As filed with the Securities and Exchange Commission on October 9, 1998
Registration No. 333-39247
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 56-1871668
(State of incorporation) (I.R.S. Employer Identification No.)
3100 Smoketree Court, Suite 600
Raleigh, North Carolina 27604
(919) 872-4924
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
With Copies to:
Ronald P. Gibson, President Brad S. Markoff, Esq.
Highwoods Properties, Inc. Alston & Bird LLP
3100 Smoketree Court, Suite 600 3605 Glenwood Avenue, Suite 310
Raleigh, North Carolina 27604 Raleigh, North Carolina 27612
(919) 872-4924 (919) 420-2210
(Address, including zip code, and telephone number, including area code, of
agent for service)
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this registration statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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HIGHWOODS PROPERTIES, INC.
PROSPECTUS
2,340,000 SHARES
COMMON STOCK
We are offering and selling up to 2,340,000 shares of common stock with
this prospectus. An accompanying prospectus supplement will set forth the
specific number of shares of common stock to be sold. Our shares are listed for
trading on the New York Stock Exchange under the symbol "HIW." On October 8,
1998, the last reported sale price of our common stock on the New York Stock
Exchange was $24 1/16 per share.
SEE "RISK FACTORS" AT PAGE 5 FOR CERTAIN FACTORS THAT YOU SHOULD
CONSIDER BEFORE YOU INVEST IN THE COMMON STOCK BEING SOLD WITH THE PROSPECTUS.
Of these securities, we sold 1.8 million to UBS AG, London Branch
("UB-LB") on August 28, 1997 for net proceeds of $56.7 million. We will receive
no additional proceeds from the sale of any of the 2,340,000 shares offered with
this prospectus. The remaining 540,000 shares, if issued, will also be issued to
UB-LB under the terms of our agreement with them. UB-LB is an underwriter with
respect to all of the offered shares and has received a placement fee equal to
$1,445,625 with respect to the 1.8 million issued shares, which represents 2.5%
of the gross proceeds. Our agreement with UB-LB also contains certain purchase
price adjustments that essentially guarantee a return on UB-LB's purchase equal
to LIBOR plus 75 basis points. We will pay UB-LB an additional placement fee
equal to approximately $290,000 if we issue any additional shares to UB-LB under
the purchase price adjustment provisions of our agreement with them.
A prospectus supplement will set forth the public offering price per
share, the name of any lead or managing underwriters and the underwriters'
discounts and commissions from the sale. See "Plan of Distribution" at page 40.
The mailing address and phone number of our executive offices are: 3100
Smoketree Court, Suite 600, Raleigh, North Carolina 27604, (919) 872-4924.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
NEITHER HAS ANY STATE SECURITIES COMMISSION APPROVED OR DISAPPROVED OF THESE
SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS
ILLEGAL FOR ANY PERSON TO TELL YOU OTHERWISE.
This prospectus may not be used to consummate sales of shares of common
stock unless accompanied by a prospectus supplement.
The date of this Prospectus is October __, 1998.
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AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information may be
inspected and copied, at prescribed rates, at the Public Reference Room of the
Commission at 450 Fifth Street, N.W., Washington, DC 25049. Information may be
obtained on the operation of the Public Reference Room by calling the Commission
at 1-800-SEC-0330. Such reports, proxy statements and other information, when
available, also may be accessed through the Internet site maintained by the
Commission (http://www.sec.gov). The common stock of the Company, $.01 per value
per share (the "Common Stock"), is listed on the New York Stock Exchange (the
"NYSE"), and such material can also be inspected and copied at the offices of
the NYSE, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on
Form S-3 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the 2,340,000 shares registered
hereby. This prospectus ("Prospectus"), which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and in the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock reference is hereby
made to such Registration Statement, exhibits and schedules. The Registration
Statement may be inspected without charge at, or copies obtained upon payment of
prescribed fees from, the Commission. Any statements contained herein concerning
a provision of any document are not necessarily complete, and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission
pursuant to the Exchange Act are incorporated herein by reference and made a
part hereof:
a. The Company's annual report on Form 10-K for the year ended
December 31, 1997 (as amended on April 29, 1998 and May 19, 1998);
b. The Company's quarterly reports on Form 10-Q for the quarters
ended March 31, 1998 and June 30, 1998;
c. The description of the Common Stock of the Company included in the
Company's registration statement on Form 8-A, dated May 16, 1994;
and
d. The Company's current reports on Form 8-K, dated January 9, 1997
(as amended on February 7, 1997, March 10, 1997 and April 28,
1998), August 27, 1997 (as amended on September 23, 1997), October
1, 1997, November 17, 1997, January 22, 1998, February 2, 1998,
February 4, 1998, April 20, 1998, April 29, 1998, June 10, 1998,
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June 17, 1998, July 1, 1998 and July 3, 1998 (as amended on
September 28, 1998 and September 30, 1998).
All documents filed by the Company with the Commission pursuant to
Sections 13(a) and 13(c) of the Exchange Act and any definitive proxy statements
so filed pursuant to Section 14 of the Exchange Act and any reports filed
pursuant to Section 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of the Common Stock shall be deemed
to be incorporated by reference into this Prospectus and to be a part hereof
from the date of filing of such documents. Any statement contained in a document
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which is incorporated by
reference herein modifies or supersedes such earlier statement. Any such
statements modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company will furnish without charge upon written or oral request to
each person to whom a copy of this Prospectus is delivered, including any
beneficial owner, a copy of any or all of the documents specifically
incorporated herein by reference (not including the exhibits to such documents,
unless such exhibits are specifically incorporated by reference in such
documents). Requests should be made to: Investor Relations, 3100 Smoketree
Court, Suite 600, Raleigh, North Carolina 27604. The Company's telephone number
is (919) 872-4924.
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THE COMPANY
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" SHALL MEAN
HIGHWOODS PROPERTIES, INC., PREDECESSORS OF HIGHWOODS PROPERTIES, INC. AND THOSE
ENTITIES OWNED OR CONTROLLED BY HIGHWOODS PROPERTIES, INC., INCLUDING HIGHWOODS
REALTY LIMITED PARTNERSHIP.
The Company is a self-administered and self-managed real estate
investment trust ("REIT") that began operations through a predecessor in 1978.
At July 31, 1998, the Company owned or had an ownership interest in 679
in-service office, industrial, retail and service center properties encompassing
approximately 46.8 million rentable square feet and 18 multifamily communities
with 2,324 apartment units (collectively, the "Properties"). The Properties are
located in 22 markets in North Carolina, Florida, Tennessee, Virginia, Georgia,
Maryland, Missouri, Kansas, Iowa, South Carolina and Alabama.
In addition, as of July 31, 1998, the Company had 43 properties (the
"Development Projects") under development in its existing markets which will
encompass approximately 4.3 million rentable square feet. At July 31, 1998, the
Company also owned approximately 1,800 acres (and had agreed to purchase an
additional 500 acres) of land for future development (the "Development Land").
The Company conducts substantially all of its activities through, and
substantially all of its interests in the Properties are held directly or
indirectly by, Highwoods Realty Limited Partnership (the "Operating
Partnership"). The Company is the sole general partner of the Operating
Partnership and as of July 31, 1998, owned 84% of the common partnership
interests (the "Common Units") in the Operating Partnership. The remaining
Common Units are owned by limited partners (including certain officers and
directors of the Company). Each Common Unit may be redeemed by the holder
thereof for the cash value of one share of Common Stock or, at the Company's
option, one share (subject to certain adjustments) of Common Stock. With each
such exchange, the number of Common Units owned by the Company and, therefore,
the Company's percentage interest in the Operating Partnership, will increase.
In addition to owning the Properties, the Development Projects and the
Development Land, the Company provides leasing, property management, real estate
development, construction and miscellaneous tenant services for the Properties
as well as for third parties. The Company conducts its third-party fee-based
services through Highwoods Services, Inc., a subsidiary of the Operating
Partnership ("Highwoods Services"), and through Highwoods/Tennessee Properties,
Inc., a wholly owned subsidiary of the Company.
The Company was formed in Maryland in 1994. The Company's executive
offices are located at 3100 Smoketree Court, Suite 600, Raleigh, North Carolina
27604, and its telephone number is (919) 872-4924. The Company maintains offices
in each of its primary markets.
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RISK FACTORS
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE THAT THERE
ARE VARIOUS RISKS, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CONSIDER
CAREFULLY THESE RISK FACTORS, TOGETHER WITH ALL OTHER INFORMATION INCLUDED IN
THIS PROSPECTUS AND ANY ATTACHED PROSPECTUS SUPPLEMENT, BEFORE YOU DECIDE TO
PURCHASE OUR COMMON STOCK.
SOME OF THE INFORMATION IN THIS PROSPECTUS MAY CONTAIN FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE,"
"CONTINUE" OR OTHER SIMILAR WORDS. THESE STATEMENTS DISCUSS FUTURE EXPECTATIONS,
CONTAIN PROJECTIONS OF RESULTS OF OPERATIONS OR OF FINANCIAL CONDITION OR STATE
OTHER "FORWARD-LOOKING" INFORMATION. WHEN CONSIDERING SUCH FORWARD-LOOKING
STATEMENTS, YOU SHOULD KEEP IN MIND THE RISK FACTORS AND OTHER CAUTIONARY
STATEMENTS IN THIS PROSPECTUS. THE RISK FACTORS NOTED IN THIS SECTION AND OTHER
FACTORS NOTED THROUGHOUT THIS PROSPECTUS COULD CAUSE OUR ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING STATEMENT.
OPERATING PERFORMANCE IS DEPENDENT ON SOUTHEASTERN MARKETS
Local economic and real estate conditions may affect our revenues and
the value of our properties. Business layoffs or downsizing, industry slowdowns,
changing demographics, and other similar factors may adversely affect the local
economic climate. The oversupply of or reduced demand for office, industrial,
and other competing commercial properties may adversely affect the real estate
market in particular geographic areas. On July 31, 1998, we owned properties in
21 markets in Alabama, Florida, Georgia, Iowa, Kansas, Maryland, Missouri, North
Carolina, South Carolina, Tennessee and Virginia. Our performance and ability to
make distributions to stockholders is dependent on the economic and real estate
conditions in the Southeast and in Florida and North Carolina in particular. We
can provide no assurances that the economies in our southeastern markets will
continue to grow.
CONFLICTS OF INTEREST COULD RESULT IN DECISIONS NOT IN YOUR BEST INTEREST
POTENTIAL TAX CONSEQUENCES UPON SALE OR REFINANCING OF PROPERTIES.
Holders of Common Units may suffer adverse tax consequences upon certain of our
properties' sales or refinancings. Therefore, holders of Common Units, including
certain of our officers and directors, may have different objectives regarding
the appropriate pricing and timing of a property's sale or refinancing. Although
the Company, as the sole general partner of the Operating Partnership, has the
exclusive authority to sell or refinance an individual property, officers and
directors who hold Common Units may influence the Company not to sell or
refinance certain properties even if such sale or refinancing might be
financially advantageous to stockholders.
POTENTIAL INABILITY TO ELIMINATE CONFLICTS OF INTERESTS. We have
adopted certain policies to eliminate conflicts of interest. These policies
include a bylaw provision requiring all transactions in which executive officers
or directors have a conflicting interest to be approved by a majority of the
Company's independent directors or by a majority of the shares of capital stock
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that disinterested stockholders hold. We can provide no assurance that our
policies will be successful in eliminating the influence of such conflicts. If
our policies are not successful, we may make decisions that fail to reflect the
interests of all stockholders.
LIMITED ABILITY OF STOCKHOLDERS TO EFFECT A CHANGE IN CONTROL
LIMITATION ON OWNERSHIP OF THE COMPANY'S CAPITAL STOCK. The Company's
Articles of Incorporation prohibit any person from owning more than 9.8% of the
Company's outstanding capital stock. This restriction may delay, defer, or
prohibit a third party from acquiring control of the Company without consent of
the board of directors, even if a change in control would be in your (the
stockholders') best interest.
REQUIRED CONSENT OF THE OPERATING PARTNERSHIP FOR SIGNIFICANT CORPORATE
ACTION. The Company may not engage in certain change of control transactions
without the approval of the holders of a majority of the Operating Partnership's
outstanding Common Units. If the Company ever owns less than a majority of the
outstanding Common Units, this voting requirement might limit the possibility of
a change in control of the Company, even if a change in control would be in your
best interest. On July 31, 1998, the Company owned approximately 84% of the
Common Units.
DIFFICULTY IN REMOVING CURRENT DIRECTORS. The Company's board of
directors has three classes of directors. Generally, shareholders elect each
Director class for a three-year term. The staggered directors' terms may affect
the stockholders' ability to change control of the Company even if such a change
in control would be in your best interest.
ANTI-TAKEOVER PROTECTIONS OF OPERATING PARTNERSHIP AGREEMENT. The
Operating Partnership Agreement contains certain provisions that may require a
potential acquiror to maintain the Operating Partnership structure and maintain
the limited partners' right to continue to hold Common Units with future
redemption rights. These provisions might limit the possibility of a change in
control of the Company, even if such change in control would be in your best
interest.
DILUTIVE EFFECT OF SHAREHOLDERS' RIGHTS PLAN. On October 4, 1997, the
Company's board of directors adopted a Shareholders' Rights Plan and declared a
distribution of one preferred share purchase right for each outstanding share of
Common Stock. The rights were issued on October 16, 1997 to each stockholder of
record on such date. The rights have certain anti-takeover effects. The rights
would cause substantial dilution to a person or group that attempts to acquire
the Company on terms of which the Company's board of directors does not approve.
The rights should not interfere with any merger or other business combination
the board of directors approves since the Company may redeem the rights for $.01
per right, prior to the time that a person or group has acquired beneficial
ownership of 15% or more of the Common Stock.
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ADVERSE IMPACT ON DISTRIBUTIONS OF FAILURE TO QUALIFY AS A REIT
We believe that we operate in a manner that enables the Company to
remain qualified as a REIT for Federal income tax purposes. We have not
requested, and do not plan to request, a ruling from the Internal Revenue
Service that we qualify as a REIT. We, however, have received an opinion from
the law firm of Alston & Bird LLP that we met the requirements for qualification
as a REIT for the taxable years ended December 31, 1994 through 1997, and that
we are in a position to continue such qualification for the taxable year that
will end December 31, 1998, if we satisfy certain requirements throughout the
year and for the year as a whole. See "Federal Income Tax Considerations --
Taxation of the Company as a REIT," on page 23.
You should be aware that opinions of counsel are not binding on the
Internal Revenue Service or any court. Furthermore, the conclusions stated in
the opinion are based solely on factual representations of ours and are
conditioned on, and our continued qualification as a REIT will depend on, our
meeting various requirements. Such requirements are discussed in more detail
under the heading "Federal Income Tax Considerations -- Requirements for
Qualification" beginning on page 24.
If we fail to qualify as a REIT, we would not be allowed a deduction
for distributions to stockholders in computing our taxable income and would be
subject to Federal income tax at regular corporate rates. We also could be
subject to the Federal alternative minimum tax. Unless we are entitled to relief
under specific statutory provisions, we could not elect to be taxed as a REIT
for four taxable years following the year during which we were disqualified.
Therefore, if we lose our REIT status, the funds available for distribution to
you would be reduced substantially for each of the years involved. See "Federal
Income Tax Considerations -- Failure to Qualify," on page 30.
FACTORS THAT COULD CAUSE POOR OPERATING PERFORMANCE OF THE PROPERTIES
RELIANCE ON PERFORMANCE OF PROPERTIES. Real property investments are
subject to varying degrees of risk. The yields available from equity investments
in real estate depend in large part on the amount of income generated and
expenses incurred. If our properties do not generate revenues sufficient to meet
operating expenses, including debt service, tenant improvements, leasing
commissions, and other capital expenditures, our ability to make distributions
to stockholders may be adversely affected.
Several factors may adversely affect our revenues and the value of our
properties. These include, among others:
o the national economy;
o local economies;
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o local real estate conditions;
o prospective tenants' perceptions of each property's
attractiveness;
o our ability to provide adequate management, maintenance, and
insurance; and
o increased operating costs (including real estate taxes and
utilities).
Such factors as applicable laws, including tax laws, interest rate levels, and
the availability of financing also affect real estate values and properties'
income. In addition, safety perceptions, the convenience and attractiveness of
our multifamily properties, the quality of local schools, and the availability
of alternatives, such as single family homes, may affect our multifamily
properties' performance.
POTENTIAL ADVERSE EFFECT OF COMPETITION ON OPERATING PERFORMANCE.
Numerous properties compete with our properties in attracting tenants to lease
space. Some of these competing properties are newer or better located than some
of our properties. Significant office or industrial property development in a
particular area could have a material effect on our ability to lease space in
our properties and on the rents we charge.
BANKRUPTCY OR WEAK FINANCIAL CONDITION OF TENANTS. At any time, one of
our tenants may seek the protection of the bankruptcy laws. This could result in
the rejection and termination of that tenant's lease and thereby reduce our cash
flows. Although we have not experienced material losses from tenant
bankruptcies, we cannot assure you that tenants will not file for bankruptcy
protection in the future or, if any tenants file, that they will affirm their
leases and continue to make rental payments in a timely manner. In addition, a
tenant from time to time may experience a downturn in its business, which may
weaken its financial condition and result in its failure to make timely rental
payments. If a bankrupt tenant does not affirm its lease, or if a tenant's
financial condition weakens, our income and stockholder distributions may be
adversely affected.
UNCERTAINTY IN RENEWAL OF LEASES AND RELETTING OF SPACE. When our
tenants decide not to renew their leases, we may not be able to relet the space.
Even if the tenants do renew or we can relet the space to other tenants, the
terms of renewal or reletting (including the cost of required renovations) may
be less favorable than current lease terms. If we were unable to relet or renew
promptly the leases for all, or a substantial portion, of this space, or if the
rental rates upon such renewal or reletting were significantly lower than
expected rates, then our cash flow and ability to make expected distributions to
you may be adversely affected.
