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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 27, 1996
REGISTRATION NO. 333-17805
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EVANS WITHYCOMBE RESIDENTIAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 86-0766008
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
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6991 EAST CAMELBACK ROAD, SUITE A-200
SCOTTSDALE, ARIZONA 85251
(602) 840-1040
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
STEPHEN O. EVANS
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
EVANS WITHYCOMBE RESIDENTIAL, INC.
6991 EAST CAMELBACK ROAD, SUITE A-200
SCOTTSDALE, ARIZONA 85251
(602) 840-1040
(Name, address, including zip code and telephone number, including area code, of
agent for service)
--------------------------
COPY TO:
KENNETH M. DORAN, ESQ.
GIBSON, DUNN & CRUTCHER LLP
333 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA
90071-3197
(213) 229-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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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 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 from 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. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PROSPECTUS
182,685 SHARES
[LOGO]
EVANS WITHYCOMBE RESIDENTIAL, INC.
COMMON STOCK
--------------------------
Evans Withycombe Residential, Inc., a Maryland corporation (the "Company"),
is a developer, owner and manager of multifamily apartment communities in the
Southwest and operates as a self-administered and self-managed real estate
investment trust (a "REIT"). The Company conducts all of its operations through
Evans Withycombe Residential, L.P., a Delaware limited partnership (the
"Operating Partnership"), either directly or through subsidiaries. The Company
is the sole general partner and a limited partner of the Operating Partnership
and as of September 30, 1996, owned an approximately 79.3% interest therein.
This Prospectus relates to (i) the possible issuance by the Company of up to
182,685 shares (the "Exchange Shares") of Common Stock, par value $.01 per share
("Common Shares"), of the Company if, and to the extent that, holders of up to
182,685 units of limited partnership interest in the Operating Partnership
("Units") tender such Units to the Operating Partnership for redemption, and the
Company elects to issue Common Shares in exchange therefor, and (ii) the offer
and sale from time to time of up to 182,685 Common Shares that may be issued to
such persons (the "Selling Stockholders"). The Company is registering the offer
and sale by the Selling Stockholders of Exchange Shares, but the registration of
such shares does not necessarily mean that any of such shares will be offered or
sold by the holders thereof.
The Company's Common Shares are traded on the New York Stock Exchange (the
"NYSE") under the symbol "EWR." On December 26, 1996, the closing sale price of
the Common Shares as reported on the NYSE was $20 3/4 per share.
THE COMMON SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" LOCATED AT PAGE 4 HEREIN.
The Selling Stockholders may from time to time offer and sell the Exchange
Shares held by them directly or through agents or broker-dealers on terms to be
determined at the time of sale. To the extent required, the names of any agent
or broker-dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution." Each of the
Selling Stockholders reserves the sole right to accept or reject, in whole or in
part, any proposed purchase of the Exchange Shares to be made directly or
through agents.
The Company will not receive any proceeds from the issuance of the Exchange
Shares or the sale of such Exchange Shares by the Selling Stockholders but has
agreed to bear certain expenses of registration of the Exchange Shares under
Federal and state securities laws, other than commissions and discounts of
agents or broker-dealers and transfer taxes, if any. The Company will acquire
Units in the Operating Partnership in exchange for any Exchange Shares that the
Company may issue to holders of Units pursuant to this Prospectus.
The Selling Stockholders and any agents or broker-dealers that participate
with the Selling Stockholders in the distribution of Exchange Shares may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), and any commissions received by them and any
profit on the resale of the Exchange Shares may be deemed to be underwriting
commissions or discounts under the Securities Act.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is December 27, 1996.
