROVE PROPERTY") as its sole general
partner), to serve as the operating partnership of Grove Property;
(ii) an exchange offer by the Operating Partnership (the "EXCHANGE
OFFER") for the tender by the Limited Partners of any or all of the limited
partnership interests of each Property Partnership in exchange for limited
partnership units in the Operating Partnership ("COMMON UNITS", which Common
Units are redeemable, commencing one year after their issuance, for cash
(based on the fair
<PAGE>
market value of an equivalent number of Common Shares at the time of such
redemption) or, at the Company's option, it may exchange Common Units for
Common Shares on a one-for-one basis, subject to certain antidilution
adjustments and exceptions), and, in certain circumstances, cash, and
involving the liquidation of certain Property Partnerships;
(iii) the declaration and issuance by GREAT, immediately prior to the
consummation of the Consolidation Transactions, of a stock dividend
aggregating 26,250 Common Shares and the concurrent effectuation by GREAT of
a 1.125 to 1.0 stock split, thereby issuing on a pro rata basis, a total of
95,130 Common Shares (the "STOCK SPLIT") to the holders of the currently
issued and outstanding 525,000 Common Shares. GREAT will not issue
fractional shares in connection with the Stock Split, but rather will pay
cash in lieu of fractional shares.
(iv) the private placement of equity securities (the "NEW EQUITY
INVESTMENT"), pursuant to which GREAT and the Operating Partnership will
sell to one or more investors (the "NEW EQUITY INVESTORS") Common Shares and
Common Units totaling, in the aggregate 3,333,333 Common Shares (giving
effect to the exchange of all Common Units for Common Shares), for total
gross proceeds to the Company of $30.0 million;
(v) the contribution by GREAT to the Operating Partnership of (a)
GREAT's four properties (the "GREAT PROPERTIES") and related assets in
exchange for 620,130 Common Units and (b) the gross proceeds of the New
Equity Investment received by GREAT, in exchange for a number of Common
Units equal to the number of Common Shares issued by GREAT in the New Equity
Investment;
(vi) the contribution by the Grove Companies of certain assets and
liabilities of the Management Company arising from or used in connection
with property management related services and the Grove Companies' general
and limited partnership interests in each Property Partnership to the
Operating Partnership, in exchange for an aggregate of 934,654 Common Units
to be issued to the Grove Companies;
(vii) the Company entering into new credit facilities (together, the
"CREDIT FACILITY") consisting of (a) a three-year secured revolving
acquisition and working capital facility of up to $25.0 million and (b) an
approximately $15.1 million ten-year term mortgage loan; and
(viii) the use by the Operating Partnership of a portion of the net
proceeds of the New Equity Investment and borrowings under the Credit
Facility to refinance the outstanding mortgage indebtedness of certain of
the Property Partnerships and to acquire certain minority interests in
certain of the Property Partnerships.
As a result of the Consolidation Transactions, the number of outstanding
Common Shares (assuming the exchange of all Common Units issued in the
Consolidation Transactions but excluding any Common Shares reserved for issuance
pursuant to GREAT's 1996 Share Incentive Plan) could increase from 525,000
Common Shares to approximately 5.8 million Common Shares.
2. To amend GREAT's Second Amended and Restated Declaration of Trust (the
"CHARTER") as follows (collectively, the "CHARTER AMENDMENTS"):
(A) To amend Section 6.4(b) of the Charter to delete the existing
requirement that GREAT receive an independent third party appraisal before
purchasing any property the ownership of which is controlled by the executive
officers of GREAT or their affiliates;
(B) To change the name of GREAT to "Grove Property Trust"; and
(C) To amend the "Excess Shares" provisions of the Charter to minimize the
risk that Grove Property could fail to qualify as a REIT for federal income tax
purposes, and to clarify the "Ownership Limit" as it applies to certain
executive officers of the Company and their affiliates.
2
<PAGE>
3. To adopt GREAT's 1996 Share Incentive Plan to (i) make available up to
900,000 Common Shares for grants of stock options and other incentive awards and
(ii) permit performance-based awards to key employees of the Company payable in
Common Shares, as incentive compensation upon the achievement by the Company of
enumerated goals.
Only the holders of the Common Shares at the close of business on
, 1997 are entitled to notice of and to vote at the Special Meeting.
------------------------
IN DETERMINING WHETHER TO APPROVE THE CONSOLIDATION TRANSACTIONS, THE
CHARTER AMENDMENTS AND THE 1996 SHARE INCENTIVE PLAN DESCRIBED HEREIN,
SHAREHOLDERS SHOULD CAREFULLY CONSIDER ALL OF THE INFORMATION INCLUDED OR
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT.
FORWARD LOOKING STATEMENTS
THIS PROXY STATEMENT CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF CERTAIN
UNCERTAINTIES SET FORTH BELOW AND ELSEWHERE IN THIS PROXY STATEMENT.
THE FORWARD LOOKING STATEMENTS INCLUDED IN THIS PROXY STATEMENT CONCERNING,
AMONG OTHER THINGS, FUTURE RESULTS OF OPERATIONS, CASH AVAILABLE FOR
DISTRIBUTION, SOURCES OF GROWTH, ECONOMIC CONDITIONS AND TRENDS AND PLANS AND
OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS ARE PROJECTIONS AND ARE
NECESSARILY SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES. ACTUAL OUTCOMES ARE
DEPENDENT UPON THE COMPANY'S SUCCESSFUL PERFORMANCE OF INTERNAL PLANS, ECONOMIC
CONDITIONS IN THE SUBMARKETS IN WHICH THE COMPANY'S PROPERTIES ARE LOCATED SUCH
AS OVERSUPPLY OF RESIDENTIAL MULTI-FAMILY HOUSING OR A REDUCTION IN THE DEMAND
FOR SUCH HOUSING, THE AVAILABILITY OF ACQUISITION FINANCING, COMPLIANCE WITH
APPLICABLE LAWS AND REGULATIONS AND THE SUCCESSFUL MANAGEMENT OF OTHER ECONOMIC,
LEGAL, FINANCIAL AND GOVERNMENTAL RISKS AND UNCERTAINTIES.
------------------------
The date of this Proxy Statement is , 1997.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY.............................................................................. 1
The Special Meeting................................................................ 1
General.......................................................................... 1
Vote by Proxy.................................................................... 3
Voting of Shares; Quorum; Appraisal Rights....................................... 3
Reasons for Soliciting Shareholder Approval...................................... 3
Votes Required................................................................... 4
The Consolidation Transactions (Proposal 1)........................................ 4
Reasons for the Consolidation Transactions; Recommendation of the Board.......... 4
Consolidation.................................................................. 4
Risk Diversification........................................................... 4
Deleveraging................................................................... 5
Access to Capital.............................................................. 5
Investor Interest.............................................................. 5
Potential Adverse Effects of the Consolidation Transactions; Risk Factors........ 5
Conflicts of Interest Could Result in Executive Officer Decisions That Do Not
Necessarily Represent the Best Interests Of Shareholders...................... 5
Reduced Distributions to Shareholders.......................................... 6
Purchase of Properties May Exceed Properties' Fair Market Value................ 6
Limitation on Control of Partially Owned Properties............................ 6
Dependence on Limited Geographical Area........................................ 6
Expansion of the Company Into New Geographic Markets........................... 6
Real Estate Financing Risks.................................................... 6
Dependence on Key Personnel; Limited Experience................................ 6
Risk of Equity Real Estate Investments; Adverse Impact On Ability to Make
Distributions; Effect on Value of Properties.................................. 6
Return of Capital.............................................................. 7
Adverse Tax Consequences of Failure of GREAT to Qualify as a REIT; Adverse Tax
Consequences of Failure of Operating Partnership to Qualify as Partnership.... 7
Inability to Make Required Distributions to Shareholders Could Affect REIT
Status; Potential Requirements to Borrow...................................... 7
Necessity to Maintain Ownership Limits Required to Maintain REIT
Qualification-- Anti-Takeover Effect; Certain Anti-Takeover Provisions May
Inhibit a Change in Control of the Company.................................... 7
Change in Investment and Financing Policies Without Shareholder Approval....... 7
Possible Environmental Liabilities............................................. 7
Possible Adverse Effects on Common Share Price Arising From Shares Available
for Current and Future Sales.................................................. 7
Possible Adverse Effects on Common Share Pricing from Possible Common Share
Repurchases................................................................... 7
Uninsured Loss................................................................. 7
Regulation..................................................................... 7
Adverse Consequences of Election to Revoke REIT Election by the Company........ 7
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Parties to the Consolidation Transactions........................................ 8
GREAT.......................................................................... 8
The Grove Companies............................................................ 8
The Operating Partnership...................................................... 9
The Management Company......................................................... 9
The Property Partnerships...................................................... 9
Terms of the Consolidation Transactions.......................................... 10
General........................................................................ 10
Formation of the Operating Partnership......................................... 10
The Exchange Offer............................................................. 10
Stock Split.................................................................... 10
New Equity Investment.......................................................... 10
The Consolidation.............................................................. 11
The Charter Amendments......................................................... 12
The 1996 Plan.................................................................. 12
The Refinancing................................................................ 12
Conditions to Consummation of the Consolidation Transactions................... 12
Structure of the Company......................................................... 13
After the Consolidation Transactions........................................... 14
The Properties................................................................... 15
The Company...................................................................... 16
Benefits to Related Parties; Conflicts of Interest; Interests of Certain
Persons......................................................................... 17
The Charter Amendments (Proposal 2)................................................ 20
Proposal to Delete the Third Party Appraisal Requirement......................... 20
Proposal to Change the Name of GREAT............................................. 20
Proposal to Amend the Excess Shares Provisions................................... 20
The 1996 Plan (Proposal 3)......................................................... 20
Sources and Uses of Funds.......................................................... 21
Capitalization Table............................................................... 22
Summary Selected Financial and Operating Data...................................... 23
THE SPECIAL MEETING.................................................................. 26
Outstanding Shares and Voting Rights............................................... 26
Record Date...................................................................... 26
Quorum........................................................................... 26
Voting Rights.................................................................... 26
No Appraisal Rights.............................................................. 26
Reasons for Seeking Shareholder Approval......................................... 26
Vote Required...................................................................... 27
Vote Required to Approve the Consolidation Transactions (Proposal 1)............. 27
Vote Required to Approve the Charter Amendments (Proposal 2)..................... 27
Vote Required to Approve the 1996 Plan (Proposal 3).............................. 27
Proxies............................................................................ 27
APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1).............................. 29
Information About GREAT............................................................ 29
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Information About the Grove Companies.............................................. 29
Information About the Operating Partnership........................................ 30
Information About the Management Company........................................... 31
Information About the Property Partnerships........................................ 31
Reasons for the Consolidation Transactions; Recommendation of the Board............ 32
Consolidation.................................................................. 32
Risk Diversification........................................................... 32
Deleveraging................................................................... 32
Access to Capital.............................................................. 32
Investor Interest.............................................................. 32
Potential Adverse Effects of the Consolidation Transactions; Risk Factors.......... 33
Conflicts of Interest Could Result in Executive Officer Decisions that Do Not
Necessarily Represent the Best Interests of Shareholders........................ 33
Risks of Equity Real Estate Investments; Adverse Impact on Ability to Make
Distributions; Effect on Value of Properties.................................... 33
Purchase Price of Properties May Exceed Properties' Fair Market Value............ 35
Limitation on Control of Partially Owned Properties.............................. 36
Dependence on Limited Geographic Area............................................ 36
Expansion of the Company Into New Geographic Markets............................. 36
Real Estate Financing Risks...................................................... 37
Dependence on Key Personnel; Limited Experience of Management.................... 38
Return of Capital................................................................ 39
Adverse Tax Consequences of Failure to Qualify as a REIT......................... 39
Adverse Tax Consequences of Failure to Qualify as Partnerships................... 39
Inability to Make Required Distributions to Shareholders Could Affect REIT
Status; Potential Requirements to Borrow........................................ 40
Necessity to Maintain Ownership Limit Required to Maintain REIT Qualification;
Anti-Takeover Effect............................................................ 40
Certain Anti-Takeover Provisions May Inhibit a Change in Control of the
Company......................................................................... 41
Possible Environmental Liabilities............................................... 42
Possible Adverse Effects on Common Share Price Arising from Shares Available for
Current and Future Sale......................................................... 43
Changes In Investment and Financing Policies Without Shareholder Approval........ 44
Uninsured Loss................................................................... 45
Adverse Effect on Trading Market for Common Shares; Reduction in Public Float.... 45
Adverse Consequences of Election to Revoke REIT Election by the Company.......... 46
Terms of the Consolidation Transactions............................................ 47
Formation of the Operating Partnership........................................... 47
The Exchange Offer............................................................... 47
General........................................................................ 47
Property Partnership Amendments................................................ 47
New Equity Investment............................................................ 48
The Consolidation................................................................ 48
The Charter Amendments........................................................... 50
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Proposal to Delete the Third Party Appraisal Requirement....................... 50
Proposal to Change the Name of GREAT........................................... 50
Proposal to Amend the Excess Shares Provisions................................. 50
The Refinancing.................................................................. 50
Refinancing.................................................................... 50
Revolving Credit Facility...................................................... 51
Long-Term Facility............................................................. 51
Interest Rate Protection....................................................... 52
Current Indebtedness........................................................... 53
Anticipated Pro Forma Indebtedness............................................. 55
Stock Split...................................................................... 56
Conditions to Consummation of the Consolidation Transactions..................... 56
Stock Split.................................................................... 57
Property Partnership Amendments................................................ 57
New Equity Investment.......................................................... 57
Shareholder Approval........................................................... 57
Third Party Consents........................................................... 57
Refinancing.................................................................... 57
The Properties..................................................................... 57
Description of the Properties.................................................... 58
Ownership of the Properties...................................................... 62
Acquisition of the Properties.................................................... 62
Valuation of the Properties and Other Assets; Allocation of Common Units......... 63
Allocation of Common Units..................................................... 63
Operating Partnership Valuation................................................ 63
Property Partnerships Valuation................................................ 63
GREAT Properties Valuation..................................................... 65
Management Company Valuation................................................... 65
Benefits to Related Parties; Conflicts of Interest; Interests of Certain Persons... 66
Benefits to Related Parties...................................................... 66
Conflicts of Interest............................................................ 67
PROPOSAL TO AMEND THE CHARTER (Proposal 2)........................................... 68
General............................................................................ 68
Description of the Charter Amendments.............................................. 68
General.......................................................................... 68
Description of Proposed Amendment to Delete the Third Party Appraisal
Requirement..................................................................... 68
Description of Proposed Amendment to Change the Name of GREAT.................... 68
Description of Proposed Amendment to the Excess Shares Provisions................ 68
Reasons for the Charter Amendment.................................................. 70
Reasons for Proposed Amendment to Delete the Third Party Appraisal Requirement... 70
Reasons for Proposed Amendment to Change the Name Of GREAT....................... 71
Reasons for Proposed Amendment to the "Excess Shares" Provisions................. 71
Vote Required...................................................................... 71
PROPOSAL TO ADOPT THE 1996 SHARE INCENTIVE PLAN...................................... 72
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
General............................................................................ 72
Awards Granted to Employees........................................................ 72
Options.......................................................................... 72
SARs............................................................................. 73
Restricted Stock Awards.......................................................... 73
Other Share-Based Awards......................................................... 74
Performance-Based Awards......................................................... 74
Options Granted to Non-Employee Trust Managers..................................... 75
1996 Share Incentive Plan; New Benefits Table...................................... 76
Administration; Change of Control.................................................. 77
Amendment and Termination.......................................................... 78
Authorized Shares; Other Provisions; Non-Exclusivity............................... 78
Federal Income Tax Consequences.................................................... 79
Vote Required...................................................................... 81
THE COMPANY.......................................................................... 82
General............................................................................ 82
Business Objectives and Operating Strategies....................................... 82
Acquisition Strategy............................................................... 83
General.......................................................................... 83
Redevelopment.................................................................... 84
Future Acquisitions.............................................................. 84
Markets............................................................................ 84
General.......................................................................... 84
Multi-Family Market.............................................................. 86
Rental Rates and Occupancy....................................................... 87
Competition........................................................................ 87
Property Management Services....................................................... 87
General.......................................................................... 87
Property Management Services..................................................... 88
Accounting Services.............................................................. 88
Property Marketing............................................................... 88
Construction Services............................................................ 89
Distribution Policy................................................................ 89
Selected Financial and Operating Data.............................................. 92
Management's Discussion and Analysis of Financial Results and Results of
Operations....................................................................... 94
Overview........................................................................... 94
Historical Results of Operations................................................... 94
Results of Operations for the Management Company and the Property Partnerships
for the nine months ended September 30, 1996 compared to the nine months ended
September 30, 1995.............................................................. 94
Results of Operations for the Management Company and the Property Partnerships
for one year ended December 31, 1995, compared to the year ended December 31,
1994............................................................................ 96
Results of Operations of GREAT for the nine months ended September 30, 1996,
compared to the nine months ended September 30, 1995............................ 97
</TABLE>
v
<PAGE>
<TABLE>
<S> <C>
Results of Operations for GREAT for the year ended December 31, 1995, compared to
the combined pro forma Results of Operations of GREAT for the year ended
December 31, 1994............................................................... 98
Liquidity and Capital Resources.................................................... 98
The Management Company and the Property Partnerships............................. 99
GREAT............................................................................ 100
Capital Expenditures............................................................... 101
The Mangement Company and Property Partnerships.................................. 101
GREAT............................................................................ 101
Inflation.......................................................................... 101
Funds from Operations.............................................................. 101
The Management Company and the Property Partnerships............................. 102
GREAT............................................................................ 102
Policies With Respect to Certain Activities........................................ 102
General.......................................................................... 102
Investment Objectives and Policies............................................... 102
Dispositions..................................................................... 103
Financing Policies............................................................... 103
Other Policies................................................................... 103
Regulation......................................................................... 104
General.......................................................................... 104
Americans with Disabilities Act.................................................. 104
Fair Housing Amendments Act of 1988.............................................. 104
Rent Control Legislation......................................................... 105
Environmental Matters.............................................................. 105
Insurance.......................................................................... 106
Legal Proceedings.................................................................. 106
MANAGEMENT........................................................................... 107
Trust Managers and Executive Officers.............................................. 107
Committees of Trust Managers....................................................... 110
Compensation of Trust Managers..................................................... 110
Non-Competition Agreements......................................................... 111
DESCRIPTION OF CAPITAL STOCK......................................................... 111
Common Shares in General........................................................... 111
Indemnification and Potential for Shareholder Liability............................ 112
Rights with Respect to Dividends and in the Event of Liquidation
Voting Rights...................................................................... 112
Other Rights....................................................................... 112
Shareholder Approval Requirements.................................................. 112
Preferred Shares in General........................................................ 112
Classification or Reclassification of Common Shares or Preferred Shares............ 113
Restrictions on Transfer........................................................... 113
Reports............................................................................ 115
</TABLE>
vi
<PAGE>
<TABLE>
<S> <C>
MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS................... 115
CERTAIN PROVISIONS OF MARYLAND LAW AND OF GREAT'S DECLARATION OF TRUST AND BYLAWS.... 116
Board of Trust Managers............................................................ 116
Removal of Trust Managers.......................................................... 117
Business Combinations.............................................................. 117
Control Share Acquisitions......................................................... 117
Amendment of the Declaration of Trust.............................................. 118
Dissolution........................................................................ 118
Advance Notice of Trust Manager Nominations and New Business....................... 118
Maryland Asset Requirements........................................................ 119
THE OP PARTNERSHIP AGREEMENT......................................................... 119
Management......................................................................... 119
Indemnification.................................................................... 119
Transferability of Interests....................................................... 119
Additional Funds................................................................... 120
Issuance of Additional Common Units................................................ 121
Distributions...................................................................... 121
Limited Partner Redemption/Exchange Rights......................................... 121
Registration Rights................................................................ 121
Tax Matters........................................................................ 121
Operations......................................................................... 122
Duties and Conflicts............................................................... 122
Representations and Warranties..................................................... 122
Term............................................................................... 122
SHARES AVAILABLE FOR FUTURE SALE..................................................... 122
General............................................................................ 122
Registration Rights................................................................ 124
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................... 125
Beneficial Ownership Tables........................................................ 126
</TABLE>
vii
<PAGE>
<TABLE>
<S> <C>
EXECUTIVE COMPENSATION
Summary Compensation Table......................................................... 127
Individual Option/SAR Grants in Last Fiscal Years.................................. 128
Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR
Values........................................................................... 128
Compensation of Trust Managers..................................................... 129
Employment Agreements; Non-Competition Agreements.................................. 129
Limitation of Liability and Indemnification........................................ 130
Executive Bonus Incentive Plan..................................................... 130
1994 Share Option Plan............................................................. 131
1996 Share Incentive Plan.......................................................... 132
Deferred Stock Grants.............................................................. 132
401(k) Plan........................................................................ 132
FEDERAL INCOME TAX CONSIDERATIONS.................................................... 133
Taxation of the Company............................................................ 133
General.......................................................................... 133
Requirements for Qualification................................................... 134
Ownership of Partnership Interest................................................ 135
Income Tests..................................................................... 135
Asset Tests...................................................................... 137
Annual Distribution Requirements................................................. 137
Failure to Qualify................................................................. 138
Taxation of Taxable U.S. Shareholder Generally..................................... 138
Backup Withholding................................................................. 139
Taxation of Tax-Exempt Shareholders................................................ 140
Taxation of Non-U.S. Shareholders.................................................. 140
Distributions.................................................................... 141
Sale of Common Shares............................................................ 142
Backup Withholding Tax and Information Reporting................................. 142
New Proposed Regulations......................................................... 143
Tax Aspects of the Operating Partnership........................................... 143
General.......................................................................... 143
Entity Classification............................................................ 143
Partnership Allocations.......................................................... 144
Tax Allocations with Respect to the Properties................................... 144
Basis in Operating Partnership Interest.......................................... 145
Other Tax Consequences............................................................. 145
ERISA CONSIDERATIONS................................................................. 146
Plan Assets -- In General.......................................................... 146
Application of the Regulation to GREAT............................................. 146
Application of the Regulation to the Operating Partnership......................... 148
CERTAIN RELATIONSHIPS AND TRANSACTIONS............................................... 149
Transactions With Executive Officers............................................... 149
Receipt of Common Units by Executive Officers.................................... 149
</TABLE>
viii
<PAGE>
<TABLE>
<S> <C>
Employment Agreements............................................................ 149
Purchase of Cambridge Estates Apartments......................................... 150
Purchase of Burgundy Studio Apartments........................................... 150
NAVAB Associates Loans............................................................. 150
Loans by NAVAB Associates........................................................ 150
Loans to NAVAB Associates........................................................ 150
Guarantees by Damon and Brian Navarro.............................................. 150
Loans from the General Partners and Affiliates of the General Partners............. 150
Transactions With the Grove Companies.............................................. 150
Certain Fees and Payments........................................................ 150
National Realty.................................................................. 151
Management Services.............................................................. 152
The Contribution Agreement....................................................... 152
Grove Coastal Associates, L.P...................................................... 153
GLOSSARY............................................................................. 154
AVAILABLE INFORMATION................................................................ 160
INCORPORATION BY REFERENCE........................................................... 160
SHAREHOLDER PROPOSALS................................................................ 160
APPENDIX I--Charter Amendments
APPENDIX II--The 1996 Plan
</TABLE>
ix
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS PROXY
STATEMENT. THE SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
SET FORTH ELSEWHERE IN THIS PROXY STATEMENT AND THE APPENDICES AND FINANCIAL
STATEMENTS INCLUDED HEREIN OR ATTACHED HERETO AND INCORPORATED BY REFERENCE
HEREIN. SHAREHOLDERS ARE URGED TO READ THIS PROXY STATEMENT IN ITS ENTIRETY.
UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROXY STATEMENT
ASSUMES (I) THE MINIMUM PERCENTAGE CONDITION IS SATISFIED AS TO EACH PROPERTY
PARTNERSHIP AND THE PROPERTY PARTNERSHIP AMENDMENTS ARE APPROVED BY THE
REQUISITE VOTE OF THE LIMITED PARTNERS OF EACH PROPERTY PARTNERSHIP, (II) THE
COMPLETION OF THE TRANSACTIONS RESULTING IN THE CONSOLIDATION, INCLUDING THE NEW
EQUITY INVESTMENT AND THE REFINANCING, (III) THE COMMON UNITS OF GROVE
OPERATING, L.P. ISSUED IN CONNECTION WITH THE CONSOLIDATION TRANSACTIONS ARE NOT
REDEEMED OR EXCHANGED FOR COMMON SHARES, (IV) GREAT ISSUES 3,333,333 COMMON
SHARES PURSUANT TO THE NEW EQUITY INVESTMENT, AT A PRICE OF $9.00 PER COMMON
SHARE RESULTING IN GROSS PROCEEDS TO GREAT OF $30.0 MILLION AND (VI) THE
SHAREHOLDERS OF GREAT APPROVE THE CONSOLIDATION TRANSACTIONS, THE CHARTER
AMENDMENTS AND THE 1996 SHARE INCENTIVE PLAN (EACH AS DEFINED AND DESCRIBED IN
MORE DETAIL IN THIS PROXY STATEMENT). UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL
REFERENCES IN THIS PROXY STATEMENT TO (I) THE "COMPANY" OR "GROVE PROPERTY"
MEANS, ON A CONSOLIDATED BASIS, GROVE PROPERTY TRUST AND ITS SUBSIDIARIES
(INCLUDING, WITHOUT LIMITATION, THE OPERATING PARTNERSHIP AND THE PROPERTY
PARTNERSHIPS), GIVING EFFECT TO THE CONSUMMATION OF THE CONSOLIDATION
TRANSACTIONS, (II) "OPERATING PARTNERSHIP" MEANS GROVE OPERATING, L.P., THROUGH
WHICH THE COMPANY WILL CONDUCT ITS BUSINESS FOLLOWING CONSUMMATION OF THE
CONSOLIDATION TRANSACTIONS, (III) "GREAT PROPERTIES" MEANS THE FOUR MULTI-FAMILY
RESIDENTIAL PROPERTIES CURRENTLY OWNED BY GREAT THAT WILL BE TRANSFERRED,
TOGETHER WITH THE OTHER ASSETS OF GREAT (COLLECTIVELY, THE "GREAT ASSETS"), TO
THE OPERATING PARTNERSHIP IN CONNECTION WITH THE CONSUMMATION OF THE
CONSOLIDATION TRANSACTIONS, (IV) "PARTNERSHIP PROPERTIES" MEANS THE 19
MULTI-FAMILY RESIDENTIAL PROPERTIES AND ONE NEIGHBORHOOD SHOPPING CENTER
CURRENTLY OWNED BY 15 LIMITED PARTNERSHIPS ("PROPERTY PARTNERSHIPS"), THE
OWNERSHIP OR CONTROL OF WHICH WILL BE ACQUIRED BY THE COMPANY IN CONNECTION WITH
THE CONSUMMATION OF THE CONSOLIDATION TRANSACTIONS, (V) "GROVE COMPANIES" MEANS
THOSE COMPANIES AND INDIVIDUALS (INCLUDING FIVE EXECUTIVE OFFICERS OF GREAT)
WHICH ARE AFFILIATED WITH GREAT AND OWN (A) THE MANAGEMENT COMPANY AND (B)
GENERAL AND LIMITED PARTNERSHIP INTERESTS IN THE PROPERTY PARTNERSHIPS.
CAPITALIZED TERMS USED HEREIN WITHOUT DEFINITION SHALL HAVE THE MEANINGS SET
FORTH IN THE GLOSSARY.
THE SPECIAL MEETING
GENERAL
This Proxy Statement is furnished to the holders (the "SHAREHOLDERS") of the
issued and outstanding common shares of beneficial interest, $.01 par value per
share (the "COMMON SHARES"), of Grove Real Estate Asset Trust ("GREAT") in
connection with the solicitation of proxies on behalf of the Board of Trust
Managers (the "BOARD") of GREAT. The proxies will be used at the Special Meeting
to be held on , , 1997, at local time, at The Hartford
Club, 44-48 Prospect Street, Hartford, Connecticut 06103, and any adjournment(s)
or postponement(s) thereof (the "SPECIAL MEETING"). The principal executive
offices of GREAT are located at 598 Asylum Avenue, Hartford, Connecticut 06105,
telephone (860) 520-4789.
At the Special Meeting, and at any adjournment(s) or postponement(s)
thereof, the Shareholders will be asked to consider and vote upon the
consolidation transactions (the "CONSOLIDATION TRANSACTIONS") proposed to be
entered into by GREAT, involving GREAT, the Operating Partnership, the Property
Partnerships and certain of the limited partners (the "LIMITED PARTNERS") of the
Property Partnerships, Grove Property Services Limited Partnership ("GPS" or the
"MANAGEMENT COMPANY"), the Grove Companies and the New Equity Investors (as
defined herein).
<PAGE>
In summary, the Consolidation Transactions (A) will result in the
consolidation of the holdings and/or control of GREAT, each of the Property
Partnerships and certain assets and liabilities of the Management Company,
transforming the Company from a real estate investment trust (a "REIT") owning
four multi-family residential properties (with an aggregate of 257 apartments),
managed by an affiliate, into a diversified, fully-integrated self-managed REIT
that owns and operates a diverse portfolio of 23 multi-family residential
properties with an aggregate of 1,752 apartments and a neighborhood shopping
center, (B) will include the change of GREAT's name to "Grove Property Trust",
concurrently with Consolidation Transactions, to recognize the significant
changes in the business and operations of GREAT as a result of the Consolidation
Transactions and (C) will include, without limitation, (i) the formation by
GREAT of the Operating Partnership (which will be controlled by Grove Property
Trust ("GROVE PROPERTY") as its sole general partner) to serve as the operating
partnership of Grove Property, (ii) an exchange offer by the Operating
Partnership (the "EXCHANGE OFFER") for the tender of any or all of the limited
partnership interests of each Property Partnership (the "PROPERTY PARTNERSHIP
UNITS") in exchange for limited partnership units in the Operating Partnership
("COMMON UNITS", which are redeemable commencing one year after their issuance
for cash (based on the fair market value of an equivalent number of Common
Shares at the time of such redemption) or, at the Company's option, it may
exchange Common Units for Common Shares on a one-for-one basis, subject to
certain antidilution adjustments and exceptions, and, in certain circumstances,
cash, and the liquidation of certain Property Partnerships, (iii) the
declaration and issuance by GREAT, immediately prior to the consummation of the
Consolidation Transactions, of a stock dividend aggregating 26,250 Common Shares
and the concurrent effectuation by GREAT of a 1.125 to 1.0 stock split, thereby
issuing on a pro rata basis, a total of 95,130 Common Shares (the "STOCK SPLIT")
to the holders of the currently issued and outstanding 525,000 Common Shares.
GREAT will not issue fractional shares in connection with the Stock Split, but
rather will pay cash in lieu of fractional shares, (iv) the private placement of
equity securities (the "NEW EQUITY INVESTMENT"), pursuant to which GREAT and the
Operating Partnership will sell to one or more investors (the "NEW EQUITY
INVESTORS") Common Shares and Common Units totaling, in the aggregate, 3,333,333
Common Shares (giving effect to the exchange of all Common Units for Common
Shares), in exchange for total gross proceeds to the Company of $30.0 million,
(v) the contribution by GREAT to the Operating Partnership of (a) the GREAT
Properties and related assets in exchange for partnership interests in the
Operating Partnership represented by 620,130 Common Units and (b) the gross
proceeds of the New Equity Investment received by GREAT, in exchange for a
number of Common Units equal to the number of Common Shares issued by GREAT in
the New Equity Investment, (vi) the contribution by the Grove Companies to the
Operating Partnership of certain assets and liabilities of the Management
Company arising from or used in connection with property management related
services and the contribution by the Grove Companies to the Operating
Partnership of the Grove Companies' general and limited partnership interests in
each Property Partnership, in exchange for an aggregate of 934,654 Common Units,
(vii) the Company entering into new credit facilities (together, the "CREDIT
FACILITY") consisting of (a) a three-year secured revolving acquisition and
working capital facility of up to $25.0 million and (b) an approximately $15.1
million ten-year term mortgage loan, and (viii) the use by the Operating
Partnership of a portion of the net proceeds of the New Equity Investment and
borrowings under the Credit Facility to refinance the outstanding mortgage
indebtedness of certain of the Property Partnerships and to acquire certain
minority interests in certain of the Property Partnerships.
A vote in favor of the Consolidation Transactions also will constitute a
vote in favor of each of the transactions contemplated thereby, as more fully
described in this Proxy Statement.
At the Special Meeting, the Shareholders will also be asked to approve
amendments to GREAT's Second Amended and Restated Declaration of Trust (the
"CHARTER"), as follows (collectively, the "CHARTER AMENDMENTS"): (i) to amend
Section 6.4(b) of the Charter to delete the existing requirement that GREAT
receive an independent third party appraisal before purchasing any property
ownership of which is controlled by the executive officers of GREAT or their
affiliates; (ii) to change the name of GREAT to "Grove Property Trust"; and
(iii) to amend the "Excess Shares" provisions of the Charter to minimize the
2
<PAGE>
risk that Grove Property could fail to qualify as a REIT for federal income tax
purposes, and to clarify the "Ownership Limit" as it applies to certain
executive officers of the Company and their affiliates.
The text of the Charter Amendments is attached hereto as APPENDIX I.
At the Special Meeting, the Shareholders will also be asked to approve a
proposal to adopt GREAT's 1996 Share Incentive Plan (the "1996 PLAN") to (i)
make available up to 900,000 Common Shares for grants of stock options and other
incentive awards and (ii) permit performance-based awards to key employees of
the Company payable in Common Shares, including certain "DEFERRED STOCK GRANTS",
as incentive compensation upon the achievement by the Company of enumerated
goals.
The 1996 Share Incentive Plan is attached hereto as APPENDIX II.
GREAT's Common Shares are currently listed on the American Stock Exchange,
and will remain so listed following the consummation of the Consolidation
Transactions. However, the Common Shares issued in connection with the
Consolidation Transactions will be subject to certain restrictions on resale.
See "MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS,"
"SHARES AVAILABLE FOR FUTURE SALE--General" and "SHARES AVAILABLE FOR FUTURE
SALE--Registration Rights."
THE BOARD HAS UNANIMOUSLY APPROVED THE CONSOLIDATION TRANSACTIONS, THE
CHARTER AMENDMENTS AND THE 1996 PLAN AND UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR APPROVAL OF EACH PROPOSAL.
VOTE BY PROXY
A Proxy Card is enclosed for use at the Special Meeting. The Common Shares
represented by all properly executed Proxy Cards will be voted or withheld from
voting at the Special Meeting as indicated; PROVIDED, that, if no instruction is
given, Common Shares represented by proxy will be voted FOR each of the
proposals described herein. As to any other business which may properly come
before the Special Meeting, all properly executed Proxy Cards will be voted by
the persons named therein in accordance with their best judgment. GREAT does not
know of any other business which may come before the Special Meeting. The proxy
may be revoked at any time before it is voted by (i) filing prior to the Special
Meeting a written notice of revocation bearing a later date with Joseph
LaBrosse, Secretary, Grove Real Estate Asset Trust, 598 Asylum Avenue, Hartford,
Connecticut 06105, (ii) delivering to GREAT a duly executed Proxy Card bearing a
later date, or (iii) attending the Special Meeting and voting in person.
VOTING OF SHARES; QUORUM; APPRAISAL RIGHTS
Only the holders of the Common Shares at the close of business on
, 1997 (the "RECORD DATE") are entitled to notice of and to vote at the
Special Meeting. Each Common Share is entitled to one vote on all matters. As of
the Record Date, 525,000 Common Shares were issued and outstanding. The
securities that can be voted at the Special Meeting consist of the 525,000
issued and outstanding Common Shares, with each Common Share entitling its owner
to vote on all matters. Shareholders on the Record Date are entitled to vote at
the Special Meeting in person or by proxy. The presence, in person or by proxy,
at the Special Meeting of Shareholders entitled to cast a majority of all votes
entitled to be cast thereat shall constitute a quorum.
Shareholders are not entitled under Maryland law or pursuant to the Charter
to appraisal rights with respect to the Consolidation Transactions.
REASONS FOR SOLICITING SHAREHOLDER APPROVAL
GREAT is seeking Shareholder approval of the Consolidation Transactions
pursuant to certain requirements of the American Stock Exchange, Inc. (the
"AMEX") regarding the continued listing of the
3
<PAGE>
Common Shares on the AMEX. Approval of the Consolidation Transactions is not
required under Maryland law, the Charter or GREAT's Bylaws (the "BYLAWS"). GREAT
is seeking Shareholder approval of the Charter Amendments in accordance with
Maryland law and the Charter. GREAT is seeking approval of the 1996 Plan in
accordance with certain provisions of the Internal Revenue Code of 1986, as
amended, (the "CODE") as well as pursuant to certain requirements of the AMEX
regarding the continued listing of the Common Shares on the AMEX.
VOTES REQUIRED
Pursuant to rules promulgated by the AMEX, the affirmative vote of a
majority of the total votes cast by the Shareholders at the Special Meeting is
required to approve the Consolidation Transactions (Proposal 1). For this
purpose, broker non-votes and abstentions will not be counted. APPROVAL OF THE
CONSOLIDATION TRANSACTIONS BY THE REQUISITE VOTE OF THE SHAREHOLDERS IS A
CONDITION TO THE CONSUMMATION OF THE CONSOLIDATION TRANSACTIONS. APPROVAL OF
PROPOSAL 1 IS CONDITIONED UPON APPROVAL OF PROPOSALS 2 AND 3.
Pursuant to the Charter, the affirmative vote of the holders of not less
than two-thirds of all outstanding Common Shares is required to approve the
Charter Amendments (Proposal 2). For this purpose, broker non-votes and
abstentions will have the effect of a vote against the Charter Amendments.
APPROVAL OF THE CHARTER AMENDMENTS BY THE REQUISITE VOTE OF THE SHAREHOLDERS IS
A CONDITION TO THE CONSUMMATION OF THE CONSOLIDATION TRANSACTIONS. APPROVAL OF
PROPOSAL 2 IS CONDITIONED UPON APPROVAL OF PROPOSALS 1 AND 3.
Pursuant to Section 162(m) of the Code, the affirmative vote of a majority
of the Shareholders is required to approve the 1996 Plan (Proposal 3). Pursuant
to rules promulgated by the AMEX, the affirmative vote of a majority of the
total votes cast by the Shareholders at the Special Meeting is required to
approve the 1996 Plan (Proposal 3). For these purposes, broker non-votes and
abstentions will not be counted. APPROVAL OF THE 1996 PLAN IS A CONDITION TO THE
CONSUMMATION OF THE CONSOLIDATION TRANSACTIONS. APPROVAL OF PROPOSAL 3 IS
CONDITIONED ON APPROVAL OF PROPOSALS 1 AND 2.
THE CONSOLIDATION TRANSACTIONS (PROPOSAL 1)
REASONS FOR THE CONSOLIDATION TRANSACTIONS; RECOMMENDATION OF THE BOARD
The Board has unanimously approved the Consolidation Transactions and has
determined that the Consolidation Transactions are in the best interests of the
Company and the Shareholders. THE BOARD UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR APPROVAL OF THE CONSOLIDATION TRANSACTIONS. In making this
recommendation, the Board considered a number of factors, including the
following benefits which the Consolidation Transactions will provide to
Shareholders:
- CONSOLIDATION. The Consolidation Transactions will transform the
Company from a REIT owning four multi-family residential properties with an
aggregate of 257 apartments, managed by an affiliate, into a full-service,
fully integrated, self-advised and self-managed REIT with a portfolio of 23
multi-family residential properties with an aggregate of 1,752 apartments
and a neighborhood shopping center, with "in-house" expertise in
acquisition, development, construction, leasing, management and other
tenant-related services.
- RISK DIVERSIFICATION. Upon completion of the Consolidation
Transactions, the Company will own, directly or indirectly through the
Operating Partnership, 100% of the interests in the four GREAT Properties,
100% of the interests in the seven Partnership Properties currently owned by
the Liquidating Partnerships (as defined) and a controlling interest in each
of the Property Partnerships that own the remaining 13 Partnership
Properties, thereby representing an investment in a significantly larger and
more diversified portfolio than that of GREAT prior to the consummation of
the Consolidation Transactions.
4
<PAGE>
- DELEVERAGING. Following the consummation of the Consolidation
Transactions, the Company's debt service coverage ratio will be
approximately 2.3 to 1.0, compared to GREAT's current debt service coverage
ratio of 3.0 to 1.0; the Company's debt-to-total market capitalization will
be approximately 38.3% compared to GREAT's current debt-to-total market
capitalization of 53.6%; and the Company's pro forma FFO and cash available
for distribution per share for the pro-forma 12 months ended September 30,
1996 were $0.99 and $0.86 ($1.17 and $1.02 before giving effect to the Stock
Split), respectively, compared to GREAT's historical FFO and cash available
for distribution per share for that period of $1.17 and $1.02, respectively.
- ACCESS TO CAPITAL. The Company's structure will, in the judgment of
the Company and the Grove Companies, provide the Company with greater access
to capital for refinancing and growth. Sources of capital include the
securities sold in the New Equity Investment and possible future issuances
of debt or equity through public offerings or private placements. The
financial strength of the Company should enable it to obtain financing at
better rates and on better terms than was otherwise available to GREAT prior
to the consummation of the Consolidation Transactions. Additionally, the
Company will have the ability to acquire properties for Common Units which
could enable a seller of property to the Company to defer its taxable gain,
if any.
- INVESTOR INTEREST. The Company has been advised by its financial
advisors, and has confirmed in subsequent conversations with prospective
investors, that certain potential investors in REITs currently are seeking
long-term capital appreciation and return on investment based upon
reinvestment of cash flow in the REIT and internal growth, rather than the
quarterly payout of a relatively high percentage of cash flow which has been
characteristic of most publicly traded REITs (including GREAT) in the past
several years. The Company believes that its decision, announced in November
1996, to reduce its quarterly distribution per Common Share, thereby
increasing the amount of cash available to the Company for reinvestment, may
increase the interest of institutional and other investors in owning Common
Shares. The Company emphasized in its November 1996 announcement that the
Company's decision to reduce its quarterly cash distribution to Shareholders
was made for the foregoing reasons and not in response to any adverse
occurrence with respect to the business or operations of the Company.
POTENTIAL ADVERSE EFFECTS OF THE CONSOLIDATION TRANSACTIONS; RISK FACTORS
In considering whether to approve the Consolidation Transactions,
Shareholders should consider the risks discussed under "APPROVAL OF THE
CONSOLIDATION TRANSACTIONS (Proposal 1)-- Potential Adverse Effects of the
Consolidation Transactions; Risk Factors." Certain of such risks are risks to
which the Shareholders' investment in the Common Shares are presently subject,
without regard to the consummation of the Consolidation Transactions. Risks
which Shareholders should consider include:
CONFLICTS OF INTEREST COULD RESULT IN EXECUTIVE OFFICER DECISIONS THAT DO
NOT NECESSARILY REPRESENT THE BEST INTERESTS OF SHAREHOLDERS. Conflicts of
interest, particularly with certain affiliates of the Grove Companies who are
executive officers of GREAT ("EXECUTIVE OFFICERS"), in connection with (i) the
Consolidation Transactions, (ii) the operation of the Company's on-going
businesses, including conflicts associated with tax consequences to the Grove
Companies of sales or refinancings of any of the Partnership Properties, which
may influence the Company's decision to sell or refinance the Partnership
Properties or prepay debt secured by certain Properties, and the other business
activities of such Executive Officers, (iii) the Company's role as property
manager for the Excluded Properties (as defined), (iv) the Company's agreement
to use National Realty Services, L.P. ("NATIONAL REALTY"), an entity owned,
directly or indirectly, by certain Executive Officers, for all of its real
estate brokerage services needs and (v) the enforcement of certain agreements
with affiliates of the Company, any one of which could result in decisions that
do not fully represent the interests of all Shareholders.
5
<PAGE>
REDUCED DISTRIBUTIONS TO SHAREHOLDERS. In connection with the Consolidation
Transactions, Grove Property will decrease its quarterly distribution from $.92
to $.63 per Common Share ($.74 per Common Share before giving effect to the
Stock Split) (or from approximately 87.0% to 73.0% of the Company's cash
available for distribution (on a pro forma basis) for the quarter ended
September 30, 1996), thereby increasing the cash available to the Company for
reinvestment. The decrease in distributions to Shareholders could have an
adverse effect on the market price of the Common Shares.
PURCHASE OF PROPERTIES MAY EXCEED PROPERTIES' FAIR MARKET VALUE. The
valuation of the Consolidated Assets was not based on third-party appraisals and
there have not been arm's-length negotiations with respect to such values,
resulting in the risk that the purchase price of the Grove Companies' assets
and/or of the limited partnership interests of the Partnership Properties
exceeds the fair market value thereof.
LIMITATION ON CONTROL OF PARTIALLY OWNED PROPERTIES. The Company will own
partial interests in 13 of the Partnership Properties. As a general partner in a
Property Partnership, the Company may have certain fiduciary duties to its other
partners therein which it will need to consider when making decisions that
affect the Property owned by that Property Partnership. Additionally, the
interests of outside partners in the Property Partnerships ("OUTSIDE PARTNERS")
who elect not to tender their Property Partnership Units in the Exchange Offer,
but rather elect to remain as limited partners in the Property Partnerships, may
not be aligned with those of the Company, potentially resulting in (i) the
necessity to provide financial or other inducement to obtain such Outside
Partners' consent to certain transactions to which such consent is required
and/or (ii) failure to obtain the requisite vote to effect a transaction the
Company believes would be in the best interests of the Shareholders.
DEPENDENCE ON LIMITED GEOGRAPHIC AREA. Geographic concentration of a
majority of the Properties in a single state--Connecticut--and all of the
Properties in the Southern New England region, creating a dependence on demand
for housing in that market and increasing the risk that the Company will be
materially adversely affected by general economic conditions in a limited
market.
EXPANSION OF THE COMPANY INTO NEW GEOGRAPHIC MARKETS. Possibility that the
Company may, in the future, acquire properties in geographic markets in which
the Company has little or no prior experience in real estate acquisition or
management, or familiarity with prevailing economic and other conditions, and
the accompanying risk that the operations and financial results of the Company
may be adversely affected if the Company is unable to purchase such properties
at attractive purchase prices and/or to effectively manage such properties.
REAL ESTATE FINANCING RISKS. Risks associated with borrowing, such as the
possibility that the Company will not have sufficient funds available to make
balloon or other payments of principal on debt associated with certain
Properties, including the Credit Facility, which could result in the loss of one
or more of the Properties in the event of a foreclosure upon default and the
possibility that such indebtedness might be refinanced at higher interest rates,
all of which could adversely affect Grove Property's ability to make expected
distributions to Shareholders and its ability to qualify as a REIT.
DEPENDENCE ON KEY PERSONNEL; LIMITED EXPERIENCE. Dependence of the Company
on the services of the Executive Officers, which could adversely affect the
operations of the Company in the event of loss of services of any of such
officers, and the relative lack of experience in REIT management and operation
of a public company of such officers, each of which could adversely affect the
operations and financial results of the Company.
RISK OF EQUITY REAL ESTATE INVESTMENTS; ADVERSE IMPACT ON ABILITY TO MAKE
DISTRIBUTIONS; EFFECT ON VALUE OF PROPERTIES. Real estate investment
considerations, such as the ability of tenants to make rent payments, the
ability of a Property to generate revenues sufficient to meet operating expenses
and the illiquidity of real estate investments, all of which may affect Grove
Property's ability to make expected distributions to Shareholders and could
adversely affect the value of the Properties.
6
<PAGE>
RETURN OF CAPITAL. The percentage of distributions by Grove Property that
represents a return of capital to Shareholders, and therefore may not be subject
to federal income tax, may vary significantly from year to year.
ADVERSE TAX CONSEQUENCES OF FAILURE OF GREAT TO QUALIFY AS A REIT; ADVERSE
TAX CONSEQUENCES OF FAILURE OF THE OPERATING PARTNERSHIP TO QUALIFY AS A
PARTNERSHIP. Taxation of Grove Property as a corporation if it fails to qualify
as a REIT for federal income tax purposes, taxation of the Operating Partnership
as a corporation if it fails to qualify as a partnership for federal income tax
purposes (and the resulting failure of the Company to qualify as a REIT), the
Company's liability for certain federal, state and local income taxes in any
such event, and the resulting decrease in cash available for distribution.
INABILITY TO MAKE REQUIRED DISTRIBUTIONS TO SHAREHOLDERS COULD AFFECT REIT
STATUS; POTENTIAL REQUIREMENTS TO BORROW. (i) Failure of Grove Property to be
able to distribute, on an annual basis, at least 95% of its REIT taxable income
to the Shareholders (as required under the Code), the resulting failure of the
Company to qualify as a REIT and the adverse tax consequences and resulting
decrease in cash available for distribution related thereto, or (ii) the need
for the Company to borrow funds (on potentially unfavorable terms) in order to
meet such distribution requirements and continue to qualify as a REIT, and the
resulting decrease in cash available for distribution due to such increased debt
service requirements.
NECESSITY TO MAINTAIN OWNERSHIP LIMIT REQUIRED TO MAINTAIN REIT
QUALIFICATION--ANTI-TAKEOVER EFFECT; CERTAIN ANTI-TAKEOVER PROVISIONS MAY
INHIBIT A CHANGE IN CONTROL OF THE COMPANY. Potential anti-takeover effect of
limiting ownership of Equity Shares to 5.0% of the outstanding Equity Shares and
certain other provisions contained in the organizational documents of Grove
Property, such as the ability to issue preferred shares of beneficial interest,
staggered terms for the Board and the super-majority voting requirements to,
among other things, elect or remove trust managers, and certain provisions in
the OP Partnership Agreement, any of which may discourage a change in control
and limit the opportunity for Shareholders to receive a premium for their Common
Shares.
CHANGE IN INVESTMENT AND FINANCING POLICIES WITHOUT SHAREHOLDER
APPROVAL. Ability of the Board to change the investment, financing, borrowing
and other policies of the Company at any time without Shareholder approval,
thereby limiting Shareholder control over these decisions.
POSSIBLE ENVIRONMENTAL LIABILITIES. Potential liability of the Company for
unknown or future environmental liabilities.
POSSIBLE ADVERSE EFFECTS ON COMMON SHARE PRICE ARISING FROM SHARES AVAILABLE
FOR CURRENT AND FUTURE SALES. Potential adverse effect that the availability of
Common Shares for future sale, including Common Shares to be issued upon
exchange of Common Units for Common Shares, may have on the market price of
Common Shares and the immediate and substantial dilution in the net tangible
book value of the Common Shares or Common Units in connection with the New
Equity Investment.
POSSIBLE ADVERSE EFFECT ON COMMON SHARE PRICE ARISING FROM COMMON SHARE
REPURCHASES. Any future repurchases by the Company and/or the Executive
Officers of Common Shares may reduce the number of Common Shares available for
sale in the public trading market, thereby reducing the liquidity of an
investment in the Common Shares.
UNINSURED LOSS. Potential losses in the event of casualty or other
liability that is not insured, insurable or economically insurable.
REGULATION. Cost of compliance with the Americans with Disabilities Act of
1990 and similar regulatory legislation.
ADVERSE CONSEQUENCES OF ELECTION TO REVOKE REIT ELECTION BY THE
COMPANY. Ability of the Board to elect, at any time without Shareholder
approval, to revoke the Company's election to be treated as a REIT for federal
income tax purposes and the adverse tax consequences and resulting decrease in
cash available for distribution related thereto.
7
<PAGE>
Additionally, when considering whether to vote to approve the Consolidation
Transactions, a Plan Fiduciary (as defined) must give appropriate consideration,
in consultation with its advisers, to the effect on the Plan (as defined) if the
assets of Grove Property or the Operating Partnership were to be treated as
"plan assets". See "ERISA CONSIDERATIONS" for a discussion of certain of these
considerations.
PARTIES TO THE CONSOLIDATION TRANSACTIONS
GREAT. GREAT is a self-administered REIT formed in 1994 pursuant to the
Maryland Real Estate Investment Trust Act (as amended, the "MARYLAND REIT ACT")
to continue the multi-family property acquisition, management and marketing
operations and related business objectives and strategies of Grove Investment
Group, Inc. ("GROVE"). GREAT first elected to qualify as a REIT for federal
income tax purposes commencing with the taxable period ending December 31, 1994.
Upon completion of an initial public offering of Common Shares in 1994 (the
"IPO"), GREAT purchased three Properties from affiliates of the Grove Companies.
In January 1996, GREAT acquired its fourth property from an affiliate of the
Grove Companies. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--
Information About GREAT."
THE GROVE COMPANIES. Grove was formed in 1980 as a Southern New England
real estate company based in Hartford, Connecticut. Damon and Brian Navarro,
co-founders of the Company, began business operations by buying and managing
small, multi-family properties with limited partners as equity investors.
As used herein, the term "Grove Companies" means Grove and its affiliates
(including certain companies and individuals) that own interests (directly or
indirectly) in the Management Company or any Property Partnership and certain of
the limited partnerships that own the Excluded Properties (as defined). The
Grove Companies include, without limitation, Brian, Damon and Edmund Navarro,
Joseph LaBrosse (collectively, the "MANAGEMENT OWNERS") and Gerald McNamara,
each an Executive Officer and, in the case of Damon Navarro and Mr. LaBrosse, a
trust manager of GREAT (a "TRUST MANAGER"), and Ronald and George Abdow.
From its formation, GREAT's Executive Officers have been shared with the
Grove Companies. Pursuant to management and administrative services agreements,
the Grove Companies (principally through the Management Company) have provided
all accounting, management and marketing and brokerage services required by
GREAT. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)
- --Information About the Grove Companies," "--Information About the Management
Company" and "THE COMPANY--Property Management Services."
At September 30, 1996, the Grove Companies owned general and limited
partnership interests in 42 limited partnerships, including the Property
Partnerships (which own the Partnership Properties), and 15 other limited
partnerships which own 14 multi-family residential projects with an aggregate of
approximately 1,600 apartments and approximately 125,000 square feet of
commercial and mixed-use property in Connecticut, Massachusetts and Rhode Island
(collectively, the "EXCLUDED PROPERTIES"). The limited partnerships that own the
Excluded Properties are not included in the Consolidation Transactions because
the Board has determined that the type (E.G., commercial properties), geographic
characteristics, cash flow, stage of redevelopment efforts, or capital structure
of the Excluded Properties either are inconsistent with the Company's investment
objectives or could affect the Company's ability to qualify as a REIT. The
Company may, however, seek to acquire one or more of the Excluded Properties
from time to time following the consummation of the Consolidation Transactions
when and if conditions are favorable to do so. See "APPROVAL OF THE
CONSOLIDATION TRANSACTIONS (Proposal 1)--Information About the Grove Companies"
and "--Benefits to Related Parties; Conflicts of Interest; Interests of Certain
Persons." The remaining limited partnerships (other than the Property
Partnerships and the partnerships that own the Excluded Properties) in which the
Grove Companies own general and limited partnership interests do not own
properties, but rather are limited purpose partnerships formed by the Grove
Companies for various other purposes.
8
<PAGE>
THE OPERATING PARTNERSHIP. The Operating Partnership is a newly formed
limited partnership organized in Delaware. GREAT is the sole general partner of
the Operating Partnership. The Operating Partnership was formed to act as the
operating partnership of the Company and the vehicle for the consolidation of
ownership and/or control of the operations and assets of GREAT, the Property
Partnerships and certain assets and liabilities of the Management Company. The
Operating Partnership will be governed by the provisions of the Operating
Partnership Agreement (the "OP PARTNERSHIP AGREEMENT"). See "THE OP PARTNERSHIP
AGREEMENT." The principal executive offices of the Operating Partnership are
located at 598 Asylum Avenue, Hartford, Connecticut 06105, telephone (860)
520-4789.
THE MANAGEMENT COMPANY. The Management Company is a Connecticut limited
partnership which is owned entirely, directly or indirectly, by the Management
Owners. Since the formation of GREAT, the Management Company has provided
certain services to GREAT in connection with GREAT's real estate operations,
including, without limitation, accounting, marketing, brokerage and management
services. See "THE COMPANY--Property Management Services," "APPROVAL OF THE
CONSOLIDATION TRANSACTIONS (Proposal 1)--Information About the Grove Companies"
and "--Information About the Management Company." The Management Company
currently provides similar services to the Property Partnerships and the limited
partnerships that own the Excluded Properties. Prior to the completion of the
Consolidation Transactions, the Management Company will contribute to National
Realty, a newly formed Delaware limited partnership owned by the Management
Owners, the assets and liabilities arising from or used in connection with the
real estate brokerage services currently performed by the Management Company.
See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Terms of the
Consolidation Transactions--The Consolidation." In connection with the
consummation of the Consolidation Transactions, the Grove Companies will
transfer the remaining assets and liabilities of the Management Company
(excluding those assets and liabilities previously contributed to National
Realty) to the Operating Partnership. Following the consummation of the
Consolidation Transactions, the Operating Partnership will provide to the
Company and the limited partnerships that own the Excluded Properties the
property management services currently provided to such entities by the
Management Company, utilizing the assets of the Management Company transferred
to it in the Consolidation Transactions. Also, following the consummation of the
Consolidation Transactions, National Realty will provide to the Company and the
limited partnerships that own the Excluded Properties the real estate brokerage
services currently provided by the Management Company. See "CERTAIN
RELATIONSHIPS AND TRANSACTIONS--Transactions With the Grove Companies-- National
Realty" and "CERTAIN RELATIONSHIPS AND TRANSACTIONS--Transactions With the Grove
Companies--Management Services."
THE PROPERTY PARTNERSHIPS. The "Property Partnerships" (which are
identified in the Glossary) were formed by the Grove Companies at various dates
from 1986 to 1995 as limited purpose investment entities formed to own the
Partnership Property or Properties currently owned by them. The Property
Partnerships, collectively, own 19 multi-family residential projects and a
neighborhood shopping center (each a "PARTNERSHIP PROPERTY" and, together with
the GREAT Properties, the "PROPERTIES"). See "APPROVAL OF THE CONSOLIDATION
TRANSACTIONS (Proposal 1)--The Properties." The Limited Partners own limited
partnership interests in the Property Partnerships. The Grove Companies own
general and limited partnership interests in the Property Partnerships totaling
from less than 1.0% to 31.0% of the partnership interests in the Property
Partnerships. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Information About the Property Partnerships."
In connection with the Consolidation Transactions, and assuming the Minimum
Percentage Condition (as defined) is met with respect to each Property
Partnership, (i) seven of the Property Partnerships (the "LIQUIDATING
PARTNERSHIPS") will be liquidated and the seven Partnership Properties owned by
these Property Partnerships will be distributed to and held directly by the
Operating Partnership or a newly-formed partnership wholly-owned by the Company
and (ii) the Company will control, directly or indirectly through the Operating
Partnership, the remaining Property Partnerships.
9
<PAGE>
TERMS OF THE CONSOLIDATION TRANSACTIONS
GENERAL. The Consolidation Transactions constitute a series of transactions
pursuant to which GREAT will be transformed into a self-administered and
self-managed REIT with control over a portfolio of 23 multi-family residential
projects and a neighborhood shopping center in the Northeastern United States.
The following is a summary description of the steps involved in the
Consolidation Transactions:
FORMATION OF THE OPERATING PARTNERSHIP. In 1996, GREAT caused the formation
of the Operating Partnership, to serve as the operating partnership of the
Company and the vehicle for the consolidation of ownership and/or control of the
operations and assets of GREAT, the Property Partnerships and certain assets and
liabilities of the Management Company. For more detailed information regarding
the Operating Partnership, see "APPROVAL OF THE CONSOLIDATION TRANSACTIONS
(Proposal 1)--Information About the Operating Partnership" and "THE OP
PARTNERSHIP AGREEMENT."
THE EXCHANGE OFFER. Pursuant to the Exchange Offer, the Operating
Partnership has offered to purchase from the Limited Partners, on the terms and
conditions set forth in the Exchange Offer, any or all outstanding Property
Partnership Units of each of the Property Partnerships in exchange for Common
Units or, in the case of any tendering Limited Partner which is not an
"Accredited Investor" (as that term is defined in Regulation D promulgated under
the Securities Act of 1933 (the "SECURITIES ACT") or any applicable state
securities laws) and certain other Limited Partners, cash. The number of Common
Units to be received by a Limited Partner in the Exchange Offer will be
calculated based upon such Limited Partner's relative interest in the applicable
Property Partnership as applied to the relative value of the Partnership
Property associated therewith, as compared to the value of all of the Properties
and the other Consolidated Assets (as defined). See "APPROVAL OF THE
CONSOLIDATION TRANSACTIONS (Proposal 1)--Terms of the Consolidation
Transactions--The Exchange Offer" and "APPROVAL OF THE CONSOLIDATION
TRANSACTIONS (Proposal 1)--The Properties --Valuation of the Properties and
Other Assets; Allocation of Common Units."
In connection with the Exchange Offer, Limited Partners which tender their
Property Partnership Units in a Property Partnership will also be consenting,
with respect to such Property Partnership, to, as applicable, (i) certain
amendments to the agreement of limited partnership of that Property Partnership
(the "PROPERTY PARTNERSHIP AGREEMENT") or (ii), in the case of the Liquidating
Partnerships, an amendment to the Property Partnership Agreement and the
subsequent liquidation of that Property Partnership with an "in-kind"
distribution of the Partnership Property to the Company (collectively, the
"PROPERTY PARTNERSHIP AMENDMENTS"). The purpose of the Property Partnership
Amendments is to amend certain provisions of the Property Partnership Agreements
which might otherwise restrict the Company's ability to obtain certain of the
advantages anticipated to be provided by the Consolidation Transactions, or, in
the case of the Liquidating Partnerships, to effect the transfer of the
respective Partnership Properties to the Company.
STOCK SPLIT. Immediately prior to the consummation of the Consolidation
Transactions, GREAT will declare and effect the PRO RATA Stock Split of 95,130
Common Shares, in the aggregate, with respect to GREAT's 525,000 currently
issued and outstanding Common Shares. The Stock Split is intended, in part, to
reduce the immediate impact to current Shareholders of the Company's decision to
reduce quarterly distributions by Grove Property from the current level of $.92
per Common Share to $.63 per Common Share ($.74 per Common Share before giving
effect to the Stock Split) and, to give effect to the Board's conclusion as to
the Consolidation Valuation (as defined) of the GREAT Assets in light of the New
Equity Investment purchase price of $9.00 per Common Share. The Company will not
issue fractional shares in connection with the Stock Split, but rather will pay
cash in lieu of fractional shares.
NEW EQUITY INVESTMENT. Pursuant to the New Equity Investment, GREAT and the
Operating Partnership will sell Common Shares and Common Units totaling, in the
aggregate, 3,333,333 Common Shares (giving effect to the exchange of all Common
Units for Common Shares). The price will be $9.00
10
<PAGE>
per Common Share or Common Unit, with total gross proceeds to the Company of
$30.0 million. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Terms of the Consolidation Transactions--New Equity Investment."
The Company expects that the Securities Purchase Agreement to be entered
into in connection with the New Equity Investment will contain representations
and warranties of the Company customary in similar transactions, and that each
of the Company's and the New Equity Investor's obligations to effect the closing
of the securities sales will be subject to various conditions. The Company
expects that it will grant to the New Equity Investors certain registration
rights that will enable the New Equity Investors to resell in registered
offerings certain Common Shares acquired by them to the public under certain
conditions. The Company will not effect any registration of the Common Shares
issued pursuant to the New Equity Investment earlier than six months following
the consummation of the Consolidation Transactions.
[INFORMATION CONCERNING THE NEW EQUITY INVESTMENTS, TERMS OF THE SECURITIES
PURCHASE AGREEMENT AND ANY RELATED AGREEMENTS TO BE ADDED BY AMENDMENT.]
THE CONSOLIDATION. In connection with the Consolidation Transactions,
pursuant to a Contribution Agreement among GREAT, the Grove Companies and the
Operating Partnership (the "CONTRIBUTION AGREEMENT"), substantially all of the
assets and operations of GREAT and the Management Company (other than real
estate brokerage services), and the Grove Companies' entire interest in the
Property Partnerships, will be transferred to, and consolidated in, the Company
(the "CONSOLIDATION"). See "CERTAIN RELATIONSHIPS AND TRANSACTIONS--Transactions
With the Grove Companies--The Contribution Agreement."
GREAT will contribute its four multi-family residential projects in
Connecticut with an aggregate of 257 apartments (the "GREAT PROPERTIES") and
certain related assets (together with the GREAT Properties, the "GREAT ASSETS")
to the Operating Partnership in exchange for approximately 620,130 Common Units
(I.E., the number of currently issued and outstanding Common Shares plus the
number of Common Shares issued in the Stock Split). Additionally, GREAT will
contribute to the Operating Partnership the gross proceeds received by GREAT
from the New Equity Investment in exchange for a number of additional Common
Units equal to the number of Common Shares issued by GREAT in the New Equity
Investment. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--The
Properties--Valuation of the Properties and Other Assets; Allocation of Common
Units" and "--Terms of the Consolidation Transactions--The Consolidation."
The Grove Companies will contribute to National Realty, a newly formed
Delaware limited partnership owned by the Management Owners, the assets and
liabilities of the Management Company currently used in connection with or
arising from the provision of real estate brokerage services. The Grove
Companies and the Board believe that the third party business to be conducted by
National Realty, and the volatility of its earnings, makes it an inappropriate
investment for the Company. Following the consummation of the Consolidation
Transactions, National Realty will provide real estate brokerage services to the
Company, as well as to other parties, including the limited partnerships which
own the Excluded Properties. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS
(Proposal 1)--Benefits to Related Parties; Conflicts of Interest; Interests of
Certain Persons" and "CERTAIN RELATIONSHIPS AND TRANSACTIONS--Transactions With
the Grove Companies --National Realty."
Following the contribution of assets to National Realty, the Grove Companies
will contribute the remaining assets and liabilities of the Management Company
to the Operating Partnership and will contribute to the Operating Partnership
all of the Grove Companies' partnership interests (both as a general partner and
as a limited partner) in each Property Partnership. In exchange for such
contributions, the Grove Companies will receive an aggregate of 934,654 Common
Units. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Properties--Valuation of the Properties and Other Assets; Allocation of
Common Units."
11
<PAGE>
THE CHARTER AMENDMENTS. Following the requisite Shareholder approval, GREAT
will adopt the Charter Amendments to (i) delete the existing requirement that
GREAT receive an independent third party appraisal before purchasing any
property, ownership of which is controlled by the executive officers of GREAT or
their affiliates, (ii) change the name of GREAT to "Grove Property Trust" and
(iii) amend the "Excess Shares" provisions of the Charter in order to minimize
the risk that GREAT could fail the "closely held" test set forth in section 856
of the Code, and thereby fail to qualify as a REIT for federal income tax
purposes, and to clarify the "Ownership Limit" as it applies to certain
Executive Officers and their affiliates. See "PROPOSAL TO AMEND THE CHARTER
(Proposal 2)."
THE 1996 PLAN. Following the requisite Shareholder approval, the 1996 Plan
will be effective to (i) make available up to 900,000 Common Shares for grants
of stock options and other incentive awards and (ii) permit performance-based
awards to key employees of the Company payable in Common Shares, including
Deferred Stock Grants, as incentive compensation upon the achievement by the
Company of enumerated goals. See "SHARES AVAILABLE FOR FUTURE SALE--General" and
"PROPOSAL TO ADOPT THE 1996 SHARE INCENTIVE PLAN (Proposal 3)."
THE REFINANCING. In connection with the Consolidation Transactions, the
Operating Partnership expects to obtain a three-year secured revolving
acquisition and working capital facility of up to $25.0 million (the "REVOLVING
CREDIT FACILITY") and an approximately $15.1 million ten-year term mortgage loan
(the "LONG-TERM FACILITY" and, together with the Revolving Credit Facility, the
"CREDIT FACILITY"). See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Terms of the Consolidation Transactions--The Refinancing."
The Company will use a portion of the proceeds from the New Equity
Investment, together with borrowings under the Long-Term Facility and the
Revolving Credit Facility, to refinance approximately $39.8 million of mortgage
indebtedness of the Property Partnerships (the "REFINANCING"). The total amount
of mortgage indebtedness of the Company upon consummation of the Consolidation
Transactions will be $32.7 million, assuming the receipt by the Company of gross
proceeds of $30.0 million in connection with the New Equity Investment. On a pro
forma basis as of September 30, 1996, after giving effect to the Consolidation
Transactions, including the application of the proceeds from the New Equity
Investment and the borrowings under the Credit Facility and the Refinancing, the
aggregate indebtedness of the Company would be approximately $32.7 million, of
which $18.5 million is variable rate debt secured, directly or indirectly, by
mortgages on 17 of the Properties.
CONDITIONS TO CONSUMMATION OF THE CONSOLIDATION TRANSACTIONS. The various
transactions comprising the Consolidation Transactions will occur on or about
the same date, and, unless otherwise indicated, be deemed to occur
simultaneously. It is a condition to the consummation of each of the various
transactions comprising the Consolidation Transactions that each of the other
transactions which comprise the Consolidation Transactions occur. Therefore, the
consummation by GREAT, the Operating Partnership, the Management Company and the
Grove Companies of the Consolidation Transactions is conditioned upon, among
other things:
- The declaration and effectuation by GREAT of the Stock Split, immediately
prior to the consummation of the Consolidation Transactions.
- Approval of the Property Partnership Amendments by the requisite vote of
Limited Partners of each Property Partnership.
- Completion of the New Equity Investment resulting in gross proceeds to the
Company of not less than $18.5 million.
- Approval of the Consolidation Transactions, the Charter Amendments and the
1996 Plan, in each case by the requisite vote of the Shareholders of
GREAT.
12
<PAGE>
- Receipt of all required material consents to the Consolidation
Transactions (or any transaction comprising a part thereof) of third
parties.
- Completion of the Refinancing, including, without limitation, the closing
of the Credit Facility.
STRUCTURE OF THE COMPANY
The following chart illustrates the organizational structure of Grove
Property, the Operating Partnership, the Management Company, the Grove Companies
and the Property Partnerships immediately following the consummation of the
Consolidation Transactions.
13
<PAGE>
AFTER THE CONSOLIDATION TRANSACTIONS
[CHART]
The diagram which appears on this page illustrates the organizational
structure of the Company, giving effect to the consummation of the Consolidation
Transactions, (as described elsewhere in this Proxy Statement) assuming that the
Minimum Percentage Condition is met (but not exceeded) as to each Property
Partnership by a tender of Property Partnership Units and that no Property
Partnership Units acquired in the Exchange Offer are acquired for cash. The
percentage ownership of the Company in each Property Partnership represents the
minimum percentage interest that would be acquired if (i) no Property
Partnership interests are acquired in the Exchange Offer but the Minimum
Percentage Condition is met (through the receipt of proxies) as to each Property
Partnership and (ii) the New Equity Investment ($30.0 million in the aggregate)
is raised. This minimum percentage for each Property Partnership includes (i)
the interests to be acquired by the Operating Partnership from the Grove
Companies pursuant to the Contribution Agreement plus (ii) the interest to be
acquired by the Operating Partnership (with the proceeds of the New Equity
Investment and the Credit Facility) in connection with its capital contribution
to enable the Property Partnership to refinance its existing indebtedness. See
"APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--The Refinancing" and
"--New Equity Investment." The Operating Partnership's partnership interest in
each Property Partnership will be increased to the extent of limited partnership
interests acquired for Common Units or cash pursuant to the Exchange Offer.
(1) Excludes the Grove Companies. Assumes that the Minimum Percentage Condition
is met (but not exceeded) as to each Property Partnership by a tender of
Property Partnership Units and that no Property Partnership Units acquired
in the Exchange Offer are acquired for cash. The percentage ownership of
each Property Partnership represents the minimum percentage interest that
would be acquired if (i) no Property Partnership interests are acquired in
the Exchange Offer but the Minimum Percentage Condition is met (through the
receipt of proxies) as to each Property Partnership and (ii) the New Equity
Investment ($30.0 million in the aggregate) is raised. This minimum
percentage for each Property Partnership includes (i) the interests to be
acquired by the Operating Partnership from the Grove Companies pursuant to
the Contribution Agreement plus (ii) the interest to be acquired by the
Operating Partnership (with the proceeds of the New Equity Investment and
the Credit Facility) in connection with its capital contribution to enable
the Property Partnership to refinance its existing indebtedness. See
"APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--The Refinancing"
and "--New Equity Investment." The Operating Partnership's partnership
interest in each Property Partnership will be increased to the extent of
limited partnership interests acquired for Common Units or cash pursuant to
the Exchange Offer.
14
<PAGE>
THE PROPERTIES
Following the consummation of the Consolidation Transactions, the Operating
Partnership will own, directly or indirectly, the four GREAT Properties and the
seven Partnership Properties currently owned by each of the Liquidating
Partnerships. Additionally, the Company will control, directly or indirectly
through the Operating Partnership, the Property Partnerships owning the
remaining Partnership Properties.
The following table sets forth certain summary information with respect to
the Properties to be owned, or, in the case of the Partnership Properties (other
than those Properties currently owned by the Liquidating Partnerships),
controlled, directly or indirectly, by Grove Property and the Operating
Partnership upon the consummation of the Consolidation Transactions. Grove
Property's percentage interest in each Partnership Property will depend upon the
Property Partnership Units tendered in the Exchange Offer. The percentage
ownership interests reflected below for each Partnership Property represents (i)
the interests to be contributed to the Operating Partnership pursuant to the
Contribution Agreement plus (ii) the interests to be issued to the Operating
Partnership in connection with the Refinancing of certain Property Partnership
indebtedness, assuming that an aggregate of $30.0 million is raised pursuant to
the New Equity Investment and the Minimum Percentage Condition is met as to each
Property Partnership. It does not include any interests of Property Partnerships
other than the Properties owned by the Liquidating Partnerships expected to be
acquired in the Exchange Offer. For more detailed information regarding the
Properties, see "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--The
Properties" and "--The Refinancing."
<TABLE>
<CAPTION>
NAME OF PROPERTY NO. OF APARTMENTS
AND PERCENTAGE AND/OR COMMERCIAL OCCUPANCY AT
OWNERSHIP INTERESTS LOCATION SQUARE FOOTAGE SEPTEMBER 30, 1996
--------------------- ---------------------- -------------------- ---------------------
<S> <C> <C> <C>
GREAT PROPERTIES
Dogwood Hills Apartments (100%) Hamden, CT 46 97.8%
Hamden Center Apartments (100%) Hamden, CT 65 95.4%
Baron Apartments (100%) Southington, CT 54 100%
Cambridge Estates (100%) Norwich, CT 92 100%
PROPERTY PARTNERSHIP PROPERTIES
Grove Avon Associates Limited Partnership Avon, CT 146 97.2%
(Avonplace Condominiums) (76%)
Burgundy Associates Limited Partnership Middletown, CT 102 96.1%
(Burgundy Studios Apartments) (62%)
Grove-Ellington Associates Limited Partnership Ellington, CT 28/4,016 sq. ft. 96.4%
(Arbor Commons) (100%)
Grove-Enfield Associates Limited Partnership Enfield, CT 168 98.8%
(Fox Hill Apartments) (77%)
Grove-Longmeadow Associates Limited Partnership Longmeadow, MA 98,077 sq. ft. 100%
(The Longmeadow Shops) (25%)
Grove-Manchester Associates Limited Partnership Manchester, CT 28/9,597 sq. ft. 100%
(208-210 Main Street Apartments) (100%)
Grove Properties III Limited Partnership West Hartford, CT 43 100%
(Loomis Manor) (59%)
Grove Opportunity Fund II Limited Partnership Cranston, RI 48 97.9%
(Dean Estates II Apartments) (61%)
Grove-Newington Associates Limited Partnership Newington, CT 73 97.3%
(Woodbridge Apartments) (100%)
Grove Opportunity Fund II Limited Partnership Cranston, RI 76 94.3%
(Royale Apartments) (61%)
Grove-Plainville Associates Limited Partnership Plainville, CT 104 96.2%
(Colonial Village Apartments) (100%)
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
NAME OF PROPERTY NO. OF APARTMENTS
AND PERCENTAGE AND/OR COMMERCIAL OCCUPANCY AT
OWNERSHIP INTERESTS LOCATION SQUARE FOOTAGE SEPTEMBER 30, 1996
--------------------- ---------------------- -------------------- ---------------------
<S> <C> <C> <C>
Grove Properties III Limited Partnership Newington, CT 64 95.3%
(Bradford Commons) (59%)
Grove-Taunton Associates Limited Partnership Taunton, MA 58 93.1%
(Dean Estates Apartments) (100%)
Grove-Vernon Associates Limited Partnership Vernon, CT 74 96.0%
(Fox Hill Commons) (100%)
Grove-West Hartford Associates Limited Partnership West Hartford, CT 63 98.4%
(Park Place West) (100%)
Grove-West Springfield Associates Limited Partnership West Springfield, MA 109/1,630 sq. ft. 99.1%
(Van Deene Manor) (43%)
Grove-Westfield Associates Limited Partnership Westfield, MA 63 100%
(Security Manor) (43%)
Grove Westwynd Associates Limited Partnership West Hartford, CT 46 91.3%
(Westwynd Apartments) (59%)
Shoreline London Associates Limited Partnership New London, CT 163 95.6%
(Ocean Reef Apartments) (61%)
Nautilus Properties Limited Partnership New London, CT 39 3.4%
(Sandalwood Apartments) (1) (61%)
--------------------
Total 1,752/113,320 sq.ft.
--------------------
--------------------
</TABLE>
- ------------------------
(1) The Sandalwood Apartments Property was purchased in November 1995 and was
rebuilt in 1996. Sandalwood Apartments was not available for lease until
August 1996, and is currently in the lease-up stage. Sandalwood Apartments
is expected to be fully leased-up and stabilized by December 31, 1996.
THE COMPANY
Upon completion of the Consolidation Transactions, the Company will be a
self-administered and self-managed REIT and the Company believes that it will be
one of the largest public owners of multi-family residential properties in
Southern New England. The Company will conduct substantially all of its
operations through the Operating Partnership. Grove Property will own an
interest in the Operating Partnership of not less than 63% and will control the
Operating Partnership as the sole general partner. The Company will own,
directly or indirectly, 100% of the interests in the four GREAT Properties and
each of the seven Partnership Properties currently owned by the Liquidating
Partnerships, and will control the remaining thirteen Properties through a
general partnership interest in the Property Partnerships that own such
Properties. See "THE COMPANY--General."
Following the consummation of the Consolidation Transactions, (i) the
Company will provide property management services to the Properties and other
real property controlled by the Grove Companies utilizing the assets related
thereto acquired from the Management Company in the Consolidation and (ii)
National Realty, wholly-owned by certain Executive Officers, will be the
exclusive provider of real estate brokerage services to the Company. See "THE
COMPANY--Property Management Services," "CERTAIN RELATIONSHIPS AND
TRANSACTIONS--Management Services" and "--National Realty."
In connection with the Consolidation Transactions, the Company will change
its distribution policy. The Board has concluded that enhancement of Shareholder
value can better be achieved through growth in the Company's asset value, which
management believes will be reflected in the market price of the Common Shares,
rather than maintaining or increasing the distribution yield on the Common
Shares. Therefore, the Board has voted to reduce the quarterly cash
distributions to Shareholders, effective upon consummation of the Consolidation
Transactions, from $.92 per Common Share to $.63 per Common
16
<PAGE>
Share ($.74 per Common Share before giving effect to the Stock Split). The
Company intends to continue to comply with the REIT requirements under the Code
that 95% of the Company's REIT taxable income be distributed annually, while
retaining for reinvestment in the Company the maximum amount permitted under the
Code.
For a detailed description of the business to be engaged in by the Company,
including, without limitation, the Company's business objectives and strategies,
acquisition strategies and distribution policy, see "THE COMPANY."
BENEFITS TO RELATED PARTIES; CONFLICTS OF INTEREST; INTERESTS OF CERTAIN PERSONS
BENEFITS TO RELATED PARTIES. In addition to the benefits to be received by
the Grove Companies in connection with the exchange of their Property
Partnership interests pursuant to the Contribution Agreement (which exchange
will be on the same terms as the exchange of Property Partnership Units pursuant
to the Exchange Offer), the Grove Companies (including certain Executive
Officers) will realize certain other benefits from the Consolidation
Transactions, including the following:
- In connection with the transfer of certain assets and liabilities of the
Management Company to the Operating Partnership, the Management Owners
will receive an aggregate of 687,076 Common Units. In connection with the
transfer of its interests in the Property Partnerships to the Operating
Partnership, the Grove Companies will receive an aggregate of 247,578
Common Units. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Terms of the Consolidation Transactions--The Consolidation" and
"CERTAIN RELATIONSHIPS AND TRANSACTIONS--Transactions with Executive
Officers--Receipt of Common Units by Executive Officers."
- Guarantees of approximately $26.8 million of mortgage indebtedness by
Messrs. Damon Navarro and Brian Navarro will be released in connection
with the repayment of indebtedness on the Partnership Properties as part
of the Refinancing.
- Each Executive Officer will enter into a new employment agreement with
Grove Property, pursuant to which he will receive (i) a 10-year option
pursuant the 1996 Plan, to purchase Common Shares at a price per share
equal to the market price of a Common Share on the date of grant, (ii)
1997 base salaries of: $50,000--Damon Navarro; $50,000--Brian Navarro;
$50,000--Edmund Navarro; $50,000--Joseph LaBrosse; and $25,000--Gerald
McNamara and (iii) annual Deferred Stock Grants (if earned) in accordance
with the 1996 Plan. See "EXECUTIVE COMPENSATION--1996 Share Incentive
Plan" and "--Employment Agreements; Non-Competition Agreements." If an
Executive Officer's employment with the Company is terminated "without
cause" by the Company or by the Executive Officer following a "change in
control" or for "good reason" (as such terms are defined in the employment
agreements), such Executive Officer will be entitled to a lump sum payment
equal to 200 percent of his annual base salary plus an amount equal to the
aggregate value of all bonuses, whether cash, stock, options or otherwise
(but specifically excluding the Deferred Stock Grants), paid to such
Executive Officer for the previous year.
- The Grove Companies will no longer be liable as a general partner of the
Property Partnerships for future operations of the Partnership Properties.
- The Property Partnerships will repay their net outstanding indebtedness to
NAVAB Associates (approximately $1.19 million at September 30, 1996), and
will receive payment from NAVAB for outstanding receivables (approximately
$0.7 million at September 30, 1996). NAVAB is a partnership owned by Damon
and Brian Navarro and George and Ronald Abdow. NAVAB Associates will, in
turn, use the net proceeds of approximately $0.5 million to repay its
outstanding bank indebtedness of approximately the same amount, which debt
is guaranteed by the Navarros and the Abdows.
17
<PAGE>
- To the extent they receive Common Units rather than cash pursuant to the
Contribution Agreement, the Grove Companies will experience a partial
deferral of the federal income tax consequences associated with their
contribution of assets to the Operating Partnership.
- The Grove Companies will obtain improved liquidity of their investments as
a result of the Consolidation Transactions. The Grove Companies will
receive Common Units, which may be redeemed for cash, or, at the option of
the Company, exchanged for Common Shares. Unlike interests in real estate
or a property management company, the Common Shares will be freely
transferable (subject to applicable securities laws and certain agreements
restricting transfer). See "THE OP PARTNERSHIP AGREEMENT--Limited Partner
Redemption/Exchange Rights" and "SHARES AVAILABLE FOR FUTURE
SALE--Registration Rights."
CONFLICTS OF INTEREST. The Executive Officers have interests that conflict
with the interests of the other Shareholders, the Limited Partners (including
the Limited Partners who elect to participate in the Consolidation Transactions)
and the persons acquiring Common Shares or Common Units in the New Equity
Investment. GREAT and the Grove Companies have been represented by the same
legal counsel and, therefore, neither GREAT nor the Property Partnerships has
been advised by separate legal counsel in connection with the Consolidation
Transactions.