ILLIQUIDITY OF REAL ESTATE. Equity real estate investments are
relatively illiquid. Such illiquidity will tend to limit our ability to vary our
portfolio promptly in response to changes in economic or other conditions. In
addition, Federal tax laws limit our ability to sell properties we hold for less
than four years. This limitation may affect our ability to sell properties at a
time
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that would otherwise be in your best interests. It may also affect our ability
to sell properties without adversely affecting our financial performance.
POTENTIAL ADVERSE EFFECT ON RESULTS OF OPERATIONS DUE TO CHANGES IN
LAWS. Because increases in income, service, or transfer taxes are generally not
passed through to tenants under leases, such increases may adversely affect our
cash flow and our ability to make distributions to you. Our properties are also
subject to various Federal, state, and local regulatory laws, such as the
Americans with Disabilities Act and state and local fire and safety
requirements. If we fail to comply with these requirements, governmental
agencies could impose fines, or private litigants could be awarded damages. We
believe our Properties comply in all material respects with such regulatory
requirements. However, if these requirements change or if authorities impose new
requirements, we may incur significant unanticipated expenditures that could
adversely affect our cash flow and expected distributions.
POTENTIAL PROBLEMS IN DEVELOPMENT, CONSTRUCTION AND ACQUISITION ACTIVITIES
We intend to continue developing and constructing office and industrial
properties, including developing the Development Land and completing the
Development Projects. Our development and construction activities, including
activities relating to the Development Land and the Development Projects, may be
subject to certain risks, including the following:
o abandoning development opportunities;
o a property's construction costs exceeding original estimates,
possibly making the property uneconomical;
o occupancy rates and rents at a newly completed property may be
insufficient to make the property profitable;
o financing may not be available on favorable terms to develop a
property; and
o construction and lease-up may not be completed on schedule,
resulting in increased debt service expense and construction
costs.
In addition, new development activities, regardless of whether or not
they are ultimately successful, typically require a substantial portion of
management's time and attention. Our development activities may also be subject
to risks relating to the inability to obtain, or delays in obtaining, all
necessary zoning, land-use, building, occupancy, and other required governmental
permits and authorizations. These risks may adversely affect our results of
operations and ability to make distributions to you.
We also intend to continue to acquire office and industrial properties.
Such acquisitions entail risks that investments will fail to perform in
accordance with our expectations, which
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could adversely affect our operations and stockholder distributions. Estimates
of the costs to bring an acquired property up to market standards may prove
inaccurate. Furthermore, we are likely to be involved in negotiations (at
various stages) to acquire one or more properties or portfolios. However, we
cannot assure you that we will consummate any of the proposed acquisitions.
Instead of purchasing properties directly, we may invest as a partner
or a co-venturer. Under certain circumstances, this type of investment may
involve risks not otherwise present, including the possibility that a partner or
co-venturer might become bankrupt or that a partner or co-venturer might have
business interests or goals inconsistent with ours. Also, such a partner or
co-venturer may be in a position to take action contrary to our instructions or
requests or contrary to our policies or objectives, including our qualification
as a REIT. We may also risk an impasse on decisions because neither the partner
nor the co-venturer would have full control over the partnership or joint
venture. We will, however, seek to maintain sufficient control of such
partnerships or joint ventures to permit us to achieve our objectives.
POTENTIAL PROBLEMS ASSOCIATED WITH NEW MARKETS
We have generally limited our development, acquisition, management, and
leasing business to suburban office and industrial properties in southeastern
markets. However, we have recently moved into certain midwestern markets and
have acquired several retail properties and multifamily communities in those
markets. We may continue to expand our business to new geographic areas and
property types. We believe that much of our past success has been a result of
our local expertise in the Southeast and our experience in the ownership,
management, and development of suburban office and industrial properties. We may
not initially possess the same level of familiarity with new geographic areas
and property types to develop, acquire, manage, or lease newly acquired
properties as profitably as we do for our existing properties. We cannot
guarantee that we will succeed in integrating acquired properties into our
existing property portfolio. Failure to successfully integrate acquired
properties could adversely affect our operational results.
Some of the risks related to entry into new markets include, among
others:
o lack of market knowledge and understanding of local economies;
o inability to obtain land for development or identify acquisition
opportunities; and
o unfamiliarity with local governmental and permitting procedures.
POTENTIAL ADVERSE EFFECT OF INCURRENCE OF DEBT
POTENTIAL INFLEXIBILITY OF DEBT FINANCING. Our business is subject to
risks normally associated with debt financing. Cash flow could be insufficient
to pay distributions at expected
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levels and meet required payments of principal and interest. We may not be able
to refinance existing indebtedness (which in virtually all cases requires
substantial principal payments at maturity). Even if we can, the terms of such
refinancing might not be as favorable as the terms of existing indebtedness. We
may attempt to raise proceeds from capital transactions, such as new equity
capital, to refinance, extend, or pay principal payments due at maturity. If we
cannot successfully complete capital transactions, our cash flow may be
insufficient in all years to repay all maturing debt. Additionally, prevailing
interest rates or other factors at the time of refinancing (such as the possible
reluctance of lenders to make commercial real estate loans) may result in higher
interest rates. This would increase our interest expense, which would adversely
affect cash flow and our ability to service debt and make distributions to you.
ADVERSE EFFECT OF POTENTIAL INCREASE IN MARKET INTEREST RATES. We have
incurred and expect in the future to incur variable-rate indebtedness in
connection with acquiring and developing properties. Also, additional
indebtedness that we may incur under our existing revolving credit facility will
bear interest at variable rates. We may purchase interest rate protection
arrangements relating to variable-rate debt. But if we do not, increases in
interest rates would increase our interest costs, which would adversely affect
our results of operations.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various laws, ordinances, and regulations, such as the
Comprehensive Environmental Response Compensation and Liability Act, and common
law, an owner or operator of real estate is liable for the costs to remove or
remediate certain hazardous or toxic chemicals or substances on or in the
property. Owners or operators are also liable for certain other costs, including
governmental fines and injuries to persons and property. Such laws often impose
liability without regard to whether the owner or operator knew of, or was
responsible for, the presence of the hazardous or toxic chemicals or substances.
The presence of such substances, or the failure to remediate such substances
properly, may adversely affect the owner's or operator's ability to sell or rent
such property or to borrow using such property as collateral. Persons who
arrange for the disposal, treatment, or transportation of hazardous or toxic
chemicals or substances may also be liable for the same types of costs at a
disposal, treatment, or storage facility, whether or not that person owns or
operates that facility. Certain environmental laws also impose liability for
releasing asbestos-containing materials. Third parties may seek recovery from
owners or operators of real property for personal injuries associated with
asbestos-containing materials. A number of our Properties contain
asbestos-containing materials or material that we presume to be
asbestos-containing materials. In connection with owning and operating our
properties, we may be liable for such costs. In addition, it is not unusual for
property owners to encounter on-site contamination caused by off-site sources.
The presence of hazardous or toxic chemicals or substances at a site close to a
property could require the property owner to participate in remediation
activities or could adversely affect the value of the property. Contamination
from adjacent properties has migrated onto at least three of our properties;
however, based on current information, we do not believe that any significant
remedial action is necessary at these affected sites.
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As of the date of this Prospectus, we have obtained Phase I
environmental assessments on 99% of our Properties. These assessments have not
revealed, nor are we aware of, any environmental liability that we believe would
materially adversely affect our financial position, operations or liquidity
taken as a whole. This projection, however, could be incorrect depending on
certain factors. For example, our assessments may not reveal all environmental
liabilities or may underestimate the scope and severity of environmental
conditions observed. If so, we may not be aware of material environmental
liabilities, or material environmental liabilities may have arisen after the
assessments were performed. In addition, we base our assumptions regarding
environmental conditions, including groundwater flow and the existence and
source of contamination, on readily available sampling data. We cannot guarantee
that such data is reliable in all cases. Moreover, we cannot assure you (i) that
future laws, ordinances, or regulations will not impose a material environmental
liability or (ii) that tenants, the condition of land or operations in the
vicinity of our Properties, or unrelated third parties will not affect the
current environmental condition of our Properties.
Some tenants use or generate hazardous substances in the ordinary
course of their respective businesses. In their leases, we require these tenants
to comply with all applicable laws and to be responsible to us for any damages
resulting from their use of the property. We are not aware of any material
environmental problems resulting from tenants' use or generation of hazardous or
toxic chemicals or substances. We cannot assure you, however, that all tenants
will comply with the terms of their leases or remain solvent. If tenants do not
comply or do not remain solvent, we may at some point be responsible for
contamination caused by such tenants.
POTENTIAL DILUTION OF CAPITAL STOCK OR DECREASE OF LIQUIDITY IN CONNECTION WITH
SETTLEMENT OF FORWARD CONTRACT
The Company has entered into a Purchase Agreement with UB-LB involving
the sale of 1.8 million shares of Common Stock and a related Forward Contract
providing for certain purchase price adjustments. See "Plan of Distribution" at
page 39 for additional information about these agreements.
The Forward Contract generally provides that if the Market Price (as
defined below) of a share of Common Stock on the maturity date is less than a
certain amount, which we refer to as the "Forward Price," we must pay UB-LB the
difference times 1.8 million. (Similarly, if the Market Price of a share of
Common Stock is above the Forward Price, UB-LB must pay us the difference in
shares of Common Stock.) If we choose not to or cannot settle in freely tradable
shares of Common Stock, we must repurchase the 1.8 million shares at the Forward
Price in cash. The Forward Price is approximately $32.16 and will be adjusted by
LIBOR plus 75 basis points, minus any dividends received on the shares. (As of
August 28, 1998, the Forward Price had increased by $.04 since August 28, 1997.)
In addition, the Forward Contract provides for quarterly payments of
collateral equal to 1.8 million times 110% of the amount by which the market
price of a share of Common Stock is
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below the Forward Price. The collateral may be in the form of cash or freely
tradeable shares of Common Stock. As a result of the difference between the
closing price of a share of Common Stock on August 28, 1998 and the Forward
Price, we gave UB-LB cash collateral of $12.8 million on September 12, 1998.
UB-LB will return the cash with interest for freely tradeable shares of Common
Stock of equal value.
The maturity date of the Forward Contract is February 28, 1999;
however, if the closing price of the Common Stock falls below $19.28, UB-LB has
the right to force a complete settlement under the Forward Contract. UBS also
has the right to force a complete settlement under the Forward Contract if,
among other things, we (i) are in default with respect to certain financial
covenants under the Forward Contract, (ii) are in default under our $600 million
credit facility with a syndicate of lenders or any other unsecured lending
agreement, (iii) fail to post sufficient cash collateral, or (iv) fail to
deliver to UBS, on or before October 26, 1998, an effective registration
statement covering the issuance through UB-LB of the shares of Common Stock
delivered to UB-LB.
In order to have the option of settling the Forward Contract or paying
collateral in shares of Common Stock, the shares must be freely tradeable by
UB-LB pursuant to an effective registration statement. We can provide no
assurance that a registration statement will be effective at the time of any
settlement or collateral payment.
Quarterly payments of collateral and the ultimate settlement of the
Forward Contract could adversely affect our liquidity or dilute our Common
Stock. If the Market Price (defined as the average closing price of the Common
Stock for the 35-trading-day period beginning February 28, 1999) is lower than
the Forward Price, settlement in shares of Common Stock would cause our
outstanding shares of Common Stock to represent a smaller ownership interest in
the Company with no increase in the value of the Company. The table below shows
the change in the value of a share of Common Stock as a result of settling the
Forward Contract at various Market Prices:
INCREASE/(DILUTION) IN VALUE
MARKET PRICE OF COMMON STOCK (1)
------------- --------------------------
$40 .5%
$35 .2%
$30 (.2%)
$25 (.7%)
$20 (1.6%)
- ---------------
(1) Assumes no change in our capital stock except for redemption of all Common
Units. Also assumes a Forward Price of $32.16.
Settlement of the Forward Contract in cash would reduce our liquidity.
Settlement in cash would involve the repurchase of 1.8 million shares at a price
per share equal to the Forward Price. Assuming the Forward Price remains at
$32.16, our repurchase price would total approximately $57.9 million. Having
already paid $12.8 million as collateral, settlement in cash
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would require the Company to pay approximately $45.1 million in additional
funds. The Company believes that it can obtain these funds from several sources:
o its existing $600 million credit facility, which has
approximately $90 million remaining;
o other borrowings;
o the disposition of certain non-core assets; and
o equity offerings.
USE OF PROCEEDS
Of the shares offered hereby, 1.8 million shares (the "Initial Shares")
were purchased by UB-LB, as successor to Union Bank of Switzerland, London
Branch ("UBS"), on August 28, 1997 for net proceeds of $56.7 million. Such
proceeds were used to discharge approximately $34 million of indebtedness under
the Company's then-existing $280 million revolving loan. The interest rate on
such discharged indebtedness had a weighted average rate of 7.9%. The revolving
loan was due to mature on October 31, 1999. The remaining $22.7 million of
proceeds were used (i) to acquire four properties for approximately $17 million
and (ii) to fund development projects.
The other shares offered hereby (the "Forward Shares" and, together
with the Initial Shares, the "Shares") are issuable under the terms of the
Forward Contract. See "Risk Factors --Potential Dilution of Capital Stock or
Decrease of Liquidity in Connection with Settlement of Forward Contract" above
for a description of the Forward Contract. Other than the $56.7 million received
in 1997, the Company will not receive any additional proceeds from any sale of
the Shares by UB-LB.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The authorized capital stock of the Company consists of 250,000,000
shares of capital stock, $.01 par value, of which 200,000,000 shares are
classified as Common Stock and 50,000,000 shares are classified as preferred
stock ("Preferred Stock"). The following description of the terms and provisions
of the shares of capital stock of the Company and certain other matters does not
purport to be complete and is subject to and qualified in its entirety by
reference to the applicable provisions of Maryland law and the Company's
Articles of Incorporation and bylaws, as amended.
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COMMON STOCK
Each holder of Common Stock is entitled to one vote at stockholder
meetings for each share of Common Stock held. Neither the Articles of
Incorporation nor the bylaws provide for cumulative voting for the election of
directors. Subject to the prior rights of any series of Preferred Stock that may
be classified and issued, holders of Common Stock are entitled to receive, pro
rata, such dividends as may be declared by the board of directors out of funds
legally available therefor, and also are entitled to share, pro rata, in any
other distributions to stockholders. The Company currently pays regular
quarterly dividends to holders of Common Stock. Holders of Common Stock do not
have any preemptive rights or other rights to subscribe for additional shares.
The Common Stock is listed for trading on the NYSE.
PREFERRED STOCK
Under the Company's Articles of Incorporation, the board of directors
may issue, without any further action by the stockholders, shares of capital
stock in one or more series having such preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption as the board of directors may determine
and as may be evidenced by Articles Supplementary to the Articles of
Incorporation adopted by the board of directors.
Through its power to establish the preferences and rights of additional
series of capital stock without further stockholder vote, the board of directors
may afford the holders of any series of senior capital stock preferences, powers
and rights, voting or otherwise, senior to the rights of holders of Common
Stock. The issuance of any such senior capital stock could have the effect of
delaying or preventing a change in control of the Company.
SERIES A PREFERRED SHARES. The following description of the Company's
8 5/8% Series A Cumulative Redeemable Preferred Shares, par value $.01 per share
(the "Series A Preferred Shares"), is in all respects subject to and qualified
in its entirety by reference to the applicable provisions of the Company's
Articles of Incorporation, including the Articles Supplementary applicable to
the Series A Preferred Shares. The Company is authorized to issue 143,750 Series
A Preferred Shares, 125,000 of which were issued and outstanding as of the date
hereof.
With respect to the payment of dividends and amounts upon liquidation,
the Series A Preferred Shares rank pari passu with any other equity securities
of the Company the terms of which provide that such equity securities rank on a
parity with the Series A Preferred Shares and rank senior to the Common Stock
and any other equity securities of the Company which by their terms rank junior
to the Series A Preferred Shares. Dividends on the Series A Preferred Shares are
cumulative from the date of original issue and are payable quarterly on or about
the last day of February, May, August and November of each year commencing May
31, 1997, at the rate of
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8 5/8% of the liquidation preference per annum (equivalent to $86.25 per annum
per share). Dividends on the Series A Preferred Shares will accrue whether or
not the Company has earnings, whether or not there are funds legally available
for the payment of such dividends and whether or not such dividends are
declared. The Series A Preferred Shares have a liquidation preference of $1,000
per share, plus an amount equal to any accrued and unpaid dividends.
The Series A Preferred Shares are not redeemable prior to February 12,
2027. On and after February 12, 2027, the Series A Preferred Shares will be
redeemable for cash at the option of the Company, in whole or in part, at $1,000
per share, plus any accrued and unpaid dividends thereon to the date fixed for
redemption. The redemption price (other than the portion thereof consisting of
accrued and unpaid dividends) is payable solely out of the sale proceeds of
other capital stock of the Company, which may include other series of Preferred
Stock, and from no other source.
If dividends on the Series A Preferred Shares are in arrears for six or
more quarterly periods, whether or not such quarterly periods are consecutive,
holders of the Series B Preferred Shares (voting separately as a class with all
other series of Preferred Stock upon which like voting rights have been
conferred and are exercisable) will be entitled to vote for the election of two
additional directors to serve on the board of directors of the Company until all
dividend arrearages have been paid.
The Series A Preferred Shares are not convertible or exchangeable for
any other property or securities of the Company. The Series A Preferred Shares
are subject to certain restrictions on ownership intended to preserve the
Company's status as a REIT for Federal income tax purposes.
SERIES B PREFERRED SHARES. The following description of the Company's
8% Series B Cumulative Redeemable Preferred Shares, par value $.01 per share
(the "Series B Preferred Shares"), is in all respects subject to and qualified
in its entirety by reference to the applicable provisions of the Company's
Articles of Incorporation, including the Articles Supplementary applicable to
the Series B Preferred Shares. The Company is authorized to issue 6,900,000
Series B Preferred Shares, all of which were issued and outstanding as of the
date hereof.
With respect to the payment of dividends and amounts upon liquidation,
the Series B Preferred Shares rank pari passu with the Series A Preferred Shares
and with any other equity securities of the Company the terms of which provide
that such equity securities rank on a parity with the Series B Preferred Shares
and rank senior to the Common Stock and any other equity securities of the
Company which by their terms rank junior to the Series B Preferred Shares.
Dividends on the Series B Preferred Shares are cumulative from the date of
original issue and are payable quarterly on March 15, June 15, September 15 and
December 15 of each year commencing December 15, 1997, at the rate of 8% of the
$25 liquidation preference per annum (equivalent to $2.00 per annum per share).
Dividends on the Series B Preferred Shares will accrue whether or not the
Company has earnings, whether or nor there are funds legally available for the
payment of such dividends and whether or not such dividends are declared. The
Series B
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Preferred Shares have a liquidation preference of $25 per share, plus an amount
equal to any accrued and unpaid dividends.
The Series B Preferred Shares are not redeemable prior to September 25,
2002. On and after September 25, 2002, the Series B Preferred Shares will be
redeemable for cash at the option of the Company, in whole or in part, at $25
per share, plus any accrued and unpaid dividends thereon to the date fixed for
redemption. The redemption price (other than the portion thereof consisting of
accrued and unpaid dividends) is payable solely out of the sale proceeds of
other capital stock of the Company, which may include other series of preferred
stock, and from no other source.
If dividends on the Series B Preferred Shares are in arrears for six or
more quarterly periods, whether or not such quarterly periods are consecutive,
holders of the Series B Preferred Shares (voting separately as a class with all
other series of preferred stock upon which like voting rights have been
conferred and are exercisable) will be entitled to vote for the election of two
additional directors to serve on the board of directors of the Company until all
dividend arrearages have been paid.
The Series B Preferred Shares are not convertible or exchangeable for
any other property or securities of the Company. The Series B Preferred Shares
are subject to certain restrictions on ownership intended to preserve the
Company's status as a REIT for Federal income tax purposes.
SERIES D PREFERRED SHARES. The following description of the Company's
8% Series D Cumulative Redeemable Preferred Shares, par value $.01 per share
(the "Series D Preferred Shares"), is in all respects subject to and qualified
in its entirety by reference to the applicable provisions of the Company's
Articles of Incorporation, including the Articles Supplementary applicable to
the Series D Preferred Shares. The Company is authorized to issue 400,000 Series
D Preferred Shares. As of the date hereof, the Company has outstanding 4,000,000
Depository Shares, each of which represents 1/10 of a share of the Series D
Preferred Shares.
With respect to the payment of dividends and amounts upon liquidation,
the Series D Preferred Shares rank pari passu with the Series A Preferred Shares
and Series B Preferred Shares and with any other equity securities of the
Company the terms of which provide that such equity securities rank on a parity
with the Series D Preferred Shares and rank senior to the Common Stock and any
other equity securities of the Company which by their terms rank junior to the
Series D Preferred Shares. Dividends on the Series D Preferred Shares are
cumulative from the date of original issue and are payable quarterly on or about
the last day of January, April, July and October of each year commencing
July 31, 1998, at the rate of 8% of the liquidation preference per annum
(equivalent to $20 per annum per share or $2 per annum per Depository Share).
Dividends on the Series D Preferred Shares will accrue whether or not the
Company has earnings, whether or nor there are funds legally available for the
payment of such dividends and whether or not such dividends are declared. The
Series D Preferred Shares have a liquidation
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preference of $250 per share (equivalent to $25 per Depository Share), plus an
amount equal to any accrued and unpaid dividends.
The Series D Preferred Shares are not redeemable prior to April 23,
2003. On and after April 23, 2003, the Series D Preferred Shares will be
redeemable for cash at the option of the Company, in whole or in part, at $250
per share (equivalent to $25 per Depository Share), plus any accrued and unpaid
dividends thereon to the date fixed for redemption. The redemption price (other
than the portion thereof consisting of accrued and unpaid dividends) is payable
solely out of the sale proceeds of other capital stock of the Company, which may
include other series of preferred stock, and from no other source.
If dividends on the Series D Preferred Shares are in arrears for six or
more quarterly periods, whether or not such quarterly periods are consecutive,
holders of the Series D Preferred Shares (voting separately as a class with all
other series of preferred stock upon which like voting rights have been
conferred and are exercisable) will be entitled to vote for the election of two
additional directors to serve on the board of directors of the Company until all
dividend arrearages have been paid.
The Series D Preferred Shares are not convertible or exchangeable for
any other property or securities of the Company. The Series D Preferred Shares
are subject to certain restrictions on ownership intended to preserve the
Company's status as a REIT for Federal income tax purposes.
CLASSIFICATION OF BOARD OF DIRECTORS; REMOVAL OF DIRECTORS; OTHER PROVISIONS
The Company's Articles of Incorporation provide for the board of
directors to be divided into three classes of directors, with each class to
consist as nearly as possible of an equal number of directors. At each annual
meeting of stockholders, the class of directors to be elected at such meeting
will be elected for a three-year term, and the directors in the other two
classes will continue in office. Because holders of Common Stock will have no
right to cumulative voting for the election of directors, at each annual meeting
of stockholders, the holders of a majority of the shares of Common Stock will be
able to elect all of the successors of the class of directors whose term expires
at that meeting.
The Articles of Incorporation also provide that, except for any
directors who may be elected by holders of a class or series of capital stock
other than Common Stock, directors may be removed only for cause and only by the
affirmative vote of stockholders holding at least two-thirds of the votes
entitled to be cast for the election of directors. Vacancies on the board of
directors may be filled by the affirmative vote of the remaining directors.
These provisions may make it more difficult and time-consuming to
change majority control of the board of directors of the Company and, thus, may
reduce the vulnerability of the Company to an unsolicited proposal for the
takeover of the Company or the removal of incumbent management. The Company's
officers and directors are and will be indemnified under
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Maryland law, the Articles of Incorporation of the Company and the agreement of
limited partnership of the Operating Partnership (the "Operating Partnership
Agreement") against certain liabilities, including liabilities under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
CERTAIN PROVISIONS AFFECTING CHANGE OF CONTROL
GENERAL. Pursuant to the Company's Articles of Incorporation and the
Maryland General Corporation Law (the "MGCL"), the Company cannot merge into or
consolidate with another corporation or enter into a statutory share exchange
transaction in which it is not the surviving entity or sell all or substantially
all of the assets of the Company unless the board of directors adopts a
resolution declaring the proposed transaction advisable and a majority of
stockholders entitled to vote thereon (voting together as a single class)
approve the transaction. In addition, the Operating Partnership Agreement
requires that any such merger or sale of all or substantially all of the assets
of the Operating Partnership be approved by a majority of the holders of Common
Units (including Common Units owned by the Company).
MARYLAND BUSINESS COMBINATION AND CONTROL SHARE STATUTES. The MGCL
establishes special requirements with respect to business combinations between
Maryland corporations and interested stockholders unless exemptions are
applicable. Among other things, the law prohibits for a period of five years a
merger and other specified or similar transactions between a company and an
interested stockholder and requires a super majority vote for such transactions
after the end of the five-year period. The Company's Articles of Incorporation
contain a provision exempting the Company from the requirements and provisions
of the Maryland business combination statute. There can be no assurance that
such provision will not be amended or repealed at any point in the future.
The MGCL also provides that control shares of a Maryland corporation
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 owned by the acquiror or by officers or directors who
are employees of the Company. The control share acquisition statute does not
apply to shares acquired in a merger, consolidation or share exchange if the
Company is a party to the transaction, or to acquisitions approved or exempted
by the Articles of Incorporation or bylaws of the Company. The Company's bylaws
contain a provision exempting from the control share acquisition statute any and
all acquisitions by any person of the Company's stock. There can be no assurance
that such provision will not be amended or repealed, in whole or in part, at any
point in the future.
The Company's Articles of Incorporation (including the provision
exempting the Company from the Maryland business combination statute) may not be
amended without the
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affirmative vote of at least a majority of the shares of capital stock
outstanding and entitled to vote thereon voting together as a single class,
provided that certain provisions of the Articles of Incorporation may not be
amended without the approval of the holders of two-thirds of the shares of
capital stock of the Company outstanding and entitled to vote thereon voting
together as a single class. The Company's bylaws may be amended by the board of
directors or a majority of the shares cast of capital stock entitled to vote
thereupon at a duly constituted meeting of stockholders.
If either of the foregoing exemptions in the Articles of Incorporation
or bylaws is amended, the Maryland business combination statute or the control
share acquisition statute could have the effect of discouraging offers to
acquire the Company and of increasing the difficulty of consummating any such
offer.
OWNERSHIP LIMITATIONS AND RESTRICTIONS ON TRANSFERS. For the Company to
remain qualified as a REIT under the Code, not more than 50% in value of its
outstanding shares of capital stock may be owned, directly or indirectly, by
five or fewer individuals (defined in the Code to include certain entities)
during the last half of a taxable year, and such shares must be beneficially
owned by 100 or more persons during at least 335 days of a taxable year of 12
months or during a proportionate part of a shorter taxable year. To ensure that
the Company remains a qualified REIT, the Articles of Incorporation provide that
no holder (other than persons approved by the directors at their option and in
their discretion) may own, or be deemed to own by virtue of the attribution
provisions of the Code, more than 9.8% (the "Ownership Limit") of the issued and
outstanding capital stock of the Company. The board of directors may waive the
Ownership Limit if evidence satisfactory to the board of directors and the
Company's tax counsel is presented that the changes in ownership will not
jeopardize the Company's status as a REIT.
If any stockholder purports to transfer shares to a person and either
the transfer would result in the Company failing to qualify as a REIT, or the
stockholder knows that such transfer would cause the transferee to hold more
than the Ownership Limit, the purported transfer shall be null and void, and the
stockholder will be deemed not to have transferred the shares. In addition, if
any person holds shares of capital stock in excess of the Ownership Limit, such
person will be deemed to hold the excess shares in trust for the Company, will
not receive distributions with respect to such shares and will not be entitled
to vote such shares. The person will be required to sell such shares to the
Company for the lesser of the amount paid for the shares and the average closing
price for the 10 trading days immediately preceding the redemption or to sell
such shares at the direction of the Company, in which case the Company will be
reimbursed for its expenses in connection with the sale and will receive any
amount of such proceeds that exceeds the amount such person paid for the shares.
If the Company repurchases such shares, it may pay for the shares with Common
Units. The foregoing restrictions on transferability and ownership will not
apply if the board of directors and the stockholders (by the affirmative vote of
the holders of two-thirds of the outstanding shares of capital stock entitled to
vote on the matter) determine that it is no longer in the best interests of the
Company to continue to qualify as a REIT.
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All certificates representing shares of capital stock bear a legend
referring to the restrictions described above.
Every beneficial owner of more than 5% (or such lower percentage as
required by the Code or regulations thereunder) of the issued and outstanding
shares of capital stock must file a written notice with the Company no later
than January 30 of each year, containing the name and address of such beneficial
owner, the number of shares of Common Stock and/or Preferred Stock owned and a
description of how the shares are held. In addition, each stockholder shall be
required upon demand to disclose to the Company in writing such information as
the Company may request in order to determine the effect of such stockholder's
direct, indirect and constructive ownership of such shares on the Company's
status as a REIT.
These ownership limitations could have the effect of precluding
acquisition of control of the Company by a third party unless the board of
directors and the stockholders determine that maintenance of REIT status is no
longer in the best interest of the Company.
OPERATING PARTNERSHIP AGREEMENT. The Operating Partnership Agreement
requires that any merger (unless the surviving entity contributes substantially
all of the assets of the Operating Partnership for Common Units) or sale of all
or substantially all of the assets of the Operating Partnership be approved by a
majority of the holders of Common Units (including Common Units owned by the
Company). The Operating Partnership Agreement also contains provisions relating
to a limited partner's redemption right in the event of certain changes of
control of the Company and under certain circumstances allows for limited
partners to continue to hold Common Units in the Operating Partnership following
such a change of control, thereby maintaining the tax basis in their Common
Units. The covered changes of control (each, a "Trigger Event") are: (i) a
merger involving the company in which the Company is not the surviving entity;
(ii) a merger involving the Company in which the Company is the survivor but all
or part of the Company's shares are converted into securities of another entity
or the right to receive cash; and (iii) the transfer by the Company to another
entity of substantially all of the assets or earning power of the Company or the
Operating Partnership.
Upon occurrence of a Trigger Event, the rights of a limited partner to
receive a share of the Company's Common Stock (a "REIT Share") or cash equal to
the fair market value of a REIT Share upon redemption of a Common Unit is
converted into the right to receive a share (a "Replacement Share") or cash
equal to the fair market value thereof of the acquiror or a parent of the
acquiror. If the acquiror does not have publicly traded securities and a parent
of the acquiror does, the publicly traded equity securities of the parent entity
with the highest market capitalization will be the Replacement Shares. If
neither the acquiror nor any parent has publicly traded equity securities, the
Replacement Shares will be the equity securities of the entity with the highest
market capitalization. The number of Replacement Shares to be received by a
limited partner (or to be used to calculate the cash payment due) upon a
redemption of Common Units shall be equal to the number of REIT Shares issuable
prior to the Trigger Event multiplied by (i) the number of Replacement Shares
the holder of a single REIT Share would have received as a
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result of the Trigger Event or, if the Replacement Shares have not been publicly
traded for one year, (ii) a fraction, the numerator of which is the Average
Trading Price (as defined in the Operating Partnership Agreement) of a REIT
Share as of the Trigger Event and the denominator of which is the Average
Trading Price of a Replacement Share as of the Trigger Event.
If the acquiror in a Trigger Event is a REIT, it must make provision to
preserve an operating partnership structure with terms no less favorable to the
limited partners than currently in place. In addition, the Operating Partnership
Agreement provides that, if a distribution of cash or property is made in
respect of a Replacement Share, the Operating Partnership will distribute the
same amount in respect of a Common Unit as would have been received by a limited
partner had such partner's Common Units been redeemed for Replacement Shares
prior to such distribution.
Because the Operating Partnership Agreement requires an acquiror to
make provision under certain circumstances to maintain the Operating Partnership
structure and maintain a limited partner's right to continue to hold Common
Units with future redemption rights, the terms of the Operating Partnership
Agreement could also have the effect of discouraging a third party from making
an acquisition proposal for the Company.
These provisions of the Operating Partnership Agreement may only be
waived or amended upon the consent of limited partners holding at least 75% of
the Common Units (excluding those held by the Company).
SHAREHOLDERS' RIGHTS PLAN. On October 4, 1997, the Company's board of
directors adopted a Shareholders' Rights Plan and declared a distribution of one
preferred share purchase right (a "Right") for each outstanding share of Common
Stock. The Rights were issued on October 16, 1997 to each stockholder of record
on such date. The Rights have certain anti-takeover effects. The Rights will
cause substantial dilution to a person or group that attempts to acquire the
Company on terms not approved by the Company's board of directors. The Rights
should not interfere with any merger or other business combination approved by
the board of directors since the Rights may be redeemed by the Company for $.01
per Right prior to the time that a person or group has acquired beneficial
ownership of 15% or more of the Common Stock.
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Common Stock and all shares of
Preferred Stock is First Union National Bank, Charlotte, North Carolina.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain Federal income tax considerations to
the Company is based on current law, is for general purposes only, and is not
tax advice. The summary addresses the material Federal income tax considerations
relating to the Company's REIT status, as well as
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material Federal income tax considerations relating to the Operating Partnership
and the Company's stockholders. The Federal income tax treatment of any investor
in the Shares will vary depending upon such investor's particular situation.
EACH INVESTOR IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE
OF THE 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 AS A REIT
Commencing with its taxable year ended December 31, 1994, the Company
has elected to be taxed as a real estate investment trust under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). The
Company believes that, commencing with its taxable year ended December 31, 1994,
it has been organized and has operated in such a manner as to qualify for
taxation as a REIT under the Code, and the Company intends to continue to
operate in such a manner, but no assurance can be given that it has operated or
will operate in a manner so as to qualify or remain qualified.
These sections of the Code 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 stockholders. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretation thereof.
Alston & Bird LLP has acted as tax counsel to the Company in connection
with the offering of the Shares and the Company's election to be taxed as a
REIT. Alston & Bird LLP is of the opinion that the Company has been organized
and has operated in conformity with the requirements for qualification and
taxation as a REIT under the Code for its taxable years ended December 31, 1994
through 1997, and that the Company is in a position to continue its
qualification and taxation as a REIT within the definition of Section 856(a) of
the Code for the taxable year that will end December 31, 1998. This opinion is
based on factual representations of the Company concerning its business
operations and its properties and Alston & Bird LLP has not independently
verified these facts. In addition, the Company's status as a REIT at any time
during 1998 is dependent, among other things, upon the Company meeting the
requirements of Section 856 through 860 of the Code throughout the year and for
the year as a whole. Accordingly, because the Company's satisfaction of such
requirements will depend upon future events, including the precise terms and
conditions of proposed transactions, the final determination of operational
results and the effect of certain provisions contained in the President's Budget
Proposal for the Fiscal Year 1999 on the Company's REIT status, no assurance can
be given that the Company will satisfy the requirements to be a REIT during the
taxable year that will end December 31, 1998.
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FEDERAL INCOME TAXATION OF THE COMPANY
If the Company qualifies for taxation as a REIT, it generally will not
be subject to Federal corporate income tax on that portion of its ordinary
income or capital gain that is currently distributed to stockholders. The REIT
provisions of the Code generally allow a REIT to deduct distributions paid to
its stockholders, substantially eliminating the Federal "double taxation" on
earnings (once at the corporate level when earned and once again at the
stockholder level when distributed) that usually results from investments in a
corporation. Nevertheless, the Company will be subject to Federal income tax as
follows. First, the Company will be taxed at regular corporate rates on its
undistributed REIT taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" as a consequence of its items of tax preference.
Third, if the Company has net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business or other non-qualifying 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 other
than foreclosure property held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax. Fifth, if the
Company should fail to satisfy either of the 75% or 95% gross income tests
(discussed below) but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which the
Company fails either the 75% or 95% test, multiplied by a fraction intended to
reflect the Company's profitability. Sixth, if the Company fails to distribute
during each year at least the sum of (i) 85% of its ordinary income for such
year, (ii) 95% of its capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company will be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, if the Company should acquire any asset from a C
corporation (i.e., a corporation generally subject to full corporate-level tax)
in a carryover-basis transaction and the Company subsequently recognizes gain on
the disposition of such asset during the 10-year period (the "Recognition
Period") beginning on the date on which the asset was acquired by the Company,
then, to the extent of the excess of (a) the fair market value of the asset as
of the beginning of the applicable Recognition Period over (b) the Company's
adjusted basis in such asset as of the beginning of such Recognition Period (the
"Built-In Gain"), such gain will be subject to tax at the highest regular
corporate rate, pursuant to guidelines issued by the Internal Revenue Service
("IRS") (the "Built-In Gain Rules").