The Grove Companies will continue to hold limited and general partner
interests in 15 limited partnerships that own, in the aggregate, 14 multi-family
residential projects with a total of approximately 1,600 apartments and seven
retail and mixed-use projects with a total of approximately 125,000 rentable
square feet (such properties comprise the Excluded Properties), and the five
Executive Officers will remain officers or directors of the Grove Companies,
including entities that have interests in the limited partnerships that own the
Excluded Properties, and will therefore have conflicts of interest in allocating
their time between the Company and such entities. See "APPROVAL OF THE
CONSOLIDATION TRANSACTIONS (Proposal 1)--Benefits to Certain Parties; Conflicts
of Interest; Interests of Certain Persons." In addition, Brian Navarro, Vice
President--Acquisition of the Company, will continue to serve as the President
of National Realty, which will be the exclusive provider of real estate
brokerage services to the Company and the limited partnerships that own the
Excluded Properties following the consummation of the Consolidation
Transactions. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Information About the Management Company" and "CERTAIN RELATIONSHIPS AND
TRANSACTIONS--Transactions With the Grove Companies--National Realty." The Grove
Companies and each of the Executive Officers have entered into agreements with
the Company which, among other things, will require each of the Executive
Officers to allocate a substantial amount of his working time to the Company.
See "MANAGEMENT--Non-Competition Agreements."
Also, the Management Owners may have conflicts of interest as a result of
their ownership of National Realty, which will continue to provide real estate
brokerage services to the Company, the limited partnerships that own the
Excluded Properties and third parties following the consummation of the
Consolidation Transactions. See "CERTAIN RELATIONSHIPS AND
TRANSACTIONS--Transactions With the Grove Companies--National Realty."
Also, following the consummation of the Consolidation Transactions, the
Operating Partnership will, pursuant to management services contracts, provide
certain real estate management services to the Grove Companies (including to the
limited partnerships that own the Excluded Properties) currently provided by the
Management Company. Certain Executive Officers may have conflicts of interest in
the negotiation and enforcement of such management services contracts as a
result of their ownership of the Grove Companies and interests in the Excluded
Properties.
The Executive Officers had conflicts of interest in establishing the terms
of the Consolidation Transactions and the provisions of the employment
agreements with the Executive Officers and the non-competition agreements. They
will also have a conflict of interest with respect to their obligations as Trust
Managers and Executive Officers to enforce the terms of various agreements, and
their objectives with
18
<PAGE>
respect to the sale of or repayment of indebtedness on any of the Partnership
Properties may differ from those of other Shareholders. Any decision regarding
the enforcement of contracts between the Company and the Grove Companies or any
Executive Officer, individually, and the sales or refinancings of Partnership
Properties, will be made by a majority of the members of the Board that are not
employed by or affiliated with the Grove Companies (the "INDEPENDENT TRUST
MANAGERS"). The Executive Officers may, however, use their positions as
executive officers and trust managers to influence the Independent Trust
Managers in this regard.
THE BOARD HAS DETERMINED THAT THE CONSOLIDATION TRANSACTIONS ARE IN THE
BEST INTERESTS OF THE COMPANY AND THE SHAREHOLDERS AND HAS UNANIMOUSLY
APPROVED THE CONSOLIDATION TRANSACTIONS. THE BOARD UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE CONSOLIDATION
TRANSACTIONS.
19
<PAGE>
THE CHARTER AMENDMENTS (PROPOSAL 2)
The Board has approved and recommends the approval by the Shareholders of
the following amendments to the Charter in connection with the consummation of
the Consolidation Transactions:
PROPOSAL TO DELETE THE THIRD PARTY APPRAISAL REQUIREMENT. To delete the
existing requirement that GREAT receive an independent third party appraisal
before purchasing any property, ownership of which is controlled by the
executive officers of GREAT or their affiliates. The Company believes that the
Independent Trust Managers are equally or better able to properly assess values
for such properties than independent third party appraisals. Such third party
appraisals may produce substantially varying valuations based upon such factors
as the party who commissions the appraisal, the reason for the appraisal, the
valuation methodology applied and the method of compensating the appraiser. The
Company has not obtained such third party appraisals with respect to any of the
Properties in connection with the Consolidation Transactions or otherwise.
PROPOSAL TO CHANGE THE NAME OF GREAT. To change the name of GREAT to "Grove
Property Trust." The Company believes that it is appropriate, in connection with
the consummation of the Consolidation Transactions, to change the name of GREAT
to reflect to potential new investors in the Company, and to the public
generally, the transformation in size, diversification, strategy and investment
philosophy which GREAT will experience as a result of the Consolidation
Transactions.
PROPOSAL TO AMEND "EXCESS SHARES" PROVISIONS. To amend the "Excess Shares"
provisions of the Charter in order to minimize the risk that GREAT could fail
the "closely held" test set forth in section 856 of the Code, and thereby fail
to qualify as a REIT for federal income tax purposes, and to clarify the
"Ownership Limit" as it applies to certain Executive Officers and their
affiliates.
APPROVAL OF THE CHARTER AMENDMENTS IS A CONDITION TO THE CONSUMMATION OF THE
CONSOLIDATION TRANSACTIONS AND IS CONDITIONED UPON THE APPROVAL OF THE
CONSOLIDATION TRANSACTIONS (PROPOSAL 1) AND THE 1996 PLAN (PROPOSAL 3). THE
BOARD UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE
CHARTER AMENDMENTS.
THE 1996 PLAN (PROPOSAL 3)
The Board has approved and recommends that the Shareholders approve the 1996
Plan to (i) make available up to 900,000 Common Shares for grants of stock
options and other incentive awards and (ii) permit performance-based awards to
key employees of the Company payable in Common Shares, including Deferred Stock
Grants, as incentive compensation upon the achievement by the Company of
enumerated goals. For a detailed description of the terms and conditions of the
1996 Plan, see "PROPOSAL TO ADOPT THE 1996 SHARE INCENTIVE PLAN (Proposal 3)."
APPROVAL OF THE 1996 PLAN IS A CONDITION TO THE CONSUMMATION OF THE
CONSOLIDATION TRANSACTIONS AND IS CONDITIONED UPON THE APPROVAL OF THE
CONSOLIDATION TRANSACTIONS (PROPOSAL 1) AND THE CHARTER AMENDMENTS (PROPOSAL 2).
THE BOARD UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE
1996 PLAN.
20
<PAGE>
SOURCES AND USES OF FUNDS
The following table sets forth a summary of the expected sources and uses of
funds required to consummate the Consolidation Transactions, assuming the
Consolidation Transactions were consummated as of September 30, 1996. Gross
proceeds to the Company from the New Equity Investment are anticipated to be
$30.0 million ($27.835 million after payment of fees and expenses related to the
New Equity Investment). The Company will use such gross proceeds, together with
borrowings under the Long-Term Facility and the Revolving Credit Facility, to
(i) make capital contributions of $30.0 million, in the aggregate, to certain
Property Partnerships in order to refinance $39.8 million of outstanding
mortgage indebtedness on 17 Partnership Properties, (ii) pay $5.1 million, in
the aggregate, in respect of cash consideration to certain Limited Partners
tendering their Property Partnership Units in the Exchange Offer, (iii) make
capital contributions of $2.1 million, in the aggregate, to the Liquidating
Partnerships to facilitate the payment by the Liquidating Partnerships of cash
distributions to the remaining Limited Partners upon the liquidation thereof,
(iv) pay $2.75 million of fees and expenses relating to the Consolidation
Transactions and (v) pay an aggregate of $476,168 of indebtedness owing to NAVAB
Associates and certain other affiliates of the Company.
<TABLE>
<CAPTION>
(THOUSANDS)
<S> <C>
SOURCES OF FUNDS:
Proceeds from New Equity Investment.............................................. $ 30,000
Proceeds from Long-Term Facility................................................. 15,143
Draw at Closing on Revolving Credit Facility..................................... 3,399
Cash on hand (including restricted cash) --Property Partnerships................. 2,087
Cash on hand (including restricted cash)--GREAT.................................. 599
-----------
Total Sources of Funds....................................................... $ 51,228
-----------
-----------
USES OF FUNDS:
Pay off existing debt of Property Partnerships................................... $ 39,800
Purchase of Non-Accredited Investor and certain other Limited Partner Property
Partnership Units.............................................................. 7,208
Financing costs.................................................................. 585
Offering expenses:
Consolidation expenses......................................................... 920
Legal, accounting and printing expenses........................................ 445
Advisory fee................................................................... 800
-----------
Sub-Total--Offering Expenses................................................. 2,165
-----------
Net Payoff of NAVAB/Affiliate loans.............................................. 476
-----------
Security deposit escrows......................................................... 794
Working Capital.................................................................. 200
-----------
Total Uses of Funds.......................................................... $ 51,228
-----------
-----------
</TABLE>
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of GREAT (unaudited) as of
September 30, 1996 on an historical basis, and of the Company on a pro forma
basis as adjusted to give effect to the Consolidation Transactions and the
application of the proceeds therefrom as described under the captions "APPROVAL
OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Terms of the Consolidation
Transactions--The Refinancing." The information set forth in the following table
should be read in conjunction with the historical financial statements of GREAT
and notes thereto, the combined historical financial information for the
Property Partnerships and the Management Company, the pro forma financial
information of the Company and the notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
<S> <C> <C>
HISTORICAL PRO FORMA
----------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Mortgage notes payable(1)........................................ $ 5,675 $ 29,251
Borrowings under Revolving Credit Facility(2).................... 3,399
-----------
Total debt......................................................... 5,675 32,650
Minority interest in the Operating Partnership(3).................. 10,061
Shareholders' Equity:
Preferred Shares, $.01 par value, 4,000,000 shares authorized, none
issued or outstanding............................................ -- --
Common Shares, $.01 par value, 10,000,000 shares authorized,
525,000 shares (historical) and 3,953,463
(pro forma) shares issued and outstanding(4)..................... 5 40
Additional paid-in capital......................................... 3,915 21,057
Distributions in excess of earnings................................ (388) --
Total shareholders' equity......................................... 3,530 21,097
----------- -----------
Total capitalization............................................. $ 9,205 $ 63,808
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) The Company, on behalf of the Operating Partnership, has obtained a written
commitment for the approximately $15.1 million Long-Term Facility, the
closing of which is a condition to the consummation of the Consolidation
Transactions. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Terms of the Consolidation Transactions--The Refinancing--Long-Term
Facility."
(2) The Company, on behalf of the Operating Partnership, has obtained a written
commitment to establish a Revolving Credit Facility of up to $25.0 million,
the closing of which is a condition to the consummation of the Consolidation
Transactions. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Terms of the Consolidation Transactions--The Refinancing-- Revolving
Credit Facility."
(3) Based upon 1,885,312 Common Units issued to Limited Partners outstanding, of
the 5,838,775 Common Shares (assuming exchange of all Common Units for
Common Shares) assumed to be outstanding (32.29%).
(4) Excludes 900,000 Common Shares reserved for issuance pursuant to the 1996
Plan. See "PROPOSAL TO ADOPT THE 1996 SHARE INCENTIVE PLAN (Proposal 3)."
22
<PAGE>
SUMMARY SELECTED FINANCIAL AND OPERATING DATA
Historical financial statements for GREAT, and on a combined basis for the
Property Partnerships and the Management Company, are included at pages F-8
through F-34 of this Proxy Statement.
The following table sets forth certain summary financial and operating data
on a consolidated pro forma basis for the Company and on a combined historical
basis for the Management Company and the Property Partnerships. The following
information should be read in conjunction with all of the financial statements
and notes thereto included elsewhere in this Proxy Statement. The combined
historical operating information of the Management Company and the Property
Partnerships for the years ended December 31, 1995 and 1994 has been derived
from the historical combined financial statements audited by Ernst & Young LLP,
independent auditors, whose report with respect thereto is included elsewhere in
this Proxy Statement. The historical operating information of GREAT for the year
ended December 31, 1995 and the period from inception (June 24, 1994) to
December 31, 1994, has been derived from the historical financial statements
audited by BDO, Seidman, LLP, independent public accountants, whose report with
respect thereto is included elsewhere in this Proxy Statement. The operating
information for the nine months ended September 30, 1996 and 1995 has been
derived from the unaudited financial statements of GREAT and the unaudited
combined financial statements of the Management Company and the Property
Partnerships. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and results of
operations for these periods. The results of operations for the nine months
ended September 30, 1996 and 1995 are not necessarily indicative of the results
to be obtained for the full fiscal year.
The unaudited pro forma information assumes completion of the Consolidation
Transactions, the New Equity Investment, the Refinancing and the use of the net
proceeds therefrom as described elsewhere in this Proxy Statement, as of the
beginning of the periods presented for the operating data and as of the balance
sheet date for the balance sheet data. In management's opinion, all adjustments
necessary to present fairly the effects of the Consolidation Transactions have
been made. THE UNAUDITED PRO FORMA INFORMATION IS NOT NECESSARILY INDICATIVE OF
WHAT THE ACTUAL RESULTS OF OPERATIONS OR FINANCIAL CONDITION WOULD HAVE BEEN FOR
THE PERIOD OR AT THE DATES INDICATED, NOR DOES IT PURPORT TO REPRESENT THE
FUTURE RESULTS OF OPERATIONS AS OF ANY FUTURE DATE OR FOR ANY FUTURE PERIODS.
FUNDS FROM OPERATIONS (AS DEFINED) SHOULD NOT BE CONSIDERED A SUBSTITUTE FOR NET
INCOME AS A MEASURE OF PROFITABILITY NOR IS IT COMPARABLE TO CASH FLOW FROM
OPERATIONS DETERMINED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES. THE PRO FORMA OPERATING INFORMATION SHOULD BE READ IN CONJUNCTION
WITH THE HISTORICAL FINANCIAL INFORMATION INCLUDED IN THIS PROXY STATEMENT.
23
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------------------------- --------------------------------------------------------
CONSOLIDATED CONSOLIDATED GREAT
PRO GREAT COMBINED PRO GREAT COMBINED PRO
FORMA(2) HISTORICAL HISTORICAL FORMA(2) HISTORICAL HISTORICAL FORMA(6)
---------- -------------- -------------- ---------- -------------- ---------------- ---------
1996 1996 1995 1996 1995 1995 1995 1994 1995 1994 1994
---------- ------ ------ ------ ------ ---------- ------ ------ ------- ------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating
Information:
Revenues:
Rental $10,990 $1,521 $ 962 $9,644 $8,864 $13,733 $1,287 $ 641 $11,965 $11,462 $1,215
Property
management 593 1,198 914 911 1,473 1,103 --
Interest and
other 146 28 22 243 449 476 30 13 445 563 22
---------- ------ ------ ------ ------ ---------- ------ ------ ------- ------- ---------
Total revenues 11,729 1,549 984 11,085 10,227 15,120 1,317 654 13,883 13,128 1,237
Total operating
expenses 5,887 775 503 5,481 4,924 7,272 677 334 6,771 6,762 685
Interest 1,874 292 64 2,807 2,861 2,499 85 44 3,829 3,817 84
Depreciation
and
amortization 2,675 293 162 2,346 2,348 3,520 216 117 3,140 3,165 216
---------- ------ ------ ------ ------ ---------- ------ ------ ------- ------- ---------
Income (loss)
before
minority
interest and
extraordinary
items 1,293 -- -- -- -- 1,829 -- -- -- -- --
Minority
interest in
earnings(7) 418 591
---------- ----------
Income (loss)
before
extraordinary
items $ 875 189 255 451 94 $ 1,238 339 159 143 (616) $ 252
---------- ---------- ---------
---------- ---------- ---------
Net income(3) $ 189 $ 255 $ 451 $2,280 $ 339 $ 159 $ 2,329 $ 1,155
------ ------ ------ ------ ------ ------ ------- -------
------ ------ ------ ------ ------ ------ ------- -------
Net income per
share(4) $ 0.22 $ 0.36 $ 0.49 $ 0.31 $ 0.64 $ 0.30 --
---------- ------ ------ ---------- ------ ------ ---------
---------- ------ ------ ---------- ------ ------ ---------
Other
information:
Funds from
Operations
(1) $ 3,922 $ 471 $ 408 $2,412 $2,012 $ 5,251 $ 552 $ 269 $ 2,685 $ 2,081 502
Total rental
properties 24 4 3 21 19 24 3 3 20 19 3
Total number of
apartments
(end of
period) 1,752 257 165 1,495 1,456 1,713 165 165 1,456 1,354 166
Physical
occupancy
(end of
period) 97.18% 98.44% 98.79% 96.95% 96.56% 96.97% 99.39% 97.58% 96.97% 95.91% 97.58%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
SEPTEMBER 30, 1996 ------------------------
---------------------------------------
HISTORICAL HISTORICAL
------------------------ ------------------------
PRO FORMA(5) GREAT COMBINED GREAT COMBINED
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Information:
Real estate assets $ 63,657 $ 8,804 $ 54,944 $ 4,698 $ 55,579
Total assets 66,066 9,547 59,163 5,241 61,678
Total debt 32,650 5,675 47,518 1,190 46,786
Shareholders'/owners' equity 21,097 3,530 8,822 3,703 12,259
</TABLE>
24
<PAGE>
- ------------------------
(1) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 (the "WHITE PAPER") defines Funds from Operations ("FFO") as net
income (loss) (computed in accordance with generally accepted accounting
principles ("GAAP")), excluding gains (or losses) from debt restructuring
and sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. Management considers FFO an appropriate measure of performance of
an equity REIT because it is predicated on cash flow analyses. The Company
computes FFO in accordance with standards established by the White Paper
which may differ from the methodology for calculating FFO utilized by other
equity REITs and, accordingly, may not be comparable to such other REITs.
FFO should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indicator of the Company's financial performance
or to cash flow from operating activities (determined in accordance with
GAAP) as a measure of the Company's liquidity, nor is it indicative of funds
available to fund the Company's cash needs, including its ability to make
distributions.
(2) Pro forma data assumes the consummation of the Consolidation Transactions as
of the beginning of the periods presented. For detailed pro forma
adjustments, see the pro forma financial statements included at pages F-2
through F-7 of this Proxy Statement.
(3) For the years ended 1995 and 1994 and the nine months ended September 30,
1995, the Company realized extraordinary gains of $2,186, $1,771 and $2,186,
respectively, resulting from the restructuring of certain mortgage debt.
(4) The pro forma net income per share calculations for the year ended December
31, 1995 and the nine months ended September 30, 1996 give effect to the
Stock Split of 95,130 Common Shares to be declared and issued immediately
prior to the consummation of the Consolidation Transactions and the issuance
of 3,333,333 Common Shares to New Equity Investors in the New Equity
Investment. Earnings per Common Share for the combined historical financial
statements of the Management Company and the Property Partnerships is not
presented. The Company believes that such information would not be useful or
meaningful to the Shareholders.
(5) Assumes the consummation of the Consolidation Transactions on September 30,
1996, and reflects the application of the estimated net proceeds therefrom.
See "SUMMARY--Sources and Uses of Funds."
(6) GREAT completed its IPO on June 23, 1994. Pro forma information is presented
for GREAT and its predecessors for the year ended December 31, 1994. For
detailed information regarding the pro forma adjustments in connection with
such presentation see the GREAT financial statements included at pages F-8
through F-24 of this Proxy Statement.
(7) Based upon 1,885,312 Common Units issued to Limited Partners outstanding, of
the 5,838,775 Common Shares (assuming the exchange of all Common Units for
Common Shares) assumed to be outstanding (32.29%).
25
<PAGE>
THE SPECIAL MEETING
OUTSTANDING SHARES AND VOTING RIGHTS
RECORD DATE. Only Shareholders of record at the close of business on the
Record Date are entitled to notice of and to vote at the Special Meeting or any
adjournment(s) thereof.
QUORUM. The Bylaws provide that the presence, in person or by proxy, of
Shareholders entitled to cast a majority of all the votes entitled to be cast at
the Special Meeting shall constitute a quorum. Abstentions, but not broker
non-votes (I.E., votes not cast by a broker or other record holder in "street"
or nominee name solely because such record holder does not have discretionary
authority to vote on the matter), will be treated as Common Shares that are
present, or represented, and entitled to vote for purposes of determining the
presence of a quorum at the Special Meeting.
VOTING RIGHTS. The securities that can be voted at the Special Meeting
consist of the 525,000 issued and outstanding Common Shares, with each Common
Share entitling its owner to one vote on all matters. There is no cumulative
voting of Common Shares. At the close of business on the Record Date, GREAT had
outstanding 525,000 Common Shares. Shareholders' votes will be tabulated by the
persons appointed by the Chairman of the Special Meeting to act as inspectors
for the Special Meeting pursuant to the Bylaws.
NO APPRAISAL RIGHTS. Shareholders are not entitled, under Maryland law or
the Charter, to appraisal rights with respect to the Consolidation Transactions.
REASONS FOR SEEKING SHAREHOLDER APPROVAL. Approval of the Consolidation
Transactions is not required by Maryland law, the Charter or the Bylaws. Rather,
GREAT is seeking Shareholder approval of the Consolidation Transactions pursuant
to the rules promulgated by the AMEX. Section712 of the American Stock Exchange
Company Guide (the "AMEX COMPANY GUIDE") requires shareholder approval (pursuant
to a proxy solicitation conforming to the SEC proxy rules) as a prerequisite to
approval of applications to list additional shares to be issued as sole or
partial consideration for an acquisition of the stock or assets of another
company where the present or potential issuance of common stock, or securities
convertible into common stock, could result in an increase in outstanding common
shares of 20% or more. It is anticipated that, in connection with the
Consolidation Transactions, Common Shares issuable pursuant to the Contribution
Agreement, the New Equity Investment and the Exchange Offer (including Common
Shares issuable at the Company's option upon exchange of the Common Units to be
issued) will result in an increase in the outstanding Common Shares of GREAT of
20% or more.
The Charter Amendments require Shareholder approval under the Charter and
Maryland law. The Charter provides that, with certain limited exceptions, it may
be amended only by the affirmative vote of the holders of not less than
two-thirds of all of the shares of capital stock of GREAT then outstanding and
entitled to vote on the matter. See "CERTAIN PROVISIONS OF MARYLAND LAW AND OF
GREAT'S DECLARATION OF TRUST AND BYLAWS--Amendment of Declaration of Trust" and
"PROPOSAL TO AMEND THE CHARTER (Proposal 2)."
The adoption of the 1996 Plan requires Shareholder approval pursuant to
Section 162(m) of the Code as well as pursuant to Section711 of the AMEX Company
Guide. Section 162(m) of the Code limits corporate deductions to $1.0 million
per year for compensation paid to the chief executive officer and each of the
four other most highly compensated executives of public companies. "Qualified
performance based compensation" is excluded from the $1.0 million annual cap. In
order for the options to be reserved for grant, and the Deferred Stock Grants to
be issued, pursuant to the 1996 Plan following the effectiveness of the 1996
Plan (and other awards to be issued thereunder) to be "qualified performance
based compensation," the 1996 Plan must (among other things) be disclosed to,
and approved by the affirmative vote of, a majority of the Shareholders.
Section711 of the AMEX Company Guide provides that approval of shareholders
26
<PAGE>
(pursuant to a proxy solicitation conforming to the SEC proxy rules) is required
as a prerequisite to approval of applications to list additional shares reserved
for options granted or to be granted to officers, directors or key employees.
See "THE 1996 SHARE INCENTIVE PLAN (Proposal 3)--Vote Required."
VOTE REQUIRED
VOTE REQUIRED TO APPROVE THE CONSOLIDATION TRANSACTIONS (PROPOSAL 1). In
order to approve the Consolidation Transactions, Section710 of the AMEX Company
Guide requires the affirmative vote of a majority of the total votes cast on the
proposal at the Special Meeting, whether in person or by proxy. Abstentions and
broker non-votes will have no effect on the result of the vote to approve the
Consolidation Transactions. Approval of the Consolidation Transactions is
conditioned upon approval of the Charter Amendments and the 1996 Plan.
VOTE REQUIRED TO APPROVE THE CHARTER AMENDMENTS (PROPOSAL 2). The
affirmative vote of the holders of not less than two-thirds of all outstanding
Common Shares is required to approve the Charter Amendments. Because the
affirmative vote of two-thirds of the outstanding Common Shares is required to
approve this proposal, abstentions and broker non-votes will have the effect of
a vote against the proposed Charter Amendments. Approval of the Charter
Amendments by the requisite vote of Shareholders is a condition to the
consummation of the Consolidation Transactions. Approval of the Charter
Amendments is conditioned upon approval of the Consolidation Transactions and
the 1996 Plan.
VOTE REQUIRED TO APPROVE THE 1996 PLAN (PROPOSAL 3). Pursuant to Section
162(m) of the Code, the 1996 Plan must be approved by the affirmative vote of a
majority of the Shareholders present at the Special Meeting, whether in person
or by proxy. Pursuant to Section710 of the AMEX Company Guide, the affirmative
vote, in person or by proxy, of a majority of the total votes cast on the
proposal at the Special Meeting, whether in person or by proxy, is required to
approve the 1996 Plan. Abstentions and broker non-votes will have no effect on
the result of the vote to approve the 1996 Plan. Approval of the 1996 Plan by
the requisite vote of Shareholders is a condition to the consummation of the
Consolidation Transactions. Approval of the 1996 Plan is conditioned upon the
approval of the Charter Amendments and the Consolidation Transactions and the
1996 Plan.
The Executive Officers and the Board own, in the aggregate, 63,250 Common
Shares. Each such person has advised GREAT that he intends to vote the Common
Shares owned by him FOR each of the three Proposals.
PROXIES
The Common Shares represented by each properly executed proxy not
subsequently revoked will be voted at the Special Meeting in accordance with the
instructions contained therein. IF NO SPECIFICATION IS MADE, THE PROXY WILL BE
VOTED (I) FOR PROPOSAL 1 TO APPROVE THE CONSOLIDATION TRANSACTIONS, (II) FOR
PROPOSAL 2 TO APPROVE AND ADOPT THE CHARTER AMENDMENTS AND (III) FOR PROPOSAL 3
TO APPROVE THE 1996 PLAN.
A Shareholder giving a proxy in the form accompanying this Proxy Statement
has the right to revoke the proxy prior to its exercise by (i) filing prior to
the Special Meeting a written notice of revocation bearing a later date with
Joseph LaBrosse, Secretary, Grove Real Estate Asset Trust, 598 Asylum Avenue,
Hartford, Connecticut 06105, (ii) delivering to GREAT a duly executed Proxy Card
bearing a later date, or (iii) attending the Special Meeting and voting in
person.
If necessary, the holders of the proxies may vote in favor of a proposal to
adjourn the Special Meeting to permit further solicitation of proxies in order
to obtain sufficient votes to approve any of the matters being considered at the
Special Meeting. If the Special Meeting is adjourned for any reason, at any
subsequent reconvening of the Special Meeting, all proxies may be voted in the
same manner as such
27
<PAGE>
proxies would have been voted at the original convening of the Special Meeting
(except for any proxies that have theretofore been effectively revoked or
withdrawn).
The cost of soliciting proxies will be borne by the Company. In addition to
the use of the mails, proxies may be solicited personally or by telephone or
facsimile transmission by officers, directors and employees of the Company, who
will not be specifically compensated for such solicitation process, and by The
First Bank of Boston, a third party solicitor (and transfer agent for the Common
Shares) which the Company intends to engage for this purpose and which will
receive a fee estimated to be between $2,000 and $5,000 (plus out-of-pocket
expenses) for its services for soliciting such proxies.
SHAREHOLDERS ARE REQUESTED TO INDICATE THEIR VOTE, SIGN AND DATE THE
ENCLOSED PROXY CARD AND RETURN IT PROMPTLY TO THE COMPANY IN THE ADDRESSED
POSTAGE-PAID ENVELOPE THAT HAS BEEN PROVIDED FOR THAT PURPOSE.
THE BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE
CONSOLIDATION TRANSACTIONS, FOR THE CHARTER AMENDMENTS AND FOR THE 1996 PLAN,
EACH AS SET FORTH IN THIS PROXY STATEMENT.
28
<PAGE>
APPROVAL OF THE CONSOLIDATION TRANSACTIONS
(PROPOSAL 1)
THE FOLLOWING DISCUSSION SUMMARIZES THE MATERIAL ASPECTS OF THE
CONSOLIDATION TRANSACTIONS AS SET FORTH IN THE VARIOUS DOCUMENTS ASSOCIATED
THEREWITH, INCLUDING, WITHOUT LIMITATION, THE CONTRIBUTION AGREEMENT AND OTHER
AGREEMENTS, COPIES OF WHICH HAVE BEEN FILED AS EXHIBITS TO GREAT'S CURRENT
REPORT ON FORM 8-K FILED WITH THE SEC ON , 1996, THE CHARTER
AMENDMENTS, THE TEXT OF WHICH IS ATTACHED HERETO AS APPENDIX I, AND THE 1996
PLAN, A COPY OF WHICH IS ATTACHED HERETO AS APPENDIX II. THIS SUMMARY IS NOT
INTENDED TO BE A COMPLETE DESCRIPTION OF ANY OF THE AFOREMENTIONED DOCUMENTS OR
THE TRANSACTIONS CONTEMPLATED THEREBY AND IS SUBJECT TO, AND QUALIFIED IN ITS
ENTIRETY BY, REFERENCE TO THOSE AGREEMENTS. SEE "AVAILABLE INFORMATION."
INFORMATION ABOUT GREAT
GREAT is a self-administered REIT formed pursuant to the Maryland REIT Act
engaging in multi-family property acquisition and redevelopment. GREAT has owned
and operated three multi-family residential projects since its inception, and
acquired a fourth property in January 1996. The GREAT Properties, all of which
are located in Connecticut, are comprised of 257 residential apartment units
which had an aggregate weighted average occupancy rate of approximately 95.0%
during 1995.
GREAT was formed in 1994 to continue the multi-family property acquisition,
management and marketing operations and related business objectives and
strategies of Grove, formed in 1980 by Damon and Brian Navarro. Upon completion
of the IPO in June 1994 and the concurrent completion of the various
transactions that occurred simultaneously therewith, GREAT purchased its three
initial properties from affiliates of Grove: Dogwood Hills Apartments, Hamden
Center Apartments and Baron Apartments. In 1996, GREAT purchased its fourth
property, Cambridge Estates, from an affiliate of Grove. These four properties,
together, constitute the GREAT Properties. See "APPROVAL OF THE CONSOLIDATION
TRANSACTIONS (Proposal 1)--The Properties."
GREAT is operated under the direction of Damon Navarro, Chairman of the
Board of Trust Managers, President and Chief Executive Officer, and a management
team consisting of substantially all of the former personnel of Grove, being
Damon, Brian and Edmund Navarro, Joseph R. LaBrosse and Gerald A. McNamara, each
an Executive Officer, and the Trust Managers of GREAT, Messrs. Damon Navarro,
Joseph R. LaBrosse, James Twaddell, J. Joseph Garrahy and Harold Gorman. See
"MANAGEMENT--Trust Managers and Executive Officers." GREAT's Executive Officers
are substantially shared with the Grove Companies, and, as described below, the
Grove Companies have been providing property management and other support
services to GREAT from its inception. See "--Information About the Grove
Companies" and "--Information About the Management Company."
GREAT's executive offices are located at 598 Asylum Avenue, Hartford,
Connecticut 06105, (860) 520-4789.
INFORMATION ABOUT THE GROVE COMPANIES
Grove was formed in 1980 as a Southern New England real estate company based
in Hartford, Connecticut. Damon and Brian Navarro, co-founders of the Company,
began business operations by buying and managing small, multi-family properties
with limited partners as equity investors. From its formation, GREAT's Executive
Officers have been shared with the Grove Companies.
As used herein, the "Grove Companies" means Grove and its affiliates
(including certain companies and individuals) that own interests (directly or
indirectly) in the Management Company, any Property Partnership or any limited
partnership which owns any Excluded Property. The Grove Companies include,
without limitation, the Management Owners and Gerald McNamara, each an Executive
Officer and, in the case of Damon Navarro and Joseph LaBrosse, a Trust Manager
of GREAT, and Ronald and George Abdow.
29
<PAGE>
At September 30, 1996, the Grove Companies owned general partnership
interests in 42 limited partnerships, including the Property Partnerships (which
own the Partnership Properties) and 15 other limited partnerships which own the
Excluded Properties. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Benefits to Certain Parties; Conflicts of Interest; Interests of Certain
Persons." The remaining limited partnerships (other than the Property
Partnerships and the partnerships that own the Excluded Properties) in which the
Grove Companies own general and limited partnership interests do not own
properties, but rather are limited purpose partnerships formed by the Grove
Companies for various other purposes.
Pursuant to management and administrative service agreements, the Grove
Companies, primarily through the Management Company, provide accounting,
management, brokerage and marketing services to GREAT as well as to the Property
Partnerships and the limited partnerships that own the Excluded Properties.
In connection with the Consolidation, certain assets and liabilities of the
Management Company related to the provision of property management services will
be contributed to the Operating Partnership. For a more detailed discussion of
such services, see "--Information About the Management Company" and "THE
COMPANY--Property Management Services." The remaining assets and liabilities of
the Management Company, related to the provision of real estate brokerage and
related services, will be contributed to National Realty in connection with the
consummation of the Consolidation Transactions. Then, following the consummation
of the Consolidation Transactions, the Operating Partnership and National Realty
will provide to the Company and to the Grove Companies (including the limited
partnerships that own Excluded Properties) the real estate related services
currently provided by the Management Company. For a more detailed discussion of
such services, see "--Information About the Management Company" and "CERTAIN
TRANSACTIONS--Transactions With the Grove Companies-- National Realty."
INFORMATION ABOUT THE OPERATING PARTNERSHIP
The Operating Partnership is a newly formed limited partnership organized in
Delaware. GREAT is the sole general partner of the Operating Partnership. The
Operating Partnership was formed to act as the operating partnership of the
Company and the vehicle for the consolidation of ownership and/or control of the
operations and assets of GREAT, the Property Partnerships and certain assets and
liabilities of the Management Company. Following the consummation of the
Consolidation Transactions, (i) Grove Property will continue to be the sole
general partner of the Operating Partnership, (ii) Grove Property or the
Operating Partnership will be, directly or indirectly, the sole general partner
of each of the Property Partnerships, and (iii) the Operating Partnership will
own, directly or indirectly, the GREAT Assets and the Properties currently owned
by the Liquidating Partnerships. The Operating Partnership will be governed by
the OP Partnership Agreement. See "THE OP PARTNERSHIP AGREEMENT." Grove
Property, certain of the Limited Partners and the Grove Companies will, and
certain of the New Equity Investors may, own limited partnership interests in
the Operating Partnership.
Persons receiving Common Units in the Exchange Offer or pursuant to the
Contribution Agreement (including the Grove Companies) will be restricted from
transferring such Common Units for a period of one year from the completion of
the Consolidation Transactions. Each Common Unit will be redeemable following
the first anniversary of the completion of the Consolidation Transactions, for
cash (based on the fair market value of an equivalent number of Common Shares at
the time of such redemption) or, at the Company's option, it may exchange Common
Units for Common Shares on a one-for-one basis, subject to certain antidilution
adjustments and exceptions. See "THE OP PARTNERSHIP AGREEMENT -- Limited Partner
Redemption/Exchange Rights." Pursuant to a Registration Rights Agreement to be
entered into between GREAT and certain unitholders (the "REGISTRATION RIGHTS
AGREEMENT"), unitholders which receive Common Shares in exchange for Common
Units may have the right, subject to certain conditions, to receive such Common
Shares pursuant to a registration with the Securities and Exchange Commission
(the "SEC") which will result in such Common Shares (other than Common Shares
held by
30
<PAGE>
an affiliate of the Company) being freely transferable in the open market upon
receipt or, alternatively, to have the Company register the resale of such
Common Shares. See "SHARES AVAILABLE FOR FUTURE SALE--Registration Rights."
INFORMATION ABOUT THE MANAGEMENT COMPANY
GPS is a Connecticut limited partnership, wholly owned, directly or
indirectly, by the Management Owners. Since the IPO, the Management Company has
provided certain services to GREAT in connection with GREAT's real estate
operations, including, without limitation, accounting, marketing, management and
real estate brokerage services. GPS manages the GREAT Properties utilizing its
staff of professional and support personnel to supervise the personnel who work
on-site at the GREAT Properties. The accounting division of GPS (the "ACCOUNTING
DIVISION") audits and monitors the financial records of each GREAT Property. The
rental marketing personnel of GPS assure the marketability, realistic pricing
and aggressive promotion of the GREAT Properties. See "THE COMPANY--Property
Management Services." Immediately before the Consolidation Transactions, the
assets and liabilities of the Management Company arising out of or used in
connection with the provision of real estate brokerage services will be
contributed to National Realty, a newly formed Delaware limited partnership
wholly owned by the Management Owners. See "CERTAIN TRANSACTIONS--Transactions
With the Grove Companies-- The Contribution Agreement" and "--Transactions With
the Grove Companies--National Realty." Then, in connection with the
Consolidation, the remaining assets and liabilities of the Management Company
arising out of or used in connection with the provision of real estate
management services will be contributed by the Grove Companies to the Operating
Partnership. Following the consummation of the Consolidation Transactions, (i)
the Operating Partnership will provide to the Company and the limited
partnerships that own the Excluded Properties (pursuant to management services
contracts), the property management services currently provided by the
Management Company and (ii) National Realty will provide to the Company and the
limited partnerships that own the Excluded Properties the real estate brokerage
services currently provided by the Management Company.
INFORMATION ABOUT THE PROPERTY PARTNERSHIPS
The Property Partnerships, collectively, own the Partnership Properties. See
"APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--The Properties." Each
of the Property Partnerships is a limited purpose investment entity which was
formed by the Grove Companies to own the Partnership Property or Properties
currently owned by it. The Limited Partners own limited partnership interests in
the Property Partnerships and the Grove Companies own general and limited
partnership interests in the Property Partnerships.
In connection with the Consolidation Transactions, the Company expects that
the Liquidating Partnerships will be liquidated and the respective Partnership
Properties will be distributed, directly or indirectly, to the Operating
Partnership. The Company will not acquire title to the remaining 13 Partnership
Properties, but will instead acquire, through the Exchange Offer and the
Contribution Agreement, partnership interests in the Property Partnerships
owning those Properties. Upon the consummation of the Consolidation
Transactions, the Company will own the general partner interest in each Property
Partnership, with control over the day-to-day operations of the Partnership
Properties. However, certain significant decisions with respect to the ownership
and operation of the Partnership Properties and the Property Partnerships will
or may require the consent of Outside Partners, including, without limitation,
decisions with respect to the sale of the respective Partnership Properties.
Moreover, even where the consent of the Outside Partners is not required, the
Company may have certain fiduciary responsibilities to the Outside Partners
which it will need to consider when making decisions relating to the Partnership
Properties and the Property Partnerships, including, without limitation, certain
decisions with respect to the timing and amount of distributions of available
cash and of additional capital contributions.
In addition, the rights to sell or transfer general partnership interests in
the Property Partnerships are subject to certain limitations and consents which
may inhibit the ability of the Company to sell its interest
31
<PAGE>
in the Property Partnerships to a third party. Similarly, the right of the
Company to assign or pledge its partnership interests in the Property
Partnerships may require the prior written consent of the Outside Partners.
REASONS FOR THE CONSOLIDATION TRANSACTIONS; RECOMMENDATION OF THE BOARD
The Board has determined unanimously that the Consolidation Transactions are
fair to, and in the best interests of, GREAT and the Shareholders, and
unanimously recommends that the Shareholders approve the Consolidation
Transactions. In evaluating the fairness of the Consolidation Transactions, and
concluding to approve them and recommend that the Shareholders approve them, the
Board reviewed the terms of the various transactions comprising the
Consolidation Transactions, the financial performance, condition, business
operations and prospects of GREAT, the Management Company, the Property
Partnerships and the Properties, and considered (among others) the following
factors:
- CONSOLIDATION. The Consolidation Transactions will transform the
Company from a REIT owning four multi-family residential properties with an
aggregate of 257 apartments, managed by an affiliate, into a full-service,
fully integrated, self-advised and self-managed REIT with a portfolio of 23
multi-family residential properties with an aggregate of 1,752 apartments
and a neighborhood shopping center, with "in-house" expertise in
acquisition, development, construction, leasing, management and other
tenant-related services, enabling the Company to benefit from economies of
scale in its operations.
- RISK DIVERSIFICATION. Upon completion of the Consolidation
Transactions, the Company will own 100% of the interests in the four GREAT
Properties and the seven Properties currently owned by the Liquidating
Partnerships, and will hold a general partnership interest in each of the
Property Partnerships that own the remaining Partnership Properties, thereby
representing an investment in a significantly larger and more diversified
portfolio than that of GREAT prior to the consummation of the Consolidation
Transactions.
- DELEVERAGING. Following the consummation of the Consolidation
Transactions, the Company's debt service coverage ratio will be
approximately 2.3 to 1.0, compared to GREAT's current debt service coverage
ratio of 3.0 to 1.0; the Company's debt-to-total market capitalization will
be approximately 38% compared to GREAT's current debt-to-total market
capitalization of 53.7%; and the Company's pro forma FFO and cash available
for distribution per share for the pro forma 12 months ended September 30,
1996 were $0.99 and $0.86 ($1.17 and $1.02 before giving effect to the Stock
Split), respectively, compared to GREAT's historical FFO and cash available
for distribution per share for that period of $1.17 and $1.02, respectively.
- ACCESS TO CAPITAL. The Company's structure will, in the judgment of
the Company and the Grove Companies, provide the Company with greater access
to capital for refinancing and growth. Sources of capital include the
securities sold in the New Equity Investment and possible future issuances
of debt or equity through public offerings or private placements. The
financial strength of the Company should enable it to obtain financing at
better rates and on better terms than are currently available to GREAT.
Additionally, the Operating Partnership will enable the Company to acquire
properties for Common Units, and thereby enable a seller of property to the
Company to defer its taxable gain realized upon such sale, if any.
- INVESTOR INTEREST. The Company has been advised by its financial
advisors, and has confirmed in subsequent conversations with prospective
investors, that potential investors in REITs are currently seeking long-term
capital appreciation and return on investment based on reinvestment of cash
flow in the REIT and internal growth, rather than the quarterly payout of a
relatively high percentage of cash flow, which has been characteristic of
publicly traded REITs (including GREAT) in the past several years. The
Company believes that its decision, announced in November 1996, to reduce
its quarterly distribution per Common Share, thereby increasing the amount
of cash available to the Company for reinvestment, may increase the interest
of institutional and other investors in owning
32
<PAGE>
Common Shares. The Company emphasized in its November 1996 announcement that
the Company's decision to reduce its quarterly cash distribution to
Shareholders was made for the foregoing reasons and not in response to any
adverse occurrence with respect to the business or operations of the
Company.
POTENTIAL ADVERSE EFFECTS OF THE CONSOLIDATION TRANSACTIONS; RISK FACTORS
The consummation by GREAT of the Consolidation Transactions involves various
risks. Shareholders should consider, among other things, the following factors
when making a decision with respect to the approval of the Consolidation
Transactions:
CONFLICTS OF INTEREST COULD RESULT IN EXECUTIVE OFFICER DECISIONS THAT DO
NOT
NECESSARILY REPRESENT THE BEST INTERESTS OF SHAREHOLDERS
The Executive Officers will realize certain benefits from the Consolidation
Transactions that will not be received by other persons participating in them.
See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Benefits to
Related Parties; Conflicts of Interest; Interests of Certain Persons" and
"CERTAIN RELATIONSHIPS AND TRANSACTIONS." As a result of these benefits, such
individuals may have conflicts of interest with respect to their obligations to
GREAT in determining whether the Company should consummate the Consolidation
Transactions. The Executive Officers may have interests that conflict with those
of others participating in the Consolidation Transactions and with the interests
of participants in the Exchange Offer. Moreover, at the conclusion of the
Exchange Offer, the Executive Officers will continue to pursue other business
interests, some of which may compete with the business of the Company as
conducted now or in the future. GREAT has adopted certain policies and has
entered into a non-competition agreement with each of the Executive Officers and
with the Grove Companies designed to eliminate or minimize conflicts of
interest. The Charter also includes a provision which requires the composition
of the Board at all times to consist of a majority of Independent Trust
Managers. See "CERTAIN PROVISIONS OF MARYLAND LAW AND OF GREAT'S DECLARATION OF
TRUST AND BYLAWS--Board of Trust Managers." However, there can be no assurance
that these policies or the provisions of any of the agreements or the Charter
will be successful in eliminating the existence of conflicts among, or influence
of, the Executive Officers and the Company, and if they are not successful,
decisions could be made that might fail to reflect fairly the interests of all
Shareholders.
The terms of the Contribution Agreement are not the result of arms-length
negotiations. See "CERTAIN RELATIONSHIPS AND TRANSACTIONS--Transactions With the
Grove Companies--The Contribution Agreement." The Executive Officers have
substantial economic interests in the Grove Companies, including ownership of
the Management Company and significant interests in the Property Partnerships,
creating the potential for a conflict of interest with respect to their
obligations as Executive Officers of Grove Property in enforcing the terms of
the Contribution Agreement. The failure to enforce the material terms of the
Contribution Agreement, particularly the indemnification provisions and the
remedy provisions for breaches of representations and warranties, could result
in a monetary loss to the Company.
RISKS OF EQUITY REAL ESTATE INVESTMENTS; ADVERSE IMPACT ON ABILITY TO MAKE
DISTRIBUTIONS;
EFFECT ON VALUE OF PROPERTIES
GENERAL. Real property investments are subject to varying degrees of risk.
The financial returns available from equity investments in apartment properties
depend on the amount of revenue generated and expenses incurred in operating the
properties. If the Company's properties do not generate revenue sufficient to
meet operating expenses, debt service, if any, and capital expenditures, the
Company's income and ability to make distributions to the Shareholders will be
adversely affected. An apartment property's income and value may be adversely
affected by the national and regional economic climates, local real estate
conditions such as the oversupply of apartments or a reduction in demand for
apartments, availability of "for purchase" housing, the attractiveness of the
properties to tenants, competition from
33
<PAGE>
other apartment properties, the ability of the owner to provide adequate
maintenance and to obtain adequate insurance, and increased operating costs
(including real estate taxes). The Company's income will also be adversely
affected if a significant number of tenants are unable to pay rent or if the
apartments cannot be rented on favorable terms. Certain significant expenditures
associated with each equity investment in real estate (such as mortgage
payments, if any, real estate taxes and maintenance costs) are generally not
reduced when circumstances cause a reduction in rental income. In addition, the
income and value of an apartment property are affected by such factors, among
others, as changes in zoning, building, environmental, rent control and other
laws and regulations, changes in real property taxes and interest rates, the
availability of financing and acts of God (such as earthquakes and floods) and
other factors beyond the control of the Company. The Company is exposed to the
various types of litigation that may be brought against a property owner or
manager in the ordinary course.
ILLIQUIDITY OF REAL ESTATE. Equity real estate investments are relatively
illiquid and, therefore, will tend to restrict the Company's ability to vary its
portfolio of apartment properties promptly in response to changes in economic or
other conditions; consequently, if the Operating Partnership were to be
liquidated, the proceeds realized by the Company at such time might be less than
the Company's total investment in the Operating Partnership. In addition, the
Code places limits on the amount of gross income the Company may realize from
sales of real property assets held for fewer than four years, which may affect
the Company's ability to sell its properties without adversely affecting returns
to holders of Common Shares. See "FEDERAL INCOME TAX CONSIDERATIONS--Taxation of
the Company."
FUTURE PROPERTY ACQUISITIONS. The Company has not identified any specific
properties for acquisition other than the Partnership Properties. In the normal
course of its business, and in the pursuit of its growth strategy, the Company
intends to continually evaluate a number of potential acquisitions in the
Northeast and Mid-Atlantic regions, including the Excluded Properties. No
assurance can be given, however, that the Company will have the opportunity to
make suitable acquisitions on terms favorable to it, or will be able to
successfully integrate more properties into the Company's portfolio.
RISKS OF RENOVATION AND ACQUISITIONS. The Company intends to renovate
certain Properties and other properties it may acquire in the future. In
connection with any renovation project, the Company will bear certain risks,
including the risks of construction delays or cost overruns that may increase
project costs and could make such projects uneconomical, and the risk that
occupancy or rental rates at a completed project will not be sufficient to
enable the Company to pay operating expenses or earn its targeted rate of return
on its investment. In case of an unsuccessful renovation project, the Company's
loss could exceed its investment in such project. Renovation projects may be
more highly leveraged than the Company's portfolio as a whole, which may result
in an increased risk of default and loss of equity investment if the project
does not have sufficient cash flow to cover its relatively high debt service
requirements. Furthermore, the fact that the Company must distribute 95% of its
REIT taxable income in order to maintain its qualification as a REIT will limit
the ability of the Company to rely upon income from operations or cash flow from
operations to finance new acquisitions. The Company may finance acquisitions
with lines of credit. As a result, if permanent debt or equity financing were
not available on acceptable terms to refinance new acquisitions undertaken
without permanent financing, further acquisitions might be curtailed or cash
available for distribution might be adversely affected.
The Company intends to actively continue to acquire multi-family residential
properties. Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that judgments with respect to the costs of
improvements to bring an acquired property up to standards established for the
market position intended for that property will prove inaccurate, as well as
general investment risks associated with any new real estate investment. See
"THE COMPANY--Acquisition Strategy."
REGULATION. A number of federal, state and local laws exist, such as the
Americans with Disabilities Act ("ADA"), which may require modifications to
existing buildings or restrict certain renovations by requiring access to such
buildings, and apartments in the buildings, by disabled persons. Additional
34
<PAGE>
legislation may impose further burdens or restrictions on owners with respect to
access by disabled persons. The costs of compliance with such laws may be
substantial, and limits or restrictions on completion of certain renovations may
limit application of the Company's investment strategy in certain instances or
reduce overall returns on its investments. The Company believes that all of the
Properties are in substantial compliance with laws currently in effect, and will
review periodically its apartment properties to determine continuing compliance
with existing laws and any additional laws that are hereafter promulgated.
In addition, the Fair Housing Amendments Act of 1988 ("FHAA") requires
apartment communities first occupied after March 13, 1990 to be accessible to
the handicapped. Failure to comply with the FHAA could result in the imposition
of fines or an award of damages to private litigants. The Company believes that
those Properties that are subject to the FHAA are in substantial compliance with
such law.
COMPETITION. There are numerous real estate companies, including those
which operate in the areas in which the Properties are located, which compete
with the Company in seeking apartment properties for acquisition and
development, and for tenants to occupy such properties. The Company may be
competing with companies that have greater resources than the Company and whose
officers and directors or trustees have more experience than the Company's
officers and trust managers. In addition, the availability of single-family
housing and other forms of multi-family residential properties, such as
manufactured housing communities, provide alternatives to potential tenants of
apartment properties. These competitive factors could adversely affect the
income generated by the Properties.
PURCHASE PRICE OF PROPERTIES MAY EXCEED PROPERTIES' FAIR MARKET VALUE
Interests in the Property Partnerships and the Management Company are being
acquired from entities that are controlled by the Grove Companies, and the Grove
Companies are controlled by certain Executive Officers. As a result, the
agreements pursuant to which such interests are being acquired including,
without limitation, the Contribution Agreement, were not negotiated on an
arm's-length basis and the representations, warranties and covenants in those
agreements may not provide the same level of protection as those contained in a
purchase contract negotiated on an arm's-length basis.
No independent valuations or appraisals of the GREAT Assets, the Management
Company or the Partnership Properties (together, the "CONSOLIDATED ASSETS") were
obtained in connection with the Consolidation Transactions (although the lenders
in the Credit Facility may obtain appraisals for certain Properties) although
GREAT's current Charter would require such appraisals, and the prices at which
the Consolidated Assets (or interests therein) are to be acquired were not based
on arm's-length negotiations. See "PROPOSAL TO AMEND THE CHARTER (Proposal
2)--Proposed Amendment to Delete Third Party Appraisal Requirement" and
"APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--The Properties
- --Valuation of the Properties and Other Assets; Allocation of Common Units." The
purchase prices of the Properties were based on the Company's and the Grove
Companies' assessment of the earnings and earnings potential of the Properties
and the Management Company. Therefore, there can be no assurance that the
purchase prices of the Properties (including the Property Partnership Units) and
the Management Company are equal to or do not exceed their fair market values.
If the fair market values of the Properties and the Management Company are
materially less than the amount being paid by the Company, it could have a
material and adverse effect on the financial performance of the Company and the
value of the Common Shares.
35
<PAGE>
LIMITATION ON CONTROL OF PARTIALLY OWNED PROPERTIES
The Company will own only partial interests in 13 of the Partnership
Properties, which Properties comprise 61% of the total rental units of the
Company at September 30, 1996. As a general partner in the Property Partnerships
holding such Properties, the Company may have certain fiduciary responsibilities
to the Outside Partners which it will need to consider when making decisions
that affect those Properties (including decisions regarding sale, refinancing
and the timing and amount of distributions therefrom).
The percentage interest retained by Outside Partners in each Property
Partnership, being those persons who elect not to tender their Property
Partnership Units in the Exchange Offer, will not be known until expiration of
the Exchange Offer. The Outside Partners are expected to own interests ranging
between 0% and 75.0% of the Property Partnerships. There can be no assurance
that the Company will meet the Minimum Percentage Condition (as defined) as to
any or all of the Property Partnerships. If the Minimum Percentage Condition is
not met as to any Property Partnership, the Operating Partnership might
nonetheless elect to acquire the partnership interests of the Grove Companies in
that partnership, but it will not become a general partner of that Property
Partnership and will therefore not be able to control the decisions of such
partnership. See "--Changes in Investment and Financing Policies Without
Shareholder Approval--Risks Involved in Acquisitions Through Partnerships or
Joint Ventures."
While the Operating Partnership will act as managing general partner of each
Property Partnership that meets the Minimum Percentage Condition and will serve
as the property manager for each Property Partnership, potential conflicts and
other problems could arise as a consequence of these ownership arrangements.
The consent of a majority in interest of the limited partners of each
Property Partnership is required to approve certain major transactions, such as
a sale of the respective Partnership Property or Properties. The interests of
the Outside Partners and those of the Company are not necessarily aligned in
connection with the resolution of these issues. Accordingly, the Company may not
be able to favorably resolve any such issue or, the Company may have to provide
financial or other inducement to the Outside Partners to obtain such resolution.
DEPENDENCE ON LIMITED GEOGRAPHIC AREA
The Properties are located in Connecticut, Rhode Island and Massachusetts
(82.6%, 4.3% and 13.1%, respectively, of the total number of apartments included
in the Properties) and consist principally of multi-family residential projects.
The Company's performance is thus linked to economic conditions in the Southern
New England area and to the market for apartments therein. Management believes
the markets are experiencing improved stability in jobs and population, since
the decline of the defense industry, combined with residential and commercial
overbuilding, caused a severe local recession in the early 1990's. The Company's
cash flow, ability to make distributions to Shareholders and the value of the
Common Shares will be dependent upon economic conditions and the demand for the
rental of apartments in those states and the individual markets therein in which
the Properties are located.
EXPANSION OF THE COMPANY INTO NEW GEOGRAPHIC MARKETS
The Company currently intends to seek to acquire properties in geographic
markets other than those markets in which the Properties are located. Those may
include markets in which the Company has little or no prior experience in the
acquisition and management of multi-family residential or other properties. See
"THE COMPANY--Future Acquisitions." Any such new geographic market may be
substantially dissimilar to the markets in which the Company currently owns and
operates the Properties, and management of the Company may be unfamiliar with
prevailing economic conditions, trends in the real estate market, and other
factors which may impact upon the Company's ability to acquire properties
therein for competitive purchase prices and to effectively and profitably manage
such properties thereafter. If purchase prices paid by the Company for such
properties exceed their fair market value and/or the Company is unable to
36
<PAGE>
manage such properties so as to cause them to be profitable, it could have an
adverse effect on the financial performance of the Company and the value of the
Common Shares.
REAL ESTATE FINANCING RISKS
INABILITY TO PAY DEBT SERVICE. The Company will be 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. Upon completion of the Consolidation Transactions, approximately $32.7
million of Company indebtedness will be outstanding, all of which will be
secured directly or indirectly by mortgages affecting the Properties. See
"APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Terms of the
Consolidation Transactions--The Refinancing." If the Company or the relevant
Property Partnership, as applicable, is unable to meet its debt service
obligations under these mortgage loans, a loss could be sustained as a result of
foreclosure on the relevant Property by the mortgagee. The Company's anticipated
approximate $15.1 million Long-Term Facility will be secured by nine Properties
and its anticipated Revolving Credit Facility will be secured by eight
Properties. If a default occurs under either the Long-Term Facility or the
Revolving Credit Facility, the respective lender would be entitled to exercise
its remedies (including foreclosure) under its mortgages encumbering the entire
pool of Properties securing the Company's obligations under that facility,
including the Properties held by certain of the Property Partnerships. See
"APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)-- Terms of the
Consolidation Transactions --The Refinancing." The cross-collateralization of
the mortgages on various Properties reduces flexibility in selling individual
properties.
VARIABLE RATE DEBT. Upon the completion of the Consolidation Transactions,
giving effect to the application of the proceeds from the New Equity Investment
and borrowings under the Credit Facility and the Refinancing, the aggregate
indebtedness of the Company will be approximately $32.7 million, including
variable rate indebtedness totaling $18.5 million with interest rates that
adjust based upon prevailing market interest rates. See "APPROVAL OF THE
CONSOLIDATION TRANSACTIONS (Proposal 1)-- Terms of the Consolidation
Transactions--The Refinancing." The Company has or will have various interest
rate protection measures in place for all of such $18.5 million variable rate
debt, but increases in the interest rates on the variable rate debt would
adversely affect the Company's cash flow and could reduce the amount of funds
available for distribution to Shareholders. See "THE COMPANY--Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company also expects to enter into the Revolving Loan Facility, which
will permit outstanding indebtedness of up to $25.0 million (of which $3.4
million is assumed to be outstanding upon completion of the Consolidation
Transactions) which will not be subject to any interest rate protection
agreement as of the consummation of the Consolidation Transactions. Outstanding
balances under this facility will bear interest at variable rates and,
therefore, the Company will be subject to higher interest costs if the
applicable interest rates increase. See "APPROVAL OF THE CONSOLIDATION
TRANSACTIONS (Proposal 1)--Terms of the Consolidation Transactions--The
Refinancing." The Company may consider purchasing an interest rate protection
agreement to cap or otherwise limit its exposure to future increases in interest
rates to the extent the Company deems this cost effective in connection with, or
as otherwise may be required by the terms of, the Revolving Credit Facility. See
"APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Terms of the
Consolidation Transactions --The Refinancing." A decision by the Company to
purchase an interest rate protection agreement poses two risks. First, that the
prospective cap for a particular loan may be very expensive. The second risk is
that the Company may fail accurately to predict the course of interest rates
and, relatedly, the economic prudence of purchasing a particular cap, which
would have a direct, adverse effect on the amount of cash available for
distribution.
REFINANCING RISKS. Because the Company anticipates that only a small
portion of the Company's mortgage indebtedness will be repaid prior to maturity
and the Company may not have on hand funds sufficient to repay such indebtedness
at maturity, it may be necessary for the Company to refinance debt
37
<PAGE>
through additional debt financing or equity offerings. If the Company were
unable to refinance its indebtedness on acceptable terms, or at all, the Company
might be forced to dispose of one or more of the Properties upon disadvantageous
terms, which might result in losses to the Company and might adversely affect
the cash available for distribution. To the extent the Company needs consent of
Outside Partners to sell or refinance certain Partnership Properties, its
flexibility will be limited. If prevailing interest rates or other factors at
the time of refinancing result in higher interest rates on refinancings, the
Company's interest expense would increase, which would adversely affect the
Company's cash available for distributions and its ability to pay expected
distributions to Shareholders.
RECOURSE DEBT. Of the Company and unconsolidated Property Partnership debt
outstanding on a pro forma basis at September 30, 1996, $7.9 million principal
amount will be general recourse obligations of the Operating Partnership.
Furthermore, the Operating Partnership and Grove Property will agree to
guarantee the repayment of the anticipated $25.0 million Revolving Credit
Facility. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Terms of
the Consolidation Transactions-- The Refinancing." The balance of the debt will
be limited in recourse by the holders to the specific assets of the Property
Partnership that secure such debt and, therefore, will be non-recourse (except
in limited circumstances) to the Company and the Operating Partnership. To the
extent this debt is recourse, it is a general obligation of the Operating
Partnership and Grove Property payable out of any unencumbered assets of the
Operating Partnership and Grove Property, and the lender's recourse will not be
limited solely to the collateral securing the debt.
NO LIMITATION ON DEBT. The Company has adopted a policy to limit its ratio
of debt-to-total market capitalization (I.E., total debt of the Company as a
percentage of total market capitalization, defined as the sum of the aggregate
market value of the outstanding Common Shares assuming the full exchange of
Common Units for Common Shares) and the total debt of the Company, to less than
60%. The Company's debt-to-total market capitalization ratio on a pro forma
basis at September 30, 1996, including, with respect to the Revolving Credit
Facility, the $3.4 million anticipated to be borrowed by the Company thereunder
upon the consummation of the Consolidation Transactions, is approximately 38%;
if the full amount of the Revolving Credit Facility had been borrowed at that
date, the ratio would be approximately 52%. The organization documents of the
Company, however, do not limit the amount or percentage of indebtedness that it
may incur. Therefore, the Board may change this policy of the Company and the
Operating Partnership regarding indebtedness, without the vote of the holders of
Common Shares or Common Units. If these policies are 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 an increase in debt service requirements which could affect
adversely the financial condition and results of operations of the Company and,
consequently, the Company's ability to make expected distribution to
Shareholders.
DEPENDENCE ON KEY PERSONNEL; LIMITED EXPERIENCE OF MANAGEMENT
The Company is dependent on the efforts of all of the Executive Officers.
The loss of their services could have a material adverse effect on the
operations of the Company. Currently, the Company has no intention to secure
key-man life insurance for the Executive Officers in the near future.
GREAT was formed in 1994. Management of GREAT has only two years experience
in the operation of a REIT and the operation of a public company, although
management and the Grove Companies have substantial experience in the
acquisition and management of multi-family residential and mixed-use properties.
See "MANAGEMENT--Trust Managers and Executive Officers." This relative lack of
experience in REIT management and operation of a public company could adversely
affect the operation and financial results of the Company.
38
<PAGE>
RETURN OF CAPITAL
The Company anticipates that its distributions will continue to equal or
exceed earnings and profits, in which case a portion of Shareholder
distributions will represent a return of capital that may not be subject to
federal income tax. Based on the Company's estimated cash flows from operating
activities for the twelve months ending December 31, 1997 and the application of
the net proceeds of the New Equity Investment and the Refinancing as described
in "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Terms of the
Consolidation Transactions--The Refinancing," the Company estimates that, with
respect to distributions in respect of this twelve-month period, none of the
distributions to be paid to the holders of Common Shares will represent a return
of capital and the full amount of such distributions will, therefore, be subject
to current federal income tax. The percentage of distributions that represent a
return of capital may vary significantly from year to year.
ADVERSE TAX CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Grove Property currently intends to continue operating so as to qualify as a
REIT under the Code. See "--Adverse Consequences of Election to Revoke REIT
Election by the Company." A REIT generally is not taxed at the corporate level
on income it currently distributes to shareholders so long as it distributes at
least 95% of its REIT taxable income. No assurance can be given that Grove
Property will be able to operate in a manner so as to remain so qualified.
Qualification as a REIT involves the application of highly technical and complex
Code provisions for which there are only limited judicial or administrative
interpretations. The determination of various factual matters and circumstances
not entirely within the Company's control may affect its ability to continue to
qualify as a REIT. The complexity of these provisions and of the applicable
income tax regulations that have been promulgated under the Code is greater in
the case of a REIT that holds its assets through a partnership. In addition, no
assurance can be given that legislation, new regulations, administrative
interpretations or court decisions will not change tax laws with respect to
qualification as a REIT or the federal income tax consequences of such
qualification. The Company, however, is not aware of any pending tax legislation
that would adversely affect its ability to operate as a REIT.
If the Company fails to qualify as a REIT in any taxable year, the Company
will not be allowed a deduction for distributions to Shareholders in computing
its taxable income and will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at the applicable
corporate rate. In addition, unless it were entitled to relief under certain
statutory provisions, the Company also would be disqualified from treatment as a
REIT for the four taxable years following the year during which qualification is
lost. This disqualification would reduce the funds of the Company available for
investment or distribution to Shareholders because of the additional tax
liability to the Company for the year or years involved. If the Company were to
fail to qualify as a REIT, it no longer would be subject to the distribution
requirements of the Code, and to the extent that distributions to Shareholders
would have been made in anticipation of the Company's qualifying as a REIT, the
Company might be required to borrow funds or to liquidate certain of its assets
to pay the applicable corporate tax.
Although the Company currently intends to operate in a manner designed to
continue to qualify as a REIT, it is possible that future economic market,
legal, tax or other considerations may cause the Board, without the approval of
the Shareholders, to decide to revoke the REIT election. See "--Adverse
Consequences of Election to Revoke REIT Election by the Company."
ADVERSE TAX CONSEQUENCES OF FAILURE TO QUALIFY AS PARTNERSHIPS
If the IRS were to challenge successfully the status of the Operating
Partnership or any Property Partnership as a partnership for federal income tax
purposes, the Operating Partnership or the affected Property Partnership would
be treated as an association taxable as a corporation. In such event, the
character of the Company's assets and income would change, which could preclude
the Company from satisfying the asset tests and possibly the income tests (as
imposed by the REIT provisions of the Code)
39
<PAGE>
and, in turn, could prevent the Company from qualifying as a REIT for federal
income tax purposes. The imposition of a corporate tax on the Operating
Partnership or any of the Property Partnerships, with a concomitant loss of REIT
status of the Company, would reduce substantially the amount of cash available
for distribution to the Company and the Shareholders. See "FEDERAL INCOME TAX
CONSIDERATIONS--Failure to Qualify."
INABILITY TO MAKE REQUIRED DISTRIBUTIONS TO SHAREHOLDERS COULD AFFECT REIT
STATUS;
POTENTIAL REQUIREMENTS TO BORROW
To obtain the favorable tax treatment accorded to a REIT under the Code,
Grove Property generally will be required each year to distribute to
Shareholders at least 95% of its REIT taxable income. The Company will be
subject to income tax on any undistributed REIT taxable income and net capital
gain, and to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less than
the sum of 85% of its ordinary income plus 95% of its capital gain net income
for the calendar year, plus 100% of its undistributed income from prior years.
GREAT intends to make distributions to the Shareholders to comply with the
distribution provisions of the Code and to avoid income taxes and the
nondeductible 4% excise tax. The Company's income will consist primarily of the
Company's share of the income of the Operating Partnership and the Company's
cash flow will consist primarily of its share of distributions from the
Operating Partnership. In turn, the Operating Partnership's income and cash flow
will consist primarily of the Operating Partnership's share of the income and
cash flow, respectively, of the Property Partnerships. Differences in timing
between the receipt of income and the payment of expenses in arriving at taxable
income (of the Company or the Operating Partnership) and the effect of
nondeductible capital expenditures, the creation of reserves or required debt
amortization payments could require the Company to borrow funds through the
Operating Partnership on a short-term or long-term basis to meet the
distribution requirements that are necessary to continue to qualify as a REIT.
In such circumstances, the Company might need to borrow funds to avoid adverse
tax consequences even if management believes that the then prevailing market
conditions generally are not favorable for such borrowings or that such
borrowings are not advisable in the absence of such tax considerations. If the
Company is unable to obtain such borrowings, Grove Property could be
disqualified from REIT treatment.
Distributions by the Operating Partnership will be determined by the
Company, as the sole general partner, through the Board, and will be dependent
on a number of factors, including the amount of cash available for distribution,
the Operating Partnership's financial condition and the financial condition of
each Property Partnership, any decision by the Board to reinvest funds rather
than to distribute such funds, the Operating Partnership's and the Property
Partnerships' capital expenditure requirements, the annual distribution
requirements under the REIT provisions of the Code and such other factors as the
Board deems relevant. There is no assurance that the Company will be able to
continue to satisfy the annual distribution requirement so as to qualify as a
REIT. See "FEDERAL INCOME TAX CONSIDERATIONS--Taxation of the Company."
For federal income tax purposes, distributions paid to Shareholders may
consist of ordinary income, capital gains, nontaxable return of capital or a
combination thereof. The Company will provide the Shareholders with an annual
statement indicating the tax character of the distributions.
NECESSITY TO MAINTAIN OWNERSHIP LIMIT REQUIRED TO MAINTAIN REIT
QUALIFICATION; ANTI-TAKEOVER EFFECT
For the Company to maintain its qualification as a REIT, not more than 50%
in value of the outstanding capital stock may be owned, actually or
constructively under the applicable attribution rules of the Code, by five or
fewer individuals (including certain tax-exempt entities, other than, in
general, qualified domestic pension funds) at any time during the last half of
any taxable year of the Company other than the first taxable year for which the
election to be taxed as a REIT has been made (the "five or fewer" requirement).
The Charter contains certain restrictions on the ownership and transfer of
Common Shares
40
<PAGE>
or Preferred Shares (as defined) ("EQUITY SHARES"), described below, which are
intended to prevent concentration of share ownership. These restrictions,
however, may not ensure that the Company will be able to satisfy the "five or
fewer" requirement in all cases. If the Company fails to satisfy such
requirement the Company's status as a REIT will terminate, and the Company will
not be able to prevent such termination.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates, and
would not be allowed a deduction in computing its taxable income for amounts
distributed to the Shareholders. Moreover, unless entitled to relief under
certain statutory provisions, the Company also would be ineligible for
qualification as a REIT for the four taxable years following the year during
which qualification was lost. Such disqualification would reduce the net
earnings of the Company available for investment or distribution to the
Shareholders due to the additional tax liability of the Company for the years
involved. See "FEDERAL INCOME TAX CONSIDERATIONS--Failure to Qualify."
The Charter does not permit any person to own (either actually or
constructively under the applicable attribution rules of the Code) more than
5.0% of the number of outstanding Equity Shares (subject to adjustment by the
Board) (the "OWNERSHIP LIMIT"), subject to certain exceptions. In addition, no
Shareholder may sell, transfer, assign, devise or otherwise dispose of Equity
Shares if such a disposition would result in (i) Common Shares and/or Preferred
Shares being owned by less than 100 shareholders; (ii) the Company being
"closely held" within the meaning of Section 856(h) of the Code or (iii) the
Company's failing to qualify as a REIT. See "DESCRIPTION OF CAPITAL
STOCK--Restrictions on Transfer."
Currently under the Charter, any attempted transfer of shares by a person,
or other change in the capital structure of Grove Property, which would violate
one of the limitations described above will cause the shares purportedly
transferred to be automatically converted into "EXCESS SHARES" or, under certain
circumstances, the transfer resulting in such violation will be deemed void AB
INITIO.Upon any transfer that results in Excess Shares pursuant to the
foregoing, such Excess Shares will be deemed to have been transferred to the
Company, as special trustee of a special trust and will be considered issued and
outstanding shares. Such Excess Shares will not be entitled to voting, dividend
or other distribution rights, and any dividend or other distribution paid prior
to the discovery by the Company that the Common and/ or Preferred Shares have
been transferred so as to be deemed Excess Shares must be repaid to the Company
upon demand. For a description of certain amendments to be made to the "Excess
Shares" provisions in connection with the Consolidation Transactions, see
"PROPOSAL TO AMEND THE CHARTER (Proposal 2)--Description of the Charter
Amendments--Description of Proposed Amendment to the Excess Shares Provision."
The Board may waive the Ownership Limit with respect to a particular Shareholder
if it is satisfied, based upon an opinion of counsel, receipt of a ruling from
the Internal Revenue Service or other evidence satisfactory to it, that such
ownership in excess of the Ownership Limit will not jeopardize the Company's
status as a REIT. See "DESCRIPTION OF CAPITAL STOCK--Restrictions on Transfer."
Limiting the ownership of more than 5.0% of the outstanding Equity Shares
may (i) discourage a change of control of the Company, (ii) deter tender offers
for Common Shares, which offers may be attractive to the Shareholders, or (iii)
limit the opportunity for Shareholders to receive a premium for the Common
Shares that might otherwise exist if an investor attempted to assemble a block
of Common Shares in excess of the specified Ownership Limit or to effect a
change of control of the Company.
CERTAIN ANTI-TAKEOVER PROVISIONS MAY INHIBIT A CHANGE IN CONTROL OF THE
COMPANY
Certain provisions of the Charter, the Bylaws and the OP Partnership
Agreement may have the effect of discouraging a third party from making an
acquisition proposal for the Company and may thereby inhibit a change in control
of the Company under circumstances that could give the holders of the
41
<PAGE>
Common Shares the opportunity to realize a premium over the then-prevailing
market prices of such Common Shares. Such provisions include the requirements
regarding the staggered terms of the Board and removal of trust managers set
forth in the Charter and the advance notice requirements for certain Shareholder
proposals set forth in the Bylaws. See "CERTAIN PROVISIONS OF MARYLAND LAW AND
OF GREAT'S DECLARATION OF TRUST AND BYLAWS--Board of Trust Managers."
PREFERRED SHARES. The Charter permits the Board to issue up to 4.0 million
preferred shares of beneficial interest, par value $.01 per share ("PREFERRED
SHARES"), and to establish the preferences and rights (including the right to
vote and the right to convert into Common Shares) of any such Preferred Shares
issued. Thus, the Board could authorize the issuance of Preferred Shares with
terms and conditions which could have the effect of discouraging a takeover or
other transaction in which holders of some, or a majority, of Common Shares
might receive a premium for their Common Shares over the then-prevailing market
price of such Common Shares. See "DESCRIPTION OF CAPITAL STOCK--Authorized
Shares."
OWNERSHIP LIMIT. The Ownership Limit imposed by the Charter for the purpose
of preserving the Company's REIT qualification may also have the effect of
precluding an acquisition of control of the Company without the approval of the
Board. The Ownership Limit might deter tender offers for Common Shares, which
offers may be advantageous to Shareholders, and might limit the opportunity for
Shareholders to receive a premium for the Common Shares that might otherwise
exist if an investor were attempting to assemble a block of Common Shares in
excess of 5.0% of the outstanding Common Shares or otherwise effect a change of
control of the Company. See "DESCRIPTION OF CAPITAL STOCK--Restrictions on
Ownership and Transfer."
STAGGERED BOARD. The Board has three classes of trust managers, whose terms
will expire in 1997, 1998 and 1999, respectively. Trust managers for each class
will be chosen for a three-year term upon the expiration of the current class'
terms. The affirmative vote of two-thirds of the outstanding Common Shares is
required for the election or removal of trust managers.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various Federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases on, under, in or emitting from such property and may be held
liable to a governmental entity or to third parties for property damage and for
investigation and clean-up costs incurred by such parties in connection with the
contamination. Such laws typically impose clean up responsibility and liability
without regard to whether the owner knew of or caused the presence of the
contaminants, and the liability under such laws has been interpreted to be joint
and several unless the harm is divisible and there is a reasonable basis for an
allocation of responsibility. The cost of investigation, remediation or removal
of such substances may be substantial, and the presence of such substances or
the failure to properly remediate the contamination on such property may
adversely affect the owner's ability to sell or rent such property or to borrow
using such property as collateral. Moreover, certain loan documents provide for
recourse liability in connection with the presence of hazardous or toxic
materials. Persons who arrange for the disposal treatment of hazardous or toxic
substances at a disposal or treatment facility also may be liable for the costs
of removal or remediation of a release of hazardous or toxic substances at such
disposal or treatment facility, whether or not such facility is owned or
operated by such person. In addition, some environmental laws create a lien on
the contaminated site in favor of the government for damages and costs it incurs
in connection with the contamination. Finally, the owner of a site may be
subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from a site. In connection
with its ownership and operation of the Properties or any properties it acquires
in the future, the Company may be potentially liable for such costs.
42
<PAGE>
Recently-enacted federal legislation will eventually require owners and
landlords of residential housing constructed prior to 1978 to disclose to
potential residents or purchasers of the properties any known lead-paint
hazards, and will impose treble damages for failure to so notify. In addition,
lead-based paint in any of the properties may result in lead poisoning in
children residing in the property if chips or particles of such lead-based paint
are ingested, and the Company may be held liable under state laws for any such
injuries caused by ingestion of lead-base paint by children living at the
properties. Lead paint tests have been conducted at most of the Properties over
the past five years and have established compliance with all applicable state
regulations for such Properties.
All of the Properties have been subjected to Phase I environmental audits
(which involves inspection without soil sampling or ground water analysis) by
independent environmental consultants. A Phase II Limited Subsurface
Investigation was performed at the Southington Apartments. The environmental
audit reports have not revealed any significant environmental liability with
respect to which the recommended maintenance action has not been taken, nor is
the Company aware of any environmental liability that management believes would
have, with proper maintenance, a material adverse effect on the Company's
business, assets or results of operations.
The environmental assessments also disclose that certain underground storage
tanks, which have been removed from the Sandalwood Apartments, Fox Hill Commons
and Ocean Reef Estates, need to be registered with the State of Connecticut
Department of Environmental Protection (the "DEP"). The environmental
assessments also disclose that four Properties include floor drains which need
to be sealed or have permits obtained from the DEP.
Certain environmental laws impose liability for release of
asbestos-containing materials ("ACMS") into the air and third parties may seek
recovery from owners or operators of real properties for personal injury
suffered by reason of asbestos-containing materials. On account of its ownership
and operation of the Properties, the Company, the Operating Partnership and the
relevant Property Partnership potentially may be liable for such costs. The
Company's environmental assessments have revealed the presence of "potentially
friable" ACMs at Hamden I. "Friable" means that the asbestos is easily crumbled
or reduced to powder. The Company believes that the ACMs have been further
encapsulated by interior painting and does not plan to conduct any renovation
projects which would disturb the ACMs, consistent with the Phase I assessment
recommendation for Hamden I. See "THE COMPANY--Environmental Matters." GREAT
also removed and replaced two underground fuel oil storage tanks at the
Southington Apartments, although the Phase I assessment for the Southington
Apartments recommended that only the fittings on these tanks be replaced.
No assurance can be given (i) that existing environmental studies for the
Properties reveal all environmental liabilities, (ii) any prior owner thereof or
resident therein did not and will not in the future create any environmental
condition with material adverse consequences to the Company or (iii) that future
laws or regulations will not require any material expenditures or create any
environmental liabilities to the Company in the future.
POSSIBLE ADVERSE EFFECTS ON COMMON SHARE PRICE ARISING FROM SHARES AVAILABLE
FOR CURRENT AND
FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
Common Shares or the availability of such shares for future sale will have on
the market price of the Common Shares. Sales of substantial amounts of Common
Shares (including shares issued pursuant to the exchange of Common Units for
Common Shares), or the perception that such sales would occur, may adversely
affect prevailing market prices for the Common Shares. The Board has the
authority, without Shareholder approval, to issue additional Common Shares and
other Equity Shares, or to cause the Operating Partnership to issue additional
Common Units or other classes of units of interest in the Operating Partnership
in any manner it deems appropriate, including in exchange for property. Existing
Shareholders will have no preemptive
43
<PAGE>
right to purchase shares or units issued in any such offerings, and any such
offerings might cause a dilution of the Shareholders' investment in the Company.
In connection with the Consolidation Transactions and assuming the New
Equity Investment is represented by Common Shares, of the 3,953,463 Common
Shares to be outstanding, 3,362,863 will have been issued without registration
or are otherwise "restricted securities" within the meaning of Rule 144
promulgated under the Securities Act, including 25,000 Common Shares acquired by
Executive Officers in June 1994. In connection with the Consolidation
Transactions, up to 6,215,954 Common Units may be issued. The Common Units
issued to the Grove Companies, the New Equity Investors and the Limited Partners
(in connection with the Exchange Offer) may be redeemed by such Unitholders for
cash or, at the option of the Company, exchanged for Common Shares following the
first anniversary of the consummation of the Consolidation Transactions. In
addition, pursuant to the terms of the 1994 Plan, GREAT has granted the
Executive Officers options to purchase an aggregate of 88,000 Common Shares and
has granted the non-employee Trust Managers options to purchase an aggregate of
12,000 Common Shares, and expects to grant options to purchase an aggregate of
300,000 Common Shares in connection with the Consolidation Transactions pursuant
to the 1996 Plan (collectively, the "Options"). The Common Shares held by the
Executive Officers, the Common Shares issued in connection with the
Consolidation Transactions, as well as those issuable upon exchange of Common
Units or upon exercise of the Options, are "restricted securities," and may not
be transferred by the holder unless they are registered under the Securities
Act, or transferred in reliance upon an exemption from registration, including
any exemption from registration provided under Rule 144.
In general, upon satisfaction of certain conditions, Rule 144 permits the
sale of certain amounts of restricted securities two years following the date of
acquisition of the restricted securities from the Company, and after three years
permits unlimited sales by persons not affiliated with the Company.
The Company has agreed to file a registration statement under the Securities
Act covering the issuance of Common Shares upon exchange of Common Units and/or
the resale thereof, and the resale of Common Shares issued pursuant to the New
Equity Investment. The Company also expects to file a registration statement
under the Securities Act covering the issuance of Common Shares pursuant to the
1996 Plan. Future sales of restricted Common Shares could have an adverse effect
on the market price of the Common Shares then outstanding. See "SHARES AVAILABLE
FOR FUTURE SALE--Registration Rights."
CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT SHAREHOLDER APPROVAL
The Board will determine the Company's investment and financing policies,
its growth strategy, and its debt, capitalization, distribution and operating
policies. Although the Board has no present intention to revise or amend these
strategies and policies, the Board may do so at any time without a vote of the
Shareholders. See "THE COMPANY--Policies With Respect to Certain Activities."
Accordingly, Shareholders will have no control over changes in strategies and
policies of the Company, and such changes may not serve the interests of all
Shareholders and could adversely affect the Company's financial condition or
results of operations.
ISSUANCE OF ADDITIONAL SECURITIES. The Company has authority to offer its
Common Shares or other equity or debt securities in exchange for property or
otherwise. Similarly, the Company may cause the Operating Partnership to offer
additional Common Units or preferred units of the Operating Partnership,
including offers in exchange for property to sellers who seek to defer certain
of the tax consequences relating to a property transfer. Existing Shareholders
and holders of Common Units will have no preemptive right to acquire any such
securities, and any such issuance of equity securities could result in dilution
in an existing Shareholder's investment in the Company.
44
<PAGE>
RISKS INVOLVED IN ACQUISITIONS THROUGH PARTNERSHIPS OR JOINT VENTURES. In
addition to its investments in the Property Partnerships, the Company may invest
in apartment properties through partnership or joint ventures instead of
purchasing apartment properties directly or through wholly-owned subsidiaries.
Partnership or joint venture investments may, under certain circumstances,
involve risks not otherwise present in a direct acquisition of properties. These
include the risk that the Company's co-venturer or partner might become
bankrupt; a co-venturer or partner might at any time have economic or business
interests or goals which are inconsistent with the business interests or goals
of the Company; and a co-venturer or partner might 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. The consent of Outside Partners who do
not tender in the Exchange Offer and remain in the Property Partnerships may be
required to approve certain major decisions of the Property Partnerships,
thereby reducing the Company's flexibility in dealing with the Partnership
Properties. See "--Limitation on Control of Partially-Owned Properties" and
"APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Information About the
Property Partnerships." There is no limitation in the Charter as to the amount
of investment the Company may make in joint ventures or partnerships.