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Company must elect to be so treated and must
meet the requirements, discussed below, relating to the Company's organization,
sources of income, and nature of assets.
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ORGANIZATIONAL REQUIREMENTS. The Code defines a REIT as a corporation,
trust or association: (i) that 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) that would be taxable as
a domestic corporation but for the REIT requirements, (iv) that 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, directly or indirectly, through the
application of certain attribution rules, by five or fewer individuals (as
defined in the Code to include certain entities), (vii) files an election to be
taxed as a REIT on its return for each taxable year, and (viii) satisfies the
95% and 75% income tests and the 75%, 25%, 10%, and 5% asset tests, as described
below. The Code provides that conditions (i) through (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 12 months or during a proportionate part of
a taxable year of less than 12 months. For purposes of condition (v), certain
pension funds and other tax-exempt entities are treated as persons. For purposes
of condition (vi), the beneficiaries of a pension or profit-sharing trust under
section 401(a) of the Code are treated as REIT stockholders. In addition, the
Articles of Incorporation currently include certain restrictions regarding
transfer of its Common Stock, which restrictions are intended (among other
things) to assist the Company in continuing to satisfy conditions (v) and (vi)
above.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership 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 asset tests. Thus, the Company's proportionate share
of the assets, liabilities, and items of income of the Operating Partnership
(including the Operating Partnership's share of the assets, liabilities, and
items of income with respect to any partnership in which it holds an interest)
will be treated as assets, liabilities and items of income of the Company for
purposes of applying the requirements described herein.
INCOME TESTS. In order to maintain qualification as a REIT, the Company
annually must satisfy two 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, including investments in other REITs or mortgages on
real property (including "rents from real property" and, in certain
circumstances, interest). 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). In addition, for taxable years ended on or before December 31,
1997, 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
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property) must represent less than 30% of the Company's gross income (including
gross income from prohibited transactions). The Taxpayer Relief Act of 1997,
enacted August 5, 1997 ("Taxpayer Relief Act"), repealed the 30% gross income
test for taxable years beginning after August 5, 1997. Accordingly, the 30%
gross income test will not apply to the Company beginning with its taxable year
that will end December 31, 1998.
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 but can be based on a
fixed percentage of gross receipts or gross sales. Second, "rents from real
property" excludes any amount received directly or indirectly from any tenant if
the Company, or an owner of 10% of more of the Company, directly or
constructively, owns 10% or more of such tenant taking into consideration the
applicable attribution rules (a "Related Party Tenant"). Third, rent
attributable to personal property is excluded from "rents from real property"
except where such personal property is leased in connection with a lease of real
property and the rent attributable to such personal property is less than or
equal to 15% of the total rent received under the lease. Finally, amounts that
are attributable to services furnished or rendered in connection with the rental
of real property, whether or not separately stated, will not constitute "rents
from real property" unless such services are customarily provided in the
geographic area. Customary services that are not provided to a particular tenant
(e.g., furnishing heat and light, the cleaning of public entrances, and the
collection of trash) can be provided directly by the Company. Where, on the
other hand, such services are provided primarily for the convenience of the
tenants and are provided to such tenants, such services must be provided by an
independent contractor. In the event that an independent contractor provides
such services, the Company must adequately compensate the independent
contractor, the Company must not derive any income from the independent
contractor, and neither the independent contractor nor certain of its
shareholders may, directly or indirectly, own more than 35% of the Company,
taking into consideration the applicable ownership rules. Pursuant to the
Taxpayer Relief Act and beginning with the Company's taxable year that will end
December 31, 1998, the Company's rental income will not cease to qualify as
"rents from real property" merely because the Company performs a de minimis
amount of impermissible services to the tenants. For purposes of the preceding
sentence, (i) the amount of income received from such impermissible services
cannot exceed one percent of all amounts received or accrued during such taxable
year, directly or indirectly, by the Company with respect to such property and
(ii) the amount treated as received by the Company for such impermissible
services cannot be less than 150 percent of the direct cost of the Company in
furnishing or rendering such services.
The Company does not currently charge and does not anticipate charging
rent that is based in whole or in part on the income or profits of any person.
The Company also does not anticipate either deriving rent attributable to
personal property leased in connection with real property that exceeds 15% of
the total rents or receiving rent from Related Party Tenants.
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The Operating Partnership does provide certain services with respect to
the Properties. The Company believes that the services with respect to the
Properties that are and will be provided directly are usually or customarily
rendered in connection with the rental of space for occupancy only and are not
otherwise rendered to particular tenants and, therefore, that the provision of
such services will not cause rents received with respect to the Properties to
fail to qualify as rents from real property. Services with respect to the
Properties that the Company believes may not be provided by the Company or the
Operating Partnership directly without jeopardizing the qualification of rent as
"rents from real property" are and will be performed by independent contractors.
The Operating Partnership and the Company receive fees in consideration
of the performance of property management and brokerage and leasing services
with respect to certain Properties not owned entirely by the Operating
Partnership. Such fees will not qualify under the 75% or the 95% gross income
test. The Operating Partnership also may receive certain other types of income
with respect to the properties it owns that will not qualify for either of these
tests. In addition, dividends on the Operating Partnership's stock in Highwoods
Services will not qualify under the 75% gross income test. The Company believes,
however, that the aggregate amount of such fees and other non-qualifying income
in any taxable year will not cause the Company to exceed the limits on
non-qualifying income under either the 75% or the 95% gross income test.
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
that year if it is eligible for relief under a certain provision of the Code.
This relief provision generally will be available if (i) the Company's failure
to meet these tests was due to reasonable cause and not due to willful neglect,
(ii) the Company attaches a schedule of the nature and amount of each item of
income to its Federal income tax return and (iii) the inclusion of any incorrect
information on such schedule is not due to fraud with intent to evade tax. It is
not possible, however, to state whether in all circumstances the Company would
be entitled to the benefit of this relief provision. For example, if the Company
fails to satisfy the gross income tests because non-qualifying 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. As discussed above in " --Federal Income Taxation of the
Company," even if this relief provision applies, a 100% tax would be imposed
with respect to the portion of the Company's taxable income that fails the 75%
or 95% gross income test.
ASSET TESTS. At the close of each quarter of its taxable year, the
Company also must satisfy four tests relating to the nature and diversification
of its assets. First, at least 75% of the value of the Company's total assets
must be represented by real estate assets, cash and cash items (including
receivables), and government securities. Second, no more than 25% of the value
of the Company's total assets may be represented by securities other than those
in the 75% asset class. Third, not more than 5% of the value of the Company's
assets may consist of securities of any one issuer (other than those securities
includible in the 75% asset test). Fourth, not more than
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10% of the outstanding voting securities of any one issuer may be held by the
Company (other than those securities includible in the 75% asset test).
The 5% test generally must be met for any quarter in which the Company
acquires securities of an issuer. Thus, this requirement must be satisfied not
only on the date on which the Company through the Operating Partnership acquired
the securities of Highwoods Services, but also each time the Company increases
its ownership of its respective securities (including as a result of increasing
its interest in the Operating Partnership as limited partners exercise their
redemption rights). Although the Company plans to take steps to ensure that it
satisfies the 5% value test for any quarter with respect to which retesting is
to occur, there can be no assurance that such steps will always be successful or
will not require a reduction in the Company's overall interest in Highwoods
Services.
The Operating Partnership owns 100% of the nonvoting stock and 1% of
the voting stock of Highwoods Services, and by virtue of its ownership of Common
Units, the Company will be considered to own its pro rata share of such stock.
See "The Company." Neither the Company nor the Operating Partnership, however,
will own more than 1% of the voting securities of Highwoods Services. In
addition, the Company and its senior management do not believe that the
Company's pro rata share of the value of the securities of Highwoods Services
exceeds 5% of the total value of the Company's assets. The Company's belief is
based in part upon its analysis of the estimated value of the securities of
Highwoods Services owned by the Operating Partnership relative to the estimated
value of the other assets owned by the Operating Partnership. No independent
appraisals will be obtained to support this conclusion, and Alston & Bird LLP,
in rendering its opinion as to the qualification and taxation of the Company as
a REIT, is relying on the conclusions of the Company and its senior management
as to the value of the securities of Highwoods Services. There can be no
assurance, however, that the IRS might not contend that the value of such
securities held by the Company (through the Operating Partnership) exceeds the
5% value limitation.
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, the failure can be cured by
disposition of sufficient non-qualifying 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.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to be taxed as a REIT, the Company is required to make
distributions (other than capital gain distributions) to its stockholders in an
amount at least equal to (a) the sum of (i) 95% of the Company's "REIT taxable
income" (computed without regard to the dividends-paid
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deduction and the Company's capital gain) and (ii) 95% of the net income, if
any, from foreclosure property in excess of the special tax on income from
foreclosure property, minus (b) the sum of certain items of non-cash income.
Such distributions must be paid in the taxable year to which they relate.
Dividends paid in the subsequent year, however, will be treated as if paid in
the prior year for purposes of such prior year's 95% distribution requirement if
one of the following two sets of criteria are satisfied: (i) the dividends were
declared in October, November, or December, the dividends were payable to
stockholders of record on a specified date in such a month, and the dividends
were actually paid during January of the subsequent year; or (ii) the dividends
were declared before the Company timely files its Federal income tax return for
such year, the dividends were distributed in the twelve month period following
the close of the prior year and not later than the first regular dividend
payment after such declaration, and the Company elected on its Federal income
tax return for the prior year to have a specified amount of the subsequent
dividend treated as if paid in the prior year. Even if the Company satisfies the
foregoing distribution requirements, the Company will be subject to tax thereon
at regular capital gains or ordinary corporate tax rates to the extent that it
does not distribute all of its net capital gain or "REIT taxable income" as
adjusted. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (a) 85% of its ordinary income for that year,
(b) 95% of its capital gain net income for that year, and (c) 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. In addition, during its Recognition Period, if the Company disposes
of any asset subject to the Built-In Gain Rules, the Company will be required,
pursuant to guidance issued by the IRS, to distribute at least 95% of the
Built-In Gain (after tax), if any, recognized on the disposition of the asset.
The Company intends to make timely distributions sufficient to satisfy
the annual distribution requirements. In this regard, the Operating 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.
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
generally will have sufficient cash or liquid assets to enable it to satisfy the
95% distribution requirement. It is possible, however, that the Company, from
time to time, may not have sufficient cash or other liquid assets to meet the
95% distribution requirement or to distribute such greater amount as may be
necessary to avoid income and excise taxation. In such event, the Company may
find it necessary to arrange for borrowings or, if possible, pay taxable stock
dividends in order to meet the distribution requirement.
In the event that the Company is subject to an adjustment to its REIT
taxable income (as defined in Section 860(d)(2) of the Code) resulting from an
adverse determination by either a final court decision, a closing agreement
between the Company and the IRS under Section 7121
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of the Code, or an agreement as to tax liability between the Company and an IRS
district director, the Company may be able to rectify any resulting failure to
meet the 95% annual distribution requirement by paying "deficiency dividends" to
stockholders that relate to the adjusted year but that are paid in a subsequent
year. To qualify as a deficiency dividend, the distribution must be made within
90 days of the adverse determination and the Company also must satisfy certain
other procedural requirements. If the statutory requirements of Section 860 of
the Code are satisfied, a deduction is allowed for any deficiency dividend
subsequently paid by the Company to offset an increase in the Company's REIT
taxable income resulting from the adverse determination. The Company, however,
will be required to pay statutory interest on the amount of any deduction taken
for deficiency dividends to compensate for the deferral of the tax liability.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable
year and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. In such event, to the extent of positive current and
accumulated earnings and profits, all distributions to stockholders will be
dividends, taxable as ordinary income, except that, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends-received deduction. Unless the Company is entitled to relief under
specific statutory provisions, the Company also will be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all circumstances
the Company would be entitled to such statutory relief. For example, if the
Company fails to satisfy the gross income tests because non-qualifying income
that the Company intentionally incurs exceeds the limit on such income, the IRS
could conclude that the Company's failure to satisfy the tests was not due to
reasonable cause.
TAXATION OF U.S. STOCKHOLDERS
As used herein, the term "U.S. Stockholder" means a holder of Common
Stock that (for Federal income tax purposes) (a) is a citizen or resident of the
United States, (b) is a corporation or partnership (including an entity treated
as a corporation or partnership for United States Federal income tax purposes)
created or organized in or under the laws of the United States or of any
political subdivision thereof, (c) is an estate, the income of which is subject
to Federal income taxation regardless of its source or (d) is any trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust, and one or more United States persons have the
authority to control all substantial decisions of the trust. For any taxable
year for which the Company qualifies for taxation as a REIT, amounts distributed
to taxable U.S. Stockholders will be taxed as discussed below.
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DISTRIBUTIONS GENERALLY. Distributions to U.S. Stockholders, other than
capital gain dividends discussed below, will constitute dividends up to the
amount of the Company's positive current and accumulated earnings and profits
and, to that extent, will be taxable to the U.S. Stockholders as ordinary
income. These distributions are not eligible for the dividends-received
deduction for corporations. To the extent that the Company makes a distribution
in excess of its positive current and accumulated earnings and profits, the
distribution will be treated first as a tax-free return of capital, reducing the
tax basis in the U.S. Stockholder's Common Stock, and then the distribution in
excess of such basis will be taxable as gain realized from the sale of its
Common Stock. Dividends declared by the Company in October, November, or
December of any year payable to a U.S. Stockholder of record on a specified date
in any such month shall be treated as both paid by the Company and received by
the stockholders on December 31 of the year, provided that the dividends are
actually paid by the Company during January of the following calendar year. U.S.
Stockholders are not allowed to include on their own Federal income tax returns
any tax losses of the Company.
The Company will be treated as having sufficient earnings and profits
to treat as a dividend any distribution by the Company up to the amount required
to be distributed in order to avoid imposition of the 4% excise tax discussed in
" -- Federal Income Taxation of the Company" above.
CAPITAL GAIN DISTRIBUTIONS. Distributions to U.S. Stockholders that are
properly designated by the Company as capital gain distributions will be treated
as long-term capital gains (to the extent they do not exceed the Company's
actual net capital gain) for the taxable year without regard to the period for
which the U.S. Stockholder has held his or her stock. However, corporate
stockholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. Capital gain dividends are not eligible for the
dividends-received deduction for corporations.
Pursuant to the Taxpayer Relief Act and beginning with the Company's
taxable year that will end December 31, 1998, the Company may elect to retain
and pay income tax on net long-term capital gain that it received during the tax
year. If such election is made, (i) the U.S. Stockholders will include in their
income their proportionate share of the undistributed long-term capital gains as
designated by the Company; (ii) the U.S. Stockholders will be deemed to have
paid their proportionate share of the tax, which would be credited or refunded
to such stockholders, and (iii) the basis of the U.S. Stockholders' shares will
be increased by the amount of the undistributed long-term capital gains (less
the amount of capital gains tax paid by the Company) included in such
stockholders' long-term capital gains.
As a result of the changes made to the capital gain rates by the
Taxpayer Relief Act (See " -- Certain Dispositions of Shares"), the IRS issued
Notice 97-64 outlining (i) when a REIT may designate its dividends as either a
20% rate gain distribution, an unrecaptured section 1250 gain distribution
(taxed at 25% as noted in "Certain Disposition of Shares"), or a 28% rate gain
distribution and (ii) how to calculate the amount of such distributions, which
may be subject to
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certain deferral or bifurcation adjustments. When a REIT designates a
distribution as a capital gain dividend, which is attributable to a taxable year
ending after May 7, 1997, for purposes of the annual distribution requirement,
the REIT also may designate such dividend as a 20% rate gain distribution, as
unrecaptured section 1250 gain distribution, or a 28% rate gain distribution.
Where no such designation is provided, the dividend will be treated as a 28%
rate gain distribution. These additional designations by the REIT are effective
only to the extent that they do not exceed certain limitations. For example, the
maximum amount of each distribution that can be classified as either a 20% rate
gain distribution, an unrecaptured section 1250 gain distribution, or a 28% rate
gain distribution must be calculated in accordance with the Code and the IRS
Notice.
PASSIVE ACTIVITY LOSS AND INVESTMENT INTEREST LIMITATIONS.
Distributions from the Company and gain from the disposition of Common Stock
will not be treated as passive activity income and, therefore, U.S. Stockholders
will not be able to apply any "passive losses" against such income. Dividends
from the Company (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of the investment
interest limitation. Net capital gain from the disposition of Common Stock or
capital gain dividends generally will be excluded from investment income unless
the U.S. Stockholder elects to have such gain taxed at ordinary income rates.
CERTAIN DISPOSITIONS OF SHARES. In general, U.S. Stockholders will
realize capital gain or loss on the disposition of Common Stock equal to the
difference between (i) the amount of cash and the fair market value of any
property received on such disposition, and (ii) such stockholders' adjusted
basis in such Common Stock. Losses incurred on the sale or exchange of Common
Stock held for less than six months (after applying certain holding period
rules) will be deemed long-term capital loss to the extent of any capital gain
dividends received by the selling U.S. Stockholder from those shares. As a
result of the Taxpayer Relief Act, and the Internal Revenue Service
Restructuring and Reform Act of 1998 ("IRS Restructuring Act"), the maximum rate
of tax on net capital gains on individuals, trusts, and estates from the sale or
exchange of assets held for more than one year has been reduced to 20%, and such
maximum rate is further reduced to 18% for assets acquired after December 31,
2000, and held for more than five years. For 15% percent bracket taxpayers, the
maximum rate on net capital gains is reduced to 10%, and such maximum rate is
further reduced to 8% for assets sold after December 31, 2000, and held for more
than five years. The maximum rate for net capital gains attributable to the sale
of depreciable real property held for more than one year is 25% to the extent of
the deductions for depreciation with respect to such property. Long-term capital
gain allocated to U.S. Stockholders by the Company will be subject to the 25%
rate to the extent that the gain does not exceed depreciation on real property
sold by the Company. The taxation of capital gains of corporations was not
changed by the Taxpayer Relief Act or the IRS Restructuring Act.
TREATMENT OF TAX-EXEMPT STOCKHOLDERS. Distributions from the Company to
a tax-exempt employee pension trust or other domestic tax-exempt stockholder
generally will not constitute "unrelated business taxable income" ("UBTI")
unless the stockholder has borrowed to acquire or
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carry its Common Stock. Qualified trusts that hold more than 10% (by value) of
the shares of pension-held REITs may be required to treat a certain percentage
of such a REIT's distributions as UBTI. This requirement will apply only if (i)
the REIT would not qualify as such for Federal income tax purposes but for the
application of a "look-through" exception to the five or fewer requirement
applicable to shares held by qualified trusts and (ii) the REIT is
"predominantly held" by qualified trusts. A REIT is predominantly held if either
(i) at least one qualified trust holds more than 25% by value of the REIT
interests or (ii) one or more qualified trusts, each owning more than 10% by
value of the REIT interests, hold in the aggregate more than 50% of the REIT
interests. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (a) the UBTI earned by the REIT (treating the REIT as if it were a
qualified trust and therefore subject to tax on UBTI) to (b) the total gross
income (less certain associated expenses) of the REIT. In the event that this
ratio is less than 5% for any year, then the qualified trust will not be treated
as having received UBTI as a result of the REIT dividend. For these purposes, a
qualified trust is any trust described in Section 401(a) of the Code and exempt
from tax under Section 501(a) of the Code. The restrictions on ownership of
Common Stock in the Articles of Incorporation generally will prevent application
of the provisions treating a portion of REIT distributions as UBTI to tax-exempt
entities purchasing Common Stock, absent a waiver of the restrictions by the
board of directors.
SPECIAL TAX CONSIDERATIONS FOR NON-U.S. STOCKHOLDERS
The rules governing United States income taxation of non-resident alien
individuals, foreign corporations, foreign partnerships, and foreign trusts and
estates (collectively, "Non-U.S. Stockholders") are complex, and the following
discussion is intended only as a summary of these rules. 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. Stockholders should
consult with their own tax advisors to determine the impact of Federal, state,
local, and foreign income tax laws on an investment in the Company, including
any reporting requirements.
In general, Non-U.S. Stockholders will be subject to regular United
States federal income tax with respect to their investment in the Company, if
the income from such investment is "effectively connected" with the Non-U.S.
Stockholder's conduct of a trade or business in the United States. A corporate
Non-U.S. Stockholder that receives income that is (or is treated as) effectively
connected with a U.S. trade or business also may be subject to the branch
profits tax under Section 884 of the Code, which is imposed in addition to
regular United States federal income tax generally at the rate of 30%, subject
to reduction under a tax treaty, if applicable. Certain certification
requirements must be met in order for effectively connected income to be exempt
from withholding. The following discussion will apply to Non-U.S. Stockholders
whose income from their investments in the Company is not so effectively
connected (except to the extent that the FIRPTA rules discussed below treat such
income as effectively connected income).
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A distribution by the Company that is not attributable to gain from the
sale or exchange by the Company of a United States real property interest and
that is not designated by the Company as a capital gain distribution will be
treated as an ordinary income dividend to the extent that it is made out of
current or accumulated earnings and profits of the Company. Generally, any
ordinary income dividend will be subject to a Federal income tax equal to 30% of
the gross amount of the dividend, withheld by the Company, unless this tax is
reduced by an applicable tax treaty. Such a distribution in excess of the
Company's earnings and profits will be treated first as a return of capital that
will reduce a Non-U.S. Stockholder's basis in its Common Stock (but not below
zero) and then as gain from the disposition of such shares, the tax treatment of
which is described under the rules discussed below with respect to dispositions
of Common Stock.
Distributions by the Company that are attributable to gain from the
sale or exchange of a United States real property interest will be taxed to a
Non-U.S. Stockholder under the Foreign Investment in Real Property Tax Act of
1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S.
Stockholder as if the distributions were gains "effectively connected" with a
United States trade or business. Accordingly, a Non-U.S. Stockholder will be
taxed at the normal capital gain rates applicable to a U.S. Stockholder (subject
to any applicable alternative minimum tax and a special alternative minimum tax
in the case of nonresident alien individuals). Such distributions also may be
subject to a 30% branch profits tax when made to a foreign corporation that is
not entitled to an exemption or reduced branch profits tax rate under an income
tax treaty.
Although tax treaties may reduce the Company's withholding obligations,
the Company generally will be required to withhold from distributions to
Non-U.S. Stockholders, and remit to the IRS, (i) 35% of designated capital gain
dividends (or, if greater, 35% of the amount of any distributions that could be
designated as capital gain dividends) and (ii) 30% of ordinary dividends paid
out of earnings and profits, unless reduced by an applicable tax treaty. In
addition, if the Company designates prior distributions as capital gain
dividends, subsequent distributions, up to the amount of such prior
distributions that were designated as capital gains dividends, will be treated
as capital gain dividends for purposes of withholding. In addition, the Company
may be required to withhold 10% of distributions in excess of the Company's
current and accumulated earnings and profits. If the amount of tax withheld by
the Company with respect to a distribution to a Non-U.S. Stockholder exceeds the
stockholder's United States tax liability with respect to such distribution, the
Non-U.S. Stockholder may file for a refund of such excess from the IRS.
Unless the Common Stock constitutes a "United States real property
interest" within the meaning of FIRPTA, a sale of Common Stock by a Non-U.S.
Stockholder generally will not be subject to Federal income taxation. The Common
Stock will not constitute a United States real property interest if the Company
is a "domestically-controlled REIT." A domestically-controlled REIT is a REIT in
which at all times during a specified testing period less than 50% in value of
its shares is held directly or indirectly by Non-U.S. Stockholders. It currently
is anticipated that the Company will be a domestically-controlled REIT and,
therefore, that the sale of Common
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Stock will not be subject to taxation under FIRPTA. However, because the Common
Stock will be publicly traded, no assurance can be given that the Company will
be a domestically-controlled REIT. If the Company were not a domestically
controlled REIT, a Non-U.S. Stockholder's sale of Common Stock would be subject
to tax under FIRPTA as a sale of a United States real property interest unless
the Common Stock were "regularly traded" on an established securities market
(such as the NYSE) on which the Common Stock will be listed and the selling
stockholder owned no more than 5% of the Common Stock throughout the applicable
testing period. If the gain on the sale of Common Stock were subject to taxation
under FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as
a U.S. Stockholder with respect to the gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals). Notwithstanding the foregoing, capital gains not subject to
FIRPTA will be taxable to a Non-U.S. Stockholder if the Non-U.S. Stockholder is
a nonresident alien individual who is present in the United States for 183 days
or more during the taxable year and certain other conditions apply, in which
case the nonresident alien individual will be subject to a 30% tax on his or her
U.S. source capital gains.
A purchaser of Common Stock from a Non-U.S. Stockholder will not be
required to withhold under FIRPTA on the purchase price if the purchased Common
Stock is "regularly traded" on an established securities market or if the
Company is a domestically-controlled REIT. Otherwise, the purchaser of Common
Stock from a Non-U.S. Stockholder may be required to withhold 10% of the
purchase price and remit this amount to the IRS. The Company's Common Stock
currently is a regularly traded security on the NYSE. The Company believes that
it qualifies under both the regularly traded and the domestically-controlled
REIT exceptions to withholding but cannot provide any assurance to that effect.
Upon the death of a nonresident alien individual, such individual's
Common Stock will be treated as part of such individual's U.S. estate for
purposes of the U.S. estate tax, except as may be otherwise provided in an
applicable estate tax treaty.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
Under certain circumstances, U.S. Stockholders may be subject to backup
withholding at a rate of 31% on payments made with respect to, or cash proceeds
of a sale or exchange of, Common Stock. Backup withholding will apply only if
(i) the payee fails to furnish his or her taxpayer identification number ("TIN")
(which, for an individual, would be his or her Social Security Number) to the
payor as required, (ii) the IRS notifies the payor that the taxpayer
identification number furnished by the payee is incorrect, (iii) the IRS has
notified the payee that such payee has failed to properly include reportable
interest and dividends in the payee's return or has failed to file the
appropriate return and the IRS has assessed a deficiency with respect to such
underreporting, or (iv) the payee has failed to certify to the payor, under
penalties of perjury, that the payee is not subject to withholding. In addition,
backup withholding will not apply with respect to payments made to certain
exempt recipients, such as corporations and tax-exempt organizations.
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U.S. Stockholders should consult their own tax advisors regarding their
qualifications for exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a U.S.
Stockholder will be allowed as a credit against the U.S. Stockholder's United
States Federal income tax liability and may entitle the U.S. Stockholder to a
refund, provided that the required information is furnished to the IRS.
Additional issues may arise pertaining to information reporting and
backup withholding for Non-U.S. Stockholders. For example, on October 7, 1997,
the Treasury Department issued new regulations (the "New Regulations") that make
certain modifications to the withholding, backup withholding, and information
reporting rules. On March 27, 1998, the Treasury Department and the IRS released
Notice 98-16, which announced that the effective date of the New Regulations
will be extended to apply generally to payments made to foreign persons after
December 31, 1999. Non-U.S. Stockholders should consult their tax advisors with
regard to U.S. information reporting and backup withholding.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
GENERAL. Substantially all of the Company's investments are held
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 includes in its income its proportionate share of the
foregoing Operating Partnership items for purposes of the various REIT income
tests and in the computation of its REIT taxable income. Moreover, for purposes
of the REIT asset tests, the Company includes its proportionate share of assets
held by the Operating Partnership.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Pursuant to Section
704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property (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 the unrealized gain or unrealized loss, respectively, associated
with the property at the time of the contribution. The amount of such unrealized
gain or unrealized loss is generally equal to the difference between the fair
market value of contributed property at the time of contribution and the
adjusted tax basis of such property at the time of contribution (a "Book-Tax
Difference"). Such allocations are solely for Federal income tax purposes and do
not affect the book capital accounts or other economic or legal arrangements
among the partners. The Operating Partnership was formed by way of contributions
of appreciated property (including the Properties). Consequently, the Operating
Partnership Agreement requires such allocations to be made in a manner
consistent with Section 704(c) of the Code.
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In general, the partners who have contributed partnership interests in
the Properties to the Operating Partnership (the "Contributing Partners") will
be allocated lower amounts of depreciation deductions for tax purposes than such
deductions would be if determined on a pro rata basis. In addition, in the event
of the disposition of any of the contributed assets (including the Properties)
that have a Book-Tax Difference, all taxable income attributable to such
Book-Tax Difference generally will be allocated to the Contributing Partners,
and the Company generally will be allocated only its share of capital gains
attributable to appreciation, if any, occurring after the closing of the
acquisition of such properties. This will tend to eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules of Section 704(c) of the Code do not always entirely 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 of the Operating Partnership will cause the Company to be allocated
lower depreciation and other deductions and possibly amounts of taxable income
in the event of a sale of such contributed assets in excess of the economic or
book income allocated to it as a result of such sale. This may cause the Company
to recognize taxable income in excess of cash proceeds, which might adversely
affect the Company's ability to comply with the REIT distribution requirements.
See " -- Annual Distribution Requirements."
Treasury Regulations under Section 704(c) of the Code provide
partnerships with a choice of several methods of accounting for Book-Tax
Differences, including the "traditional method" that may leave some of the
Book-Tax Differences unaccounted for, or the election of certain methods which
would permit any distortions caused by a Book-Tax Difference at this time 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
determined to use the "traditional method" for accounting for Book-Tax
Differences with respect to the Properties contributed to the Partnership. As a
result of such determination, distributions to stockholders will be comprised of
a greater portion of taxable income rather than a return of capital. The
Operating Partnership and the Company have not determined which of the
alternative methods of accounting for Book-Tax Differences will be elected with
respect to Properties contributed to the Partnership in the future.
With respect to any property purchased by the Operating Partnership,
such property initially will 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) constructive distributions resulting from a reduction in the Company's
share of indebtedness of the Operating Partnership.
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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 an adjusted
tax basis in its partnership interest. 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
cash distribution to the partners) exceed the Company's adjusted tax basis, such
excess distributions (including such constructive distributions) constitute
taxable income to the Company. Such taxable income normally will be
characterized as a capital gain if the Company's interest in the Operating
Partnership has been held for longer than one year, subject to reduced tax rates
described above (See " -- Taxation of U.S. Stockholders -- CAPITAL GAIN
DISTRIBUTIONS"). Under current law, capital gains and ordinary income of
corporations generally are taxed at the same marginal rates.
SALE OF THE PROPERTIES. The Company's share of gain realized by the
Operating Partnership on the sale of any property held by the Operating
Partnership as inventory or other property held primarily for sale to customers
in the ordinary course of the Operating Partnership's trade or business will be
treated as income from a prohibited transaction that is subject to a 100%
penalty tax. See " -- Requirements for Qualification -- INCOME TESTS." Such
prohibited transaction income also may 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 the Operating Partnership's 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, including
peripheral land, as are consistent with the Operating Partnership's investment
objectives.
OTHER TAX CONSIDERATIONS
A portion of the amounts to be used to fund distributions to
stockholders is expected to come from the Operating Partnership through
distributions on stock of Highwoods Services held by the Operating Partnership.
Highwoods Services will not qualify as a REIT and will pay Federal, state, and
local income taxes on its taxable income at normal corporate rates. Any Federal,
state, or local income taxes that Highwoods Services is required to pay will
reduce the cash available for distribution by the Company to its stockholders.
As described above, the value of the securities of Highwoods Services
held by the Company cannot exceed 5% of the value of the Company's assets at a
time when a Common Unit holder in the Operating Partnership exercises his or her
redemption right (or the Company otherwise is considered to acquire additional
securities of Highwoods Services). See " -- Federal Income Taxation of the
Company." This limitation may restrict the ability of Highwoods
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Services to increase the size of its business unless the value of the assets of
the Company is increasing at a commensurate rate.
STATE AND LOCAL TAX
The Company and its stockholders may be subject to state and local tax
in various states localities, including those in which it or they transact
business, own property, or reside. The tax treatment of the Company and the
stockholders in such jurisdictions may differ from the Federal income tax
treatment described above. Consequently, prospective stockholders should consult
their own tax advisors regarding the effect of state and local tax laws on an
investment in the Common Stock of the Company.
PROPOSED LEGISLATION
Under current law, the Company cannot own more than 10% of the
outstanding voting securities (other than those securities includible in the 75%
asset test) of any one issuer and qualify for taxation as a REIT. See " --
Requirements for Qualification -- ASSET TESTS". For example, the Operating
Partnership owns 100% of the nonvoting stock and 1% of the voting stock of
Highwoods Services, and by virtue of its ownership of Common Units, the Company
is considered to own its pro rata share of such stock. Neither the Company nor
the Operating Partnership, however, own more than 1% of the voting securities of
Highwoods Services and the 10% test is satisfied.
The Company conducts its third-party fee-based services (i.e., leasing,
property management, real estate development, construction and other
miscellaneous services) through Highwoods Services. The President's Budget
Proposal for Fiscal Year 1999 ("Budget Proposal") includes a provision to
restrict these types of activities conducted by REITs under current law by
expanding the ownership limitation from no more than 10% of the voting
securities of an issuer to no more than 10% of the vote or value of all classes
of the issuer's stock. The Company, therefore, could not own stock (either
directly or indirectly through the Operating Partnership) possessing more than
10% of the vote or value of all classes of any issuer's stock.
The Budget Proposal would be effective only with respect to stock
directly or indirectly acquired by the Company on or after the date of first
committee action. To the extent that the Company's stock ownership in Highwoods
Services is grandfathered by virtue of this effective date, that grandfathered
status will terminate if Highwoods Services engages in a trade or business that
it is not engaged in on the date of first committee action or acquires
substantial new assets on or after that date. Such restriction, if enacted,
would adversely affect the ability to expand the business of Highwoods Services.
The Budget Proposal, however, will not become effective until legislation is
duly passed by Congress and signed by the President. Consequently, it is not
possible to determine at this time all the ramifications that would result from
legislation based on the Budget Proposal.
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PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to time of up
to an aggregate of 2,340,000 shares of Common Stock by the Company. Such shares
include the 1,800,000 Initial Shares purchased by UB-LB, as successor to UBS,
pursuant to the Purchase Agreement by and among the Company, UBS Limited and UBS
dated August 28, 1997 (the "Purchase Agreement"). The remaining 534,000 Forward
Shares may be issued pursuant to a letter agreement between the Company and UBS
dated August 25, 1997, as amended by a letter agreement between the Company and
UB-LB dated August 28, 1998 (the "Forward Contract").
Under the Purchase Agreement, the Initial Shares were sold to UB-LB at
$32.125 per share. A placement fee of 2.5% of the gross proceeds or $1,445,625
has been paid to UB-LB or its affiliates pursuant to the Forward Contract. A
description of the terms of the Forward Contract is set forth above at "Risk
Factors -- Potential Dilution of Capital Stock or Decrease of Liquidity in
Connection with Settlement of the Forward Contract." The Forward Contract
provides for certain purchase price adjustments that essentially guarantee a
return to UB-LB equal to LIBOR plus 75 basis points. To the extent the Forward
Contract is settled in shares of Common Stock, UB-LB will also be entitled to
receive an additional placement fee equal to approximately $290,000.
The sale or distribution of all or any portion of the Shares may be
effected from time to time by UB-LB or any of its broker-dealer affiliates, who
may sell Shares through brokers or dealers or in a distribution by one or more
additional underwriters on a firm commitment or best efforts basis, on the NYSE,
in the over-the-counter market, on any other national securities exchange on
which shares of the Common Stock are listed or traded, in privately negotiated
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. The
shares are currently traded on the following exchanges: the NYSE, the Boston
Stock Exchange, the Chicago Stock Exchange, the Pacific Stock Exchange and the
Philadelphia Stock Exchange. Except as described above, the Company will not
receive any proceeds from sales of the Shares.