RISKS INVOLVED IN INVESTMENTS IN SECURITIES RELATED TO REAL ESTATE. The
Company may pursue its investment objectives through the ownership of securities
of entities engaged in the ownership of real estate. Ownership of such
securities may not entitle the Company to control the ownership, operation and
management of the underlying real estate. In addition, the Company may have no
ability to control the distributions with respect to such securities, which may
adversely affect the Company's ability to make required distributions to
Shareholders. Furthermore, if the Company desires to control an issuer of
securities, it may be prevented from doing so by the limitations on percentage
ownership and gross income tests which must be satisfied by the Company in order
for the Company to qualify as a REIT. See "FEDERAL INCOME TAX
CONSIDERATIONS--Taxation of the Company--Requirements for Qualification." The
Company intends to operate its business in a manner that will not require the
Company to register under the Investment Company Act of 1940 and Shareholders
will therefore not have the protection of that Act.
The Company may also invest in mortgages, and may do so as a strategy for
ultimately acquiring the underlying property. In general, investments in
mortgages include the risk that borrowers may not be able to make debt service
payments or pay principal when due, the risk that the value of the mortgaged
property may be less than the principal amount of the mortgage note securing
such property, and the risk that interest rates payable on the mortgages may be
lower than the Company's cost of funds to acquire these mortgages. In any of
these events, cash available for distributions and the Company's ability to make
required distributions to Shareholders could be adversely affected.
UNINSURED LOSS
The Company carries comprehensive liability, fire, flood (where appropriate
and available) and extended coverage insurance (excluding rental loss) with
respect to the Properties with policy specifications, limits and deductibles
customarily carried for similar properties. There are, however, certain types of
extraordinary losses which may be either uninsurable or not economically
insurable, such as those resulting from earthquakes, volcanos, floods, tidal
waves, explosion of water pipes or nuclear hazards. Should an uninsured loss or
a loss in excess of insured limits occur, the Company could lose both its
investment in and anticipated profits and cash flow from a Property while it
would continue to be obligated on any mortgage indebtedness or other financial
obligations on such Property. Any such loss would adversely affect the Company.
Moreover, as the general partner of the Operating Partnership, the Company
generally will be liable for any of the Operating Partnership's unsatisfied
obligations other than non-recourse obligations. Similarly, as the general
partner of the Property Partnerships, the Operating Partnership generally will
be liable for any of the Property Partnership's unsatisfied obligations other
than non-recourse obligations. The Company's management believes that the
Properties are insured adequately and in accordance with prevailing real estate
industry standards for properties similar to the Properties.
45
<PAGE>
ADVERSE EFFECT ON TRADING MARKET FOR COMMON SHARES; REDUCTION IN PUBLIC
FLOAT
Reduction in Periodic Distributions.In response to the investment interests
of certain potential investors in the Company, and the Company's evaluation of
what it perceives to be a changing philosophy in REIT investments generally, the
Company has decided, in connection with the Consolidation, to reduce periodic
cash distributions per Common Share and to increase the reinvestment of its cash
flow in the Company. The Company believes that this will enable it to achieve
greater long-term capital appreciation for investors in the Company. However,
there can be no assurance that the Company will be able to identify favorable
investments in the future or that any capital appreciation will result from this
strategy. See "--Risks of Equity Real Estate Investments; Adverse Impact on
Ability to Make Distributions; Effect on Value of Properties--Future Property
Acquisitions." Also, an adverse perception by the investing public of the reason
for such decision, and the continuing interest of certain investors in owning
relatively high-yield REIT common stock, may adversely affect the market price
of the Common Shares and may cause reduced trading activity in the Common Shares
on the AMEX. Such a reduction would reduce the liquidity of an investment in the
Common Shares. One of the factors that currently may influence the price of the
Common Shares in public markets is the amount of the Company's annual dividend
distributions and the yield such distributions represent; accordingly, an
increase in market interest rates may lead purchasers of Common Shares to demand
a higher annual yield, which could affect adversely the market price of the
Common Shares.
REPURCHASE OF COMMON SHARES BY THE COMPANY. Additionally, following the
consummation of the Consolidation Transactions, the Company and/or certain
Executive Officers may from time to time seek to repurchase Common Shares, in
market or privately negotiated transactions, if the Company or such Executive
Officers believe at such time that the market price undervalues the Common
Shares. In connection with its approval of the Consolidation Transactions and
the related decision to decrease periodic cash distributions to Shareholders,
the Board authorized the repurchase of up to 100,000 Common Shares following the
consummation of the Consolidation Transactions. The Company has no obligation to
repurchase any Common Shares. Any such Common Shares purchased by the Company or
the Executive Officers would reduce the number of Common Shares available for
trading in the public market. Moreover, if trading in the Common Shares were to
fall below a certain level, the Company may be unable to maintain the standards
for continued quotation on the AMEX, and the Common Shares could be subject to
de-listing from the AMEX. If such de-listing were to occur, trading in the
Common Shares would thereafter be conducted in the over-the-counter market on an
electronic bulletin board established for securities that do not meet the
listing requirements for the AMEX, or in what are commonly referred to as the
"pink sheets." As a result, an investor would find it more difficult to dispose
of, or to obtain accurate quotations for the price of, the Common Shares. In
addition, such de-listing would subject the Common Shares to so called "penny
stock" rules that impose additional sales practices and market making
requirements on broker-dealers who sell and/or make a market in such securities.
Consequently, de-listing from the AMEX could affect the ability or willingness
of broker-dealers to sell and/or make a market in the Common Shares.
ADVERSE CONSEQUENCES OF ELECTION TO REVOKE REIT ELECTION BY THE COMPANY
The Board has the authority to revoke Grove Property's REIT election at any
time without Shareholder approval. Although the Company currently intends to
operate in a manner designed to continue to qualify as a REIT, the Company is
aware that certain institutional investors have questioned whether it is
preferable for a company to elect to be taxed as a corporation that is not
qualified as a REIT so that the entity is not required to distribute to
shareholders 95% of its REIT taxable income. These investor preferences, as well
as economic, market, legal, tax or other considerations, may cause the Board at
some time in the future to revoke the Company's REIT election.
Such an election may be made by the Board, without any Shareholder vote. For
a discussion of the adverse tax consequences which would result to the Company,
and to cash available for distribution to
46
<PAGE>
Shareholders, in connection with such an election by the Board, see "--Adverse
Tax Consequences of Failure to Qualify as a REIT."
TERMS OF THE CONSOLIDATION TRANSACTIONS
FORMATION OF THE OPERATING PARTNERSHIP
In 1996, GREAT caused the formation of the Operating Partnership, to act as
the operating partnership of the Company and the vehicle for the consolidation
of ownership and/or control of the operations and assets of GREAT, the Property
Partnerships and certain assets and liabilities of the Management Company. The
Operating Partnership will be governed by the provisions of the OP Partnership
Agreement. See "THE OP PARTNERSHIP AGREEMENT." Following the consummation of the
Consolidation Transactions, the Operating Partnership will own, directly or
indirectly, the GREAT Properties and the Partnership Properties currently owned
by the Liquidating Partnerships, and expects to be, directly or indirectly, the
sole general partner of the remaining Property Partnerships with control over
the Properties owned thereby. As such, GREAT will exercise complete control over
the Operating Partnership, with control over the Properties owned thereby and
will have the authority to enter into a wide range of transactions, as described
in "OP PARTNERSHIP AGREEMENT--Management."
THE EXCHANGE OFFER
GENERAL. Pursuant to the Exchange Offer, the Operating Partnership has
offered to purchase, on the terms and conditions set forth in an Exchange Offer
dated , 1996, from the Limited Partners, any or all outstanding
Property Partnership Units of each of the Property Partnerships in exchange for
Common Units or, in the case of a tendering Limited Partner which is not an
Accredited Investor and certain other Limited Partners, cash. The number of
Common Units offered to each Limited Partner in the Exchange Offer was
calculated based upon such Limited Partner's relative interest in the applicable
Property Partnership as applied to the relative value of the Partnership
Property owned by the Property Partnership as compared to the value of all of
the Properties and other Consolidated Assets. Consolidation Valuations (as
defined) were based principally on the relative valuation of such Properties
determined by capitalizing pro forma net operating income, less reserves for
capital expenditures, as of September 30, 1996 at capitalization rates ranging
from 9.0% to 11.0%, and deducting the amount of debt allocable to the Property.
See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Terms of the
Consolidation Transactions--The Exchange Offer" and "APPROVAL OF THE
CONSOLIDATION TRANSACTIONS (Proposal 1)--The Properties--Valuation of the
Properties and Other Assets; Allocation of Common Units." The amount of cash
offered to Limited Partners who are not Accredited Investors and certain other
Limited Partners was calculated by multiplying the number of Common Units a
Limited Partner would have otherwise received by $8.35, representing a valuation
per Common Unit of $9.00, less 7.2%, which the Company estimates to be its costs
attributable to raising the requisite capital for the cash purchase.
PROPERTY PARTNERSHIP AMENDMENTS. The Property Partnership Agreement of each
Property Partnership contains provisions which would restrict the Company's
ability to obtain certain advantages anticipated to be available to it as a
result of the Consolidation Transactions. Certain Property Partnership
Agreements (i) would characterize contributions by the Operating Partnership to
the applicable Property Partnership (including contributions in connection with
the Refinancing) as non-interest bearing loans rather than a contribution to
capital and (ii) could be construed to limit the authority of the general
partner to authorize certain refinancings. Accordingly, the Exchange Offer as to
each Property Partnership is conditioned upon the minimum number of Property
Partnership Units of that Property Partnership being tendered and/or voted in
favor of the applicable Property Partnership Amendment, so as to permit the
amendment of that partnership's Property Partnership Agreement or the
liquidation of that Property Partnership, as applicable, as described below
(such number, with respect to each Property Partnership, the "MINIMUM PERCENTAGE
CONDITION").
47
<PAGE>
In connection with the Exchange Offer, Limited Partners of each Property
Partnership who tender their Property Partnership Units will also be consenting
to the applicable Property Partnership Amendments. The Property Partnership
Amendments will, among other things (if not already included in the respective
Property Partnership Agreement), (i) permit the Operating Partnership to
contribute to the capital of the Property Partnership the amounts contemplated
by the Refinancing and thereby increase its percentage interest in the Property
Partnership, (ii) authorize the Refinancing and the pledge of the Property
Partnership's Property to secure certain obligations of the Company, including,
without limitation, its obligations under the Credit Facility, (iii)
specifically authorize the general partner of the Property Partnership to enter
into transactions with related parties without the consent of the limited
partners (other than a sale of all or substantially all of the assets of the
Property Partnership), provided that the fee for property management services is
not more than 6.0% of gross revenues, (iv) in the case of the Liquidating
Partnerships only, permit the liquidation of the Property Partnership and the
distribution "in-kind" of the respective Partnership Property or Properties to
the Operating Partnership, (v) permit the Partnership Agreement of the Property
Partnerships to be amended without an obligation to set forth the verbatim
language of any proposed amendment and (vi) permit a dissolution of the Property
Partnership with the consent of the limited partners.
Limited Partners who elect not to tender their Property Partnership Units in
the Exchange Offer will, upon consummation of the Consolidation Transactions,
(i) in the case of Liquidating Partnerships, receive a cash distribution in
exchange for such Property Partnership Units upon the liquidation of the
applicable Property Partnership and (ii) in the case of non-liquidating Property
Partnerships, continue as "Outside Partners" of the applicable Property
Partnership.
NEW EQUITY INVESTMENT
Pursuant to the New Equity Investment, GREAT and the Operating Partnership
will sell Common Shares and Common Units totaling, in the aggregate, 3,333,333
Common Shares (giving effect to the exchange of all Common Units for Common
Shares), and will grant rights with respect to such securities under the
Registration Rights Agreement. The price will be $9.00 per Common Share or
Common Unit, with total gross proceeds to the Company of $30.0 million.
The Company expects that the Securities Purchase Agreement to be entered
into in connection with the New Equity Investment will contain representations
and warranties of the Company customary in similar transactions, and that each
of the Company's and the New Equity Investors' obligations to effect the closing
of the securities sales will be subject to various conditions. The Company
expects that it will grant to the New Equity Investors certain registration
rights that will enable the New Equity Investors to resell in registered
offerings certain Common Shares acquired by them to the public under certain
conditions. The Company will not effect any registration of the Common Shares
issued pursuant to the New Equity Investment earlier than six months following
the consummation of the Consolidation Transactions.
[INFORMATION CONCERNING THE NEW EQUITY INVESTORS, TERMS OF THE SECURITIES
PURCHASE AGREEMENT AND ANY RELATED AGREEMENTS TO BE ADDED BY AMENDMENT.]
THE CONSOLIDATION
In connection with the Consolidation Transactions, pursuant to the
Contribution Agreement all of the assets and operations of GREAT, certain assets
and liabilities of the Management Company and the interests of the Grove
Companies in the Property Partnerships will be consolidated in the Company. See
"CERTAIN RELATIONSHIPS AND TRANSACTIONS--Transactions With the Grove
Companies--The Contribution Agreement."
GREAT will contribute to the Operating Partnership the GREAT Assets and the
gross proceeds received by GREAT from the New Equity Investment. In exchange for
the contribution of the GREAT Assets, GREAT will receive the sole general
partnership interest in the Operating Partnership, evidenced
48
<PAGE>
by 620,130 Common Units, which is the number of issued and outstanding Common
Shares outstanding after giving effect to the Stock Split (and assuming a $9.00
per Common Share purchase price in the New Equity Investment) but before giving
effect to the balance of Consolidation Transactions. The exact number of Common
Units to be issued to GREAT may vary slightly since GREAT will not issue
fractional shares in connection with the Stock Split, but instead will pay cash
in lieu of a fractional share on the basis of $9.00 per Common Share. In
exchange for the contribution of the proceeds of the New Equity Investment,
GREAT will receive a number of additional Common Units equal to the number of
Common Shares issued by GREAT in the New Equity Investment.
The Grove Companies will contribute to National Realty, a newly formed
Delaware limited partnership (which will be wholly owned by the Management
Owners), certain assets and liabilities of the Management Company currently used
in connection with the provision of real estate brokerage services to GREAT, the
Property Partnerships and the limited partnerships that own the Excluded
Properties. The Grove Companies and the Board believe that the third party
business to be conducted by National Realty, and the volatility of its earnings,
makes it an inappropriate investment for the Company. Following the consummation
of the Consolidation Transactions, National Realty will continue to provide real
estate brokerage services to the Company, as well as to other parties, including
the limited partnerships which own the Excluded Properties. See "CERTAIN
RELATIONSHIPS AND TRANSACTIONS--Transactions With The Grove Companies--National
Realty" and "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Benefits
to Related Parties; Conflicts of Interest; Interests of Certain Persons."
Following such contribution of assets to National Realty, the Grove
Companies will contribute to the Operating Partnership the remaining assets and
liabilities of the Management Company and all of the Grove Companies'
partnership interests (both as a general partner and as a limited partner) in
each Property Partnership. In exchange for such contributions, the Grove
Companies will receive an aggregate of 934,654 Common Units (with an aggregate
value of approximately $8.4 million, on the basis of $9.00 per Common Unit).
The respective obligations of GREAT and the Grove Companies to effectuate
the above-described transfers pursuant to the Contribution Agreement are
conditioned upon the concurrent completion of the Exchange Offer, approval and
effectuation of the Property Partnership Amendments, approval of the
Consolidation Transactions, the Charter Amendments and the 1996 Plan by the
requisite vote of Shareholders of GREAT, the completion of the New Equity
Investment for gross proceeds equal to not less than $18.5 million, the closing
under the Credit Facility, and normal and customary conditions to the closing of
real estate transactions, including the consents of various lenders. GREAT and
the Grove Companies are in the process of obtaining such lender consents and
expect to obtain all necessary consents prior to the consummation of the
Consolidation Transactions. The Contribution Agreement also contains
representations and warranties from the Grove Companies to the Operating
Partnership concerning the operation of the Partnership Properties and
environmental matters, as well as certain other covenants, representations and
warranties customarily found in real estate purchase agreements. Claims for
indemnification for any breach of these representations and warranties must be
asserted within one year from discovery of such breach by the Board, but in no
event more than two years from the date of the consummation of the Consolidation
Transactions. In the event that any of the representations or warranties is
breached, GREAT's recovery will be limited to recourse against the Common Units
received by the Grove Companies. See "CERTAIN RELATIONSHIPS AND
TRANSACTIONS--Transactions With the Grove Companies--The Contribution
Agreement."
For a more detailed summary of certain terms and conditions of the
Contribution Agreement, see "CERTAIN RELATIONSHIPS AND
TRANSACTIONS--Transactions With the Grove Companies--The Contribution
Agreement."
49
<PAGE>
THE CHARTER AMENDMENTS
PROPOSAL TO DELETE THE THIRD PARTY APPRAISAL REQUIREMENT. The first
proposed amendment to the Charter is to delete the requirement, contained in
Section 6.4(b) of the Charter, that GREAT is required to have received an
independent third party appraisal before purchasing a property, the ownership of
which is controlled by an executive officer of GREAT or an affiliate. Neither
GREAT nor the Grove Companies has received such an appraisal with respect to any
of the Partnership Properties in connection with the Consolidation Transactions
or otherwise. Therefore, the approval of this amendment by the requisite vote of
the Shareholders is a condition to the consummation of the Consolidation
Transactions. The Board believes that its familiarity with the Properties and
its expertise in the Company's geographic market enable the Board and, in
particular, the Independent Trust Managers to assess the valuations to be
attributed to the Properties, or any other property to be purchased by the
Company, as well as or better than an independent third party appraiser. In
reaching this conclusion, the Board noted that valuations derived from a third
party appraisal may be inconsistent and may vary substantially as a result of a
variety of factors. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Benefits to Related Parties; Conflicts of Interest; Interests of Certain
Persons" and "PROPOSAL TO AMEND THE CHARTER (Proposal 2)--Reasons for the
Charter Amendments."
PROPOSAL TO CHANGE THE NAME OF GREAT. The second proposed amendment to the
Charter is to change the name of GREAT to "Grove Property Trust." The Company
believes that it is appropriate, in connection with the consummation of the
Consolidation Transactions, to change the name of GREAT to reflect to new
potential investors in the Company, and to the public generally, the
transformation in size, diversification, strategy and investment philosophy
which GREAT will experience as a result of the Consolidation Transactions. See
"PROPOSAL TO AMEND THE CHARTER (Proposal 2)--Reasons for the Charter
Amendments."
PROPOSAL TO AMEND THE "EXCESS SHARES" PROVISIONS. The final proposed
amendment to the Charter is to make certain amendments to the "Excess Shares"
provisions of the Charter in response to certain rulings recently promulgated by
the Internal Revenue Service, in order to minimize the risk that GREAT could
fail the "closely held" test set forth in section 856 of the Code, and thereby
fail to qualify as a REIT for federal income tax purposes, and to clarify the
"Ownership Limit" as it applies to certain Executive Officers and their
affiliates. See "PROPOSAL TO AMEND THE CHARTER (Proposal 2)--Reasons for the
Charter Amendments--Reasons for the Proposed Amendment to the Excess Shares
Provisions" "-- Description of the Charter Amendments--Description of the
Proposed Amendment to the Excess Shares Provisions" and "CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS--Taxation of the Company."
See APPENDIX I for the full text of the Charter Amendments. The Charter
Amendments are being considered together as a single proposal.
THE REFINANCING
REFINANCING. As part of the Consolidation Transactions, in connection with
the Refinancing, the Company will refinance approximately $39.8 million of
mortgage indebtedness of 17 Property Partnerships. On a pro forma basis as of
September 30, 1996, after giving effect to the Consolidation Transactions,
including the application of the proceeds from the New Equity Investment and
borrowings under the Credit Facility, including the Refinancing, the aggregate
indebtedness of the Company would be approximately $32.7 million, of which $18.5
million is variable rate debt secured, directly or indirectly, by mortgages on
17 of the Properties.
GREAT expects that the Credit Facility will consist of two separate loans:
(i) a revolving, acquisition mortgage loan facility of up to $25.0 million (the
Revolving Credit Facility) and (ii) a ten-year term mortgage loan of
approximately $15.1 million (the Long-Term Facility), each of which is more
fully
50
<PAGE>
described below. The Revolving Credit Facility will be recourse to the Operating
Partnership, Grove Property and the Property Partnerships.
REVOLVING CREDIT FACILITY. The Company expects to enter into an agreement
for a three-year term, Revolving Credit Facility for up to $25.0 million
(subject to a maximum of 60% of the appraised value of the collateral, to be
determined prior to the closing and then from time to time during the term),
secured by a blanket first mortgage on the eight Properties which are not being
pledged as security in connection with the Long-Term Facility, a collateral
assignment of the leases and rents associated with such Properties and a first
priority security interest in all personal property located at such Properties
related to the operation of the real property, and a full guarantee of Grove
Property. Borrowings under the Revolving Credit Facility will bear interest at a
floating rate equal to 1.20% per annum above the 30-, 60- or 90-day LIBOR rate.
Interest under the Revolving Credit Facility is payable monthly. The Operating
Partnership is required to maintain Debt Service Coverage (to be defined in
Revolving Credit Facility) of at least 1.60 to 1.0 on the Properties that
constitute the collateral for the facility and to maintain aggregate minimum
occupancy for the collateral pool of 90%, with not less than 80% occupancy for
any single Property. The lender under the Revolving Credit Facility may require
the Operating Partnership to obtain interest rate protection for the outstanding
borrowings, although it is not anticipated that any such interest rate
protection will be in place at the time of the closing under the Revolving
Credit Facility and the consummation of the Consolidation Transactions. All of
the facility will be available to supplement net cash generated from the
operations of the Operating Partnership to fund future property acquisitions,
and up to $4.0 million is expected to be available to fund working capital
requirements of the Company. It is expected that the Company will draw down $3.4
million of the Revolving Credit Facility at closing to make certain payments in
connection with the Refinancing. During the term of the Revolving Credit
Facility, Grove Property (as a guarantor thereunder) will be required to
maintain a Debt to Tangible Net Worth Coverage (to be defined in the Revolving
Credit Facility) of less than 1.25 to 1.0 and to distribute to Shareholders not
more than 95% of FFO. Amounts outstanding from time to time under the Revolving
Credit Facility may be prepaid by the Company without penalty or premium. The
closing under the Revolving Credit Facility will be subject to certain
conditions, including without limitation the receipt by the lender of
satisfactory independent appraisals of the values of, and "Phase I"
environmental assessments on, the Properties constituting the collateral. The
loan documents to be entered into by the Company and the lender in connection
with the Revolving Credit Facility will contain such other representations and
warranties, conditions and covenants as are customarily found in similar
financing documents. Additionally, the closing of the Revolving Credit Facility
will be conditioned on the consummation by the Company of the Consolidation
Transactions.
LONG-TERM FACILITY. The Company has obtained a commitment for a ten-year
term mortgage loan in the approximate amount of $15.1 million (subject to a
maximum loan to value of 60%), secured by first mortgages on nine Properties,
collateral assignments of the leases and rents associated with such Properties
and a security interest in all personal property and improvements associated
with such Properties. The Long-Term Facility will be cross-collateralized and
cross-defaulted, but will be non-recourse to Grove Property and the Operating
Partnership except for recourse with respect to waste, misapplication of rents,
insurance proceeds and/or condemnation proceeds, environmental problems and
liabilities, failure to use property income to pay property expenses and fraud.
Under the terms of the Long-Term Facility, neither the borrowers nor any general
or limited partners of the borrowers will be permitted to obtain secondary
financing or pledge their equity interests in the Properties constituting the
collateral toward any other debt. The Long-Term Facility will bear interest at a
rate equal to the one-month LIBOR rate plus 114 basis points, and interest only
is payable monthly throughout the term. Upon the closing of the Long-Term
Facility, a "lockbox" will be established and all funds relating to Properties
constituting collateral will be swept daily into an account with the lender and
may be applied by the lender in the event of certain payment defaults. The
Company will not be permitted to prepay amounts outstanding under the Long-Term
Facility during the first three years of the term; thereafter, prepayment will
be permitted without penalty or premium. The Long-Term Facility will provide
that each Property which constitutes collateral
51
<PAGE>
thereunder must be managed by the Company or an affiliate, except that the
lender may compel the Company to engage a new manager for any Property if such
Property fails to maintain a certain minimum debt service coverage ratio. The
closing under the Long-Term Facility will be subject to certain conditions,
including without limitation the receipt by the lender of satisfactory
independent appraisals of the values of, and "Phase I" environmental assessments
on, the Properties constituting the collateral, and the completion of certain
other due diligence to be performed by the lender . The loan documents to be
entered into by the Company and the lender in connection with the Long-Term
Facility will contain such other representations and warranties, conditions and
covenants as are customarily found in similar financing documents.
INTEREST RATE PROTECTION. In connection with the Long-Term Facility which
will bear interest at a variable rate, the Company will enter into an interest
rate swap (the "INTEREST SWAP") with a third party lender for a "notional"
principal amount equal to the $15.1 million principal amount of the Long-Term
Facility, to hedge the risk of an increase in interest rates to a variable rate
index (one-month LIBOR). The Interest Swap will be a separate, stand alone
agreement pursuant to which the Company and the third party lender will exchange
net future interest payments so that, in effect, the Company will fix its
interest rate at a fixed rate per annum to be determined prior to the closing
under the Long-Term Facility and the consummation of the Consolidation
Transactions. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Potential Adverse Effects of the Consolidation Transactions; Risk
Factors--Real Estate Financing Risks--Variable Rate Debt." The Interest Swap is
expected to be for a ten-year term and may therefore continue in effect after
the Long-Term Facility is repaid.
CURRENT INDEBTEDNESS. The following table sets forth certain information
concerning the current financing arrangements for the GREAT Properties and the
Property Partnerships:
52
<PAGE>
CURRENT INDEBTEDNESS
<TABLE>
<CAPTION>
OUTSTANDING
PRINCIPAL
AMOUNT
ORIGINAL (AS OF INTEREST RATE (AS
PRINCIPAL SEPTEMBER 30, OF SEPTEMBER 30, INTEREST MONTHLY MATURITY
NAME OF PROPERTY AMOUNT 1996) 1996) RATE TERM PAYMENT DATE
- ---------------------------------------- ---------- ------------- ----------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
GREAT PROPERTIES
Dogwood Hills Apartments (1)............ -- -- -- -- -- --
Hamden Center Apartments (1)............ -- -- -- -- -- --
Baron Apartments (2).................... $1,250,000 $ 1,217,906 4.00% June-97 $ 4,167 June-97
7.25% June-13 8,527 June-13
Cambridge Estates (1)................... 4,500,000 4,457,572 7.04% Jan-06 $ 31,920 Jan-06
---------- ------------- ---------
Subtotal................................ $5,750,000 $ 5,675,478 $ 40,447
---------- ------------- ---------
PROPERTY PARTNERSHIP PROPERTIES
Grove Avon Associates Limited
Partnership
(Avonplace Condominiums) (76%).......... $6,000,000 $ 5,839,173 7.67% Floating $ 45,364 Oct-02
Burgundy Associates Limited Partnership
(Burgundy Studio Apartments) (62%)...... 1,500,000 1,481,850 7.67% Floating 11,842 Nov-05
Grove-Ellington Associates Limited
Partnership
(Arbor Commons) (100%).................. 900,000 883,857 9.27% Nov-96 7,720 Nov-99
Grove-Enfield Associates Limited
Partnership
(Fox Hill Apartments) (77%)............. 6,000,000 5,747,114 7.47% Nov-98 44,166 Nov-00
Grove-Longmeadow Associates Limited
Partnership
(The Longmeadow Shops) (25%)............ 4,000,000 4,000,000 7.50% Jan-99 25,000 Jan-99
Grove-Manchester Associates Limited
Partnership
(208-210 Main Street Apartments)
(100%).................................. 800,000 786,059 9.27% Nov-96 6,862 Nov-99
Grove-Newington Associates Limited
Partnership
(Woodbridge Apartments) (100%).......... 3,000,000 2,784,774 8.49% Feb-97 21,850 Sept-01
Grove Opportunity Fund II Limited
Partnership
(Royale Apartments) (61%)............... 1,850,000 1,772,032 7.22% Dec-98 13,336 Dec-00
Grove Opportunity Fund II Limited
Partnership
(Dean Estates II Apartments) (61%)...... 1,200,000 1,154,469 7.37% Dec-98 8,713 Dec-03
Grove-Plainville Associates Limited
Partnership
(Colonial Village Apartments) (100%).... 3,432,000 3,353,925 7.41% Floating 26,952 May-00
Grove Properties III Associates Limited
Partnership
(Bradford Commons) (59%)................ 2,028,000 1,977,936 8.19% May-98 17,204 May-00
Grove Properties III Associates Limited
Partnership (Loomis Manor) (59%)........ 2,143,030 1,998,791 8.49% Feb-97 15,493 Sept-01
Grove Taunton Limited Partnership
(Dean Estates Apartments) (100%)........ 2,080,000 2,060,980 7.09% Dec-00 14,821 Dec-00
Grove-Vernon Associates Limited
Partnership
(Fox Hill Commons) (100%)............... 2,340,000 2,271,234 7.41% Floating 19,617 May-00
<CAPTION>
GENERAL PARTNER
NAME OF PROPERTY GUARANTEE %
- ---------------------------------------- ---------------
<S> <C>
GREAT PROPERTIES
Dogwood Hills Apartments (1)............ --
Hamden Center Apartments (1)............ --
Baron Apartments (2).................... 15%
--
Cambridge Estates (1)................... --
Subtotal................................
PROPERTY PARTNERSHIP PROPERTIES
Grove Avon Associates Limited
Partnership
(Avonplace Condominiums) (76%).......... 50%
Burgundy Associates Limited Partnership
(Burgundy Studio Apartments) (62%)...... 50%
Grove-Ellington Associates Limited
Partnership
(Arbor Commons) (100%).................. 100%
Grove-Enfield Associates Limited
Partnership
(Fox Hill Apartments) (77%)............. 100%
Grove-Longmeadow Associates Limited
Partnership
(The Longmeadow Shops) (25%)............ 0%
Grove-Manchester Associates Limited
Partnership
(208-210 Main Street Apartments)
(100%).................................. 100%
Grove-Newington Associates Limited
Partnership
(Woodbridge Apartments) (100%).......... 25%
Grove Opportunity Fund II Limited
Partnership
(Royale Apartments) (61%)............... 100%
Grove Opportunity Fund II Limited
Partnership
(Dean Estates II Apartments) (61%)...... 50%
Grove-Plainville Associates Limited
Partnership
(Colonial Village Apartments) (100%).... 100%
Grove Properties III Associates Limited
Partnership
(Bradford Commons) (59%)................ 100%
Grove Properties III Associates Limited
Partnership (Loomis Manor) (59%)........ 0%
Grove Taunton Limited Partnership
(Dean Estates Apartments) (100%)........ 100%
Grove-Vernon Associates Limited
Partnership
(Fox Hill Commons) (100%)............... 100%
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
OUTSTANDING
PRINCIPAL
AMOUNT
ORIGINAL (AS OF INTEREST RATE (AS
PRINCIPAL SEPTEMBER 30, OF SEPTEMBER 30, INTEREST MONTHLY MATURITY
NAME OF PROPERTY AMOUNT 1996) 1996) RATE TERM PAYMENT DATE
- ---------------------------------------- ---------- ------------- ----------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Grove-West Hartford Associates Limited
Partnership
(Park Place West) (100%)................ $1,725,000 $ 1,694,062 9.27% Nov-96 $ 14,796 Nov-99
Grove-West Springfield Associates
Limited Partnership
(Van Deene Manor) (43%)................. 3,750,000 3,613,258 7.53% Dec-98 27,785 Dec-00
Grove-Westfield Associates Limited
Partnership
(Security Manor) (43%).................. 1,998,000 1,924,291 7.53% Dec-98 14,804 Dec-00
Nautilus Properties Limited Partnership
(Sandalwood Apartments) (61%) (3)....... 640,000 640,000 6.90% Floating 4,483 Oct-05
Shoreline London Associates Limited
Partnership
(Ocean Reef Apartments) (61%) (4)....... 3,100,000 2,971,967 7.49% Sept-05 17,720 Sept-05
Grove Westwynd Associates Limited
Partnership
(Westwynd Apartments) (59%)............. 1,300,000 1,276,684 9.27% Nov-96 11,151 Nov-96
---------- ------------- ---------
Subtotal................................ $49,786,030 $48,232,456 $ 369,678
---------- ------------- ---------
TOTAL................................... $55,536,030 $53,907,934 $ 410,125
---------- ------------- ---------
---------- ------------- ---------
<CAPTION>
GENERAL PARTNER
NAME OF PROPERTY GUARANTEE %
- ---------------------------------------- ---------------
<S> <C>
Grove-West Hartford Associates Limited
Partnership
(Park Place West) (100%)................ 100%
Grove-West Springfield Associates
Limited Partnership
(Van Deene Manor) (43%)................. 50%
Grove-Westfield Associates Limited
Partnership
(Security Manor) (43%).................. 50%
Nautilus Properties Limited Partnership
(Sandalwood Apartments) (61%) (3)....... 100%
Shoreline London Associates Limited
Partnership
(Ocean Reef Apartments) (61%) (4)....... 20%
Grove Westwynd Associates Limited
Partnership
(Westwynd Apartments) (59%)............. 100%
Subtotal................................
TOTAL...................................
</TABLE>
- ------------------------------
(1) The Cambridge Estates debt is also secured by a first mortgage lien on the
Dogwood Hills Apartments and Hamden Center Apartments Properties.
(2) The debt on the Baron Apartments is fixed at 4% through June 1997 at which
time the rate adjusts to 7.25%. Payments of interest only are due monthly
through June 1997. Subsequently, principal and interest payments are due
monthly in accordance with a 30-year amortization schedule.
(3) As of September 30, 1996, the Sandalwood Apartments Property was not
encumbered. In October 1996, a $640,000 loan, secured by the Property, was
obtained to cover the cost of substantially renovating the Property. The
amounts included in this table includes such new $640,000 mortgage.
(4) As of September 30, 1996, the Ocean Reef Apartments Property had $600,000
less debt than listed above. In October 1996, an additional $600,000 second
mortgage loan was placed on such Property. The amount included in this table
includes such new $600,000 second mortgage.
54
<PAGE>
ANTICIPATED PRO FORMA INDEBTEDNESS. The following table sets forth certain
information regarding the indebtedness encumbering the Properties which is
expected to be outstanding upon the consummation of the Consolidation
Transactions, assuming gross proceeds of $30.0 million from the New Equity
Investment. The principal balance of the indebtedness secured by the various
Partnership Properties included as security for the Credit Facility will vary,
depending upon the number of Limited Partners who receive cash (rather than
Common Units) in exchange for their Property Partnership Units. The principal
balances included in the table assume that all Limited Partners who are offered
cash in exchange for their Property Partnership Units will elect to take cash
rather than Common Units, and allocate the Long-Term Facility and $3.4 million
of the Revolving Credit Facility to each Property on a pro rata basis.
INDEBTEDNESS AFTER REFINANCING
<TABLE>
<CAPTION>
OUTSTANDING
PRINCIPAL
AMOUNT (AS OF EXEC. OFF.
SEPTEMBER 30, INTEREST INTEREST MONTHLY MATURITY GUARANTEE
NAME OF PROPERTY 1996) RATE RATE TERM PAYMENT DATE % (3)
- ------------------------------------------------------- ------------- ----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
GREAT PROPERTIES
Dogwood Hills Apartments............................... $ -- -- -- $ -- -- --
Hamden Center Apartments............................... -- -- -- -- -- --
Baron Apartments....................................... 1,217,906 4.00% June-13 4,167 June-97 15%
7.25% June-13 8,527 June-13 0%
Cambridge Estates...................................... 4,457,572 7.04% Jan-06 31,920 Jan-06 0%
------------- ---------
Subtotal............................................... $ 5,675,478 $ 40,447
------------- ---------
PROPERTY PARTNERSHIP PROPERTIES (2)
Grove Avon Associates Limited Partnership
(Avonplace Associates) (76%)........................... $ 1,074,961 7.90% (1) $ 7,077 Jan-07 0%
Burgundy Associates Limited Partnership
(Burgundy Studio Apartments) (62%)..................... 1,316,853 7.90% (1) 8,669 Jan-07 13%
Grove-Ellington Associates Limited Partnership
(Arbor Commons) (100%)................................. 142,621 7.90% (1) 939 Jan-07 0%
Grove-Enfield Associates Limited Partnership
(Fox Hill Apartments) (77%)............................ 1,033,134 7.90% (1) 29,831 Jan-07 0%
Grove-Longmeadow Associates Limited Partnership
(The Longmeadow Shops) (25%)........................... 4,000,000 7.50% Jan-99 25,000 Jan-99 0%
Grove-Manchester Associates Limited Partnership
(208-210 Main Street Apartments) (100%)................ 146,712 7.90% (1) 966 Jan-07 0%
Grove-Newington Associates Limited Partnership
(Woodbridge Apartments) (100%)......................... 1,850,021 7.90% (1) 12,179 Jan-07 13%
Grove Opportunity Fund II Limited Partnership
(Royale Apartments) (61%).............................. 363,713 7.90% (1) 2,394 Jan-07 0%
Grove Opportunity Fund II Limited Partnership
(Dean Estates II Apartments) (61%)..................... 194,077 7.90% (1) 5,604 Jan-07 0%
Grove-Plainville Associates Limited Partnership
(Colonial Village Apartments) (100%)................... 2,463,774 7.90% (1) 16,042 Jan-07 13%
Grove Properties III Associates Limited Partnership
(Bradford Commons) (59%)............................... 1,461,342 7.90% (1) 9,621 Jan-07 13%
Grove Properties III Associates Limited Partnership
(Loomis Manor) (59%)................................... 1,408,707 7.90% (1) 9,274 Jan-07 13%
Grove Taunton Limited Partnership
(Dean Estates Apartments) (100%)....................... 2,060,980 7.09% Dec-00 14,821 Dec-00 100%
Grove-Vernon Associates Limited Partnership
(Fox Hill Commons) (100%).............................. $ 1,033,134 7.90% (1) $ 29,831 Jan-07 0%
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
OUTSTANDING
PRINCIPAL
AMOUNT (AS OF EXEC. OFF.
SEPTEMBER 30, INTEREST INTEREST MONTHLY MATURITY GUARANTEE
NAME OF PROPERTY 1996) RATE RATE TERM PAYMENT DATE % (3)
- ------------------------------------------------------- ------------- ----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Grove-West Hartford Associates Limited Partnership
(Park Place West) (100%)............................... 348,851 7.90% (1) 2,297 Jan-07 0%
Grove-West Springfield Associates Limited Partnership
(Van Deene Manor) (43%)................................ 2,751,962 7.90% (1) 18,117 Jan-07 13%
Grove-Westfield Associates Limited Partnership
(Security Manor) (43%)................................. 1,258,520 7.90% (1) 8,285 Jan-07 13%
Nautilus Properties Limited Partnership
(Sandalwood Apartments) (61%).......................... 94,619 7.90% (1) 623 Jan-07 0%
Shoreline London Associates Limited Partnership
(Ocean Reef Apartments) (61%).......................... 2,371,967 7.49% Sept-05 17,720 Sept-05 0%
Grove Westwynd Associates Limited Partnership
(Westwynd Apartments) (59%)............................ 936,969 7.90% (1) 6,168 Jan-07 13%
------------- ---------
Subtotal............................................... $26,974,516 $ 206,962
------------- ---------
TOTAL.................................................. $32,649,994 $ 247,409
------------- ---------
------------- ---------
</TABLE>
- ------------------------------
(1) The interest rate on the refinanced debt will be a floating rate of between
114 basis points and 120 basis points over the 30-day LIBOR rate. At
September 30, 1996, the 30-day LIBOR was approximately 5.5%. The interest
rate reflected assumes the Company will hedge its interest rate risk and
that the effective interest rate, after hedging expenses, will be
approximately 7.9%.
(2) The pro forma principal balance of the refinanced loans secured by each
Property (see note 1) will vary depending on which Properties are pledged to
secure the Long-Term Credit Facility and the Revolving Credit Facility,
respectively. The principal balances for the refinanced loans included in
this table are allocated to each Property on a pro rata basis. The actual
principal due on each refinanced Property loan may be different on a
Property by Property basis, depending on lender requirements; however, the
total amount of debt outstanding will be the same.
(3) This generally represents a "last dollar" guarantee by certain Executive
Officers, which is being issued in connection with the Credit Facility,
principally to enable such persons to avoid taxable income upon exchange of
Property Partnership Units for Common Units in connection with the
Consolidation.
STOCK SPLIT
Immediately prior to the consummation of the Consolidation Transactions,
GREAT will declare and effect the Stock Split with respect to GREAT's 525,000
currently issued and outstanding Common Shares. The Stock Split is intended, in
part, to reduce the immediate impact to current Shareholders of the Company's
decision to reduce quarterly distributions by Grove Property from the current
level of $.92 per Common Share to $.63 per Common Share ($.74 per Common Share
before giving effect to the Stock Split) and to give effect to the Board's
conclusion as to the Consolidation Valuation of the GREAT Assets in light of the
$9.00 per Common Share purchase price in the New Equity Investment. See
"APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Reasons for the
Consolidation Transactions; Recommendation of the Board--Investor Interest" and
"THE COMPANY--Business Objectives and Operating Strategies." The actual number
of shares issued pursuant to the Stock Split will increase or decrease, as
appropriate, if the purchase price per Common Share in the New Equity Investment
is less or more than $9.00. The Company will not issue fractional shares in
connection with the Stock Split, but rather will pay cash in lieu of a
fractional share on the basis of $9.00 per Common Share. The Company expects
that such cash payments in lieu of fractional shares will total less than
$10,000.
CONDITIONS TO CONSUMMATION OF THE CONSOLIDATION TRANSACTIONS
Unless otherwise indicated, the various transactions comprising the
Consolidation Transactions will occur on or about the same date, and be deemed
to occur simultaneously. It is a condition to the consummation of each of the
various transactions comprising the Consolidation Transactions that each of the
other transactions which comprise the Consolidation Transactions occur.
Therefore, the consummation
56
<PAGE>
by GREAT, the Operating Partnership, the Management Company and the Grove
Companies of the Consolidation Transactions is conditioned upon, among other
things:
STOCK SPLIT. The declaration and effectuation by GREAT of the Stock Split,
immediately prior to the consummation of the Consolidation Transactions.
PROPERTY PARTNERSHIP AMENDMENTS. Approval, in connection with the Exchange
Offer, of the Property Partnership Amendments by the requisite vote of Limited
Partners of each Property Partnership, and the effectuation of the Property
Partnership Amendments and the liquidation of the Liquidating Partnerships.
NEW EQUITY INVESTMENT. Completion of the New Equity Investment by the
Operating Partnership and GREAT, resulting in aggregate gross proceeds of not
less than $18.5 million.
SHAREHOLDER APPROVAL. Shareholder approval at the Special Meeting of the
Consolidation Transactions, the Charter Amendments and the 1996 Plan.
THIRD PARTY CONSENTS. Receipt of all required material consents of third
parties to the Consolidation Transactions or any of the transactions comprising
the Consolidation Transactions.
REFINANCING. Completion of the Refinancing, including, without limitation,
the closing of the Credit Facility.
THE PROPERTIES
DESCRIPTION OF THE PROPERTIES
Set forth below is certain information concerning the GREAT Properties and
the Partnership Properties to be owned or, in the case of certain of the
Partnership Properties, controlled, directly or indirectly, by GREAT and the
Operating Partnership upon the consummation of the Consolidation Transactions.
GREAT's percentage interest in each Partnership Property will depend upon the
Property Partnership Units tendered by the Limited Partners in the Exchange
Offer. The percentage ownership interests reflected below for each Partnership
Property represents (i) the interests to be contributed to the Operating
Partnership pursuant to the Contribution Agreement plus (ii) the interests to be
issued to the Operating Partnership in connection with the Refinancing of
certain Property Partnership indebtedness, assuming an aggregate of $30.0
million is raised pursuant to the New Equity Investment. See "APPROVAL OF THE
CONSOLIDATION TRANSACTIONS (Proposal 1)--Terms of the Consolidation
Transactions--The Refinancing."
57
<PAGE>
PROPERTIES
<TABLE>
<CAPTION>
DATE OF WEIGHTED
NAME OF PROPERTY AND CONSTRUCTION/ TOTAL AVERAGE 1995 SEPTEMBER 30,
PERCENTAGE OWNERSHIP MAJOR RENTABLE UNIT SIZE AVERAGE 1996
INTERESTS MARKET AREA RENOVATION(1) # OF AP'TS. SQ. FT. (SQ. FT.) OCCUPANCY(2) OCCUPANCY(2)
- --------------------- ------------------- ----------------- ----- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
GREAT PROPERTIES
Dogwood Hills
Apartments (100%).... Hamden, CT 1993 46 61,198 1,330 100% 97.83%
Hamden Center
Apartments (100%).... Hamden, CT 1993 65 56,730 873 96.92% 95.38%
Baron Apartments
(100%)............... Southington, CT 1994 54 50,304 932 97.38% 100%
Cambridge Estates
(100%)............... Norwich, CT 1992 92 86,378 939 98.91% 100%
----- --------- ----- ------------- -------------
Subtotal/Weighted
Average.............. 257 254,610 991 98.28% 98.44%
----- --------- ----- ------------- -------------
----- --------- ----- ------------- -------------
PROPERTY PARTNERSHIP
PROPERTIES
Grove Avon Associates
Limited Partnership
(Avonplace
Condominiums)(76%)... Avon, CT 1995 146 169,296 1,160 96.74% 97.24%
Burgundy Associates
Limited Partnership
(Burgundy Studio
Apartments) (62%).... Middletown, CT 1996 102 45,141 443 98.53% 96.08%
Grove-Ellington
Associates Limited
Partnership
(Arbor Commons)
(100%)............... Ellington, CT 1988 28 21,840 780 98.21% 96.43%
Grove-Enfield
Associates Limited
Partnership
(Fox Hill Apartments)
(77%)................ Enfield, CT 1991 168 133,712 796 93.65% 98.81%
Grove-Manchester
Associates Limited
Partnership
(208-210 Main Street
Apartments) (100%)... Manchester, CT 1988 28 26,002 929 96.43% 100%
Grove-Newington
Associates Limited
Partnership
(Woodbridge
Apartments) (100%) Newington, CT 1991 73 57,825 792 97.72% 97.26%
Grove Opportunity
Fund II Limited
Partnership
(Royale Apartments)
(61%) Cranston, RI 1993 76 87,438 1,151 98.69% 94.29%
<CAPTION>
NINE MONTHS 1996 THIRD
ENDED SEPTEMBER 1995 AVERAGE QUARTER MONTHLY
NAME OF PROPERTY AND 30, 1996 MONTHLY RENT RENT PER SQ.
PERCENTAGE OWNERSHIP AVERAGE PER SQ. FT./ FT./
INTERESTS OCCUPANCY(2) PER AP'T.(3) PER AP'T.(3)
- --------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
GREAT PROPERTIES
Dogwood Hills
Apartments (100%).... 98.55% $ 0.53 $ 0.54
Hamden Center
Apartments (100%).... 96.92% 0.72 0.73
Baron Apartments
(100%)............... 96.91% 0.71 0.74
Cambridge Estates
(100%)............... 97.95% 0.74 0.76
------ ----- -----
Subtotal/Weighted
Average.............. 97.58% $ 0.68 $ 0.70
------ ----- -----
------ ----- -----
PROPERTY PARTNERSHIP
PROPERTIES
Grove Avon Associates
Limited Partnership
(Avonplace
Condominiums)(76%)... 98.10% $ 0.71 $ 0.72
Burgundy Associates
Limited Partnership
(Burgundy Studio
Apartments) (62%).... 97.22% 0.93 0.97
Grove-Ellington
Associates Limited
Partnership
(Arbor Commons)
(100%)............... 97.62% 0.87 0.88
Grove-Enfield
Associates Limited
Partnership
(Fox Hill Apartments)
(77%)................ 97.09% 0.80 0.81
Grove-Manchester
Associates Limited
Partnership
(208-210 Main Street
Apartments) (100%)... 98.81% 0.80 0.82
Grove-Newington
Associates Limited
Partnership
(Woodbridge
Apartments) (100%) 95.74% 0.89 0.90
Grove Opportunity
Fund II Limited
Partnership
(Royale Apartments)
(61%) 97.78% 0.58 0.60
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
DATE OF WEIGHTED
NAME OF PROPERTY AND CONSTRUCTION/ TOTAL AVERAGE 1995 SEPTEMBER 30,
PERCENTAGE OWNERSHIP MAJOR RENTABLE UNIT SIZE AVERAGE 1996
INTERESTS MARKET AREA RENOVATION(1) # OF AP'TS. SQ. FT. (SQ. FT.) OCCUPANCY(2) OCCUPANCY(2)
- --------------------- ------------------- ----------------- ----- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Grove Opportunity
Fund II Limited
Partnership
(Dean Estates II
Apartments) (61%).... Cranston, RI 1994 48 56,172 1,170 92.88% 97.92%
Grove-Plainville
Associates Limited
Partnership
(Colonial Village
Apartments) (100%)... Plainville, CT 1989 104 102,000 981 96.96% 96.15%
Grove Properties III
Associates Limited
Partnership
(Bradford Commons)
(59%)................ Newington, CT 1989 64 57,188 894 95.31%% 95.31%
Grove Properties III
Associates Limited
Partnership
(Loomis Manor)
(59%)................ West Hartford, CT 1990 43 48,916 1,138 98.45% 100%
Grove Taunton Limited
Partnership
(Dean Estates
Apartments) (100%)... Taunton, MA N/A 58 58,830 1,014 98.13% 93.10%
Grove-Vernon
Associates Limited
Partnership
(Fox Hill Commons)
(100%)............... Vernon, CT 1989 74 62,840 849 97.18% 95.95%
Grove-West Hartford
Associates Limited
Partnership
(Park Place West)
(100%)............... West Hartford,CT 1989 63 54,264 861 96.96% 98.41%
Grove-West
Springfield
Associates Limited
Partnership
(Van Deene Manor) West Springfield,
(43%)................ MA 1990 109 72,400 664 98.78% 99.08%
Grove-Westfield
Associates Limited
Partnership
(Security Manor)
(43%)................ Westfield, MA 1988 63 72,452 1,150 99.34% 100%
Nautilus Properties
Limited Partnership
(Sandalwood
Apartments)(4)
(61%)................ New London, CT 1996 39 20,170 515 0.00% 30.77%
Shoreline London
Associates Limited
Partnership
(Ocean Reef
Apartments) (61%).... New London, CT 1995 163 135,143 829 93.35% 96.32%
<CAPTION>
NINE MONTHS 1996 THIRD
ENDED SEPTEMBER 1995 AVERAGE QUARTER MONTHLY
NAME OF PROPERTY AND 30, 1996 MONTHLY RENT RENT PER SQ.
PERCENTAGE OWNERSHIP AVERAGE PER SQ. FT./ FT./
INTERESTS OCCUPANCY(2) PER AP'T.(3) PER AP'T.(3)
- --------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Grove Opportunity
Fund II Limited
Partnership
(Dean Estates II
Apartments) (61%).... 92.59% 0.57 0.59
Grove-Plainville
Associates Limited
Partnership
(Colonial Village
Apartments) (100%)... 95.94% 0.73 0.74
Grove Properties III
Associates Limited
Partnership
(Bradford Commons)
(59%)................ 91.84% 0.75 0.77
Grove Properties III
Associates Limited
Partnership
(Loomis Manor)
(59%)................ 100% 0.71 0.73
Grove Taunton Limited
Partnership
(Dean Estates
Apartments) (100%)... 95.98% $ 0.65 $ 0.66
Grove-Vernon
Associates Limited
Partnership
(Fox Hill Commons)
(100%)............... 97.60% 0.80 0.82
Grove-West Hartford
Associates Limited
Partnership
(Park Place West)
(100%)............... 98.77% 0.75 0.76
Grove-West
Springfield
Associates Limited
Partnership
(Van Deene Manor)
(43%)................ 98.98% 0.91 0.92
Grove-Westfield
Associates Limited
Partnership
(Security Manor)
(43%)................ 99.29% 0.50 0.50
Nautilus Properties
Limited Partnership
(Sandalwood
Apartments)(4)
(61%)................ 3.42% -- 0.87
Shoreline London
Associates Limited
Partnership
(Ocean Reef
Apartments) (61%).... 95.64% 0.73 0.77
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
DATE OF WEIGHTED
NAME OF PROPERTY AND CONSTRUCTION/ TOTAL AVERAGE 1995 SEPTEMBER 30,
PERCENTAGE OWNERSHIP MAJOR RENTABLE UNIT SIZE AVERAGE 1996
INTERESTS MARKET AREA RENOVATION(1) # OF AP'TS. SQ. FT. (SQ. FT.) OCCUPANCY(2) OCCUPANCY(2)
- --------------------- ------------------- ----------------- ----- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Grove Westwynd
Associates Limited
Partnership
(Westwynd Apartments)
(59%)................ West Hartford, CT 1990 46 41,433 901 95.83% 91.30%
Subtotal/Weighted
Average(4)........... 1,495 1,322,962 885 96.50% 96.95%
Totals/Weighted
Average(4)........... 1,752 1,577,572 900 96.77% 97.18%
----- --------- ----- ------------- -------------
----- --------- ----- ------------- -------------
<CAPTION>
NINE MONTHS 1996 THIRD
ENDED SEPTEMBER 1995 AVERAGE QUARTER MONTHLY
NAME OF PROPERTY AND 30, 1996 MONTHLY RENT RENT PER SQ.
PERCENTAGE OWNERSHIP AVERAGE PER SQ. FT./ FT./
INTERESTS OCCUPANCY(2) PER AP'T.(3) PER AP'T.(3)
- --------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Grove Westwynd
Associates Limited
Partnership
(Westwynd Apartments)
(59%)................ 94.93% $ 0.71 $ 0.72
Subtotal/Weighted
Average(4)........... 96.90% 0.73 0.75
Totals/Weighted
Average(4)........... 97.00% $ 0.72 $ 0.74
------ ----- -----
------ ----- -----
</TABLE>
- ----------------------------------
(1) Major renovation ("Major Renovation") is defined as a renovation of a
Property that includes one or more of the following which, in total, involve
an aggregate expenditure of an amount no less than $1,000 times the number
of apartments in the Property: roof replacement; resurfacing of parking
lots; exterior painting; structural or exterior repairs; replacement of
appliances or carpeting; and installation, repair or replacement of
Property-wide amenities.
(2) Occupancy is defined as the number of occupied apartments, divided by the
total number of apartments, expressed as a percentage. Average occupancy for
any period represents the average of the monthly occupancies over such
period. Occupancy for a month represents the occupancy as set forth on the
rent roll as of the close of the monthly accounting period. "Occupied
Apartments" includes all apartments occupied by tenants under an effective
lease.
(3) Average monthly rent per apartment for any Property for any period is
defined as (a) the total rental revenue for the period divided by the number
of months in the period, divided by (b) the product of (i) occupancy at the
Property during such period (defined in note (2) above) times (ii) the
number of apartments in the Property divided by the total rentable square
feet.
(4) Occupancy and rental rate columns exclude the Sandalwood Apartments
Property. The Sandalwood Apartments Property was purchased in December 1995
and was rebuilt in 1996. Sandalwood Apartments was not available for lease
until August 1996, and is currently in the lease-up stage. Sandalwood
Apartments is expected to be fully leased-up and stabilized by December 31,
1996.
60
<PAGE>
The following is a summary by apartment type for each of the residential
Properties:
<TABLE>
<CAPTION>
COMMERCIAL
SPACE
NAME OF PROPERTY TOTAL SQ. FT. STUDIOS ONE BEDROOM TWO BEDROOM THREE BEDROOM
- --------------------------------------------------- ------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Dogwood Hills Apartments........................... 0 0 23 23 0
Hamden Center Apartments........................... 0 1 28 36 0
Baron Apartments................................... 0 0 16 38 0
Cambridge Estates.................................. 0 0 42 50 0
Grove Avon Associates Limited Partnership.......... 0 0 39 78 29
(Avonplace Condominiums)
Burgundy Associates Limited Partnership............ 0 102 0 0 0
(Burgundy Studio Apartments)
Grove-Ellington Associates Limited Partnership..... 4,016 0 28 0 0
(Arbor Commons)
Grove-Longmeadow Associates Limited Partnership.... 98,007 0 0 0 0
(The Long Meadow Shops)
Grove-Enfield Associates Limited Partnership....... 0 8 124 36 0
(Fox Hill Apartments)
Grove-Manchester Associates Limited Partnership.... 9,597 0 8 20 0
(208-210 Main Street Apartments)
Grove-Newington Associates Limited Partnership..... 0 0 24 49 0
(Woodbridge Apartments)
Grove Opportunity Fund II Limited Partnership...... 0 3 47 26 0
(Royale Apartments)
Grove Opportunity Fund II Limited Partnership...... 0 0 24 24 0
(Dean Estates II Apartments)
Grove-Plainville Associates Limited Partnership.... 0 0 44 60 0
(Colonial Village Apartments)
Grove Properties III Associates Limited 0 0 24 40 0
Partnership........................................
(Bradford Commons)
Grove Properties III Associates Limited 0 0 1 42 0
Partnership........................................
(Loomis Manor)
Grove Taunton Limited Partnership.................. 0 4 6 48 0
(Dean Estates Apartments)
Grove-Vernon Associates Limited Partnership........ 0 0 24 50 0
(Fox Hill Commons)
Grove-West Hartford Associates Limited 0 2 30 30 1
Partnership........................................
(Park Place West)
Grove-West Springfield Associates Limited 1,630 0 47 62 0
Partnership........................................
(Van Deene Manor)
Grove-Westfield Associates Limited Partnership..... 0 0 45 18 0
(Security Manor)
Nautilus Properties Limited Partnership............ 0 27 12 0 0
(Sandalwood Apartments)
Shoreline London Associates Limited Partnership.... 0 8 52 103 0
(Ocean Reef Apartments)
Grove Westwynd Associates Limited Partnership...... 0 0 30 16 0
(Westwynd Apartments)
------------- --- --- --- --
Totals......................................... 113,320 155 718 849 30
------------- --- --- --- --
------------- --- --- --- --
<CAPTION>
NAME OF PROPERTY TOTAL
- --------------------------------------------------- ---------
<S> <C>
Dogwood Hills Apartments........................... 46
Hamden Center Apartments........................... 65
Baron Apartments................................... 54
Cambridge Estates.................................. 92
Grove Avon Associates Limited Partnership.......... 146
(Avonplace Condominiums)
Burgundy Associates Limited Partnership............ 102
(Burgundy Studio Apartments)
Grove-Ellington Associates Limited Partnership..... 28
(Arbor Commons)
Grove-Longmeadow Associates Limited Partnership....
(The Long Meadow Shops)
Grove-Enfield Associates Limited Partnership....... 168
(Fox Hill Apartments)
Grove-Manchester Associates Limited Partnership.... 28
(208-210 Main Street Apartments)
Grove-Newington Associates Limited Partnership..... 73
(Woodbridge Apartments)
Grove Opportunity Fund II Limited Partnership...... 76
(Royale Apartments)
Grove Opportunity Fund II Limited Partnership...... 48
(Dean Estates II Apartments)
Grove-Plainville Associates Limited Partnership.... 104
(Colonial Village Apartments)
Grove Properties III Associates Limited 64
Partnership........................................
(Bradford Commons)
Grove Properties III Associates Limited 43
Partnership........................................
(Loomis Manor)
Grove Taunton Limited Partnership.................. 58
(Dean Estates Apartments)
Grove-Vernon Associates Limited Partnership........ 74
(Fox Hill Commons)
Grove-West Hartford Associates Limited 63
Partnership........................................
(Park Place West)
Grove-West Springfield Associates Limited 109
Partnership........................................
(Van Deene Manor)
Grove-Westfield Associates Limited Partnership..... 63
(Security Manor)
Nautilus Properties Limited Partnership............ 39
(Sandalwood Apartments)
Shoreline London Associates Limited Partnership.... 163
(Ocean Reef Apartments)
Grove Westwynd Associates Limited Partnership...... 46
(Westwynd Apartments)
---------
Totals......................................... 1,752
---------
---------
</TABLE>
61
<PAGE>
The following table presents information concerning the commercial space in
the Properties:
<TABLE>
<CAPTION>
DATE OF
CONSTRUCTION/ TOTAL SEPTEMBER 30,
NAME OF PROPERTY AND PERCENTAGE MAJOR RENTABLE 1995 AVERAGE 1996
OWNERSHIP INTERESTS MARKET AREA RENOVATION(1) # OF UNITS SQ. FT. OCCUPANCY(2) OCCUPANCY(2)
- ------------------------------------ --------------- ----------------- ----- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Grove-Ellington Associates Limited Ellington, CT 1988 3 4,016 100.00% 100.00%
Partnership (Arbor Commons)
Grove-Manchester Associates Limited Manchester, CT 1988 4 9,597 68.75% 100.00%
Partnership
(208-210 Main Street Apartments)
Grove-West Springfield Associates West 1990 2 1,630 100.00% 100.00%
Limited Partnership Springfield, MA
(Van Deene Manor)
Grove-Longmeadow Associates Limited Longmeadow, MA 1996 28 79,012 94.64% 100.00%
Partnership
(The Longmeadow Shops)
-- ----------- ------------- -------------
Total/Weighted Average 37 94,255 90.85% 100.00%
-- ----------- ------------- -------------
-- ----------- ------------- -------------
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30, 1996 1995 THIRD QUARTER
NAME OF PROPERTY AND PERCENTAGE AVERAGE AVERAGE RENT 1996 RENT PER
OWNERSHIP INTERESTS OCCUPANCY(2) PER SQ. FT. SQ. FT.
- ------------------------------------ --------------- --------------- ---------------
<S> <C> <C> <C>
Grove-Ellington Associates Limited 100.00% $ 0.72 $ 0.74
Partnership (Arbor Commons)
Grove-Manchester Associates Limited 100.00% 0.42 0.65
Partnership
(208-210 Main Street Apartments)
Grove-West Springfield Associates 100.00% 1.25 1.25
Limited Partnership
(Van Deene Manor)
Grove-Longmeadow Associates Limited 96.83% 0.91 1.01
Partnership
(The Longmeadow Shops)
------ ----- -----
Total/Weighted Average 99.21% $ 0.82 $ 0.91
------ ----- -----
------ ----- -----
</TABLE>
- ----------------------------------
(1) Major Renovation is defined as a renovation of a Property that includes one
or more of the following which, in total, involve an aggregate expenditure
of an amount no less than $1.00 times the number of total square feet
associated with the Property: roof replacement; resurfacing of parking lots;
exterior painting; structural or exterior repairs; and installation, repair
or replacement of Property-wide amenities.
(2) Occupancy is defined as the number of occupied square feet, divided by the
total number of square feet, expressed as a percentage. Average occupancy
for any period represents the average of the monthly occupancies over such
period.
OWNERSHIP OF PROPERTIES.
Upon completion of the Consolidation Transactions, fee title to each of the
GREAT Properties and the Partnership Properties currently held by the
Liquidating Partnerships will be held by the Operating Partnership or a
wholly-owned subsidiary of the Operating Partnership, and fee title to each of
the remaining Partnership Properties will be held in a Property Partnership in
which the Company is the sole general partner. Grove Property (or a direct or
indirect subsidiary of Grove Property) and the Operating Partnership will own
100% of the general partnership interests in, and control, the Property
Partnerships. The percentage of the total partnership interests that will be
owned by Grove Property and the Operating Partnership will depend upon the
percentage of partnership interests of each Property Partnership tendered by the
Limited Partners pursuant to the Exchange Offer. The percentage ownership
interests reflected in the table above represent the interests to be acquired
from the Grove Companies pursuant to the Contribution Agreement, plus the
partnership interests to be issued to the Operating Partnership in connection
with the Refinancing, assuming gross proceeds of the New Equity Investment equal
to $30.0 million, therefore representing the maximum economic interest GREAT
will own in each Partnership Property without giving effect to the Exchange
Offer. See "--Acquisition of the Properties."
ACQUISITION OF THE PROPERTIES.
The Operating Partnership will acquire the GREAT Assets, including the GREAT
Properties, pursuant to the Contribution Agreement. Pursuant to the Contribution
Agreement, the Grove Companies have agreed to contribute to the Operating
Partnership (i) their respective interests in each of the Property Partnerships
(ranging from less than 1.0% to 31.0% of the partnership interests therein) and
(ii) the assets and liabilities of the Management Company (following the
contribution of certain assets and liabilities related to real estate brokerage
services to National Realty). The obligations to transfer assets under the
Contribution Agreement are conditioned upon the concurrent completion of the
Exchange Offer, approval and effectuation of the Property Partnership
Amendments, approval of the Consolidation Transactions, the Charter Amendments
and the 1996 Plan by GREAT's Shareholders, the closing under the New Equity
Investment for gross proceeds not less than $18.5 million, the closing under the
Credit Facility, and normal
62
<PAGE>
and customary conditions to the closing of real estate transactions, including
the consents of various lenders. GREAT and the Grove Companies are in the
process of obtaining such lender consents and expect to obtain all necessary
consents prior to the completion of the Consolidation Transactions. The
Contribution Agreement also contains representations and warranties from the
Grove Companies to the Operating Partnership concerning the operation of the
Partnership Properties and environmental matters and certain other covenants,
representations and warranties customarily found in real estate purchase
agreements. Claims for indemnification for any breach of these representations
and warranties must be asserted within one year from discovery of the breach by
the Board, but in no event more than two years from the completion of the
Consolidation Transactions. In the event that any of the representations or
warranties is breached, GREAT's recovery will be limited to recourse against the
Common Units received by the Grove Companies. For a more detailed summary of the
terms of the Contribution Agreement, see "CERTAIN RELATIONSHIPS AND
TRANSACTIONS--Transactions With the Grove Companies--The Contribution
Agreement."
VALUATION OF PROPERTIES AND OTHER ASSETS; ALLOCATION OF COMMON UNITS
Set forth below is a description of the methods used by GREAT and the Grove
Companies to determine the value of the Properties and other Consolidated Assets
to be contributed to the Operating Partnership in connection with the
Consolidation Transactions (the "CONSOLIDATION VALUATIONS"). The Consolidation
Valuations were used to determine the allocation of Common Units (or cash, in
the case of Limited Partners) among the current owners of the Consolidated
Assets, with the Common Units being allocated based upon the value of each
party's contribution as a percentage of the value of the total contribution.
ALLOCATION OF COMMON UNITS. The Common Units will be divided into limited
partnership interests and general partnership interests in the Operating
Partnership. Grove Property will be the sole general partner, owning a 1%
general partnership interest in the Operating Partnership. Grove Property will
also own limited partnership interests in the Operating Partnership. The total
number of Common Units owned by Grove Property following the completion of the
Consolidation Transactions will be equal to the number of Common Shares which
are outstanding on the date the Consolidation Transactions are consummated,
giving effect to the Consolidation. This will permit the Common Units issuable
to the Limited Partners, the participants in the New Equity Investment and the
Grove Companies, at the option of the Company, to be exchanged on a one-for-one
basis for Common Shares upon the future exercise, if any, of the unitholders'
redemption rights. The one-for-one exchange ratio will be adjusted in the event
of a stock combination, stock split, stock dividend or other event having a
dilutive or anti-dilutive effect on the Common Unit holders' redemption rights.
See "THE OP PARTNERSHIP AGREEMENT--Limited Partner Redemption/Exchange Rights."
OPERATING PARTNERSHIP VALUATION. The valuation of the Operating Partnership
was determined by capitalizing the pro forma FFO of the Operating Partnership by
an amount necessary to achieve a negotiated yield of 11.1% and 9.6% of FFO and
cash available for distribution, respectively.
PROPERTY PARTNERSHIPS VALUATIONS. The Company has established the following
Consolidation Valuations of the Property Partnerships for purposes of the
Consolidation Transactions. Property Partnerships
63
<PAGE>
sharing the same Limited Partners and other common assets have been grouped
together, and aggregate Consolidation Valuations are presented therefor:
<TABLE>
<CAPTION>
PROPERTY PARTNERSHIP (NAME OF PROPERTY)
- ---------------------------------------------------------------------------------------------------
CONSOLIDATION
VALUATION
-------------
(THOUSANDS)
-------------
<S> <C>
Grove Avon Associates Limited Partnership (Avonplace Condominiums)................................. $ 7,140
Burgundy Associates Limited Partnership (Burgundy Apartments)...................................... 1,133
Grove-Enfield Associates Limited Partnership (Fox Hill Apartments)................................. 6,979
Grove-Longmeadow Associates Limited Partnership (The Longmeadow Shops)............................. 4,151
Grove-Newington Associates Limited Partnership (Woodbridge Apartments)............................. 1,275
Grove-Plainville Associates Limited Partnership (Colonial Village Apartments)...................... 1,727
Grove Taunton Limited Partnership (Dean Estates Apartments)........................................ 634
Grove-Vernon Associates Limited Partnership (Fox Hill Commons)..................................... 1,262
Grove-West Hartford Associates Limited Partnership, Grove-Ellington Associates Limited Partnership
and Grove-Manchester Associates Limited Partnership (Park Place West, Arbor Commons and 208-210
Main Street Apartments).......................................................................... 4,337
Grove-Westfield Associates Limited Partnership and Grove-West Springfield Associates Limited
Partnership (Security Manor and Van Deene Manor)................................................. 2,954
Shoreline London Associates Limited Partnership, Nautilus Properties Limited Partnership and Grove
Opportunity Fund II Limited Partnership (Ocean Reef Apartments, Sandalwood Apartments, Royale
Apartments and Dean Estates II Apartments)....................................................... 6,672
Grove Properties III Associates Limited Partnership and Grove Westwynd Associates Limited
Partnership (Westwynd Apartments, Bradford Commons and Loomis Manor)............................. 2,787
</TABLE>
The Consolidation Valuations for the Property Partnerships were determined
by valuing their respective Properties using the direct capitalization method.
Under this approach, a single year's income is converted into a market value for
a property through the application of a market-derived capitalization rate (the
lower the capitalization rate applied to a property's income, the higher its
value). The Consolidation Valuation for each Partnership Property was determined
by (i) capitalizing pro forma net operating income for that partnership, less a
reserve for capital expenditures, as of September 30, 1996, at a capitalization
rate ranging from 9.00% to 11.00%, (ii) deducting the amount of debt on the
Partnership Property and (iii) adding other assets of the Property Partnership,
net of liabilities (such as cash, accounts receivable, accounts payable and
security deposits). GREAT and the Grove Companies determined the appropriate
capitalization rate for each Partnership Property based upon their experience in
real estate matters. They sought local market sales information for comparable
properties, estimated actual capitalization rates (net operating income less
capital reserves divided by sales price) and then evaluated the Partnership
Property in light of its relative competitive position, taking into account
property location, occupancy rate, overall property condition and other relevant
factors. GREAT and the Grove Companies believe that arm's-length purchasers
would base their purchase offers on capitalization rates substantially similar
to those used to calculate the above Consolidation Valuations. The Grove
Companies own from less than 1.0% to 31.0% of the interests in the Property
Partnerships.
The number of Common Units to be issued in exchange for a limited
partnership interest in each Property Partnership was determined on the basis of
the applicable Property Partnership Agreement,
64
<PAGE>
assuming (i) that the underlying Partnership Property was sold on September 30,
1996 for an amount equal to the Consolidation Valuation of that Property and
(ii) a valuation of $9.00 per Common Unit. The Cash Consideration (as defined in
the Exchange Offer) payable to Limited Partners who are not Accredited Investors
(and certain other Limited Partners) for each Property Partnership Unit is an
amount equal to the number of Common Units per Property Partnership Unit to
which the Limited Partner would otherwise be entitled times $9.00 per Unit, less
7.2%, which the Company estimates to be its costs attributable to raising the
requisite capital for the cash purchase.
The number of Common Shares to be issued in exchange for a limited
partnership interest as well as the Cash Consideration, will increase or
decrease, as appropriate, if the purchase price per Common Share in the New
Equity Investment is less or more than $9.00.
GREAT PROPERTIES VALUATION. The Company has established approximately
$5,581,000 as the Consolidation Valuation of the net GREAT Assets for the
purposes of the Consolidation Transactions. This Consolidation Valuation is
equivalent to the number of Common Shares to be outstanding immediately prior to
consummation of the Consolidation Transactions (giving effect to the Stock
Split) times the $9.00 purchase price per Common Share in the New Equity
Investment. If the purchase price per Common Share in the New Equity Investment
is more or less than $9.00, the number of Common Shares issued in the Stock
Split will be decreased or increased, as appropriate; the Consolidation
Valuation of the net GREAT Assets will not change (assumed to be 620,130 Common
Shares, giving effect to the Stock Split, times $9.00 per Common Share). The
Company believes that this aggregate Consolidation Valuation for the GREAT
Assets is consistent with what aggregate valuations for the GREAT Properties
would be, applying the direct capitalization method used for valuing the
Partnership Properties, together with a "going concern" value or GREAT itself.
MANAGEMENT COMPANY VALUATION. The Company has established a Consolidation
Valuation of approximately $6,184,000 for the Management Company. The
Consolidation Valuation for the Management Company was also determined by the
direct capitalization method, determined by capitalizing pro forma net operating
income for the Management Company as of September 30, 1996, with pro forma
adjustments to give effect to the Consolidation Transactions, at a
capitalization rate of 13.0%. All of the Management Company's income is
generated by property management agreements with GREAT, the Property
Partnerships and other limited partnerships controlled by the Grove Companies or
their affiliates (which own the Excluded Properties). Accordingly, GREAT
believes that the proper capitalization rate to be applied to value the
Management Company is the rate applicable to the properties managed by it, which
would be a capitalization rate of 9.00% to 11.0%. However, GREAT and the Grove
Companies agreed to apply a 13.0% capitalization rate, resulting in a more
favorable purchase price to the REIT.
No independent real estate appraisals or other third-party valuations have
been obtained with respect to any of the Consolidated Assets. GREAT and the
Grove Companies believe that the Consolidation Valuations are fair and have been
consistently applied among all of the Properties and other assets being
contributed to the Operating Partnership (directly or through acquisition of
Property Partnership interests). See "PROPOSAL TO AMEND THE CHARTER (Proposal
2)--Reasons for the Charter Amendments--Reasons for the Proposal to Delete the
Third Party Appraisal Requirement." The income approach to valuation involves
converting the anticipated economic benefits of a property or other asset into a
value estimate through capitalization; because this approach is based on
investor expectations for income producing properties, GREAT and the Grove
Companies believe that it provides the best value indication for multi-family
residential projects and neighborhood retail centers, and the related property
management services. The value of the Common Units issued in connection with the
Consolidation Transactions will depend on the value of the Common Shares
generally.
65
<PAGE>
BENEFITS TO RELATED PARTIES; CONFLICTS OF INTEREST; INTERESTS OF CERTAIN PERSONS
BENEFITS TO RELATED PARTIES. In addition to the benefits to be received by
the Grove Companies in connection with the exchange of their Property
Partnership interests pursuant to the Contribution Agreement (which exchange
will be on the same terms as the exchange of Property Partnership Units pursuant
to the Exchange Offer), the Grove Companies (including certain Executive
Officers) will realize certain other benefits from the Consolidation
Transactions, including the following:
- In connection with the transfer of the Management Company, the Management
Owners will receive an aggregate of 687,076 Common Units. In connection
with the transfer of its interests in the Property Partnerships, the Grove
Companies will receive an aggregate of 247,578 Common Units. See "APPROVAL
OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Terms of the Consolidation
Transactions--The Consolidation" and "CERTAIN RELATIONSHIPS AND
TRANSACTIONS--Transactions With the Executive Officers--Receipt of Common
Units by the Executive Officers."
- Guarantees of approximately $26.8 million of mortgage indebtedness by
Messrs. Damon and Brian Navarro will be released in connection with the
repayment of indebtedness on the Partnership Properties as part of the
Refinancing.
- Each Executive Officer will enter into an employment agreement with GREAT,
pursuant to which they will receive (i) 10-year options pursuant to the
1996 Plan to purchase Common Shares at a price per share equal to the
market price of a Common Share on the date of grant, (ii) 1997 base
salaries of: $50,000--Damon Navarro; $50,000--Brian Navarro;
$50,000--Edmund Navarro; $50,000--Joseph LaBrosse; and $25,000--Gerald
McNamara and (iii) Deferred Stock Grants of Common Shares (if earned) in
accordance with the 1996 Plan, as incentive compensation based upon the
achievement by the Company of certain enumerated annual financial goals.
See "EXECUTIVE COMPENSATION--1996 Share Incentive Plan." If an Executive
Officer's employment with the Company is terminated "without cause" by the
Company or by the Executive Officer following a "change in control" or for
"good reason" (as such terms are defined in the employment agreements),
the respective Executive Officer will be entitled to a lump sum payment
equal to 200 percent of such Executive Officer's annual base salary plus
an amount equal to the aggregate value of all bonuses, whether cash,
stock, options or otherwise (but specifically excluding the Deferred Stock
Grants), paid to such Executive Officer for the previous year.
- The Grove Companies will no longer be liable as a general partner of the
Property Partnerships for future operations of the Partnership Properties.
- The Property Partnerships will repay their outstanding indebtedness to
NAVAB Associates (approximately $1.19 million at September 30, 1996), and
will receive payment from NAVAB for outstanding receivables (approximately
$0.7 million at September 30, 1996). NAVAB is a partnership owned by Damon
and Brian Navarro and George and Ronald Abdow. NAVAB Associates will, in
turn, use the net proceeds of approximately $0.5 million to repay its
outstanding bank indebtedness of approximately the same amount, which debt
is guaranteed by the Navarros and the Abdows.
- To the extent they receive Common Units rather than cash pursuant to the
Contribution Agreement, the Grove Companies will experience a partial
deferral of the federal income tax consequences associated with their
contribution of assets to the Operating Partnership.
- The Grove Companies will obtain improved liquidity of their investments as
a result of the Consolidation Transactions. The Grove Companies will
receive Common Units, which may be redeemed for cash or, at the option of
the Company exchanged for Common Shares. Unlike interests in real estate
or a property management company, the Common Shares will be freely
transferable (subject to applicable securities laws and certain agreements
restricting transfer). See
66
<PAGE>
"THE OP PARTNERSHIP AGREEMENT--Limited Partner Redemption/Exchange Rights"
and "SHARES AVAILABLE FOR FUTURE SALE--Registration Rights."
CONFLICTS OF INTEREST. The Executive Officers have interests that conflict
with the interests of the Shareholders, the Limited Partners (including the
Limited Partners who elect to participate in the Consolidation Transactions),
and the persons acquiring Common Shares or Common Units in the New Equity
Investment. GREAT and the Grove Companies have been represented by the same
legal counsel and, therefore, neither GREAT nor the Property Partnerships has
been advised by separate legal counsel in connection with the Consolidation
Transactions.
The Grove Companies will continue to hold limited and general partner
interests in the limited partnerships which own the Excluded Properties. These
partnerships are not included in the Consolidation Transactions because the type
(E.G., commercial properties), geographic characteristics, cash flow, stage of
redevelopment efforts, or capital structure of the properties to which such
interests relate either are inconsistent with the Company's investment
objectives or could affect the Company's ability to qualify as a REIT. The
Company may, however, seek to acquire one or more of the Excluded Properties
from time to time following the consummation of the Consolidation Transactions
when and if conditions are favorable to do so. The Executive Officers will
remain officers or directors of the Grove Companies, including entities that
have interests in the Excluded Properties, and will therefore have conflicts of
interest in allocating their time between the Company and such entities. Certain
of the Excluded Properties are located near or adjacent to one or more of the
Properties and therefore may compete with one or more of the Properties for
prospective tenants, resulting in potential conflicts of interest for certain
Executive Officers. The Executive Officers may also experience conflicts of
interest as a result of their ownership interests in the limited partnerships
which own the Excluded Properties for which the Operating Partnership is
providing property management services following the consummation of the
Consolidation Transactions. The Executive Officers also have other business
interests. Brian Navarro, Vice President--Acquisition of the Company, will
continue to serve as the President of National Realty. As part of the
Consolidation Transactions, the equity interests of National Realty will be
distributed to the Management Owners. National Realty will hold all of the
assets and liabilities of the Management Company which relate to real estate
brokerage services, and will continue to perform real estate brokerage services
for the Grove Companies, as well as for the Company. National Realty will be the
Company's exclusive broker for the purchase or sale of real property. See
"APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Information About the
Management Company" and "CERTAIN RELATIONSHIPS AND TRANSACTIONS--Transactions
with the Grove Companies--National Realty." The Executive Officers and the Grove
Companies have each entered into non-competition agreements with the Company
which, among other things, will require each of the Executive Officers to
allocate a substantial amount of his working time to the Company. See
"MANAGEMENT--Non-Competition Agreements."
The Management Owners had conflicts of interest in establishing the terms of
the Exchange Offer and the terms of the agreements pursuant to which certain
assets and liabilities of the Management Company and the Grove Companies'
interests in the Property Partnerships will be contributed to the Operating
Partnership, including the Contribution Agreement. The Executive Officers who
are Trust Managers also had conflicts of interest in establishing the provisions
of the employment agreements with the Executive Officers and the non-competition
agreements. They will also have a conflict of interest with respect to their
obligations as Trust Managers and Executive Officers of the Company to enforce
the terms of the Non-Competition Agreements, the Contribution Agreement and the
other agreements entered into in connection with the Consolidation Transactions,
including establishing the terms of the brokerage services agreement with
National Realty and the terms of the property management agreements with the
limited partnerships that own the Excluded Properties.
Any decision regarding the enforcement of contracts between the Company and
the Grove Companies or any Executive Officer, individually, and the sales or
refinancings of Partnership Properties, will be made by a majority of the
Independent Trust Managers. The Executive Officers may, however, use their
positions as Executive Officers and Trust Managers to influence the Independent
Trust Managers in this regard.
67
<PAGE>
PROPOSAL TO AMEND THE CHARTER
(PROPOSAL 2)
GENERAL
The Board has determined that it is necessary and/or desirable in connection
with the Consolidation Transactions to effect certain amendments to the Charter
to (i) delete the requirement, contained in Section 6.4(b) of the Charter, that
GREAT must receive an independent third party appraisal before purchasing any
property, ownership of which is controlled by an executive officer of GREAT or
an affiliate thereof, (ii) change the name of GREAT to "Grove Property Trust"
and (iii) to make certain amendments to the "Excess Shares" provisions of the
Charter in order to minimize the risk that Grove Property could fail the
"closely held" test set forth in section 856 of the Code, and thereby fail to
qualify as a REIT for federal income tax purposes, and to clarify the "Ownership
Limit" as it applies to certain Executive Officers and their affiliates. Each of
the proposed amendments to the Charter is being considered together, and a vote
for the Charter Amendments constitutes a vote for each proposed amendment to the
Charter. If this Proposal 2 is approved by the Shareholders and otherwise
becomes effective, the Board will cause the Company to adopt the Charter
Amendments and to take such other actions as may be deemed necessary or
desirable to effect such action. See "--Description of the Charter Amendments."
DESCRIPTION OF THE CHARTER AMENDMENTS
GENERAL. The discussion set forth below does not purport to be complete and
is subject to and qualified in its entirety by reference to Maryland law
(including, without limitation, the Maryland REIT Act), GREAT's existing Charter
and Bylaws, and the full text of the Charter Amendments attached as Appendix I
to this Proxy Statement.
DESCRIPTION OF PROPOSED AMENDMENT TO DELETE THE THIRD PARTY APPRAISAL
REQUIREMENT. Currently, Section 6.4(b) of the Charter provides that:
"[i]n the event the Trust desires to purchase a property, the ownership
of which is under the control of any of the executive officers or their
Affiliates, the Trust shall first have received an appraisal of the value of
that property from an independent third party appraiser."
The first proposed amendment to the Charter is to delete this provision in
its entirety, thereby removing the requirement that GREAT receive an independent
third party appraisal prior to purchasing a property, ownership of which is
controlled by the executive officers of GREAT or their affiliates. GREAT did not
obtain any independent third party appraisals for the Partnership Properties,
which Properties are controlled by Executive Officers or their Affiliates within
the meaning of Section 6.4(b) of the Charter.