In effecting sales, brokers or dealers engaged by UB-LB may arrange for
other brokers or dealers to participate. Any public offering price and any
discount or concessions allowed or reallowed or paid to dealers may be changed
from time to time. UB-LB may from time to time deliver all or a portion of the
Shares to cover a short sale or sales or upon the exercise, settlement or
closing of a call equivalent position or a put equivalent position.
In connection with a sale of any Shares, the following information
will, to the extent then required, be provided in the Prospectus Supplement
relating to such sale or in a post-effective amendment to the Registration
Statement of which this Prospectus is a part: the number of shares of Common
Stock to be sold; the purchase price; the public offering price; the method of
distribution; the name of any underwriter, agent or broker-dealer; and any
applicable
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commissions, discounts or other items constituting compensation to such
underwriters, agents or broker-dealers with respect to the particular sale.
UB-LB and any broker-dealers participating in the distribution of the
Shares are "underwriters" within the meaning of the Securities Act and any
profit on the sale of the Shares by any of them, together with the return to
UB-LB and the placement fees described above, will be regarded as underwriting
commissions under the Securities Act. UB-LB is entitled, under agreements with
the Company, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act.
The Company will pay all reasonable expenses in connection with the
registration of the Shares. The applicable underwriter will be responsible for
any brokerage or underwriting commissions and taxes of any kind (including,
without limitation, transfer taxes) due to a third party with respect to any
disposition, sale or transfer of the Shares, and legal, accounting and other
expenses incurred by it.
In connection with the sale or distribution of the Shares, the rules of
the Commission permit any underwriter to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
If any underwriter creates a short position in the Common Stock in
connection with the sale or distribution of the Shares -- i.e., if the
underwriter sells more shares of Common Stock than are set forth on the cover
page hereof, such underwriter may reduce that short position by purchasing
shares of Common Stock in the open market.
Any managing underwriter(s) may also impose a penalty bid on certain
underwriters and selling group members. This means that, if any managing
underwriter purchases shares of Common Stock in the open market to reduce any
underwriter's short position, or to stabilize the price of the Common Stock,
such managing underwriter may reclaim the amount of the selling concession from
any such underwriters and selling group members who sold those Shares.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any underwriter makes any representation or
prediction as to the direction or magnitude of any effect that any of the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any underwriter makes any representation that
any underwriter will engage in any such transaction or that any such
transaction, once commenced, will not be discontinued without notice.
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In order to comply with the securities laws of certain states, if
applicable, the Shares offered hereby will be sold in such jurisdictions only
through registered or licensed brokers or dealers.
EXPERTS
The consolidated financial statements and schedule of Highwoods
Properties, Inc., incorporated herein by reference from the Company's annual
report (Form 10-K) for the year ended December 31, 1997 (as amended on Form
10-K/A filed on April 29, 1998 and May 19, 1998), the statement of revenues and
certain expenses of Garcia Properties for the year ended December 31, 1997
incorporated herein by reference from the Company's current report on Form 8-K
dated February 4, 1998, the statements of revenues and certain expenses of
Shelton Properties, Riparius Properties and Winners Circle for the year ended
December 31, 1996 incorporated herein by reference from the Company's current
report on Form 8-K dated November 17, 1997, and the financial statements with
respect to Anderson Properties, Inc. and the financial statements with respect
to Century Center Group incorporated herein by reference from the Company's
current report on Form 8-K dated January 9, 1997 (as amended on Forms 8- K/A
filed on February 7, 1997, March 10, 1997 and April 28, 1998), have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon included therein and incorporated herein by reference. Such financial
statements are incorporated herein by reference in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
The combined statement of revenue and certain operating expenses of the
Associated Capital Properties Portfolio for the year ended December 31, 1996,
and the combined statement of revenue and certain operating expenses of the 1997
Pending Acquisitions for the year ended December 31, 1996, incorporated by
reference herein from the Company's current reports on Form 8-K dated August 27,
1997 (as amended on Form 8-K/A filed September 23, 1997) and dated October 1,
1997, have been so incorporated in reliance upon the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
The consolidated financial statements of J.C. Nichols Company and
subsidiaries as of December 31, 1997 and each of the years in the three-year
period then ended, incorporated by reference herein from the Company's current
report on Form 8-K dated July 3, 1998 (as amended on Form 8-K/A filed September
28, 1998 and Form 8-K/A filed September 30, 1998) have been so incorporated in
reliance upon the report of KPMG Peat Marwick LLP, independent accountants,
given on the authority of such firm as experts in accounting and auditing.
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LEGAL MATTERS
Certain legal matters have been passed upon for the Company by Alston &
Bird LLP, Raleigh, North Carolina. In addition, Alston & Bird LLP has rendered
its opinion with respect to certain Federal income tax matters relating to the
Company.
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PART II
SUPPLEMENTAL INFORMATION
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimates of the various expenses to be
paid by Highwoods Properties, Inc. (the "Company") in connection with the
registration of the Registerable Securities.
Securities and Exchange Commission Registration Fee......................$23,314
Fees and Expenses of Counsel..............................................50,000
Miscellaneous .......................................................... 1,686
------
TOTAL...........................................................$75,000
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's officers and directors are and will be indemnified
against certain liabilities in accordance with the MGCL, the Articles of
Incorporation and bylaws of the Company and the Operating Partnership Agreement.
The Articles of Incorporation require the Company to indemnify its directors and
officers to the fullest extent permitted from time to time by the MGCL. The MGCL
permits a corporation to indemnify its directors and officers, among others,
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reasons of their service in those or other capacities unless it
is established that the act or omission of the director or officer 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, or the director or officer
actually received an improper personal benefit in money, property or services,
or in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful.
The Operating Partnership Agreement also provides for indemnification
of the Company and its officers and directors to the same extent indemnification
is provided to officers and directors of the Company in its Articles of
Incorporation and limits the liability of the Company and its officers and
directors to the Operating Partnership and its partners to the same extent
liability of officers and directors of the Company to the Company and its
stockholders is limited under the Company's Articles of Incorporation.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission
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such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
1.1 (1) Purchase Agreement between the Company, UBS Limited and Union Bank of
Switzerland, London Branch, dated as of August 28, 1997
1.2 (1) Forward Stock Purchase Agreement between the Company and Union Bank of
Switzerland, London Branch, dated as of August 28, 1997
1.3* Form of Letter Agreement between the Company and UBS AG, London Branch,
dated as of August 28, 1998
1.4 Waiver in respect of August 28, 1998 Letter Agreement between the Company
and UBS AG, London Branch
2.1 (2) Master Agreement of Merger and Acquisition by and among the Company, the
Operating Partnership, Eakin & Smith, Inc. and the partnerships and limited
liability companies listed therein dated April 1, 1996
2.2 (3) Stock Purchase Agreement among AP CRTI Holdings, L.P., AEW Partners, L.P.,
Thomas J. Crocker, Barbara F. Crocker, Richard S. Ackerman and Robert E.
Onisko and the Company and Cedar Acquisition Corporation, dated April 29,
1996
2.3 (3) Agreement and Plan of Merger by and among the Company, Crocker Realty
Trust, Inc. and Cedar Acquisition Corporation, dated as of April 29, 1996
2.4 (4) Contribution and Exchange Agreement by and among Century Center group, the
Operating Partnership and the Company, dated December 31, 1996
2.5 (4) Master Agreement of Merger and Acquisition by and among the Company, the
Operating Partnership, Anderson Properties, Inc., Gene Anderson, and the
partnerships and limited liability companies listed therein, dated January 31, 1997
2.6 (5) Amended and Master Agreement of Merger and Acquisition dated January 9,
1995 by and among Highwoods Realty Limited Partnership, Forsyth Partners
Holdings, Inc., Forsyth Partners Brokerage, Inc., John L. Turner, William T.
Wilson III, John E. Reece II, H. Jack Leister and the partnerships and corporations
listed therein
2.7 (6) Master Agreement of Merger and Acquisition by and among the Company, the
Operating Partnership, Associated Capital Properties, Inc. and its shareholders
dated August 27, 1997
2.8 (1) Agreement and Plan of Merger by and among the Company, Jackson Acquisition
Corp. and J.C. Nichols Company dated December 22, 1997
2.9 (7) Amendment No. 1 to Agreement and Plan of Merger by and among the Company,
Jackson Acquisition Corp. and J.C. Nichols Company dated April 23, 1998
4.1 (8) Amended and Restated Articles of Incorporation of the Company
II-2
<PAGE>
4.2 (9) Rights Agreement, dated as of October 6, 1997, between the Company and First
Union National Bank
4.3 (10) Form of certificate representing shares of Common Stock
5* Opinion of Alston & Bird LLP re legality
8 Opinion of Alston & Bird LLP re tax matters
23.1 Consent of Alston & Bird LLP (included as part of Exhibits 5 and 8)
23.2 Consent of Ernst & Young LLP
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of KPMG Peat Marwick LLP
24* Power of Attorney (included on the signature page hereof)
</TABLE>
- -----------------
*Previously filed.
(1) Filed as part of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference.
(2) Filed as part of the Company's Current Report on Form 8-K dated April
1, 1996 and incorporated herein by reference.
(3) Filed as part of the Company's Current Report on Form 8-K dated April
29, 1996 and incorporated herein by reference.
(4) Filed as part of the Company's Current Report on Form 8-K dated January
9, 1997 and incorporated herein by reference.
(5) Filed as part of Registration Statement No. 33-88364 with the
Securities and Exchange Commission and incorporated herein by
reference.
(6) Filed as part of the Company's Current Report on Form 8-K dated August
27, 1997 and incorporated herein by reference.
(7) Filed as part of Registration Statement No. 333-51671 with the
Securities and Exchange Commission and incorporated herein by
reference.
(8) Filed as part of the Company's Current Report on Form 8-K dated
September 25, 1997 and amended by Articles Supplementary filed as part
of the Company's Current Report on Form 8-K dated October 4, 1997 and
Articles Supplementary filed as part of the Company's Current Report on
Form 8-K dated April 20, 1998, each of which is incorporated herein by
reference.
(9) Filed as part of the Company's Current Report on Form 8-K dated October
4, 1997 and incorporated herein by reference.
(10) Filed as part of Registration Statement No. 33-76952 with the
Securities and Exchange Commission and incorporated herein by
reference.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to the Registration Statement:
II-3
<PAGE>
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; provided, however, that any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement; provided, however, that the undertakings set
forth in paragraphs (i) and (ii) shall not apply if the information
required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions described under Item 15 of the
Registration Statement, or otherwise, the registrant has been advised that in
the opinion of the Commission such indemnification is against public policy as
II-4
<PAGE>
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this
Post-Effective Amendment No. 2 to Registration Statement 333-39247 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Raleigh, State of North Carolina, on October 9, 1998.
HIGHWOODS PROPERTIES, INC.
By: /s/ Carman J. Liuzzo
------------------------------------------
Carman J. Liuzzo
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 2 to Registration Statement 333-39247 has been
signed by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
* Chairman of the Board of Directors October 9, 1998
- ----------------------------------------
O. Temple Sloan, Jr.
* President, Chief Executive Officer and Director October 9, 1998
- ----------------------------------------
Ronald P. Gibson
Chief Investment Officer and Vice Chairman of the October 9, 1998
* Board of Directors
- ----------------------------------------
John L. Turner
* Senior Vice President and Director October 9, 1998
- ----------------------------------------
Gene H. Anderson
* Senior Vice President and Director October 9, 1998
- ----------------------------------------
John W. Eakin
* Director October 9, 1998
- ----------------------------------------
William T. Wilson, III
* Director October 9, 1998
- ----------------------------------------
Thomas W. Adler
* Director October 9, 1998
- ----------------------------------------
William E. Graham, Jr.
II-6
<PAGE>
* Director October 9, 1998
- ----------------------------------------
L. Glenn Orr, Jr.
* Director October 9, 1998
- ----------------------------------------
Willard H. Smith, Jr.
* Director October 9, 1998
- ----------------------------------------
Stephen Timko
/s/James R. Heistand October 9, 1998
- ----------------------------------------
James R. Heistand Senior Vice President and Director
October 7, 1998
/s/ Kay Nichols Callison Director
- ----------------------------------------
Kay Nichols Callison
/s/ Carman J. Liuzzo Vice President, Chief Financial Officer and
- ----------------------------------------Treasurer (Principal Financial Officer and October 9, 1998
Carman J. Liuzzo Principal Accounting Officer)
* By /s/ Carman J. Liuzzo
- ------------------------------------------------
Carman J. Liuzzo (Attorney-in-Fact)
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
1.1 (1) Purchase Agreement between the Company, UBS Limited and Union Bank of
Switzerland, London Branch, dated as of August 28, 1997
1.2 (1) Forward Stock Purchase Agreement between the Company and Union Bank of
Switzerland, London Branch, dated as of August 28, 1997
1.3* Form of Letter Agreement between the Company and UBS AG, London Branch,
dated as of August 28, 1998
1.4 Waiver in respect of August 28, 1998 Letter Agreement between the Company and
UBS AG, London Branch
2.1 (2) Master Agreement of Merger and Acquisition by and among the Company, the
Operating Partnership, Eakin & Smith, Inc. and the partnerships and limited
liability companies listed therein dated April 1, 1996
2.2 (3) Stock Purchase Agreement among AP CRTI Holdings, L.P., AEW Partners, L.P.,
Thomas J. Crocker, Barbara F. Crocker, Richard S. Ackerman and Robert E.
Onisko and the Company and Cedar Acquisition Corporation, dated April 29, 1996
2.3 (3) Agreement and Plan of Merger by and among the Company, Crocker Realty Trust,
Inc. and Cedar Acquisition Corporation, dated as of April 29, 1996
2.4 (4) Contribution and Exchange Agreement by and among Century Center group, the
Operating Partnership and the Company, dated December 31, 1996
2.5 (4) Master Agreement of Merger and Acquisition by and among the Company, the
Operating Partnership, Anderson Properties, Inc., Gene Anderson, and the
partnerships and limited liability companies listed therein, dated January 31, 1997
2.6 (5) Amended and Master Agreement of Merger and Acquisition dated January 9, 1995
by and among Highwoods Realty Limited Partnership, Forsyth Partners Holdings,
Inc., Forsyth Partners Brokerage, Inc., John L. Turner, William T. Wilson III, John
E. Reece II, H. Jack Leister and the partnerships and corporations listed therein
2.7 (6) Master Agreement of Merger and Acquisition by and among the Company, the
Operating Partnership, Associated Capital Properties, Inc. and its shareholders
dated August 27, 1997
2.8 (1) Agreement and Plan of Merger by and among the Company, Jackson Acquisition
Corp. and J.C. Nichols Company dated December 22, 1997
2.9 (7) Amendment No. 1 to Agreement and Plan of Merger by and among the Company,
Jackson Acquisition Corp. and J.C. Nichols Company dated April 23, 1998
4.1 (8) Amended and Restated Articles of Incorporation of the Company
4.2 (9) Rights Agreement, dated as of October 6, 1997, between the Company and First
Union National Bank
4.3 (10) Form of certificate representing shares of Common Stock
5* Opinion of Alston & Bird LLP re legality
8 Opinion of Alston & Bird LLP re tax matters
23.1 Consent of Alston & Bird LLP (included as part of Exhibits 5 and 8)
23.2 Consent of Ernst & Young LLP
II-8
<PAGE>
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of KPMG Peat Marwick LLP
24* Power of Attorney (included on the signature page hereof)
</TABLE>
- -----------------
*Previously filed.
(1) Filed as part of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference.
(2) Filed as part of the Company's Current Report on Form 8-K dated April
1, 1996 and incorporated herein by reference.
(3) Filed as part of the Company's Current Report on Form 8-K dated April
29, 1996 and incorporated herein by reference.
(4) Filed as part of the Company's Current Report on Form 8-K dated January
9, 1997 and incorporated herein by reference.
(5) Filed as part of Registration Statement No. 33-88364 with the
Securities and Exchange Commission and incorporated herein by
reference.
(6) Filed as part of the Company's Current Report on Form 8-K dated August
27, 1997 and incorporated herein by reference.
(7) Filed as part of Registration Statement No. 333-51671 with the
Securities and Exchange Commission and incorporated herein by
reference.
(8) Filed as part of the Company's Current Report on Form 8-K dated
September 25, 1997 and amended by Articles Supplementary filed as part
of the Company's Current Report on Form 8-K dated October 4, 1997 and
Articles Supplementary filed as part of the Company's Current Report on
Form 8-K dated April 20, 1998, each of which is incorporated herein by
reference.
(9) Filed as part of the Company's Current Report on Form 8-K dated October
4, 1997 and incorporated herein by reference.
(10) Filed as part of Registration Statement No. 33-76952 with the
Securities and Exchange Commission and incorporated herein by
reference.
II-9
UBS AG, London Branch has verbally agreed to extend the deadline for an
effective registration statement relating to the sale of the Shares from October
12, 1998 to October 26, 1998. Such deadline is set forth in Paragraph 4 of the
August 28, 1998 Letter Agreement between the Company and UBS, AG London Branch.
ALSTON&BIRD LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
404-881-7000
Fax: 404-881-7777
www.alston.com
PINNEY L. ALLEN DIRECT DIAL: 404-881-7485
October 9, 1998
Highwoods Properties, Inc.
3100 Smoketree Court, Suite 600
Raleigh, North Carolina 27604
Re: Registration Statement on Form S-3 Relating to 2,340,000
Shares of Common Stock of Highwoods Properties, Inc.
Ladies and Gentlemen:
In connection with the registration statement on Form S-3, File No.
333-39247, as in the form filed on October 9, 1998, relating to the registration
of 2,340,000 shares of common stock by Highwoods Properties, Inc. (the
"Company"), you have requested our opinion concerning certain of the federal
income tax consequences to the Company of its election to be taxed as a real
estate investment trust ("REIT") under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the "Code").
This opinion is based solely on various facts and factual assumptions as
set forth in the Registration Statement and is conditioned upon certain
representations made by the Company as to factual matters through certificates
of officers of the Company (the "Officers' Certificates") attached hereto and
made a part hereof. We have made no independent inquiry as to the factual
matters set forth herein. In addition, we have examined no documents other than
the Registration Statement for purposes of this opinion and, therefore, our
opinion is limited to matters determined through an examination of such document
and the factual matters set forth in the Officers' Certificates.
In rendering the opinions set forth herein, we have assumed the
authenticity of all documents submitted to us as originals, the genuineness of
all signatures thereon, the legal capacity of natural persons executing such
documents and the conformity to authentic original documents of all documents
submitted to us as copies.
We are opining herein as to the effect on the subject transaction only of
the federal income tax laws of the United States and we express no opinion with
respect to the applicability thereto, or the effect thereon, of other federal
laws, the laws of any other
<TABLE>
<CAPTION>
<S> <C>
1211 East Morehead Street 3605 Glenwood Avenue, Suite 310 601 Pennsylvania Avenue, N.W.
P. O. Drawer 34009 P. O. Drawer 31107 North Building, 11th Floor
Charlotte, NC 28234-4009 Raleigh, NC 27622-1107 Washington, DC 20004-2601
704-331-6000 919-420-2200 202-756-3300
Fax: 704-334-2014 Fax: 919-881-3175 Fax: 202-756-3333
</TABLE>
<PAGE>
Highwoods Properties, Inc.
October 9, 1998
Page 2
jurisdiction, the laws of any state or as to any matters of municipal law or the
laws of any other local agencies within any state.
Based solely on the facts in the Registration Statement and the facts in
the Officers' Certificates, we are of the opinion that the Company has been
organized and has operated in conformity with the requirements for qualification
and taxation as a REIT under the Code for its taxable years ended December 31,
1994 through 1997, and that the Company is in a position to continue its
qualification and taxation as a REIT within the definition of Section 856(a) of
the Code for the taxable year that will end December 31, 1998. With respect to
1998, we note that the Company's status as a REIT at any time during such year
is dependent, among other things, upon the Company meeting the requirements of
Sections 856 through 860 of the Code throughout the year and for the year as a
whole. Accordingly, because the Company's satisfaction of such requirements will
depend upon future events, including the precise terms and conditions of
proposed transactions, the final determination of operational results, and the
effect of certain provisions contained in the President's Budget Proposal for
the Fiscal Year 1999 on the Company's REIT status, it is not possible to assure
that the Company will satisfy the requirements to be a REIT during the taxable
year that will end December 31, 1998.
In addition, we have participated in the preparation of the material under
the heading "Federal Income Tax Considerations" of the Registration Statement
and we are of the opinion that the federal income tax treatment described
therein is accurate in all material respects.
This opinion is based on various statutory provisions, regulations
promulgated thereunder and interpretations thereof by the Internal Revenue
Service and the courts having jurisdiction over such matters, all of which are
subject to change either prospectively or retroactively. Also, any variation or
difference in the facts from those set forth in the Registration Statement or
the Officers' Certificates may affect the opinions stated herein.
This opinion is limited to the specific matters covered hereby and should
not be interpreted to imply that the undersigned has offered its opinion on any
other matter. We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement.
Very truly yours,
ALSTON&BIRD LLP
By: /s/ Pinney L. Allen
-------------------
Pinney L. Allen
<PAGE>
CERTIFICATE
-----------
I, MACK D. PRIDGEN, III, in my capacity as Vice-President and General
Counsel of Highwoods Properties, Inc. (the "Company"), do hereby certify, to the
best of my knowledge and belief after making appropriate inquiries with respect
to all matters set forth below, as follows:
1. That I am a Vice-President and the General Counsel of the Company
and I am licensed to practice law in the state of North Carolina;
2. That in such capacity, I have access to relevant information
regarding each of the factual matters set forth below;
3. That for purposes of this Certificate,
(a) "AFFILIATED LIMITED LIABILITY COMPANIES" means, collectively:
(i) Shockoe Plaza Investors LLC, a Virginia limited liability
company that is owned 99% by Highwoods Realty Limited Partnership and 1% by
Highwoods Services;
(ii) HPI Title Agency LLC, a North Carolina limited liability
company that is owned 100% by Highwoods Realty Limited Partnership;
(iii) Nine Crondall Associates, LLC, a Maryland limited
liability company that is owned 100% by Highwoods Realty Limited Partnership;
(iv) Eight Crondall Associates LLC, a Maryland limited
liability company that is owned 100% by Highwoods Realty Limited Partnership;
(v) Seven Crondall Associates LLC, a Maryland limited
liability company that is owned 100% by Highwoods Realty Limited Partnership;
(vi) 9690 Derecho Rd. LLC, a Maryland limited liability
company that is owned 100% by Highwoods Realty Limited Partnership;
(vii) Highwoods/Florida GP, LLC, a Florida limited liability
company that is owned 100% by Highwoods Realty Limited Partnership;
(viii) Kessinger/Hunter LLC, a Missouri limited liability
company that is owned 30% by the Company; and
(ix) Dallas County Partners III, LC, an Iowa limited liability
company that is owned 50% by Highwoods Realty Limited Partnership;
1
<PAGE>
(b) "AFFILIATED PARTNERSHIPS" means, collectively:
(i) AP-GP Southeast Portfolio Partners, L.P., a Delaware
limited partnership that is owned 1% by Highwoods Realty GP Corp. and 99% by
Highwoods Realty Limited Partnership;
(ii) Highwoods/Tennessee Holdings, L.P., a Tennessee
limited partnership that is owned .01% by Highwoods/Tennessee Properties,
Inc. and 99.99% by Highwoods Realty Limited Partnership;
(iii) AP Southeast Portfolio Partners, L.P., a Delaware
limited partnership that is owned 1% by AP-GP Southeast Portfolio Partners,
L.P. and 99% by Highwoods Realty Limited Partnership;
(iv) Highwoods/Florida Holdings, L.P., a Delaware limited
partnership that is owned .01% by Highwoods/Florida GP, Corp. and 99.99% by
Highwoods Realty Limited Partnership;
(v) Pinellas Northside Partners, Ltd., a Florida limited
partnership that is owned 99% by Highwoods/Florida Holdings, L.P. and 1% by
Highwoods Realty Limited Partnership;
(vi) Interstate Business Park, Ltd., a Florida limited
partnership that is owned 99% by Highwoods/Florida Holdings, L.P. and 1% by
Highwoods Realty Limited Partnership;
(vii) Pinellas Bay Vista Partners, Ltd., a Florida limited
partnership that is owned 99% by Highwoods/Florida Holdings, L.P. and 1% by
Highwoods Realty Limited Partnership;
(viii) Pinellas Pinebrook Partners, Ltd., a Florida
limited partnership that is owned 99% by Highwoods/Florida Holdings, L.P. and
1% by Highwoods Realty Limited Partnership;
(ix) Downtown Clearwater Tower, Ltd., a Florida limited
partnership that is owned 99% by Highwoods/Florida Holdings, L.P. and 1% by
Highwoods Realty Limited Partnership;
(x) BDBP, Ltd., Cross Bayou, Ltd., a Florida limited
partnership that is owned 99% by Highwoods/Florida Holdings, L.P. and 1% by
Highwoods Realty Limited Partnership;
(xi) SISBROS, Ltd., a Florida limited partnership that is
owned 99% by Highwoods/Florida Holdings, L.P. and 1% by Highwoods Realty
Limited Partnership;
2
<PAGE>
(xii) Highwoods/Interlachen Holdings, L.P., a Florida
limited partnership that is owned 99% by Highwoods/Florida Holdings, L.P. and
1% by Highwoods Realty Limited Partnership;
(xiii) Center Court Partners, a Florida general partnership
that is owned 50% by the Company;
(xiv) FHDT, LP, a limited partnership that is owned 33.33% by
the Company;
(xv) Raphael Hotel Group LP, a Missouri limited partnership
that is owned 5% by the Company;
(xvi) 4600 Madison Associates, LP, a limited partnership that
is owned 12.50% by the Company;
(xvii) Marley Continental Homes of Kansas, a Kansas general
partnership that is owned 99% by Highwoods Realty Limited Partnership;
(xviii) Fountain One, an Iowa general partnership that is
owned 90% by Highwoods Realty Limited Partnership;
(xix) Fountain Two, an Iowa general partnership that is owned
60% by Highwoods Realty Limited Partnership;
(xx) Fountain Three, an Iowa general partnership that is owned
50% by Highwoods Realty Limited Partnership;
(xxi) J.C. Nichols Iowa Partners, an Iowa general partnership
that is owned 86 2/3% by Highwoods Realty Limited Partnership;
(xxii) Neptune Building Partners, L.P., an Iowa limited
partnership that is owned 50% by Highwoods Realty Limited Partnership;
(xxiii) Dallas County Partners, an Iowa general partnership
that is owned 50% by Highwoods Realty Limited Partnership;
(xxiv) Dallas County Partners II, an Iowa general partnership
that is owned 50% by Highwoods Realty Limited Partnership;
(xxv) Meridith Drive Associates, LP, an Iowa limited
partnership that is owned 49.5% by Highwoods Realty Limited Partnership;
3
<PAGE>
(xxvi) Terrace Place Partners, an Iowa general partnership
that is owned 50% by Highwoods Realty Limited Partnership;
(xxvii) Village Court Associates, an Iowa general
partnership that is owned 75% by J.C. Nichols Iowa Partners;
(xxviii) Corporate Center Associates, LP, an Iowa limited
partnership that is owned 90% by Neptune Building Partners, LP;
(xxix) Highwoods/Florida Holdings GP, L.P., a Delaware limited
partnership that was owned 1% by Highwoods/Florida GP Corp. and 99% by
Highwoods/Forsyth Limited Partnership (currently known as Highwoods Realty
Limited Partnership) and that was merged out of existence on December 31, 1997;
and
(xxx) Highwoods/Tennessee Holdings GP, L.P., a Tennessee
limited partnership that was owned 1% by Highwoods/Tennessee Properties, Inc.
and 99% by Highwoods/Forsyth Limited Partnership (currently known as Highwoods
Realty Limited Partnership) and that was merged out of existence on December 31,
1997;
(c) "CODE" means the Internal Revenue Code of 1986, as amended;
(d) "FORECLOSURE PROPERTY" means real property (including interests
in real property), and any personal property incident to such real property,
acquired by the real estate investment trust as a result of such trust having
bid in such property at foreclosure, or having otherwise reduced such property
to ownership or possession by agreement or process of law, after there was
default (or default was imminent) on a lease of such property or on an
indebtedness that such property secured;
(e) "HIGHWOODS SERVICES" means Highwoods Services, Inc., a
North Carolina corporation, the equity ownership of which is owned 99% by
Highwoods/Forsyth Limited Partnership and .5% each by Ronald P. Gibson and
Edward J. Fritsch;
(f) "INDEPENDENT CONTRACTOR" means any person who does not own,
directly or indirectly, more than 35% of the shares in the REIT, and, if such
person is a corporation, not more than 35% of the total combined voting power of
whose stock (or 35% of the total shares of all classes of whose stock), or, if
such person is not a corporation, not more than 35% of the interest in whose
assets or net profits is owned, directly or indirectly, by one or more persons
owning 35% or more of the shares in the REIT;
(g) "OPERATING PARTNERSHIP" means Highwoods Realty Limited
Partnership (formerly Highwoods/Forsyth Limited Partnership), a North Carolina
partnership of which the Company is the sole general partner with an approximate
85.5% ownership interest, including a 1% general partnership interest and an
84.4% limited
4
<PAGE>
partnership interest, and various others (including officers and directors of
the Company) are the remaining limited partners with an approximate 14.5%
aggregate interest;
(h) "OPERATING PARTNERSHIP AGREEMENT" means the First Amended
and Restated Agreement of Limited Partnership of Highwoods Realty Limited
Partnership, dated June 14, 1994, as amended;
(i) "PROHIBITED TRANSACTION" means a sale or other disposition of
property, other than foreclosure property, that is stock in trade of the
taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or
property held by the taxpayer primarily for sale to customers in the ordinary
course of trade or business;
(j) "QUALIFIED REIT SUBSIDIARY" means (1) any corporation in which a
real estate investment trust owned stock during any taxable year ended on or
before December 31, 1997, if 100% of the stock of such corporation was held by
the real estate investment trust at all times during the period such corporation
was in existence and (2) any corporation in which a real estate investment trust
owns stock after the taxable year ended December 31, 1997, if 100% of the stock
of such corporation is held by the real estate investment trust;
(k) "REAL ESTATE ASSETS" means real property (including interests in
real property and interests in mortgages on real property) and shares (or
transferable certificates of beneficial interest) in other entities qualifying
to be taxed as real estate investment trusts;
(l) "REGISTRATION STATEMENT" means the Form S-3, File No. 333-39247,
as in the form filed on October 9, 1998, relating to the registration of
2,340,000 shares of the Company's common stock;
(m) "REIT" means a real estate investment trust;
(n) "REIT ELECTION" means an election to be taxed as a REIT under
Code Section 856(c)(1); and
(o) "SERVICE" means the Internal Revenue Service;
4. That I have consulted with other employees and officers of the Company
regarding the matters set forth below and such persons have agreed in all
respects with the representations made below;
5. That, except as otherwise noted, all representations made below are
true and complete for each of the taxable years ended December 31, 1994, through
December 31, 1997, and through the date hereof; and that I have no reason to
believe that such
5
<PAGE>
representations will not continue to be true for the taxable year that will end
December 31, 1998;
6. That the Company has operated and will continue to operate in
accordance with Maryland law, its articles of incorporation, and its bylaws and
in accordance with the statements and representations made in the Registration
Statement;
7. That the Operating Partnership has operated and will continue to
operate in accordance with North Carolina law, the Operating Partnership
Agreement, and the statements and representations made in the Registration
Statement;
8. That I am a licensed attorney familiar with the requirements for
qualification as a REIT under applicable provisions of the Code, that all such
requirements have been satisfied for the Company's taxable years ended December
31, 1994, through December 31, 1997; that I have no reason to believe that such
requirements will not continue to be satisfied in the taxable year that will end
December 31, 1998; and that I have exercised ordinary business care and prudence
to attempt to satisfy such requirements and I have advised Alston & Bird LLP of
any matter of which I am aware that could cause reason for concern as to whether
those requirements have been or will be satisfied;
9. That the Company filed an election to be taxed as a REIT with its tax
return for the taxable year ended December 31, 1994, and has not taken any
action to terminate such election; that I have no reason to believe that the
Company will not continue such election or that it will take any action to
terminate such election for the period that will end December 31, 1998; and that
the Company has received no notification formally or informally from the Service
or any other person that such election may not be valid or has been revoked or
withdrawn in any respect;
10. That the Company is and will continue to be managed by one or more of
its directors who have exclusive authority over the management of the Company,
the management of its officers, and the management and disposition of the
Company's property;
11. That the beneficial ownership of the Company is and will continue to
be evidenced by transferable shares; and that there are no restrictions on the
transferability of such shares either in the Articles of Incorporation or in any
agreement to which the Company is a party, other than the restrictions set forth
in the Articles of Incorporation that permit the directors to redeem shares or
refuse to transfer shares in any case where such directors, in good faith,
believe that a failure to redeem or that a transfer of shares would result in
the loss of the Company's REIT status;
12. That the Company has been a domestic corporation during its entire
existence;
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13. That the Company has not been, is not, and will not be (i) a bank, a
mutual savings bank, a cooperative bank, a domestic building and loan
association or other savings institution, a small business investment company
operating under the Small Business Investment Act of 1958, or a corporation
created under state law for the purpose of promoting, maintaining, and assisting
the economy within a state by making loans, or (ii) an insurance company;
14. That at no time during the last half of any taxable year for which a
REIT election has been made has more than 50% of the value of the Company's
outstanding stock been beneficially owned by five or fewer individuals, taking
into consideration the applicable attribution rules, which generally apply a
look-through provision to determine constructive stock ownership; and that the
Company will take all measures within its control to ensure that, at no time
during the last half of any taxable year for which a REIT election will be made
will more than 50% of the value of the Company's outstanding stock be
beneficially owned by or for five or fewer individuals;
15. That the record and beneficial ownership of the Company has been and
will be held by 100 or more persons;
16. That at least 95% of the gross income derived by the Company
(including the income derived through its ownership of the Operating
Partnership, the Affiliated Partnerships, and the Affiliated Limited Liability
Companies) in all taxable years consisted of: (i) amounts derived from rental of
real property, including rents attributable to personal property as described in
representation (20) below and including charges for services customarily
furnished or rendered in connection with the rental of such real property,
whether or not such charges are separately stated, but excluding rents received
from parties in which the Company owns 10% or more of the vote or value of
equity ownership of such party and excluding amounts received or accrued with
respect to any real or personal property if the Company furnishes noncustomary
services to the tenants or manages or operates such property other than through
an Independent Contractor from which neither the Company nor the Operating
Partnership derives any form of income; (ii) interest; (iii) gain realized upon
the sale of all or a portion of a Real Estate Asset that is not a Prohibited
Transaction; (iv) dividends; (v) abatements and refunds of tax; (vi) income and
gain from Foreclosure Property; and (vii) amounts for making loans by secured
properties or to purchase or lease real property; and that I have no reason to
believe that such 95% gross income test will not continue to be met for the
taxable year that will end December 31, 1998;
17. That at least 75% of the gross income derived by the Company
(including the income derived through its ownership of the Operating
Partnership, the Affiliated Partnerships, and the Affiliated Limited Liability
Companies) in all taxable years consisted of: (i) amounts derived from rental of
real property, including rents attributable to personal property as described in
representation (20) below and including charges for services customarily
furnished or rendered in connection with the rental of such real property,
whether or not such charges are separately stated, but excluding rents received
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from parties in which the Company owns 10% or more of the vote or value of
equity ownership of such party and excluding amounts received or accrued with
respect to any real or personal property if the Company furnishes noncustomary
services to the tenants or manages or operates such property other than through
an Independent Contractor from which neither the Company nor the Operating
Partnership derives any form of income; (ii) interest on obligations secured by
mortgages on real property or on interests in real property; (iii) gain realized
upon the sale of all or a portion of the real property; (iv) abatements and
refunds of property tax; (v) income and gain derived from Foreclosure Property;
(vi) amounts for agreeing to make loans secured by real property or to purchase
or lease real property; and (vii) gain from the sale or disposition of a Real
Estate Asset that is not a Prohibited Transaction; and that I have no reason to
believe that such 75% gross income test will not continue to be met for the
taxable year that will end December 31, 1998;
18. That, for taxable years ended on or before December 31, 1997, less
than 30% of the gross income of the Company (including the income derived
through its ownership of the Operating Partnership, the Affiliated Partnerships,
and the Affiliated Limited Liability Companies) in all taxable years was derived
from (i) the sale or other disposition of stock or securities held for less than
one year; (ii) property in a transaction that is a Prohibited Transaction; and
(iii) real property (including interests in real property and interests in
mortgages on real property) held for less than four years other than property
compulsorily or involuntarily converted and property that is Foreclosure
Property;
19. That the Company, the Operating Partnership, the Affiliated
Partnerships, and the Affiliated Limited Liability Companies have not entered
into and will not enter into any lease, agreement, or other arrangement in
connection with the rental of real property under which any amount payable to
the Company, the Operating Partnership, the Affiliated Partnerships, or the
Affiliated Limited Liability Companies depends or will depend in whole or in
part on the income or profits derived from any tenant (or sub-tenant) of such
real property (except that such an amount may be based on a fixed percentage or
percentages of gross receipts or sales);
20. That (i) any personal property directly or indirectly leased by the
Company, the Operating Partnership, the Affiliated Partnerships, and the
Affiliated Limited Liability Companies has been and will be leased under or in
connection with a lease of the real property; and (ii) the average of the
adjusted bases of such personal property at the beginning and at the end of the
taxable year is less than 15% of the average of the aggregate adjusted bases of
both the real property and the personal property at the beginning and at the end
of the taxable year, as calculated on a lease by lease basis;
21. That for purposes of Items 16 and 17 above, "rent" does not include
rent received for any real property directly or indirectly from any person in
which the Company owns (i) in the case of a corporation, 10% or more of the
total combined voting
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power of all classes of stock entitled to vote, or 10% or more of the total
number of shares of all classes of stock; or (ii) in the case of an entity other
than a corporation, an interest of 10% or more in the assets or net profits of
such entity; (for purposes of this representation, ownership is determined by
taking into account the attribution rules, which generally apply a look-through
provision to determine constructive stock ownership);
22. That the fair market value of any real property (or, with respect to
any construction loan, the fair market value of the land plus the reasonably
estimated cost of the improvements other than personal property) securing a
note, determined at the time the Company became bound to make the loan, is equal
to or exceeds the amount of the loan;
23. That no interest (including interest on obligations secured by
mortgages on real property or interests in real property) received or accrued,
directly or indirectly, by the Company, its Qualified REIT Subsidiaries, the
Operating Partnership, the Affiliated Partnerships, or the Affiliated Limited
Liability Companies has been or will be determined in whole or in part by
reference to the income or profits derived by any person;
24. That neither the Company, its Qualified REIT Subsidiaries, the
Operating Partnership, the Affiliated Partnerships, nor the Affiliated Limited
Liability Companies have owned any Foreclosure Property (other than property the
income from which would not cause the statements contained in Items 16 and 17
above to no longer be true).