DESCRIPTION OF PROPOSED AMENDMENT TO CHANGE THE NAME OF GREAT. Currently,
Section 1.1 of the Charter provides that the name of the trust is "GROVE REAL
ESTATE ASSET TRUST." The second proposed amendment to the Charter is to amend
Section 1.1 of the Charter to provide that the name of the trust is "GROVE
PROPERTY TRUST."
DESCRIPTION OF PROPOSED AMENDMENT TO EXCESS SHARES PROVISIONS. For a
description of the "Excess Shares" provision and certain other provisions
relating to restrictions on transfer of the Company's Equity Shares contained in
Article VII of the Charter as currently set forth therein, see "DESCRIPTION OF
CAPITAL STOCK--Restrictions on Transfer."
Because the Company expects to continue to qualify as a REIT, as amended and
restated, the Charter will continue to contain restrictions on the ownership and
transfer of Equity Shares which are intended to assist the Company in complying
with these requirements. The Charter will provide that, subject to certain
specified exceptions, (i) no person or entity (except for the Executive Officers
and their affiliates) may own, or be deemed to own by virtue of the applicable
constructive ownership provisions of the Code, more
68
<PAGE>
than 5.0% (by number or value, whichever is more restrictive) of the outstanding
Equity Shares (the "OWNERSHIP LIMIT") and no Executive Officer may, nor may the
Executive Officers, in the aggregate, own more than 20% of the outstanding
Equity Shares (by number or value, whichever is more restrictive) (the
"EXECUTIVE OFFICER OWNERSHIP LIMIT"). The constructive ownership rules of the
Code are complex, and may cause Equity Shares owned actually or constructively
by a group of related individuals and/or entities to be owned constructively by
one individual or entity. As a result, the acquisition of less than 5.0% or 20%
of the Equity Shares (or the acquisition of an interest in an entity that owns,
actually or constructively, Equity Shares) by an individual or entity could,
nevertheless cause that individual, or another individual or entity, to own
constructively in excess of 5.0% or 20% of the outstanding Equity Shares and
thus subject such Equity Shares to the Ownership Limit or the Executive Officer
Ownership Limit, as the case may be. The Board may, but in no event will be
required to, waive the Ownership Limit or the Executive Officer Ownership Limit
with respect to a particular Shareholder if it determines that such ownership
will not jeopardize the Company's status as a REIT. As a condition to such
waiver, the Board may require opinions of counsel satisfactory to it and/or
undertakings or representations from the applicant with respect to preserving
the REIT status of the Company.
The Charter will further prohibit (a) a person from actually or
constructively owning Equity Shares that would result in the Company being
"closely held" under Section 856(h) of the Code or otherwise cause the Company
to fail to qualify as a REIT and (b) any person from transferring Equity Shares
if such transfer would result in Equity Shares being owned by fewer than 100
persons. Any person who acquires or attempts or intends to acquire Equity Shares
that will or may violate any of the foregoing restrictions on transferability
and ownership is required to give notice immediately to the Company and provide
the Company with such other information as the Company may request in order to
determine the effect of such transfer on the Company's status as a REIT. The
foregoing restrictions on transferability and ownership will not apply if the
Board determines that it is no longer in the best interest of the Company to
attempt to qualify, or to continue to qualify, as a REIT.
As amended and restated, the Charter will provide that, if any purported
transfer of Equity Shares of Grove Property or any other event would otherwise
result in any person violating the Ownership Limit, the Executive Officer
Ownership Limit or the Charter, then any such purported transfer will be void AB
INITIO and of no force or effect with respect to the purported transferee (the
"PROHIBITED TRANSFEREE") as to that number of Equity Shares in excess of the
Ownership Limit or the Executive Officer Ownership Limit, as the case may be,
and the Prohibited Transferee shall acquire no right or interest (or, in the
case of any event other than a purported transfer, the person or entity holding
record title to any such Equity Shares in excess of the Ownership Limit or the
Executive Officer Ownership Limit, as the case may be (the "PROHIBITED OWNER")
shall cease to own any right or interest) in such Equity Shares. Any such Equity
Shares described above will be transferred automatically, by operation of law,
to a Trust (the "TRUST"), the beneficiary of which will be a qualified
charitable organization selected by Grove Property (the "BENEFICIARY"). Such
automatic transfer shall be deemed to be effective as of the close of business
on the Business Day (as defined in the Charter) prior to the date of such
violative transfer. Within twenty days of receiving notice from Grove Property
of the transfer of Equity Shares to the Trust, the Trustee of the Trust (who
shall be designated by Grove Property and be unaffiliated with Grove Property
and any Prohibited Transferee or Prohibited Owner, the "TRUSTEE") will be
required to sell such shares to a person or entity who could own such shares
without violating the Ownership Limit or the Executive Officer Ownership Limit,
as the case may be, and distribute to the Prohibited Transferee an amount equal
to the lesser of the price paid by the Prohibited Transferee for such Equity
Shares or the sales proceeds received by the Trust for such Equity Shares. In
the case of any Equity Shares in excess of the Ownership Limit or the Executive
Officer Ownership Limit, as the case may be, resulting from an event other than
a transfer, or from a transfer for no consideration (such as a gift), the
Trustee will be required to sell such Equity Shares to a qualified person or
entity and distribute to the Prohibited Owner an amount equal to the lesser of
the fair market value of such Equity Shares as of the date of such event or the
sales proceeds received by the Trust for such Equity Shares. In either case, any
proceeds in excess of the amount distributable to the Prohibited
69
<PAGE>
Transferee or Prohibited Owner, as applicable, will be distributed to the
Beneficiary. Prior to a sale of any Equity Shares in excess of the Ownership
Limit or the Executive Officer Ownership Limit by the Trust, the Trustee will be
entitled to receive, in trust for the Beneficiary, all dividends and other
distributions paid by Grove Property with respect to such Equity Shares, and
also will be entitled to exercise all voting rights with respect to such Equity
Shares. Subject to Maryland law, effective as of the date that such Equity
Shares have been transferred to the Trust, the Trustee shall have the authority
(at the Trustee's sole discretion) (i) to rescind as void any vote cast by a
Prohibited Transferee prior to the discovery by Grove Property that such Equity
Shares have been transferred to the Trust and (ii) to recast such vote in
accordance with the desires of the Trustee acting for the benefit of the
Beneficiary. However, if Grove Property has already taken irreversible action,
then the Trustee shall not have the authority to rescind and recast such vote.
Any dividend or other distribution paid to the Prohibited Transferee or
Prohibited Owner (prior to the discovery by the Company that such shares had
been automatically transferred to the Trust as described above) will be required
to be repaid to the Trustee upon demand for distribution to the Beneficiary. In
the event that the transfer to the Trust as described above in not automatically
effective (for any reason) to prevent violation of the Ownership Limit or the
Executive Officer Ownership Limit, as the case may be, then the Charter provides
that the transfer of the Equity Shares will be void.
In addition, Equity Shares held in the Trust shall be deemed to have been
offered for sale to Grove Property, or its designee, at a price per Common Share
equal to the lesser of (i) the price per share in the transaction that resulted
in such transfer to the Trust (or, in the case of a devise or gift, the market
price at the time of such devise or gift) and (ii) the market price on the date
Grove Property, or its designee, accepts such offer. Grove Property shall have
the right to accept such offer until the Trustee has sold the Equity Shares held
in the Trust. Upon such a sale to Grove Property, the interest of the
Beneficiary in the shares sold shall terminate and the Trustee shall distribute
the net proceeds of the sale to the Prohibited Transferee or Prohibited Owner,
as the case may be.
All certificates representing Equity Shares will bear a legend referring to
the restrictions described above.
REASONS FOR THE CHARTER AMENDMENTS
REASON FOR THE PROPOSED AMENDMENT TO DELETE THE THIRD PARTY APPRAISAL
REQUIREMENT. The Board has determined that the Trust Managers of GREAT,
including the Independent Trust Managers acting separately, are as able as, or
better able than, a third party appraiser to assess the value of any property to
be acquired by the Company, whether from an Executive Officer or an affiliate,
or from any unrelated third party. This determination is based, in part, upon
the Board's familiarity with the Properties and its expertise in the Company's
geographic market. The Charter contains no requirement that a third party
appraisal be obtained prior to an acquisition from an unrelated third party, and
the Trust Managers believe that they are fully capable of valuing any such
property. The Trust Managers do not believe that the identity of the proposed
seller impacts on their ability to value the subject property. In reaching this
conclusion, the Trust Managers, including the Independent Trust Managers acting
separately, noted that valuations of properties from independent third party
appraisers may be inconsistent, and may vary significantly depending upon such
factors as the party who commissioned the appraisal, the reason for
commissioning the appraisal, the valuation methodology applied and the method of
determining the compensation to be received by the third party appraiser. Thus,
the receipt by GREAT of such an appraisal would not necessarily ensure the
accuracy of the valuation of the subject property and the fairness of the price
to be paid by GREAT to the Executive Officer (or affiliate).
Neither GREAT nor the Grove Companies has received an independent third
party appraisal with respect to any of the Properties. See "APPROVAL OF THE
CONSOLIDATION TRANSACTIONS (Proposal 1)--The Properties--Valuation of the
Properties and Other Assets; Allocation of Common Units" and "APPROVAL OF THE
CONSOLIDATION TRANSACTIONS (Proposal 1)--Benefits to Related Parties; Conflicts
of Interest; Interests of Certain Persons." It is therefore a condition to the
70
<PAGE>
consummation of the Consolidation Transactions that the Charter Amendments be
approved by the requisite Shareholder vote.
REASONS FOR THE PROPOSED AMENDMENT TO CHANGE THE NAME OF GREAT. The
Consolidation Transactions will transform GREAT from a REIT owning four
multi-family residential projects with an aggregate of 257 apartments, managed
by an affiliate, into a more diversified, fully-integrated, self-managed real
estate investment trust with ownership and control over a diverse portfolio of
23 multi-family residential projects and a neighborhood shopping center in the
Northeastern United States. Also, in connection with the Consolidation, GREAT is
changing its distribution policy to reduce its periodic distributions to
Shareholders and increase the percentage of cash flow available for reinvestment
by the Company. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Reasons for the Consolidation Transactions; Recommendation of the
Board--Investor Interest." The Board has concluded that it is appropriate, in
connection with the consummation of the Consolidation Transactions, to change
the name of GREAT to reflect to potential new investors in the Company, and to
the public generally, the transformation in size, diversification, strategy and
investment philosophy which GREAT will experience as a result of the
Consolidation Transactions.
REASONS FOR THE PROPOSED AMENDMENTS TO EXCESS SHARES PROVISIONS. The Board
has determined that it is necessary and/or advisable to amend the Excess Shares
provisions and certain other provisions relating to restrictions on transfer of
Equity Shares contained in Article 7 of the Charter (as described above) in
response to rulings recently promulgated by the Service, and to clarify the
Ownership Limit applicable to the Executive Officers. Such amendments will
minimize the risk that Grove Property could fail the "closely held" test set
forth in section 856 of the Code, and thereby fail to qualify as REIT for
federal income tax purposes and, as to the Executive Officer Ownership Limit,
will clarify the maximum percentage of Equity Shares that certain persons may
own. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1) --Potential
Adverse Effects of the Consolidation Transactions; Risk Factors--Adverse Tax
Consequences of Failure to Qualify as a REIT."
VOTE REQUIRED
Pursuant to the Charter and Maryland law, the affirmative vote of the
holders of not less than two-thirds of all Common Shares is required to approve
the Charter Amendments. THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF
THE CHARTER AMENDMENTS (PROPOSAL 2).
71
<PAGE>
PROPOSAL TO ADOPT THE 1996 SHARE INCENTIVE PLAN
(PROPOSAL 3)
GENERAL
The Board has determined that it is desirable in connection with the
Consolidation Transactions, to adopt the 1996 Plan to (i) make available up to
900,000 Common Shares for grants of stock options and other incentive awards and
(ii) permit performance-based awards to key employees payable in restricted
Common Shares as incentive compensation upon the achievement by the Company of
enumerated goals.
The Board has approved the 1996 Plan, subject to Shareholder approval. If so
approved by the Shareholders, the 1996 Plan will become effective upon the
consummation of the Consolidation Transactions. A copy of the full text of the
1996 Plan is set forth in APPENDIX II to this Proxy Statement and the following
description is qualified in its entirety by reference to APPENDIX II.
All employees of the Company and its subsidiaries (approximately 170 persons
as of September 30, 1996), including the Executive Officers, will be eligible to
receive awards under the 1996 Plan, subject to the discretion of the
Compensation Committee to determine the particular individuals who, from time to
time, will be selected to receive awards. In addition, stock option awards will
be granted automatically to Non-Employee Trust Managers (three persons as of
September 30, 1996) pursuant to the terms set forth in the 1996 Plan. Except as
set forth below with respect to (i) Non-Employee Trust Managers, (ii) options to
be granted to Executive Officers in connection with the Consolidation
Transactions and (iii) the right of Executive Officers to receive Deferred Stock
Grants, neither the individuals who are to receive awards, the number of awards
that will be granted to any individual or group of individuals, nor the amounts
payable with respect to such awards, have been determined at this time. The 1996
Plan will remain in existence as to all outstanding awards until all such awards
are either exercised, converted or terminated; PROVIDED, however, that no award
can be made after December 31, 2006.
AWARDS GRANTED TO EMPLOYEES
Awards to employees under the 1996 Plan may be in the form of nonqualified
stock options, incentive stock options, stock appreciation rights ("SARS"), and
other share-based incentive awards. Awards may be granted singly or in
combination with other awards. Each award will be evidenced by an award
agreement entered into between the Company and the recipient setting forth the
specific terms and conditions applicable to that award. Awards under the 1996
Plan that are not vested or exercised generally will be nontransferable by a
holder (other than by will, the laws of descent and distribution or a qualified
domestic relations order) and rights thereunder will generally be exercisable,
during the holder's lifetime, only by the holder, subject to such exceptions as
(consistent with applicable legal considerations) may be authorized from time to
time by the Compensation Committee.
OPTIONS. Stock options authorized under the 1996 Plan are rights to
purchase a specified number of Common Shares at a set price during a specified
period. As of September 30, 1996, the closing price of a Common Share on the
AMEX was $9.375. Unless the Compensation Committee provides otherwise, and such
provision is reflected in the award agreement, the exercise price of an option
may not be less than the Fair Market Value of the Common Shares on the date of
grant. "Fair Market Value" for purposes of the 1996 Plan means, generally, the
average of the closing prices of the Common Shares for the five trading days
immediately preceding the grant date. Stock options that are granted as
incentive stock options will be granted with such additional terms as are
necessary to satisfy the applicable requirements of Section 422 of the Code. The
fair market value of the Common Shares for which incentive stock options are
exercisable for the first time by an optionee during any calendar year may not
exceed $100,000 (measured as of the date of grant) under current tax law. Other
awards are not limited in this manner, however, the maximum number of Common
Shares or share-units that may be subject to all share-based awards that qualify
under Section 162(m) of the Code, including options and SARs, but specifically
excluding Deferred Stock Grants
72
<PAGE>
to the extent described below, that are granted to any participant under the
1996 Plan during any calendar year, will not exceed 250,000 Common Shares (or
share-units), either individually or in the aggregate.
Assuming Shareholder approval of the 1996 Plan, upon the consummation of the
Consolidation Transactions each Executive Officer will receive a grant of
options to purchase the number of Common Shares indicated opposite such
Executive Officer's name in the table below. See "--1996 Share Incentive Plan;
New Plan Benefits." The award agreement to be entered into between the
respective Executive Officer and the Company will provide that the exercise
price with respect to such options will be the Fair Market Value of the Common
Shares on the date of grant, that such options will become exercisable by the
respective Executive Officer in increments of 50% per year on each of the first
two anniversaries of the date of grant, will expire ten years from the date of
grant (subject to earlier termination) and are being granted to the Executive
Officer in consideration of his agreement, pursuant to an employment agreement
being entered into in connection with the Consolidation Transactions, to serve
for a minimal annual base salary relative to the annual base compensation paid
to executive officers of comparable companies. See "EXECUTIVE
COMPENSATION--Employment Agreements; Non-Competition Agreements." The award
agreements will further provide that if an Executive Officer's employment with
the Company terminates by reason of death, disability or retirement, such
options will immediately become and remain fully exercisable for one year after
the date of such termination or until the expiration date of such option,
whichever occurs first. If an Executive Officer's employment with the Company
terminates for any other reason (except as set forth in the following sentence),
that portion of the option that is not exercisable at such time shall terminate
and any portion then exercisable may be exercised until the earlier of three
months after the date of termination or the expiration date of the option. In
the event of (i) the termination of an Executive Officer's employment with the
Company by the Executive Officer "for good reason" or by the Company "without
cause" (each as defined in such individual's employment agreement) or (ii) a
Change of Control (as defined below), each such option will become immediately
exercisable and will remain so exercisable until the expiration date of the
option.
SARS. SARs entitle the recipient to receive, upon exercise of the SAR, an
amount (payable in cash and/or Common Shares) based on the appreciation in the
value of a Common Share on the date the SAR is exercised (or some lesser ceiling
amount) over the base price of the Common Share established in the award
agreement.
RESTRICTED STOCK AWARDS. A restricted stock award is an award entitling the
recipient to acquire, at no cost or for a purchase price determined by the
Compensation Committee, Common Shares subject to such restrictions and
conditions as the Committee may determine at the time of grant. Conditions may
be based on continuing employment and/or achievement of pre-established
performance goals and objectives. Upon payment for (if required) and acceptance
of a restricted stock award, a participant will have all rights of a Shareholder
with respect to such restricted stock, including voting and dividend rights,
subject to non-transferability restrictions and other conditions contained in
the written instrument evidencing the restricted stock award or the resolution
of the Board or the Compensation Committee authorizing such award. Restricted
Common Shares will become vested with respect to a participant following the
date or dates specified or the attainment of the pre-established performance
goals, objectives or other conditions associated with such restricted stock
award. Following such date or dates or the attainment of such pre-established
performance goals, objectives or other conditions, restricted stock will be
deemed "vested" and will no longer be restricted stock.
Unless otherwise specified in the written instrument evidencing the
restricted stock award or the resolution of the Board or Compensation Committee
authorizing such award, in the event of termination of employment for any reason
other than the participant's death or disability, the Company (or its designee)
shall have the right, at the discretion of the Compensation Committee, to
repurchase restricted stock with respect to which conditions have not lapsed at
their purchase price, or to require forfeiture of such Common Shares if acquired
at no cost, from the participant or the participant's legal representative.
73
<PAGE>
In connection with the consummation of the Consolidation Transactions, the
Compensation Committee has authorized the grant to certain Executive Officers of
restricted Common Shares ("DEFERRED STOCK GRANTS"), as incentive compensation
based on the annual growth of FFO per Common Share for the fiscal year prior to
the year in which such restricted Common Shares are granted. Such Deferred Stock
Grants have been authorized to be granted in 1998, 1999 and 2000 respect of the
fiscal years ending 1997, 1998 and 1999, respectively. Common Shares granted
pursuant to Deferred Stock Grants (if any) will be forfeited if the Executive
Officer's employment with the Company is terminated at any time in the four year
period following the date of grant other than upon a Change of Control or upon
the termination of the Executive Officer's employment with the Company "without
cause" (as defined in the Executive Officer's employment agreement with the
Company). During such four-year period, the Executive Officer will be paid all
distributions in respect of Common Shares subject to a Deferred Stock Grant and
such distributions will not be required to be disgorged in the event of the
forfeiture of the underlying Common Shares as a result of the termination of
such Executive Officer's employment. The 1997 Deferred Stock Grant will consist
of Common Shares with an aggregate Fair Market Value of $200,000 if the FFO per
Common Share for the fiscal year ended December 31, 1997 ("1997 FFO") is more
than 3.0% higher than the FFO per Common Share for the fiscal year ended
December 31, 1996 ("1996 FFO") (giving pro forma effect to the Consolidation
Transactions for the entirety of each fiscal year), increasing by a number of
Common Shares with an aggregate Fair Market Value of $25,000 for each additional
0.5% increase (in excess of 3.0%) in 1997 FFO over 1996 FFO. There will be no
1997 Deferred Stock Grant unless 1997 FFO is more than 3.0% higher than 1996
FFO. The 1997 Deferred Stock Grant will be allocated among the Executive
Officers at the time of grant at the discretion of the Compensation Committee,
but no Executive Officer may be allocated more than 75% of the total 1997
Deferred Stock Grant. The formula for Deferred Stock Grants for 1998 and 1999
will mirror that for the 1997 Deferred Stock Grant, except that the FFO per
Common Share comparison will, in each instance, relate to the immediately
preceding fiscal year. The Compensation Committee has discretion to increase the
aggregate value of the Deferred Stock Grants available for grant in 1998 and
1999 in the event of a significant increase in the capitalization of the
Company.
OTHER SHARE-BASED AWARDS. Other share-based awards might include phantom
stock or units, performance stock or units, bonus stock or units, dividend
equivalent units, or similar securities or rights and other awards payable in or
with a value derived from or related to the Fair Market Value of the Common
Shares, payable on such terms as the Compensation Committee may approve. Such
awards may be granted, become vested or be payable based upon the continued
employment of a participant, or upon the attainment of specified corporate or
individual performance goals (as in the case of performance stock or units).
PERFORMANCE-BASED AWARDS. Under Section 162(m) of the Code, the Company may
not deduct certain compensation in excess of $1.0 million to the Chief Executive
Officer or any one of the four other most highly compensated Executive Officers
of the Company unless, among other things, this compensation qualifies as
"performance-based" compensation under Section 162(m), and the material terms of
the plan for such compensation are approved by stockholders. Certain types of
awards under the 1996 Plan may be granted to qualify as performance-based
compensation under Section 162(m) of the Code. Stock options and SARs that are
granted at a fair market value exercise price are intended to qualify as
performance-based compensation. In addition, other share-based awards (such as
performance units) may qualify as performance-based compensation. All employees
of the Company and its subsidiaries are eligible to receive such share-based
awards, and performance goals are any one or a combination of Return on Equity,
Total Shareholder Return and FFO. These goals will be applied over either
consecutive or rolling cycles of more than one but not more than five fiscal
years. Specific cycles, weightings of more than one performance goal and target
levels of performance upon which actual payments will be based, as well as the
award levels payable upon achievement of specified levels of performance, will
be determined by the Compensation Committee no later than the applicable
deadline under Section 162(m), and in any event at a time when achievement of
such targets is substantially uncertain. These variables may change from cycle
74
<PAGE>
to cycle. Appropriate adjustments to the performance goals and targets in
respect of share-based awards may be made by the Compensation Committee based
upon objective criteria in the case of significant acquisitions or dispositions
by the Company, extraordinary gains or losses, material changes in accounting
principles or practices, or certain other events that were not anticipated (or
the effects of which were not anticipated) at the time goals were established,
in order to neutralize the effect of such events on the share-based awards. It
is intended that the Deferred Stock Grants to be granted to Executive Officers
(if earned) will qualify as performance-based compensation.
The Compensation Committee must certify the achievement of the applicable
performance goals and the actual amount payable to each participant under the
share-based awards prior to payment. Share-based awards generally will be paid
following the completion of each cycle. The Compensation Committee may retain
discretion to reduce, but not increase, the amount payable under a share-based
award to any participant, notwithstanding the achievement of targeted
performance goals. Share-based awards may be accelerated in the event of a
Change of Control (as defined below). The maximum number of Common Shares or
share-units that may be subject to all qualifying share-based awards, including
stock options and SARs, but specifically excluding Deferred Stock Grants to the
extent described above, that are granted to any participant under the 1996 Plan
during any calendar year, will not exceed 250,000 Common Shares (or share
units), either individually, or in the aggregate.
The Compensation Committee also has the authority to grant awards under the
1996 Plan in substitution for or assumption of stock incentive awards held by
employees of other entities who become employees of the Company or a subsidiary
as a result of a merger or acquisition of the entity.
Awards may be granted in connection with the surrender or cancellation of
previously granted awards, or may be amended, under such terms and conditions,
including numbers of Common Shares and exercise price, exercisability or
termination, that are the same as or different from the existing awards, all as
the Compensation Committee may approve.
All awards under the 1996 Plan will be granted subject to the Ownership
Limit, the Executive Officer Ownership Limit and the other restrictions on
transfer of Equity Shares contained in the Charter. See "DESCRIPTION OF CAPITAL
STOCK--Restrictions on Transfer" and "PROPOSAL TO AMEND THE CHARTER (Proposal 2)
- -- Description of the Proposed Amendments to the Charter -- Description of the
Proposed Amendments to the "Excess Shares" Provisions." No award will be granted
if such award would violate any such restriction, or otherwise cause the Company
to fail to qualify as a REIT; PROVIDED, that such award may be granted if the
Board has determined (as permitted in the Charter) that such award will not
jeopardize the Company's status as a REIT or that it is no longer in the best
interest of the Company to continue to qualify for taxation as a REIT.
OPTIONS GRANTED TO NON-EMPLOYEE TRUST MANAGERS
The 1996 Plan provides that each Non-Employee Trust Manager who is first
elected or appointed after the 1996 Annual Meeting of Shareholders will receive
an automatic initial grant of an option to purchase 10,000 Common Shares. In
addition, promptly following the date of each Annual Meeting of Shareholders
(including the 1997 Annual Meeting), each Non-Employee Trust Manager elected by
the Shareholders (including the current nominees) will receive an additional
automatic grant of an option to purchase 5,000 Common Shares; PROVIDED, however,
that no Non-Employee Trust Manager will receive more than one such automatic
grant in any calendar year. The exercise price for grants to Non-Employee Trust
Managers will be 100% of the Fair Market Value of the Common Shares on the date
of grant. Each such option will expire ten years from the grant date (subject to
earlier termination). Each option will become exercisable in increments of 50%
per year on each of the first two anniversaries of the date of grant. If a
Non-Employee Trust Manager's service terminates by reason of death, disability,
or retirement, the options will immediately become and remain fully exercisable
for one year after the date of such termination or until the expiration date of
such option, whichever occurs first. If a Non-Employee Trust
75
<PAGE>
Manager's service terminates for any other reason, that portion of the option
that is not exercisable at such time shall terminate and any portion then
exercisable may be exercised until the earlier of three months after the date of
termination or the expiration date of the option. In the event of a Change of
Control (as defined below), each option granted to a Non-Employee Trust Manager
will become immediately exercisable.
Assuming Shareholder approval of the 1996 Plan, upon the consummation of the
Consolidation Transactions, each Non-Employee Trust Manager will receive a grant
of options to purchase 10,000 Common Shares at an exercise price equal to the
Fair Market Value of the Common Shares on the date of grant. Such options will
have other terms substantially similar to, and are in addition to, those options
described in the preceding paragraph.
The table below sets forth the determinable benefits that would be granted
under the 1996 Plan if the Shareholders approve the 1996 Plan.
1996 SHARE INCENTIVE PLAN
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
OPTIONS TO ACQUIRE DEFERRED STOCK GRANTS
COMMON SHARES
----------------------- ------------------------
<S> <C> <C> <C> <C>
DOLLAR NUMBER DOLLAR NUMBER
NAME AND POSITION VALUE ($) OF UNITS VALUE ($) OF UNITS
- ---------------------------------------------------------------------- ----------- ---------- ----------- -----------
Damon Navarro......................................................... (1) 75,000(2) (4) (5)
Chairman of the Board of Trust Managers, President and Chief
Executive Officer.................................................
Brian Navarro......................................................... (1) 75,000(2) (4) (5)
Vice President--Acquisitions........................................
Edmund Navarro........................................................ (1) 75,000(2) (4) (5)
Vice President--Property............................................
Joseph LaBrosse....................................................... (1) 25,000(2) (4) (5)
Chief Financial Officer, Secretary, Treasurer and Trust Manager.....
Gerald McNamara....................................................... (1) 20,000(2) (4) (5)
Vice President--Marketing and Strategic Planning....................
Executive Officers, as a group........................................ (1) 270,000 (4) (5)
Non-Employee Trust Managers, as a group............................... (1) 30,000(3) N/A N/A
Employees, including all officers, who are not Executive Officers as a
group............................................................... N/A N/A N/A N/A
</TABLE>
- ------------------------
(1) The exercise price for the options to purchase Common Shares to be granted
to each Executive Officer or Non-Employee Trust Manager will be the Fair
Market Value of the Common Shares on the date of grant. As it is not
possible to determine currently (i) the Fair Market Value of the Common
Shares on the date of the consummation of the Consolidation Transactions,
(ii) the time at which an Executive Officer or Non-Employee Trust Manager
will elect to exercise all or a part of such Executive Officer's or
Non-Employee Trust Manager's options or (iii) the value of the Common Shares
at the time of such exercise(s), the dollar value of the options granted to
the each Executive Officer or Non-Employee Trust Manager is not presently
determinable.
(2) Options to purchase the number of Common Shares indicated will be granted to
such Executive Officer pursuant to the 1996 Plan in connection with the
consummation of the Consolidation Transactions (assuming Shareholder
approval of the 1996 Plan). For detailed information regarding
76
<PAGE>
the terms and conditions associated with such options, see "--Awards Granted
to Employees-- Options."
(3) Includes options to purchase 10,000 Common Shares being granted to each of
the Non-Employee Trust Managers (Messrs. Garrahy, Gorman and Twaddell) in
connection with the consummation of the Consolidation Transactions. For
detailed information regarding the terms and conditions associated with such
options, see "--Options Granted to Non-Employee Trust Managers" and
"MANAGEMENT--Compensation of Trust Managers."
(4) The dollar value of the Common Shares subject to Deferred Stock Grants, if
any, which will be granted to each Executive Officer under the 1996 Plan is
currently not determinable. See note (5) below.
(5) It is not possible to currently determine the number of Common Shares
subject to Deferred Stock Grants, if any, which will be granted to the
Executive Officers under the 1996 Plan. Whether the Executive Officers
receive Deferred Stock Grants in respect of any of 1997, 1998 and 1999 will
depend upon whether the Company achieves the specified minimum level of FFO
per Common Share for such fiscal year. See "--Awards Granted to
Employees--Restricted Stock Awards."
ADMINISTRATION; CHANGE OF CONTROL
The 1996 Plan will be administered by the Compensation Committee,
constituted so as to permit the 1996 Plan to comply with the "non-employee
director" requirements of Rule 16b-3 under the Securities Exchange Act of 1934,
as amended, and the "outside director" requirements of Section 162(m) of the
Code, and will initially consist of each of the three Independent Trust
Managers. The Compensation Committee will have authority within the terms and
limitations of the 1996 Plan, to designate recipients of awards, determine or
modify the form, amount, terms, conditions, restrictions, and limitations of
awards, including vesting provisions, terms of exercise of an award, expiration
dates and the treatment of an award in the event of the retirement, disability,
death or other termination of a participant's employment with the Company, and
to construe and interpret the 1996 Plan. Such authority includes the discretion
to accelerate and extend outstanding awards but does not include the ability to
reduce by amendment the exercise or purchase price of an outstanding award.
The Compensation Committee is authorized to include specific provisions in
award agreements relating to the treatment of awards in the event of a "Change
of Control" of the Company (as defined in the 1996 Plan) and is authorized to
take certain other actions in such an event. A "Change of Control" is defined
generally to include the following: (i) certain acquisitions of 25% or more of
the combined voting power of the then outstanding Common Shares and any other
securities of the Company entitled to vote generally in the election of trust
managers, or (ii) the failure of persons currently serving on the Board,
together with persons nominated by at least a majority of the continuing
directors, to constitute at least a majority of the Board, or (iii) approval by
the Shareholders of any reorganization, merger or consolidation of the Company
in which the beneficial owners of the Common Shares and other voting securities
of the Company immediately prior to such transaction fail to beneficially own at
least 50% of the combined voting power of all securities entitled to vote
generally in the election of trust managers following any such transaction, or
(iv) approval by the Shareholders of any complete liquidation or dissolution of
the Company, or of any sale or other disposition of all or substantially all of
the Company's assets.
The Compensation Committee may delegate to the officers or employees of the
Company and its subsidiaries the authority to execute and deliver such
instruments and documents and to take such actions as are necessary, advisable
or convenient for the effective administration of the 1996 Plan. It is intended
generally that the share-based awards under the 1996 Plan and the 1996 Plan
itself comply with, and be interpreted in a manner that, in the case of
participants who are subject to Section 16 of the Exchange Act and for whom (or
whose awards) the benefits of Rule 16b-3 are intended satisfy, the applicable
requirements of Rule 16b-3, so that such persons will be entitled to the
benefits of Rule 16b-3 or other exemptive
77
<PAGE>
rules under Section 16. The 1996 Plan provides that neither the Company nor any
member of the Board nor of the Compensation Committee shall have any liability
to any person for any action taken or not taken in good faith under the 1996
Plan.
AMENDMENT AND TERMINATION
The Board will have the authority to amend, suspend or discontinue the 1996
Plan at any time, PROVIDED, that no such action will affect any outstanding
award in any manner adverse to a participant without the consent of that
participant. The 1996 Plan may be amended by the Board without further
Shareholder approval, and no guidelines have been established relating to the
nature of the amendments that may be made to the 1996 Plan without Shareholder
approval. Such approval, however, may be required (E.G., in the case of
amendments that materially increase the available number of Common Shares under
the 1996 Plan) to preserve the qualifying status of the 1996 Plan under Rule
16b-3, to satisfy tax rules applicable to performance-based compensation under
Section 162(m) of the Code or to subsequent grants of incentive stock options,
or to satisfy other applicable legal requirements. Amendments made without
Shareholder approval could increase the costs to the Company under the 1996
Plan, although the amount thereof is not determinable. Because the Compensation
Committee will retain the discretion to set and change the specific targets for
each performance period under a performance-based award intended to be exempt
from Section 162(m), Shareholder ratification of the performance goals will be
required, in any event, at five-year intervals in the future to exempt awards
granted under the 1996 Plan from the limitations in deductibility.
AUTHORIZED SHARES; OTHER PROVISIONS; NON-EXCLUSIVITY
The number of Common Shares that may be issued in respect of awards under
the 1996 Plan will not exceed 900,000. The 900,000 figure for the number of
Common Shares to be available under the 1996 Plan is based on an estimate of the
number of Common Shares that will be subject to awards granted during the first
three years of the term of the 1996 Plan. The number and kind of shares
available for grant and the Common Shares subject to outstanding awards (as well
as individual share limits on awards, performance targets and exercise prices of
awards) may be adjusted to reflect the effect of a stock dividend, split,
recapitalization, merger, consolidation, reorganization, combination or exchange
of Common Shares, extraordinary dividend or other distribution or other similar
transaction. Any unexercised or undistributed portion of any expired, cancelled,
terminated or forfeited award, or any alternative form of consideration under an
award that is not paid in connection with the settlement of any portion of an
award, will again be available for award under the 1996 Plan, whether or not the
participant has received benefits of ownership (such as dividends or dividend
equivalents or voting rights) during the period in which the participant's
ownership was restricted or otherwise not vested. Upon the issuance of an SAR
settled in Common Shares, the right to purchase an equal number of Common Shares
covered by a related stock option, if any, shall be deemed to have been
surrendered and will no longer be exercisable, and such number of Common Shares
shall no longer be available under the 1996 Plan. Although Common Shares subject
to cancelled options or SARs will be counted against the individual share-based
award limits to the extent required by Section 162(m), only Common Shares
actually issued will be charged against the aggregate Common Share limit under
the 1996 Plan. Upon approval of the 1996 Plan by the Shareholders, the Company
intends to register under the Securities Act the number of Common Shares
reserved for issuance under the 1996 Plan.
Full payment for Common Shares purchased on exercise of any option, along
with payment of any required tax withholding, must be made at the time of such
exercise in cash or, if permitted by the Compensation Committee, in exchange for
a promissory note in favor of the Company, in shares of stock having a Fair
Market Value equivalent to the exercise price and withholding obligation, or any
combination thereof, or pursuant to such "cashless exercise" procedures as may
be permitted by the Compensation
78
<PAGE>
Committee. Any payment required in respect of other awards may be in such amount
and in any lawful form of consideration as may be authorized by the Compensation
Committee.
If a stock option being exercised or a restricted stock award being granted
is an option or restricted stock award granted to an employee of Grove Property
or a Grove Property Subsidiary (as defined), then Grove Property will sell the
Common Shares underlying the option or restricted stock award to the optionee or
restricted stock award recipient in return for the purchase price paid to Grove
Property for such Common Shares. For the purposes of the 1996 Plan, a "Grove
Property Subsidiary" means any corporation, partnership or other entity (other
than Grove Property) in an unbroken chain beginning with Grove Property if all
of them, in the aggregate, other than the last one in the unbroken chain, then
own stock or other interests possessing 50 percent or more of the total combined
economic interests or the total combined voting power of all classes of stock or
other interests in each of the others in such chain; PROVIDED, however, that
"Grove Property Subsidiary" shall not include the Operating Partnership or its
Operating Partnership Subsidiaries (as defined).
If a stock option being exercised or a restricted stock award being granted
is an option or restricted stock award granted to an employee of the Operating
Partnership or an Operating Partnership Subsidiary (as defined), as soon as
practicable after the Operating Partnership receives payment of the purchase
price (if any) for the Common Shares underlying such option or restricted stock
award, (i) Grove Property will sell to the Operating Partnership the number of
Common Shares for which such option is being exercised or for which such
restricted stock award is being granted for an aggregate purchase price equal to
the product of (x) such number of Common Shares multiplied by (y) the Fair
Market Value of a Common Share on the date of the exercise or grant, as the case
may be, and (ii) the Operating Partnership will sell such Common Shares to the
optionee or restricted stock award recipient in return for the purchase price
paid to it by the optionee or restricted stock award recipient. For the purposes
of the 1996 Plan, an "Operating Partnership Subsidiary" means any corporation,
partnership or other entity (other than the Operating Partnership) in an
unbroken chain beginning with the Operating Partnership if all of them, in the
aggregate, other than the last one in the unbroken chain, then own stock or
other interests possessing 50 percent or more of the total combined economic
interests or the total combined voting power of all classes of stock or other
interests in each of the others in such chain; PROVIDED, however, that
"Operating Partnership Subsidiary" will not include Grove Property or its Grove
Property Subsidiaries.
The 1996 Plan generally does not impose any minimum vesting periods on
options or other awards. However, Common Shares acquired after exercise of any
option may not, in the ordinary course, be sold before the expiration of six
months from the date of grant. The maximum term of an option or any other award
is ten years.
The 1996 Plan is not exclusive and does not limit the authority of the Board
or its committees to grant awards or authorize any other compensation, with or
without reference to the Common Shares, under any other plan or authority.
Approval of the 1996 Plan by the Shareholders of the Company will not be deemed
to constitute approval of any other such compensation plan or authority.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general description of federal income tax consequences to
participants and the Company relating to nonqualified stock options and certain
other awards that may be granted under the 1996 Plan. This discussion does not
purport to cover all tax consequences relating to stock options and other
awards.
An optionee will not recognize income upon the grant of a nonqualified stock
option to purchase Common Shares. Upon exercise of the option, the optionee will
recognize ordinary compensation income equal to the excess of the fair market
value of the Common Shares on the date the option is exercised over the option
price for such stock. The tax basis of the option stock in the hands of the
optionee will equal the option price for the stock plus the amount of ordinary
compensation income the optionee recognizes upon
79
<PAGE>
exercise of the option, and the holding period for the stock will commence on
the day the option is exercised. An optionee who sells option stock will
recognize capital gain or loss measured by the difference between the tax basis
of the stock and the amount realized on the sale. Such gain or loss will be
long-term if the stock is held for more than one year after exercise. The
Company will be entitled to a deduction equal to the amount of ordinary
compensation income recognized by the optionee. The deduction will be allowed at
the same time the optionee recognizes the income.
An optionee will not recognize income upon the grant of an incentive stock
option to purchase Common Shares and will not recognize income upon exercise of
the option, provided such optionee was an employee of the Company at all times
from the date of grant until three months prior to exercise (or one year prior
to exercise in the event of death or disability). Generally, the amount by which
the fair market value of the Common Shares on the date of exercise exceeds the
option price will be includable in alternative minimum taxable income for
purposes of determining alternative minimum tax and such amounts will be added
to the tax basis of such stock for purposes of determining alternative minimum
taxable income in the year in which the stock is sold. Where an optionee who has
exercised an incentive stock option sells the Common Shares acquired upon
exercise more than two years after the date of grant and more than one year
after exercise, long-term capital gain or loss will be recognized equal to the
difference between the sales price and the option price. An optionee who sells
such Common Shares within two years after the date of grant or within one year
after exercise will recognize ordinary compensation income in an amount equal to
the lesser of the difference between (a) the option price and the fair market
value of such Common Shares on the date of exercise or (b) the option price and
the sales proceeds. Any remaining gain or loss will be treated as capital gain
or loss. The Company will be entitled to a deduction equal to the amount of
ordinary compensation income recognized by the optionee in this case. The
deduction will be allowable at the same time the optionee recognizes the income.
The current federal income tax consequences of other awards authorized under
the 1996 Plan generally follow certain basic patterns: SARs are taxed and
deductible in substantially the same manner as nonqualified options; performance
awards and dividend equivalents generally are subject to tax at the time of
payment; unconditional stock bonuses are generally subject to tax at the time of
payment; in each of the foregoing cases, the Company or a subsidiary will
generally have (at the time the participant recognizes income) a corresponding
deduction.
If, as a result of a Change of Control, a participant's SARs or options or
other rights become immediately exercisable, or Common Shares or other benefits
covered by another type of award are immediately vested or issued, the
additional value, if any, attributable to the acceleration or issuance may be
deemed a "parachute payment" under Section 280G of the Code. In such case, the
participant may be subject to a 280G non-deductible excise tax as to all or a
portion of such economic value, in addition to any income tax payable. The
Company or a subsidiary will not be entitled to a deduction for that portion of
any parachute payment that subject to the excise tax.
Notwithstanding any of the foregoing discussion with respect to the
deductibility of compensation under the 1996 Plan, Section 162(m) would render
non-deductible to the Company certain compensation in excess of $1.0 million in
any year to certain Executive Officers, unless such excess compensation is
"performance-based" (as defined) or is otherwise exempt from Section 162(m). The
applicable conditions of an exemption for performance-based compensation plan
include, among others, a requirement that the stockholders approve the material
terms of the plan. Stock options, SARs and certain (but not all) other types of
awards that may be granted to Executive Officers as contemplated by the 1996
Plan are intended to qualify for the exemption for the performance-based
compensation under Section 162(m). However, in light of the ambiguities in
Section 162(m) and uncertainties regarding its ultimate interpretation and
application in these circumstances, no assurances can be given that the
compensation paid under the 1996 Plan to any Executive Officer will in fact be
deductible if it should, together with other non-exempt compensation paid to
such Executive Officer, exceed $1.0 million.
80
<PAGE>
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE 1996 PLAN. ALL CURRENT TRUST
MANAGERS AND EXECUTIVE OFFICERS WILL RECEIVE OR ARE ELIGIBLE TO RECEIVE BENEFITS
UNDER THE 1996 PLAN AND WILL HAVE AN INTEREST IN THE 1996 PLAN.
VOTE REQUIRED
Pursuant to Section 162(m) of the Code, the 1996 Plan must be approved by
the affirmative vote of the Shareholders present at the Special Meeting, whether
in person or by proxy. Pursuant to Section710 of the AMEX Company Guide, the
affirmative vote of a majority of the total votes case on the proposal at the
Special Meeting, whether in person or by proxy, is required to approve the 1996
Plan.
81
<PAGE>
THE COMPANY
GENERAL
Upon completion of the Consolidation Transactions, the Company will be a
self-administered and self-managed REIT. The Company will conduct substantially
all of its operations through the Operating Partnership. Grove Property will own
an interest in the Operating Partnership of not less than 63% and will control
the Operating Partnership as the sole general partner. The Company will own,
directly or indirectly, 100% of the interests in the four GREAT Properties and
each of the seven Partnership Properties currently owned by the Liquidating
Partnerships, and will control the remaining thirteen Properties through a
general partnership interest in the Property Partnerships that own such
Properties. The Company's interest in the various Partnership Properties (other
than those owned by the Liquidating Partnerships) cannot be determined until
consummation of the Exchange Offer; if no Property Partnership Units are
acquired in the Exchange Offer, the Company's interest in certain Partnership
Properties could be as little as 1.0%. See "APPROVAL OF THE CONSOLIDATION
TRANSACTIONS (Proposal 1)-- The Properties" and "APPROVAL OF THE CONSOLIDATION
TRANSACTIONS (Proposal 1)--Terms of the Consolidation Transactions--The
Consolidation."
Following the Consolidation Transactions, the Company believes that it will
be one of the largest public owners of multi-family properties in Southern New
England. The multi-family properties that will be owned or controlled by the
Company include 1,752 residential apartments located in Connecticut,
Massachusetts and Rhode Island and a neighborhood retail complex in Longmeadow,
Massachusetts with net rentable square feet of approximately 79,012. In
addition, three of the residential properties include leased office space with
total leasable office space of approximately 15,200 square feet.
The Company believes that it is the only publicly traded multi-family
apartment REIT conducting operations exclusively in the Northeast. Management
believes that this concentration in a single geographic area and the Company's
reputation in the Northeast as a superior property management company with
approximately 170 employees, coupled with a sound performance as a public
company since June 1994, will be attractive to potential investors in the
Company, including owners of multi-family properties that might be acquired by
the Company for Common Units, thereby deferring the owner's federal income tax
liability, if any, on a sale.
BUSINESS OBJECTIVES AND OPERATING STRATEGIES
In connection with the Consolidation Transactions, the Board has unanimously
approved a change in the Company's distribution policy. The Board has concluded
that enhancement of shareholder value can better be achieved through growth in
the Company's asset value, which management believes will be reflected in the
market price of the Common Shares, rather than maintaining or increasing the
distribution yield on the Common Shares. The Board has therefore voted to reduce
the quarterly cash distribution to Shareholders, effective upon consummation of
the Consolidation Transactions, from its level for the quarter ended September
30, 1996 of $.23 per Common Share (resulting in an annual distribution of $.92
per Common Share) to a quarterly distribution of $0.1575 ($0.1850 before giving
effect to the Stock Split) per Common Share (resulting in an annual distribution
of $.63 per Common Share ($.74 per Common Share before giving effect to the
Stock Split)), thereby reducing the percentage payout of the Company's FFO and
cash available for distribution from approximately 77% and 87%, respectively, at
September 30, 1996 to approximately 63% and 73%, respectively at that date on a
pro forma basis. This distribution level is expected to comply with the REIT
requirements under the Code that 95% of the Company's REIT taxable income be
distributed annually, while retaining for reinvestment in the Company the
maximum amount permitted under the Code. The Company plans to reinvest the
balance of its cash flow in the Company's properties, including property
redevelopment and additional property acquisitions, the reduction of outstanding
indebtedness and, when appropriate, the repurchase of outstanding Common Shares.
82
<PAGE>
The Company's decision to reduce its quarterly cash distribution to Shareholders
is not in response to a reduction in earnings (the Company has experienced no
such reduction), nor is such decision in response to any other adverse
occurrence with respect to the business or operations of the Company. Rather,
the Company believes that focusing its distribution and investment philosophy on
total return to shareholders, rather than focusing principally on the amount of
periodic cash distributions to shareholders, will enhance long-term shareholder
value and could reduce the volatility of the market price of the Common Shares.
In connection with the Consolidation Transactions, the Board has authorized
the repurchase of up to 100,000 Common Shares over the next 12 months, from time
to time when management believes that the purchase price for the Common Shares
is below the asset value per Common Share. See "--Distribution Policy" and
"APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Potential Adverse
Effects of the Consolidation Transactions; Risk Factors--Repurchase of Common
Shares by the Company."
The Company's primary business objective is to pursue a growth strategy
which centers on acquisitions and property redevelopment in Southern New
England. Although the Company's principal focus has been, and continues to be,
multi-family residential properties, it will also seek to acquire a limited
number of mixed-use and specialty retail properties in its existing markets.
Management intends to implement its growth strategy by acquiring additional
properties which offer solid and steady growth opportunities. Such acquisitions
may be from affiliates of the Grove Companies or from unrelated third parties.
The properties that may be acquired from the Grove Companies (the Excluded
Properties), are principally multi-family residential properties, but also
include four mixed-use commercial properties. All of the Excluded Properties are
located in Connecticut, Massachusetts or Rhode Island. The Excluded Properties
include 1,507 apartments in 15 multi-family residential projects, and 113,300
square feet of commercial space in eight properties. Additional properties may
be acquired from affiliates or others for cash, for Common Shares or for Common
Units.
The Company seeks to acquire properties at prices below estimated
replacement cost, which can generate improved cash flow and long-term investment
value through strategic capital improvements and aggressive property management.
Attractive acquisitions are those properties that (i) meet an identified market
demand, (ii) are well located and under-performing in improving rental markets
and (iii) are capable of producing a high component of current income through
value added/return-oriented capital improvements to individual apartment units
and property sites, such as adding new amenities, including fitness centers and
community rooms, upgrading landscaping and signage and improving the overall
curb appeal of the property.
Management believes that its operating strategy will result in growth in
shareholder value through: (i) maximizing investment returns as quickly as
possible, (ii) maximizing investment returns through rigorous on-site management
which implements an individualized marketing plan for each property responsive
to the character of the site, on both a short- and long-term basis, and (iii)
increasing investment yields by making return-oriented capital improvements
which upgrade individual apartment units and property sites and, in turn,
promote stable occupancy levels and justify increasing rental rates. The use of
retained cash in connection with acquisitions to be made by the Company is
expected by management to enhance Shareholder value and return on equity.
ACQUISITION STRATEGY
GENERAL. Management believes that the Company has available to it an
established network of relationships with real estate owners, developers,
brokers, lenders and other institutions in the Southern New England region,
which may provide the Company with access to potential acquisitions prior to
their being widely marketed.
An acquisition property should furnish the Company with significant
opportunity for increasing property value through rental increases, reducing
expenses, or a combination of such strategies. Local
83
<PAGE>
demographics and economics in the target location should be stable and strong or
showing continuing improvement. When analyzing acquisition targets, the Company
conducts market surveys consisting of a study of the region, community and trade
area. A physical inspection, a review of the resident mix, an assessment of the
current vacancies, and a complete rental analysis is performed.
Properties held by affiliates of the Company may satisfy the economic and
other criteria which form the basis for the Company's acquisition strategy. The
Company expects from time to time to seek to acquire one or more of such
Excluded Properties at such time as it is able to negotiate a fair price.
REDEVELOPMENT. The Grove Company affiliates that previously owned the GREAT
Properties renovated and upgraded such Properties at the time of purchase, and
GREAT has since completed additional renovations. The exterior of Hamden Center
Apartments ("HAMDEN") has been upgraded, including landscaping, window shutters
and the renovation of the entrances to all six buildings. Some building and
entrance way roofing was also replaced at Hamden. At Baron Apartments, the
landscaping at the entrance of the Property and at the front two buildings was
upgraded, and a new rental office was added. New energy efficient lighting was
installed in all common areas of Baron Apartments. At all of the GREAT
Properties, unit interiors have been renovated as apartments turned over,
including carpet and appliance replacement, and new lighting fixtures as
necessary. The Company intends to undertake and/or continue similar renovations
and upgrades in connection with the Partnership Properties.
FUTURE ACQUISITIONS. In the pursuit of its growth strategy, the Company
intends to engage in discussions with potential sellers of multi-family
properties, whether affiliates of the Company or third party sellers.
Management believes that an important strategic target for growth
opportunities in the Company's primary market are portfolios of multi-unit
apartment communities owned and operated by individuals. The Company believes
that a significant portion of New England's multi-unit housing properties is
older, and that ownership is very fragmented. Owners of 75- to 150-unit
complexes in the Company's market area have advised management of the Company
that they would be interested in selling their properties, but they have little
or no tax bases remaining in such properties, and such owners have concluded
that the potential tax liability which may be incurred by them upon transfer is
prohibitive of such sales. By utilizing the Operating Partnership structure, the
Company can offer competitive purchase prices to such owners and make payment of
such purchase prices in Common Units, thereby deferring all or a portion of an
owner's federal income tax liability.
In the event the Company desires to purchase a property from an affiliate,
the Company's investment policies require majority approval of the proposed
purchase by the Independent Trust Managers of the Company (I.E., those who are
neither executive officers of the Company nor affiliates of the Grove
Companies). The Charter requires a majority of Independent Trust Managers on the
Board at all times. The Charter also requires prior receipt of an independent
third-party appraisal with respect to the property. The proposed amendment to
the Charter would delete the requirement that GREAT obtain such an independent
third party appraisal. See "PROPOSAL TO AMEND THE CHARTER (Proposal 2)--Reasons
for the Charter Amendments--Reasons for the Proposed Amendment to Delete the
Third Party Appraisal Requirement."
There can be no assurance that the Company will be able to identify
acquisition opportunities, that definitive contracts will be entered into with
respect to any prospective acquisitions, or that the Company will acquire any
property as to which it enters into a definitive contract.
MARKETS
GENERAL. The Company believes that the existing conditions in the Northeast
market present a substantial barrier to new development. Northeast is defined to
include the New England and Mid-Atlantic states. The existing density in the
Northeast marketplace limits the amount of developable land. In
84
<PAGE>
addition, zoning is administered at the local level, thereby allowing the
individual localities their own often restrictive policies within the existing
zoning and environmental laws. The lack of developable land as well as the
current zoning environment contribute to the overall high cost of construction
of apartment communities and corresponding low level of multi-family
development. The following graph details the number of multi-family units in
complexes of five or more units completed nationally for years 1993, 1994 and
1995 and in the Northeast region for the same three years.
<TABLE>
<CAPTION>
COMPLETION PROPERTIES WITH 5 OR MORE UNITS
[LINE GRAPH]
QUARTER ENDING
SEPTEMBER 30,
1993 1994 1995 1996
--------- --------- --------- --------------
<S> <C> <C> <C> <C>
Nationally....................................................... 150,000 175,000 250,000 235,000
Northeast........................................................ 10,000 6,000 19,000 14,000
</TABLE>
- ------------------------
(1) "Northeast" is defined as an area including New England (including Maine,
New Hampshire, Vermont, Massachusetts, Connecticut and Rhode Island), New
York, Pennsylvania and New Jersey.
The Company believes the following data with respect to rental costs
relative to income indicates that increased rental rates could be obtained in
two of the Company's primary markets (Hartford and Providence). Similar data is
not readily available for the Company's other, more local, markets.
1995 RENTAL COST--INCOME
SELECTED MARKETS
<TABLE>
<CAPTION>
RENTAL COST MEDIAN HOUSEHOLD
METROPOLITAN MARKET RELATIVE TO INCOME (1) INCOME (2)
- ---------------------------------------------------- ----------------------- -----------------
<S> <C> <C>
Rochester........................................... 21.3 $ 41,000
Hartford............................................ 24.0 $ 49,500
Providence.......................................... 24.3 $ 36,400
Salt Lake City...................................... 24.9 $ 39,200
Seattle............................................. 26.5 $ 45,000
Atlanta............................................. 28.0 $ 42,400
Baltimore........................................... 28.8 $ 41,800
Portland............................................ 28.9 $ 38,700
Las Vegas........................................... 31.1 $ 35,100
Chicago............................................. 31.3 $ 47,400
Boston.............................................. 31.8 $ 48,400
New York............................................ 32.4 $ 40,600
Miami............................................... 35.2 $ 31,600
San Francisco....................................... 42.7 $ 45,700
</TABLE>
85
<PAGE>
- ------------------------
(1) Based on analysis of 4th Quarter 1995 data for Class A apartments as
reported in Koll National RE Index in MARKET MONITOR. The Properties consist
of Class A and Class B apartments.
(2) SALES AND MARKETING MANAGEMENT'S 1995 SURVEY ON BUYING POWER.
The Company's properties are located in in-fill locations which have
experienced occupancy rates 200 basis points better than the regional average
and approximately 300 basis points better than the national average for 1994 and
1995. The Company expects that its very low vacancy rate, combined with
relatively low vacancy rates in its markets as a whole, will enable the Company
to raise rents at the rate of inflation or higher over the next several years.
The Company's rental revenues, on a pro forma basis, increased 8.8% for the nine
months ended September 30, 1996 as compared with the same period in 1995 and
4.4% for the year ended December 31, 1995 as compared to the year ended December
31, 1994. The following graph shows the Company's 1994 and 1995 vacancy rates as
compared with the Northeast and the United States.
<TABLE>
<CAPTION>
VACANCY RATES
[BAR GRAPH]
GROVE UNITED STATES NORTHEAST
----------- ----------------- -------------
<S> <C> <C> <C>
1994............................................................................ 3.8% 7.2% 7.1%
1995............................................................................ 3.6% 7.5% 6.9%
</TABLE>
The Company believes that occupancy levels in the Northeast are increasing
principally because few new apartment communities are being built in the
Northeast. Nationally, as reported by Hanley-Wood U.S. HOUSING MARKETS, for the
three-month period ended December 31, 1995 the vacancy rate in rental apartment
communities comprised of more than five units was 9.6% as compared to 9.3% for
the comparable period in 1994. However, in the Northeast, the vacancy rate was
6.9% for the three-month period ended December 31, 1995 as compared to 7.1% for
the comparable period in 1994. For the period ended December 31, 1995, the
occupancy rate of the Properties was 96.8%, and the rate increased to 97.2% at
September 30, 1996. The Company believes that the lack of new multi-unit housing
properties, the low ratio of rental costs relative to income in two of its
primary markets and its high occupancy rates should result in higher rental
rates and increased appreciation in the value of the Company's assets over the
next several years.
MULTI-FAMILY MARKET. Management believes that the real estate capital
shortage resulting from the national and regional banking crisis and from
residential property overbuilding in the 1980's has severely limited the supply
of new multi-family properties entering the Southern New England marketplace
since 1991. The Company expects that the high land costs and high construction
costs experienced by many Northeast residential property developers and owners
will continue to inhibit new construction in the near term. The Company's
resident leases are generally for a one-year term, so that the Company is in a
position to increase rents annually if the market is favorable.
RENTAL RATES AND OCCUPANCY. The average physical occupancy rate of the
Company's multi-family properties for the nine months ended September 30, 1996
was 97.0%. The average monthly rental rate for
86
<PAGE>
the multi-family properties has increased to $.74 per square foot per month for
the three months ended September 30, 1996 from an average of $.72 per square
foot per month for the 12 months ended December 31, 1995. The total commercial
rentable space associated with the Properties is 113,320 square feet. The
average physical occupancy of the Company's commercial properties for the nine
months ended September 30, 1996 was 99.2%. The average rent per square foot per
month for the Company's commercial property has increased to $0.86 per square
foot per month for the three months ended September 30, 1996 from an average of
$0.78 per square foot per month for the 12 months ended December 31, 1995.
COMPETITION
There are numerous housing alternatives that compete with the Properties in
attracting residents. The Properties compete directly with other multi-family
properties 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
the new and existing home market. In addition, the Company competes with other
investors for acquisitions and redevelopment projects, and some of these
competitors have greater resources than the Company.
PROPERTY MANAGEMENT SERVICES
GENERAL. GPS has rendered property management services to each of the GREAT
Properties, the Partnership Properties and the Excluded Properties since their
acquisition by an affiliate of the Grove Companies (at dates ranging from 1986
to 1996). Currently GPS generates all of its fee income from GREAT, the Property
Partnerships and the limited partnerships that own the Excluded Properties
(interests in which are owned by the Grove Companies), although in the past it
also provided property management services to unrelated third parties. In
connection with the Consolidation Transactions, the Company will succeed to the
property management activities of GPS, and the Operating Partnership will
acquire all of the assets and liabilities of the GPS related to property
management services. Edmund F. Navarro, Vice President/Property Management of
the Company and President of GPS, will continue to lead the Company's property
management team, and substantially all of the employees of GPS will become
employees of the Operating Partnership in connection with the Consolidation.
In addition to managing the 1,752 multi-family apartment units and the
commercial space in its 24 Properties, the Company will continue to manage the
Excluded Properties, pursuant to management services contracts between the
Company and the limited partnerships that own the Excluded Properties. The
Excluded Properties include 1,507 apartments in 15 multi-family residential
projects, and 113,300 square feet of commercial space in eight properties. The
management services agreements will provide that the Operating Partnership shall
receive in exchange for its provision of property management services, with
respect to each Property or Excluded Property, a fee equal to from 4% to 6% of
gross income (excluding interest income). Such management services agreements
are expected to have terms of one year, and will automatically renew for
successive one-year terms if neither party thereto gives notice of termination
within 90 days prior to the end of the then current term. Because the Management
Company (which will be consolidated in the Company after the Consolidation) has
existing relationships with, and has provided and continues to provide property
management services for, the limited partnerships that own the Excluded
Properties, management anticipates that such contracts will continue to renew
for additional one-year terms upon the expiration of their initial terms, and
will not be terminated by the limited partnerships that own the Excluded
Properties. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Benefits to Certain Parties; Conflicts of Interest; Interests of Certain
Persons" and "CERTAIN RELATIONSHIPS AND TRANSACTIONS--Transactions With the
Grove Companies--Property Management Services."
PROPERTY MANAGEMENT SERVICES. The Management Company manages properties
utilizing its staff of professional and support personnel, including certified
regional property managers, apartment managers,
87
<PAGE>
apartment maintenance technicians and leasing agents, and the services of the
Accounting Division of the Management Company. As of September 30, 1996, the
Management Company's property management personnel consisted of approximately
170 employees. The depth of the Management Company's organization is intended to
enable it to deliver quality services on an uninterrupted basis, thereby
promoting resident satisfaction and improving resident retention. The services
of the Management Company are important to GREAT's implementation of its
objective to overhaul management procedures of prior owners of the properties
acquired pursuant to its growth strategy. The Management Company has developed,
and continues to improve, on-site management programs, accounting systems,
marketing systems and resident quality control and retention procedures.
The Management Company's property management staff will become employees of
the Operating Partnership. The property management team for each Property
includes on-site management and maintenance personnel as well as off-site
support staff. Property management teams perform leasing and rent collection
functions and coordinate resident services. Substantially all personnel are
trained extensively and are encouraged, and in certain cases required, to
continue their education through Company-designed in-house courses and
participation in outside seminars. The focus of the Company's on-site management
program is to provide prompt, courteous and responsive service to its residents.
The Company monitors the responsiveness of its on-site management through
various resident surveys. Service request response cards are left in residents'
apartments after any maintenance is performed, soliciting resident feedback of
the service provided.
ACCOUNTING SERVICES. The Accounting Division of the Management Company is
managed by Steven Splain, Controller of the Company. The accounting staff audits
and monitors each property's financial records, including monthly income and
expense reports, bank statement reconciliations, rent rolls and economic
occupancy reports and budget compliance. Staff members visit each site on a
regular basis to conduct on-site audits and supervise on-site bookkeeping. The
information generated during these visits is used by the Company's on-site
management staff at each site to set personal and team goals which relate to
budget and fiscal matters, on a weekly and monthly basis, subject to the
supervision of the Management Company.
PROPERTY MARKETING. The rental marketing personnel of the Management
Company attempt to assure that each property is marketable, priced realistically
and promoted aggressively. The Management Company uses a full range of
promotional tools in its marketing programs: point-of-purchase materials, high
quality curb appeal, targeted advertising and resident referrals. Instead of
waiting until vacancies occur, the Management Company markets the properties in
its management portfolio on a continuous basis. It takes steps necessary to
avoid move-outs by quality residents, which include quality customer service
throughout the lease term and renewal incentives.
The Management Company has established specific reporting requirements and
management guidelines to be applied at each of the Properties. Marketing reports
are prepared by on-site property management staff to track each Property's
occupancy, lease expiration, prospective resident traffic, unit availability,
renewal and rental rates and resident profile information. The Company's on-site
staff, which consists of property managers, leasing agents, service technicians,
porters and landscapers, participates in weekly goal setting sessions to
evaluate these marketing reports and examine issues relating to resident
underwriting, meet weekly to evaluate progress, set next week's goals and review
financial results. These sessions are supervised by the Management Company's
marketing director and regional managers. In this way, the Management Company
intends to encourage customer service and team empowerment.
Marketing and leasing procedures established by the Management Company are
designed to ensure compliance with all federal, state and local laws and
regulations. Individual property marketing plans have been structured by GPS to
respond to local market conditions. Resident underwriting guidelines for
prospective residents comply with the FHA and ADA regulations and are designed
to stabilize service levels and cash flow through lower resident turnover. None
of the Properties are currently subject to rent
88
<PAGE>
control or rent stabilization regulation or deed restrictions. The Company's
standard 12-month lease contracts facilitate uniform lease administration
relating to rent collections, security deposit dispositions, evictions, repairs
and renewals.
CONSTRUCTION SERVICES. Grove Development Corporation ("GDC"), a Connecticut
corporation owned by the Management Owners, facilitates the provision of
construction services to the Property Partnerships, GREAT and the limited
partnerships that own the Excluded Properties in connection with the
redevelopment of their respective properties. GDC has only one employee who
directs the operations of GDC; GDC functions as a general contractor,
supervising the various sub-contractors who perform construction and related
services. GDC has no material assets or liabilities, and will be dissolved upon
the consummation of the Consolidation Transactions. The employee will become an
employee of the Operating Partnership, which will continue to provide such
construction-related services in connection with the redevelopment of the
Properties and the Excluded Properties.
DISTRIBUTION POLICY
GREAT has made a quarterly distribution to its holders of Common Shares in
each quarter since the closing of the IPO. Distributions for the year ended
December 31, 1995 totaled $475,125, representing 86% of FFO and 90% of cash
available for distribution. Distributions for the nine months ended September
30, 1996 totaled $360,938, representing 77% of FFO and 87% of cash available for
distribution.
The Company expects to continue to make quarterly distributions following
the Consolidation Transactions. Assuming a $9.00 per Common Share purchase price
in the New Equity Investment, and therefore a distribution of 95,130 Common
Shares pursuant to the Stock Split, the Company currently expects to make an
annual distribution of $.63 ($.74 before giving effect to the Stock Split) per
Common Share for the 12 months following the consummation of the Consolidation
Transactions, a distribution equal to approximately 63% of estimated pro forma
FFO for the 12 months ending September 30, 1997 (73% of estimated cash available
for distribution). The Board may vary the percentage of cash available for
distribution which is distributed if the actual results of operations, economic
conditions or other factors differ from the assumptions used in the Company's
estimates. The Company's long-term goal is to distribute the minimum amount of
cash required to qualify as a REIT under the Code. See "--Business Objectives
and Operating Strategy" and APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Reasons for the Consolidation Transactions--Investor Interest." Common Units
and Common Shares will receive equal distributions, except that the first
distribution with respect to Common Units following the consummation of the
Consolidation Transactions will be pro-rated for the period of the quarter that
such Common Units were outstanding.
The Company believes that its estimate of cash available for distribution
following consummation of the Consolidation Transactions constitutes a
reasonable basis for setting the initial distribution rate following the
Consolidation (the "INITIAL DISTRIBUTION RATE") and is made solely for purposes
of setting the Initial Distribution Rate, and is not intended to be a projection
or forecast of the Company's results of operations or of its liquidity. The
Company presently intends to maintain the initial distribution rate for the 12
months following the consummation of the Consolidation Transactions unless
actual results from operations, economic conditions, REIT taxable income or
other factors differ significantly from the assumptions used in its estimate.
However, no assurance can be given that the Company's estimate will prove
accurate. The actual return that the Company will realize will be affected by a
number of factors, including the revenue received from the Properties, the
distributions and other payments received from the Property Partnerships, the
operating expenses of the Company and the Operating Partnership, the interest
expense incurred on their respective borrowings, the ability of tenants to meet
their obligations, general leasing activity and unanticipated capital
expenditures. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Potential Adverse Effects of the Consolidation Transactions--Risks of Equity
Real Estate Investments; Adverse Impact on Ability to Make Distributions; Effect
on Value of Properties."
89
<PAGE>
The following table illustrates the adjustments made by the Company to its
pro forma FFO for the twelve months ended September 30, 1996 in order to
calculate estimated cash available for distribution:
<TABLE>
<CAPTION>
(DOLLARS
IN
THOUSANDS)
---------
<S> <C>
Pro forma net income for the year ended December 31, 1995....................................... $ 1,829
Plus: Pro forma net income for the nine months ended September 30, 1996......................... 1,293
Less: Pro forma net income for the nine months ended September 30, 1995......................... (1,093)
---------
Pro forma net income for the 12 months ended September 30, 1996................................. 2,029
Add back non-cash items:
Pro forma depreciation for the 12 months ended September 30, 1996(1).......................... 3,204
Pro forma amortization for the 12 months ended September 30, 1996(1).......................... 124
---------
Pro forma Funds from Operations for the 12 months ended September 30, 1996...................... 5,357
Adjustments:
Net increase in rental revenues from existing leases(2)....................................... 535
Net increase in Sandalwood operating expenses(5).............................................. (62)
---------
Estimated Funds from Operations for the twelve months ending September 30, 1997................. 5,830
Estimated recurring capital expenditures(3)..................................................... 596
Estimated principal payments on long-term debt.................................................. 154
---------
Estimated cash available for distribution for the twelve months ending
September 30, 1997............................................................................ $ 5,080
---------
---------
Company share of cash available for distribution(4)........................................... .7% $ 3,439
---------
---------
Minority interest's share of cash available for distribution.................................. .3% $ 1,641
---------
---------
Total estimated initial distribution............................................................ $ 3,678
---------
---------
Estimated initial annual distribution per share................................................. $ .63
---------
---------
Estimated Funds from Operations distribution payout ratio....................................... 63%
---------
---------
Estimated cash available for distribution payout ratio.......................................... 73%
---------
---------
</TABLE>
- ------------------------
(1) Pro forma depreciation of $31,154 for the year ended December 31, 1995 plus
$2,407 for the nine months ended September 30, 1996, less $2,358 for the
nine months ended September 30, 1995. Pro forma amortization of $191 for the
year ended December 31, 1995 plus 163 for the nine months ended September
30, 1996 less $140 for the nine months ended September 30, 1995.
Amortization consists primarily of intangible assets related to commercial
leases and other non-recurring amounts. Non-cash interest expense of $147
related to amortization of the costs associated with the Refinancing and
existing debt is not added back in this table in conformity with NAREIT's
recently adopted definition of Funds from Operations.
(2) Represents an incremental increase in Funds from Operations attributable to
annual rental revenues from leases in place as of September 30, 1996 for the
12 months ending September 30, 1997 (over actual rental revenue included in
the pro forma Funds from Operations for the 12 months ended September 30,
1996).
(3) Reflects $596 of estimated recurring costs for interior replacement of
appliances, carpeting and vinyl flooring which are anticipated to be funded
from operations.
(4) The Company's share of estimated distributions based on its approximately
67.7% partnership interest in the Operating Partnership.
(5) The Sandalwood Apartments was purchased in December 1995 and rebuilt in
1996. The Sandalwood Apartments were not available for rent until August
1996. The operating expenses of this Property are expected to increase once
the Property is stabilized. The Sandalwood Apartments is expected to be
fully leased and stabilized by December 31, 1996.
The Company anticipates that its estimated cash available for distribution
will exceed earnings and profits due to non-cash expenses, primarily
depreciation and amortization, to be incurred by the Company. Distributions by
the Company to the extent of its current or accumulated earnings and profits for
federal income tax purposes, other than capital gain dividends, will be taxable
to Shareholders as ordinary
90
<PAGE>
dividend income. Capital gain distributions generally will be treated as
long-term capital gains. Distributions in excess of earnings and profits
generally will be treated as non-taxable reduction of the Shareholders' basis in
the Common Shares to the extent thereof, and thereafter as taxable gain.
Distributions treated as non-taxable reduction in basis will have the effect of
deferring taxation until the sale of a Shareholder's Common Shares. Based on the
estimated cash flow available for distribution set forth in the table above, the
Company believes that none of the distributions for the 12 months ending
December 31, 1997 would represent a return of capital. If actual cash available
for distribution or taxable income vary from these amounts, the percentage of
distributions which represent a return of capital may be materially different.
For a discussion of the tax treatment of distributions to holders of Common
Shares see "FEDERAL INCOME TAX CONSIDERATIONS--Taxation of U.S. Shareholders"
and "--Special Tax Considerations for Foreign Shareholders." In order to qualify
to be taxed as a REIT, the Company must make annual distributions to
Shareholders of at least 95% of its REIT taxable income (determined by excluding
any net capital gains) which the Company anticipates will be less than its share
of adjusted FFO. Under certain circumstances, the Company may be required to
make distributions in excess of cash available for distribution in order to meet
such distribution requirements.
Financing activities such as repayment or refinancing of loans also may
affect the Company's assets and liabilities and the amount of cash available for
distribution for future periods. Management will seek to control the timing and
nature of investing and financing activities in order to maximize the Company's
return on invested capital.
Future distributions by the Company will be subject to the requirements of
the Maryland REIT Act and the discretion of the Board, and will depend on the
actual cash flow of the Company, its financial condition, its capital
requirements, any decision by the general partners of each Property Partnership
to reinvest that Property Partnership's FFO, rather than distribute such funds
to its partners (including the Operating Partnership), any decision by the Board
to reinvest the Operating Partnership's FFO rather than distribute such funds to
the Company, the annual distribution requirements under the REIT provisions of
the Code (see "FEDERAL INCOME TAX CONSIDERATIONS--Taxation of the
Company--Annual Distribution Requirements") and such other factors as the Board
deems relevant. There can be no assurance that any distributions will be made or
that the expected level of distributions will be maintained by the Company. See
"APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)-- Potential Adverse
Effects of the Consolidation Transactions; Risk Factors--Risks of Equity Real
Estate Investments; Adverse Impact on Ability to Make Distributions; Effect on
Value of Properties." If revenues generated by the Company's properties in
future periods decrease materially from current levels, the Company's ability to
make expected distributions would be materially adversely affected, which could
result in a decrease in the market price of the Common Shares.
91
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
Historical financial statements for GREAT, and on a combined basis, for the
Property Partnerships and the Management Company, are included at pages F-8
through F-34 of this Proxy Statement.
The following table sets forth certain financial and operating data on a
consolidated pro forma basis for the Company and on a combined historical basis
for the Management Company and the Property Partnerships. The following
information should be read in conjunction with all of the financial statements
and notes thereto included elsewhere in this Proxy Statement. The combined
historical operating information of the Management Company and the Property
Partnerships for the years ended December 31, 1995 and 1994 has been derived
from the historical combined financial statements audited by Ernst & Young LLP,
independent auditors, whose report with respect thereto is included elsewhere in
this Proxy Statement. The historical operating information of GREAT for the year
ended December 31, 1995 and the period from inception (June 24, 1994) to
December 31, 1994, has been derived from the historical financial statements
audited by BDO, Seidman, LLP, independent public accountants, whose report with
respect thereto is included elsewhere in this Proxy Statement. The operating
information for the nine months ended September 30, 1996 and 1995 has been
derived from the unaudited financial statements of GREAT and the unaudited
combined financial statements of the Management Company and the Property
Partnerships. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and results of
operations for these periods. The results of operations for the nine months
ended September 30, 1996 and 1995 are not necessarily indicative of the results
to be obtained for the full fiscal year.
The unaudited pro forma information assumes completion of the Consolidation
Transactions, the New Equity Investment, the Refinancing and the use of the net
proceeds therefrom as described elsewhere in this Proxy Statement, as of the
beginning of the periods presented for the operating data and as of the balance
sheet date for the balance sheet data. In management's opinion, all adjustments
necessary to present fairly the effects of the Consolidation Transactions have
been made. THE UNAUDITED PRO FORMA INFORMATION IS NOT NECESSARILY INDICATIVE OF
WHAT THE ACTUAL RESULTS OF OPERATIONS OR FINANCIAL CONDITION WOULD HAVE BEEN FOR
THE PERIOD OR AT THE DATES INDICATED, NOR DOES IT PURPORT TO REPRESENT THE
FUTURE RESULTS OF OPERATIONS AS OF ANY FUTURE DATE OR FOR ANY FUTURE PERIODS.
FUNDS FROM OPERATIONS SHOULD NOT BE CONSIDERED A SUBSTITUTE FOR NET INCOME AS A
MEASURE OF PROFITABILITY NOR IS IT COMPARABLE TO CASH FLOW FROM OPERATIONS
DETERMINED IN ACCORDANCE WITH GAAP. THE PRO FORMA OPERATING INFORMATION SHOULD
BE READ IN CONJUNCTION WITH THE HISTORICAL FINANCIAL INFORMATION INCLUDED IN
THIS PROXY STATEMENT.
92
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED CONSOLIDATED
PRO GREAT HISTORICAL COMBINED HISTORICAL PRO GREAT HISTORICAL
FORMA(2) FORMA(2)
------------- -------------------- -------------------- ------------- --------------------
<CAPTION>
1996 1996 1995 1996 1995 1995 1995 1994
------------- --------- --------- --------- --------- ------------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Information:
Revenues:
Rental........................ 10,990 $ 1,521 $ 962 $ 9,644 $ 8,864 $ 13,733 $ 1,287 $ 641
Property management........... 593 1,198 914 911
Interest and other............ 146 28 22 243 449 476 30 13
------------- --------- --------- --------- --------- ------------- --------- ---------
Total revenues.................. 11,729 1,549 984 11,085 10,227 15,120 1,317 654
Total operating expenses........ 5,887 775 503 5,481 4,924 7,272 677 334
Interest........................ 1,874 292 64 2,807 2,861 2,499 85 44
Depreciation and amortization... 2,675 293 162 2,346 2,348 3,520 216 117
------------- --------- --------- --------- --------- ------------- --------- ---------
Income (loss) before minority
interest and extraordinary
items......................... 1,293 -- -- -- -- 1,829 -- --
Minority interest in
earnings(7)................... 418 -- -- -- -- 591 -- --
------------- --------- --------- --------- --------- ------------- --------- ---------
Income (loss) before
extraordinary items........... $ 875 189 255 451 94 $ 1,238 339 159
------------- ---------
------------- ---------
Net income(3)................... $ 189 $ 255 $ 451 $ 2,280 $ 339 $ 159
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Net income per share(4)......... $ 0.22 $ 0.36 $ 0.49 $ 0.31 $ 0.64 $ 0.30
------------- --------- --------- ------------- --------- ---------
------------- --------- --------- ------------- --------- ---------
Other information:
Funds from Operations........... $ 3,922 $ 471 $ 408 $ 2,412 $ 2,012 $ 5,251 $ 552 $ 269
Total rental properties......... 24 4 3 21 19 24 3 3
Total number of apartments
(end of period)............... 1,752 257 165 1,495 1,456 1,713 165 165
Physical occupancy (end of
period)....................... 97.18% 98.44% 98.79% 96.95% 96.56% 96.97% 99.39% 97.58%
<CAPTION>
<S> <C> <C> <C>
GREAT
COMBINED HISTORICAL PRO
FORMA(6)
-------------------- -----------
1995 1994 1994
--------- --------- -----------
<S> <C> <C> <C>
Operating Information:
Revenues:
Rental........................ $ 11,965 $ 11,462 1,215
Property management........... 1,473 1,103 --
Interest and other............ 445 563 22
--------- --------- -----------
Total revenues.................. 13,883 13,128 1,237
Total operating expenses........ 6,771 6,762 685
Interest........................ 3,829 3,817 84
Depreciation and amortization... 3,140 3,165 216
--------- --------- -----------
Income (loss) before minority
interest and extraordinary
items......................... -- -- --
Minority interest in
earnings(7)................... -- -- --
--------- --------- -----------
Income (loss) before
extraordinary items........... 143 (616) $ 252
Net income(3)................... $ 2,329 $ 1,155
--------- ---------
--------- ---------
Net income per share(4)......... --
-----------
-----------
Other information:
Funds from Operations........... $ 2,685 $ 2,081 502
Total rental properties......... 20 19 3
Total number of apartments
(end of period)............... 1,456 1,354 165
Physical occupancy (end of
period)....................... 96.97% 95.91% 97.58%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER
SEPTEMBER 30, 1996 31, 1995
--------------------------------------- ---------
<S> <C> <C> <C> <C>
HISTORICAL HISTORICAL
------------------------ ---------
<CAPTION>
PRO FORMA(5) GREAT COMBINED GREAT
------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance Sheet Information:
Real estate assets.................................................. $ 63,657 $ 8,804 $ 54,944 $ 4,698
Total assets........................................................ 66,066 9,547 59,163 5,241
Total debt.......................................................... 32,650 5,675 47,518 1,190
Shareholders'/owners' equity........................................ 21,097 3,530 8,822 3,703
<CAPTION>
<S> <C>
COMBINED
-----------
<S> <C>
Balance Sheet Information:
Real estate assets.................................................. $ 55,579
Total assets........................................................ 61,678
Total debt.......................................................... 46,786
Shareholders'/owners' equity........................................ 12,259
</TABLE>
- ------------------------
(1) The White Paper approved by the Board of Governors of NAREIT in March 1995
defines FFO as net income (loss) (computed in accordance with GAAP,
excluding gains (or losses) from debt restructuring and sales of property,
plus real estate related depreciation and amortization and after adjustments
for unconsolidated partnerships and joint ventures. Management considers FFO
an appropriate measure of performance of an equity REIT because it is
predicated on cash flow analyses. The Company computes FFO in accordance
with standards established by the White Paper which may differ from the
methodology for calculating FFO utilized by other equity REITs and,
accordingly, may not be comparable to such other REITs. FFO should not be
considered as an alternative to net income (determined in accordance with
GAAP) as an indicator of the Company's financial performance or to cash flow
from operating activities (determined in accordance with GAAP) as a measure
of the Company's liquidity, nor is it indicative of funds available to fund
the Company's cash needs, including its ability to make distributions.
(2) Pro forma data assumes the consummation of the Consolidation Transactions as
of the beginning of the periods presented. For detailed pro forma
adjustments, see the pro forma financial statements included at pages F-2
through F-7 of this Proxy Statement.
(3) For the years ended 1995 and 1994 and the nine months ended September 30,
1995, the Company realized extraordinary gains of $2,186, $1,771 and $2,186,
respectively, resulting from the restructuring of certain mortgage debts.
(4) The pro forma net income per Common Share calculations for the year ended
December 31, 1995 and the nine months ended September 30, 1996 give effect
to the Stock Split of 95,130 Common Shares to be declared and issued
immediately prior to the consummation of the Consolidation Transactions and
the issuance of 3,333,333 Common Shares to New Equity Investors in the New
Equity Investment. Earnings per Common Share for the combined historical
financial statements of the Management Company and the Property Partnerships
is not presented. The Company believes that such information would not be
useful or meaningful to the Shareholders.
(5) Assumes the consummation of Consolidation Transactions on September 30, 1996
and reflects the application of the estimated net proceeds therefrom. See
"SUMMARY- Sources and Uses of Funds".
(6) GREAT completed the IPO on June 23, 1994. Pro forma information is presented
for GREAT and its predecessors for the year ended December 31, 1994. For
detailed information regarding the pro forma adjustments in connection with
such presentation see the GREAT financial statements included at pages F-8
through F-24 of this Proxy Statement.
(7) Based upon 1,885,312 Common Units issued to Limited Partners outstanding, of
the 5,838,775 Common Shares (assuming exchange of all Common Units for
Common Shares) assumed to be outstanding (32.29%).
93
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with "THE
COMPANY--Selected Financial and Operating Data," the financial statements of
GREAT and the notes thereto, the historical combined financial statements of the
Management Company and the Property Partnerships and the notes thereto and the
pro forma condensed consolidated financial statements (unaudited) and the notes
thereto appearing elsewhere in this Proxy Statement. The historical combined
financial statements of the Management Company and the Property Partnerships
have been prepared to reflect the historical combined operations, assets and
liabilities of the Management Company and the Property Partnerships whose assets
are to be transferred to the Company in connection with the Consolidation. See
"APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Terms of the
Consolidation Transactions--The Consolidation." The pro forma financial and
other information contained in this Proxy Statement give effect to the
consummation of the Consolidation Transactions, including the New Equity
Investment and the Refinancing (including the Credit Facility) and the use of
the net proceeds therefrom as described elsewhere in this Proxy Statement. See
"SUMMARY--Sources and Uses."
The Company believes that the consummation of the Consolidation
Transactions, including the New Equity Investment and the Refinancing (including
the Credit Facility), will improve its financial condition and operating
results. The completion of the Refinancing will reduce the Company's mortgage
debt (with a corresponding reduction in interest expense resulting therefrom)
and the Long-Term Facility and the Revolving Credit Facility will make available
to the Company $15.1 million at a floating interest rate and a ten-year term,
and $3.4 million (the amount of the Revolving Credit Facility that the Company
expects to borrow in connection with the consummation of the Consolidation
Transactions) at a floating interest rate and a three-year term, respectively,
together with additional borrowing capacity under the Revolving Credit Facility.
See "SUMMARY--Sources and Uses," "SUMMARY--Capitalization," "APPROVAL OF THE
CONSOLIDATION TRANSACTIONS (Proposal 1)--Terms of the Consolidation
Transactions-- The Refinancing" and the financial statements and notes thereto
contained elsewhere in this Proxy Statement.
The combined financial statements of the Management Company and the Property
Partnerships include (i) the 20 Property Partnerships which own the Partnership
Properties and (ii) the Management Company (before giving effect to certain
transfers to be effected to National Realty prior to the Consolidation.) See
"APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Terms of the
Consolidation Transactions--The Consolidation and the pro forma financial
statements of the Property Partnerships and the Management Company contained
elsewhere in this Proxy Statement.
HISTORICAL RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE MANAGEMENT COMPANY AND THE PROPERTY PARTNERSHIPS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1995.
In December 1995 the Nautilus Properties Limited Partnership acquired the
Sandalwood Apartments ("SANDALWOOD") which was rebuilt during 1996. Construction
was completed in October 1996 and Sandalwood is currently in the lease-up stage.
The total apartment homes included in the Partnership Properties were 1,495 at
September 30, 1996 compared to 1,456 at September 30, 1995.
Income before extraordinary items for the Management Company and the
Property Partnerships for the nine months ended September 30, 1996 increased
$357,000 to $451,000 from $94,000 for the nine months ended September 30, 1995.
The increase is due primarily to an increase in rental income of
94
<PAGE>
$780,000, an increase in property management income of $284,000, a decrease in
general and administrative expenses of $61,000 and a decrease in interest
expense of $54,000, offset in part by a decrease in interest and other income of
$206,000, an increase in payroll related expenses of $175,000, an increase in
other property operating expenses of $400,000 and an increase in real estate
taxes of $43,000 .
Rental revenues for the Property Partnerships increased $780,000 to
$9,644,000 for the nine months ended September 30, 1996 from $8,864,000 for the
same period in 1995. The increase was due primarily to increases in occupancy
and rental rates associated with the Partnership Properties. The weighted
average rental rates for the multi-family residential Partnership Properties
increased to $689 for the nine months ended September 30, 1996 as compared to
$675 for the same period in 1995. Physical occupancy increased to a weighted
average of 96.9% from 96.3% for the same period in 1995. Physical occupancy was
97.0% at September 30, 1996. The average physical occupancy of the commercial
Partnership Properties increased to 99.2% for the nine months ended September
30, 1996 from 92.9% for the same period in 1995. The average rent per square
foot for the commercial Partnership Properties increased to $0.91 for the nine
months ended September 30, 1996 from $0.88 for the same period in 1995.
Property management revenue for the Management Company increased $284,000 to
$1,198,000 for the nine months ended September 30, 1996, from $914,000 for the
same period in 1995. The increase is due primarily to an increase in brokerage
fees received with respect to acquisition or refinancing services for third
party properties that were provided by the Management Company. The assets which
generated such brokerage fees (and the related liabilities) are not being
transferred to the Company in connection with the Consolidation Transactions.
See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--Terms of the
Consolidation Transactions--The Consolidation."
Interest and other income for the Management Company and the Partnership
Properties decreased $206,000 to $243,000 for the nine months ended September
30, 1996 from $449,000 for the same period in 1995, due primarily to the
decrease in sales of condominiums at the Avonplace Condominiums.
Payroll and related expense for the Management Company and the Property
Partnerships increased $175,000 to $1,678,000 for the nine months ended
September 30, 1996 from $1,503,000 for the same period in 1995, due primarily to
costs related to an increase in personnel of the Management Company.
Other property and operating expenses for the Management Company and the
Property Partnerships increased $400,000 to $2,671,000 for the nine months ended
September 30, 1996 from $2,271,000 for the same period in 1995. The increase was
due primarily to a $128,000 increase in expenses related to snowplowing, gas and
oil due to the severe winter experienced in the New England area in 1996, an
increase of $91,000 in expenses related to repairs and maintenance and an
increase of $44,000 in condominium fees due primarily to a special assessment in
1996. As a percentage of rental revenue, payroll and related expenses and other
property operating expenses were 45.1% for the nine months ended September 30,
1996 compared to 42.6% for the same period in 1995.
General and administrative expenses for the Management Company and the
Property Partnerships decreased $61,000 to $194,000 for the nine months ended
September 30, 1996 from $255,000 for the same period in 1995, due primarily to a
decrease in legal costs.
Real estate taxes for the Property Partnerships increased $43,000 to
$938,000 for the nine months ended September 30, 1996 from $895,000 for the same
period in 1995, due primarily to an increase in the number of Partnership
Properties owned by the Property Partnerships for the full nine months of 1996.
Interest expense for the Management Company and the Property Partnerships
decreased $54,000 to $2,807,000 for the nine months ended September 30, 1996
from $2,861,000 for the same period in 1995. The decrease was due primarily to
the decreased debt levels due to the debt restructuring done during 1995
combined with lower interest rates.
95
<PAGE>
RESULTS OF OPERATIONS FOR THE MANAGEMENT COMPANY AND THE PROPERTY PARTNERSHIPS
FOR THE YEAR ENDED DECEMBER 31, 1995, COMPARED TO THE YEAR ENDED DECEMBER 31,
1994.
Burgundy Associates Limited Partnership acquired the Burgundy Studio
Apartments ("BURGUNDY") in September 1995, increasing its portfolio by 102
apartment homes. The total apartment homes included in the Property Partnerships
were 1,456 at December 31, 1995 compared to 1,354 at December 31, 1994,
excluding for the year ended December 31, 1995 the Sandalwood Property which was
purchased in November 1995 and was rebuilt during 1996.
Income before extraordinary items for the Management Company and the
Property Partnerships for the year ended December 31, 1995 increased $759,000 to
$143,000 for the year ended December 31, 1995 from a loss of $616,000 for the
year ended December 31, 1994. Net income increased $1,174,000 to $2,329,000 from
$1,155,000. The increase was due primarily to an increase in rental income for
the Property Partnerships of $503,000, an increase in extraordinary-item gain on
restructuring of debt of $415,000, an increase in property management income for
the Management Company of $370,000, decreases in depreciation and amortization
of $25,000 and in other property operating expenses of $35,000, a decrease in
general and administrative expense of $10,000, and a decrease in real estate
taxes of $19,000, respectively, offset in part by a decrease in interest and
other income of $118,000, an increase in payroll expense of $73,000, an increase
in interest expense of $12,000. The extraordinary items represent gains on
restructuring of debt on various mortgages due to banks.
Rental income for the Property Partnerships increased $503,000 to
$11,965,000 in 1995 from $11,462,000 in 1994. The increase was due to the
increase in total apartment homes and commercial rentable space discussed above,
together with increases in rental rates. The weighted average rental rates for
the multi-family residential Partnership Properties increased to $677 for the
year ended December 31, 1995 from $666 for the year ended December 31, 1994.
These numbers do not include the Sandalwood or Burgundy Properties. Physical
occupancy for the Partnership Properties decreased to an aggregate weighted
average occupancy of 96.4% for the year ended December 31, 1995 from an
aggregate weighted average of 96.6% for the year ended December 31, 1994.
Physical occupancy was 97.0% at December 31, 1995. The average physical
occupancy of the commercial Partnership Properties increased to 90.9% for the
year ended December 31, 1995 from 89.8% for the year ended December 31, 1994.
The average rent per square foot for the commercial Partnership Properties
increased to $0.82 for the year ended December 31, 1995 from $0.80 for the year
ended December 31, 1994.
Property management revenue for the Management Company increased $370,000 to
$1,473,000 in 1995, from $1,103,000 in 1994. The increase was due primarily to
the increase in brokerage fees with respect to third party properties for
acquisition and refinancing services provided by the Management Company. As
discussed above, the assets which generated such brokerage fees (and the related
liabilities) are not being transferred to the Company in connection with the
Consolidation Transactions. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS
(Proposal 1)--Terms of the Consolidation Transactions--The Consolidation."
Interest and other income for the Management Company and the Property
Partnerships decreased $118,000 to $445,000 in 1995 from $563,000 in 1994, due
primarily to a decrease in sales of condominiums at the Avonplace Condominiums.
Payroll and related expenses for the Management Company and the Property
Partnerships increased $73,000 to $2,358,000 in 1995 from $2,285,000 in 1994 due
primarily to increased personnel costs to the Management Company associated with
more apartment homes under management.
Other property and operating expenses for the Management Company and the
Property Partnerships decreased $35,000 to $2,918,000 from $2,953,000 in 1994.
The decrease was primarily due to decrease in gas and oil-related expenses due
to a milder winter experienced in the New England area in 1995. As a
96
<PAGE>
percentage of rental revenue, payroll and related expenses and other property
and operating expenses were 44.1% for 1995, compared to 45.7% for the same
period 1994.
Interest expense for the Management Company and the Property Partnerships
increased $12,000 to $3,829,000 in 1995, from $3,817,000 in 1994. The increase
was due primarily to the increase in interest rates experienced during 1994,
combined with increased debt levels due to acquisitions made by the Property
Partnerships during 1994 and 1995, offset by debt restructurings in 1994 and
1995.
RESULTS OF OPERATIONS OF GREAT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996,
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995.
Dogwood Hills Apartments, Hamden Center Apartments and Baron Apartments (the
"ORIGINAL GREAT PROPERTIES") experienced increases in occupancy and rental rates
which resulted in a corresponding increase in revenues. The weighted average
rental rates associated with the Original GREAT Properties increased to $676 for
the nine months ended September 30, 1996 from $658 for the nine months ended
September 30, 1995. Physical occupancy for the Original GREAT Properties
remained at an aggregate weighted average occupancy of 97.4% for the nine months
ended September 30, 1996 from the same weighted average for the nine months
ended September 30, 1995. Physical occupancy for the Original GREAT Properties
decreased to 97.6% at September 30, 1996 from 98.8% at September 30, 1995. The
weighted average physical occupancy for the Original GREAT Properties and
Cambridge Estates (which was acquired by GREAT in January 1996) for the nine
months ended September 30, 1996 was 97.6%. Physical occupancy for the Original
GREAT Properties and Cambridge Estates was 98.4% at September 30, 1996.
Rental and other income for GREAT increased $565,400 from $983,800 to
$1,549,200 during the nine months ended September 30, 1996, as compared to the
corresponding period in 1995. Approximately $537,000 of such increase was due to
the operations of Cambridge Estates, and the remainder is attributable to
increases in rental rates discussed above.
Property operating and maintenance expenses for GREAT increased $188,900
from $296,500 to $485,400 during the nine months ended September 30, 1996, as
compared to the corresponding period in 1995. Approximately $170,000 of the
increase is due the acquisition of Cambridge Estates. Additionally, the Original
GREAT Properties experienced an increase in operating and maintenance expenses
due primarily to the harsh winter experienced in the New England area in 1996
compared to the more mild winter experienced in 1995.
General and administrative expenses for GREAT increased $9,000 from $46,300
to $55,300 during the nine months ended September 30, 1996, as compared to the
corresponding period in 1995. The increase was primarily due to additional
expenses related to the acquisition of Cambridge Estates and increased overhead
expenses.
Real estate taxes for GREAT increased $44,100 from $110,900 to $155,000
during the nine months ended September 30, 1996, as compared to the
corresponding period in 1995. Related party management fees paid by GREAT to the
Management Company increased $30,000 from $49,900 to $79,900. These increases
were due primarily to the acquisition by GREAT of, and the provision by the
Management Company of property management services to, Cambridge Estates.
Interest expense for GREAT increased $228,000 from $63,600 to $291,600
during the nine months ended September 30, 1996, as compared to the
corresponding period in 1995. The increase is due to the $4,500,000 mortgage
note payable used to finance the acquisition of Cambridge Estates. Depreciation
and amortization for GREAT increased $131,600, primarily as a result of the
acquisition of the Cambridge Estates.
GREAT's net income decreased $66,300 from $255,000 to $188,700 during the
nine months ended September 30, 1996, as compared to the corresponding period in
1995. Approximately $40,000 of the
97
<PAGE>
decrease was due to a loss experienced by Cambridge Estates. The decrease in net
income for the Original GREAT Properties of approximately $26,000 was due to an
increase in property operating and maintenance expenses along with increases in
other expenses.
RESULTS OF OPERATIONS FOR GREAT FOR THE YEAR ENDED DECEMBER 31, 1995, COMPARED
TO THE COMBINED PRO FORMA RESULTS OF OPERATIONS OF GREAT FOR THE YEAR ENDED
DECEMBER 31, 1994.
See Note (3) to GREAT's financial statements contained elsewhere in this
Proxy Statement for a detailed description of the pro forma presentation of
GREAT's operations for the year ended December 31, 1994.
The Original GREAT Properties experienced increases in occupancy and rental
rates with a corresponding increase in revenues. Weighted average rental rates
associated with the Original GREAT Properties increased to $660 for the year
ended December 31, 1995 from $642 for the year ended December 31, 1994. Physical
occupancy associated with the Original GREAT Properties increased to an
aggregate weighted average occupancy of 97.8% for the year ended December 31,
1995 from an aggregate weighted average of 95.6% for the year ended December 31,
1994. Physical occupancy increased to 99.4% at December 31, 1995 from 97.6% at
December 31, 1994.
Rental and other income for the Original GREAT Properties increased $79,600
from $1,237,300 to $1,316,900. Rental and other income increased primarily as a
result of the increases in occupancy and rental rates discussed above. The 2.17%
increase in weighted average occupancy resulted in approximately $34,000 of the
increase in rental income with the increase in rental rates accounting for
approximately $35,000 of such increase. Other income increased primarily as a
result of the investment of additional funds generated in connection with the
IPO.
Property operations and maintenance expenses decreased $21,500 from $427,700
for the year ended December 31, 1994 to $406,200 for the year ended December 31,
1995. Expenses decreased primarily due to the mild winter experienced in the New
England area in 1995, and also as a result of a reduction in the amount of
advertising engaged in by the Company.
General and administrative expenses increased $13,600 from $42,800 to
$56,400 for the years ended December 31, 1994 and 1995, respectively. The
increase was due primarily to additional expenses incurred by GREAT in
connection with the performance of certain accounting, financial reporting and
other functions related to its status as a public entity.
The Company's net income increased $85,800 from $252,500 to $338,300 for the
years ended December 31, 1994 and 1995, respectively. The increase was due
primarily as a result of increases in occupancy and rental rates associated with
the Original GREAT Properties and a decrease in property operating and
maintenance expenses, offset in part by the increase in general and
administrative expenses discussed in the immediately preceding paragraph.
LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the Consolidation Transactions, including the New Equity
Investment and the Refinancing (including the Credit Facility) and the
application of the net proceeds therefrom, the Company expects to have reduced
its total indebtedness as of September 30, 1996 by approximately $20.6 million.
The Company's outstanding indebtedness following the repayment of mortgage
indebtedness of certain of the Property Partnerships in connection with the
Refinancing will include $15.1 million of new financing under the Long-Term
Facility, an initial drawdown of $3.4 million under the Revolving Credit
Facility, and $14.1 million of existing mortgages secured by various Properties
at various interest rates. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS
(Proposal 1)--The Refinancing--Long-Term Facility" and "--Revolving Credit
Facility."
98
<PAGE>
The Long-Term Facility will require monthly interest payments for ten years
with the outstanding principal amount due on the tenth anniversary of the
initial closing thereunder. The Revolving Credit Facility will require monthly
interest payments for three years with the outstanding principal amount due on
the third anniversary of the initial closing thereunder. Since the Company
anticipates that it will not have funds on hand sufficient to repay such
indebtedness upon maturity, it will be necessary for the Company to refinance
such debt either through the Long-Term Facility (in the case of the Revolving
Credit Facility), by unsecured private or public debt offerings or through
additional equity offerings. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS
(Proposal 1)--Potential Adverse Effects of the Consolidation Transactions; Risk
Factors--Real Estate Financing Risks."
The Company expects to make distributions to Shareholders from cash
available for distribution, which the Company believes will exceed cash
available for distribution historically available as a result of the reduction
in debt service requirements expected to result from the Refinancing. The
Company will invest a portion of the proceeds of the New Equity Investment in
interest-bearing accounts and short-term, interest-bearing securities which are
consistent with the Company's intention to continue to qualify for taxation as a
REIT. Such investments may include, without limitation, government agency
securities, certificates of deposit, eurodollar investments, and
interest-bearing bank deposits.
The Company expects to meet its short-term liquidity requirements, including
operating expenses and debt service requirements, principally through net cash
provided by operations, and funds available through the Revolving Credit
Facility. The Company expects that these sources of funds will be sufficient to
allow the Company to make any distributions necessary to enable the Company to
continue to qualify as a REIT. The Company expects to use a portion of cash
available for distribution for anticipated capital improvement requirements,
working capital requirements, the acquisition of additional income producing
assets, and other purposes. The Company believes that the foregoing sources of
liquidity will be sufficient to fund its short-term liquidity needs.
The Company expects to meet certain long-term liquidity requirements such as
property acquisitions, renovations, expansions and other non-recurring capital
improvements through long-term secured and unsecured indebtedness, retained cash
and the issuance of additional equity securities. The anticipated size of the
Company's distribution will not allow the Company, using only cash available for
distribution, to retire all of its debt when due, and therefore the Company will
be required to utilize the Credit Facility or to seek periodic debt or equity
financing in order to repay such debt. To the extent that such financing may be
unavailable, the Company will have to make such debt repayment from cash
available for distribution, which would affect cash available for distribution
to Shareholders. The Company also expects to use funds available under the
Credit Facility to fund acquisitions and capital improvements on an interim
basis. See "THE COMPANY--Distribution Policy" and "--Policies with Respect to
Certain Activities--Financing Policies."
The Company does not believe the matters disclosed under "APPROVAL OF THE
CONSOLIDATION TRANSACTIONS (Proposal 1)--Potential Adverse Effects of the
Consolidation Transactions; Risk Factors--Possible Environmental Liabilities" or
compliance with applicable environmental laws and regulations, will have a
material adverse effect on the Company's results of operations or liquidity
requirements.
THE MANAGEMENT COMPANY AND THE PROPERTY PARTNERSHIPS
Cash and cash equivalents for the Management Company and the Property
Partnerships decreased $54,000 to $1,290,000 as of September 30, 1996 from
$1,344,000 as of September 30, 1995.
Net cash provided by operating activities for the Management Company and the
Property Partnerships for the nine months ended September 30, 1996 as compared
to the nine months ended September 30, 1995 increased $2,583,000 to $4,579,000
from $1,996,000, due primarily to an increase in net income before
99
<PAGE>
extraordinary items of $357,000 as noted in the historical results of operations
and an increase of $2,196,000 of amounts due related parties.
Cash flows used in investing activities for the Management Company and the
Property Partnerships for the nine months ended September 30, 1996 as compared
to the nine months ended September 30, 1995 increased $13,000 to $1,312,000 from
$1,299,000 due primarily to acquisitions and the redevelopment of certain
Partnership Properties during the nine months ended September 30, 1996.
Net cash used in financing activities for the Management Company and the
Property Partnerships for the nine months ended September 30, 1996 as compared
to the nine months ended September 30, 1995 increased $2,814,000 to $4,145,000
from $1,331,000 due primarily to an increase in distributions made to partners
(primarily from refinancing proceeds) in 1996.
Cash and cash equivalents for the Management Company and the Partnership
Properties increased $190,000 to $2,168,000 as of December 31, 1995 from
$1,978,000 as of December 31, 1994, due to cash flow provided from operating and
financing activities, offset by the use of cash flows in investing activities.
Net cash flows from operating activities for the Management Company and the
Property Partnerships for the year ended December 31, 1995 as compared to the
year ended December 31, 1994, increased $468,000 to $2,815,000 from $2,347,000
due primarily to an increase in net income before extraordinary items of
$759,000 as noted in the historical results of operations, offset by a decrease
in amounts due related parties of $503,000.
Cash flows from investing activities for the Management Company and the
Property Partnerships decreased $2,987,000 to $3,419,000 from $6,406,000 for the
year ended December 31, 1995 as compared to the year ended December 31, 1994,
due to a decline in the number of properties acquired by the Property
Partnerships.
Cash flows provided by financing activities for the Management Company and
the Property Partnerships decreased $3,170,000 to $794,000 from $3,964,000 for
the year ended December 31, 1995 as compared to the year ended December 3, 1994,
due primarily to a decrease in capital contributions from partners of the
Property Partnerships of $2,665,000.
GREAT
Cash and cash equivalents for GREAT totaled $441,600 as of September 30,
1996. GREAT's long-term debt to market capitalization on September 30, 1996 was
53.6% based on total market capitalization of $10,597,000 (525,000 shares
outstanding at $9.375 per share plus long-term debt) and long-term debt of
$5,675,000.
Cash provided by operating activities for GREAT was $480,500 for the nine
months ended September 30, 1996. Cash used in investing activities, for the
purchase of property and equipment, was $89,200 for the nine months ended
September 30, 1996.
Net cash used in financing activities was $333,300 for the nine months ended
September 30, 1996. On January 12, 1996, Cambridge was purchased from Grove
Cambridge Associates Limited Partnership for $4,250,000. The acquisition was
100% financed by a first mortgage of $4,500,000 from a bank. The transaction
provided GREAT with approximately $203,000 of cash after the purchase of
Cambridge Estates and payment of financing costs of approximately $100,000.
On September 13, 1996, GREAT declared a dividend of $0.23 per share, payable
on October 17, 1996, to Shareholders of record on September 25, 1996. On May 17,
1996, GREAT declared a dividend of $0.23 per share, payable on July 17, 1996 to
Shareholders of record on June 26, 1996. On March 21, 1996, GREAT declared a
dividend of $0.23 per share payable on April 16, 1996 to Shareholders of record
on March 26, 1996. Dividends declared during such period of $0.69 per Common
Share resulted in a 76.6% payout of FFO for the nine months ended September 30,
1996.
100
<PAGE>
Cash and cash equivalents for GREAT totaled $383,700 as of December 31,
1995. GREAT's long-term debt to market capitalization on December 31, 1995 was
21.8%, based on total market capitalization of $5,455,700 (525,000 Common Shares
outstanding at $8.125, plus long-term debt) and long-term debt of $1,190,000.
Cash provided by operating activities for GREAT was $585,100 for the year
ended December 31, 1995. Cash used in investing activities, for the purchase of
fixed assets, was $99,000 for the year ended December 31, 1995.
On December 15, 1995, GREAT declared a dividend of $0.23 per share. The
dividend was paid on January 18, 1996 to Shareholders of record on December 26,
1995. GREAT also paid a dividend of $0.23 on October 18, 1995 to Shareholders of
record on September 26, 1995, a dividend of $0.23 was paid on July 17, 1995 to
Shareholders of record on June 30, 1995 and a dividend of $0.22 per share on
April 17, 1995 to Shareholders of record on March 31, 1995. The total dividends
declared in 1995 of $0.91 per Common Share resulted in an 80.6% payout of FFO
for the year ended December 31, 1995.
CAPITAL EXPENDITURES
THE MANAGEMENT COMPANY AND PROPERTY PARTNERSHIPS
Recurring non-revenue-generating capital expenditures (I.E., capital
replacements) totaled $309,000 and $282,000 for the nine months ended September
30, 1996 and 1995, respectively, and totaled $396,000 and $484,000 for the years
ended December 31, 1995 and 1994, respectively. Average capital replacements per
unit for the Partnership Properties were $212 and $208 for the nine months ended
September 30, 1996 and 1995, respectively, and equaled $288 and $357 for the
years ended December 31, 1995 and 1994, respectively.
GREAT
Recurring non-revenue-generating capital expenditures (i.e., capital
replacements) totaled $46,700 and $24,800 for the nine months ended September
30, 1996 and 1995, respectively, and totaled $44,100 and $40,200 for the years
ended December 31, 1995 and 1994, respectively. Average capital replacements per
unit for the Properties were $182 and $150 for the nine months ended September
30, 1996 and 1995, respectively and equaled $267 and $244 for the years ended
December 31, 1995 and 1994, respectively.
Recurring capital improvements include replacements and betterments, such as
carpets, tile, linoleum, appliances, cabinets and countertops.
INFLATION
Substantially all of the leases at the Properties which are multi-family
residential properties are for a term of one year or less, which may enable the
Company to seek increased rents upon renewal of existing leases or commencement
of new leases. Such short-term leases generally reduce the risk to the Company
of the potential adverse effects of inflation. The leases at the Properties
which are commercial properties are for terms of 3 years to 10 years.
FUNDS FROM OPERATIONS
Industry analysts generally consider FFO an appropriate measure of
performance of an equity REIT. The White Paper approved by the Board of
Governors of the NAREIT in March 1995 defines FFO as net income (loss) (computed
in accordance with GAAP), excluding gains (or losses) from debt restructuring
and sales of property, plus real estate related depreciation and amortization
and after adjustments for unconsolidated partnerships and joint ventures.
Management considers FFO an appropriate measure of performance of an equity REIT
because it is predicated on cash flow analyses. The Company computes FFO in
accordance with standards established by the White Paper which may differ from
the methodology
101
<PAGE>
for calculating FFO utilized by other equity REITs and, accordingly, may not be
comparable to such other REITs. FFO should not be considered as an alternative
to net income (determined in accordance with GAAP) as an indicator of the
Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as an indicator of the Company's liquidity,
nor is it indicative of funds available to fund the Company's cash needs,
including its ability to make distributions.
THE MANAGEMENT COMPANY AND THE PROPERTY PARTNERSHIPS
For the nine months ended September 30, 1996, FFO for the Management Company
and the Property Partnerships increased $400,000 to $2,412,000 from $2,012,000
for the same period in 1995. The increase was primarily attributable to an
increase in net income before extraordinary items as noted in the historical
results of operations.
For the year ended December 31, 1995, FFO for the Management Company and the
Property Partnerships increased $604,000 to $2,685,000 from $2,081,000 for the
year ended December 31, 1994. The increase was primarily attributable to an
increase in net income before extraordinary items as noted in the historical
results of operations.
GREAT
FFO for GREAT increased $63,200 from $408,000 for the nine months ended
September 30, 1995 to $471,200 for the nine months ended September 30, 1996.
Dividends declared for the nine months ended September 30, 1996 were $360,938,
representing 76.6% of FFO. Dividends declared for the nine months ended
September 30, 1995 were $355,700, representing 87.2% of FFO.
FFO for GREAT increased $338,700 or 56.7% from $269,700 in 1994 to $552,000
in 1995. Dividends declared for the year ended December 31, 1995 were $475,100,
representing 86.1% of FFO. The increase in FFO resulted from the retirement of
debt associated with properties in the portfolio with the proceeds of the IPO in
June 1994 along with increased net income.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
GENERAL. The following is a discussion of certain investment, financing and
other policies of the Company. These policies have been determined by the Board
and may be amended or revised from time to time by the Board without a vote of
the Shareholders, except that the Company cannot change its policy of holding
its assets and conducting its business principally through the Operating
Partnership without the consent of the holders of Common Units as provided in
the OP Partnership Agreement. See "OP PARTNERSHIP AGREEMENT--Transferability of
Interests". No assurance can be given that the Company's investment objectives
will be attained or that the value of the Company will not decrease.
INVESTMENT OBJECTIVES AND POLICIES. The Company's investment objective is
to provide quarterly distribution of a portion of cash available for
distribution and achieve long-term capital appreciation through increases in
cash flow from operations, reinvestment of retained cash and growth of the
Company's property portfolio through acquisitions and redevelopment. For a
discussion of the Company's growth strategy of property acquisition and
redevelopment and related business strategies, see "--Business Objectives and
Operating Strategy" and "--Acquisition Strategy." The Company's policy is to
acquire assets primarily for generation of current income and appreciation in
long-term value.
The Company may purchase or lease income-producing multi-family, mixed-use
or specialty retail properties for long-term investment, expand and improve the
properties acquired, or sell such properties, in whole or in part, when
circumstances warrant. Financing or indebtedness of the Properties, or any
properties to be acquired by the Company in the future, may be secured by a
first mortgage. Any such financing or indebtedness will have a priority over the
Common Shares in the event of a forced sale or upon liquidation of any property
in the Company's portfolio.
For a discussion of the Company's investment policies involving transactions
with affiliates of GREAT, see "--Business Objectives and Operating Strategies"
and "--Acquisition Strategy".
102
<PAGE>
While the Company emphasizes equity real estate investments in multi-family
properties, it may, at the discretion of the Board, invest in shoreline or
coastal mixed-use buildings, equity real estate investments in other type of
properties, mortgages (including participating or convertible mortgages), stock
of other REITs and other real estate interests. The Company does not presently
intend to invest in mortgages or stock of other REITs. The investment by the
Company in securities of other REITs, other concerns engaged in real estate
activities or other issuers is subject to the percentage of ownership
limitations and gross income tests necessary for REIT qualification.
DISPOSITIONS. Management periodically will review the assets in the
Company's portfolio. The Company has no current intention to dispose of any
Property, or any property that may be acquired in the future, unless the Board,
based in part upon management's periodic reviews, determines that the
disposition of such property is in the best interests of the Company.
FINANCING POLICIES. Upon completion of the Consolidation Transactions, the
Company's debt-to-book capitalization ratio will be approximately 51% (excluding
any additional availability under the Credit Facility). The debt-to-book
capitalization ratio is based on the ratio of book values of debt to book value
of total liabilities and shareholders' equity. Upon full investment of the
Credit Facility, such ratio would be below 60%.
The Company's debt-to-total capitalization ratio, which will be 38% upon
completion of the Consolidation Transactions (excluding any additional
availability under the Credit Facility), is based upon the market values of the
Common Shares, and, accordingly, will fluctuate with changes in the price of the
Common Shares (and the issuance by the Company of additional Common Shares, or
other forms of capital, if any). This ratio differs from the
debt-to-book-capitalization ratio, which is based upon book values. As the
debt-to-book capitalization ratio may not reflect the current income potential
of a company's assets and operating business, the Company believes that the
debt-to-total capitalization ratio provides a more appropriate indication of
leverage for a company whose assets are primarily operating real estate.
The Company intends to maintain a conservative debt-to-total-capitalization
ratio of 60% or less. Such ratio presents total debt of the Company as a
percentage of the market value of the Common Shares plus consolidated debt.
GREAT's Charter and Bylaws, however, do not limit the amount or percentage of
indebtedness that GREAT may incur. In addition, from time to time, the Company
may modify its debt policy in light of current economic conditions, relative
costs of debt and equity capital, market values of its properties, general
conditions in the market for debt and equity securities, fluctuations in the
fair market prices of the Common Shares, growth and acquisition opportunities
and other factors. Accordingly, the Company may increase or decrease its
debt-to-total capitalization ratio beyond the limits described above.
In the event that the Board determines to raise additional equity capital,
the Board has the authority, without approval of the Shareholders, to issue
additional Common Shares or Preferred Shares in any manner (and on such terms
and for such consideration) it deems appropriate, including exchange for
property. Existing Shareholders would have no preemptive right to purchase
shares issued in any subsequent offering by Grove Property, and any such
offering might cause a dilution of Shareholders' investment in Grove Property.
Indebtedness incurred by the Company may be in the form of bank borrowings,
purchase money obligations to the sellers of properties, publicly or privately
placed debt instruments or financing from institutional investors or other
lenders, any of which indebtedness may be unsecured or may be secured by
mortgages or other interest in the property owned by the Company. The recourse
of the holders of such indebtedness may be to all or any part of the property of
the Company or may be limited to the particular property to which the
indebtedness relates. The proceeds from any borrowings by Grove Property must be
loaned, on the same terms, to the Operating Partnership. See "THE OPERATING
PARTNERSHIP AGREEMENT--Additional Funds."
OTHER POLICIES. The Company intends to operate in a manner that will not
subject it to regulation under the Investment Company Act of 1940. The Company
does not intend to (i) invest in the securities of
103
<PAGE>
other issuers for the purpose of exercising control over such issuer, (ii)
underwrite securities of other issuer or (iii) actively trade in loans or other
investments.
The Company may make investments other than as previously described,
although it does not currently intend to do so. The Company has authority to
purchase or otherwise acquire Common Shares or any of its other securities in
the open market or otherwise may engage in such activities in the future. Except
in connection with the IPO, in June, 1994 and the Consolidation Transactions,
Grove Property has not issued Common Shares or any other securities in exchange
for property or any other purpose. The Board has authorized the repurchase from
time to time of up to 100,000 Common Shares after consummation of the
Consolidation Transactions, any such action will be taken only in conformity
with applicable federal and state laws and the requirements for qualifying as a
REIT under the Code. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Potential Adverse Effects of the Consolidation Transactions; Risk
Factors--Repurchase of Shares by the Company."
GREAT has not made any loans to third parties, although it may in the future
make loans to third parties, including, without limitation, to the Property
Partnership, or other joint ventures in which it participates. GREAT has not
engaged in trading, underwriting or agency distribution or sale of securities of
other issuers, and Grove Property does not intend to do so in the future. Grove
Property's policies with respect to such activities may be reviewed and modified
from time to time by the Board without the vote of the Shareholders.
At all times, Grove Property intends to make investments in such a manner as
to be consistent with the requirements of the Code to qualify as a REIT unless,
because of circumstances or changes in the Code, the Board determines to revoke
Grove Property's REIT election.
The Company has authority to offer its Common Shares, or options to purchase
Common Shares, in exchange for property and to repurchase or otherwise acquire
its Common Shares in the open market or otherwise and may engage in such
activities in the future. The Company expects (but is not obligated) to issue
Common Shares to holders of Common Units in the Operating Partnership upon
exercise of their redemption rights.
REGULATION
GENERAL. Apartment community properties are subject to various laws,
including regulations relating to recreational facilities such as swimming
pools, activity centers and other common areas. The Company believes that under
present laws, ordinances and regulations, it has the necessary permits and
approvals to operate the Properties.
AMERICANS WITH DISABILITIES ACT. The Properties and any newly acquired
properties must comply with Title III of the ADA to the extent that such
properties are "public accommodations" and/or "commercial facilities" (each as
defined by the ADA). Compliance with the ADA requirements could require removal
of structural barriers to handicapped access in certain public areas of the
Properties where such removal is readily achievable. The ADA does not, however,
consider residential properties, such as multi-family properties, to be public
accommodations or commercial facilities, except to the extent portions of such
facilities, such as a leasing office, are open to the public. Although the
Company believes that the Properties substantially comply with all present
requirements under the ADA and applicable state laws, final regulations under
the ADA have not yet been promulgated. Noncompliance with ADA requirements could
result in imposition of fines or awards of damages to private litigants. If
required changes involve greater expenditures than the Company currently
anticipates, or if the changes must be made on a more accelerated basis than it
anticipates, the Company's ability to make expected distributions could be
adversely affected. The Company believes that its competitors face similar costs
to comply with requirements of the ADA.
FAIR HOUSING AMENDMENTS ACT OF 1988. The FHAA requires multi-family
properties first occupied after March 13, 1990 to be accessible to the
handicapped. Noncompliance with the FHAA could result in the
104
<PAGE>
imposition of fines or an award of damages to private litigants. The Company
believes that the Properties that are subject to the FHAA are in compliance with
such law.
RENT CONTROL LEGISLATION. State and local rent control laws in certain
jurisdictions limit a property owner's ability to increase rents and to recover
increases in operating expenses and costs of capital improvements from
residents. Enactment of such laws has been considered from time to time in other
jurisdictions, although such laws have not been adopted in the Company's
markets. The Company does not presently intend to acquire multi-family
properties in markets that are either subject to rent control or in which rent
limiting legislation exists.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations
relating to the protection of the environment, an owner or operator of real
estate may be held liable for the costs of removal or remediation of certain
hazardous or toxic substances located on or in the property. These laws often
impose liability without regard to whether the owner was responsible for, or
even knew of, the presence of such hazardous or toxic substances. The costs of
investigation, removal or remediation of such substances may be substantial, and
the presence of such substances may adversely affect the owner's ability to rent
or sell the property or to borrow using such property as collateral and may
expose it to liability resulting from any release or exposure of such
substances. Moreover, certain loan documents provide for recourse liability in
connection with hazardous or toxic substances. Persons who arrange for the
disposal or treatment of hazardous or toxic substances at another location may
also be liable for the costs of removal or remediation of such substances at the
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 also seek
recovery from owners or operators of real properties for personal injury
associated with asbestos-containing materials and other hazardous or toxic
substances. In connection with the ownership (direct or indirect), operation,
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, potentially liable
for removal or remediation costs, as well as certain other related costs,
including governmental penalties and injuries to persons and property.
All of the Properties were subject to Phase I (or an update of a prior Phase
I) or similar environmental assessments by independent environmental consultants
in connection with the IPO (as to the four GREAT Properties) or in connection
with their original acquisition (as to the Partnership Properties): Phase I
assessments are intended to discover information regarding, and to evaluate the
environmental condition of, the surveyed property and surrounding properties.
Phase I assessments generally include an historical review, a public records
review, a preliminary investigation of the surveyed site and surrounding
properties, and preparation and issuance of a written report, but do not include
soil sampling or subsurface investigations.
The environmental assessments disclose that certain underground storage
tanks ("USTS"), which have been removed from the Sandalwood Apartments, Fox Hill
Commons and Ocean Reef Estates, need to be registered with the DEP. The
environmental assessments also disclose that four properties include floor
drains which need to be sealed or have permits obtained from DEP. The Company
intends to comply with the DEP registration and permit requirements related to
USTs and floor drains.
The Company's environmental assessments of the Properties have not revealed
any environmental liability that the Company believes would have a material
adverse effect on the Company's business, assets or results of operations taken
as a whole, or is the Company aware of any such material environmental
liability. Nonetheless, it is possible that the Company's assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no assurance
that (i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Properties will not be affected by
105
<PAGE>
tenants, by the condition of land or operations in the vicinity of the
Properties (such as the presence of underground storage tanks), or by third
parties unrelated to the Company.
INSURANCE
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance on all of the Properties, with policy specifications,
insured limits and deductibles customarily carried for similar properties. The
Company also carries customary levels of comprehensive insurance under its
umbrella policy covering liability, fire and theft. There are, however, certain
types of losses (such as losses arising from acts of war or from sexual
harassment, gender, age, disability or race discrimination suits) that are not
generally insured because they are either uninsurable or not economically
insurable. In addition, certain disaster-related insurance covering catastrophic
events, such as earthquakes, may not be available or may only be available at
rates that, in the opinion of the Company, are prohibitive. Should an uninsured
loss or a loss in excess of insured limits occur, the Company could lose its
capital invested in the affected Property, as well as the anticipated future
revenues from such Property and would continue to be obligated on any mortgage
indebtedness or other obligations related to the Property. Any such loss would
adversely affect the Company and its financial condition and results of
operations. Management of the Company believes that the Company and the
Properties are adequately insured in accordance with industry standards.
LEGAL PROCEEDINGS
Neither the Company nor the Properties are presently subject to any material
litigation, nor, to the Company's knowledge, is material litigation threatened
against the Company or any of the Properties other than routine litigation
arising in the ordinary course of business, some of which are expected to be
covered by liability insurance, and all of which, collectively, are not expected
to have a material adverse effect on the business, financial condition or result
of operations of Company.
106
<PAGE>
MANAGEMENT
TRUST MANAGERS AND EXECUTIVE OFFICERS
The Trust Managers and Executive Officers of GREAT, and other key employees
of GREAT, their ages (at September 30, 1996) and their positions and offices
with GREAT are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES HELD
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Trust Managers and Executive Officers
Damon D. Navarro 42 Chairman of the Board of Trust Managers, President
and Chief Executive Officer
Joseph R. LaBrosse 33 Chief Financial Officer, Secretary, Treasurer and
Trust Manager
James F. Twaddell 56 Trust Manager
Harold Gorman 52 Trust Manager
J. Joseph Garrahy 65 Trust Manager
Brian A. Navarro 41 Vice President--Acquisitions
Gerald A. McNamara 56 Vice President--Marketing and Strategic planning
Edmund F. Navarro 35 Vice President--Property Management
Key Employees
Andy Mazur 45 Director of Site Operations--Regional Property
Manager
Karen McHugh 38 Director of Marketing--Regional Property Manager
Paul Bengtson 35 Director of Landscaping--Regional Property Manager
Steven Splain 34 Controller
Leanne Bruder 27 Accounting Manager
</TABLE>
Pursuant to the terms of the Charter and Bylaws, the Board must consist of
not less than two nor more than 15 persons, of which a majority must be
"Independent Trust Managers" (who are neither executive officers nor affiliates
of GREAT). Trust Managers are divided into three classes serving staggered
three-year terms. Messrs. Navarro's and Gorman's terms of office will expire at
the Annual Meeting of Shareholders to be held in 1997; Mr. Twaddell's term of
office will expire at the Annual Meeting of Shareholders to be held in 1998; and
Messrs. Garrahy's and LaBrosse's terms of office will expire at the Annual
Meeting of Shareholders to be held in 1999. Trust Managers whose terms expire at
the next annual meeting will hold office until their successors are duly elected
and qualified.
The Charter requires majority approval by the Independent Trust Managers of
GREAT for all Board decisions. Currently, the Independent Trust Managers are
Messrs. Twaddell, Gorman and Garrahy.
DAMON NAVARRO is Chairman of the Board of Trust Managers, President and
Chief Executive Officer of GREAT. Mr. Navarro is the President of all of the
Grove Companies, except GPS. Co-founder of Grove
107
<PAGE>
in 1980, he is responsible for investor relations, marketing, new business
development and organizational management for the Grove Companies and their
affiliates. Mr. Navarro is a general partner or principal of the general partner
for 42 of the limited partnerships affiliated with the Grove Companies,
including each of the Property Partnerships, and is the Chief Executive Officer
for 27 corporations affiliated with those limited partnerships. Mr. Navarro is a
graduate of the University of Rhode Island with a degree in Finance.
JOSEPH LABROSSE is Chief Financial Officer, Secretary and Treasurer, as well
as a Trust Manager of GREAT. Mr. LaBrosse is Chief Financial Officer for the
Grove Companies and their affiliates. He is responsible for financing, loan
portfolio management, financial reporting, tax planning, cash management,
strategic budgeting and planning. Prior to joining the Grove Companies in 1988,
Mr. LaBrosse was a real estate tax consultant at Arthur Andersen & Company in
Hartford, Connecticut. He is a magna cum laude graduate of the University of
Connecticut with a degree in Accounting. He is a licensed Certified Public
Accountant and a member of the American Institute of Certified Public
Accountants, the Connecticut Society of Certified Public Accountants and the
Real Estate Finance Association.
JAMES F. TWADDELL is a Trust Manger of GREAT. Mr. Twaddell is a member of
the investment banking group of Schnieder Securities, Inc., located in
Providence, Rhode Island. From 1974 through 1995, Mr. Twaddell served as
Chairman of Barclay Investments, Inc., a member firm of the National Association
of Securities Dealers, Inc. (the "NASD"). Mr. Twaddell also served as Chairman
of Regional Investment Brokers, Inc., a 125-member cooperative association of
regional investment bankers and broker/dealers conducting business throughout
the United States. For the 1993-1995 term, he was elected to serve on both the
NASD District 11 Committee and the District Business Conduct Committee. He has
served as Chairman of the Board of First Mutual Fund, a 30-year old
publicly-traded mutual fund, since 1979. Mr. Twaddell received his B.A. degree
from Brown University in 1961.
HAROLD GORMAN is a Trust Manager of GREAT. From 1968 to 1993, Mr. Gorman
served as Vice President and Assistant General Counsel of Heublein, Inc. From
October 1993 to March 31, 1995, he served as Vice President/General Counsel to
the Paddington Corporation. Since April 1, 1995, Mr. Gorman has served as Vice
President and Senior Regulatory Counsel for Heublein, Inc., located in Hartford,
Connecticut. He received his B.A. from Wesleyan University in 1965 and his J.D.
from the University of Connecticut Law School. Mr. Gorman is a member of each of
the Connecticut Bar Association, the American Bar Association and the Board of
Directors of the Arthritis Society.
J. JOSEPH GARRAHY is a Trust Manager of GREAT. J. Joseph Garrahy began his
career in public service in 1962 as a Rhode Island State Senator. In 1968, he
was elected Lieutenant Governor of The State of Rhode Island, where he served
four two-year terms. In 1976, Mr. Garrahy was elected Governor of the State, and
was reelected to that office in 1978, 1980 and 1982. He served as Chairman of
the National Governors' Association's Subcommittee on Health Policy in 1977 and
the National Governors' Association's Human Services Committee as Chairman of
the Coalition of Northeast Governors' Committee on Transportation. Mr. Garrahy
was a Senior Vice President with the merchants banking firm of G. William Miller
& Company, Inc. of Washington, D.C. from 1985 to 1990. Mr. Garrahy has served as
President of J. Joseph Garrahy & Associates, Inc., a consulting firm, in
Providence, Rhode Island, since its formation in 1990. Mr. Garrahy attended the
University of Buffalo and the University of Rhode Island.
BRIAN NAVARRO is Vice President--Acquisitions of GREAT. Mr. Navarro also
serves as a vice president of all of the Grove Companies. Mr. Navarro is
responsible for the acquisition and disposition of property and financing and
organizational management for the Grove Companies and their affiliates. Prior to
co-founding Grove in 1980, Brian Navarro acquired, renovated and resold over 30
two-, three- and six-family houses in the Hartford, Connecticut, Springfield,
Massachusetts and Westerly, Rhode Island areas. Mr. Navarro is a graduate of the
University of Connecticut with a degree in Finance and a special concentration
in real estate.
GERALD A. MCNAMARA is Vice President--Marketing and Strategic Planning of
GREAT. Mr. McNamara has been a principal and vice president of the Grove
Companies and their affiliates since
108
<PAGE>
1985. He has served as a general partner in many of the 32 limited partnerships
sponsored by the Grove Companies. Mr. McNamara is involved in all aspects of
property acquisition and financing, and is responsible for the long range
planning and new product/concept development of the Grove Companies. Prior to
his association with the Grove Companies, Mr. McNamara was Senior Vice President
of Heublein International where he was in charge of Food and Beverage Operations
overseas. Mr. McNamara is a graduate of Trinity College with a degree in History
and Economics.
EDMUND NAVARRO is Vice President--Property Management of GREAT. Edmund
Navarro wholly-owns Grove Services Inc., the general partner of GPS, and serves
as President of GPS. He is responsible for the management of approximately 45
properties and 180 employees and the marketing and supervision of construction
projects. Mr. Navarro became a principal of Grove in 1983. GREAT believes that,
since that time, Mr. Navarro has developed one of the top property management
staffs in New England. Prior to his employment with the Grove Companies, Mr.
Navarro was a Media Marketing Planner with Vitt Median International in New York
City. Mr. Navarro is a graduate of the University of Rhode Island with a degree
in Marketing.
ANDY MAZUR is Director of Site Operations and a Regional Property Manager
for GPS. He has been with Grove since 1988. Mr. Mazur is responsible for the
Service Technician Training Program and Continuing Development of GPS'
maintenance systems and supervising the management of several properties. Mr.
Mazur has a Masters Degree from Springfield College and a Bachelors Degree from
Central Connecticut State College.
KAREN MCHUGH is Director of Marketing and a Regional Property Manager for
GPS. She has been with Grove since 1991. She develops and oversees training
programs for property leasing directors. Prior to joining GPS, Ms. McHugh worked
for a real estate developer in the property management area for seven years. Ms.
McHugh graduated from Mount Holyoke College with a B.A. in English and a B.A. in
Political Science.
PAUL BENGTSON is Director of Landscaping and a Regional Property Manager for
GPS. He has been with Grove since 1993. Mr. Bengston gained his landscaping
expertise while working for a landscaping contractor throughout high school and
college. Prior to joining Grove he worked for four years for a property
management company based in Boston. Mr. Bengston is a graduate of Worcester
State College with a B.A. degree in Business Management.
STEVEN A. SPLAIN is the Controller for all the Grove Companies. He has been
with Grove since 1994 and is in charge of the financial and tax reporting and
day-to-day accounting functions. Between 1984 and 1994, Mr. Splain was Tax
Manager at Blum, Shapiro, a regional accounting firm in West Hartford,
Connecticut. Mr. Splain is a graduate of Southern Connecticut State University
with a B.S. in Accounting. He is a licensed Certified Public Accountant, and a
member of the American Institute of Certified Public Accountants and the
Connecticut Society of Certified Public Accountants.
LEANNE BRUDER is the Accounting Manager for the corporate division of the
Accounting Division of GPS. She began working for Grove full-time in January
1996 and worked part time for Grove in 1991 and 1992. Prior to joining Grove
full-time, Leanne was a senior accountant at the Hartford, Connecticut office of
KPMG Peat Marwick. While at KPMG, Ms. Bruder was a member of the Real Estate
Industry Focus Group and was responsible for the audits of multi-billion dollar
mortgage loan and real estate-owned portfolios of several prominent insurance
companies. She was also instrumental in the securitization of a large portfolio
of loans and in organizing the first REIT to be offered by one of these
companies. Ms. Bruder is a graduate of the University of Connecticut with a B.S.
in accounting, and is a Certified Public Accountant.
Damon Navarro, Brian Navarro and Edmund Navarro are brothers. No family
relationships exist among any of the other trust managers or executive officers
of GREAT. No arrangement or understanding exists between any Trust Manager or
Executive Officer or any other person pursuant to which any Trust
109
<PAGE>
Manager or Executive Officer was selected as a Trust Manager or Executive
Officer, except that Mr. Twaddell was elected to the Board at the closing of the
IPO in 1994, for a term of one year, pursuant to the terms of the Underwriting
Agreement between GREAT and the underwriters in connection with the IPO, Barclay
Investments, Inc. Subject to the provisions of their respective employment
agreements, if any, executive officers are elected for and serve at the
discretion of the Board. See "--EXECUTIVE COMPENSATION--Employment Agreements;
Non-Competition Agreements."
COMMITTEES OF THE TRUST MANAGERS
AUDIT COMMITTEE. An Audit Committee of the Board has been established,
consisting of three Independent Trust Managers. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the plans and results of audit
engagements, approves professional services provided by the independent public
accountants, reviews the independence of the independent public accountants,
considers the range of audit and non-audit fees and reviews the adequacy of
GREAT's internal accounting controls. Each of the three Independent Trust
Managers is a current member of the Audit Committee.
INVESTMENT COMMITTEE. The Trust Managers have established an Investment
Committee, consisting of Mr. Damon Navarro and two of the Independent Trust
Managers, James Twaddell and Harold Gorman. The Investment Committee has the
authority to acquire, dispose of and finance investments for GREAT and execute
contracts and agreements, including those related to the borrowing of money by
GREAT, and generally exercise all other powers of the Trust Managers except for
those which require action by all Trust Managers or the Independent Trust
Managers under the Charter or Bylaws or under applicable law.
COMPENSATION COMMITTEE. The Trust Managers have established a Compensation
Committee, currently consisting of the three Independent Trust Managers. The
Compensation Committee has the authority to determine compensation for GREAT's
Executive Officers and to administer the Incentive Plan, the 1994 Plan and the
1996 Plan. See "EXECUTIVE COMPENSATION". The Compensation Committee has the
authority to grant share options and share appreciation rights in accordance
with the 1996 Plan and the 1994 Plan to the Trust Managers and Executive
Officers, other key employees of the Company and consultants. Each of the three
Independent Trust Managers is a current member of the Compensation Committee.
The Board does not have a nominating committee; the entire Board performs
the functions of a nominating committee.
COMPENSATION OF THE TRUST MANAGERS
Currently, GREAT pays its trust managers who are not employees of GREAT
("NON-EMPLOYEE TRUST MANAGERS") a fee of $250 for attending each meeting of the
Board. Following the consummation of the Consolidation Transactions, Grove
Property will pay the Non-Employee Trust Managers a fee of $1,000 for attending
each meeting of the Board. In addition, GREAT may and Grove Property may
continue to, reimburse the Trust Managers for travel expenses incurred in
connection with their activities on behalf of GREAT. Each Non-Employee Trust
Manager in office at the time of the IPO received options to purchase 2,000
Common Shares at the IPO price ($11 1/8 per Common Share) under GREAT's 1994
Plan. Thereafter, beginning with the Annual Meeting held in 1995, each
Non-Employee Trust Manager then in office has received an annual grant of
options to purchase 1,000 Common Shares, in each case at the then-current market
price. See "EXECUTIVE COMPENSATION--1994 Share Option Plan."
The 1996 Plan provides that each Non-Employee Trust Manager who is first
elected or appointed after the 1996 Annual Meeting of Shareholders would receive
an automatic initial grant of an option to purchase 10,000 Common Shares. In
addition, promptly following the date of each Annual Meeting of Shareholders
(including the 1997 Annual Meeting), each Non-Employee Trust Manager elected by
the Shareholders will receive an additional automatic grant of an option to
purchase 5,000 Common Shares;
110
<PAGE>
PROVIDED, however, that no Non-Employee Trust Manager will receive more than one
such automatic grant in any calendar year. The exercise price for grants to
Non-Employee Trust Managers will be 100% of the Fair Market Value of the Common
Shares on the date of grant. Each such option will expire ten years from the
grant date (subject to earlier termination). Assuming Shareholder approval of
the 1996 Plan, upon the consummation of the Consolidation Transactions, each
Non-Employee Trust Manager will receive a grant of options to purchase 10,000
Common Shares at an exercise price equal to the Fair Market Value of the Common
Shares on the date of grant. For a description of the terms of these option, see
"PROPOSAL TO ADOPT THE 1996 SHARE INCENTIVE PLAN--1996 Share Incentive Plan New
Plan Benefits."
Trust Managers who are employees of GREAT are not paid any trust manager
fees.
NON-COMPETITION AGREEMENTS
The Executive Officers are entering into new non-competition agreements with
the Company (the "NON-COMPETITION AGREEMENTS"). The Non-Competition Agreement of
each Executive Officer will preclude him from directly or indirectly developing,
redeveloping, acquiring, managing or operating multi-family or retail mixed-use
properties, other than the Excluded Properties, which compete with the GREAT
Properties or with properties acquired by GREAT in the future (including the
Partnership Properties) for so long as he is an Executive Officer, Trust
Manager, significant Shareholder (5% or more of the outstanding Common Shares)
or employee of, or consultant to, Grove Property, and for a period of
twenty-four months after termination thereof other than in the event of
termination of his employment by Grove Property without cause or by the
Executive Officer in the event of a "change in control" or "for good reason" (as
defined therein). Grove Property also has entered into a Non-Competition
Agreement with the Grove Companies which will remain in effect until such time
as no person who serves as a director, general partner or executive officer of
the Grove Companies also serves as a Trust Manager or Executive Officer of Grove
Property. Except for the Executive Officers, no other Trust Manager has an
interest in any of the Grove Companies and no direct or indirect investor in the
Grove Companies, other than the Executive Officers, will be bound by the
Non-Competition Agreements. These Non-Competition Agreements supersede the
existing non-compete agreements with GREAT entered into at the time of the IPO,
effective upon consummation of the Consolidation Transactions. Such existing
agreements preclude the identified activities only if they compete with the
GREAT Properties (including properties acquired by GREAT in the future).
The Executive Officers control or share control, and have substantial
economic interest in, the limited partnerships that own the Excluded Properties;
ownership and management of the Excluded Properties are specifically exempted
from the provisions of the Non-Competition Agreements. Certain of the Excluded
Properties compete with Properties that are in close proximity thereto.
DESCRIPTION OF CAPITAL STOCK
The following summary of GREAT's capital stock does not purport to be
complete, and is qualified in its entirety by reference to the pertinent
sections of the Charter, a copy of which is available upon request from GREAT.
For certain amendments to be made to the Charter in connection with the
Consolidation Transactions (assuming Shareholder approval of the Charter
Amendments), see "PROPOSAL TO AMEND THE CHARTER (Proposal 2)."
GREAT is a REIT. Rights of Shareholders are governed by the Maryland REIT
Act, the Charter and the Bylaws.
COMMON SHARES IN GENERAL. The Charter provides that GREAT may issue up to
14,000,000 shares of beneficial interest, consisting of 10,000,000 Common Shares
and 4,000,000 Preferred Shares. As of September 30, 1996, 525,000 Common Shares
were issued and outstanding. The Transfer Agent and Registrar for the Common
Shares is The First National Bank of Boston.
111
<PAGE>
INDEMNIFICATION AND POTENTIAL FOR SHAREHOLDER LIABILITY. Both the Maryland
statutes governing REITs and the Charter provide that no Shareholder will be
personally liable for any obligation of GREAT solely as a result of his or her
or its status as a Shareholder of GREAT. The Bylaws further provide that GREAT
shall indemnify each Shareholder against any claim or liability for which the
Shareholder may become subject by reason of his being or having been a
Shareholder, and that GREAT shall reimburse each Shareholder for all legal and
other expenses reasonably incurred by him in connection with any such claim or
liability. In addition, it is GREAT's policy that Shareholders assume no
personal liability for obligations entered into on behalf of GREAT. However,
with respect to tort claims, contractual claims where Shareholder liability is
not so negated, claims for taxes and certain statutory liability, Shareholders
may, in some jurisdictions, be personally liable to the extent that such claims
are not satisfied by GREAT. Inasmuch as GREAT will carry public liability
insurance which it considers adequate, any risk of personal liability to
Shareholders is limited to a situation in which GREAT's assets plus its
insurance coverage would be insufficient to satisfy such claims against the
Shareholders.
RIGHTS WITH RESPECT TO DIVIDENDS AND IN THE EVENT OF LIQUIDATION,
DISSOLUTION OR WINDING-UP. All issued and outstanding Common Shares are duly
authorized, fully paid and nonassessable. Subject to the preferential rights of
any other shares or series of shares of beneficial interest (if any) and to the
provisions of the Charter regarding Excess Shares (as defined below), holders of
Common Shares are entitled to receive dividends if, as and when authorized and
declared by the Board out of assets legally available therefor, and to share
ratably in the assets of GREAT legally available for distribution to its
Shareholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of GREAT.
VOTING RIGHTS. Subject to the provisions of the Charter regarding Excess
Shares, each outstanding Common Share entitles the holder thereof to one vote on
all matters submitted to a vote of Shareholders, including the election of trust
managers, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares of beneficial interest, the
holders of Common Shares will possess exclusive voting power. There is no
cumulative voting in the election of trust managers, which means that the
holders of a majority of the outstanding Common Shares can elect all of the
trust managers then standing for election, and the holders of the remaining
shares of beneficial interest, if any, will not be able to elect any trust
managers.
OTHER RIGHTS. Holders of Common Shares have no conversion, sinking fund,
redemption or preemptive rights to subscribe for any securities of GREAT.
Subject to the provisions of the Charter regarding Excess Shares, and to any
future classification of Common Shares (see "--Classification or
Reclassification of Common Shares or Preferred Shares" and "--Preferred Shares
in General"), Common Shares have equal voting, dividend, distribution,
liquidation and other rights, and have no preference, exchange or, except as
expressly required by the Maryland REIT Act, appraisal rights.
SHAREHOLDER APPROVAL REQUIREMENTS. Pursuant to the Maryland REIT Act, a
REIT generally cannot dissolve, amend its declaration of trust or merge unless
approved by the affirmative vote or written consent of shareholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the REIT's declaration of trust. The Charter does
not provide for a lesser percentage in such situations. A declaration of trust
may permit the trust managers to amend the declaration of trust by a two-thirds
vote from time to time to qualify as a REIT under the Code or the Maryland REIT
Act without the affirmative vote or written consent of the shareholders. The
Charter permits such action by the Board.
PREFERRED SHARES IN GENERAL. Preferred Shares may by issued from time to
time, in one or more series, as authorized by the Board. Prior to issuance of
shares of each series, the Board is required by the Maryland REIT Act and the
Charter to designate for each such series, subject to the provisions of the
Charter regarding Excess Shares, the preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption, as
112
<PAGE>
are permitted by Maryland law. The Board could authorize the issuance of
Preferred Shares with terms and conditions which could have the effect of
discouraging a takeover or other transactions which holders of some, or a
majority, of the Common Shares might believe to be in their best interests or in
connection with which holders of some, or a majority, of the Common Shares might
receive a premium for their Common Shares over the then market price of such
Common Shares. As of the date hereof, no Preferred Shares are outstanding, and
GREAT has no present plans to issue any Preferred Shares.
CLASSIFICATION OR RECLASSIFICATION OF COMMON SHARES OR PREFERRED
SHARES. The Charter authorizes the Board to classify or reclassify any unissued
Common Shares or Preferred Shares by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
distributions, qualifications or terms or conditions of redemption.
RESTRICTIONS ON TRANSFER. In order for GREAT to qualify as a REIT under the
Code, Equity Shares 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 of
qualification as a REIT), or during a proportionate part of a shorter taxable
year. Also, not more than 50% of the value of the issued and outstanding Equity
Shares may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities such as qualified private
pension plans) during the last half of a taxable year (other than the first year
of qualification as a REIT), or during a proportionate part of a shorter taxable
year. As of September 30, 1996, the Executive Officers constituted three
individuals for purposes of this test and, under the Internal Revenue Service's
(the "SERVICE") rules applicable to determining percentages of ownership, are
deemed to own approximately 1.6% of the value of the outstanding Common Shares.
Because the Board believes it is essential for GREAT to continue to qualify
as a REIT, the Charter, subject to certain exceptions, currently provides that
no holder of Equity Shares may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 5% (the "OWNERSHIP LIMIT") of the
number or value of the issued and outstanding Equity Shares. GREAT's Board, upon
receipt of a ruling from the Service, an opinion of counsel or other evidence
satisfactory to the Board and upon such other conditions as the Board may
direct, may also exempt a proposed transferee from the Ownership Limit. As a
condition of such exemption, the intended transferee must give written notice to
GREAT of the proposed transfer no later than the fifteenth day prior to any
transfer which, if consummated, would result in the intended transferee owning
shares in excess of the Ownership Limit. The Board may require such opinions of
counsel, affidavits, undertakings or agreements as it may deem necessary or
advisable in order to determine or ensure GREAT's status as a REIT. Any transfer
of Common Shares and/or Preferred Shares that would (i) create a direct or
indirect ownership of shares of beneficial interest in excess of the Ownership
Limit, (ii) result in the Common Shares or Preferred Shares being owned by fewer
than 100 persons or (iii) result in GREAT being "closely held" within the
meaning of Section 856(h) of the Code, shall be null and void, and the intended
transferee will acquire no rights to the Common Shares or Preferred Shares of
beneficial interest. The foregoing restrictions on transferability and ownership
will not apply if the Board determines that it is no longer in the best interest
of GREAT to attempt to qualify, or to continue to qualify, as a REIT.
The Charter currently excludes from the Ownership Limit the Grove Affiliate
Investors (as defined in the Charter and including the Executive Officers) and
their beneficial owners, who would otherwise exceed the Ownership Limit. The
Charter also allows these persons to acquire additional Common Shares through
the 1994 Plan, but in no event will such persons be entitled to acquire
additional Common Shares such that the five largest beneficial owners of GREAT's
Common Shares hold more than 50% of the total outstanding Common Shares.
Upon consummation of the Consolidation Transactions, and giving effect to
the exchange of their Common Units for Common Shares but not giving effect to
the acquisition of any Common Shares pursuant to the 1996 Plan, the Navarros
(who constitute a single individual under the Code), Mr. LaBrosse and Mr.
McNamara would own 15.98%, 1.25% and .57%, respectively, of the outstanding
Common
113
<PAGE>
Shares. The Charter Amendments include amendments to the above-described
provisions to clarify the application of the Ownership Limit to certain
Executive Officers and their affiliates. The Executive Officers, in the
aggregate, will be permitted to own 20% of the outstanding Equity Shares. See
"PROPOSAL TO AMEND THE CHARTER (Proposal 2)--Description of the Charter
Amendments--Description of the Proposed Amendment to the Excess Shares
Provision."
Currently, pursuant to the Charter any purported transfer of Common Shares
that would result in a person owning Common Shares in excess of the Ownership
Limit or cause GREAT to become "closely held" under Section 856(h) of the Code
that is not otherwise permitted as provided above will constitute excess shares
("EXCESS SHARES"), which will be transferred by operation of law to GREAT as
trust manager for the exclusive benefit of the person or persons to whom the
Excess Shares are ultimately transferred, until such time as the intended
transferee retransfers the Excess Shares. While the Excess Shares are held in
trust, such transferee will not be entitled to vote or to share in any dividends
or other distributions (except upon liquidation) with respect thereto. Subject
to the Ownership Limit, the Excess Shares may be retransferred by the intended
transferee to any person (if the Excess Shares would not be deemed to be Excess
Shares in the hands of such person) at a price not to exceed the price paid by
the intended transferee, or, if the intended transferee did not give value for
such Excess Shares (E.G., the transfer was by gift or devise), the fair market
value (as described below) at the time of the purported transfer that resulted
in the Excess Shares, at which point the Excess Shares will automatically be
exchanged for the Common Shares to which the Excess Shares are attributable. In
addition, such Excess Shares held in trust are subject to purchase by GREAT at a
purchase price equal to the lesser of (i) the price paid for the Common Shares
by the intended transferee (or, in the case of a devise or gift, the fair market
value at the time of such devise or gift) and (ii) the fair market value of the
Common Shares on the date GREAT exercised its right to purchase. Fair market
value shall be the last reported sales price of such shares of beneficial
interest on the trading day immediately preceding the relevant date as reported
on the AMEX system over which such Common Shares may be traded, or, if not then
traded over any exchange or quotation system, then the fair market value of such
shares of beneficial interest on the relevant date as determined in good faith
by the Board. GREAT's right to purchase shall be for a period of 90 days after
the later of the date of the proposed transfer which resulted in the Excess
Shares and the date the Board determines in good faith that such a transfer has
occurred. From and after the intended transfer to the intended transferee of the
Excess Shares, the intended transferee shall cease to be entitled to
distributions (except upon liquidation), voting rights and other benefits with
respect to such shares, except the right to payment of the purchase price for
the shares or the retransfer of shares as provided above. Any dividend or
distribution paid to a proposed transferee in respect of Excess Shares prior to
discovery by GREAT shall be repaid to GREAT upon demand. If the foregoing
transfer restrictions are determined to be void or invalid by virtue of any
legal decision, statute, rule or regulation, then the intended transferee of any
Excess Shares may be deemed, at the option of GREAT, to have acted as an agent
on behalf of GREAT in acquiring such Excess Shares and to hold such Excess
Shares on behalf of GREAT. Assuming the requisite Shareholder approval of the
Charter Amendments, the "Excess Shares" provisions of the Charter will be
amended in connection with the consummation of the Consolidation Transactions.
For a detailed description of the proposed amendments to the "Excess Shares"
provisions of the Charter, see "PROPOSAL TO AMEND THE CHARTER (Proposal
2)--Description of the Charter Amendments--Description of the Proposed Amendment
to Excess Shares Provisions."
All certificates representing shares of beneficial interest will bear a
legend referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% (or such other percentage between 1/2 of 1% and 5%, as
provided in the rules and regulations promulgated under the Code) of the number
or value of the outstanding Common Shares of GREAT must give a written notice of
such ownership to GREAT by January 31 of each year. In addition, each
Shareholder will, upon demand, be required to disclose to GREAT in writing such
information with respect to the direct,
114
<PAGE>
indirect and constructive ownership of Common Shares as the Board deems
reasonably necessary to comply with the provisions of the Code applicable to a
REIT, to comply with the requirements of any taxing authority or governmental
agency or to determine any such compliance.
These ownership limitations could have the effect of discouraging a takeover
or other transaction in which holders of some, or a majority, of Common Shares
might receive a premium for their Common Shares over the then prevailing market
price or which such holders might believe to be otherwise in their best
interest.
REPORTS. Shareholders will receive annual reports containing audited
financial statements with a report thereon by GREAT's independent certified
public accountants and quarterly reports containing unaudited financial
information for each of the first three quarters of each fiscal year.
MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The Common Shares have traded on the AMEX under the symbol "GRE" since June
23, 1994. The Common Shares are also registered on the Boston Stock Exchange.
The following table sets forth for the periods indicated, the high and low sale
prices as reported on the AMEX and the dividends declared by GREAT per Common
Share for each such period.
<TABLE>
<CAPTION>
DIVIDEND PER
1995 QUARTER ENDING HIGH LOW COMMON SHARE
- ------------------------------------------------------------------------------- --------- --------- ------------
<S> <C> <C> <C>
March 31, 1995................................................................. $ 8.625 $ 7.75 $ 0.2225
June 30, 1995.................................................................. $ 8.75 $ 8.50 $ 0.2275
September 30, 1995............................................................. $ 8.375 $ 7.25 $ 0.2275
December 31, 1995.............................................................. $ 8.875 $ 7.63 $ 0.2275
1996 QUARTER ENDING
- -------------------------------------------------------------------------------
March 31, 1996................................................................. $ 10.125 $ 8.375 $ 0.2275
June 30, 1996.................................................................. $ 10.00 $ 9.00 $ 0.230
September 30, 1996............................................................. $ 9.50 $ 8.875 $ 0.230
</TABLE>
DIVIDENDS
For the nine-month period ended September 30, 1996, GREAT declared dividends
totaling $0.6875 per Common Share, or approximately 77.0% of its FFO during such
period. For 1995, GREAT declared dividends totaling $0.9050 per Common Share, or
approximately 86.0% of its FFO during such year. For 1994, GREAT declared
dividends totaling $0.4525 per Common Share, or approximately 88.0% of its FFO
during such year. The payment of dividends by GREAT has been and will continue
to be at the discretion of the Board, and will depend on numerous factors,
including, without limitation, the actual cash flow of the Company, its
financial condition, capital requirements, the annual distribution requirements
under the REIT provisions of the Code and such other factors as the Board deems
relevant. See "THE COMPANY--Distribution Policy" for a description of recently
announced changes in the Company's distribution policy.
115
<PAGE>
Distributions by the Company to the extent of its current and accumulated
earnings and profits for Federal income tax purposes generally will be taxable
to Shareholders as ordinary dividend income. Distributions in excess of current
and accumulated earnings and profits (I.E., return of capital) will be treated
as a non-taxable reduction of a Shareholder's basis in the Common Shares to the
extent thereof and thereafter as taxable gain. Dividends that are treated as a
reduction of a Shareholder's basis in its Common Shares will have the effect of
deferring taxation until the sale of such Shareholder's Common Shares.
Approximately $0.10 (or 15.0%) of the $0.6875 of dividends declared for nine
month period ended September 30, 1996 represented a return of capital.
Approximately $0.1519 (or 16.78%) of the $0.9050 of dividends declared for 1995
represented a return of capital. Approximately $0.1967 (or 43.47%) of the
$0.4525 of dividends declared for 1994 represented a return of capital.
HOLDERS
The approximate number of holders of record of the Common Shares was 36 as
of September 30, 1996. The Company's transfer agent estimates that, as of such
date, there were 700 beneficial owners of the Common Shares issued and
outstanding.
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF GREAT'S DECLARATION OF TRUST AND BYLAWS
The following is a summary of certain provisions of the Maryland REIT Act,
the Charter and the Bylaws. This summary does not purport to be complete and is
subject to and qualified in its entirety by reference to the Maryland REIT Act,
the Charter and the Bylaws in their entirety.
BOARD OF TRUST MANAGERS. The Charter provides that the number of trust
managers of GREAT may be established by the Board, but may not be fewer than two
nor more than fifteen. It also provides that the Board must consist of a
majority of Independent Trust Managers at all times. The Bylaws provide that any
vacancy will be filled, at any regular meeting or at any special meeting called
for that purpose, by a majority of the remaining Trust Managers or, in the case
of an intention to increase the number of trust managers, by a majority of the
entire Board.
Pursuant to the terms of the Charter, the Board is divided into three
classes. One class, elected at the Annual Meeting of Shareholders held in 1996,
will hold office for a term expiring at the Annual Meeting of Shareholders to be
held in 1999; another class holds office initially for a term expiring at the
Annual Meeting of Shareholders to be held in 1997; the final class holds office
initially for a term expiring at the Annual Meeting of Shareholders to be held
in 1998. As the term of each class expires, the successors to the Trust Managers
in that class will be elected for a term of three years and until their
successors are duly elected and qualified, and the Trust Managers in the other
two classes will continue in office. GREAT believes that classification of the
Board will help to assure the continuity and stability of GREAT's business
strategies and policies as determined by the Board.
The foregoing provisions classifying the Board could have the effect of
making the removal of incumbent Trust Managers more time-consuming and
difficult, which could discourage a third party from making a tender offer or
otherwise attempting to obtain control of GREAT, even though such an attempt
might be beneficial to GREAT and the Shareholders. At least two Annual Meetings
of Shareholders, instead of one, will generally be required to effect a change
in the majority of the Board. Thus, the classified Board provisions could
increase the likelihood that incumbent Trust Managers will retain their
positions. Holders of Common Shares will have no rights to cumulative voting for
the election of trust managers. Consequently, at each Annual Meeting of
Shareholders, the holders of a majority of the Common Shares will be able to
elect all of the successors of the class of trust managers whose term expire at
such meeting. The Charter requires approval of a majority of Independent Trust
Managers for all decisions required to be made by the Board.
116
<PAGE>
REMOVAL OF TRUST MANAGERS. The Charter provides that a trust manager may be
removed only for cause and only by the affirmative vote of at least two-thirds
of the votes entitled to be cast in an election of trust managers. This
provision, when coupled with the provision in the Bylaws authorizing the Board
to fill vacant trust manager positions, precludes Shareholders from removing
incumbent trust managers except upon a substantial affirmative vote followed by
filling the vacancies created by such removal with their own nominees.
BUSINESS COMBINATIONS. Under the Maryland REIT Act, certain "business
combinations" (including mergers, consolidations, share exchanges or, in certain
circumstances, asset transfers or issuances or reclassifications of equity
securities) between a trust and any person who beneficially owns 10% or more of
the voting power of the trust's shares (or an affiliate of the trust) who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then outstanding
shares of beneficial interest of the trust (an "INTERESTED SHAREHOLDER") (or an
affiliate thereof), are prohibited for five years after the most recent date on
which the Interested Shareholder became an Interested Shareholder. Thereafter,
any such business combination must be recommended by the board of trust managers
of such trust and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding shares of the trust and (b)
two-thirds of the votes entitled to be cast by holders of outstanding shares of
the trust other than shares held by the Interested Shareholder with whom the
business combination is to be effected, unless, among other things, the trust's
shareholders receive a minimum price (as defined in the Maryland REIT Act) for
their shares and the consideration is received in cash or in the same form as
previously paid by the Interested Shareholder for its shares. These provisions
of Maryland law do not apply, however, to business combinations that are
approved or exempted by the board of trust managers of the trust prior to the
time that the Interested Shareholder became an Interested Shareholder. The Board
has resolved to opt out of the business combination provisions of the Maryland
REIT Act, and such resolutions also require that any decision to opt back in be
subject to the approval of holders of a majority of the Common Shares.
CONTROL SHARE ACQUISITIONS. The Maryland REIT Act provides that "control
shares" of a Maryland REIT acquired in a "control share acquisition" have no
voting rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares of beneficial interest owned
by the acquiror or by officers or trust managers who are employees of the trust
(the "CONTROL SHARE PROVISIONS"). "CONTROL SHARES" are voting shares of
beneficial interest which, if aggregated with all other such shares of
beneficial interest previously acquired by the acquiror or in respect of which
the acquiror is able to exercise or direct the exercise of voting power (except
solely by revocable proxy), would entitle the acquiror to exercise voting power
in electing trust managers within one of the following ranges of voting power:
(i) one-fifth or more, but less than one-third, (ii) one-third or more, but less
than a majority or (iii) a majority of all voting power. Control Shares do not
include shares of beneficial interest the acquiring person is then entitled to
vote as a result of having previously obtained shareholder approval. A "CONTROL
SHARE ACQUISITION" means the acquisition of Control Shares, subject to certain
exceptions.
A person who has made or proposes to make a Control Share Acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of trust managers of the trust to call a special meeting of
shareholders to be held within fifty days of such demand to consider the
granting of voting rights to the Control Shares. If no request for a meeting is
made, the trust may itself present the question at any shareholder meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as is required by the Control
Share Provisions, then, subject to certain conditions and limitations, the trust
may redeem any or all of the Control Shares (except those for which voting
rights have previously been approved) for fair value determined, without regard
to the absence of voting rights for the Control Shares, as of the date of the
last Control Share Acquisition by the acquiror, or as of the date of any meeting
of shareholders at which the voting rights of such shares are considered and not
approved. If voting rights for Control Shares are approved at a shareholders'
meeting and the acquiror
117
<PAGE>
becomes entitled to vote a majority of the shares of beneficial interest
entitled to vote, all other shareholders may exercise appraisal rights. The fair
value of the shares of beneficial interest as determined for purposes of such
appraisal rights may not be less than the highest price per share paid by the
acquiror in the Control Share Acquisition.
The Control Share Provisions do not apply to shares acquired in a merger,
consolidation or share exchange if the trust is a party to the transaction, or
to acquisitions approved or exempted by the declaration of trust or bylaws of
the trust.
The Bylaws contain a provision exempting from the Control Share Provisions
any and all acquisitions by any person of shares of the Company's stock.
Although there can be no assurances that this provision will not be amended or
eliminated at any time in the future, the Board has resolved that the provision
may not be amended or eliminated without the approval of at least a majority of
the Common Shares.
The foregoing provisions regarding business combinations and, if the
foregoing exception in the Bylaws is repealed, in whole or in part, the Control
Share Provisions, could have the effect of discouraging offers to acquire GREAT,
and of increasing the difficulty of consummating any such offer.
AMENDMENT OF THE DECLARATION OF TRUST. The Charter, including its
provisions on classification of the Board and removal of trust managers, may be
amended only by the affirmative vote of the holders of not less than two-thirds
of the votes entitled to be cast on the matter. Pursuant to the Maryland REIT
Act, a REIT generally cannot dissolve, amend its declaration of trust or merge,
unless approved by the affirmative vote of shareholders holding at least
two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the REIT's declaration of trust. The Charter does
not provide for a lesser percentage in such situations. A declaration of trust
may permit the trust managers, by a two-thirds vote, to amend the declaration of
trust from time to time to qualify as a REIT under the Code or the Maryland REIT
Act without the affirmative vote or written consent of its shareholders. The
Charter permits such action by the Board.
DISSOLUTION. Pursuant to the Charter, the dissolution of GREAT must be
approved by the affirmative vote of the holders of not less than two-thirds of
the votes entitled to be cast on the matter.
ADVANCE NOTICE OF TRUST MANAGER NOMINATIONS AND NEW BUSINESS. The Bylaws
provide that, with respect to an Annual Meeting of Shareholders, nominations of
persons for election to the Board and the proposal of business to be considered
by Shareholders may be made only (i) pursuant to a notice of such meeting by
GREAT, (ii) by or at the direction of the Board or (iii) by a Shareholder who is
entitled to vote at the meeting and has complied with the advance notice
procedures set forth in the Bylaws. With respect to special meetings of
Shareholders, the Bylaws provide that only the business specified in GREAT's
notice of meeting may be brought before the meeting of Shareholders. Where
GREAT's notice of meeting specifies that trust managers are to be elected at a
special meeting, nominations of persons for election to the Board may be made
only (i) pursuant to GREAT's notice of meeting, (ii) by or at the direction of
the Board upon its determination that trust managers shall be elected at such
meeting or (iii) by a Shareholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the Bylaws.
The provisions in the Charter regarding the classification of the Board and
the removal of trust managers, the business combination provisions described
above and, if the applicable provision in the Bylaws is rescinded, the Control
Share Provisions, together with and the advance notice provisions of the Bylaws,
could have the effect of discouraging a takeover or other transaction in which
holders of some, or a majority, of the Common Shares might receive a premium for
their Common Shares over the then prevailing market price. Certain Shareholders
might nonetheless believe these transactions to be in their best interests.
118
<PAGE>
MARYLAND ASSET REQUIREMENTS. To maintain its qualification as a Maryland
REIT, 75% of the value of GREAT's assets must be comprised of real estate
assets, governmental securities, cash and cash items, including receivables. The
Maryland REIT Act also prohibits using land for farming, agriculture,
horticulture or similar purposes.
THE OP PARTNERSHIP AGREEMENT
THE FOLLOWING SUMMARY OF THE OP PARTNERSHIP AGREEMENT AND THE DESCRIPTION OF
CERTAIN PROVISIONS SET FORTH ELSEWHERE IN THIS PROXY STATEMENT, ARE QUALIFIED IN
THEIR ENTIRETY BY REFERENCE TO THE OP PARTNERSHIP AGREEMENT, WHICH WILL BE FILED
WITH THE SEC. SEE "AVAILABLE INFORMATION."
MANAGEMENT. The Operating Partnership will be organized as a Delaware
limited partnership pursuant to the terms of the OP Partnership Agreement. The
Company will be the sole general partner of, and will initially hold not less
than approximately 63% of the economic interests in, the Operating Partnership.
The Company will conduct substantially all of its business through the Operating
Partnership. Generally, pursuant to the OP Partnership Agreement, the Company,
as the sole general partner of the Operating Partnership will have full,
exclusive and complete responsibility and discretion in the management and
control of the Operating Partnership, including the ability to cause the
Operating Partnership to enter into certain major transactions including
acquisitions, dispositions and refinancings and to cause changes in the
Operating Partnership's line of business and distribution policies. However, any
decision of the Operating Partnership to institute any proceeding for bankruptcy
or to be dissolved prior to December 31, 2056 (which is the expiration of the
Operating Partnership's term) or prior to the occurrence of certain liquidating
events, generally would require the consent of a majority in interest of the
Common Units. The limited partners of the Operating Partnership have no right to
remove GREAT as general partner of the Operating Partnership or to transact
business for, or participate in the management activities or decisions of, the
Operating Partnership, except as provided in the OP Partnership Agreement and as
required by applicable law.
INDEMNIFICATION. To the extent permitted by law, the OP Partnership
Agreement provides for indemnification of the Company, as general partner, its
officers and trust managers and such other persons as the Company may designate,
to the same extent indemnification is provided to officers and trust managers of
the Company in its Charter, and limits the liability of the Company and its
officers and trust managers to the Operating Partnership to the same extent
liability of officers and trust managers of the Company is limited under the
Charter.
TRANSFERABILITY OF INTERESTS. Except for a transaction described in the
following paragraph, the OP Partnership Agreement provides that GREAT may not
voluntarily withdraw from the Operating Partnership, or transfer or assign its
interest in the Operating Partnership, without the consent of a majority in
interest of the holders of the Common Units and, in certain instances, the
consent of a majority in interest of the limited partners of the Operating
Partnership. The limited partners of the Operating Partnership may transfer
their interests in the Operating Partnership to a transferee subject to certain
conditions, including that such transferee assumes all obligations of the
transferor limited partner and provided further that such transfer does not
cause a termination of the Operating Partnership for federal income tax purposes
and does not cause Grove Property to cease to comply with requirements under the
Code for qualification as a REIT. Pursuant to the OP Partnership Agreement,
except as described below under "--Limited Partner Redemption/Exchange Rights,"
the Grove Companies have agreed not to transfer, assign, sell, encumber or
otherwise dispose of, their Common Units received in connection with the
consummation of the Consolidation Transactions, or any Common Shares issued upon
exchange of such Common Units, for a period of two years from the completion of
the Consolidation Transactions without the consent of Grove Property, other than
to another limited partner or their affiliates (as such term is defined in the
OP Partnership Agreement), including Messrs. Damon and Brian Navarro, in each
case
119
<PAGE>
provided the transferee agrees to assume the obligations of the transferor under
the OP Partnership Agreement.