25. That the Company has reviewed and will continue to review all leases
for each property to ensure that such leases conform with all REIT requirements;
26. That, for taxable years prior to 1998, neither the Company, the
Operating Partnership, the Affiliated Partnerships, nor the Affiliated Limited
Liability Companies have provided any services to any tenant, other than through
an Independent Contractor from whom no income was derived or received by any
such entity, except for services that would be considered customarily furnished
or rendered in connection with the rental of real property, such as the
furnishing of water, heat, lights, trash collection, and maintenance of common
areas; that, for taxable years beginning after December 31, 1997, neither the
Company, the Operating Partnership, the Affiliated Partnerships, nor the
Affiliated Limited Liability Companies have provided or will provide services
that would generate impermissible service income in an amount that exceeds 1% of
all amounts received or accrued during the taxable year, directly or indirectly,
by the Company with respect to such property, with the amount treated as
received or accrued by the Company for such impermissible services not being
less than 150% of the direct cost of the Company in furnishing or rendering such
services (for purposes of this representation, impermissible service income
means any amount received or accrued directly or indirectly by the Company for
services furnished or rendered by the Company to the tenants of its property or
for managing or operating such property, unless (i) such
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services, management, or operations are provided through an Independent
Contractor from whom the Company has not derived or received and will not derive
or receive any income or (ii) such services are customarily furnished or
rendered in connection with the rental of real property, such as the furnishing
of water, heat, lights, trash collection, and maintenance of common areas);
27. That no independent contractor providing management and operating
functions for either the Company, the Operating Partnership, the Affiliated
Partnerships, or the Affiliated Limited Liability Companies or any of their
properties has any ownership interest in the Company in excess of 35%;
28. That at the close of each quarter of any taxable year that the Company
has made or will make a REIT election, at least 75% of the total combined value
of its assets, including its proportionate share of the assets of the Operating
Partnership, the Affiliated Partnerships, and Affiliated Limited Liability
Companies has or will consist of Real Estate Assets, cash and cash items
(including receivables), and government securities;
29. That at the close of each quarter of any taxable year that the Company
has made or will make a REIT election not more than 25% of the value of the
Company's total assets (including those assets owned indirectly through the
Operating Partnership, the Affiliated Partnerships, or Affiliated Limited
Liability Companies) has been or will be represented by securities (other than
government securities) for purposes of this calculation limited in respect of
any one issuer to an amount not greater in value than 5% of the value of the
total assets of the Company and to not more than 10% of the outstanding voting
securities of such issuer;
30. That the Company's pro rata share of the value of the securities of
Highwoods Services has not exceeded 5% of the total value of the Company's
assets at the end of any calendar quarter; that 99% of the voting stock of
Highwoods Services is owned by Ronald P. Gibson and Edward J. Fritsch; that the
Company has no informal or formal agreement with Highwoods Services or the other
shareholders of Highwoods Services regarding the voting of the Highwoods
Services stock; and that the stock owned by Ronald P. Gibson and Edward J.
Fritsch is not subject to any voting or purchase agreement that effectively
would deny such individuals of the economic rights of such stock;
31. That the Company, the Operating Partnership, the Affiliated
Partnerships, and the Affiliated Limited Liability Companies have held and hold
all real property and all other assets for investment purposes and not as (i)
stock in trade or other property of a kind which would properly be includible in
inventory if on hand at the close of the taxable year, or (ii) property held
primarily for sale to customers in the ordinary course of the trade or business
of the Operating Partnership or the Company;
32. That for each taxable year for which a REIT election has been made the
Company has distributed an amount equal to or exceeding the sum of 95% of the
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Company's real estate investment trust taxable income for such taxable year,
determined without regard for the deduction for dividends paid and by excluding
any net capital gain, and 95% of the excess of the net income from Foreclosure
Property over the tax imposed on such income, reduced by, any excess noncash
income;
33. That, in each taxable year for which a REIT election has been made,
the dividends paid by the Company on the Company's common stock were made pro
rata, with no preference to any share of the common stock as compared with other
such shares;
34. That for each taxable year for which a REIT election has been made the
Company has (i) maintained stock records that disclose actual ownership of the
Company's outstanding stock, and (ii) within 30 days of each taxable year end,
demanded a written statement from shareholders of record of five percent of more
of the Company's stock for the purpose of disclosing actual ownership;
35. That the Company has at all times adopted and used a calendar year
accounting period;
36. That other than (i) the direct ownership of the stock in
Highwoods/Florida GP Corp., Highwoods Realty GP Corp., Highwoods/Tennessee
Properties, Inc., Jackson Acquisition Corporation, Florida Transition Co. II,
Garcia Property Management, Inc., Westshore Square, Inc., Garcia, Meyers Co.,
Alemada Towers Development Company, The Bay Plaza Companies, Inc., Board of
Trade Redevelopment Corporation, Challenger, Inc., Guardian Management, Inc.,
Nichols Plaza West, Inc., Ozark Mountain Village, Inc., and Plaza Land Company,
and (ii) the indirect ownership of stock in Highwoods Services and its direct
and indirect subsidiaries, Southeast Realty Options Corp., Atrium Acquisition
Corp., 5565 Sterrett Place, Inc., PSC Acquisition Corporation (which is owned
through RC One LLC), Pikesville Sportsman Club, Inc., First Geary Corp, Board of
Trade Investment Company, Kan-Build, Inc., Someday, Inc., J.C. Nichols Realty
Company, and K.C. Condor, Inc., the Company has owned no stock or other voting
securities in any corporation (including mutual funds) at the close of any
quarter of any taxable year ended on or before December 31, 1997, or at the
close of any quarter through the date hereof;
37. That other than (i) the direct ownership of the stock in
Highwoods/Florida GP Corp., Highwoods Realty GP Corp., Highwoods/Tennessee
Properties, Inc., Alemada Towers Development Company, The Bay Plaza Companies,
Inc., Board of Trade Redevelopment Corporation, Challenger, Inc., Guardian
Management, Inc., Nichols Plaza West, Inc., Ozark Mountain Village, Inc., and
Plaza Land Company, and (ii) the indirect ownership of stock in Highwoods
Services and its direct and indirect subsidiaries, Southeast Realty Options
Corp., Atrium Acquisition Corp., 5565 Sterrett Place, Inc., Pikesville Sportsman
Club, Inc. (which is owned through RC One LLC), First Geary Corp, Board of Trade
Investment Company, Kan-Build, Inc., Someday, Inc., J.C. Nichols Realty Company,
and K.C. Condor, Inc., the Company owns no stock or other voting securities in
any corporation (including mutual funds) as of the date hereof;
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38. That each of Highwoods/Florida GP Corp., Highwoods Realty GP Corp.,
Highwoods/Tennessee Properties, Inc., Jackson Acquisition Corporation, Florida
Transition Co. II, Garcia Property Management, Inc., Westshore Square, Inc.,
Garcia, Meyers Co., Alemada Towers Development Company, The Bay Plaza Companies,
Inc., Board of Trade Redevelopment Corporation, Challenger, Inc., Guardian
Management, Inc., Nichols Plaza West, Inc., Ozark Mountain Village, Inc., and
Plaza Land Company was or has been a Qualified REIT Subsidiary at the close of
each quarter during the entire period of time in which the Company has held an
ownership interest in such corporation;
39. That the Company acquired J.C. Nichols Company in accordance with the
terms and conditions set forth in the Agreement and Plan of Merger, dated
December 22, 1997, by and among the Company, Jackson Acquisition Corp., and J.C.
Nichols Company, pursuant to which J.C. Nichols Company was merged with and into
Jackson Acquisition Corp., a wholly-owned subsidiary of the Company, (the
"Merger"); that at the time of the Merger, J.C. Nichols Company did not have any
earnings and profits accumulated from a year when it was taxable as a "C"
corporation; that as a result of the Merger, the Company was required to
complete certain restructuring events to continue its REIT status and that all
such restructuring events were completed on or before September 30, 1998; that I
have no reason to believe that the acquisition of J.C. Nichols Company or the
ownership of any of the properties acquired directly or indirectly thereby will
cause the Company to fail to satisfy any of the matters set forth in this
Certificate or to fail to qualify as a REIT in the taxable year that will end
December 31, 1998;
40. That the Operating Partnership and the Affiliated Partnerships are the
only partnerships in which the Company has held a direct or indirect interest at
the close of any quarter of any taxable year ended on or before December 31,
1997, or at the close of any quarter through of the date hereof and each of
these partnerships were formed as partnerships under the laws of the applicable
states; that the Affiliated Limited Liability Companies and RC One LLC, a
Maryland limited liability company that is owned 100% by Highwoods Services, are
the only limited liability companies in which the Company has held a direct or
indirect interest at the close of any quarter of any taxable year ended on or
before December 31, 1997, or at the close of any quarter through the date
hereof, and each of these limited liability companies were formed as limited
liability companies under the laws of the applicable states and elected to be
treated as partnerships for federal income tax purposes; that all such
partnerships (including the Affiliated Limited Liability Companies and RC One
LLC) have made no election to be treated as a corporation or any other type of
entity for federal income tax purposes; and that the Company has received no
notification formally or informally from the Service or any other person
challenging the status of any of these entities as a partnership for federal
income tax purposes;
41. That the Operating Partnership and the Affiliated Partnerships
(excluding Highwoods/Florida Holdings GP, L.P. and Highwoods/Tennessee Holdings
GP, L.P.) are the only partnerships in which the Company holds a direct or
indirect interest as of the date hereof; and that the Affiliated Limited
Liability Companies and RC One LLC are the
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only limited liability companies in which the Company holds a direct or indirect
interest as of the date hereof;
42. That the Company is not a party to any stock or asset purchase
agreement, including any plan of merger or reorganization, that will cause the
Company to fail to satisfy any of the matters set forth in this Certificate or
to fail to qualify as a REIT in the taxable year that will end December 31,
1998;
43. That the Company has filed timely income tax returns in each year of
its existence and has not included any information in such returns due to fraud
with an intent to evade taxes;
44. That the Company's ownership interests in the Operating Partnership
and its other directly or indirectly held subsidiaries are held free and clear
of any security interest, mortgage, pledge, lien, encumbrance, claim or equity;
45. That the Company will undertake to advise you of any change in the
representations made herein for so long as the Registration Statement referred
to above remains in effect; and
46. That, in rendering an opinion in connection with the Registration
Statement, Alston & Bird is entitled to rely on the factual representations set
forth in previous Officer's Certificates to the extent that such representations
are not otherwise reflected herein; and that, in rendering future opinions,
Alston & Bird is entitled to rely on the factual representations set forth in
this Officer's Certificate except to the extent that the facts covered herein
are otherwise reflected or altered by the content of any future Officer's
Certificates.
The foregoing Certification is provided to Alston & Bird LLP in connection
with rendering an opinion regarding the qualification of the Company as a REIT
and may not be relied upon for any other purpose or by any other party except as
otherwise provided herein. It is understood that such opinion is limited to the
factual matters revealed pursuant hereto and other materials provided to them
and that to the extent required, I have asked questions of the appropriate
individuals to confirm the foregoing answers, and to the best of my knowledge
and belief such answers are true, correct, and complete and in no way are
misleading.
October 9, 1998 /s/ MACK D. PRIDGEN, III
------------------------
MACK D. PRIDGEN, III
Vice-President and General Counsel
Highwoods Properties, Inc.
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CERTIFICATE
I, CARMAN J. LIUZZO, in my capacity as Vice-President, Chief Financial
Officer, and Treasurer of Highwoods Properties, Inc. (the "Company"), do hereby
certify, to the best of my knowledge and belief after making appropriate
inquiries with respect to all matters set forth below, as follows:
1. That I am a Vice-President, Chief Financial Officer, and Treasurer of
the Company;
2. That in such capacity, I have access to relevant information regarding
each of the factual matters set forth below;
3. That for purposes of this Certificate, "Registration Statement" means
the Form S-3, File No. 333-39247, as in the form filed on October 9, 1998,
relating to the registration of 2,340,000 shares of the Company's common stock;
4. That the description of the Company, its properties, and its method of
operation contained in the Registration Statement is accurate and complete in
all material aspects with respect to this opinion; and
5. That the Company will undertake to advise you of any change in the
representations made herein for so long as the Registration Statement referred
to above remains in effect.
The foregoing Certification is provided to Alston & Bird LLP in connection
with rendering an opinion regarding the qualification of the Company as a real
estate investment trust and may not be relied upon for any other purpose or by
any other party. It is understood that such opinion is limited to the factual
matters revealed pursuant hereto and other materials provided to them and that
to the extent required, I have asked questions of the appropriate individuals to
confirm the foregoing answers, and to the best of my knowledge and belief such
answers are true, correct, and complete and in no way are misleading.
October 9, 1998 /s/ Carman J. Liuzzo
-------------------------------
CARMAN J. LIUZZO
Vice-President, Chief Financial
Officer, and Treasurer
Highwoods Properties, Inc.
1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3, No. 333-39247) and the related Prospectus of
Highwoods Properties, Inc. for the registration of 2,340,000 shares of its
common stock. We also consent to the incorporation by reference therein of our
reports (a) dated February 20, 1998, with respect to the consolidated financial
statements and schedule of Highwoods Properties, Inc. included in its Annual
Report (Form 10-K) for the year ended December 31, 1997 (as amended on Form
10-K/A dated April 29, 1998 and May 19, 1998), (b) dated January 24, 1997, and
January 25, 1997 with respect to the Combined Statements of Revenues and Certain
Expenses of Century Center and Anderson Properties, respectively, included in
the Current Report on Form 8-K of Highwoods Properties, Inc. dated January 9,
1997 (as amended on Form 8-K/A on February 7, 1997, March 10, 1997 and April 28,
1998), (c) dated January 16, 1998, with respect to the Combined Statements of
Revenues and Certain Expenses of Shelton Properties and Riparius Properties and
the Statement of Revenues and Certain Expenses of Winners Circle for the year
ended December 31, 1996 included in the Current Report on Form 8-K of Highwoods
Properties, Inc. dated November 17, 1997, and (d) dated January 30, 1998 with
respect to the Combined Statement of Revenues and Certain Expenses of Garcia
Properties for the year ended December 31, 1997 included in the Current Report
on Form 8-K of Highwoods Properties, Inc. dated February 4, 1998, all filed with
the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
October 8, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective
Amendment No. 2 to Registration Statement on Form S-3 (File No. 333-39247) of
our reports dated September 12, 1997, on our audits of the combined statement of
revenues and certain operating expenses of the Associated Capital Properties
Portfolio for the year ended December 31, 1996, and the combined statement of
revenues and certain operating expenses of the 1997 Pending Acquisitions for the
year ended December 31, 1996, which reports are included in the Form 8-K of
Highwoods Properties, Inc. dated August 27, 1997 (as amended on September 23,
1997) and October 1, 1997. We also consent to the reference to our firm under
the caption "Experts."
/s/ PRICEWATERHOUSECOOPERS LLP
Memphis, Tennessee
October 9, 1998
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement Form
S-3 (No. 333- 39247) and related Prospectus of Highwoods Properties, Inc. of our
report on the consolidated financial statements of J. C. Nichols Company and
subsidiaries as of December 31, 1997 and for each of the years in the three-year
period then ended, which was dated March 6, 1998.
/s/ KPMG PEAT MARWICK LLP
October 9, 1998