The Company may not engage in any merger, consolidation or other combination
with or into another person, sale of all or substantially all of its assets or
any reclassification, recapitalization or change of its outstanding equity
interests (a "TERMINATION TRANSACTION"), unless the Termination Transaction has
been approved by holders of at least 66 2/3 of the Common Units (including
Common Units held by the Company, which will represent at least 63% of all
Common Units outstanding upon consummation of the Consolidation Transactions)
and in connection with which all holders of Common Units will receive, or will
have the right to elect to receive, for each Common Unit an amount of cash,
securities, or other property equal to the product of the number of Common
Shares for which each Common Unit is then exchangeable and the greatest amount
of cash, securities, or other property paid to the holder of one Common Share in
consideration of one Common Share at any time pursuant to the Termination
Transaction is consummated. If, in connection with the Termination Transaction,
a purchase, tender or exchange offer shall have been made to and accepted by the
holders of more than 50% of the outstanding Common Shares, each holder of Common
Units will receive, or will have the right to elect to receive, the greatest
amount of cash, securities or other property which such holder would have
received had it exercised its redemption rights, and received Common Shares in
exchange for its Common Units immediately prior to the expiration of such
purchase, tender or exchange offer, and thereupon accepted such purchase, tender
or exchange offer.
The Company may also merge or otherwise combine its assets with another
entity if the following conditions are met: (i) substantially all of the assets
directly or indirectly owned by the surviving entity are held directly or
indirectly by the Operating Partnership or another limited partnership or
limited liability company which is the survivor of a merger, consolidation or
combination of assets with the Operating Partnership (in each case, the
"SURVIVING PARTNERSHIP"); (ii) the limited partners of the Operating Partnership
own a percentage interest of the Surviving Partnership based on the relative
fair market value of the net assets of the Operating Partnership and the other
net assets of the Surviving Partnership immediately prior to the consummation of
such transaction; (iii) the rights, preferences and privileges of the limited
partners of the Operating Partnership in the Surviving Partnership are at least
as favorable as those in effect immediately prior to the consummation of such
transaction and as those applicable to any other limited partners or
non-managing members of the Surviving Partnership; and (iv) such rights of the
limited partners of the Operating Partnership include the right to exchange
their interests in the Surviving Partnership for at least one of the following:
(a) the consideration available to such persons pursuant to the preceding
paragraph, or (b) if the ultimate controlling person of the Surviving
Partnership has publicly traded common equity securities, such common equity
securities, with an exchange ratio based on the relative fair market value of
such securities and the Common Shares. For purposes of this paragraph, the
determination of relative fair market values shall be reasonably determined by
the Company as of the time of the Termination Transaction and, to the extent
applicable, shall be no less favorable to the limited partners of the Operating
Partnership than the relative values reflected in the terms of the Termination
Transaction.
In respect of any transaction described in the preceding two paragraphs, the
Company is required to use its commercially reasonable efforts to structure such
transaction to avoid causing the limited partners of the Operating Partnership
to recognize gain for federal income tax purposes by virtue of the occurrence of
or their participation in such transaction. The Operating Partnership will also
use commercially reasonable efforts to cooperate with the limited partners of
the Operating Partnership to minimize any taxes payable in connection with any
repayment, refinancing, replacement or restructuring of indebtedness of the
Operating Partnership.
ADDITIONAL FUNDS. The OP Partnership Agreement provides that if the
Operating Partnership requires additional funds at any time, or from time to
time, in excess of funds available to the Operating Partnership from borrowings
or prior capital contributions, Grove Property may borrow such funds and lend
such funds to the Operating Partnership on the same terms and conditions as are
applicable to
120
<PAGE>
GREAT's borrowing of such funds. The OP Partnership Agreement and 1996 Plan also
provide that in the event Grove Property issues additional shares of capital
stock (including any issuance of Common Shares pursuant to 1996 Plan), Grove
Property is required to contribute to the Operating Partnership as an additional
capital contribution any net proceeds from such issuance in exchange for
additional partnership interests with preferences and rights corresponding to
the capital stock so issued.
ISSUANCE OF ADDITIONAL COMMON UNITS. As sole general partner of the
Operating Partnership, the Company has the ability to cause the Operating
Partnership to issue additional Common Units representing general and limited
partnership interests in the Operating Partnership.
DISTRIBUTIONS. The OP Partnership Agreement sets forth the manner in which
the net cash flow of the Operating Partnership (which includes operating
revenues and proceeds from sales or refinancings less certain expenditures) will
be distributed with respect to the Common Units.
LIMITED PARTNER REDEMPTION/EXCHANGE RIGHTS. Each limited partner of the
Operating Partnership will have the right to require the Operating Partnership
to redeem part or all of their Common Units for cash (based on the fair market
value of an equivalent number of Common Shares at the time of such redemption)
or, at the election of the Company, to exchange such Common Units for Common
Shares, at any time beginning one year after completion of the Consolidation
Transactions subject, in the case of the Grove Companies, to the obligation of
the Grove Companies to indemnify the Company in connection with the
Consolidation Transactions. See "CERTAIN RELATIONSHIP AND
TRANSACTIONS--Transactions With the Grove Companies--The Contribution
Agreement." Upon completion of the Consolidation Transactions, an aggregate of
at least 934,654 Common Units will be held by limited partners of the Operating
Partnership. If the Company elects to exchange Common Units for Common Shares,
each Common Unit will be exchangeable for one Common Share, subject to
adjustment in the event of stock splits, distribution of rights, extraordinary
dividends and similar events.
In order to protect the Company's status as a REIT, a holder of Common Units
is prohibited from exchanging such Common Units for Common Shares to the extent
that, as a result of such exchange, any person would own or would be deemed to
own, actually or constructively, Equity Shares in excess of the Ownership Limit,
or the Executive Officer Ownership Limit, as applicable, except to the extent
such holder has been granted an exception to the Ownership Limit, or would
otherwise cause the Company to fail to continue to qualify as a REIT. See
"Description of Capital Stock--Restrictions on Ownership and Transfer."
REGISTRATION RIGHTS. The Company has granted the limited partners receiving
Common Units in connection with the Consolidation Transactions certain
registration rights (collectively, the "REGISTRATION RIGHTS") with respect to
the Common Shares acquired upon the exchange of Common Units (the "REGISTRABLE
SHARES"). The Company will bear expenses incident to its registration
obligations upon exercise of the Registration Rights, including the payment of
federal securities laws and state Blue Sky registration fees, except that it
will not bear any underwriting discounts or commissions or transfer taxes
relating to registration of the Registrable Shares. See "SHARES AVAILABLE FOR
FUTURE SALE--Registration Rights."
TAX MATTERS. Pursuant to the OP Partnership Agreement, Grove Property will
be the "tax matters partner" of the Operating Partnership and, as such, will
have authority to make tax elections under the Code on behalf of the Operating
Partnership.
The net income or net loss of the Operating Partnership generally will be
allocated to Grove Property and the limited partners in accordance with their
percentage interests, subject to compliance with the provisions of Sections
704(b), respecting allocations generally, and 704(c), respecting allocations
with respect to contributed properties, of the Code and the applicable Treasury
Regulations. For further discussion of such allocations, see "FEDERAL INCOME TAX
CONSIDERATIONS--Tax Aspects of the Operating Partnership."
121
<PAGE>
OPERATIONS. The OP Partnership Agreement requires that the Operating
Partnership be operated in a manner that will enable Grove Property to satisfy
the requirements for qualification as a REIT and to avoid any federal income or
excise tax liability.
DUTIES AND CONFLICTS. The OP Partnership Agreement provides that
substantially all of the business activities of Grove Property must be conducted
through the Operating Partnership and its subsidiaries. The OP Partnership
Agreement prohibits Grove Property from borrowing for the purpose of making a
distribution to Shareholders unless it arranges such borrowing through the
Operating Partnership.
REPRESENTATIONS AND WARRANTIES. The Grove Companies will be making the same
representations and warranties in the OP Partnership Agreement as they will be
making in the Contribution Agreement pursuant to which the Operating Partnership
will acquire certain assets and liabilities of the Management Company and the
Grove Companies' partnership interests in the Property Partnerships, including
representations and warranties relating to their knowledge concerning, among
other things, compliance with laws, environmental matters, the absence of liens
and encumbrances, tenant leases, litigation, contractual obligations, absence of
undisclosed liabilities and the existence of insurance. Recourse for a breach of
such representations and warranties will be limited to the Common Units received
by them in the Consolidation Transactions. Under the OP Partnership Agreement,
the Operating Partnership is permitted to dilute the Grove Companies' interests
in the Operating Partnership issued in the Consolidation Transactions to the
extent of any unpaid claims for indemnification, PROVIDED that, with respect to
representations and warranties related to the Partnership Properties, such
claims must exceed $50,000 in the aggregate, before such dilution may be
effected.
The OP Partnership Agreement provides that the representations and
warranties thereunder will survive the Consolidation Transactions, provided that
no claim for breach may be maintained by the Operating Partnership or Grove
Property unless notice shall have been delivered to the Grove Companies within
one year of discovery of the breach by the Board, but in any event on or before
the second anniversary of the completion of the Consolidation Transactions.
TERM. The Operating Partnership will continue in full force and effect
until December 31, 2056 or until sooner dissolved and terminated pursuant to the
terms of the OP Partnership Agreement.
SHARES AVAILABLE FOR FUTURE SALE
GENERAL. Upon the consummation of the Consolidation Transactions, GREAT
will have outstanding 3,953,463 Common Shares, of which 590,600 Common Shares
will be freely tradeable in the public market by persons other than affiliates
of the Company without restriction or registration under the Securities Act. In
addition, the Company has reserved 2,262,461 Common Shares for issuance upon
exchange of Common Units and 418,120 Common Shares for issuance upon exercise of
options granted under the 1994 Plan and the 1996 Plan. The Common Shares to be
issued pursuant to the New Equity Investment (up to 3,333,333 Common Shares),
the Common Shares owned by "affiliates" of the Company, and the Common Shares
issuable at the option of the Company upon exchange of Common Units (other than
those issued pursuant to registration rights, as described below), will be
deemed to be "restricted securities" within the meaning of Rule 144 promulgated
under the Securities Act ("RULE 144"), and may not be transferred in the absence
of registration under the Securities Act unless an exemption from registration
is available, including exemptions contained in Rule 144. The Common Shares are
also subject to other restrictions to facilitate the maintenance of REIT status
by GREAT. See "Description of Capital Stock--Restrictions on Transfer" and
"PROPOSAL TO AMEND THE CHARTER (Proposal 2)--Description of the Proposed
Amendments to the Charter--Description of the Proposed Amendment to the "Excess
Shares" Provision."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated with them in accordance with Rule 144) who has
beneficially owned "restricted shares" (defined generally as shares acquired
from the issuer or an affiliate in a non-public transaction) for at least two
years, as well
122
<PAGE>
as any person who purchased unrestricted shares on the open market who may be
deemed an affiliate of the Company, would be entitled to sell, subject to
certain manner of sale, public information and notice requirements, within any
three-month period, a number of Common Shares that does not exceed the greater
of 1% of the then-outstanding number of Common Shares or 1% of the average
weekly trading volume of those shares during the four calendar weeks preceding
each such sale. After restricted shares are held for three years, a person who
is not then deemed an affiliate of the Company is entitled to sell such shares
under Rule 144 without regard to these volume limitations. Sales of Common
Shares by affiliates of the Company will continue to be subject to the volume
limitations, unless resold under an effective registration statement under the
Securities Act. The SEC has published a notice of proposed rulemaking which, if
adopted as proposed, would shorten the applicable holding period under Rule
144(d) and Rule 144(k) to one and two years, respectively (from the current two-
and three-year periods described above). The Company cannot predict whether such
amendments will be adopted or the effect thereof on the trading market for its
Common Shares.
It is expected that the Operating Partnership will issue up to an aggregate
of 2,262,461 Common Units to Limited Partners and the Grove Companies in
connection with the Consolidation Transactions, which may be redeemed by holders
for cash or, at the Company's option, exchanged for Common Shares, subject to
certain anti-dilution adjustments. See "THE OP PARTNERSHIP AGREEMENT--Limited
Partner Redemption/Exchange Rights." Each such Limited Partner will be required,
upon the issuance of Common Units to such Limited Partner to agree not to,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose (or announce an offer,
sale, offer to sell, pledge, grant of any options to purchase or sell or
dispose) of any Common Units or Common Shares, or any securities convertible or
exercisable or exchangeable for any Common Units or Common Shares or other
capital stock, for a period of one year from the consummation of the
Consolidation Transactions.
GREAT established the 1994 Plan for the purpose of attracting and retaining
executive officers, trust managers and other key employees. See "EXECUTIVE
COMPENSATION--1994 Share Option Plan." Initially, 100,000 Common Shares were
reserved for grant under the 1994 Plan. Upon the consummation of the IPO, the
Executive Officers were issued options to purchase 50,000 Common Shares under
the 1994 Plan having an exercise price of $11.25, which will expire in June
2004. In addition, under the 1994 Plan, each Non-Employee Trust Manager of GREAT
was granted, upon his election to the Board, a Non-Employee Trust Manager Option
to purchase 2,000 Common Shares, and has been granted an additional Non-Employee
Trust Manager Option to purchase 1,000 Common Shares on each anniversary of his
election. On October 31, 1996, GREAT issued options to purchase an additional
38,000 Common Shares to certain Executive Officers pursuant to the 1994 Plan.
Options to purchase all 100,000 authorized Common Shares have been issued to
Executive Officers and Non-Employee Trust Managers pursuant to the 1994 Plan. In
connection with the Consolidation Transactions, upon the effectiveness of the
1996 Plan, no further options to purchase Common Shares will be granted under
the 1994 Plan.
Following the consummation of the Consolidation Transactions, pursuant to
the 1996 Plan, each Non-Employee Trust Manager of Grove Property will receive an
annual grant of Non-Employee Trust Manager Options to purchase 5,000, rather
than 1,000 Common Shares. See "MANAGEMENT--Compensation of Trust Managers" and
"PROPOSAL TO ADOPT THE 1996 SHARE INCENTIVE PLAN (Proposal 3)-- Options Granted
to Non-Employee Trust Managers." Additionally, simultaneously with and in
connection with the consummation of the Consolidation Transactions, pursuant to
the 1996 Plan, the Company intends to issue options to purchase 300,000 Common
Shares to certain Executive Officers and Non-Employee Trust Managers of the
Company. See "PROPOSAL TO ADOPT THE 1996 SHARE INCENTIVE PLAN (Proposal
3)--Awards to Employees--Options," "--Options Granted to Non-Employee Trust
Managers" and "EXECUTIVE COMPENSATION--1996 Share Incentive Plan." Giving effect
to the additional 900,000 Common Shares to be reserved for issuance pursuant to
the 1996 Plan, 600,000 Common Shares will remain available for future grants of
options under the 1996 Plan following the consummation of the
123
<PAGE>
Consolidation Transactions. In addition, the Company may issue from time to time
additional Common Shares or Common Units in connection with the acquisition of
properties.
Common Shares issued at the option of the Company upon the exchange of
Common Units for Common Shares or issued upon the exercise of options, may be
sold in the public market pursuant to the registration rights described below.
Future sales of the Common Shares could have an adverse effect on the market
price of Common Shares and the existence of Common Units, options, Common Shares
reserved for issuance at the option of the Company upon exchange of Common
Units, and the exercise of options and registration rights (described below) may
adversely affect the market price of Common Shares and/or the terms upon which
the Company may be able to obtain capital through the sale of equity securities.
REGISTRATION RIGHTS. Each limited partner of the Operating Partnership will
have redemption rights, which will permit them, at any time beginning one year
after the completion of the Consolidation Transactions, to require the Operating
Partnership to redeem part or all of their Common Units for cash (based on the
fair market value of an equivalent number of Common Shares on the date of such
redemption) or, at the option of the Company, to exchange such Common Units for
Common Shares on a one-for-one basis (subject to certain antidilution
adjustments and conditions), subject to indemnification claims. Upon completion
of the Consolidation Transactions, an aggregate of approximately 2,262,461
Common Units will be held by Limited Partners and the Grove Companies. If a
limited partner of the Operating Partnership elects to redeem Common Units and
the Company elects to exchange such Common Units for Common Shares, each Common
Unit will be exchangeable for one Common Share, subject to adjustment in the
event of stock splits, distributions of rights, extraordinary dividends and
similar events affecting the Common Shares.
In order to protect Grove Property's status as a REIT, a holder of Common
Units is prohibited from receiving Common Shares upon exchange for Common Units,
to the extent that as a result of such exchange any person would own or would be
deemed to own a number of Common Shares in excess of the Ownership Limit or the
Executive Officer Ownership Limit, or if ownership of such Common Shares by such
holder would otherwise cause the Company to fail to continue to qualify as a
REIT. See "Description of Capital Stock--Restrictions on Ownership and Transfer"
and "PROPOSAL TO AMEND THE CHARTER (Proposal 2)--Description of the Proposed
Amendments to the Charter--Description of the Proposed Amendments to the Excess
Shares Provision."
The Company has granted certain entities and individuals receiving Common
Units in connection with the Consolidation Transactions the Registration Rights
with respect to Registrable Shares. Pursuant to the Registration Rights
Agreement, holders of Common Units may have the right to receive the Common
Shares issued upon the exercise by such holders of their redemption rights,
pursuant to a registration with the SEC, and may have the resale of such Common
Shares registered if necessary. The Company has agreed to file and generally
keep continuously effective beginning one year after the completion of the
Consolidation Transactions a registration statement covering the issuance of
shares upon exchange of Common Units and the resale thereof. Such Registration
Rights will be subject to certain significant conditions, including, but not
limited to, GREAT's ability to effect and maintain such registration, customary
blackout provisions and any procedures and limitations which may be imposed by
the staff of the SEC. The Company will bear expenses incident to its
registration obligations upon exercise of the Registration Rights, including the
payment of federal securities law and state blue sky registration fees, except
that it will not bear any underwriting discounts or commissions or transfer
taxes relating to registration of Registrable Shares. The Company expects that
the securities issued pursuant to the New Equity Investment will also have the
benefit of the Registration Rights Agreement.
124
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Shares and
Common Units by each person the Company expects will beneficially own more than
5% of the Common Shares and/or the Common Units following, and giving effect to,
the Consolidation Transactions.
<TABLE>
<CAPTION>
PERCENT OF
CLASS OF
AMOUNT AND NATURE OF COMMON
BENEFICIAL OWNERSHIP(1)(2) PERCENT OF CLASS PERCENT OF SHARES/
NAME AND ADDRESS ------------------------------- OF COMMON COMMON COMMON
OF BENEFICIAL OWNER COMMON SHARES COMMON UNITS SHARES UNITS UNITS
- ----------------------------------------------- --------------- -------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Damon D. Navarro............................... 32,585(3) 301,563 0.8% 5.2% 5.7%
598 Asylum Avenue
Hartford, CT 06105
Brian A. Navarro............................... 30,215(4) 292,512 0.8% 5.0% 5.5%
598 Aslyum Avenue
Hartford, CT 06105
Grove Property Services Limited
Partnership(5)............................... -- 610,734 -- 11.8% 11.8%
</TABLE>
- ------------------------
(1) Beneficial ownership of the Common Shares held by the Grove Companies has
been attributed to the named individuals based solely on their respective
PRO RATA ownership interests in the equity of the entities included in the
Grove Companies. However, because of their ability to control certain voting
and/or investment decisions of the entities included in the Grove Companies,
one or more of the named individuals may be deemed to have beneficial
ownership of all of the Common Units held by certain of the Grove Companies
under Regulation 13d-3 promulgated by the SEC under the Securities Exchange
Act of 1934, as amended. See Note (5) below.
(2) The number of Common Shares underlying options granted under the 1994 Plan
to each named individual has been adjusted to give effect to the Stock
Split, as provided in the 1994 Plan.
(3) Includes 12,155 Common Shares subject to options to purchase Common Shares
granted to Mr. Navarro pursuant to the 1994 Plan.
(4) Includes 11,221 Common Shares subject to options to purchase Common Shares
granted to Mr. Navarro pursuant to the 1994 Plan.
(5) Includes the Common Units that may be held by Grove Property Services
Limited Partnership, rather than by individuals, upon consummation of the
Consolidation Transactions. These Common Units are also included in the
beneficial ownership of the named individuals to the extent of their equity
ownership of Grove Property Services Limited Partnership.
125
<PAGE>
The following table sets forth the beneficial ownership of the Common Shares
and Common Units by (i) the Trust Managers, (ii) the Chief Executive Officer of
GREAT and the four most highly compensated Executive Officers of GREAT other
than the Chief Executive Officer and (iii) the Trust Managers and the Executive
Officers of GREAT as a group, following, and giving effect to, the Consolidation
Transactions.
<TABLE>
<CAPTION>
PERCENT OF
CLASS OF
AMOUNT AND NATURE PERCENT OF COMMON
OF BENEFICIAL OWNERSHIP(1)(2) CLASS PERCENT OF SHARES/
NAME AND ADDRESS ------------------------------- OF COMMON COMMON COMMON
OF BENEFICIAL OWNER COMMON SHARES COMMON UNITS SHARES UNITS UNITS
- ----------------------------------------------- --------------- -------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Damon D. Navarro(3)............................
Brian A. Navarro(3)............................
Edmund F. Navarro.............................. 30,215(4) 247,877 0.8% 4.3% 4.8%
Joseph R. LaBrosse............................. 7,702(5) 65,473 0.2% 1.1% 1.3%
Gerald A. McNamara............................. 5,808(6) 27,229 0.2% 0.5% 0.6%
James F. Twaddell.............................. 10,710(7) -- 0.3% 0.0% 0.2%
Harold V. Gorman............................... 1,969(8) -- 0.1% 0.0% 0.1%
J. Joseph Garrahy.............................. 1,969(8) -- 0.1% 0.0% 0.1%
Trust Managers and Executive Officers as a
Group (8 Persons)............................ 121,171 934,654 3.0% 16.0% 17.9%
</TABLE>
- ------------------------
(1) Beneficial ownership of the Common Shares held by the Grove Companies has
been attributed to the named individuals (where and if applicable) based
solely upon their respective pro rata ownership interests in the equity of
the entities included in the Grove Companies. However, because of their
ability to control certain voting and/or investment decisions of such
entities, one or more of the named individuals may be deemed to have
beneficial ownership of all of the Common Shares held by certain of the
Grove Companies under Regulation 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended.
(2) The number of Common Shares underlying options to purchase Common Shares
granted to each named individual under the 1994 Plan has been adjusted to
give effect to the Stock Split, as provided in the 1994 Plan.
(3) The beneficial ownership interests of each of these persons is disclosed in
the table above.
(4) Includes 11,221 Common Shares subject to options to purchase Common Shares
granted pursuant to the 1994 Plan.
(5) Includes 2,807 Common Shares subject to options to purchase Common Shares
granted pursuant to the 1994 Plan.
(6) Includes 1,969 Common Shares subject to options to purchase Common Shares
granted pursuant to the 1994 Plan, including 1,181 Common Shares
beneficially owned by Mr. McNamara's daughter, with respect to which he
disclaims beneficial ownership.
(7) Includes 1,969 Common Shares subject to options to purchase Common Shares
granted pursuant to the 1994 Plan, including 1,417 Common Shares
beneficially owned by Mr. Twaddell's spouse, with respect to which he
disclaims beneficial ownership.
(8) Includes 1,969 Common Shares subject to options to purchase Common Shares
granted pursuant to the 1994 Plan.
126
<PAGE>
EXECUTIVE COMPENSATION
The following tables set forth information concerning the cash compensation,
share options and retirement benefits provided to the Company's Chief Executive
Officer and its four other Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------------
AWARDS
--------------------------
ANNUAL COMPENSATION SECURITIES PAYOUTS
---------------------------------------------------- UNDERLYING -----------
OTHER ANNUAL RESTRICTED OPTIONS/ LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS SARS(1) PAYOUTS
- ------------------------------------- --------- ----------- ----------- --------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Damon D. Navarro 1996 none none none none 12,048(2) none
Chairman or the Board of 1995 none none none none none none
Trust Managers, President 1994 none none none none 18,232(3) none
and Chief Executive Officer
Joseph R. LaBrosse 1996 none none none none 4,016(2) none
Chief Financial Officer, 1995 none none none none none none
Secretary, Treasurer and 1994 none none none none 4,211(3) none
Trust Manager
Edmund F. Navarro 1996 none none none none 12,048(2) none
Vice President--Property 1995 none none none none none none
Management 1994 none none none none 16,832(3) none
Brian A. Navarro 1996 none none none none 12,048(2) none
Vice President-- 1995 none none none none none none
Acquisitions 1994 none none none none 16,832(3) none
Gerald A. McNamara 1996 none none none none 4,725(2) none
Vice President--Marketing 1995 none none none none none none
and Strategic Planning 1994 none none none none 2,953(3) none
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION
- ------------------------------------- ---------------
<S> <C>
Damon D. Navarro none
Chairman or the Board of none
Trust Managers, President none
and Chief Executive Officer
Joseph R. LaBrosse none
Chief Financial Officer, none
Secretary, Treasurer and none
Trust Manager
Edmund F. Navarro none
Vice President--Property none
Management none
Brian A. Navarro none
Vice President-- none
Acquisitions none
Gerald A. McNamara none
Vice President--Marketing none
and Strategic Planning none
</TABLE>
- ------------------------
(1) The number of Common Shares underlying options granted to each named
individual under the 1994 Plan has been adjusted to give effect to the Stock
Split, as provided in the 1994 Plan.
(2) Options to purchase the indicated number of Common Shares were granted to
such Executive Officer on October 31, 1996, pursuant to the 1994 Plan. For a
summary of the terms and conditions pursuant to which such options were
granted, see "--1994 Share Option Plan."
(3) Options to purchase the indicated numbers of Common Shares were granted to
such Executive Officer on June 17, 1994, pursuant to the 1994 Plan. For a
summary of the terms and conditions pursuant to which such options were
granted, see "--1994 Share Option Plan."
127
<PAGE>
INDIVIDUAL OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS/SARS EXERCISE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERM
OPTIONS/SARS EMPLOYEES PRICE EXPIRATION --------------------------
NAME GRANTED (#) IN FISCAL YEAR ($/SHARE) DATE 5%($)(3) 10%($)(4)
- ------------------------------------- ----------------- --------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Damon Navarro........................ 12,048(1) 26.8% 7.25(2) 10/31/06 142,280.69 226,558.22
Joseph LaBrosse...................... 4,016(1) 9.8% 7.25(2) 10/31/06 47,426.90 75,519.41
Brian Navarro........................ 12,048(1) 26.8% 7.25(2) 10/31/06 142,280.69 226,558.22
Edmund Navarro....................... 12,048(1) 26.8% 7.25(2) 10/31/06 142,280.69 226,558.22
Gerald McNamara...................... 4,725(1) 10.6% 7.25(2) 10/31/06 55,799.82 88,851.89
</TABLE>
- ------------------------
(1) Options to purchase the indicated number of Common Shares were granted to
such Executive Officer on October 31, 1996, pursuant to the 1994 Plan. The
number of Common Shares underlying such options have been adjusted to give
effect to the Stock Split, as provided in the 1994 Plan.
(2) The exercise price per Common Share of options granted under the 1994 Plan
has been adjusted to give effect to the Stock Split, as provided in the 1994
Plan.
(3) Each of the potential realizable values listed below assumes (i) that the
Common Shares underlying the options granted to such Executive Officers
appreciate in value from the date of grant ($7.25 per Common Share, as
adjusted) through the ten-year term of such options, at an annualized rate
of 5.0% and (ii) that such Executive Officer does not exercise such options
(and such options do not otherwise become unexercisable) prior to the end of
such ten-year option term.
(4) Each of the potential realizable values listed below assumes (i) that the
Common Shares underlying the options granted to such Executive Officers
appreciate in value from the date of grant ($7.25 per Common Share, as
adjusted) through the ten-year term of such options, at an annualized rate
of 10.0% and (ii) that such Executive Officer does not exercise such options
(and such options do not otherwise become unexercisable) prior to the end of
such ten-year option term.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
SHARES UNEXERCISED OPTIONS/SARS AT
ACQUIRED VALUE FY-END
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE(1)(2)
- --------------------------------- ----------------- --------------- ---------------------------------
<S> <C> <C> <C>
Damon Navarro.................... 0 0 12,155/18,126
Joseph LaBrosse.................. 0 0 2,807/5,420
Brian Navarro.................... 0 0 11,221/17,659
Edmund Navarro................... 0 0 11,221/17,659
Gerald McNamara.................. 0 0 1,969/5,709
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS/SARS
NAME AT FY-END(3)
- --------------------------------- ---------------------------
<S> <C>
Damon Navarro.................... 0
Joseph LaBrosse.................. 0
Brian Navarro.................... 0
Edmund Navarro................... 0
Gerald McNamara.................. 0
</TABLE>
- ------------------------
(1) The number of Common Shares underlying options to purchase Common Shares
granted to an individual under the 1994 Plan has been adjusted to give
effect to the Stock Split, as provided in the 1994 Plan.
128
<PAGE>
(2) The number of Common Shares underlying unexercised options is given as of
September 30, 1996, rather than as of the end of the 1995 fiscal year.
(3) The determination as to whether such options are "in-the-money" was made by
reference to the market price of the Common Shares at September 30, 1996, as
the market value of the Common Shares at the end of the 1996 fiscal year is
presently undeterminable.
COMPENSATION OF TRUST MANAGERS. For detailed information regarding the
compensation paid by GREAT and to be paid by Grove Property to Trust Managers,
see "MANAGEMENT--Compensation of Trust Managers."
EMPLOYMENT AGREEMENTS; NON-COMPETITION AGREEMENTS. In connection with the
IPO, GREAT entered into a three-year employment agreement (each, an "EMPLOYMENT
AGREEMENT") with each Executive Officer that will expire on the date of the
Annual Meeting of Shareholders to be held in 1997.
These Employment Agreements provide that the Executive Officers will not be
paid a salary during the term. However, GREAT issued to each Executive Officer,
as a sign-on bonus, options to purchase an aggregate of 50,000 Common Shares at
$11 1/8 per share. Such options are exercisable for a period of ten years from
the date of grant (June 17, 1994), were issued pursuant to the 1994 Plan, and
vest in increments of one-third on each anniversary of the closing date of the
IPO. Pursuant to the Employment Agreements, upon the death or disability of any
Executive Officer, he or his estate, as the case may be, will be entitled to
receive a payment equal to three times the amount of bonuses received by him
during the term of his Employment Agreement, however, only to the extent these
benefits can be funded with suitable life and disability insurance policies.
In connection with the Consolidation Transactions, and particularly as a
result of the Operating Partnership's acquisition of the Partnership Properties
and certain assets and liabilities of the Management Company from the Grove
Companies, Grove Property will enter into new employment agreements with each
Executive Officer. The following table sets forth the annual base salary Grove
Property intends to establish for each Executive Officer.
<TABLE>
<CAPTION>
ANNUAL BASE
NAME TITLE SALARY
- -------------------------------------- ------------------------------------------------------------ ------------
<S> <C> <C>
Damon Navarro......................... Chairman of the Board of Trust Managers; President and Chief $ 50,000
Executive Officer
Brian A. Navarro...................... Vice President--Acquisitions $ 50,000
Edmund F. Navarro..................... Vice President--Property Management $ 50,000
Joseph R. LaBrosse.................... Chief Financial Officer, Secretary and Treasurer $ 50,000
Gerald A. McNamara.................... Vice President--Marketing and Strategic Planning $ 25,000
</TABLE>
The employment agreements, effective upon consummation of the Consolidation
Transactions, will provide that the Executive Officers shall devote a
substantial part of their business time to the operations of the Company. The
agreements establish the initial base salaries set forth in the table above and
provide for an initial three-year term for each of the Executive Officers. The
term of each agreement is automatically extended for an additional year upon
expiration of the initial term and any extension period unless either Grove
Property or the Executive Officer provides the other with at least 120 days'
prior written notice that such term shall not be extended. If the agreements are
terminated by Grove Property "without cause" or are terminated by the Executive
Officer after a "change in control" or for "good reason" (as such terms are
defined in the agreements), the Executive Officer will be entitled to a lump sum
payment equal to 200 percent of such Executive Officer's annual base salary plus
an amount equal to the aggregate value of all bonuses, whether cash, stock,
options, or otherwise, granted to such Executive Officer for the previous year.
129
<PAGE>
The Executive Officers are also entering into the Non-Competition
Agreements. For a description of the terms of the Non-Competition Agreements,
see "MANAGEMENT--Non-Competition Agreements."
LIMITATION OF LIABILITY AND INDEMNIFICATION. Under Maryland law, a REIT
formed in Maryland is permitted to limit, by provision in its Declaration of
Trust, the liability of its trust managers and officers to the trust or its
shareholders 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 includes such a provision which limits such liability to the
fullest extent permitted by Maryland law.
The Bylaws require it to indemnify (a) any present or former trust manager,
officer or Shareholder or person who, while a trust manager, officer or
Shareholder, served or is serving as a trust manager, officer, director,
shareholder or partner of another entity at GREAT's express request (a "GREAT
AGENT") who has been successful, on the merits or otherwise, in the defense of a
proceeding to which he was made a party by reason of service in such capacity,
against any claim or liability by reason of service in such capacity unless it
is established that (i) his act or omission was material to the matter giving
rise to the proceeding and was committed in bad faith or was the result of
active and deliberate dishonesty, (ii) he actually received an improper personal
benefit in money, property or services or (iii) in the case of a criminal
proceeding, he had reasonable cause to believe that his act or omission was
unlawful, and (b) any present or former Shareholder against any claim or
liability to which he becomes subject by reason of such status. In addition, the
Bylaws require it to pay or reimburse, in advance of final disposition of a
proceeding, reasonable expenses incurred by a present or former trust manager,
officer or shareholder or person who, while a trust manager, officer or
Shareholder, served or is serving as a GREAT Agent, made a party to a proceeding
by reason of service in such capacity provided that, in the case of a trust
manager or officer, GREAT shall have received (1) a written affirmation by such
person of his good faith belief that he has met the standard of conduct
necessary for indemnification by GREAT as authorized by the Bylaws and (2) a
written undertaking by or on his behalf to repay the amount paid or reimbursed
by GREAT if it shall ultimately be determined that the applicable standard of
conduct was not met. The Bylaws also (x) permit GREAT to provide indemnification
and payment or reimbursement of expenses to a present or former trust manager,
officer or Shareholder who served a predecessor of GREAT, and to any GREAT
Agent, or agent of a predecessor of GREAT, (y) provided that any indemnification
or payment or reimbursement of the expenses permitted by the Bylaws shall be
furnished in accordance with the procedures provided for indemnification and
payment or reimbursement of expenses under Section 2-418 of the Maryland REIT
Act for directors of Maryland corporations and (z) permit GREAT to provide such
other and further indemnification or payment or reimbursement of expenses as may
be permitted by Section 2-418 of the Maryland REIT Act for directors of Maryland
corporations.
Pursuant to indemnification agreements between GREAT and each Trust Manager
and Executive Officer, GREAT has agreed to indemnify each of them to the fullest
extent permitted by Maryland law as in effect on the date of such
indemnification agreements or as such laws may from time to time thereafter be
amended to increase the scope of that indemnification.
GREAT does not presently intend to obtain directors' and officers' liability
insurance coverage, although it may do so in the future.
EXECUTIVE BONUS INCENTIVE PLAN. A bonus incentive compensation plan was
established for the Executive Officers in connection with the IPO (the
"INCENTIVE PLAN"). The Incentive Plan awards a cash bonus to eligible Executive
Officers based on the achievement of specified targets and goals established for
GREAT and the individual officer. The primary target is the desired annual
distribution per Common Share based upon targeted cash available for
distribution. If targets and goals are not met, no payment is made. The amount
of the cash bonus is based on a formula determined for each executive and key
officer based on the attainment of certain levels of cash available for
distribution. Specifically, (i) if GREAT achieves cash available for
distribution in an amount equal to $600,000, the Executive Officers receive a
130
<PAGE>
bonus of $25,000, in the aggregate; (ii) if GREAT achieves cash available for
distribution in an amount equal to $650,000 in the aggregate, the Executive
Officers receive an additional bonus of $25,000; and (iii) if GREAT achieves
cash available for distribution in an amount in excess of $650,000, the
Executive Officers receive an additional bonus in an amount equal to 50% of the
amount by which cash available for distribution exceeds $650,000, up to a
maximum aggregate bonus amount of $75,000, with respect to (iii), only. As of
the date of this Proxy Statement, no Executive Officer has received an award
under the Incentive Plan. The Incentive Plan will be terminated upon
consummation of the Consolidation Transactions.
1994 SHARE OPTION PLAN. GREAT has adopted a share option plan (the "1994
PLAN") which is administered by a committee of the Board (the "COMMITTEE")
consisting of at least two trust managers who are "disinterested persons" within
the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as amended.
The Compensation Committee currently functions as the Committee. The Committee
generally has the authority, within limitations set forth in the 1994 Plan, to
establish rules and regulations concerning the 1994 Plan, to determine the
persons to whom options may be granted, the number of Common Shares to be
covered by each option and the terms and provisions of the options to be
granted. The Committee has the right to cancel any outstanding options and to
issue new options on such terms and conditions as may be consented to by the
optionee affected.
A total of 100,000 Common Shares has been reserved for issuance under the
1994 Plan. Options to purchase all 100,000 such Common Shares have been granted
to Executive Officers and Non-Employee Trust Managers. Options to purchase
50,000 Common Shares were granted to the Executive Officers in connection with
the IPO. These options have an exercise price equal to $11 1/8 per Common Share,
expire in June 2004 and became exercisable in increments of 33 1/3% per year on
each of the first two anniversaries of the date of grant, with the balance
exercisable in June 1997.
Under the 1994 Plan, each Trust Manager who was not an employee of GREAT
automatically received, upon his election to the Board, a non-qualified stock
option to purchase 2,000 Common Shares, and has received an option to purchase
1,000 Common Shares on each anniversary of such election. The Non-Employee Trust
Managers have received options to purchase an aggregate of 12,000 Common Shares
under the 1994 Plan.
On October 31, 1996, pursuant to the 1994 Plan, GREAT granted to the
Executive Officers options to purchase, in the aggregate, 38,000 Common Shares.
The exercise price of each such option is $8 9/16.
Following the consummation of the Consolidation Transactions, no further
grants will be made under the 1994 Plan and future grants of options and Common
Shares will be made pursuant to the 1996 Plan. See "PROPOSAL TO ADOPT THE 1996
SHARE INCENTIVE PLAN--Awards Granted to Employees" and "--Options Granted to
Non-Employee Trust Managers."
131
<PAGE>
The table below sets forth certain information with respect to the options
granted to Executive Officers and Non-Employee Trust Managers since GREAT's
formation in 1994. All such options were granted pursuant to the 1994 Plan and
have been adjusted to give effect to the Stock Split, as provided in the 1994
Plan. Additionally, the exercise prices per Common Share presented for such
options have been adjusted to give effect to the Stock Split.
<TABLE>
<CAPTION>
1996
1994 OPTIONS 1995 OPTIONS OPTIONS
---------------------- ---------------------- ---------
DATE OF OPTION EXPIRATION DATE OF OPTION EXPIRATION DATE OF
NAME GRANT NO. GRANTED PRICE DATE GRANT NO. GRANTED PRICE DATE GRANT
- ---------------- --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Damon Navarro 6/23/94 18,232 9.42 6/22/04 -- -- -- -- 10/31/96
Joseph LaBrosse 6/23/94 4,211 9.42 6/22/04 -- -- -- -- 10/31/96
Brian Navarro 6/23/94 16,832 9.42 6/22/04 -- -- -- -- 10/31/96
Edmund Navarro 6/23/94 16,832 9.42 6/22/04 -- -- -- -- 10/31/96
Gerald A.
McNamara 6/23/94 2,953 9.42 6/22/04 -- -- -- -- 10/31/96
James F.
Twaddell 6/23/94 2,362 9.42 6/22/04 6/13/95 1,181 7.20 6/12/05 5/17/96
Harold Gorman 6/23/94 2,362 9.42 6/22/04 6/13/95 1,181 7.20 6/12/05 5/17/96
J. Joseph
Garrahy 6/23/94 2,362 9.42 6/22/04 6/13/95 1,181 7.20 6/12/05 5/17/96
<CAPTION>
OPTION EXPIRATION
NAME NO. GRANTED PRICE DATE
- ---------------- ----------- ----------- -----------
<S> <C> <C> <C>
Damon Navarro 12,048 7.25 10/31/06
Joseph LaBrosse 4,016 7.25 10/31/06
Brian Navarro 12,048 7.25 10/31/06
Edmund Navarro 12,048 7.25 10/31/06
Gerald A.
McNamara 4,725 7.25 10/31/06
James F.
Twaddell 1,181 7.73 5/16/06
Harold Gorman 1,181 7.73 5/16/06
J. Joseph
Garrahy 1,181 7.73 5/16/06
</TABLE>
1996 SHARE INCENTIVE PLAN. Assuming Shareholder approval of the 1996 Plan,
upon the consummation of the Consolidation Transactions, the Company will adopt
the 1996 Plan and each Executive Officer will receive a grant of options to
purchase the number of Common Shares indicated opposite such Executive Officer's
name in the table below. See "PROPOSAL TO ADOPT THE 1996 SHARE INCENTIVE PLAN
(Proposal 3)--Awards Granted to Employees--Options" for a description of these
grants.
Upon the closing of the Consolidation Transactions, options to purchase the
following numbers of Common Shares will be granted to the Executive Officers
pursuant to the 1996 Plan, and will be exercisable at the Fair Market Value on
the date of grant:
<TABLE>
<CAPTION>
NAME OPTIONS GRANTED
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Damon Navarro................................................................ 75,000
Joseph LaBrosse.............................................................. 25,000
Brian Navarro................................................................ 75,000
Edmund Navarro............................................................... 75,000
Gerald McNamara.............................................................. 20,000
</TABLE>
DEFERRED STOCK GRANTS. In connection with the consummation of the
Consolidation Transactions, the Compensation Committee has authorized the grant
of Deferred Stock Grants to Executive Officers under the 1996 Plan as incentive
compensation based on the annual growth of FFO per Common Share for the fiscal
year prior to the year in which such restricted Common Shares are granted. See
"PROPOSAL TO ADOPT THE 1996 SHARE INCENTIVE PLAN--Awards Granted to
Employees--Restricted Stock Awards" for a description of the terms of these
Deferred Stock Grants."
401(k) PLAN. In 1994, GREAT adopted the Grove Real Estate Asset Trust
401(k) Savings Plan (the "PLAN"), which is a voluntary and defined contribution
plan. Under the Plan, every employee is eligible to participate in the Plan
beginning on the earlier of January 1 or July 1 following the date the employee
has completed six months of continuous service with GREAT.
132
<PAGE>
Each participant may make contributions to the Plan by means of a pre-tax
salary deferral which may not be less than 1% nor more than 16% of the
participant's compensation. The Code limits the annual amount of salary
deferrals that may be made by any participant. Each year, for each $1.00
contributed to the Plan by a participant, GREAT may make a matching contribution
of $0.25 on the participant's behalf, up to 4% of the participant's
compensation.
A participant's salary deferral contributions are always 100% vested and
nonforfeitable. In the event of death or disability, a participant will become
vested in GREAT's matching contribution. Otherwise, a participant will become
vested in GREAT's matching contributions 33 1/3% after one year of service,
66 2/3% after two years of service and 100% after three or more years of
service.
The Board may amend or terminate the Plan at any time, but may not
retroactively diminish or adversely affect any accrued interest or benefit of
the participants under the Plan. Upon termination of the Plan, each
participant's matching contribution will become fully vested, regardless of the
years of vesting service.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the Company is based on current law, is for general information only
and is not tax advice. This discussion does not purport to deal with all aspects
of taxation that may be relevant to particular Shareholders in light of their
personal investment or tax circumstances, or to certain types of Shareholders
subject to special treatment under the federal income tax laws, including
certain financial institutions, life insurance companies, dealers in securities
or currencies, shareholders holding Common Shares as part of a conversion
transaction, as part of a hedge or hedging transaction, or as a position in a
straddle for tax purposes, tax-exempt organizations (except to the extent
discussed under the heading "--Taxation of Tax-Exempt Shareholders") or foreign
corporations and persons who are not citizens or residents of the United States
(except to the extent discussed under the heading "Taxation of Non-U.S.
Shareholders"). In addition, the summary below does not consider the effect of
any foreign, state, local or other tax laws that may be applicable to
prospective shareholders.
EACH SHAREHOLDER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR REGARDING
THE SPECIAL TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE
OF THE COMMON SHARES INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
GENERAL. The Company has made an election to be taxed as a REIT under
Sections 856 through 860 of the Code commencing with its taxable year ending
December 31, 1994. The Company believes that, commencing with such taxable year,
it has been organized and operated in such a manner as to qualify for taxation
as a RElT under the Code, and the Company intends to continue to operate in such
a manner, but no assurance can be given that it will operate in such a manner so
as to remain so qualified.
These sections of the Code, and the corresponding Treasury Regulations, are
highly technical and complex. The following sets forth the material aspects of
the sections that govern the federal income tax treatment of a REIT and its
shareholders. This summary is qualified in its entirety by the applicable Code
provisions, rules and regulations promulgated thereunder, and administrative and
judicial interpretations thereof.
133
<PAGE>
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to shareholders. This treatment substantially eliminates the "double
taxation" (at the corporate and shareholder levels) that generally results from
investment in a regular corporation. However, the Company will be subject to
federal income tax as follows: First, the Company will be taxed at regular
corporate rates on any undistributed "REIT taxable income," including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" (defined generally as property acquired by
the Company through foreclosure or otherwise after a default on a loan secured
by the property or a lease of the property) which is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest corporate
rate on such income. Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of business
other than foreclosure property), such income will be subject to a 100% tax.
Fifth, if the Company should fail to satisfy the 75% gross income test or the
95% gross income test (as discussed below), but has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company fails the 75% or
95% test multiplied by (b) a fraction intended to reflect the Company's
profitability. Sixth, 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 net 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. Seventh, with respect to any asset (a "BUILT-IN GAIN
ASSET") acquired by the Company from a corporation which is or has been a C
corporation (I.E., generally a corporation subject to full corporate-level tax)
in a transaction in which the basis of the Built-ln Gain Asset in the hands of
the Company is determined by reference to the basis of the asset in the hands of
the C corporation, if the Company recognizes gain on the disposition of such
asset during the ten-year period (the "RECOGNITION PERIOD,") beginning on the
date on which such asset was acquired by the Company, then, to the extent of the
Built-In Gain (I.E., the excess of (a) the fair market value of such asset over
(b) the Company's adjusted basis in such asset, determined as of the beginning
of the Recognition Period), such gain will be subject to tax at the highest
regular corporate rate pursuant to Treasury Regulations that have not yet been
promulgated. The results described above with respect to the recognition of
Built-In Gain assume that the Company will make an election pursuant to IRS
Notice 88-19 and that such treatment is not modified by certain revenue
proposals in the Administration's 1997 Budget Proposal.
REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation,
trust or association: (i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) which would be
taxable as a domestic corporation, but for Sections 856 through 859 of the Code;
(iv) which is neither a financial institution nor an insurance company subject
to certain provisions of the Code; (v) the beneficial ownership of which is held
by 100 or more persons; (vi) during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities); and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) to (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of twelve
months, or during a proportionate part of a taxable year of less than twelve
months. Conditions (v) and (vi) will not apply until after the first taxable
year for which an election is made to be taxed as a REIT. For purposes of
conditions (v) and (vi), pension funds and certain other tax-exempt entities are
treated as individuals, subject to a "look-through" exception in the case of
condition (vi).
134
<PAGE>
The Company believes that it has issued sufficient Common Shares with
sufficient diversity of ownership to allow it to satisfy conditions (v) and
(vi). In addition, the Company's Declaration of Trust provides for restrictions
regarding the transfer and ownership of shares, which restrictions are intended
to assist the Company in continuing to satisfy the share ownership requirements
described in (v) and (vi) above. Such ownership and transfer restrictions are
described in "Description of Capital Stock-Restrictions on Ownership and
Transfer." These restrictions may not ensure that the Company will, in all
cases, be able to satisfy the share ownership requirements described above. If
the Company fails to satisfy such share ownership requirements, the Company's
status as a REIT will terminate. See "--Failure to Qualify."
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company has a calendar taxable year.
OWNERSHIP OF A PARTNERSHIP INTEREST. In the case of a REIT which is a
partner in a partnership, Treasury Regulations provide that the REIT will be
deemed to own its proportionate share of the assets of the partnership and will
be deemed to be entitled to the income of the partnership attributable to such
share. In addition, the 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. Thus, the Company's proportionate share of the assets and
items of income of the Operating Partnership (including the Operating
Partnership's share of such items of any subsidiary partnerships, including the
Property Partnerships) will be treated as assets and items of income of the
Company for purposes of applying the requirements described herein. A summary of
the rules governing the federal income taxation of partnerships and their
partners is provided below in "--Tax Aspects of the Operating Partnership." The
Company has direct control of the Operating Partnership and intends to operate
it consistent with the requirements for qualification as a REIT.
INCOME TESTS. In order to maintain its qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing). Third, subject to certain exceptions in the year in which the
Company is liquidated, short-term gain from the sale or other disposition of
stock or securities, gain from prohibited transactions and gain on the sale or
other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year. For purposes of applying the 30% gross
income test, the holding period of Properties acquired by the Operating
Partnership in the Consolidation Transactions will be deemed to have commenced
on the date of acquisition.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the REIT, or an owner of 10% or more of the REIT, actually or
constructively owns 10% or more of such tenant (a "RELATED PARTY TENANT").
Third, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Finally, for rents received to qualify as
"rents from real property," the REIT generally must not
135
<PAGE>
operate or manage the property or furnish or render services to the tenants of
such property, other than through an independent contractor from whom the REIT
derives no revenue. The RElT may, however, directly perform certain services
that are "usually or customarily rendered" in connection with the rental of
space for occupancy only and are not otherwise considered "rendered to the
occupant" of the property. The Company does not and will not: (i) charge rent
for any property that is based in whole or in part on the income or profits of
any person (except by reason of being based on a percentage of receipts or
sales, as described above); (ii) rent any property to a Related Party Tenant
(unless the Board of Trust Managers determines in its discretion that the rent
received from such Related Party Tenant is not material and will not jeopardize
the Company's status as a REIT); (iii) derive rental income attributable to
personal property (other than personal property leased in connection with the
lease of real property, the amount of which is less than 15% of the total rent
received under the lease); or (iv) perform services considered to be rendered to
the occupant of the property, other than through an independent contractor from
whom the Company derives no revenue.
The Operating Partnership will receive fees in exchange for the performance
of certain third party property management activities. The Company's
proportionate share of these fees will be treated as income of the Company by
virtue of its status as a partner of the Operating Partnership as discussed
above. Such fees will not qualify under the 95% gross income test, or the 75%
gross income test. The Company believes, however, that the aggregate amount of
this and other nonqualifying income in any taxable year will not exceed the
limit on nonqualifying income under the gross income tests.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally would not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its federal income tax
return, and any incorrect information on the schedule was 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. For example, if the Company fails to satisfy the gross income tests
because nonqualifying income that the Company intentionally incurs exceeds the
limits on such income, the IRS could conclude that the Company's failure to
satisfy the tests was not due to reasonable cause. If these relief provisions
are inapplicable to a particular set of circumstances involving the Company, the
Company would not qualify as a REIT. As discussed above in "federal income tax
Considerations--Taxation of the Company--General," even if these relief
provisions apply, a 100% tax would be imposed on an amount equal to (a) the
gross income attributable to the greater of the amount by which the Company
failed the 75% or 95% test multiplied by (b) a fraction intended to reflect the
Company's profitability. No similar mitigation provision provides relief if the
Company fails the 30% gross income test. In such case, the Company would cease
to qualify as a REIT.
Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the ordinary
course of business will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. Such prohibited transaction income may also
have an adverse effect upon the Company's ability to satisfy the income tests
for qualification as a REIT. Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of a trade
or business is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. The Operating
Partnership intends to hold 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 other properties) and to make such
occasional sales of the Properties as are consistent with the Operating
Partnership's investment objectives.
136
<PAGE>
ASSET TESTS. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets including (i) its allocable share of real estate assets held by
partnerships in which the Company owns a direct or indirect interest (such as
the Operating Partnership and the Property Partnerships) and (ii) stock or debt
instruments held for not more than one year purchased with the proceeds of a
stock offering or long-term (at least five years) public debt offering of the
Company, cash, cash items and government securities. Second, not more than 25%
of the Company's total assets may be represented by securities other than those
in the 75% asset class. Third, of the investments included in the 25% asset
class, the value of any one issuer's securities owned by the Company may not
exceed 5% of the value of the Company's total assets and the Company may not own
more than 10% of any one issuer's outstanding voting securities.
The Company anticipates that it will satisfy these asset tests.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter (including as a result of the
Company increasing its interest in the Operating Partnership), the failure can
be cured by the disposition of sufficient nonqualifying assets within 30 days
after the close of that quarter. The Company intends to maintain adequate
records of the value of its assets to ensure compliance with the asset tests and
to take such other actions within 30 days after the close of any quarter as may
be required to cure any noncompliance. If the Company fails to cure
noncompliance with the asset tests within such time period, the Company would
cease to qualify as a REIT.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its shareholders in an amount at least equal to (i) the sum of (a) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and by excluding the Company's net capital gain) and (b) 95% of the
excess of the net income, if any, from foreclosure property over the tax imposed
on such income, minus (ii) the excess of the sum of certain items of noncash
income (I.E., income attributable to leveled stepped rents, original issue
discount or purchase money debt, or a like-kind exchange that is later
determined to be taxable) over 5% of "REIT taxable income" as described in
clause (i)(a) above. In addition, if the Company disposes of any Built-In Gain
Asset during its Recognition Period, the Company will be required, pursuant to
Treasury Regulations which have not yet been promulgated, to distribute at least
95% of the Built-in Gain (after tax), if any, recognized on the disposition of
such asset. 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. Such distributions are taxable to
holders of Common Shares (other than tax-exempt entities, as discussed below) in
the year in which paid, even though such distributions relate to the prior year
for purposes of the Company's 95% distribution requirement. The amount
distributed must not be preferential--I.E., each holder of Common Shares must
receive the same distribution per share. A REIT may have more than one class of
capital stock, as long as distributions within each class are pro rata and non-
preferential. 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 thereon at regular
ordinary and capital gain corporate tax rates. The Company intends to make
timely distributions sufficient to satisfy these annual distribution
requirements. In this regard, the OP Partnership Agreement 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.
As enumerated above, for purposes of these tests, the Company's allocable
share of the assets of the Operating Partnership (and any other partnership in
which the Company holds an interest) are included. The Company anticipates that
it will satisfy these asset tests.
137
<PAGE>
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, the Company anticipates that it will
generally have sufficient cash or liquid assets to enable it to satisfy the
distribution requirements described above. It is possible, however, that the
Company, from time to time, may not have sufficient cash or other liquid assets
to meet these distribution requirements due to timing differences between (i)
the actual receipt of income and actual payment of deductible expenses and (ii)
the inclusion of such income and deduction of such expenses in arriving at
taxable income of the Company. In the event that such timing differences occur,
in order to meet the distribution requirements, the Company may find it
necessary to arrange for short-term, or possibly long-term, borrowings, to pay
dividends in the form of taxable stock dividends.
If the Company fails to meet the 95% distribution test due to certain
adjustment (E.G., an increase in the Company's income or a decrease in its
deduction for dividends paid) by reason of a judicial decision or by agreement
with the IRS, the Company may pay a "deficiency dividend" to holders of Common
Shares in the taxable year of the adjustment, which dividend would relate back
to the year being adjusted. In such case, the Company would also be required to
pay interest to the IRS and would be subject to any applicable penalty
provisions.
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 RElT 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.
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 shareholders 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. As a result, the Company's failure to qualify as a REIT
would reduce the cash available for distribution by the Company to its
shareholders. In addition, if the Company fails to qualify as a REIT, all
distributions to shareholders will be taxable as ordinary income, to the extent
of the Company's current and accumulated earnings and profits, and, subject to
certain limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, 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 in all circumstances the Company would be
entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS GENERALLY
As used herein, the term "U.S. Shareholder" means a holder of Common Shares
who (for United States 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, or (iii) is an estate or trust the income of which is
subject to United States federal income taxation regardless of its source.
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. Shareholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction otherwise available with respect
to dividends received by U.S. Shareholders 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. Shareholders as long-term capital
gains (to the extent that they do not exceed the Company's actual net capital
gain for the taxable year) without regard to the
138
<PAGE>
period for which a U.S. Shareholder has held his Common Shares. U.S.
Shareholders 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. Shareholder, reducing
the adjusted basis which such U.S. Shareholder has in his Common Shares for tax
purposes by the amount of such distribution (but not below zero), with
distributions in excess of a U.S. Shareholder's adjusted basis in his shares
taxable as long-term capital gains (or short-term capital gain if the shares
have been held for one year or less), provided that the shares have been held as
a capital asset. Dividends declared by the Company in October, November, or
December of any year and payable to a shareholder of record on a specified date
in any such month shall be treated as both paid by the Company and received by
the shareholder 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. Shareholders 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. Shareholder of Common Shares will not be treated as passive activity
income, and, as a result, U.S. Shareholders 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
income limitation. Gain arising from the sale or other disposition of Common
Shares, however, will not be treated as investment income unless the U.S.
Shareholder elects to reduce the amount of such U.S. Shareholder's total net
capital gain eligible for the 28% maximum capital gains rate by the amount of
such gain with respect to such Common Shares.
Upon any sale or other disposition of Common Shares, a U.S. Shareholder 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 Common Shares for tax purposes. Such gain or loss will be
capital gain or loss if the shares have been held by the U.S. Shareholder as a
capital asset, and will be long-term gain or loss if such shares have been held
for more than one year. In general, any loss recognized by a U.S. Shareholder
upon the sale or other disposition of Common Shares 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. Shareholder from the Company which were required to be treated as
long-term capital gains.
BACKUP WITHHOLDING
The Company will report to its U.S. Shareholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. Shareholder that does not provide the Company with his 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 shareholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions to any shareholders who fail to certify
their non-foreign status to the Company. See "--Taxation of Non-U.S.
Shareholders."
139
<PAGE>
TAXATION OF TAX-EXEMPT SHAREHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified RElT
do not constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling, provided that a tax-exempt shareholder
(except certain tax-exempt shareholders described below) has not held its Common
Shares as "debt financed property" within the meaning of the Code and such
shares are not otherwise used in a trade or business, the dividend income from
the Company will not be UBTI to a tax-exempt shareholder. Similarly, income from
the sale of Common Shares will not constitute UBTI unless such tax-exempt
shareholder has held such shares as "debt financed property" within the meaning
of the Code or has used the shares in a trade or business.
For tax-exempt shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501 (c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their own tax advisors concerning these
"set aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" shall be treated as UBTI as to any trust which (i) is
described in Section 401(a) of the Code, (ii) is tax-exempt under Section 501(a)
of the Code, and (iii) holds more than 10% (by value) of the interests in the
REIT. Tax-exempt pension funds that are described in Section 401(a) of the Code
are referred to below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Code provides that stock owned by
qualified trusts shall be treated, for purposes of the "not closely held"
requirement, as owned by the beneficiaries of the trust (rather than by the
trust itself), and (ii) either (a) at least one such qualified trust holds more
than 25% (by value) of the interests in the REIT, or (b) one or more such
qualified trusts, each of which owns more than 10% (by value) of the interests
in the REIT, hold in the aggregate more than 50% (by value) of the interests in
the REIT. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (i) the UBTI earned by the REIT (treating the REIT as if it were a
qualified trust and therefore subject to tax on UBTI) to (ii) the total gross
income of the REIT. A de minimis exception applies where the percentage is less
than 5% for any year. The provisions requiring qualified trusts to treat a
portion of REIT distributions as UBTI will not apply if the RElT is able to
satisfy the "not closely held" requirement without relying upon the "look-
through" exception with respect to qualified trusts.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of 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. SHAREHOLDERS") 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 United States
federal income tax and does not address state, local or foreign tax consequences
that may be relevant to a Non-U.S. Shareholder in light of its particular
circumstances, including, for example, if the investment in the Company is
connected to the conduct by a Non-U.S. Shareholder of a U.S. trade or business.
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.
Prospective Non-U.S. Shareholders should consult with their own tax advisers to
determine the impact of federal, state, local and foreign income tax laws with
regard to an investment in Common Shares, including any reporting requirements.
140
<PAGE>
DISTRIBUTIONS. Distributions by the Company to a Non-U.S. Shareholder that
are neither attributable to gain from sales or exchanges by the Company of
United States real property interests nor designated by the Company as capital
gains dividends will be treated as dividends of ordinary income to the extent
that they are made out of current or accumulated earnings and profits of the
Company. Such distributions ordinarily will be subject to withholding of United
States federal income tax on a gross basis (that is, without allowance of
deductions) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are treated as effectively
connected with the conduct by the Non-U.S. Shareholder of a United States trade
or business. Dividends that are effectively connected with such a trade or
business will be subject to tax on a net basis (that is, after allowance of
deductions) at graduated rates, in the same manner as domestic shareholders are
taxed with respect to such dividends and are generally not subject to
withholding. Any such dividends received by a Non-U.S. Shareholder that is a
corporation may also be subject to an additional branch profits tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
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 determining the applicability of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations, not currently in effect, however, a Non-U.S.
Shareholder who wished to claim the benefit of an applicable treaty rate would
be required to satisfy certain certification and other requirements. Under
certain treaties, lower withholding rates generally applicable to dividends do
not apply to dividends from a REIT, such as the Company. Certain certification
and disclosure requirements must be satisfied to be exempt from withholding
under the effectively connected income exemption discussed above.
Distributions in excess of current or accumulated earnings and profits of
the Company will not be taxable to a Non-U.S. Shareholder to the extent that
they do not exceed the adjusted basis of the shareholder's Common Shares, but
rather will reduce the adjusted basis of such stock. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Shareholder's Common
Shares, they will give rise to gain from the sale or exchange of his stock, the
tax treatment of which is 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 or accumulated earnings and profits, the distribution will generally
be treated as a dividend for withholding purposes. However, amounts thus
withheld are generally refundable if it is subsequently determined that such
distribution was, in fact, in excess of current or accumulated earnings and
profits of the Company. Under a "technical corrections" provision recently added
to the Code by the Small Business Job Protection Act of 1996, distributions in
excess of earnings and profits may also be subject to a 10% withholding under
the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") withholding
provisions.
Distributions to a Non-U.S. Shareholder that are designated by the Company
at the time of distribution as capital gains dividends (other than those arising
from the disposition of a United States real property interest) generally will
not be subject to United States federal income taxation, unless (i) investment
in the Common Shares is effectively connected with the Non-U.S. Shareholder's
United States trade or business, in which case the Non-U.S. Shareholder will be
subject to the same treatment as domestic shareholders with respect to such gain
(except that a shareholder that is a foreign corporation may also be subject to
the 30% branch profits tax, as discussed above), or (ii) the Non-U.S.
Shareholder is a nonresident alien individual who is 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 nonresident alien individual will be subject to
a 30% tax on the individual's capital gains.
Distributions to a Non-U.S. Shareholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests will
cause the Non-U.S. Shareholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. Non-U.S.
Shareholders would thus generally be entitled to offset its gross income by
allowable deductions and would
141
<PAGE>
pay tax on the resulting taxable income at the same rates applicable to domestic
shareholders (subject to a special alternative minimum tax in the case of
nonresident alien individuals). Also, such gain may be subject to a 30% branch
profits tax in the hands of a Non-U.S. Shareholder that is a corporation and is
not entitled to treaty relief or exemption, as discussed above. The Company is
required to withhold 35% of any such distribution. That amount is creditable
against the Non-U.S. Shareholder's United States federal income tax liability.
To the extent that such withholding exceeds the actual tax owed by the Non-U.S.
Shareholder, the Non-U.S. Shareholder may claim a refund from the IRS.
The Company or any nominee (E.G., a broker holding shares in street name)
may rely on a certificate of non-foreign status on Form W-8 or Form W-9 to
determine whether withholding is required on gains realized from the disposition
of United States real property interests. A domestic person who holds Common
Shares on behalf of a Non-U.S. Shareholder will bear the burden of withholding,
provided that the Company has properly designated the appropriate portion of a
distribution as a capital gain dividend.
SALE OF COMMON SHARES. Gain recognized by a Non-U.S. Shareholder upon the
sale or exchange of Common Shares generally will not be subject to United States
taxation unless such shares constitute a "United States real property interest"
within the meaning of FIRPTA. The Common Shares will not constitute a "United
States real property interest" so long as the Company is a "domestically
controlled REIT." A "domestically controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its stock is
held directly or indirectly by Non-U.S. Shareholders. The Company believes that
at September 30, 1996 it was a "domestically controlled REIT," and therefore
that the current sale of Common Shares will not be subject to taxation under
FIRPTA. However, because the Common Shares are publicly traded, no assurance can
be given that the Company will continue to be a "domestically-controlled REIT."
Notwithstanding the foregoing, gain from the sale or exchange of Common Shares
not otherwise subject to FIRPTA will be taxable to a Non-U.S. Shareholder if the
Non-U.S. Shareholder is a nonresident alien individual who is present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States. In such case, the nonresident alien individual will be
subject to a 30% United States withholding tax on the amount of such
individual's gain. If the gain on the sale of Common Shares were to be subject
to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to the same
treatment as U.S. Shareholders with respect to such gain (subject to applicable
alternative minimum tax, possible withholding tax and a special alternative
minimum tax in the case of nonresident alien individuals).
If the Company does not qualify as or ceases to be a
"domestically-controlled REIT," gain arising from the sale or exchange by a
Non-U.S. Shareholder of Common Shares would be subject to United States taxation
under FIRPTA as a sale of a "United States real property interest" unless the
shares are "regularly traded" (as defined by applicable Treasury Regulations) on
an established securities market (E.G., the American Stock Exchange) and the
selling Non-U.S. Shareholder held less than 5% of an interest in the Company
during the shorter of (i) the period during which the taxpayer held such
interest, or (ii) the 5-year period ending on the date of the disposition of
such interest. If gain on the sale or exchange of Common Shares were subject to
taxation under FIRPTA, the Non-U.S. Shareholder would be subject to regular
United States income tax with respect to such gain in the same manner as a U.S.
Shareholder (subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations), and the purchaser of the stock would be required to withhold and
remit to the IRS 10% of the purchase price.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Shareholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by the
142
<PAGE>
Company of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Shares by or through a foreign office of a foreign
broker. Information reporting (but not backup withholding) will apply, however,
to a payment of the proceeds of a sale of Common Shares by a foreign office of a
broker that (a) is a United States person, (b) derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States or (c) is a "controlled foreign corporation" (generally, a foreign
corporation controlled by United States shareholders) for United States tax
purposes, unless the broker has documentary evidence in its records that the
holder is a Non-U.S. Shareholder and certain other conditions are met, or the
shareholder otherwise establishes an exemption. Payment to or through a United
States office of a broker of the proceeds of a sale of Common Shares is subject
to both backup withholding and information reporting unless the shareholder
certifies under penalty of perjury that the shareholder is a Non-U.S.
Shareholder, or otherwise establishes an exemption. A Non-U.S. Shareholder may
obtain a refund of any amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the IRS.
NEW PROPOSED REGULATIONS. The United States Treasury has recently issued
proposed Treasury Regulations regarding the withholding and information
reporting rules discussed above. In general, the proposed Treasury Regulations
do not alter the substantive withholding and information reporting requirements
but unify current certification procedures and forms and clarify and modify
reliance standards. If finalized in their current form, the proposed regulations
would generally be effective for payments made after December 31, 1997, subject
to certain transition rules.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
GENERAL. Substantially all of the Company's investments will be held
indirectly through 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 will include in its income its proportionate share of
the foregoing partnership items for purposes of the various REIT income tests
and in the computation of its REIT taxable income. Moreover, for purposes of the
REIT asset tests, the Company will include its proportionate share of assets
held by the Operating Partnership. See "--Taxation of the Company."
ENTITY CLASSIFICATION. The Company's interest in the Operating Partnership
involves special tax considerations, including the possibility of a challenge by
the IRS of the status of the Operating Partnership as a partnership (as opposed
to an association taxable as a corporation) for federal income tax purposes. If
the Operating Partnership were treated as an association, such partnership would
be taxable as a corporation and therefore be subject to an entity-level tax on
its income. In such a situation the character of the Company's assets and items
of gross income would change and preclude the Company from satisfying the asset
tests and possibly the income tests (see "Federal Income Tax
Considerations--Taxation of the Company-Asset Tests" and "--Income Tests"), and
in turn would prevent the Company from qualifying as a REIT. See "Federal Income
Tax Considerations--Taxation of the Company--Failure to Qualify" above for a
discussion of the effect of the Company's failure to meet such tests for a
taxable year. In addition, a change in the Operating Partnership's status for
tax purposes might be treated as a taxable event in which case the Company might
incur a tax liability without any related cash distributions.
An organization formed as a partnership will be treated as a partnership for
federal income tax purposes rather than as a corporation only if it has no more
than two of the four corporate characteristics that the Treasury Regulations use
to distinguish a partnership from a corporation for tax purposes. These four
characteristics are (i) continuity of life, (ii) centralization of management,
(iii) limited liability and (iv) free transferability of interests. The Company
has not requested, and does not intend to request, a
143
<PAGE>
ruling from the IRS that the Operating Partnership will be treated as a
partnership for federal income tax purposes.
Recently proposed Treasury Regulations (the "PROPOSED REGULATIONS"), if
finalized in their present form, would eliminate the four factor test described
above and, in its place, permit a partnership or limited liability company to
elect to be taxed as a partnership for federal income tax purposes without
regard to the number of corporate characteristics possessed by such entity. The
Proposed Regulations are proposed to apply for tax periods beginning on or after
the date that final regulations are published by the IRS. Until that time, the
existing regulations will continue to apply. The Proposed Regulations provide
that the IRS will not challenge the classification of an existing partnership or
limited liability company for tax periods to which the existing Treasury
Regulations apply if (i) the entity had a reasonable basis for its claimed
classification, (ii) the entity claimed that same classification in all prior
years, and (iii) as of the date that the proposed regulations were published,
neither the entity nor any partner or member of the entity had been notified in
writing that the classification of the entity is under examination by the IRS.
Therefore, if the Operating Partnerships meets the conditions above, the IRS
will not challenge the status of the Operating Partnership as a partnership for
tax purposes.
PARTNERSHIP ALLOCATIONS. Although a partnership agreement will generally
determine the allocation of income and loss among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic arrangement
of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The Operating Partnership's allocations of
taxable income and loss are intended to comply with the requirements of Section
704(b) of the Code and the Treasury Regulations promulgated thereunder.
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 (such as the Properties) that is contributed to a
partnership in exchange for an interest in the partnership, 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 such time (a "BOOK-TAX DIFFERENCE"). Such allocations
are solely for federal income tax purposes and do not affect the book capital
accounts or other economic or legal arrangements among the partners. The
Operating Partnership was formed by way of contributions of appreciated property
(including the Properties). Consequently, the OP Partnership Agreement requires
that such allocations be made in a manner consistent with Section 704(c) of the
Code.
In general, the Grove Companies and other Equity Participants who are
limited partners of the Operating Partnership will be allocated depreciation
deductions for tax purposes which are lower than such deductions would be if
determined on a pro rata basis. In addition, in the event of the disposition of
any Partnership Properties which have a Book-Tax Difference, all income
attributable to such Book-Tax Difference (which decreases with the passage of
time) will generally be allocated to such limited partners, and the Company will
generally be allocated only its share of capital gains attributable to
appreciation, if any, occurring after the closing of the Consolidation
Transactions. However, the special allocation rules of Section 704(c) do not
always entirely eliminate 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 the Operating Partnership may cause
the Company to be allocated lower depreciation and other
144
<PAGE>
deductions, and possibly an amount 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 "--Taxation of the
Company-Annual Distribution Requirements."
With respect to the GREAT Properties, Grove Property may be allocated lower
depreciation deductions for tax purposes than would be determined on a pro rata
basis and will be allocated income upon disposition of such assets attributable
to the Book-Tax Difference with respect to such assets.
Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for Book-Tax Differences,
including retention of the "traditional method" or the election of certain
methods which would permit any distortions caused by a Book-Tax Difference to be
entirely rectified on an annual basis or with respect to a specific taxable
transaction such as a sale. The Operating Partnership and the Company have not
yet determined what method to use for accounting for Book-Tax Differences with
respect to the Properties initially contributed to the Operating Partnership.
With respect to any property purchased by the Operating Partnership
subsequent to the admission of the Company to the Operating Partnership, such
property will initially have a tax basis equal to its fair market value, and
Section 704(c) of the Code will not apply.
BASIS IN OPERATING PARTNERSHIP INTEREST. The Company's adjusted tax basis
in its interest in the Operating Partnership generally (i) will be equal to the
amount of cash and the basis of any other property contributed to the Operating
Partnership by the Company, (ii) will be increased by (a) its allocable share of
the Operating Partnership's income and (b) its allocable share of indebtedness
of the Operating Partnership and (iii) will be reduced, but not below zero, by
the Company's allocable share of (a) losses suffered by the Operating
Partnership, (b) the amount of cash distributed to the Company and (c) by
constructive distributions resulting from a reduction in the Company's share of
indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's partnership
interest in the Operating Partnership, the recognition of such excess loss will
be deferred until such time and to the extent that the Company has adjusted tax
basis in its interest in the Operating Partnership. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share of
the indebtedness of the Operating Partnership (such decreases being considered a
constructive cash distribution to the partners), exceeds the Company's adjusted
tax basis, such excess distributions (including such constructive distributions)
will constitute taxable income to the Company. Such taxable income will normally
be characterized as a capital gain, and if the Company's interest in the
Operating Partnership has been held for longer than the long-term capital gain
holding period (currently one year), such distributions and constructive
distributions will constitute long-term capital gain.
OTHER TAX CONSEQUENCES
The Company and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective shareholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
145
<PAGE>
ERISA CONSIDERATIONS
The following section sets forth a summary of certain material
considerations arising under the Employee Retirement Income Security Act of
1974, as amended ("ERISA") and the provisions of Section 4975 of the Code that a
Plan Fiduciary (as defined in the Glossary) should consider before deciding
whether to vote for the effectuation of the Consolidation Transactions.
A DESCRIPTION OF ALL ASPECTS OF THE APPLICABLE RULES IN ERISA AND THE CODE
AND, TO THE EXTENT NOT PREEMPTED, STATE LAW THAT COULD AFFECT SUCH A DECISION IS
BEYOND THE SCOPE OF THIS PROXY STATEMENT. THEREFORE, EACH PLAN FIDUCIARY IS
URGED TO SEEK ADVICE FROM HIS, HER OR ITS OWN ADVISORS REGARDING SUCH VOTE, AND
AN INVESTMENT IN COMMON SHARES.
ERISA generally requires that the assets of an Employee Benefit Plan (as
defined in the Glossary) be held in trust, and that the trustee or a duly
authorized investment manager (within the meaning of Section 3(38) of ERISA)
have the exclusive authority and discretion to manage and control the assets of
the Plan. As discussed below, the Company believes that neither the assets of
Grove Property nor the assets of the Operating Partnership will be deemed to be
"plan assets" of any Employee Benefit Plan owning Common Shares or Common Units
. In the event that the assets of Grove Property or the Operating Partnership
are nevertheless deemed to be plan assets, the members of the Board and the
executive officers of the Company could be deemed to be fiduciaries to certain
of such Employee Benefit Plans. As such, they would be held to the fiduciary
standards of ERISA in all investments and the Plan Fiduciary of each affected
Employee Benefit Plan could be liable for investments that do not conform to
such standards. In addition, if the Trust Managers and Executive Officers are
considered fiduciaries under ERISA and the Code, they would also be "parties in
interest" under ERISA (and "disqualified persons" under the Code) with respect
to the affected Employee Benefit Plans, and one or more of their affiliates also
could be so characterized. ERISA and the Code specifically prohibit an Employee
Benefit Plan from engaging in certain transactions ("prohibited transactions")
involving plan assets with parties in interest or disqualified persons unless an
exemption applies. Under these rules, certain of the contemplated transactions
between the Trust Managers and Executive Officers (and certain of their
affiliates) and GREAT or the Operating Partnership could constitute prohibited
transactions. In such event, certain of the parties involved in the transaction
could be required to undo the transaction, restore to the Plan any profit (or
make up for any loss) realized, and pay an excise tax. If an individual
retirement account (an "IRA") engaged in a prohibited transaction, it could lose
its tax-exempt status but, in that case, the other penalties for prohibited
transactions would not apply.
PLAN ASSETS--IN GENERAL
The United States Department of Labor (the "DOL") has promulgated a
regulation (the "REGULATION") defining the term "plan assets" for purposes of
the fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and the Code. Under the Regulation, when an Employee Benefit Plan makes an
equity investment in another entity, the underlying assets of that entity
generally will not be considered plan assets if (i) the equity interest is a
"publicly offered security" or a security issued by an investment company
registered under the Investment Company Act of 1940, (ii) the entity is an
"operating company," including a "real estate operating company" (a "REOC"), or
(iii) equity participation in such entity by benefit plan investors is not
significant (the "INSIGNIFICANT PARTICIPATION TEST").
APPLICATION OF REGULATION TO GREAT
The Regulation provides that a "publicly offered security" is a security
that is (i) freely transferable, (ii) part of a class of securities that is
owned by 100 or more investors who are independent of the issuer and one another
(the "WIDELY HELD REQUIREMENT") , and (iii) either part of a class of securities
registered
146
<PAGE>
under Section 12(b) or (g) of the Securities Exchange Act of 1934 or is sold to
the Plan as part of an offering of securities to the public pursuant to an
effective registration statement under the Securities Act of 1933 and the class
of securities of which such security is a part is registered under the
Securities Exchange Act of 1934 within 120 days (or such later time as may be
allowed by the SEC) after the end of the fiscal year of the issuer during which
the offering of such securities to the public occurred ("REGISTRATION
REQUIREMENT").
The Common Shares sold in the IPO and outstanding prior to the effectuation
of the Consolidated Transactions, met the Registration Requirement, and the
Company believes that they currently meet the Widely Held Requirement. Since no
restrictions on the transferability of such Common Shares exist other than those
set forth in the Charter, such Common Shares should qualify as "freely
transferable" under the Regulation. Assuming these requirements are met, such
Common Shares will be "publicly-offered securities" within the meaning of the
Regulation, and the underlying assets of GREAT should not be considered to be
plan assets of any Employee Benefit Plan that owns Common Shares originally
issued in the IPO.
Any Common Shares issued to the New Equity Investors will not qualify as
publicly-offered securities because they cannot meet the Registration
Requirement, and may not meet the Widely Held Requirement. Therefore, if any New
Equity Investor is a Plan, the underlying assets of Grove Property would be
deemed to be plan assets of such Plan unless the Insignificant Participation
Test is met or Grove Property qualifies as a REOC. Even if the assets of Grove
Property were deemed to be plan assets of an Employee Benefit Plan that is a New
Equity Investor, however, the assets of Grove Property would not be deemed to be
plan assets of any Employee Benefit Plan that holds Common Shares issued in the
IPO if those Common Shares qualify as publicly offered securities, as discussed
above.
An entity will meet the Insignificant Participation Test if, immediately
after the most recent acquisition of any equity interest in the entity, less
than 25% of each class of its equity interests is held in the aggregate by
"benefit plan investors." For this purpose, "benefit plan investors" includes
Employee Benefit Plans (and any other employee benefit plans whether or not
subject to ERISA), and any entities the underlying assets of which include plan
assets as a result of a Plan's investment therein. In computing the percentage
of a class of equity interests that is owned by benefit plan investors, equity
interests owned by non-benefit plan investors who have discretionary authority
or who provide investment advice for a fee (direct or indirect) with respect to
the assets of the entity being tested, or any affiliate of such a person
("ENTITY MANAGERS"), are disregarded. The Insignificant Participation Test must
be met at all times.
The Regulation does not contain a definition of "class of securities" for
purposes of the Insignificant Participation Test, and does not specifically
indicate how to apply the Insignificant Participation Test if an entity issues
equity interests in both public and private offerings. However, the preamble to
the Regulation (which is not primary authority) states that the Insignificant
Participation Test is not intended to affect a Plan's investment in
publicly-offered securities, and contains an example that supports the position
that any Common Shares issued to New Equity Investors should be treated as a
separate class from the Common Shares issued in the IPO for these purposes.
GREAT has represented that it will use its best efforts to ensure that less than
25% of the Common Shares issued in the New Equity Investment are purchased by
benefit plan investors within the meaning of the Regulation, and will impose
transfer restrictions on such Common Shares so that the Insignificant
Participation Test continues to be met until it has received an opinion of
counsel that another exception in the Regulation applies to such Common Shares.
The Company has agreed to file a registration statement under the Securities Act
covering the resale of Common Shares issued in connection with the New Equity
Investment. At that time, all of the Common Shares should be treated as publicly
offered assuming the Widely Held Requirement is met with respect to all
outstanding Common Shares.
An entity that does not meet the Insignificant Participation Test may still
be exempt from plan asset treatment if it is a REOC. In order to qualify as a
REOC, from the date of its first investment, and thereafter on any date in each
"annual valuation period" (as defined in the DOL Regulation), the entity
147
<PAGE>
seeking REOC status must (i) invest at least 50% of its assets, valued at cost
and without regard to short-term investments pending long-term commitment or
distribution to investors, in "real estate" which is "managed" or "developed,"
and with respect to which the entity has the right to substantially participate
directly in the management or development activities and (ii) engage in the
ordinary course of its business, directly in real estate management and
development activities with respect to such real estate investments. Based on
the type of investments the Company will make and its intended method of
operations, no determination has been made whether Grove Property can qualify as
a REOC.
APPLICATION OF REGULATION TO OPERATING PARTNERSHIP
Even if the assets of Grove Property are not deemed to be plan assets, the
assets of the Operating Partnership could be deemed to be plan assets if any
Employee Benefit Plan owns Common Units unless the Operating Partnership meets
one of the exceptions in the Regulation. If the assets of the Operating
Partnership were deemed to be plan assets under the Regulation, the fiduciary
standards and prohibited transaction rules of ERISA and the Code would apply to
its investments, and the persons managing its operations could be characterized
as fiduciaries of Employee Benefit Plans holding Common Units. Since Common
Units are not publicly offered securities within the meaning of the Regulation,
the Operating Partnership must meet the Insignificant Participation Test or
qualify as a REOC. No determination has been made whether the Operating
Partnership can qualify as a REOC. Therefore, the GREAT has represented that it
will use its best efforts to ensure that less than 25% of the Common Units owned
by persons other than Entity Managers will be owned by benefit plan investors
within the meaning of the Regulation at the time of the effectuation of the
Consolidation Transactions, and will not admit any person to the Operating
Partnership as a limited partner (or permit the redemption/exchange of any
limited partnership interest) unless the Insignificant Participation Test will
be met immediately thereafter or it has received an opinion of counsel that the
Operating Partnership is a REOC or that another exception in the Regulation
applies. Based on the foregoing, and assuming that the assets of Grove Property
are not deemed to be plan assets, the Company believes that the assets of the
Operating Partnership will not be considered plan assets under the Regulation.
A plan established and maintained by a state, any political subdivision of a
state, or by any agency or instrumentality of a state or its political
subdivisions, for the benefit of its employees ("a governmental plan") that is
not subject to ERISA or Section 4975 of the Code is subject to state statutes
regulating its investments and the obligations of its fiduciaries. NO ATTEMPT
HAS BEEN MADE IN THIS SECTION TO DISCUSS ANY OF THE SPECIAL CONSEQUENCES THAT
ARE RELEVANT TO A GOVERNMENTAL PLAN UNDER SUCH STATE STATUTES. ANY FIDUCIARY OF
A GOVERNMENTAL PLAN THAT OWNS COMMON SHARES IS URGED TO SEEK ADVICE FROM HIS OR
HER ADVISORS REGARDING THE MATTERS SET FORTH IN THE PROXY STATEMENT.
148
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Certain Trust Managers and Executive Officers of the Company (or members of
their immediate families) and persons who will hold more than 5% of the
outstanding Common Shares (assuming the exchange of all Common Units for Common
Shares) have direct or indirect interests in transactions with GREAT or
transactions which have been or will be consummated by the Company or the Grove
Companies in connection with the consummation of the Consolidation Transactions,
including, without limitation, (i) the transfer of certain assets and
liabilities of the Management Company and the Grove Companies' interests in the
Property Partnerships to the Operating Partnership pursuant to the Contribution
Agreement and the receipt by certain Executive Officers of Common Units in
connection therewith, (ii) the repayment of certain indebtedness encumbering the
Partnership Properties in connection with the Refinancing and the release of
guarantees by certain Executive Officers in connection therewith and (iii) the
provision, following the consummation of the Consolidation Transactions, by the
Operating Partnership and National Realty of certain property related services
to the Company, the partnerships owning the Excluded Properties and other third
parties.
TRANSACTIONS WITH EXECUTIVE OFFICERS
RECEIPT OF COMMON UNITS BY EXECUTIVE OFFICERS. In connection with the
Consolidation Transactions, pursuant to the Contribution Agreement (as more
fully described below), the Executive Officers will receive the number of Common
Units set forth opposite their names below in exchange for their respective
interests in the Property Partnerships and certain assets and liabilities of the
Management Company. See "--Transactions with the Grove Companies--The
Contribution Agreement" and "APPROVAL OF THE CONSOLIDATION TRANSACTIONS
(Proposal 1)--Terms of the Consolidation Transactions--The Consolidation." No
member of the Board who is not also an Executive Officer is transferring any
assets to the Company in connection with the Consolidation Transactions. The
Common Units received by such Executive Officers will carry redemption rights
and Registration Rights, as described in further detail elsewhere in this Proxy
Statement. See "SHARES AVAILABLE FOR FUTURE SALE--Registration Rights" and "THE
OP PARTNERSHIP AGREEMENT--Limited Partner Redemption/Exchange Rights."
<TABLE>
<CAPTION>
EXECUTIVE OFFICER COMMON UNITS(1)
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Damon D. Navarro............................................................ 301,563
Brian A. Navarro............................................................ 292,512
Edmund F. Navarro........................................................... 247,877
Joseph R. LaBrosse.......................................................... 65,473
Gerald A. McNamara.......................................................... 27,229
</TABLE>
- ------------------------
(1) Includes Common Units an Executive Officer may be deemed to own beneficially
as a result of his ownership of entities included in the Grove Companies,
based solely on his pro rata ownership of the equity of that entity. One or
more of the Executive Officers may be deemed to own beneficially
additionally Common Units held by the Grove Companies pursuant to Regulation
13d-3 of the Securities Exchange Act of 1934, as amended, as a result of
such Executive Officer's ability to exercise control over voting and/or
investment decisions with respect to one or more of the entities included in
the Grove Companies.
EMPLOYMENT AGREEMENTS. In connection with the Consolidation Transactions,
each Executive Officer will enter into a new employment agreement with the
Company, will receive a grant of options under the 1996 Plan and will be
eligible to receive Deferred Stock Grants under the 1996 Plan. For a more
detailed description of the terms of such Employment Agreements, including the
compensation to be paid to the Executive Officers thereunder, see "EXECUTIVE
COMPENSATION--Employment Agreements; Non-competition Agreements."
149
<PAGE>
PURCHASE OF CAMBRIDGE ESTATES APARTMENTS. GREAT entered into a purchase and
sale agreement on October 30, 1995 to buy Cambridge Estates Apartments (one of
the GREAT Properties), a 92 unit multi-family residential apartment complex in
Norwich, Connecticut. On January 12, 1996, Cambridge was purchased from Grove
Cambridge Associates Limited Partnership for $4,250,000. Grove Cambridge
Associates Limited Partnership is owned by 99% by Grove Norwich Associates
Limited Partnership and 0.5% by Grove. Grove Norwich Associates Limited
Partnership is owned 50%, and Grove is owned 100%, by Messrs. Damon, Brian and
Edmund Navarro, each an Executive Officer.
PURCHASE OF BURGUNDY STUDIO APARTMENTS. Burgundy Associates Limited
Partnership acquired Burgundy from a bank in September 1995 for a purchase price
equal to $1,925,000. In connection with the Exchange Offer, the Company will
acquire Property Partnership Units giving it at least a 62% interest in Burgundy
Associates Limited Partnership as well as the sole general partner interest in
that entity. See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--The
Properties--Valuation of the Properties and Other Assets; Allocation of Common
Units."
NAVAB ASSOCIATES LOANS
LOANS BY NAVAB ASSOCIATES. NAVAB Associates (owned one-quarter each by
Damon and Brian Navarro and Ronald and George Abdow, "NAVAB") has made unsecured
loans to certain of the Property Partnerships for redevelopment and acquisition
of certain Partnership Properties; the aggregate net outstanding principal
balance of such loans at September 30, 1996 was $1.19 million. Loans from NAVAB
to the Property Partnerships are unsecured, are payable on demand and bear
interest, payable monthly, at a rate equal to 2.5% over the prime rate (as
published from time to time in the Wall Street Journal).
LOANS TO NAVAB ASSOCIATES. Certain of the Property Partnerships have made
unsecured loans to NAVAB; the aggregate outstanding principal balance of such
loans at September 30, 1996 was $.7 million. Loans from the Property
Partnerships to NAVAB are unsecured, payable on demand and bear interest,
payable monthly, at a rate equal to 1.5% below the prime rate (as published from
time to time in the Wall Street Journal).
GUARANTEES BY DAMON AND BRIAN NAVARRO
Guarantees of approximately $26.8 million of mortgage indebtedness (assuming
gross proceeds of $30.0 million from the New Equity Investment) of certain
Property Partnerships issued by Messrs. Brian and Damon Navarro will be released
upon the repayment of certain indebtedness associated with [17] Partnership
Properties in connection with the Refinancing. See "APPROVAL OF THE
CONSOLIDATION TRANSACTIONS (Proposal 1)--Terms of the Consolidation
Transactions--The Refinancing."
LOANS FROM THE GENERAL PARTNERS AND AFFILIATES OF THE GENERAL PARTNERS
The Grove Companies and their affiliates (which include certain of the
Executive Officers) have made unsecured loans to certain of the Property
Partnerships; the aggregate outstanding principal balance of such loans at
September 30, 1996 was $340,630. Such loans are non-interest bearing loans which
are payable on demand. In connection with the consummation of the Consolidation
Transactions such loans will be forgiven by the Grove Companies and their
affiliates.
TRANSACTIONS WITH THE GROVE COMPANIES
CERTAIN FEES AND PAYMENTS. Pursuant to the Property Partnership Agreements,
the general partner(s) of the Property Partnerships (which is one or more of the
Grove Companies) and their affiliates receive various fees from the Property
Partnerships. Certain of the Property Partnerships (in which the Grove Companies
own limited and general partnership interests) are required to pay to GPS (which
is owned by the Management Owners) an annual fee ranging from $5,000 to $7,500
in exchange for the performance of certain administrative services for such
Property Partnerships. Aggregate annual fees paid to GPS by the Property
Partnerships were $40,834, $40,834 and $33,334 for the nine months ended
September 30, 1996 and the fiscal years ending December 31, 1995 and 1994,
respectively.
150
<PAGE>
Pursuant to the Property Partnership Agreements, the general partners of
each Property Partnership (which is one or more of the Grove Companies) receives
one percent (1%) of the net profits, losses and distributions of cash flow of
such Property Partnership (and 25% to 30% of residuals, after payment of
residuals, after payment of priority items).
Each Property Partnership has retained GPS to manage its related Partnership
Property or Properties in exchange for a fee or distribution equal to from 4% to
6% of gross income (excluding interest income). Aggregate management fee and
distribution income for the Property Partnerships received by GPS totaled
$609,948, $671,889 and $558,410 for the nine months ended September 30, 1996 and
the fiscal years ended December 31, 1995 and 1994, respectively.
Grove Brokerage, a division of the Management Company (the assets and
liabilities of which will be contributed to National Realty in connection with
the Consolidation), performs all real estate brokerage services for the Property
Partnerships. Aggregate brokerage fees paid to the Management Company by the
Property Partnerships in respect of services performed by Grove Brokerage
totaled $106,340, $153,798 and $161,306 for the nine months ended September 30,
1996 and the fiscal years ended December 31, 1995 and 1994, respectively.
GDC (which is owned by the Grove Companies) facilitates the provision of
construction services to the Property Partnerships in connection with the
redevelopment of the Partnership Properties. Aggregate fees paid to GDC for such
services were $72,223, $379,708 and $383,222 for the nine months ended September
30, 1996 and the fiscal years ended December 31, 1995 and 1994, respectively.
Similarly, the Management Company and GDC have performed property management
and construction services for GREAT since the IPO. The fees for such services
were equal to 5.0% of gross revenues for property management services. The total
fees paid by GREAT to GPS (including Grove Brokerage) and GDC were $79,883 and
$12,488, $66,781 and $26,788 and $33,282 and $49,688 for the nine months ended
September 30, 1996 and for the fiscal years ended December 31, 1995 and 1994,
respectively.
NATIONAL REALTY. Following the consummation of the Consolidation
Transactions, National Realty will be owned by the Management Owners, each an
Executive Officer. National Realty will hold the assets and liabilities of the
Management Company currently used in connection with the provision of real
estate brokerage services. See "--Transactions with the Grove Companies--Certain
Fees and Payments" and "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal
1)--Terms of the Consolidation Transactions--The Consolidation." Following the
consummation of the Consolidation Transactions, pursuant to brokerage services
contracts between National Realty, on the one hand, and certain of the Property
Partnerships or, where applicable, the Operating Partnership (as owner of the
GREAT Properties and the Partnership Properties currently held by the
Liquidating Partnerships), on the other hand, National Realty will continue to
provide real estate brokerage and related services to the Company. The real
estate brokerage services to be performed by National Realty for the Company
will include the finding, underwriting and negotiation of purchase contracts
with respect to properties to be acquired by the Company, the negotiation of the
contracts with respect to properties to be sold by the Company, and certain
commercial leasing services. In connection with such services, National Realty
will receive a 4% commission on purchases or sales arranged by National Realty
which are valued at up to $5.0 million and a 3% commission on purchases or sales
arranged by National Realty which are valued at in excess of $5.0 million.
National Realty will also provide such services to the limited partnerships
owning the Excluded Properties (in which the Grove Companies will own interests)
and may do so for other non-related third parties. The brokerage services
contracts will provide that the applicable Property Partnership or the Operating
Partnership, as the case may be, will indemnify National Realty and the Grove
Affiliates for any liability incurred in performing such services, except in
certain circumstances. Such agreements are expected to have terms of one to two
years, subject to either party's right to cancel upon at least 30 days' notice.
The brokerage services contracts have not been negotiated on an arm's-length
basis and the Management Owners may have conflicts of interest (due to their
ownership of National Realty) in connection with the brokerage services
contracts and the provision of real estate brokerage services by National Realty
to the Company.
151
<PAGE>
MANAGEMENT SERVICES. Following the consummation of the Consolidation
Transactions, the Operating Partnership will own certain of the assets and
liabilities of the Management Company currently used by the Management Company
in connection with the provision of real estate management services to the
Property Partnerships, GREAT and the partnerships that own the Excluded
Properties. For a detailed description of such real estate management services,
see "THE COMPANY--Property Management Services." Following the consummation of
the Consolidation Transactions, pursuant to management services agreements, the
Operating Partnership will provide such property management services to the
Property Partnerships, the limited partnerships owning the Excluded Properties,
the GREAT Properties and the Properties currently held by the Liquidating
Partnerships. Such management services agreements will provide that the
Operating Partnership shall receive in exchange for its provision of property
management services, with respect to each Property or Excluded Property, a fee
equal to from 4% to 6% of gross income (excluding interest income). Such
management services agreements are expected to have terms of one year, and will
automatically renew for successive one-year terms if neither party thereto gives
notice of termination within 90 days prior to the end of the then current term.
THE CONTRIBUTION AGREEMENT. In connection with the Consolidation
Transactions, pursuant to the Contribution Agreement among GREAT, the Operating
Partnership and the Grove Companies, all of the assets and operations of GREAT,
certain assets and liabilities of the Management Company and the interests of
the Grove Companies in the Property Partnerships will be consolidated in the
Company.
GREAT will contribute to the Operating Partnership the GREAT Assets and the
gross proceeds received by GREAT from the New Equity Investment. In exchange for
the contribution of the GREAT Assets, pursuant to the terms of the Contribution
Agreement, GREAT will receive the sole general partnership interest in the
Operating Partnership, and will own in the aggregate 620,130 Common Units (the
number of issued and outstanding Common Shares outstanding after giving effect
to the Stock Split but before giving effect to the remaining Consolidation
Transactions). See "APPROVAL OF THE CONSOLIDATION TRANSACTIONS (Proposal 1)--The
Properties--Valuation of the Properties and Other Assets; Allocation of Common
Units." In exchange for the contribution of the proceeds of the New Equity
Investment, GREAT will receive a number of additional Common Units equal to the
number of Common Shares issued by GREAT in the New Equity Investment.
The Grove Companies will contribute to National Realty, a newly formed
Delaware limited partnership owned by the Management Owners, the assets and
liabilities of the Management Company currently used in connection with the
provision of real estate brokerage services to GREAT, the Property Partnerships
and the partnerships that own the Excluded Properties. The Grove Companies and
the Board believe that the third party business conducted by the Management
Company which will be contributed to National Realty, and the volatility of its
earnings, makes it an inappropriate investment for the Company. Following the
consummation of the Consolidation Transactions, National Realty will continue to
provide real estate brokerage services to the Company, as well as to other
parties, including the limited partnerships which own the Excluded Properties.
See "THE COMPANY--Property Management Services" and "--Transactions With the
Grove Companies--National Realty."
Following the contribution of assets to National Realty, the Grove Companies
will contribute to the Operating Partnership the remaining assets and
liabilities of the Management Company and all of the Grove Companies'
partnership interests (both as a general partner and as a limited partner) in
each Property Partnership. In exchange for such contributions, the Grove
Companies will receive an aggregate of 934,654 Common Units (with an aggregate
value of $8,411,884, on the basis of $9.00 per Common Unit). For a summary of
the number of Common Units to be received by each of the Executive Officers
pursuant to the Contribution Agreement, see "--Transactions With Executive
Officers--Receipt of Common Units by Executive Officers."
The respective obligations of GREAT and the Grove Companies to effectuate
the above-described transfers of assets pursuant to the Contribution Agreement
are conditioned upon the concurrent completion of the Exchange Offer, approval
and effectuation of the Property Partnership Amendments, approval of the
Consolidation Transactions, the Charter Amendments and the 1996 Plan by the
requisite vote of
152
<PAGE>
Shareholders of GREAT, the completion of the New Equity Investment for gross
proceeds of not less than $18.5 million, the completion of the Refinancing
(including the closing under the Credit Facility), and normal and customary
conditions to the closing of real estate transactions, including the consents of
various lenders. GREAT and the Grove Companies are in the process of obtaining
such lender consents and expect to obtain all necessary consents prior to the
consummation of the Consolidation Transactions.
The Contribution Agreement also contains representations and warranties from
the Grove Companies to the Operating Partnership concerning the operation of the
Partnership Properties and certain environmental matters, as well as certain
other covenants, representations and warranties customarily found in real estate
purchase agreements. Claims for indemnification for any breach of these
representations and warranties must be asserted within one year from discovery
of such breach by the Board, but in no event more than two years from the date
of the consummation of the Consolidation Transactions. The Contribution
Agreement limits the total aggregate liability of the Grove Companies for any
loss suffered as a result of a breach of any representation, warranty or
covenant of the Grove Companies set forth therein to recourse against the Common
Units received by the Grove Companies. However, the Company's right to
indemnification exists only if the loss or damage resulting from a breach (or
breaches) under the Contribution Agreement with respect to property-related
representations and warranties is in excess of $50,000.
GROVE COASTAL ASSOCIATES, L.P.
In connection with the acquisition by the Company of the general partnership
interest in each of the Property Partnerships, the Company will purchase from
the Grove Companies all of the issued and outstanding capital stock of Grove,
which owns general partnership interests in certain of the Property
Partnerships. Grove also owns a general partnership interest in Grove Coastal
Associates, L.P. ("GROVE COASTAL"), one of the limited partnerships which owns
seven Excluded Properties. Although the Company will acquire the general
partnership interest in Grove Coastal owned by Grove, the Company will neither
seek to acquire fee title to, nor control over, the Excluded Properties owned by
Grove Coastal in connection with the Consolidation Transactions (although the
Company may seek to do so at some future time). The Board has determined that
the type (E.G., commercial properties), geographic characteristics, cash flow,
stage of redevelopment efforts, or capital structure of such properties either
are inconsistent with the Company's investment objectives or could affect the
Company's ability to qualify as a REIT. The Company may, however, seek to
acquire one or more of such Excluded Properties from time to time following the
consummation of the Consolidation Transactions when and if conditions are
favorable to do so. The purchase price to be paid by the Company in connection
with the purchase of Grove will not include any amount attributable to the
general partnership interest in Grove Coastal. The Company and the Grove
Companies have determined that it would be impracticable to assign a value to
this interest in Grove Coastal independent of the transfer of ownership of, or
control over, the Excluded Properties owned by Grove Coastal. Therefore, the
Grove Companies and the Company have agreed that payment of the purchase price
for such interest will be deferred until such future time, if any, as the
Company (or a third party purchaser) acquires ownership of, or control over, the
Excluded Properties owned by Grove Coastal; at that time, the Company will pay
to the Grove Companies (in respect of the acquisition by the Company of the
general partnership interest in Grove Coastal being acquired, indirectly,
pursuant to the Contribution Agreement) an amount equal to the then fair market
value of the Company's interest in Grove Coastal.
153
<PAGE>
GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Proxy Statement:
"ACCOUNTING DIVISION" means the accounting division of the Management
Company.
"ACCREDITED INVESTOR" means an "Accredited Investor" as defined in
Regulation D, promulgated under the Securities Act and any applicable state
securities laws.
"ACMS" means asbestos-containing materials.
"ADA" means the Americans with Disabilities Act of 1990.
"AMEX" means the American Stock Exchange, Inc.
"BENEFICIARY" means a qualified charitable organization to be the
beneficiary of the Trust established in connection with the amendment to the
"Excess Shares" provision of the Charter.
"BOARD" means the Board of Trust Managers of GREAT.
"BOOK-TAX DIFFERENCE" means, with respect to property contributed to a
partnership, the amount of unrealized gain or unrealized loss associated with
such property, which 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 such time.
"BUILT-IN GAIN ASSET" means any asset acquired by the Company from a
corporation which is or has been a "C" corporation.
"BYLAWS" means GREAT's Bylaws.
"CHARTER" means, as amended from time to time, GREAT's Second Amended and
Restated Declaration of Trust.
"CHARTER AMENDMENTS" means the proposal to amend the Charter, (i) to delete
the requirement contained in Section 6.4(b) thereof that GREAT receive an
independent third party appraisal prior to purchasing a property, ownership of
which is controlled by the executive officers of GREAT or their affiliates, (ii)
to change the name of GREAT to "Grove Property Trust" and (iii) to make certain
amendments to the "Excess Shares" provision of the Charter in order to minimize
the risk that GREAT could fail to qualify as a REIT for federal income tax
purposes, and to clarify the "Ownership Limit" as it applies to certain
Executive Officers and their affiliates.
"CODE" means, amended from time to time, the Internal Revenue Code of 1986.
"COMMITTEE" means the committee of the Board of GREAT which administers the
1994 Plan.
"COMMON SHARES" means GREAT's common shares of beneficial interest, $0.01
par value per share.
"COMMON UNITS" means units representing ownership interests in the Operating
Partnership.
"COMPANY" means Grove Property and its subsidiaries (including the Property
Partnerships and the Operating Partnership) on a consolidated basis, giving
effect to the consummation of the Consolidation Transactions.
"CONSOLIDATED ASSETS" means, collectively, the GREAT Assets, certain assets
and liabilities of the Management Company being acquired by the Operating
Partnership in connection with the Consolidation and the Partnership Properties.
"CONSOLIDATION" means the consolidation of (i) the GREAT Assets, (ii)
ownership and/or control of the Partnership Properties and (iii) certain assets
an liabilities of the Management Company used or
154
<PAGE>
arising in connection with the provision of real estate related services, in the
Operating Partnership, in connection with the Consolidation Transactions.
"CONSOLIDATION TRANSACTIONS" means the consolidation transactions proposed
to be entered into by GREAT, as more fully described in this Proxy Statement.
"CONSOLIDATION VALUATIONS" means the value assigned to the Property
Partnerships, the other Consolidated Assets to be contributed to the Operating
Partnership and the Operating Partnership in connection with the Consolidation
Transactions.
"CONTRIBUTION AGREEMENT" means the contribution agreement among GREAT, the
Grove Companies and the Operating Partnership.
"CREDIT FACILITY" means, together, the Long-Term Facility and the Revolving
Credit Facility.
"DEFERRED STOCK GRANTS" means annual grants of restricted Common Shares to
be granted (if earned) to the Executive Officers pursuant to the 1996 Plan, as
incentive compensation upon the achievement by the Company of certain enumerated
goals.
"DEP" means the Connecticut Department of Environmental Protection.
"EMPLOYEE BENEFIT PLAN" or "PLAN" means an "employee benefit plan," as
defined in and subject to Section 3(3) of ERISA, or a "plan," as defined in
Section 4975 of the Code, including any plan that provides welfare benefits or
retirement benefits to an individual or to an employer's employees and their
beneficiaries, such as a corporate pension or profit-sharing plan, a "simplified
employee pension plan," a so-called "Keogh" plan for self-employed individuals
(including partners), a funded health insurance plan, an individual retirement
account described in Section 408 of the Code ("IRAS") and any entity, such as a
group trust or separate account of an insurance company, that is treated as
holding the assets of any such plan.
"EQUITY SHARES" means Common Shares and/or Preferred Shares of GREAT.
"ERISA" means the Employee Retirement Income Security Act of 1974, as it may
be amended from time to time.
"EXCESS SHARES" means, pursuant to the Charter, any Equity Shares
purportedly transferred which would otherwise violate the Ownership Limit in the
hands of the purported transferee, or any Equity Shares sold, transferred,
assigned, devised or otherwise disposed of by a Shareholder which result in (i)
Common Shares and/or Preferred Shares being owned by less than 100 Shareholders;
(ii) the Company being "closely held" within the meaning of Section 856(h) of
the Code or (iii) the Company's failing to qualify as a REIT.
"EXCHANGE OFFER" means an Exchange Offer, dated , 1996, by the
Operating Partnership to the Limited Partners, for any and all Property
Partnership Units in exchange for Common Units or, in the case of Limited
Partners who are not Accredited Investors and certain other Limited Partners,
cash.
"EXCLUDED PROPERTIES" means 14 multi-family residential projects with an
aggregate of approximately 1,600 apartments and approximately 125,000 square
feet of commercial and mixed use property owned by 15 limited partnerships in
which the Grove Companies own limited and general partnership interests, which
properties are not being acquired by the Company in connection with the
Consolidation Transactions.
"EXECUTIVE OFFICER OWNERSHIP LIMIT" means 20% which is the maximum
percentage of outstanding Equity Shares any Executive Officer individually, or
the Executive Officers, in the aggregate, will be permitted to beneficially own
under the Charter, as amended and restated, subject to waiver by the Board under
certain circumstances.
155
<PAGE>
"EXECUTIVE OFFICERS" means the executive officers of GREAT, Damon, Brian and
Edmund Navarro, Joseph R. LaBrosse and Gerald A. McNamara.
"FFO" means Funds from Operations which is defined as follows: The White
Paper approved by the Board of Governors of the NAREIT in March 1995 defines FFO
as net income (loss) (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Management considers FFO an appropriate measure
of performance of an equity REIT because it is predicated on cash flow analyses.
The Company computes FFO in accordance with standards established by the White
Paper which may differ from the methodology for calculating FFO utilized by
other equity REITs and, accordingly, may not be comparable to such other REITs.
FFO should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indicator of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make distributions.
"FHAA" means the Fair Housing Amendments Act of 1988.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"GAAP" means generally accepted accounting principles in the United States.
"GDC" means Grove Development Corporation (which is owned by Grove
Companies) and facilitates the provision of construction services to the
Property Partnerships, the GREAT Properties and the Excluded Properties in
connection with the redevelopment of such properties.
"GPS" means Grove Property Services Limited Partnership.
"GREAT" means Grove Real Estate Asset Trust, a Maryland real estate
investment trust.
"GREAT AGENT" means, as defined in the Bylaws, any present or former trust
manager, officer or Shareholder or person who, while a trust manager, officer or
Shareholder, served or is serving as a trust manager, officer, director,
Shareholder or partner of another entity at GREAT's express request.
"GREAT ASSETS" means the GREAT Properties, together with certain related
assets.
"GREAT PROPERTIES" means four multi-family residential projects in
Connecticut owned by GREAT, with an aggregate of 257 units.
"GROVE" means Grove Investment Group, Inc.
"GROVE COASTAL" means Grove Coastal Associates, L.P..
"GROVE COMPANIES" means certain companies and individuals which are
affiliated with GREAT (including the Executive Officers) and which own the
Management Company and general and limited partnership interests in the Property
Partnerships and the limited partnerships that own the Excluded Properties.
"GROVE PROPERTY" means Grove Property Trust, the name by which GREAT will be
known following the consummation of the Consolidation Transactions.
"INCENTIVE PLAN" means the bonus incentive compensation plan established by
GREAT for the Executive Officers in connection with the IPO.
"INDEPENDENT TRUST MANAGERS" means Messrs. James Twaddell, J. Joseph Garrahy
and Harold Gorman, the members of the Board who are neither employed by, nor
affiliated with, the Grove Companies or GREAT.
"LIMITED PARTNERS" means the limited partners of the Property Partnerships.
156
<PAGE>
"LIQUIDATING PARTNERSHIPS" means those Property Partnerships which will be
liquidating and making a distribution "in-kind" of the Partnership Property or
Properties owned by such Property Partnerships to the Operating Partnership, in
connection with the Consolidation Transactions.
"LONG-TERM FACILITY" means the approximately $15.1 million ten-year term
mortgage loan facility being entered into by the Company in connection with the
Refinancing and the consummation of the Consolidation Transactions.
"MANAGEMENT COMPANY" means Grove Property Services Limited Partnership,
which provides real estate management services to the Properties.
"MANAGEMENT OWNERS" means Brian, Damon and Edmund Navarro and Joseph
LaBrosse.
"MARYLAND REIT ACT" means, as amended from time to time, the Maryland Real
Estate Investment Trust Act.
"MINIMUM PERCENTAGE CONDITION" means, with respect to any Property
Partnership, the minimum number of Partnership Units that must be tendered or
voted in favor of the Property Partnership Amendments in order for the
Partnership Agreement Amendments to be adopted with respect to such Property
Partnership and the Exchange Offer to be effected with respect to such Property
Partnership.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"NATIONAL REALTY" means National Realty Services, L.P., a newly formed
Delaware limited partnership, wholly owned by the Management Owners, which will
acquire the assets and liabilities currently used by the Management Company to
provide real estate brokerage services.
"NAVAB" means NAVAB Associates, a company owned one-quarter each by Brian
and Damon Navarro and Ronald and George Abdow.
"NEW EQUITY INVESTMENT" means the issuance, in connection with the
consummation of the Consolidation Transactions, by GREAT and the Operating
Partnership of up to 3,333,333 Common Shares (assuming the exchange of all
Common Units for Common Shares) to the New Equity Investors in return for gross
proceeds of $30.0 million.
"NEW EQUITY INVESTORS" means one or more investors in the New Equity
Investment.
"1994 PLAN" means the 1994 Share Option Plan of GREAT.
"1996 PLAN" means the 1996 Share Incentive Plan of the Company to be adopted
(assuming Shareholder approval) upon the consummation of the Consolidation
Transactions.
"NON-COMPETITION AGREEMENTS" means the non-competition agreements to be
entered into between each Executive Officer and the Company and between the
Grove Companies and the Company, upon the consummation of the Consolidation
Transactions.
"NON-EMPLOYEE TRUST MANAGER" means the Trust Managers who are not employees
of GREAT.
"NON-U.S. SHAREHOLDER" means, for the purposes of the rules governing United
Stated federal income taxation, a nonresident alien individual, foreign
corporation, foreign partnership or foreign estate or trust.
"OPERATING PARTNERSHIP" means Grove Operating, L.P., a newly formed Delaware
limited partnership, which is the operating partnership of GREAT.
"OP PARTNERSHIP AGREEMENT" means the Agreement of Limited Partnership of the
Operating Partnership, which governs the Operating Partnership.
"OPTIONS" means options to purchase Common Shares granted pursuant to the
1994 Plan or the 1996 Plan.
157
<PAGE>
"OUTSIDE PARTNERS" means, with respect to any Property Partnership, those
Limited Partners in the Property Partnership who do not tender their Property
Partnership Units in the Exchange Offer and elect to remain limited partners in
such Property Partnership following the consummation of the Consolidation
Transactions.
"OWNERSHIP LIMIT" means the maximum number of Equity Shares which any holder
of GREAT's Equity Shares is permitted to own or be deemed to own by virtue of
the attribution provisions of the Code, which is equal to 5.0% (of the number or
value, whichever is more restrictive) of the issued and outstanding Equity
Shares, subject to certain exceptions.
"PARTNERSHIP PROPERTY" means, with respect to each Property Partnership, the
Property or Properties owned by such Property Partnership.
"PCBS" means polychlorinated biphenyls.
"PLAN FIDUCIARY" means a fiduciary of an Employee Benefit Plan who has
investment discretion with respect to the assets of such Plan.
"PREFERRED SHARES" means up to 4.0 million preferred shares of beneficial
interest of GREAT, par value $.01 per share, which the Board is permitted to
issue pursuant to the Charter.
"PROHIBITED OWNER" means, in connection with the proposed amendment to the
"Excess Shares" provisions of the Charter, any record owner of Equity Shares
whose ownership of such shares would cause such shares to be deemed to be in
excess of the Ownership Limit or the Executive Officer Ownership Limit, or would
otherwise cause the Company to fail to continue to qualify as a REIT (and who
came to own such shares by means other than a transfer thereof).
"PROHIBITED TRANSFEREE" means, in connection with the proposed amendment to
the "Excess Shares" provisions of the Charter, any attempted transferee of
Equity Shares in whose possession such Equity Shares would be deemed to be in
excess of the Ownership Limit or the Executive Officer Ownership Limit, or would
otherwise cause the Company to fail to continue to qualify as a REIT.
"PROPERTY PARTNERSHIPS" means the following limited partnerships: (i) Grove
Avon Associates Limited Partnership, (ii) Burgundy Associates Limited
Partnership, (iii) Grove-Ellington Associates Limited Partnership, (iv)
Grove-Enfield Associates Limited Partnership, (v) Grove-Longmeadow Associates
Limited Partnership, (vi) Grove-Manchester Associates Limited Partnership, (vii)
Grove-Newington Associates Limited Partnership, (viii) Grove Opportunity Fund II
Limited Partnership, (ix) Grove-Plainville Associates Limited Partnership, (x)
Grove-West Hartford Associates Limited Partnership, (xi) Grove-West Springfield
Associates Limited Partnership, (xii) Grove-Westfield Associates Limited
Partnership, (xiii) Grove Westwynd Associates Limited Partnership, Shoreline
London Associates Limited Partnership, (xvi) Nautilus Properties Limited
Partnership, (xv) Grove Properties III Limited Partnership, (xvi) Grove Taunton
Associates Limited Partnership and (xvii) Grove-Vernon Associates Limited
Partnership.
"PROPERTY PARTNERSHIP AGREEMENT" means, with respect to each Property
Partnership, the agreement of limited partnership of such Property Partnership.
"PROPERTY PARTNERSHIP AMENDMENTS" means, with respect to each Property
Partnership, as applicable, (i) certain amendments to such Property
Partnership's Property Partnership Agreement which will permit the Company to
realize certain benefits anticipated to be available to it as a result of the
consummation of the Consolidation Transactions or (ii) in the case of the
Liquidating Partnerships only, the amendment of such Property Partnership's
Partnership Agreement to permit the liquidation of that Property Partnership
with an "in-kind" distribution of the related Partnership Property to the
Company.
"PROPERTY PARTNERSHIP UNITS" means, with respect to any Property
Partnership, units representing limited partnership interests in that Property
Partnership.
158
<PAGE>
"PROPERTIES" means the 24 properties to be owned and/or controlled by the
Company following the Consolidation Transactions, which include the 19
multi-family residential projects and one neighborhood shopping center owned by
the Property Partnerships and the four multi-family residential projects which
constitute the GREAT Properties.
"PROPOSED REGULATIONS" means certain recently proposed Treasury Regulations.
"RECOGNITION PERIOD" means the ten-year period in which the Company
recognizes gain on the disposition of an asset.
"RECORD DATE" means the close of business on , 1997.
"REFINANCING" means the refinancing of $39.8 million of mortgage
indebtedness of 17 Property Partnerships in connection with the consummation of
the Consolidation Transactions.
"REGISTRABLE SHARES" means any Common Shares which are subject to
Registration Rights.
"REGISTRATION RIGHTS" means collectively, certain registration rights that
the Company has granted certain persons receiving Common Units in connection
with the Consolidation Transactions pursuant to the Registration Rights
Agreement.
"REGISTRATION RIGHTS AGREEMENT" means a Registration Rights Agreement to be
entered into between GREAT, the Operating Partnership, certain holders of the
Common Units and the New Equity Investors.
"REIT" means a real estate investment trust.
"RELATED PARTY TENANT" means an owner of 10% or more of a REIT, who actually
or constructively owns 10% or more of a tenant of a property owned by such REIT.
"REVOLVING CREDIT FACILITY" means a three-year secured revolving acquisition
and working capital facility of up to $25.0 million to be entered into by the
Company in connection with the Refinancing and the consummation of the
Consolidation Transactions.
"RULE 144" means Rule 144 promulgated under the Securities Exchange Act of
1934, as amended.
"SAR" means a stock appreciation right.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SERVICE" means the Internal Revenue Service.
"SHAREHOLDERS" means the holders of GREAT's issued and outstanding Common
Shares.
"SPECIAL MEETING" means the special meeting of the Shareholders of GREAT to
be held on , , 1997 at the Hartford Club, 44-48 Prospect
Street, Hartford, Connecticut 06103, at local time, and any adjournment(s)
or postponement(s) thereof for the purpose of voting on the matters set forth in
this Proxy Statement.
"STOCK SPLIT" means a stock dividend aggregating 26,250 Common Shares to be
declared and issued by GREAT immediately prior to the consummation of the
Consolidation Transactions, together with the concurrent effectuation by GREAT
of a 1.125 to 1.0 stock split with respect to GREAT's 525,000 currently issued
and outstanding Common Shares.
"TRUST" means, in connection with the propose amendment to the "Excess
Shares" provisions of the Charter, a trust to be created for the benefit of the
Beneficiary.
"TRUSTEE" means, in connection with the proposed amendment to the "Excess
Shares" provisions of the Charter, a trustee of a Trust.
159
<PAGE>
"TRUST MANAGERS" means the Trust Managers of GREAT: Messrs. Damon Navarro,
Joseph R. LaBrosse, James Twaddell, J. Joseph Garrahy and Harold Gorman.
"UBITI" means any unrelated business taxable income.
"USTS" means underground storage tanks.
"WHITE PAPER" means the White Paper on FFO approved by the Board of
Governors of NAREIT in March 1995.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "EXCHANGE ACT") and in accordance therewith files
reports, proxy statements and other information with the SEC. Reports, proxy
statements and other information filed by the Company, including the Current
Report on Form 8-K filed by the Company with the SEC on , 1996, may be
inspected and copied at the public reference facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 75 Park
Place, 14th Floor, New York, New York 10007, or by way of the SEC's Internet
address, http://www.sec.gov. Copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549.
INCORPORATION BY REFERENCE
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this Proxy Statement shall be deemed to be modified
or superseded for purposes of this Proxy Statement to the extent that a
statement contained in this Proxy Statement (or in any subsequently filed
document that also is or is deemed to be incorporated by reference in this Proxy
Statement) modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement. This Proxy Statement incorporates by
reference the following documents:
1. Current Report on Form 8-K filed by the Company with the SEC on ,
1996.
Copies of such documents will be available without charge upon request to
Grove Real Estate Asset Trust, 598 Asylum Avenue, Hartford, Connecticut 06105,
(860) 520-4789.
SHAREHOLDER PROPOSALS
Any qualified Shareholder wishing to make a proposal to be acted upon at the
Company's Annual Meeting of Shareholders in 1997 must submit such proposal to be
considered by the Company for inclusion in the Company's proxy statement, to
Joseph LaBrosse, Secretary, Grove Real Estate Asset Trust, 598 Asylum Avenue,
Hartford, Connecticut, 06105, no later than December 16, 1996.
160
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
---------
<S> <C>
GROVE REAL ESTATE ASSET TRUST
Pro Forma Financial Statements (Unaudited):
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1996............................ F-2
Notes to Pro Forma Condensed Consolidated Balance Sheet............................................ F-3
Pro Forma Condensed Consolidated Statements of Income for the Nine Months Ended September 30, 1996
and Year Ended December 31, 1995.................................................................. F-5
Notes to Pro Forma Condensed Consolidated Statements of Income..................................... F-7
Historical Financial Statements:
Unaudited Balance Sheet as of September 30, 1996................................................... F-8
Unaudited Statements of Income for the Nine Months Ended September 30, 1996 and 1995............... F-9
Unaudited Statement of Changes in Owners' Equity for the Nine Months Ended September 30, 1996...... F-10
Unaudited Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995........... F-11
Notes to the Unaudited Financial Statements........................................................ F-12
Report of Independent Auditors..................................................................... F-14
Balance Sheet as of December 31, 1995.............................................................. F-15
Statements of Income for the Year Ended December 31, 1995 and the period from
inception (June 24, 1994) to December 31, 1994................................................... F-16
Statement of Shareholders' Equity for the Year Ended December 31, 1995
and the period from inception (June 24, 1994) to December 31, 1994............................... F-17
Statements of Cash Flows for the Year Ended December 31, 1995 and the period
from inception (June 24, 1994) to December 31, 1994.............................................. F-18
Notes to the Financial Statements.................................................................. F-19
GROVE OPERATING, L.P.
Financial Statements:
Report of Independent Auditors..................................................................... F-25
Balance Sheet as of November 4, 1996............................................................... F-26
Notes to Balance Sheet............................................................................. F-27
GROVE PROPERTY SERVICES LIMITED PARTNERSHIP AND PROPERTY PARTNERSHIPS
Combined Financial Statements:
Report of Independent Auditors..................................................................... F-29
Combined Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995................. F-30
Combined Statements of Operations for the Nine Months Ended September 30, 1996 and 1995 (unaudited)
and the Years Ended December 31, 1995 and 1994.................................................... F-31
Combined Statements of Changes in Owners' Equity for the Nine Months Ended September 30, 1996
(unaudited) and the Years Ended December 31, 1995 and 1994........................................ F-32
Combined Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 (unaudited)
and the Years Ended December 31, 1995 and 1994.................................................... F-33
Notes to the Combined Financial Statements......................................................... F-34
GROVE CAMBRIDGE ASSOCIATES LIMITED PARTNERSHIP
Financial Statements:
Reports of Independent Auditors.................................................................... F-39
Balance Sheet as of December 31, 1995.............................................................. F-41
Statements of Income for the Years Ended December 31, 1995 and 1994................................ F-42
Statements of Changes in Partners' Equity (Deficit) for the Years Ended December 31, 1995 and
1994.............................................................................................. F-43
Statements of Cash Flows for the Years Ended December 31, 1995 and 1994............................ F-44
Notes to the Financial Statements.................................................................. F-45
</TABLE>
F-1
<PAGE>
GROVE REAL ESTATE ASSET TRUST
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
This unaudited Pro Forma Condensed Consolidated Balance Sheet is presented as if
(i) the Consolidation Transactions as defined elsewhere in this Proxy Statement,
including the New Equity Investment of $30.0 million, had occurred on September
30, 1996, and (ii) the Company used a portion of the net proceeds from the New
Equity Investment together with borrowings under the new Credit Facility
("Refinancings") to retire certain mortgage notes and to purchase a portion of
the interests of the Limited Partners in certain of the Property Partnerships.
The pro forma information assumes that all parties to the Consolidation
Transactions participate in full. The unaudited Pro Forma Condensed Consolidated
Balance Sheet should be read in conjunction with the Combined Financial
Statements of Grove Property Services Limited Partnership and Property
Partnerships, Grove Real Estate Asset Trust and Grove Cambridge Associates
Limited Partnership and Notes thereto included elsewhere in this Proxy
Statement. In management's opinion, all adjustments necessary to present fairly
the effects of the Consolidation Transactions have been made.
The pro forma information is not necessarily indicative of the results that
would have been reported had such events actually occurred on the dates
specified, nor is it indicative of the Company's future results.
<TABLE>
<CAPTION>
SEPTEMBER 30,1996
-------------------------------------------------------------------------------
MANAGEMENT
HISTORICAL HISTORICAL PRO FORMA COMPANY PRO FORMA
GREAT (A) COMBINED (A) ADJUSTMENTS ADJUSTMENTS CONSOLIDATED
--------- ------------ -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Real estate, net............................. $8,804 $54,944 $ 851(B)
(942)(I) $63,657
Cash and cash equivalents.................... 442 1,290 (1,692)(C) $ (80)(H) 200
240(F)
Restricted cash.............................. 157 655 (18)(I)
794
Due from partners............................
884 (884)(G) --
Deferred costs, net.......................... 83 969 38(D)
1,090
Other assets................................. 61 421 (4)(I) (153)(H) 325
--------- ------------ -------------- ------ ------------
Total assets................................. $9,547 $59,163 $ (2,411) $(233) $66,066
--------- ------------ -------------- ------ ------------
--------- ------------ -------------- ------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage notes payable....................... $5,675 $47,518 $(39,800)(E)
16,383(F) $29,251
(525)(I)
Revolving credit facility....................
3,399(F) 3,399
Accounts payable and other liabilities....... 61 1,183
(72)(H) 1,172
Due to affiliates............................ 3 985 (476)(C)
(341)(G) 171
Resident security deposits................... 157 655 (18)(I)
794
Dividends payable............................ 121
121
--------- ------------ -------------- ------ ------------
Total liabilities............................ 6,017 50,341 (21,378) (72) 34,908
Minority interest............................ -- -- 10,061(J) -- 10,061
Shareholders' equity:
Common shares................................ 5
35(G) 40
Additional paid-in capital................... 3,913
27,205(G) 21,057
(10,061)(J)
Distributions in excess of earnings.......... (388) -- 388(G) --
Partners' equity.............................
8,822 (1,000)(F) (161)(H) --
(7,240)(G)
(421)(I)
--------- ------------ -------------- ------ ------------
Shareholders' equity......................... 3,530 8,822 8,906 (161) 21,097
--------- ------------ -------------- ------ ------------
Total liabilities and shareholders' equity... $9,547 $59,163 $ (2,411) $(233) $66,066
--------- ------------ -------------- ------ ------------
--------- ------------ -------------- ------ ------------
</TABLE>
F-2
<PAGE>
GROVE REAL ESTATE ASSET TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(A) Balance sheet data was derived from the financial statements appearing
elsewhere in this Proxy Statement.
(B) Certain Limited Partners will receive cash for their Property
Partnership interests acquired by the Operating Partnership. Purchase accounting
will be applied to the acquisition of Property Partnership interests from such
partners. The pro forma adjustment of $851 reflects the excess of the purchase
price ($7,208) of these interests over the net book value of $6,357. The
acquisition of all other interests will be accounted for as a reorganization of
entities under common control and, accordingly, assets and liabilities related
to those interests will be reflected at historical cost in a manner similar to
that used in pooling of interests accounting.
(C) Reflects the following transactions:
<TABLE>
<S> <C>
Proceeds from New Equity Investment............................... $ 30,000
Expenses of New Equity Investment................................. (2,165)
Payment of mortgage notes and interest............................ (39,800)
Payments for Property Partnership interests....................... (7,208)
Payment of loans from affiliates.................................. (476)
Issuance of new debt.............................................. 18,542
Financing costs................................................... (585)
---------
$ (1,692)
---------
---------
</TABLE>
(D) Reflects the following transactions:
<TABLE>
<S> <C>
Financing costs...................................................... $ 585
Write-off of deferred costs related to retired debt.................. (547)
---------
$ 38
---------
---------
</TABLE>
(E) Reflects the $39,800 paydown of certain existing mortgage notes payable.
(F) Reflects the issuance of new long term mortgage financing of $15,143 and
drawdown of new revolving credit facility of $3,399, due in lump sum payments
after ten years and three years, respectively. Additional cash of $240 was
derived from $1,240 of new debt obtained in October, 1996 net of $1,000 which
will be distributed to certain Limited Partners of Grove Opportunity Fund II
Limited Partnership prior to the Consolidation Transactions.
F-3
<PAGE>
GROVE REAL ESTATE ASSET TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(G) Reflects the following transactions:
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN
SHARES CAPITAL
------------- -----------
<S> <C> <C> <C>
Proceeds from New Equity Investment......................... $ 30,000 $ 33 $ 29,967
Expenses of New Equity Investment........................... (2,165) (2,165)
Conversion of remaining partnership interest................ 7,240 7,240
Reduction to partners' capital accounts
for contributions receivable.............................. (884) (884)
Affiliated debt contributed to capital...................... 341 341
Acquisition of Property Partnership interests for cash...... (7,208) (7,208)
Allocation of purchase price................................ 851 851
Reclassification of distributions in excess of earnings..... (388) (388)
Par value of Stock dividends and stock split................ 2 (2)
Write-off of deferred costs related
to retired debt........................................... (547) (547)
--------- --- -----------
Total shareholders' equity.................................. $ 27,240 $ 35 $ 27,205
--------- --- -----------
--------- --- -----------
</TABLE>
(H) Represents adjustments to exclude the assets and liabilities of Grove
Property Services Limited Partnership used in connection with brokerage services
that will be transferred to National Realty Services, L.P., a newly formed
entity which will not be included in the Consolidation Transactions.
(I) Reflects adjustments to exclude the Company's investment in Talcott
Forest which is not included in the Consolidation Transactions.
(J) Based upon 1,885,312 Common Units issued to Limited Partners outstanding
of the 5,838,775 Common Shares (assuming the exchange of all Common Units for
Common Shares) assumed to be outstanding (32.29%).
F-4
<PAGE>
GROVE REAL ESTATE ASSET TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
These unaudited Pro Forma Condensed Consolidated Statements of Income are
presented as if (i) the Company had acquired Grove Cambridge Associates Limited
Partnership as of the beginning of the period and (ii) the Consolidation
Transactions, as defined elsewhere in this Proxy Statement, including the New
Equity Investment and Refinancings, had occurred as of the beginning of the
period. The pro forma information assumes that all parties to the Consolidating
Transactions participate in full. The unaudited Pro Forma Condensed Consolidated
Statements of Income should be read in conjunction with the Combined Financial
Statements of Grove Property Services Limited Partnership and Property
Partnerships, Grove Real Estate Asset Trust and Grove Cambridge Associates
Limited Partnership and Notes thereto included elsewhere in this Proxy
Statement. In management's opinion, all adjustments necessary to present fairly
the effects of the Consolidation Transactions have been made.
The pro forma information is not necessarily indicative of the results that
would have been reported had such events actually occurred on the dates
specified, nor is it indicative of the Company's future results.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
----------------------------------------------------------------------------------
MANAGEMENT
HISTORICAL ACQUISITION HISTORICAL PRO FORMA COMPANY PRO FORMA
GREAT(A) ADJUSTMENTS(A) COMBINED(A) ADJUSTMENTS ADJUSTMENTS CONSOLIDATED
----------- --------------- ----------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental income............ $ 1,521 $ 28 $ 9,644 $ (190)(D) $ (13)(H) $ 10,990
Property management...... 1,198 (525)(H) 593
(80)(I)
Interest and other....... 28 1 243 (26)(D) (100)(J) 146
----------- --- ----------- ----------- ----- -----------
Total revenue.......... 1,549 29 11,085 (216) (718) 11,729
Expenses:
Related party management
fees................... 80 (80)(I) --
Other property
operating.............. 485 14 4,349 (89)(D) (663)(H) 4,096
General and
administrative......... 55 12 194 (3)(D)
30(G) 424(H) 712
Real estate taxes........ 155 3 938 (17)(D) 1,079
----------- --- ----------- ----------- ----- -----------
Total expenses....... 775 29 5,481 (79) (319) 5,887
----------- --- ----------- ----------- ----- -----------
774 -- 5,604 (137) (399) 5,842
Interest................. 292 63 2,807 (1,254)(C)
(34)(D) 1,874
Depreciation and
amortization........... 293 27 2,346 (35)(D) 31(H)
(13)(E)
26(F) 2,675
----------- --- ----------- ----------- ----- -----------
Income before minority
interest and
extraordinary items.... 189 (90) 451 1,173 (430) 1,293
Minority interest in
earnings............... (418)(K) (418)
----------- --- ----------- ----------- ----- -----------
Income before
extraordinary items.... $ 189 $ (90) $ 451 $ 755 $ (430) $ 875
----------- --- ----------- ----------- ----- -----------
----------- --- ----------- ----------- ----- -----------
</TABLE>
F-5
<PAGE>
GROVE REAL ESTATE ASSET TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------------------------------------
MANAGEMENT
HISTORICAL ACQUISITION HISTORICAL PRO FORMA COMPANY PRO FORMA
GREAT (A) ADJUSTMENTS(A)(B) COMBINED(A) ADJUSTMENTS ADJUSTMENTS CONSOLIDATED
----------- ------------------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Revenues:
Rental income.................... $ 1,287 $ 746 $ 11,965 $ (247)(D) $ (18)(H) $ 13,733
Property management.............. 1,473 (448)(H)
(114)(I) 911
Interest and other............... 30 16 445 (15)(D) 476
----------- ----- ------------ ----------- ----- ------------
Total revenue................ 1,317 762 13,883 (262) (580) 15,120
Expenses:
Related party management fees.... 67 47 (114)(I) --
Other property operating......... 406 222 5,276 (84)(D) (885)(H) 4,935
General and administrative....... 56 261 (3)(D)
40(G) 566(H) 840
Real estate taxes................ 148 61 1,234 (26)(D) 1,417
----------- ----- ------------ ----------- ----- ------------
Total expenses............... 677 330 6,771 (73) (433) 7,272
----------- ----- ------------ ----------- ----- ------------
640 432 7,112 (189) (147) 7,848
Interest......................... 85 409 3,829 (1,772)(C) 2,499
(52)(D)
Depreciation and amortization.... 216 187 3,140 (42)(D) 37(H)
(53)(E)
35(F) 3,520
----------- ----- ------------ ----------- ----- ------------
Income before minority interest
and extraordinary items........ 339 (164) 143 1,695 (184) 1,829
Minority interest in earnings.... (591)(K) (591)
----------- ----- ------------ ----------- ----- ------------
Income before extraordinary
items.......................... $ 339 $ (164) $ 143 $ 1,104 $ (184) $ 1,238
----------- ----- ------------ ----------- ----- ------------
----------- ----- ------------ ----------- ----- ------------
</TABLE>
F-6
<PAGE>
GROVE REAL ESTATE ASSET TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(A) Results of operations data was derived from the financial statements
appearing elsewhere in this Proxy Statement.
(B) Results of operations of Grove Cambridge Associates Limited Partnership
prior to its acquisition on January 12, 1996.
(C) Represents the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
Pro forma interest expense on refinanced debt......... $ 1,061 $ 1,375
Historical interest expense on refinanced debt........ (2,315) (3,147)
------- -------
$ (1,254) $ (1,772)
------- -------
------- -------
</TABLE>
Interest expense on the new debt is based on a rate of approximately 7.9%
per annum.
(D) Reflects adjustments to exclude the results of operations of Talcott
Forest which is not included in the Consolidation Transactions.
(E) Represents the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------- -------------------
<S> <C> <C>
Pro forma deferred financing amortization costs....... $ 87 $ 116
Historical deferred financing amortization costs...... (100) (169)
----- -----
$ (13) $ (53)
----- -----
----- -----
</TABLE>
(F) Represents adjustment to record depreciation on the excess of the
purchase price relating to the purchase of certain partnership interests from
partners, over the net book value.
(G) Represents adjustment to record compensation expense associated with the
Deferred Stock Grants granted to Executive Officers in connection with the
consummation of the Consolidation Transactions, pursuant to the 1996 Plan.
(H) Represents adjustments to exclude the results of operations of Grove
Property Services Limited Partnership attributable to brokerage services and
reclassification of certain expenses historically classified by Grove Property
Services Limited Partnership as property management expenses to general and
administrative of the Company, as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------- -------------------
<S> <C> <C>
Other property operating--brokerage services.......... $ (239) $ (319)
Reclassification of other property operating to
general and administrative.......................... (424) (566)
----- -----
$ (663) $ (885)
----- -----
----- -----
</TABLE>
(I) Elimination of intercompany management fees.
(J) Elimination of commission received from an affiliate.
(K) Based upon 1,885,312 Common Units issued to Limited Partners
outstanding, of the 5,838,775 Common Shares (assuming the exchange of all Common
Units for Common Shares) assumed to be outstanding (32.29%).
F-7
<PAGE>
GROVE REAL ESTATE ASSET TRUST
BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Real estate assets:
Land.......................................................................... $ 920,293
Buildings and improvements.................................................... 8,494,112
Furniture, fixtures and equipment............................................. 347,336
---------
9,761,741
Less--accumulated depreciation................................................ (958,017)
---------
Net real estate assets.................................................... 8,803,724
Cash and cash equivalents....................................................... 441,632
Cash--resident security deposits................................................ 156,592
Deferred charges, net of accumulated amortization of $4,247..................... 83,222
Other assets.................................................................... 62,069
---------
Total assets.................................................................... $9,547,239
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable........................................................ $5,675,478
Accounts payable, accrued expense and other................................... 61,189
Due to affiliates............................................................. 2,532
Resident security deposits.................................................... 156,592
Dividends payable............................................................. 120,750..
---------
Total liabilities............................................................... 6,016,541
---------
Commitments and subsequent event
Shareholders' equity:
Preferred shares, $.01 par value per share, 4,000,000 shares authorized; no
shares issued or outstanding................................................ --
Common shares, $.01 par value per share, 10,000,000 shares authorized; 525,000
shares issued and outstanding............................................... 5,250
Additional paid-in capital.................................................... 3,913,176
Distributions in excess of earnings........................................... (387,728)
---------
Total equity.................................................................... 3,530,698
---------
Total liabilities and shareholders' equity...................................... $9,547,239
---------
---------
</TABLE>
See accompanying notes.
F-8
<PAGE>
GROVE REAL ESTATE ASSET TRUST
INCOME STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
----------------------------
<S> <C> <C>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
Revenues:
Rental income..................................................................... $ 1,521,188 $ 961,423
Interest and other income......................................................... 28,015 22,395
------------- -------------
Total revenues.................................................................. 1,549,203 983,818
------------- -------------
Expenses:
Property operating and maintenance................................................ 485,361 296,532
Real estate taxes................................................................. 155,007 110,858
Related party management fees..................................................... 79,883 49,874
General and administrative........................................................ 55,337 46,329
------------- -------------
Total expenses.................................................................. 775,588 503,593
------------- -------------
773,615 480,225
Interest expense.................................................................... 291,551 63,588
Depreciation and amortization....................................................... 293,328 161,686
------------- -------------
Net income.................................................................... $ 188,736 $ 254,951
------------- -------------
------------- -------------
Net income per share................................................................ $ 0.36 $ 0.49
------------- -------------
------------- -------------
Weighted average number of shares 525,000 525,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-9
<PAGE>
GROVE REAL ESTATE ASSET TRUST
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL DISTRIBUTIONS
COMMON PAIN-IN IN EXCESS OF
SHARES CAPITAL NET INCOME
----------- ------------ ------------
<S> <C> <C> <C>
Amounts at December 31, 1995............................................... $ 5,250 $ 3,913,176 $ (215,526)
Net income................................................................. 188,736
Declared dividends......................................................... (360,938)
----------- ------------ ------------
Amounts at September 30, 1996.............................................. $ 5,250 $ 3,913,176 $ (387,728)
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See accompanying notes.
F-10
<PAGE>
GROVE REAL ESTATE ASSET TRUST
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 188,736 $ 254,951
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 293,328 161,686
Imputed interest--mortgage...................................................... 27,875 25,931
Increase in other assets........................................................ (59,357) (33,003)
Increase (decrease) in accounts payable, accrued expenses and other............. 29,885 (2,372)
------------- -------------
Net cash provided by operating activities..................................... 480,467 407,193
------------- -------------
Cash flows from investing activities:
Expenditures for building and improvements........................................ (67,635) (37,624)
Expenditures for furniture, fixtures and equipment................................ (21,604) (5,057)
------------- -------------
Net cash used in investing activities......................................... (89,239) (42,681)
------------- -------------
Cash flows from financing activities:
Proceeds from mortgage payable.................................................... 220,197 --
Financing costs................................................................... (56,469) --
Repayment of mortgage payable..................................................... (42,428) --
Repayment of notes payable to affiliates.......................................... (94,996) (50,000)
Dividends paid.................................................................... (359,625) (353,063)
------------- -------------
Net cash used in financing activities......................................... (333,321) (403,063)
------------- -------------
Net increase (decrease) in cash and cash equivalents................................ 57,907 (38,551)
Cash and cash equivalents, beginning of period...................................... 383,725 416,012
------------- -------------
Cash and cash equivalents, end of period............................................ $ 441,632 $ 377,461
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-11
<PAGE>
GROVE REAL ESTATE ASSET TRUST
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. FORMATION AND BUSINESS OF THE COMPANY
Grove Real Estate Asset Trust (the "Company") was organized in the State of
Maryland on April 4, 1994 as a Real Estate Investment Trust ("REIT"). The
Company currently operates four properties with a total of 257 residential
apartments. The Company purchased three properties on June 23, 1994 (the
"Original Properties"), and the fourth property ("Cambridge") was acquired for
$4,250,000 in January of 1996. Cambridge is a ninety-two unit multifamily
apartment complex located in Norwich, Connecticut
These statements do not contain all information required by generally
accepted accounting principles to be included in a full set of financial
statements. In the opinion of management, the accompanying unaudited financial
statements reflect all the adjustments necessary to present fairly the financial
position of the Company at September 30, 1996 and results of operations and its
cash flows for the period then ended and the period ended September 30, 1995.
These unaudited financial statements should be read in conjunction with the
audited financial statements and notes contained in the Company's Form 10-KSB
for the year ended December 31, 1995. Results of operations for this period are
not necessarily indicative of results to be expected for the full year.
Earnings per share is based on the weighted average number of common shares
issued and outstanding from January 1, 1996 to September 30, 1996, and from
January 1, 1995 to September 30, 1995, which was equal to 525,000 shares. The
assumed exercise of outstanding stock options and warrants is not dilutive and,
therefore, is not included.
2. MORTGAGE NOTES PAYABLE
Mortgage notes payable at September 30, 1996 consist of the following:
<TABLE>
<S> <C>
Southington Apartments note..................................... $1,217,906
Cambridge Estates note.......................................... 4,457,572
---------
$5,675,478
---------
---------
</TABLE>
The mortgage note on the Southington Apartments property located in
Southington, Connecticut, one of the Original Properties, which has a face
amount of $1,250,000, has an imputed interest rate of 7.25% due in monthly
interest payments of $4,167 through June 1997 and monthly principal and interest
payments of $8,527 through July 2013. The note is collateralized by the
Southington Apartments property and 15% of the face amount is guaranteed by
certain executive officers and shareholders of the Company.
The Cambridge note payable had an original principal balance of $4,500,000.
Monthly principal and interest payments of $31,920 based on a 25-year
amortization table are due through January 2006. Interest is fixed at 7.04%. The
mortgage is secured by a blanket first mortgage lien on the Cambridge property,
and the two other Original Properties located in Hamden, Connecticut.
3. STOCK OPTIONS AND WARRANTS
The Company has adopted the 1994 Share Option Plan (the "Plan") and has
reserved 100,000 shares for issuance under the Plan. The Company has granted
options to purchase 50,000 shares to the executive officers with an exercise
price of $11.125 per share. The options will expire on the tenth anniversary of
the closing of the IPO. Additionally, the Company has granted each Trust Manager
of the Company who is not
F-12
<PAGE>
GROVE REAL ESTATE ASSET TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
3. STOCK OPTIONS AND WARRANTS (CONTINUED)
an employee upon their election as a Trust Manager a non-qualified stock option
to purchase 2,000 shares for a total of 6,000 shares with an exercise price of
$11.125 per share. At the time of each annual meeting of shareholders, each
non-employee Trust Manager receives an option to purchase 1,000 shares at the
fair market value of the shares on the date of grant. All options which have
been granted under the Plan become exercisable in increments of 33 1/3% per year
on each of the first three anniversaries of the date of grant. At September 30,
1996, no options had been exercised. At September 30, 1996, 62,000 options are
outstanding, of which 38,334 are exercisable.
At September 30, 1996, warrants to purchase an aggregate of 40,000 common
shares are exercisable at $13.35 per share and expire in June 1999.
4. RELATED PARTY TRANSACTIONS
DUE TO AFFILIATES
Amounts due to affiliates at September 30, 1996 consist of the following:
<TABLE>
<S> <C>
Grove Property Services Limited Partnership......................... $ 2,532
---------
Total due to affiliates......................................... $ 2,532
---------
---------
</TABLE>
MANAGEMENT FEE
Grove Property Services Limited Partnership, an affiliate of GREAT, provides
all of the operating and support functions requisite to the operation of
properties owned by GREAT, including building management and leasing, to the
Company. The management agreement provides for a management fee equal to 5% of
gross rental revenues, as defined. The agreement expires on June 30, 1997.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was $278,551 and $63,431 for the nine months
ended September 30, 1996 and 1995, respectively. On January 12, 1996 the Company
purchased Cambridge for $4,250,000, which was financed with a $4,500,000 first
mortgage from a bank.
F-13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Shareholders and Board of Directors
of Grove Real Estate Asset Trust
Hartford, Connecticut
We have audited the accompanying balance sheet of Grove Real Estate Asset
Trust as of December 31, 1995, and the related statements of income,
shareholders' equity and cash flows for the year ended December 31, 1995 and for
the period of initial operations (June 24, 1994) through December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial statements referred to above present fairly,
in all material respects, the financial position of Grove Real Estate Asset
Trust as of December 31, 1995 and the results of its operations and its cash
flows for the year ended December 31, 1995 and for the period of initial
operations (June 24, 1994) through December 31, 1994 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
January 30, 1996
New York, New York
F-14
<PAGE>
GROVE REAL ESTATE ASSET TRUST
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Real estate assets:
Land.......................................................................... $ 493,823
Buildings and improvements.................................................... 4,658,438
Furniture, fixtures and equipment............................................. 240,438
---------
5,392,699
Less--accumulated depreciation................................................ (694,215)
---------
Net real estate assets.................................................... 4,698,484
Cash and cash equivalents....................................................... 383,725
Cash--resident security deposits................................................ 99,973
Deferred charges, net of accumulated amortization of $11,736.................... 56,279
Other assets.................................................................... 2,712
---------
Total assets.............................................................. $5,241,173
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage note payable......................................................... $1,190,031
Accounts payable, accrued expense and other................................... 31,304
Due to affiliates............................................................. 97,528
Resident security deposits.................................................... 99,973
Dividends payable............................................................. 119,438
---------
Total liabilities......................................................... 1,538,273
---------
Commitments and subsequent event (notes 6, 8, 9, and 11)........................ --
Shareholders' equity:
Preferred shares, $.01 par value per share, 4,000,000 shares authorized; no
shares issued or outstanding................................................ --
Common shares, $.01 par value per share, 10,000,000 shares authorized; 525,000
shares issued and outstanding............................................... 5,250
Additional paid-in capital.................................................... 3,913,176
Distributions in excess of earnings........................................... (215,526)
---------
Total equity.............................................................. 3,702,900
---------
Total liabilities and shareholders' equity................................ $5,241,173
---------
---------
</TABLE>
See accompanying notes.
F-15
<PAGE>
GROVE REAL ESTATE ASSET TRUST
INCOME STATEMENTS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
YEAR ENDED (JUNE 24, 1994) TO
DECEMBER 31, DECEMBER 31,
1995 1994
------------ --------------------
<S> <C> <C>
Revenues:
Rental income............................................................... $1,287,013 $ 641,036
Interest and other income................................................... 29,902 12,952
------------ --------
Total revenues.......................................................... 1,316,915 653,988
------------ --------
Expenses:
Property operating and maintenance.......................................... 406,227 207,625
Real estate taxes........................................................... 147,770 76,391
Related party management fees............................................... 66,781 33,282
General and administrative.................................................. 56,363 16,433
------------ --------
Total expenses.......................................................... 677,141 333,731
------------ --------
639,774 320,257
Interest expense.............................................................. 85,103 44,478
Depreciation and amortization................................................. 216,413 116,876
------------ --------
Net income.............................................................. $ 338,258 $ 158,903
------------ --------
------------ --------
Net income per share.......................................................... $ 0.64 $ 0.30
------------ --------
------------ --------
Weighted average number of shares............................................. 525,000 525,000
------------ --------
------------ --------
</TABLE>
See accompanying notes.
F-16
<PAGE>
GROVE REAL ESTATE ASSET TRUST
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL DISTRIBUTIONS
COMMON PAID-IN IN EXCESS OF
SHARES CAPITAL NET INCOME
----------- ------------- ------------
<S> <C> <C> <C>
Shareholders' equity, June 24, 1994 (Inception)........................... $ -- $ -- $ --
Public offering of 500,000 shares....................................... 5,000 5,181,958 --
Purchase price of property in excess of carryover basis................. -- (1,524,507) --
Issuance of 25,000 shares............................................... 250 255,625 --
Proceeds of underwriting warrants....................................... -- 100 --
Net income.............................................................. -- -- 158,903
Declared dividends...................................................... -- -- (237,562)
----------- ------------- ------------
Shareholders' equity, December 31, 1994................................... 5,250 3,913,176 (78,659)
Net income.............................................................. -- -- 338,258
Declared dividends...................................................... -- -- (475,125)
----------- ------------- ------------
Shareholders' equity, December 31, 1995................................... $ 5,250 $ 3,913,176 $ (215,526)
----------- ------------- ------------
----------- ------------- ------------
</TABLE>
See accompanying notes.
F-17
<PAGE>
GROVE REAL ESTATE ASSET TRUST
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
YEAR ENDED (JUNE 24, 1994) TO
DECEMBER 31, DECEMBER 31,
1995 1994
------------ --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 338,258 $ 158,903
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................................. 216,413 116,876
Imputed interest--mortgage................................................ 34,892 18,516
Decrease in other assets.................................................. 4,472 --
Increase in accounts payable, accrued expenses and other.................. (8,891) 153,467
------------ -----------
Net cash provided by operating activities............................... 585,144 447,762
------------ -----------
Cash flows from investing activities:
Acquisition of real estate assets........................................... -- (4,956,961)
Expenditures for building and improvements.................................. (81,410) (63,931)
Expenditures for furniture, fixtures and equipment.......................... (17,592) (24,184)
------------ -----------
Net cash used in investing activities................................... (99,002) (5,045,076)
------------ -----------
Cash flows from financing activities:
Proceeds of stock issuance, net of issuance costs........................... -- 5,181,958
Financing costs............................................................. (23,000) (47,882)
Repayment of notes payable to affiliates.................................... (22,929) --
Dividends paid.............................................................. (472,500) (120,750)
------------ -----------
Net cash provided by (used in) financing activities..................... (518,429) 5,013,326
------------ -----------
Net increase (decrease) in cash and cash equivalents.......................... (32,287) 416,012
Cash and cash equivalents, beginning of period................................ 416,012 --
------------ -----------
Cash and cash equivalents, end of period...................................... $ 383,725 $ 416,012
------------ -----------
------------ -----------
</TABLE>
See accompanying notes.
F-18
<PAGE>
GROVE REAL ESTATE ASSET TRUST
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD
FROM INCEPTION (JUNE 24, 1994) TO DECEMBER 31, 1994
1. FORMATION AND BUSINESS OF THE COMPANY
Grove Real Estate Asset Trust ("GREAT" or the "Company") was organized in
the State of Maryland on April 4, 1994 as a Real Estate Investment Trust
("REIT"). The Company commenced operations effective with the completion of an
initial public offering (the "IPO") of 500,000 common shares for $5,562,500 at a
price of $11.125 per share on June 23, 1994. Concurrently with the equity
offering the Company purchased three properties (the "Properties") with a total
of 165 residential apartments for gross amount of $6,064,490, assumed a mortgage
on one of the properties with a principal balance of $1,139,490, the executive
officers purchased 25,000 restricted shares for $255,875, and a $3,000,000 line
of credit agreement (the "Credit Facility") was entered into with a bank.
Prior to the IPO, the predecessor entities operations consisted of the
combined operations of 3 individual limited partnerships, all of which were
affiliated with the Company. The accompanying financial statements reflect the
operations of the Company for the year ended December 31, 1995. See Note 3, "Pro
Forma Statement of Operations", for operating results of the combined operations
of the predecessor entities from January 1, through December 31, 1994.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less at the time of the purchase to be cash
equivalents for financial statement purposes.
REAL ESTATE ASSETS AND DEPRECIATION
The Properties were recorded in the accounts of GREAT at their historical
cost due to the controlling relationship between the principals of the entities
previously operating the Properties (the "Grove Affiliates") and GREAT. The
proportion of the purchase price attributable to the net assets acquired from
Grove Affiliates exceeds their amortized historical cost. Accordingly, the
excess amount is reflected as a decrease in equity for accounting purposes. All
real estate assets purchased subsequent to the IPO have been recorded at cost.
Depreciation is recorded using the straight-line method over the estimated life
of the assets (7 to 27.5 years).
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of common shares
issued and outstanding during the period from June 23, 1994 to December 31, 1994
and for the year ended December 31, 1995,
F-19
<PAGE>
GROVE REAL ESTATE ASSET TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD
FROM INCEPTION (JUNE 24, 1994) TO DECEMBER 31, 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
which was equal to 525,000 shares for both periods. The assumed exercise of
outstanding stock options and warrants is not dilutive and, therefore, is not
included.
INCOME TAXES AND DIVIDENDS
The Company has made the election to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). A
REIT will generally not be subject to federal income tax to the extent it
distributes at least 95% of its taxable income to its shareholders and complies
with other requirements. Accordingly, no provision has been made for federal
income taxes for the Company in the accompanying financial statements. Even
though the Company qualifies for taxation as a REIT, the Company may be subject
to certain state and local taxes on its income and property and to federal
income and excise taxes on its undistributed income, if any. Shareholders are
taxed on dividends declared and must report such dividends as either ordinary
income, short term gains, long term gains, or as a return of capital.
As the Company intends to continue to qualify as a REIT, it will not be
subject to corporate income taxes. Therefore, the difference between the tax
bases and reported amounts of assets and liabilities has not been recognized for
financial reporting purposes. The only significant unrecognized temporary
difference, approximately $1,180,701 at the statutory tax rate, relates to basis
differential in the carrying amount of real estate assets for financial
reporting and income tax purposes.
The federal income tax characteristics of dividends paid by the Company
consisted of:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Ordinary income.............................................................. 83.22% 56.53%
Return of capital............................................................ 16.78% 43.47%
</TABLE>
DEFERRED CHARGES
Deferred charges, consisting principally of loan costs, are amortized on a
straight line basis over the term of the related obligation.
RENTAL INCOME
The Company leases space to tenants pursuant to lease agreements accounted
for as operating leases. Revenues, consisting primarily of rentals for
apartments, are recognized as earned. The leases are generally for one year.
FINANCIAL STATEMENT RECLASSIFICATIONS
Certain amounts reflected in the financial statements for the period ended
December 31, 1994 have been reclassified to conform to the presentation for the
year ended December 31, 1995.
F-20
<PAGE>
GROVE REAL ESTATE ASSET TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD
FROM INCEPTION (JUNE 24, 1994) TO DECEMBER 31, 1994
3. PRO FORMA STATEMENT OF OPERATIONS
The following unaudited pro forma statement of operations for the year ended
December 31, 1994 is presented as if (i) GREAT had owned all of its 3 original
properties at the beginning of the year, and (ii) GREAT had qualified as a REIT,
distributed all of its taxable income and, therefore, incurred no federal income
tax expense during the year. The unaudited statement of operations does not
purport to represent what GREAT's results of operations would actually have been
if such transactions, in fact, had occurred on January 1, 1994, nor does it
purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
GROVE GROVE REAL
AFFILIATES ESTATE ASSET
JANUARY 1, 1994 TRUST
TO JUNE 23, JUNE 24, 1994 TO HISTORICAL PRO FORMA
1994 DECEMBER 31, 1994 COMBINED ADJUSTMENTS PRO FORMA
--------------- ----------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Total Revenues........................ $ 583,274 653,988 1,237,262 0 1,237,262
--------------- ------- ---------- ----------- ----------
EXPENSES
Property Operating & Maintenance...... 220,086 207,625 427,711 0 427,711
Related Party Management Fee.......... 33,367 33,282 66,649 0 66,649
General & Administrative.............. 14,316 16,433 30,749 12,091 42,840
Real Estate Taxes..................... 71,402 76,391 147,793 0 147,793
Interest Expense...................... 173,416 44,478 217,894 (134,081) 83,813
Depreciation & Amortization........... 101,536 116,876 218,412 (2,477) 215,935
--------------- ------- ---------- ----------- ----------
Total Expenses........................ 614,123 495,085 1,109,208 (124,467) 984,741
--------------- ------- ---------- ----------- ----------
Net Income............................ $ (30,849) 158,903 128,054 124,467 252,521
--------------- ------- ---------- ----------- ----------
--------------- ------- ---------- ----------- ----------
</TABLE>
The unaudited pro forma adjustments gives effect to (i) actual operating
revenues and expenses of the properties acquired on June 24, 1994 for the period
January 1, 1994 through the date of purchase; (ii) the elimination of the
interest expense on certain notes payable which were satisfied from the proceeds
from the IPO; (iii) a net increase in general and administrative expenses in the
operation of GREAT, including administrative services (pursuant to the
Administrative Services Agreement) and rental of GREAT's principal executive
offices; and (iv) the elimination of amortization of intangible assets of the
Grove Affiliates and the addition of the amortization of financing costs
associated with the Credit Facility.
4. MORTGAGE NOTE PAYABLE
The Company's mortgage note payable is due to an unrelated party and had a
balance of $1,190,031 at December 31, 1995. This mortgage note was assumed by
the Company concurrently with the IPO with an imputed balance of $1,139,490 and
a face amount of $1,250,000. The note has an imputed interest rate of 7.25% due
in monthly interest payments of $4,167 through June 1997 and monthly principal
and interest payments of $8,527 through July 2013. The note is collateralized by
one of the Company's operating properties and 15% of the face amount is
guaranteed by certain executive officers and shareholders of the Company.
F-21
<PAGE>
GROVE REAL ESTATE ASSET TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD
FROM INCEPTION (JUNE 24, 1994) TO DECEMBER 31, 1994
4. MORTGAGE NOTE PAYABLE (CONTINUED)
Aggregate maturities of the mortgage note for the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1996............................................................................ $ 0
1997............................................................................ 6,038
1998............................................................................ 12,751
1999............................................................................ 13,706
2000............................................................................ 14,734
Thereafter...................................................................... 1,202,771
------------
Total....................................................................... $ 1,250,000
------------
------------
</TABLE>
The carrying amount of the mortgage note at December 31, 1995 approximates
its fair value.
5. CREDIT FACILITY
The Company entered into the Credit Facility concurrently with the IPO. The
Credit Facility, which provided for up to $3.0 million in borrowings, was
expected to be used to finance acquisitions of properties, re-development and
renovation costs and expenses, and for working capital purposes related to
future acquisitions. The Credit Facility was not drawn upon, and was terminated
in January 1996.
6. 1994 STOCK OPTION PLAN
The Company has adopted a stock option plan (the "Plan") and has reserved
100,000 shares for issuance under the Plan. The Company has granted options to
purchase 50,000 shares to the executive officers with an exercise price of
$11.125 per share. The options will expire June 23, 2004. Additionally, each
Trust Manager of the Company who is not an employee has received a non-qualified
stock option to purchase 2,000 shares for a total of 6,000 shares with an
exercise price of $11.125 per share. On each anniversary of his or her election
to the Board of Trust Managers, each non-employee Trust Manager shall receive an
option to purchase 1,000 shares at the fair market value of the shares on the
date of grant. All options which have been granted under the Plan become
exercisable in increments of 33 1/3% per year on each of the first three
anniversaries of the date of grant. At December 31, 1995 no options had been
exercised. At December 31, 1995 57,000 options are outstanding, of which 18,667
are exercisable.
7. UNDERWRITER WARRANTS
In conjunction with the IPO, the managing underwriter, Barclay Investments,
Inc., was granted Underwriter Warrants to purchase 40,000 Common Shares. The
Underwriter Warrants are exercisable at $13.35 per share and expire in June
1999. No warrants had been exercised.
8. PENSION PLAN
The Company has a 401(k) savings plan (the "Plan") which is a voluntary
defined contribution plan. Under the Plan, eligible employees may contribute a
percentage of their salaries to the Plan, subject to
F-22
<PAGE>
GROVE REAL ESTATE ASSET TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD
FROM INCEPTION (JUNE 24, 1994) TO DECEMBER 31, 1994
8. PENSION PLAN (CONTINUED)
certain dollar limitations and the Company may make matching contributions on
the participant's behalf equal to 25% of the participants contribution. Expenses
under this Plan are not material.
9. RELATED PARTY TRANSACTIONS
MANAGEMENT FEE
Grove Property Services ("GPS"), an affiliate of GREAT, provides to the
Company all of the operating and support functions requisite to the operation of
the Properties, including building management and leasing. The management
agreement provides for a management fee equal to 5% of gross rental revenues, as
defined. The agreement expires on June 30, 1997.
CONSTRUCTION SERVICES
Grove Development Corporation ("GDC"), an affiliate of GREAT, provides
construction services to the Company. These services are generally provided at
the cost of materials and labor plus a project management and supervision fee
equal to 20% of the aforementioned direct project costs. Services related to the
redevelopment of the Properties and tenant improvements have been capitalized as
real estate assets in the accompanying balance sheet. Total costs of $26,788 and
$49,688 were paid or payable to GDC during 1995 and 1994, respectively.
OPERATING EXPENSES AND NON-OPERATING EXPENSES
Certain operating and non-operating expenses include amounts paid or payable
to affiliates of GREAT for administrative expenses and for reimbursement of
expenditures funded by them in connection with the conduct of the business of
the Company. Included in these amounts are general and administrative expenses
allocated to the Company by GPS. This charge reflects an allocation of the cost
of accounting and related support staff expenses incurred by GPS for services
required by the Company, which are outside the scope of services customarily
rendered by a property management company for its basic fee.
DUE TO AFFILIATES
Amounts due to affiliates at December 31, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
1995 1994
--------- ----------
<S> <C> <C>
Grove Investment Group................................................. $ 70,457 120,457
GPS.................................................................... 14,890 --
GDC.................................................................... 12,181 --
--------- ----------
Total due to affiliates............................................ $ 97,528 120,457
--------- ----------
--------- ----------
</TABLE>
The amount due to the Grove Investment Group ("GIG") relates to advances
made by GIG to GREAT to fund expenses incurred by the Company related to the IPO
and to fund initial organization costs. The Company repaid $50,000 of note
payable balance during the second quarter of 1995 and repaid
F-23
<PAGE>
GROVE REAL ESTATE ASSET TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD
FROM INCEPTION (JUNE 24, 1994) TO DECEMBER 31, 1994
9. RELATED PARTY TRANSACTIONS (CONTINUED)
the remaining balance in January 1996. No interest is being charged on the
outstanding balance, and there are no repayment terms.
RENT TO RELATED PARTY
GREAT's executive offices are leased from an affiliate for $500 per month
under a three year lease. Rent expense incurred by the Company under this
agreement was $3,000 for the period ended December 31, 1994, and $6,000 for the
year ended December 31, 1995. Minimum annual future base rental expenditures are
not significant.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was $84,892 and $37,499 for the year ended
December 31, 1995 and for the period from June 23, 1994 to December 31, 1994,
respectively.
11. SUBSEQUENT EVENT
On January 12, 1996, GREAT purchased the assets and operations of Grove
Cambridge Associates Limited Partnership ("Cambridge") GREAT paid $4,250,000 in
cash for Cambridge. The acquisition was 100% financed by a loan of $4,500,000
from a bank. The loan is secured by a blanket first mortgage lien on the
Cambridge property, and the Hamden I and Hamden II properties. Monthly payments
of principal and interest based on a 25-year amortization are due through
January, 2006. Interest is fixed at 7.04%.
Grove Cambridge Associates Limited Partnership is owned 99% by Grove Norwich
Associates Limited Partnership, and 0.5% each by Grove Investment Group, Inc.
and Springfield Development Corporation. Grove Norwich Associates Limited
Partnership is owned 50% by Messrs. Damon, Brian and Edmund Navarro and 50% by
individuals who are not affiliates of GREAT. Grove Investment Group, Inc. is
owned 100% by Messrs. Damon, Brian and Edmund Navarro. Springfield Development
Corporation is owned 100% by individuals who are not affiliates of GREAT.
The following unaudited pro forma information for the year ended December
31, 1995 and 1994 is presented as if (i) GREAT had owned all of its 4 properties
at the beginning of the 1994, and (ii) GREAT had qualified as a REIT,
distributed all of its taxable income and, therefore, incurred no federal income
tax expense during the year. The unaudited information does not purport to
represent what GREAT's results of operations would actually have been if such
transactions, in fact, had occurred on January 1, 1994, nor does it purport to
represent the results of operations for future periods
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Revenues.......................................................... $ 2,078,292 $ 1,988,299
Net Income........................................................ $ 281,759 $ 162,453
Earnings per share................................................ $ 0.54 $ 0.31
</TABLE>
F-24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Grove Operating, L.P.
We have audited the accompanying balance sheet of Grove Operating, L.P. as
of November 4, 1996. This balance sheet is the responsibility of the
Partnership's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Grove Operating, L.P. at November
4, 1996, in conformity with generally accepted accounting principles.
Hartford, Connecticut
November 4, 1996
F-25
<PAGE>
GROVE OPERATING, L.P.
BALANCE SHEET
NOVEMBER 4, 1996
<TABLE>
<S> <C>
ASSETS
Cash................................................................................. $ 100
---------
Total assets......................................................................... $ 100
---------
---------
OWNERS' EQUITY
Contributed capital.................................................................. $ 100
---------
Total owners' equity................................................................. $ 100
---------
---------
</TABLE>
See accompanying notes.
F-26
<PAGE>
GROVE OPERATING, L.P.
NOTES TO BALANCE SHEET
NOVEMBER 4, 1996
1. ORGANIZATION
Grove Operating, L.P. ("Operating Partnership") is a newly formed limited
partnership organized to act as the vehicle for the consolidation of ownership
and/or control of the operations and assets and liabilities of Grove Real Estate
Asset Trust ("GREAT") and Grove Property Services Limited Partnership and
Property Partnerships ("the Grove Companies"). These entities are expected to be
the subject of a business combination in connection with the formation of an
umbrella REIT (the "Company). GREAT is the sole general partner of the Operating
Partnership.
2. CONSOLIDATION TRANSACTIONS
The Consolidation Transactions constitute a series of transactions pursuant
to which GREAT will become a self-administered and self-managed REIT with
control over 23 multi-family residential projects and one neighborhood shopping
center in the Northeastern United States. The following transactions have
occurred or will occur prior to the consummation of the Consolidation
Transactions.
- The Operating Partnership was formed as a Delaware limited partnership in
November 1996.
- Pursuant to an Exchange Offer, the Operating Partnership will offer to
purchase from the Limited Partners of the Property Partnerships, any and
all outstanding partnership units of each of the Property Partnerships in
exchange for Common Units of the Operating Partnership, or, in certain
circumstances, cash. The number of Common Units to be received by a
Limited Partner will be calculated based upon such partners' interest in
the applicable partnership as applied to the value of the property
partnership associated therewith.
In connection with the Exchange Offer, Limited Partners who tender their
partnership units will also be consenting to certain amendments of the
limited partnership agreements including provisions which might otherwise
restrict the Company's ability to effect the Consolidation Transactions.
- Immediately prior to the consummation of the Consolidation Transactions,
GREAT will declare and issue a stock dividend aggregating 26,250 Common
Shares and concurrently effect a Stock Split of 1.125 to 1, thereby
issuing on a pro rata basis a total of 95,130 Common Shares to the holders
of the currently issued and outstanding 525,000 Common Shares.
- GREAT will issue up to 3,333,333 Common Shares and/or cause the Operating
Partnership to issue up to 3,333,333 Common Units to new equity investors
in exchange for $30.0 million of New Equity Investment.
- Pursuant to a Contribution Agreement among GREAT, the Grove Companies and
the Operating Partnership, substantially all of the assets and operations
of GREAT, the management services division of Grove Property Services
Limited Partnership and the Grove Companies' interests in the Property
Partnerships will be transferred to the Company.
In exchange for the above, the Grove Companies will receive an aggregate
of 934,654 Common Units in the Operating Partnership and GREAT will
receive 620,130 Common Units in the Operating Partnership. Additionally,
GREAT will contribute to the Operating Partnership the gross proceeds
received from the New Equity Investment in exchange for a number of
additional Common Units equal to the number of Common Shares issued by
GREAT to the new equity investors.
F-27
<PAGE>
GROVE OPERATING, L.P.
NOTES TO BALANCE SHEET
NOVEMBER 4, 1996
2. CONSOLIDATION TRANSACTIONS (CONTINUED)
- In connection with the Consolidation Transactions, the Operating
Partnership will enter into a three-year secured revolving acquisition and
working capital facility of up to $25 million and an approximately $15.1
million ten-year term mortgage loan.
The Company will use a portion of the proceeds from the New Equity
Investment, together with borrowings under the new credit facilities, to
paydown or refinance approximately $39.8 million of mortgage indebtedness
of the Property Partnerships and to acquire certain minority interests in
certain of the Property Partnerships.
F-28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Partners and Owners
Grove Property Services Limited Partnership and Property Partnerships
We have audited the accompanying combined balance sheets of Grove Property
Services Limited Partnership and Property Partnerships as of December 31, 1995,
and the related combined statements of income, owners' equity and cash flows for
each of the two years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of Grove Property
Services Limited Partnership and Property Partnerships at December 31, 1995, and
the combined results of their operations and their cash flows for each of the
two years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Hartford, Connecticut
October 12, 1996
F-29
<PAGE>
GROVE PROPERTY SERVICES LIMITED PARTNERSHIP AND PROPERTY PARTNERSHIPS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 1996 31, 1995
----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Real estate assets, at cost:
Land............................................................. $ 7,735 $ 7,741
Buildings and improvements....................................... 66,632 65,242
Furniture, fixtures and equipment................................ 4,144 3,852
----------- -----------
78,511 76,835
Less accumulated depreciation...................................... 23,567 21,256
----------- -----------
Net real estate assets........................................... 54,944 55,579
Cash and cash equivalents.......................................... 1,290 2,168
Restricted cash-resident security deposits......................... 655 619
Due from related parties, net...................................... 1,434
Due from partners.................................................. 884 324
Deferred costs, net of accumulated amortization of $1,570 and
$1,349 at September 30, 1996 and December 31, 1995,
respectively..................................................... 969 1,369
Other assets....................................................... 421 185
----------- -----------
Total assets....................................................... $ 59,163 $ 61,678
----------- -----------
----------- -----------
LIABILITIES AND OWNERS' EQUITY
Mortgage notes payable............................................. $ 47,518 $ 46,786
Accounts payable and other liabilities............................. 1,183 1,077
Due to NAVAB....................................................... 508 937
Due to related parties, net........................................ 477
Resident security deposits......................................... 655 619
----------- -----------
Total liabilities.................................................. 50,341 49,419
Owners' equity:
General partners................................................. (3,328) (3,316)
Limited partners................................................. 12,150 15,575
----------- -----------
8,822 12,259
----------- -----------
Total liabilities and owners' equity............................... $ 59,163 $ 61,678
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-30
<PAGE>
GROVE PROPERTY SERVICES LIMITED PARTNERSHIP AND PROPERTY PARTNERSHIPS
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- --------------------
1996 1995 1995 1994
--------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Rental income........................................... $ 9,644 $ 8,864 $ 11,965 $ 11,462
Property management..................................... 1,198 914 1,473 1,103
Interest and other...................................... 243 449 445 563
--------- --------- --------- ---------
Total revenues............................................ 11,085 10,227 13,883 13,128
--------- --------- --------- ---------
Expenses:
Payroll related......................................... 1,678 1,503 2,358 2,285
Other property operating................................ 2,671 2,271 2,918 2,953
General and administrative.............................. 194 255 261 271
Real estate taxes....................................... 938 895 1,234 1,253
--------- --------- --------- ---------
Total expenses............................................ 5,481 4,924 6,771 6,762
--------- --------- --------- ---------
5,604 5,303 7,112 6,366
Interest expense.......................................... 2,807 2,861 3,829 3,817
Depreciation and amortization............................. 2,346 2,348 3,140 3,165
--------- --------- --------- ---------
Income (loss) before extraordinary items.................. 451 94 143 (616)
Extraordinary items-gain on restructuring of debt......... 2,186 2,186 1,771
--------- --------- --------- ---------
Net income................................................ $ 451 $ 2,280 $ 2,329 $ 1,155
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-31
<PAGE>
GROVE PROPERTY SERVICES LIMITED PARTNERSHIP AND PROPERTY PARTNERSHIPS
COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY
NINE-MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
GENERAL LIMITED OWNERS'
PARTNERS PARTNERS EQUITY
--------- --------- ---------
<S> <C> <C> <C>
Owners' equity, December 31, 1993................................................ $ (2,940) $ 11,123 $ 8,183
Capital contributions............................................................ 2,667 2,667
Distributions.................................................................... (12) (1,047) (1,059)
Net income....................................................................... (591) 1,746 1,155
--------- --------- ---------
Owners' equity, December 31, 1994................................................ (3,543) 14,489 10,946
Capital contributions............................................................ 1 1 2
Distributions.................................................................... (10) (1,008) (1,018)
Net income....................................................................... 236 2,093 2,329
--------- --------- ---------
Owners' equity, December 31, 1995................................................ (3,316) 15,575 12,259
Capital contributions (unaudited)................................................ 855 855
Distributions (unaudited)........................................................ (23) (4,720) (4,743)
Net income (unaudited)........................................................... 11 440 451
--------- --------- ---------
Owners' equity, September 30, 1996 (unaudited)................................... $ (3,328) $ 12,150 $ 8,822
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-32
<PAGE>
GROVE PROPERTY SERVICES LIMITED PARTNERSHIP AND PROPERTY PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE-MONTHS ENDED YEAR ENDED DECEMBER
SEPTEMBER 30 31
-------------------- --------------------
1996 1995 1995 1994
--------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 451 $ 2,280 $ 2,329 $ 1,155
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 2,346 2,348 3,140 3,165
Gain on restructuring of debt.......................... (2,186) (2,186) (1,771)
Decrease (increase) in assets:
Other assets......................................... (236) (313) (25) 111
(Decrease) increase in liabilities:
Accounts payable and other liabilities............... 107 152 59 (312)
Due to related parties, net.......................... 1,911 (285) (502) (1)
--------- --------- --------- ---------
Net cash provided by operating activities................ 4,579 1,996 2,815 2,347
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of real estate assets........................... (1,312) (910) (3,004) (6,015)
Payment for deferred costs............................... (389) (415) (391)
--------- --------- --------- ---------
Net cash used in investing activities.................... (1,312) (1,299) (3,419) (6,406)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of mortgage notes.............................. (558) (7,110) (7,655) (5,791)
Proceeds from mortgage notes............................. 1,290 5,800 7,800 8,725
Payment for financing costs.............................. (131) (256) (104)
Due from partners........................................ (560) 116 750 (13)
Due to NAVAB............................................. (429) 753 1,171 (461)
Distributions to owners.................................. (4,743) (759) (1,018) (1,059)
Capital contributions.................................... 855 2 2,667
--------- --------- --------- ---------
Net cash provided by (used in) financing activities...... (4,145) (1,331) 794 3,964
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents..... (878) (634) 190 (95)
Cash and cash equivalents, beginning of year............. 2,168 1,978 1,978 2,073
--------- --------- --------- ---------
Cash and cash equivalents, end of year................... $ 1,290 $ 1,344 $ 2,168 $ 1,978
--------- --------- --------- ---------
--------- --------- --------- ---------
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest................... $ 2,599 $ 2,729 $ 3,883 $ 3,817
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-33
<PAGE>
GROVE PROPERTY SERVICES LIMITED PARTNERSHIP AND PROPERTY PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. BASIS OF PRESENTATION
Grove Property Services Limited Partnership and Property Partnerships (the
"Group") combined financial statements include the accounts of various
partnerships; it is not a separate legal entity. "Property Partnerships" is a
combination of affiliated entities that have ownership interests principally in
multifamily communities in the Connecticut, Massachusetts and Rhode Island
areas. The accounts are presented on a combined basis because all of the
communities are managed by Grove Property Services Limited Partnership (GPS)
whose general partners have a controlling interest in each of the communities
and because these communities are expected to be the subject of a business
combination in connection with the formation of an umbrella REIT (the
"Company"). Each of the communities are expected to be substantially owned by a
newly formed Operating Partnership, which will be owned, in part, by the
Company. The Company intends to qualify as a real estate investment trust under
the Internal Revenue Code of 1986, as amended.
The business combination is structured so that the partners will receive
cash, limited partnership interests in Grove Operating, L.P. (the "Operating
Partnership" which will hold substantially all of the operating assets of the
Company), or a combination thereof. The Company will be the sole general partner
of the Operating Partnership.
In addition to GPS, and Grove Longmeadow Associates, a neighborhood shopping
center, the following limited partnerships have been included in the combined
financial statements:
<TABLE>
<CAPTION>
NUMBER OF
LIMITED PARTNERSHIP NAME EXISTING COMMUNITY NAME APARTMENTS
- ------------------------------------------------- ------------------------------------------------- ---------------
<S> <C> <C>
Avonplace Associates............................. Avonplace 146
Burgundy Associates.............................. Burgundy Studios 102
Grove-Ellington Associates....................... Arbor Commons 28
Grove-Enfield Associates......................... Fox Hill Apartments 168
Grove-Manchester Associates...................... 208-210 Main Street Apartments 28
Grove-Newington Associates....................... Woodbridge Apartments 73
Grove Opportunity Fund II........................ Dean Estates II 58
Royale Apartments 76
Talcott Forest 19
Grove-Plainville Associates...................... Colonial Village Apartments 104
Grove Properties III............................. Bradford Commons 64
Loomis Manor 43
Grove Taunton Associates......................... Dean Estates 48
Grove-Vernon Associates.......................... Fox Hill Commons 74
Grove-West Hartford Associates................... Park Place West 63
Grove-West Springfield Associates................ Van Deene Manor 109
Grove-Westfield Associates....................... Security Manor 63
Grove-Westwynd Associates........................ Westwynd Apartments 46
Shoreline London Associates...................... Ocean Reef 163
Nautilus Properties.............................. Sandalwood* 39
</TABLE>
- ------------------------
* Available for lease August 1996.
All significant intercompany accounts and transactions have been eliminated
in combination.
F-34
<PAGE>
GROVE PROPERTY SERVICES LIMITED PARTNERSHIP AND PROPERTY PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DEPRECIATION OF REAL ESTATE ASSETS
Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments are capitalized and depreciated over their
estimated useful lives. Depreciation of real estate is computed principally on a
straight-line basis over the expected useful lives of depreciable property,
which ranges from 15 to 39 years for buildings, improvements and land
improvements and 5 to 7 years for furnishings and equipment.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement 121 in the first quarter of 1996. The effect of
adoption on the financial statements was not material.
REVENUE RECOGNITION
Rental income attributable to leases is recognized on a straight-line basis
over the terms of the leases. Residential leases are for periods of up to one
year. Commercial leases are generally for periods of 5 to 10 years.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid debt investments with
original maturities of three months or less from the date of purchase.
DEFERRED COSTS
Deferred costs consist of organization costs and costs incurred in obtaining
long-term financing. Deferred financing costs are amortized over the term of the
related mortgage loan obligation. Organization costs are amortized over 5 years.
INCOME TAXES
The Group is owned by various partnerships whose partners are required to
include their respective share of profits and losses in their individual income
tax returns. Accordingly, no federal or state income taxes have been provided in
the accompanying combined financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-35
<PAGE>
GROVE PROPERTY SERVICES LIMITED PARTNERSHIP AND PROPERTY PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PARTNERSHIP AGREEMENTS
The net income or loss for each partnership is allocated in accordance with
the provisions of the partnership agreements. Such amounts are allocated to the
general and limited partners based on distribution percentages ranging from 1%
to 15% for general partners and 85% to 99% for limited partners.
3. DUE TO AND FROM RELATED PARTIES AND NAVAB
Certain properties managed by GPS are not included in the Group. Due to/from
related parties represent costs paid by the Group on behalf of these properties,
property expense and other advances from the Group to those properties, and
management fees owed to the Group by those properties.
An affiliate of the Group, NAVAB, periodically loans funds to the
partnerships under their line of credit. These loans generally bear interest at
2.5% above the prime rate. Interest paid to NAVAB was $115,600 and $156,500 for
the years ended December 31, 1995 and 1994, respectively and $74,700 and $29,500
for the nine months ended September 30, 1996 and 1995 (unaudited), respectively.
4. MORTGAGE NOTES PAYABLE
The Group's mortgage notes at December 31, 1995 and September 30, 1996
(unaudited) consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 31,
1996 1995
----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Mortgage notes payable at fixed interest rates
ranging from 7.09% to 7.5%, payable in varying
amounts through December 2003..................... $ 6,061 $ 6,068
Mortgage notes payable with floating interest rates
(7.22% to 9.27% at December 31, 1995), payable in
varying amounts through November 2005............. 41,457 40,718
----------- -----------
$ 47,518 $ 46,786
----------- -----------
----------- -----------
</TABLE>
Each of the mortgage notes is collateralized by a first mortgage on separate
communities. Certain loans are guaranteed in whole or part by individuals
affiliated with the Group. Such guarantees aggregate approximately $29.5 and
29.8 million at September 30, 1996 and December 31, 1995, respectively.
F-36
<PAGE>
GROVE PROPERTY SERVICES LIMITED PARTNERSHIP AND PROPERTY PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
4. MORTGAGE NOTES PAYABLE (CONTINUED)
Principal maturities as of December 31, 1995 are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
1996............................................................... $ 662
1997............................................................... 721
1998............................................................... 778
1999............................................................... 4,844
2000............................................................... 923
Thereafter......................................................... 38,858
---------
$ 46,786
---------
---------
</TABLE>
5. RELATED PARTY TRANSACTIONS
GPS performs management services for certain communities not included in the
Group. Management fees received from these communities were $891,300 and
$747,200 for the years ended December 31, 1995 and 1994, respectively, and
$754,600 and $708,400 for the nine-months ended September 30, 1996 and 1995
(unaudited), respectively.
The Group leases office space from an affiliate at $4,000 per month.
6. EXTRAORDINARY GAIN
The Group recognized gains during 1995 and 1994 relating to restructuring of
debt on various mortgage notes due to banks. The total amount due to banks
consisted of $11,112,000 of principal and interest in 1995 and $6,257,000 of
principal and interest in 1994. The Group paid $8,926,000 and $4,486,000, in
1995 and 1994, respectively, in satisfaction of the notes, resulting in
extraordinary gains of $2,186,000 and $1,771,000, respectively.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by
management using available market information and appropriate valuation
methodologies. Judgment is necessary to interpret market data and develop
estimated fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Group could realize on disposition of
the financial instruments. The use of different market assumptions and/or
estimation methodolgies may have a material effect on the estimated fair value
amounts.
Cash equivalents, accounts receivable, accounts payable and other accruals,
and mortgage notes are carried at amounts that approximate their fair values.
Fair values were estimated using discounted cash flow analyses, based on
interest rates currently available to the Group for issuance of debt with
similar terms and remaining maturities.
8. SUBSEQUENT EVENTS
In October 1996, the Group obtained additional mortgage loans for two of its
properties aggregating $1.24 million. The loans bear interest at a LIBOR based
rate and are due in 2005.
F-37
<PAGE>
GROVE PROPERTY SERVICES LIMITED PARTNERSHIP AND PROPERTY PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
9. LEASES
Future minimum lease payments to be received on noncancelable commercial
leases with terms greater than one year consist of the following at December 31,
1995:
<TABLE>
<S> <C>
1996............................................................ $1,030,300
1997............................................................ 910,800
1998............................................................ 787,800
1999............................................................ 779,300
2000............................................................ 670,200
Thereafter...................................................... 2,487,900
---------
$6,666,300
---------
---------
</TABLE>
F-38
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Shareholders and Board of Directors
of Grove Real Estate Asset Trust
Hartford, Connecticut
We have audited the accompanying statements of income, partners' equity and
cash flows of Grove Cambridge Associates Limited Partnership for the year ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and csh flows of Grove
Cambridge Associates Limited Partnership for the year ended December 31, 1994 in
conformity with generally accepted accounting principals.
BDO SEIDMAN, LLP
December 8, 1995
New York, New York
F-39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Partners
Grove Cambridge Associates Limited Partnership
We have audited the accompanying balance sheet of Grove Cambridge Associates
Limited Partnership as of December 31, 1995, and the related statements of
operations, partners' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Grove Cambridge Associates
Limited Partnership at December 31, 1995, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
Hartford, Connecticut
October 12, 1996
F-40
<PAGE>
GROVE CAMBRIDGE ASSOCIATES LIMITED PARTNERSHIP
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Real estate assets, at cost:
Land.......................................................................... $ 504,301
Buildings and improvements.................................................... 4,700,870
Furniture, fixtures and equipment............................................. 78,880
---------
5,284,051
Less: accumulated depreciation................................................ 1,120,190
---------
Net real estate assets.................................................... 4,163,861
Cash and cash equivalents....................................................... 14,033
Deferred charges, net of accumulated amortization of $17,082.................... 27,454
Other assets.................................................................... 200
---------
Total assets.............................................................. $4,205,548
---------
---------
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities:
Mortgage payable.............................................................. $2,968,307
Accounts payable, and other liabilities....................................... 89,647
Loans payable--affiliates..................................................... 1,170,942
Other liabilities............................................................. 53,813
---------
Total liabilities......................................................... 4,282,709
---------
Partners' equity (deficit):
General partner............................................................... (773)
Limited partners.............................................................. (76,388)
---------
Total partners' equity (deficit).......................................... (77,161)
---------
Total liabilities and partners' equity (deficit)........................ $4,205,548
---------
---------
</TABLE>
See accompanying notes
F-41
<PAGE>
GROVE CAMBRIDGE ASSOCIATES LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Revenues:
Rental income........................................................................ $ 745,655 $ 719,720
Interest and other income............................................................ 15,722 31,317
----------- ------------
Total revenues..................................................................... 761,377 751,037
----------- ------------
Expenses:
Property operating and maintenance................................................... 223,143 245,642
Real estate taxes.................................................................... 60,839 58,740
Related party management fees........................................................ 46,556 42,469
----------- ------------
Total expenses..................................................................... 330,538 346,851
----------- ------------
430,839 404,186
Interest expense....................................................................... 408,941 322,285
Depreciation and amortization.......................................................... 186,628 186,625
----------- ------------
Loss before extraordinary item......................................................... (164,730) (104,724)
Extraordinary item:
Gain on restructuring of debt........................................................ 1,033,566
----------- ------------
Net income (loss)...................................................................... $ (164,730) $ 928,842
----------- ------------
----------- ------------
</TABLE>
See accompanying notes.
F-42
<PAGE>
GROVE CAMBRIDGE ASSOCIATES LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1993................................................... $ (8,414) $ (832,859) $ (841,273)
Net income............................................................... 9,288 919,554 928,842
--------- ----------- -----------
Balance, December 31, 1994................................................... 874 86,695 87,569
Net loss................................................................. (1,647) (163,083) (164,730)
--------- ----------- -----------
Balance, December 31, 1995................................................... $ (773) $ (76,388) $ (77,161)
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
See accompanying notes.
F-43
<PAGE>
GROVE CAMBRIDGE ASSOCIATES LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................................... $ (164,730) $ 928,842
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization...................................................... 186,628 186,625
Gain on restructuring of debt...................................................... -- (1,033,566)
Decrease in other assets......................................................... 8,929 10,713
Increase (decrease) in accounts payable and other liabilities.................... 11,625 (9,537)
----------- -----------
Net cash provided by operating activities...................................... 42,452 83,077
----------- -----------
Cash flows from investing activities:
Expenditures for building and other improvements..................................... (36,884) (27,693)
Payment for deferred costs........................................................... (3,083) (32,653)
----------- -----------
Net cash used in investing activities.......................................... (39,967) (60,346)
----------- -----------
Cash flows from financing activities:
Repayment of mortgages and notes payable............................................. (28,364) (82,165)
Increase in loans from affiliates.................................................... 20,627 56,806
----------- -----------
Net cash used in financing activities.......................................... (7,737) (25,359)
----------- -----------
Net decrease in cash and cash equivalents.............................................. (5,252) (2,628)
Cash and cash equivalents, beginning of year........................................... 19,285 21,913
----------- -----------
Cash and cash equivalents, end of year................................................. $ 14,033 $ 19,285
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-44
<PAGE>
GROVE CAMBRIDGE ASSOCIATES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION AND NATURE OF BUSINESS
Grove Cambridge Associates Limited Partnership ("CAMBRIDGE" or the
"partnership") owns and operates an apartment complex in Norwich, CT (the
"property").
ALLOCATIONS AND DISTRIBUTIONS
The net income or loss of the partnership is allocated in accordance with
the provisions of the partnership agreement. In general, these amounts are
allocated on a pro-rata basis in proportion to the equity interest held by each
general or limited partner.
DEPRECIATION OF REAL ESTATE ASSETS
Expenditures for additions, renewals and betterment's are capitalized;
expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation is computed on the straight-line method over the estimated useful
lives of the assets as follows:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Buildings and improvements............................................................ 20-30
Land improvements..................................................................... 15
Furnishings and equipment............................................................. 5-7
</TABLE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement 121 in the first quarter of 1996. The effect of
adoption on the financial statements was not material.
REVENUE RECOGNITION
Revenues, consisting primarily of rentals for apartments, are recognized on
a straight-line basis over the term of lease, generally for one year.
INCOME TAXES
The activities of the partnership are included in the respective tax returns
of the partners and no Federal income taxes are provided or imposed at the
partnership level.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the partnership considers all
highly liquid debt instruments with an original maturity of three months or less
from the date of purchase to be cash equivalents.
F-45
<PAGE>
GROVE CAMBRIDGE ASSOCIATES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. MORTGAGE PAYABLE
The outstanding mortgage payable of $2,968,307 is secured by a first
mortgage lien on the Property and is personally guaranteed by certain officers
and stockholders of one of the general partners. Monthly payments, based on a
25-year amortization table, are due through November 1999, at which time the
remaining principal balance becomes due and payable. The loan bears interest at
a fixed interest rate of 9.27% through November 1996, after which, at the option
of the Partnership, is adjusted annually at a rate equal to 2.4% over the one
year U.S. Treasury Securities rate or 2% over the bank's costs of funds rate.
Principal payments are as follows:
<TABLE>
<S> <C>
1996............................................................ $ 35,099
1997............................................................ 38,495
1998............................................................ 42,219
1999............................................................ 2,852,494
---------
$2,968,307
---------
---------
</TABLE>
In September 1994, the partnership completed a bank debt restructuring
through an affiliate. The partnership paid $3,000,000 in full satisfaction of
the principal and interest obligations to the bank, which totaled $4,033,566,
resulting in an extraordinary gain of $1,033,566.
In November 1994, the affiliate transferred its loan to an unaffiliated
lending institution. During 1994, the partnership made payments aggregating
approximately $85,000 to the affiliate, including $68,820 of interest.
3. RELATED PARTY TRANSACTIONS
The partnership agreement provides for a management fee and bookkeeping fee
based on the gross monthly revenues (as defined) to be paid to a related party.
An affiliate of Cambridge periodically loans funds to the partnership under
its $1.5 million line of credit. These loans generally bear interest at 2.5%
above the prime rate, however, the affiliate has waived the interest during
certain periods. Borrowings under this line of credit were $570,228 at December
31, 1995.
The partnership has notes payable to other affiliates totaling $600,714.
Those notes are principally due on demand and are no-interest bearing.
4. SUBSEQUENT EVENT
On January 12, 1996, the partnership sold its assets and operations to Grove
Real Estate Asset Trust ("GREAT"). The principals of GREAT are also principals
of Cambridge. The selling price was $4,250,000 in cash.
F-46
<PAGE>
APPENDIX I
GROVE REAL ESTATE ASSET TRUST
THIRD AMENDED AND RESTATED
DECLARATION OF TRUST
Dated , 1997
THIS THIRD AMENDED AND RESTATED DECLARATION OF TRUST is made in conformity
with the provisions of Section 12.5 hereof, as of the date set forth above by
the undersigned Trust Managers.
ARTICLE I
THE TRUST; CERTAIN DEFINITIONS
SECTION 1.1 Name. The name of the trust (the "TRUST") is:
GROVE PROPERTY TRUST
SECTION 1.2 Resident Agent. The name and address of the resident agent of
the Trust in the State of Maryland is the CT Corporation System, Maryland, 32
South Street, Baltimore, Maryland 21202. The Trust may have such offices or
places of business within or without the State of Maryland as the Trustees may
from time to time determine.
SECTION 1.3 Nature of Trust. The Trust is a real estate investment trust
within the meaning of "Title 8", defined below.
SECTION 1.4 Powers. The Trust shall have all of the powers granted to real
estate investment trusts generally by Title 8 and shall have any other and
further powers as are not inconsistent with Title 8 or other applicable law.
SECTION 1.5 Definitions. As used in this Declaration of Trust, the following
terms shall have the following meanings unless the context otherwise requires:
"AFFILIATE" or "AFFILIATED" means, as to any corporation, partnership, trust
or other association (other than the Trust), any Person (i) that holds
beneficially, directly or indirectly, 5% or more of the outstanding stock or
equity interests thereof or (ii) who is an officer, director, partner or trustee
thereof or of any Person which controls, is controlled by, or is under common
control with, such corporation, partnership, trust or other association or (iii)
which controls, is controlled by, or is under common control with, such
corporation, partnership, trust or other association.
"BOARD OF TRUST MANAGERS" means the Board of Trust Managers of the Trust.
"BYLAWS" means the Bylaws of the Trust, as amended.
"CODE" means the Internal Revenue Code of 1986, as amended.
"DECLARATION" or "DECLARATION OF TRUST" means this Declaration Trust,
including any amendments or supplements hereto.
"EXECUTIVE OFFICERS" means Damon D. Navarro, Brian Navarro, Edmund Navarro,
Joseph LaBrosse and Gerald McNamara.
"INDEPENDENT TRUST MANAGER" means a member of the Board of Trust Managers of
the Trust which is not employed by or affiliated with the Trust or an Affiliate
of the Trust.
1
<PAGE>
"PERSON" means an individual, corporation, partnership, estate, trust
(including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a
portion of a trust permanently set aside for or to be used exclusively for the
purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 508(a) of the Code, joint stock company
or other entity, or any government and agency or political subdivision thereof.
"REIT PROVISIONS OF THE CODE" means Section 856 through 860 of the Code and
any other successor provisions of the Code relating to real estate investment
trust (including provisions as to the attribution of ownership of beneficial
interests therein) and the regulations promulgated thereunder.
"SECURITIES" means Shares (defined below), any stock, shares or other
evidences of equity, beneficial or other interests, voting trust certificates,
bonds, debentures, notes or other evidences of indebtedness, secured or
unsecured, convertible, subordinated or otherwise, or in general any instruments
commonly known as "securities" or any certificates of interest, shares or
participations in, temporary or interim certificates for, receipts for,
guarantees of, or warrants, options or rights to subscribe to, purchase or
acquire, any of the foregoing.
"SECURITIES OF THE TRUST" means any securities issued by the Trust.
"SHAREHOLDERS" means holders of record of Shares.
"SHARES" means transferable shares of beneficial interest of the Trust of
any class or series.
"TITLE 8" means Title 8 of the Corporations and Associations Article of the
Annotated Code of Maryland, or any successor statute.
"TRUST MANAGER" means, individually, an individual, and "TRUST MANAGERS"
means, collectively, the individuals, in each case, as named in Section 2.2 of
this Declaration so long as they continue in office and any and all other
individuals who have been duly elected and qualify as Trust Managers of the
Trust hereunder.
"TRUST PROPERTY" means any and all property, real, personal or otherwise,
tangible or intangible, which is transferred or conveyed to the Trust or the
Trust Managers (including all rents, income, profits and gains therefrom), which
is owned or held by, or for the account of, the Trust or the Trust Managers.
ARTICLE II
TRUST MANAGERS
SECTION 2.1 Number, Composition. The number of Trust Managers initially
shall be five, which number may thereafter be increased or decreased by the
Trust Managers then in office from time to time; however, the total number of
Trust Managers shall be not less than two and not more than 15. No reduction in
the number of Trust Managers shall cause the removal of any Trust Managers from
office prior to the expiration of his term.
At all times after the date of closing of the Initial Public Offering (as
defined herein), the composition of the Board of Trust Managers shall consist of
a majority of Independent Trust Managers.
SECTION 2.2 Term. At each Annual Meeting of Shareholders, the successors to
the class of Trust Managers whose term expires at such Meeting shall be elected
to hold office for a term expiring at the annual Meeting of Shareholders held in
the third year following the year of their election and the other Trust Managers
shall continue in office.
SECTION 2.3 Resignation, Removal or Death. Any Trust Manager may resign by
written notice to the remaining Trust Managers, effective upon execution and
delivery to the Trust of such written notice or upon any future date specified
in the notice. A Trust Manager may be removed, only with Cause (as hereinafter
defined), at a Meeting of the Shareholders called for that purpose, by the
affirmative vote of
2
<PAGE>
the holders of not less than two-thirds of the Shares then outstanding and
entitled to vote in the election of Trustees. As used herein, "CAUSE" shall mean
(a) material theft, fraud or embezzlement or active and deliberate dishonesty by
a Trust Manager; (b) habitual neglect of duty by a Trust Manager having a
material and adverse significance to the Trust; or (c) the conviction of a Trust
Manager of a felony or of any crime involving moral turpitude. Upon the
incapacity, death, resignation or removal of any Trust Manager, or his otherwise
ceasing to be a Trust Manager, he shall automatically cease to have any right,
title or interest in and to the Trust Property and shall execute and deliver
such documents as the remaining Trust Managers require for the conveyance of any
Trust Property held in his name, and shall account to the remaining Trust
Managers as they require for all property which he holds as Trust Manager.
SECTION 2.4 Legal Title. Legal title to all Trust Property shall be vested
in the Trust, but the Trust may cause legal title to any Trust Property to be
held by or in the name of any or all of the Trust Managers or any other Person
as nominee. Any right, title or interest of the Trust Managers in and to the
Trust Property shall automatically vest in successor and additional Trust
Managers upon their qualification and acceptance of election or appointment as
Trust Managers, and they shall thereupon have all the right and obligations of
Trust Managers, whether or not conveyancing documents have been executed and
delivered pursuant to Section 2.3 or otherwise. Written evidence of the
qualification and acceptance of election or appointment of successor and
additional Trust Managers may be filed with the records of the Trust and in such
other offices, agencies or places as the Trust or Trust Managers may deem
necessary or desirable.
ARTICLE III
POWERS OF TRUST MANAGERS
Subject to the express limitations herein or in the Bylaws, (1) the business
and affairs of the Trust shall be managed under the direction of the Board of
Trust Managers and (2) the Trust Managers shall have full, exclusive and
absolute power, control and authority over the Trust Property and over the
business of the Trust as if they, in their own right, were the sole owners
thereof. The Trustees may take any actions as in their sole judgment and
discretion are necessary or desirable to conduct the business of the Trust. This
Declaration of Trust shall be construed with a presumption in favor of the grant
of power and authority to the Trust Managers. Any construction of this
Declaration or determination made in good faith by the Trust Managers concerning
their powers and authority hereunder shall be conclusive. The powers of the
Trust Managers shall in no way be limited or restricted by reference to or
inference from the terms of this or any other provision of this Declaration or
construed or deemed by inference or otherwise in any manner to exclude or limit
the powers conferred upon the Trust Managers under the general laws of the State
of Maryland as now or hereafter in force.
ARTICLE IV
INVESTMENT POLICY
The fundamental investment policy of the Trust is to make investments in
such a manner as to comply with the REIT Provisions of the Code and with the
requirements of Title 8 with respect to the composition of the Trust's
investments and the derivation of its income. Subject to Section 6.7, the Trust
Managers shall use their best efforts to carry out this fundamental investment
policy and to conduct the affairs of the Trust in such a manner as to continue
to qualify the Trust for the tax treatment provided in the REIT Provisions of
the Code; PROVIDED, HOWEVER, that no Trust Manager, officer, employee or agent
of the Trust shall be liable for any action or omission resulting in the loss of
tax benefits under the Code, except to the extent provided in Section 11.2. The
Trust Managers may change from time to time, either by resolution or by
amendment to the Bylaws of the Trust, such investment policies as they determine
to be in the best interest of the Trust, including prohibitions or restrictions
upon certain types of investments.
3
<PAGE>
ARTICLE V
SHARES
SECTION 5.1 Authorized Shares. The total number of Shares which the Trust
has authority to issue is 14,000,000 shares, of which 10,000,000 are Common
Shares, $.01 par value per share (each, a "COMMON SHARE" or collectively,
"COMMON SHARES"), and 4,000,000 are Preferred Shares, $.01 par value per share
(each a "PREFERRED SHARE" or collectively, "PREFERRED SHARES").
SECTION 5.2 Common Shares. Subject to the provisions of Article VII
regarding Excess Shares (as such term is defined therein), each Common Share
shall entitle the holder thereof to one vote. Holders of Common Shares shall not
be entitled to cumulative voting.
SECTION 5.3 Preferred Shares. Preferred Shares may be issued, from time to
time, in one or more series, as authorized by the Board of Trust Managers. Prior
to issuance of Preferred Shares of each series, the Board of Trust Managers, by
resolution, shall designate that series of Preferred Shares to distinguish it
from all other series and classes of Preferred Shares, shall specify the number
of Preferred Shares to be included in the series and, subject to the provisions
of Article VII regarding Excess Shares, shall set the terms, preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption.
SECTION 5.4 Classification or Reclassification of Unissued Shares. Subject
to the express terms of any series of Preferred Shares or any class of Common
Shares outstanding at the time and notwithstanding any other provision of the
Declaration of Trust, the Board of Trust Managers may increase or decrease the
number of, alter the designation of or classify or reclassify any unissued
Shares by setting or changing, in any one or more respects, from time to time
before issuing the Shares, and subject to the provisions of Article VII
regarding Excess Shares, the terms, preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions of redemption of any series or class of
Shares.
SECTION 5.5 Declaration of Trust and Bylaws. All persons who acquire Shares
shall acquire the same subject to the provisions of this Declaration of Trust
and the Bylaws.
ARTICLE VI
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
TRUST AND OF THE SHAREHOLDERS AND TRUST MANAGERS
SECTION 6.1 Authorization by Board of Share Issuance. The Board of Trust
Managers may authorize the issuance from time to time of Shares of any class,
whether now or hereafter authorized, or securities convertible into Shares of
any class, whether now or hereafter authorized, for such consideration as the
Board of Trust Managers may deem advisable, subject to such restrictions or
limitations, if any, as may be set forth in this Declaration of Trust or in the
Bylaws or in the general corporation laws or other laws of the State of Maryland
affecting or having application to real estate investment trusts.
SECTION 6.2 Preemptive and Appraisal Rights. Except as may be provided by
the Board of Trust Managers in authorizing the issuance of Preferred Shares
pursuant to Section 5.3, no holder of Shares shall, as such holder, (a) have any
preemptive right to purchase or subscribe for any additional Shares or any other
security of the Trust which the Trust may issue or sell or (b), except as
expressly required by Title 8, have any right to require the Trust to pay him
the fair value of his Shares in an appraisal or similar proceeding.
SECTION 6.3 Advisor or Property Management Agreements. Subject to such
approval of the Shareholders and other conditions, if any, as may be required by
any applicable statute, rule or regulation, the Board of Trust Managers may
authorize the execution and performance by the Trust of one or more
4
<PAGE>
agreements with any person, corporation, association, company, trust,
partnership (limited or general) or other organization, whether or not an
Affiliate of the Trust (each, an "ADVISOR"), whereby, subject to the supervision
and control of the Board of Trust Managers, any such Advisor shall render or
make available to the Trust managerial, investment, advisory and/or related
services, office space, and property management services, and other services and
facilities (including, if deemed advisable by the Board of Trust Managers, the
management or supervision of the investments of the Trust) upon such terms and
conditions as may be provided in such agreement or agreements (including, if
deemed fair and equitable by the Board of Trust Managers, the compensation
payable thereunder by the Trust), subject to the provisions of Section 11.6.
SECTION 6.4 Related Party Transactions.
(a) Without limiting any other procedures available by law or otherwise to
the Trust, the Board of Trust Managers may authorize any agreement of the
character described in Section 6.3 or any other transaction with any Advisor,
although one or more of the Trust Managers or officers of the Trust may be a
party to such agreement or may be an officer, director, stockholder or member of
such Advisor, and no such agreement or transaction shall be invalidated or
rendered void or voidable solely by reason of the existence of any such
relationship if the existence is disclosed or known to the Board of Trust
Managers, and the contract or transaction is approved by the Board of Trust
Managers (including the affirmative vote of a majority of the Independent Trust
Managers, even if they constitute less than a quorum of the Board). Any Trust
Manager who is also a director, officer, stockholder or member of an Advisor or
other entity with whom the Trust proposes to engage in business may be counted
in determining the existence of a quorum at any meeting of the Board of Trust
Managers considering such matter.
(b) Subsequent to the Closing Date (as defined herein), the affirmative vote
of a majority of the Independent Trust Managers (even if they constitute less
than a quorum of the Board) shall be required to approve the purchase by the
Trust or its subsidiaries of any multifamily residential or mixed-use
properties, the ownership of which is under the control, whether directly or
indirectly, of Messrs. Damon D. Navarro and Joseph R. LaBrosse or any of the
Executive Officers of the Trust, or their respective Affiliates.
SECTION 6.5 Determinations by Board. The determination as to any of the
following matters, made in good faith by, or pursuant to the direction of, the
Board of Trust Managers consistent with this Declaration of Trust and in the
absence of actual receipt of an improper benefit in money, property or services
or active and deliberate dishonesty established by a court, shall be final and
conclusive and shall be binding upon the Trust and every holder of Shares: (a)
the amount of the net income of the Trust for any period and the amount of
assets at any time legally available for the payment of dividends, redemption of
Shares or the payment of other distributions with respect to Shares; (b) the
amount of paid-in surplus, net assets, other surplus, annual or other net
profit, net assets in excess of capital, undivided profits or excess of profits
over losses on sales of assets; (c) the amount, purpose, time of creation,
increase or decrease, alteration or cancellation of any reserves or charges and
the propriety thereof (whether or not any obligation or liability for which such
reserves or charges shall have been created shall have been paid or discharged);
(d) the fair value, or any sale, bid or asked price to be applied in determining
the fair value, of any asset owned or held by the Trust; and (e) any matters
relating to the acquisition, holding and disposition of any assets by the Trust.
The affirmative vote of a majority of the Independent Trust Managers, even
if they constitute less than a quorum, shall be required to approve any and all
matters for which approval by the Board of Trust Managers is required by this
Declaration of Trust.
SECTION 6.6 Reserved Powers of Board. The enumeration and definition of
powers of the Board of Trust Managers included in this Article VI shall in no
way be limited or restricted by reference to or inference from the terms of any
other clause of this or any other provision of the Declaration of Trust, or
construed or deemed by inference or otherwise in any manner to exclude or limit
the powers conferred upon the Board of Trust Managers under the general laws of
the State of Maryland as now or hereafter in force.
5
<PAGE>
SECTION 6.7 REIT Qualification. The Board of Trust Managers shall use its
reasonable best efforts to cause the Trust and the Shareholders to qualify for
federal income tax treatment in accordance with the REIT Provisions of the Code.
In furtherance of the foregoing, the Board of Trust Managers shall use its
reasonable best efforts to take such actions as are necessary, and may take such
actions as in its sole judgment and discretion are desirable, to preserve the
status of the Trust as a REIT, including amending the provisions of this
Declaration of Trust as provided in Article IX; provided, however, that if the
Board of Trust Managers determines that it is no longer in the best interests of
the Trust for it to continue to qualify as a REIT, the Board of Trust Managers
may revoke or otherwise terminate the Trust's REIT election.
ARTICLE VII
RESTRICTIONS ON OWNERSHIP AND TRANSFER
TO PRESERVE TAX BENEFIT
SECTION 7.1 Definitions. For the purposes of this Article VII, the following
terms shall have the following meanings:
"BENEFICIAL OWNERSHIP" shall mean ownership of Equity Shares by a Person who
is or would be treated as an owner of such Equity Shares either actually or
constructively through the application of Section 544 of the Code, as modified
by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially
Own," "Beneficially Owns" and "Beneficially Owned" shall have the correlative
meanings.
"CHARITABLE BENEFICIARY" shall mean one or more beneficiaries of a Special
Trust as determined pursuant to Section 7.3(f) of this Article VII.
"CLOSING DATE" shall mean the time and date of the payment for and delivery
of Common Shares issued pursuant to the Initial Public Offering.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute.
"CONSTRUCTIVE OWNERSHIP" shall mean ownership of Equity Shares by a Person
who is or would be treated as an owner of such Equity Shares either actually or
constructively through the application of Section 318 of the Code, as modified
by Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Own," "Constructively Owns" and "Constructively Owned" shall
have the correlative meanings.
"DEFERRED STOCK GRANT" means a grant, pursuant to the Trust's 1996 Share
Incentive Plan of Common Shares.
"EQUITY SHARES" shall mean Common Shares and/or Preferred Shares.
"EXECUTIVE OFFICERS" shall mean Damon Navarro, Brian Navarro, Edmund
Navarro, Joseph LaBrosse and Gerald McNamara.
"EXECUTIVE OFFICER OWNERSHIP LIMIT" means % (by value or by number of
Shares, whichever is more restrictive) of the outstanding Equity Shares of the
Trust.
"INITIAL PUBLIC OFFERING" shall mean the sale of Common Shares pursuant to
the Trust's first effective registration statement for such Common Shares filed
under the Securities Act of 1933, as amended, on Form SB-2 in June 1994.
"IRS" means the United States Internal Revenue Service.
"MARKET PRICE" shall mean the last reported sales price reported on the
Emerging Company Marketplace of the American Stock Exchange, Inc. (the "AMEX"),
or otherwise on the AMEX, of the Common Shares, or Preferred Shares, as the case
may be, on the trading day immediately preceding the relevant
6
<PAGE>
date, or if not then traded on the AMEX, the last reported sales price of the
Common Shares, or Preferred Shares, as the case may be, on the trading day
immediately preceding the relevant date as reported on any exchange or quotation
system over which the Common Shares, or Preferred Shares, as the case may be,
may be traded, or if not then traded over any exchange or quotation system, then
the market price of the Common Shares, or Preferred Shares, as the case may be,
on the relevant date as determined in good faith by the Board of Trust Managers.
"OPTION" means an option, granted pursuant to the Trust's 1994 Share Option
Plan or 1996 Share Incentive Plan, to acquire Common Shares.
"OWNERSHIP LIMIT" shall mean 5.0% (by value or by number of shares,
whichever is more restrictive) of the outstanding Equity Shares of the Trust.
"PARTNERSHIP AGREEMENT" shall mean the Agreement of Limited Partnership of
Grove Operating, L.P., of which the Trust is the sole general partner, dated as
of , 1996, as such agreement may be amended from time to time.
"PERSON" shall mean an individual, corporation, partnership, limited
liability company, estate, trust (including a trust qualified under Section
401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside
for or to be used exclusively for the purposes described in Section 642(c) of
the Code, association, private foundation within the meaning of Section 509(a)
of the Code, joint stock company or other entity; but does not include an
underwriter acting in a capacity as such in a public offering of the Common
Shares, or Preferred Shares, as the case may be, provided that the ownership of
Common Shares, or Preferred Shares, as the case may be, by such underwriter
would not result in the Trust being "closely held" within the meaning of Section
856(h) of the Code, or otherwise result in the Trust failing to qualify as a
REIT.
"PURPORTED BENEFICIAL TRANSFEREE" shall mean, with respect to any purported
Transfer which results in a transfer to a Special Trust, as provided in Section
7.2(b) of this Article VII, the purported beneficial transferee or owner for
whom the Purported Record Transferee would have acquired or owned Equity Shares,
if such Transfer had been valid under Section 7.2(a) of this Article VII.
"PURPORTED RECORD TRANSFEREE" shall mean, with respect to any purported
Transfer which results in a transfer to a Special Trust, as provided in Section
7.2(b) of this Article VII, the record holder of the Equity Shares if such
Transfer had been valid under Section 7.2(a) of this Article VII.
"REIT" shall mean a real estate investment trust under Sections 856 through
860 of the Code.
"RESTRICTION TERMINATION DATE" shall mean the first day after the Closing
Date on which the Board of Trust Managers determines that it is no longer in the
best interests of the Trust to attempt to, or continue to, qualify as a REIT.
"TRANSFER" shall mean any sale, transfer, gift, assignment, devise or other
disposition of Equity Shares, including (i) the granting of any option or
entering into any agreement for the sale, transfer or other disposition of
Equity Shares or (ii) the sale, transfer, assignment or other disposition of any
securities (or rights convertible into or exchangeable for Equity Shares),
whether voluntary or involuntary, whether of record or beneficially or
Beneficially or Constructively (including but not limited to transfers of
interests in other entities which result in changes in Beneficial or
Constructive Ownership of Equity Shares), and whether by operation of law or
otherwise.
"SPECIAL TRUST" shall mean each of the trusts provided for in Section 7.3 of
this Article VII.
"TRUSTEE" shall mean the Person unaffiliated with the Trust, the Purported
Beneficial Transferee, and the Purported Record Transferee, that is appointed by
the Trust to serve as trustee of a Special Trust.
7
<PAGE>
Section 7.2 Restrictions on Ownership and Transfers.
(a) From the Closing Date and prior to the Restriction Termination Date:
(i) except as provided in Section 7.9 of this Article VII, (i) no Person
(other than an Executive Officer) shall Beneficially Own Equity Shares in
excess of the Ownership Limit and (ii) no Executive Officer shall, nor shall
all of the Executive Officers, in the aggregate, Beneficially Own Equity
Shares in excess of the Executive Officer Ownership Limit;
(ii) except as provided in Section 7.9 of this Article VII, no Person
shall Constructively Own in excess of 9.8% (by value or by number of shares,
whichever is more restrictive) of the outstanding Equity Shares of the
Trust; and
(iii) no Person shall Beneficially or Constructively Own Equity Shares
to the extent that such Beneficial or Constructive Ownership would result in
the Trust being "closely held" within the meaning of Section 856(h) of the
Code, or otherwise failing to qualify as a REIT (including, but not limited
to, ownership that would result in the Trust owning (actually or
Constructively) an interest in a tenant that is described in Section
856(d)(2)(B) of the Code if the income derived by the Trust (either directly
or indirectly through one or more partnerships) from such tenant would cause
the Trust to fail to satisfy any of the gross income requirements of Section
856(c) of the Code).
(b) If, during the period commencing on the Closing Date and prior to the
Restriction Termination Date, any Transfer (whether or not such Transfer is the
result of a transaction entered into through the facilities of the AMEX) or
other event occurs that, if effective, would result in any Person Beneficially
or Constructively Owning Equity Shares in violation of Section 7.2(a) of this
Article VII, (i) then that number of Equity Shares that otherwise would cause
such Person to violate Section 7.2(a) of this Article VII (rounded up to the
nearest whole share) shall be automatically transferred to a Special Trust for
the benefit of a Charitable Beneficiary, as described in Section 7.3, effective
as of the close of business on the business day prior to the date of such
Transfer or other event, and such Purported Beneficial Transferee shall
thereafter have no rights in such Equity Shares or (ii) if, for any reason, the
transfer to a Special Trust described in clause (i) of this sentence is not
automatically effective as provided therein to prevent any Person from
Beneficially or Constructively Owning Equity Shares in violation of Section
7.2(a) of this Article VII, then the Transfer of that number of Equity Shares
that otherwise would cause any Person to violate Section 7.2(a) shall be void AB
INITIO, and the Purported Beneficial Transferee shall have no rights in such
Equity Shares.
(c) Notwithstanding any other provisions contained herein, during the period
commencing on the Closing Date and prior to the Restriction Termination Date,
any Transfer of Equity Shares (whether or not such Transfer is the result of a
transaction entered into through the facilities of the AMEX) that, if effective,
would result in the capital stock of the Trust being beneficially owned by less
than 100 Persons (determined without reference to any rules of attribution)
shall be void AB INITIO, and the intended transferee shall acquire no rights in
such Equity Shares.
(d) It is expressly intended that the restrictions on ownership and Transfer
described in this Section 7.2 of Article VII shall apply to the
redemption/exchange rights provided in Section of the Partnership
Agreement. Notwithstanding any of the provisions of the Partnership Agreement or
any other agreement between Grove Operating, L.P. and any of its partners to the
contrary, a partner of Grove Operating, L.P. shall not be entitled to effect an
exchange of an interest in Grove Operating, L.P. for Equity Shares to the extent
the actual or beneficial or Beneficial or Constructive ownership of such Equity
Shares would be prohibited under the provisions of this Article VII.
8
<PAGE>
SECTION 7.3 Transfers of Equity Shares in Trust
(a) Upon any purported Transfer or other event described in Section 7.2(b)
of this Article VII, such Equity Shares shall be deemed to have been transferred
to the Trustee in his capacity as trustee of a Special Trust for the exclusive
benefit of one or more Charitable Beneficiaries. Such transfer to the Trustee
shall be deemed to be effective as of the close of business on the business day
prior to the purported Transfer or other event that results in a transfer to a
Special Trust pursuant to Section 7.2(b). The Trustee shall be appointed by the
Trust and shall be a Person unaffiliated with the Trust, any Purported
Beneficial Transferee, and any Purported Record Transferee. Each Charitable
Beneficiary shall be designated by the Trust as provided in Section 7.3(f) of
this Article VII.
(b) Equity Shares held by the Trustee shall be issued and outstanding Common
Shares or Preferred Shares of the Trust, as the case may be. The Purported
Beneficial Transferee or Purported Record Transferee shall not benefit
economically from ownership of any Equity Shares held in trust by the Trustee,
shall have no rights to dividends and shall not possess any rights to vote or
other rights attributable to the Equity Shares held in a Special Trust.
(c) The Trustee shall have all voting rights and rights to dividends with
respect to Equity Shares held in a Special Trust, which rights shall be
exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend
or distribution paid prior to the discovery by the Trust that the Equity Shares
have been transferred to the Trustee shall be paid to the Trustee upon demand,
and any dividend or distribution declared but unpaid shall be paid when due to
the Trustee with respect to such Equity Shares. Any dividends or distributions
so paid over to the Trustee shall be held in trust for the Charitable
Beneficiary. The Purported Record Transferee and Purported Beneficial Transferee
shall have no voting rights with respect to the Equity Shares held in a Special
Trust and, subject to Maryland law, effective as of the date the Equity Shares
have been transferred to the Trustee, the Trustee shall have the authority (at
the Trustee's sole discretion) (i) to rescind as void any vote cast by a
Purported Record Transferee prior to the discovery by the Trust that the Equity
Shares have been transferred to the Trustee and (ii) to recast such vote in
accordance with the desires of the Trustee acting for the benefit of the
Charitable Beneficiary; PROVIDED, however, that if the Trust has already taken
irreversible action, then the Trustees shall not have the authority to rescind
and recast such vote. Notwithstanding the provisions of this Article VII, until
the Trust has received notification that the Equity Shares have been transferred
into a Special Trust, the Trust shall be entitled to rely on its share transfer
and other stockholder records for purposes of preparing lists of stockholders
entitled to vote at meetings, determining the validity and authority of proxies
and otherwise conducting votes of stockholders.
(d) Within 20 days of receiving notice from the Trust that Equity Shares
have been transferred to a Special Trust, the Trustee of a Special Trust shall
sell the Equity Shares held in a Special Trust to a person, designated by the
Trustee, whose ownership of the Equity Shares will not violate the ownership
limitations set forth in Section 7.2(a). Upon such sale, the interest of the
Charitable Beneficiary in the Equity Shares sold shall terminate and the Trustee
shall distribute the net proceeds of the sale to the Purported Record Transferee
and to the Charitable Beneficiary as provided in this Section 7.3(d). The
Purported Record Transferee shall receive the lesser of (i) the price paid by
the Purported Record Transferee for the Equity Shares in the transaction that
resulted in such transfer to a Special Trust (or, if the event which resulted in
the transfer to a Special Trust did not involve a purchase of such Equity Shares
at Market Price, the Market Price of such Equity Shares on the day of the event
which resulted in the transfer of the Equity Shares to a Special Trust) and (ii)
the price per share received by the Trustee (net of any commissions and other
expenses of sale) from the sale or other disposition of the Equity Shares held
in a Special Trust. Any net sales proceeds in excess of the amount payable to
the Purported Record Transferee shall be immediately paid to the Charitable
Beneficiary together with any dividends or other distributions thereon. If,
prior to the discovery by the Trust that such Equity Shares have been
transferred to the Trustee, such Equity Shares are sold by a Purported Record
Transferee then (i) such Equity Shares shall be deemed to have been sold on
behalf of the Special Trust and (ii) to the extent that the Purported Record
Transferee
9
<PAGE>
received an amount for such Equity Shares that exceeds the amount that such
Purported Record Transferee was entitled to receive pursuant to this
subparagraph (3)(d), such excess shall be paid to the Trustee upon demand.
(e) Equity Shares transferred to the Trustee shall be deemed to have been
offered for sale to the Trust, or its designee, at a price per share equal to
the lesser of (i) the price paid by the Purported Record Transferee for the
Equity Shares in the transaction that resulted in such transfer to a Special
Trust (or, if the event which resulted in the transfer to a Special Trust did
not involve a purchase of such Equity Shares at Market Price, the Market Price
of such Equity Shares on the day of the event which resulted in the transfer of
the Equity Shares to a Special Trust) and (ii) the Market Price on the date the
Trust, or its designee, accepts such offer. The Trust shall have the right to
accept such offer until the Trustee has sold the Equity Shares held in a Special
Trust pursuant to Section 7.3(d). Upon such a sale to the Trust, the interest of
the Charitable Beneficiary in the Equity Shares sold shall terminate and the
Trustee shall distribute the net proceeds of the sale to the Purported Record
Transferee and any dividends or other distributions held by the Trustee with
respect to such Equity Shares shall thereupon be paid to the Charitable
Beneficiary.
(f) By written notice to the Trustee, the Trust shall designate one or more
nonprofit organizations to be the Charitable Beneficiary of the interest in a
Special Trust such that (i) the Equity Shares held in a Special Trust would not
violate the restrictions set forth in Section 7.2(a) in the hands of such
Charitable Beneficiary and (ii) each Charitable Beneficiary is an organization
described in Sections 170(b)(1)(A), 170(c)(2) and 501(c)(3) of the Code.
SECTION 7.4 Remedies for Breach. If the Board of Trust Managers, or a
committee thereof (or other designees if permitted by Maryland law) shall at any
time determine in good faith that a Transfer or other event has taken place in
violation of Section 7.2 of this Article VII or that a Person intends to
acquire, has attempted to acquire or may acquire beneficial ownership
(determined without reference to any rules of attribution), Beneficial Ownership
or Constructive Ownership of any Equity Shares of the Trust in violation of
Section 7.2 of this Article VII, the Board of Trust Managers, or a committee
thereof (or other designees if permitted by Maryland law) shall take such action
as it deems advisable to refuse to give effect to or to prevent such Transfer,
including, but not limited to, causing the Trust to redeem Equity Shares,
refusing to give effect to such Transfer on the books of the Trust or
instituting proceedings to enjoin such Transfer; PROVIDED, however, that any
Transfers (or, in the case of events other than a Transfer, ownership or
Constructive Ownership or Beneficial Ownership) in violation of Section 7.2(a)
of this Article VII, shall automatically result in the transfer to a Special
Trust as described in Section 7.2(b) and any Transfer in violation of Section
7.2(c) shall automatically be void AB INITIO, irrespective of any action (or
non-action) by the Board of Trust Managers.
SECTION 7.5 Notice of Restricted Transfer. Any Person who acquires or
attempts to acquire Equity Shares in violation of Section 7.2 of this Article
VII or any Person who is a Purported Transferee such that an automatic transfer
to a Special Trust results under Section 7.2(b) of this Article VII, shall
immediately give written notice to the Trust of such event and shall provide to
the Trust such other information as the Trust may request in order to determine
the effect, if any, of such Transfer or attempted Transfer on the Trust's status
as a REIT.
SECTION 7.6 Owners Required to Provide Information. From the Closing Date
and prior to the Restriction Termination Date:
(a) Every Beneficial Owner of more than 5% (or such other percentage between
1/2 of 1% and 5%, as provided in the income tax regulations promulgated under
the Code) of the number or value of the outstanding Equity Shares shall, within
30 days after January 1 of each year, give written notice to the Trust stating
the name and address of such Beneficial Owner, the number of Equity Shares
Beneficially Owned, and a description of how such Equity Shares are held. Each
such Beneficial Owner shall provide to the
10
<PAGE>
Trust such information as may be reasonably requested by the Trust and as may be
reasonably necessary to determine the effect, if any, of such Beneficial
Ownership on the Trust's status as a REIT.
(b) Each Person who is a beneficial owner or Beneficial Owner or
Constructive Owner of Equity Shares and each Person (including the Shareholder
of record) who is holding Equity Shares for a Beneficial Owner or Constructive
Owner shall provide to the Trust such information that the Trust may request, in
good faith, in order to determine the Trust's status as a REIT.
SECTION 7.7 Remedies Not Limited. Nothing contained in this Article VII (but
subject to Section 6.7 of the Charter) shall limit the authority of the Board of
Trust Managers to take such other action as it deems necessary or advisable to
protect the Trust and the interests of its shareholders by preservation of the
Trust's status as a REIT.
SECTION 7.8 Ambiguity. In the case of an ambiguity in the application of any
of the provisions of Sections 7.2 through 7.9, 7.13 and 7.14 of this Article
VII, including any definition contained in Section 7.1, the Board of Trust
Managers shall have the power to determine the application of the provisions of
Sections 7.2 through 7.9, 7.13 and 7.14 with respect to any situation based on
the facts known to it. In the event any of Sections 7.2 through 7.9, 7.13 or
7.14 requires an action by the Board of Trust Managers and this Third Amended
and Restated Declaration of Trust fails to provide specific guidance with
respect to such action, the Board of Trust Managers shall have the power to
determine the action to be taken so long as such action is not contrary to the
provisions of such Sections 7.2 through 7.9 of this Article VII. Absent a
decision to the contrary by the Board of Trust Managers (which the Board of
Trust Managers may make in its sole and absolute discretion), if a Person would
have (but for the remedies set forth in Section 7.2(b)) acquired Beneficial or
Constructive Ownership of Equity Shares in violation of Section 7.2(a), such
remedies (as applicable) shall apply first to the Equity Shares which but for
such remedies, would have been actually owned by such Person, and second to
Equity Shares which, but for such remedies, would have been Beneficially Owned
or Constructively Owned (but not actually owned) by such Person, PRO RATA among
the Persons who actually own such Equity Shares based upon the relative number
of the Equity Shares held by each such Person.
SECTION 7.9 Exceptions.
(a) Subject to Section 7.2(a)(iii), the Board of Trust Managers, in its sole
discretion, may exempt a Person from the limitation on a Person Beneficially
Owning Equity Shares in excess of the Ownership Limit or the Executive Officers
Beneficially Owning Equity Shares, in the aggregate, in excess of the Executive
Officer Ownership Limit, as the case may be, if the Board of Trust Managers
obtains such representations and undertakings from such Person or from such
Executive Officer or Executive Officers as are reasonably necessary to ascertain
that no individual's Beneficial Ownership or the Executive Officers' Beneficial
Ownership, in the aggregate, as the case may be, of such Equity Shares will
violate the Ownership Limit or the Executive Officer Ownership, as the case may
be, or that any such violation will not cause the Trust to fail to qualify as a
REIT under the Code, and agrees that any violation of such representations or
undertaking (or other action which is contrary to the restrictions contained in
Section 7.2 of this Article VII) or attempted violation will result in such
Equity Shares being transferred to a Special Trust in accordance with Section
7.2(b) of this Article VII.
(b) Subject to Section 7.2(a)(iii), the Board of Trust Managers, in its sole
discretion, may exempt a Person from the limitation on a Person Constructively
Owning Equity Shares in excess of 9.8% (by value or by number of Equity Shares,
whichever is more restrictive) of the outstanding Equity Shares of the Trust, if
such Person does not, and represents that it will not own, actually or
Constructively, an interest in a tenant of the Trust (or a tenant of any entity
owned in whole or in part by the Trust) that would cause the Trust to own,
actually or Constructively, more than a 9.8% interest (as set forth in Section
856(d)(2)(B) of the Code) in such tenant and the Trust obtains such
representations and undertakings from such Person as are reasonably necessary to
ascertain this fact and agrees that any violation or attempted violation will
result in such Equity Shares being transferred to the Trust in accordance with
Section 7.2(b) of this Article VII.
11
<PAGE>
Notwithstanding the foregoing, the inability of a Person to make the
certification described in this Section 7.9(b) shall not prevent the Board of
Trust Managers, in its sole discretion, from exempting such Person from the
limitation on a Person Constructively Owning Equity Shares in excess of 9.8% of
the outstanding Equity Shares if the Board of Trust Managers determines that the
resulting application of Section 856(d)(2)(B) of the Code would affect the
characterization of less than 0.5% of the gross income (as such term is used in
Section 856(c)(2) of the Code) of the Trust in any taxable year, after taking
into account the effect of this sentence with respect to all other Equity Shares
to which this sentence applies.
(c) Prior to granting any exception pursuant to Section 7.9(a) or (b) of
this Article VII, the Board of Trust Managers may require a ruling from the
Internal Revenue Service, or an opinion of counsel, in either case in form and
substance satisfactory to the Board of Trust Managers in its sole discretion, as
it may deem necessary or advisable in order to determine or ensure the Trust's
status as a REIT.
SECTION 7.10 Legend. Each certificate for Equity Shares shall bear
substantially the following legend:
"The Trust is authorized to issue two classes of capital stock
which are designated as Common Shares and Preferred Shares. The
Board of Trust Managers is authorized to determine the
preferences, limitations and relative rights of the Preferred
Shares before the issuance of any Preferred Shares. The Trust will
furnish, without charge, to any shareholder making a written
request therefor, a copy of the Declaration of Trust of the Trust
and a written statement of the designations, relative rights,
preferences and limitations applicable to each such class of
stock. Requests for such written statement may be directed to the
Secretary of the Trust, at the Trust's principal office.
The shares represented by this certificate are subject to
restrictions on Beneficial and Constructive Ownership and Transfer
for the purpose of the Trust's maintenance of its status as a Real
Estate Investment Trust under the Internal Revenue Code of 1986,
as amended (the "CODE"). Subject to certain further restrictions
and except as expressly provided in the Trust's Charter, (i)(A) no
Person (except for an Executive Officer) may Beneficially Own in
excess of 5.0% of the outstanding Equity Shares of the Trust (by
value or by number of shares, whichever is more restrictive) and
(B) no Executive Officer may, nor may the Executive Officers, in
the aggregate, Beneficially Own in excess of % of the
outstanding Equity Shares of the Trust (by value or by number of
shares, whichever is more restrictive); (ii) no Person may
Constructively Own in excess of 9.8% of the outstanding Equity
Shares of the Trust (by value or by number of shares, whichever is
more restrictive); (iii) no Person may Beneficially or
Constructively Own Equity Shares that would result in the Trust
being "closely held" under Section 856(h) of the Code or otherwise
cause the Trust to fail to qualify as a REIT; and (iv) no Person
may Transfer Equity Shares if such Transfer would result in the
capital stock of the Trust being owned by fewer than 100 Persons.
Any Person who Beneficially or Constructively Owns or attempts to
Beneficially or Constructively Own Equity Shares which causes or
will cause a Person to Beneficially or Constructively Own Equity
Shares in excess of the above limitations must immediately notify
the Trust. If any of the restrictions on transfer or ownership are
violated, the Equity Shares represented hereby will be
automatically transferred to a Trustee of a Special Trust for the
benefit of one or more Charitable Beneficiaries. In addition, the
Trust may redeem shares upon the terms and conditions specified by
the Board of Trust Managers in its sole discretion if the Board of
Trust Managers determines that ownership or a Transfer or other
event may violate the restrictions described above. Furthermore,
upon the occurrence of certain events, attempted Transfers in
violation of the restrictions described above may be void AB
INITIO. All capitalized terms in this legend have the meanings
defined in the Declaration of Trust of the Trust, as the same may
be amended from time to time, a
12
<PAGE>
copy of which, including the restrictions on transfer and
ownership, will be furnished to each holder of Equity Shares on
request and without charge. Requests for such a copy may be
directed to the Secretary of the Trust, at the Trust's principal
office."
SECTION 7.11 Severability. If any provision of this Article VII or any
application of any such provision is determined to be invalid by any Federal or
state court having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
SECTION 7.12 AMEX. Nothing in this Article VII shall preclude the settlement
of any transaction entered into through the facilities of the AMEX or any other
national securities exchange. The fact that the settlement of any transaction is
so permitted shall not negate the effect of any other provision of this Article
VII and any transferee in such a transaction shall be subject to all the
provisions and limitations of this Article VII.
SECTION 7.13 Changes In Ownership Limit and Executive Officer Ownership
Limit. Subject to the limitations provided in Section 7.14, the Board of Trust
Managers may from time to time increase (or decrease) the Ownership Limit and/or
the Executive Officer Ownership Limit (including, but not limited to, in
connection with the grant of Options and/or Deferred Stock Grants to the
Executive Officers).
SECTION 7.14 Limitations on Changes In the Ownership Limit and the Executive
Officer Ownership Limit.
(a) Neither the Ownership Limit nor the Executive Officer Ownership Limit
may be increased if, as a result of such increase, five Beneficial Owners of
Equity Shares (including all of the Executive Officers) could Beneficially Own,
in the aggregate, more than 50.0% (in number or value, whichever is more
restrictive) of the then outstanding Equity Shares.
(b) Prior to the modification of the Ownership Limit or the Executive
Officer Ownership Limit pursuant to Section 7.13, the Board of Trust Managers
may require such opinions of counsel, affidavits, undertakings or agreements as
it may deem necessary or advisable in order to determine or ensure the Trust's
status as a REIT.
(c) The Executive Officer Ownership Limit shall not be reduced to a
percentage which is less than the Ownership Limit.
ARTICLE VIII
SHAREHOLDERS
SECTION 8.1 Meetings of Shareholders. There shall be an Annual Meeting of
the Shareholders, to be held at such time and place as shall be determined by or
in the manner prescribed in Article II of the Bylaws, at which Trust Managers
shall be elected and any other proper business may be conducted. Except as
otherwise provided in this Declaration of Trust, special meetings of
Shareholders may be called in the manner provided in Article II of the Bylaws.
If there are no Trust Managers, the President or any other officer of the Trust
shall promptly call a special meeting of the Shareholders entitled to vote for
the election of successor Trust Managers. Any meeting may be adjourned and
reconvened as the Trust Managers determine or as provided in Article II of the
Bylaws.
SECTION 8.2 Voting Rights of Shareholders. Subject to the provisions of any
class or series of Shares then outstanding, the Shareholders shall be entitled
to vote only on the following matters: (a) the election or removal of Trust
Managers; (b) the amendment of this Declaration of Trust; (c) the voluntary
dissolution or termination of the Trust; (d) the reorganization of the Trust;
and (e) the merger or consolidation of the Trust or the sale or other
disposition of all or substantially all of the Trust Property. Except with
respect to the foregoing matters, no action taken by the Shareholders at any
meeting shall in any way bind the Trust Managers.
13
<PAGE>
ARTICLE IX
AMENDMENT
SECTION 9.1 By Shareholders. Except as provided in Section 9.2 hereof, this
Declaration of Trust may be amended only by the affirmative vote of the holders
of not less than two-thirds of all the Shares then outstanding and entitled to
vote on the matter.
SECTION 9.2 By Trust Managers. The Trust Managers, by a two-thirds vote, may
amend provisions of this Declaration of Trust from time to time to enable the
Trust to qualify as a real estate investment trust under the Code or under Title
8.
SECTION 9.3 No Other Amendment. This Declaration of Trust may not be amended
except as provided in this Article IX.
ARTICLE X
DURATION OF TRUST
The Trust shall continue perpetually unless terminated pursuant to any
applicable provision of Title 8. The Trust may be voluntarily dissolved or
reorganized or its existence terminated only by the affirmative vote of the
holders of not less than two-thirds of all the Shares then outstanding and
entitled to vote on the matter. The Trust may sell or otherwise dispose of all
or substantially all of the Trust Property only by the affirmative vote of the
holders entitled to vote on the matter.
ARTICLE XI
LIABILITY OF SHAREHOLDERS, TRUST MANAGERS, OFFICERS,
EMPLOYEES AND AGENTS
AND TRANSACTIONS BETWEEN THEM AND THE TRUST
SECTION 11.1 Limitation of Shareholder Liability. No Shareholder shall be
liable for any debt, claim, demand, judgment or obligation of any kind of,
against or with respect to the Trust by reason of his being a Shareholder, nor
shall any Shareholder be subject to any personal liability whatsoever, in tort,
contract or otherwise, to any Person in connection with the Trust Property or
the affairs of the Trust.
SECTION 11.2 Limitation of Trust Manager and Executive Officer Liability. To
the maximum extent that Maryland law in effect from time to time permits
limitations of the liability of trustees and officers of a real estate
investment trust, no Trust Manager or officer of the Trust shall be liable to
the Trust or to any Shareholder for money damages. Neither the amendment nor
repeal of this Section, nor the adoption or amendment of any other provision of
this Declaration of Trust inconsistent with this section, shall apply to or
affect in any respect the applicability of the preceding sentence with respect
to any act or failure to act which occurred prior to such amendment, repeal or
adoption. In the absence of any Maryland statute limiting the liability of
trustees and officers of a Maryland real estate investment trust for money
damages in a suit by or on behalf of the Trust or by any Shareholder, no Trust
Manager or Executive Officer of the Trust shall be liable to the Trust or to any
Shareholder unless (a) that Trust Manager or Executive Officer actually received
an improper benefit or profit in money, property or services, and then, for the
amount of the benefit of profit in money or services actually received or (b) a
judgment or other final adjudication adverse to the Trust Manager or Executive
Officer is entered in a proceeding based on a finding in the proceeding that the
Trust Manager's or Executive Officer's action or failure to act was the result
of active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding or (c) otherwise, in accordance with the
provisions of an indemnification agreement between any of them and the Trust.
SECTION 11.3 Express Exculpatory Clauses in Instruments. Neither the
Shareholders nor the Trust Managers, Executive Officers, employees or agents of
the Trust shall be liable under any written
14
<PAGE>
instrument creating an obligation of the Trust, and all Persons shall look
solely to the Trust Property for the payment of any claim under or for the
performance of the instrument. The omission of the foregoing exculpatory clause
in such instrument shall not render any Shareholder, Trust Manager, Executive
Officer, employee or agent liable thereunder to any third party, nor shall the
Trust Manager or any officers, employees or agents of the Trust be liable to
anyone for such omission. In the event of a conflict between the terms of this
Declaration and any indemnification agreement, the terms of the indemnification
agreement shall control.
SECTION 11.4 Indemnification and Advance for Expenses. The Trust shall have
the power, to the maximum extent permitted by Maryland law in effect from time
to time, to obligate itself to indemnify, and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to, (a) any individual
who is a present or former Shareholder, Trust Manager or officer of the Trust or
(b) any individual who, while a Shareholder, Trust Manager or officer of the
Trust and at the express request of the Trust, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a director, officer, Shareholder, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, from and against all claims and liabilities to which such person may
become subject and against all claims and liabilities to which such person may
become subject by reason of his being or having been a Shareholder, Trust
Manager or Executive Officer. The Trust shall have the power, with the approval
of its Board of Trust Managers, to provide such indemnification and advancement
of expenses to a person who served a predecessor of the Trust in any of the
capacities described in (a) or (b) above and to any employee or agent of the
Trust or a predecessor of the Trust.
SECTION 11.5 Transactions Between the Trust and its Trust Managers,
Executive Officers, Employees and Agents. Subject to any express restriction in
this Declaration of Trust, including, but not limited to, Section 6.4, any
restriction adopted by the Trust Managers in the Bylaws or by resolution, and in
accordance with the terms and provisions of any employment agreement and/or
non-competition agreement with any Trust Manager or Executive Officer and the
Trust, as applicable, the Trust may enter into any contract or transaction of
any kind (including, without limitation, for the purchase or sale of property or
for any type of services, including those in connection with the underwriting or
the offer or sale of Securities of the Trust) with any Person, including any
Trust Manager, Executive Officer, employee or agent of the Trust, whether or not
any of them has a financial interest in such transaction.
SECTION 11.6 Limitation on Total Operating Expenses. The Total Operating
Expenses of the Trust shall not exceed the greater of 2% of its average invested
assets or 25% of its net income in any fiscal year as defined below. The Trust
Managers will limit operating expenses to these levels unless a majority of the
Independent Trust Managers make a finding that, based on unusual or
non-recurring factors, a higher level of expenses is justified for that year.
Written records and supporting data shall be maintained by the Trust Managers in
this regard.
Within 60 days after the end of any fiscal quarter in which Total Operating
Expenses for the preceding twelve (12) months exceeded this limitation, the
Trust will disclose this fact to the Shareholders, together with an explanation
of the factors upon which the Independent Trust Managers relied in approving
higher operating expenses.
For purposes of this Section 11.6, "TOTAL OPERATING EXPENSES" shall include
all cash operating expenses, including additional expenses paid directly or
indirectly by the Trust to its Affiliates or third parties based upon their
relationship with the Trust, including loan administration, servicing,
engineering, inspection and all other expenses paid by the Trust, except the
expenses related to raising capital, for interest, taxes and direct property
acquisition, operation, maintenance and management costs.
"AVERAGE INVESTED ASSETS", for purposes of this Section 11.6, for any
period, shall mean the average of the aggregate book value of the assets of the
Trust, invested, directly or indirectly, in equity interests and in
15
<PAGE>
loans secured by real estate, before reserves for depreciation or bad debts or
other similar non-cash reserves computed by taking the average of such values at
the end of each month during such period.
"NET INCOME", for purposes of the calculation contained in this Section
11.6, shall mean total revenues applicable to such period, other than additions
to reserves for depreciation or bad debts or other similar non-cash reserves.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 Governing Law. This Third Amended and Restated Declaration of
Trust is executed by the Trust Managers and delivered in the State of Maryland
with reference to the laws thereof, and the rights of all parties and the
validity, construction and effect of every provision hereof shall be subject to
and construed according to the laws of the State of Maryland without regard to
conflict of law provisions thereof.
SECTION 12.2 Reliance by Third Parties. Any certificate shall be final and
conclusive as to any Person dealing with the Trust if executed by an individual
who, according to the records of the Trust or of any recording office in which
this Third Amended and Restated Declaration of Trust may be recorded, appears to
be the Secretary or an Assistant Secretary of the Trust or a Trust Manager, and
if certifying to: (a) the number or identity of Trust Managers, officers of the
Trust or Shareholders; (b) the due authorization of the execution of any
document; (c) any action or vote taken, and the existence of a quorum at a
meeting of Trust Managers or Shareholders; (d) a copy of this Declaration or of
the Bylaws as a true and complete copy as then in force; (e) an amendment to
this Declaration; (f) the termination of the Trust; or (g) the existence of any
fact or facts which relate to the affairs of the Trust. No purchaser, lender,
transfer agent or other Person shall be bound to make any inquiry concerning the
validity of any transaction purported to be made on behalf of the Trust by the
Trust Managers or by any officer, employee or agent of the Trust.
SECTION 12.3 Provisions in Conflict With Law or Regulations.
(a) The provisions of this Third Amended and Restated Declaration of Trust
are severable, and if the Trust Managers shall determine, with the advice of
counsel, that any one or more of such provisions are in conflict with the REIT
Provisions of the Code, Title 8 or any other applicable federal or state law,
the conflicting provisions shall be deemed never to have constituted a part of
this Declaration of Trust, even without any amendment of this Declaration of
Trust pursuant to Article IX; PROVIDED, HOWEVER, that such determination by the
Trust Managers shall not affect or impair any of the remaining provisions of
this Declaration of Trust or render invalid or improper any action taken or
omitted prior to such determination. No Trust Manager shall be liable for making
or failing to make such a determination.
(b) If any provision of this Third Amended and Restated Declaration of Trust
shall be held invalid or unenforceable in any jurisdiction, such holding shall
not in any manner affect or render invalid or unenforceable such provision in
any other jurisdiction or any other provision of this Declaration of Trust in
any jurisdiction.
Section 12.4 Construction. In this Third Amended and Restated Declaration of
Trust, unless the context requires otherwise, words used in the singular or in
the plural include both the plural and singular and words denoting any gender
include all genders. Title and headings of different parts of this Declaration
are inserted for convenience and shall not affect the meaning, construction or
effect hereof. In defining or interpreting the powers and duties of the Trust
and its Trust Managers and officers, reference may be made, to the extent
appropriate and not inconsistent with the Code or Title 8, to Titles 1 through 3
of the Corporations and Associations Article of the Annotated Code of Maryland
(the "MARYLAND CODE"). In furtherance and not in limitation of the foregoing, in
accordance with the provisions of Title 3, Subtitles
16
<PAGE>
6 and 7, of the Maryland Code, the Trust shall be included within the definition
of "corporation" for purposes of such provisions.
SECTION 12.5 Recordation. This Third Amended and Restated Declaration of
Trust and any amendment or supplement hereto shall be filed for record with the
State Department of Assessments and Taxation of Maryland and may also be filed
or recorded in such other places as the Trust Managers deem appropriate, but
failure to file for record this Third Amended and Restated Declaration or any
amendment or supplement hereto in any office other than in the State of Maryland
shall not affect or impair the validity or effectiveness of this Third Amended
and Restated Declaration or any amendment hereto. This Third Amended and
Restated Declaration, and any subsequently amended and restated Declaration,
shall, upon filing, be conclusive evidence of all amendments or supplements
contained therein and may thereafter be referred to in lieu of the original
Declaration and the various amendments or supplements thereto.
IN WITNESS WHEREOF, this Third Amended and Restated Declaration of Trust has
been signed on this day of , 1997, by the undersigned Trust
Managers, each of whom acknowledge that this document is his free act and deed,
that, to the best of his knowledge, information and belief, the matters and
facts set forth herein are true in all material respects and that this statement
is made under the penalties for perjury.
<TABLE>
<S> <C> <C>
- --------------------- --------------------- ---------------------
Harold Gorman Damon D. Navarro James F. Twaddell
- --------------------- ---------------------
J. Joseph Garrahy Joseph R. LaBrosse
</TABLE>
17
<PAGE>
APPENDIX II
GROVE PROPERTY TRUST'S 1996 SHARE
INCENTIVE PLAN TO BE ADDED
BY AMENDMENT.
18
<PAGE>
PRELIMINARY COPY
GROVE REAL ESTATE ASSET TRUST
SPECIAL MEETING OF SHAREHOLDERS-- , 199
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUST MANAGERS
The undersigned hereby appoints Damon Navarro, Brian Navarro, Edmund
Navarro, Joseph LaBrosse, Gerald McNamara, or any one of them, with full power
of substitution, as proxies, to vote on behalf of the undersigned at the Special
Meeting of Shareholders of Grove Real Estate Asset Trust, to be held on ,
, 1996 at The Hartford Club, 44-48 Prospect Street, Hartford,
Connecticut 06103, at local time, and at any adjournment(s) or
postponement(s) thereof, in the manner indicated below, and in their discretion
on any other matter which may properly come before the Special Meeting.
This Proxy will be voted in accordance with the instructions given. In the
absence of instructions, the Proxy will be voted "FOR" Proposals 1 through 3.
<PAGE>
This Proxy will be voted in accordance with the instructions given. In the
absence of instructions, the Proxy will be voted "FOR" Proposals 1 through 3.
<TABLE>
<S> <C> <C> <C> <C>
Proposal 1: Approval of the / / FOR / / AGAINST / / ABSTAIN The undersigned hereby revokes any proxy
Consolidation Transactions / / FOR / / AGAINST / / ABSTAIN heretofore given to the meeting and acknowledges
Proposal 2: Approval of the / / FOR / / AGAINST / / ABSTAIN receipt of the Notice of Special Meeting of
Charter Amendments Shareholders and Proxy Statement dated ,
Proposal 3: Approval of the 199 .
1996 Plan Dated ---------------------------, 199
SHAREHOLDERS MUST VOTE ON EACH RESOLUTION SEPARATELY AND APPROVAL OF ANY --------------------------------------------------
RESOLUTION IS NOT DEPENDENT ON APPROVAL OF ANY OTHER RESOLUTION. THE BOARD Signature
OF TRUST MANAGERS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF EACH OF THE --------------------------------------------------
RESOLUTIONS. Print Name
--------------------------------------------------
Signature (if held jointly)
--------------------------------------------------
Print Name
--------------------------------------------------
Title, if applicable
PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. WHEN
COMMON SHARES ARE HELD BY JOINT TENANTS, BOTH
SHOULD SIGN. WHEN SIGNING AS AN ATTORNEY, AS
EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN,
PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION,
PLEASE SIGN NAME BY PRESIDENT OR OTHER DULY
AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN
IN PARTNERSHIP NAME BY AUTHORIZED PERSON. PLEASE
MARK, SIGN, DATE AND RETURN THIS PROXY CARD
PROMPTLY USING THE ENCLOSED PREPAID ENVELOPE TO:
GROVE REAL ESTATE ASSET TRUST, 598 ASYLUM AVENUE,
HARTFORD, CONNECTICUT 06105. IF YOU HAVE ANY
QUESTIONS, PLEASE CALL GROVE REAL ESTATE ASSET
TRUST AT (860) 520-4789.
</TABLE>