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AVAILABLE INFORMATION
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of the contract or other document filed as an exhibit to this
Registration Statement on Form S-3 (the "Registration Statement") filed with the
Securities and Exchange Commission (the "Commission"), each statement being
qualified in all respects by such reference and the exhibits and schedules
hereto, which may be inspected without charge at the Commission's principal
office at 450 Fifth Street, N.W., Washington, D.C. and copies of the
Registration Statement or any part thereof may be obtained from such office,
upon payment of the fees prescribed by the Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed with the
Commission by the Company can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission located at 500 West
Madison Street, Room 1400, Chicago, Illinois 60606-2511 and at 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company's Common
Shares are listed on the New York Stock Exchange (the "NYSE") and the reports,
proxy and information statements and other information filed by the Company with
the NYSE can also be inspected at the offices of the NYSE at 20 Broad Street,
New York, New York 10005. The Commission maintains a website that contains
reports, proxy and information statements and other information filed
electronically with the Commission at http:\\www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 1-13256)
pursuant to the Exchange Act are incorporated herein by reference:
(1) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995;
(2) the Company's Quarterly Reports on Form 10-Q for the quarterly periods
ended March 31, 1996, June 30, 1996 and September 30, 1996;
(3) the Company's Current Report on Form 8-K filed with the Commission on
December 26, 1996;
(4) the description of the Company's Common Shares contained in the
Company's Registration Statement on Form 8-A filed with the Commission on
August 1, 1994;
(5) the Company's Proxy Statement relating to the Company's 1996 Annual
Meeting of Shareholders; and
(6) all other documents filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the filing of a post-effective amendment which
indicates that all securities offered hereby have been sold or which
deregisters all securities then remaining unsold.
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents or into this Prospectus) will be
provided without charge to each person, including any beneficial owner, to whom
this Prospectus is delivered, upon a written or oral request to Evans Withycombe
Residential, Inc., Attention: Secretary, 6991 East Camelback Road, Suite A-200,
Scottsdale, Arizona 85251, telephone number: (602) 840-1040.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
DESCRIPTIONS AND THE FINANCIAL INFORMATION AND STATEMENTS APPEARING ELSEWHERE
AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED OR
AS THE CONTEXT OTHERWISE REQUIRES, (A) REFERENCES TO THE "COMPANY" SHALL INCLUDE
THE COMPANY'S PREDECESSOR, EVANS WITHYCOMBE, INC., AND ITS AFFILIATES,
PREDECESSORS AND PARTNERS (COLLECTIVELY, "EVANS WITHYCOMBE") AND EVANS
WITHYCOMBE RESIDENTIAL, L.P. (THE "OPERATING PARTNERSHIP"), EVANS WITHYCOMBE
FINANCE PARTNERSHIP, L.P. (THE "FINANCING PARTNERSHIP") AND EVANS WITHYCOMBE
MANAGEMENT, INC. (THE "MANAGEMENT COMPANY"), AND (B) REFERENCES TO THE OPERATING
PARTNERSHIP INCLUDE THE FINANCING PARTNERSHIP.
THE COMPANY
The Company is a developer, owner and manager of apartments in the
Southwest. The Company's property portfolio consists of stabilized properties
and properties under construction (a property is considered stabilized when it
reaches 93% occupancy). As of September 30, 1996, the Company owned and managed
44 stabilized multifamily apartment communities located in the metropolitan
Phoenix and Tucson areas, which contained a total of 11,885 apartments and four
stabilized multifamily apartment communities located in the Riverside/San
Bernardino, California area, which contained a total of 1,404 apartments. As of
September 30, 1996, the Company was also in the process of developing or
expanding six communities comprising 1,198 units in its Arizona markets. Six of
these communities were new developments or expansions of existing communities
owned by the Company comprising 1,198 units in its Arizona markets. The
stabilized communities and the communities under construction are referred to
herein collectively as the "Communities."
In August 1994 the Company completed an initial public offering of 8,685,000
Common Shares (the "Initial Public Offering"), and subsequently completed the
sale of an additional 1,302,750 Common Shares upon exercise of the underwriters'
over-allotment option. Concurrently with the Initial Public Offering, the
Company consummated transactions undertaken in connection with the formation of
the Company to transfer the ownership of the Communities and certain development
rights and the business of Evans Withycombe and other assets to the Operating
Partnership (the "Formation Transactions"). Pursuant to the Formation
Transactions, Common Shares or Units were issued to Messrs. Stephen O. Evans and
F. Keith Withycombe, certain affiliated entities and certain officers and
employees of such entities, affiliates of Aldrich, Eastman and Waltch, L.P.
("AEW") and funds managed by an affiliate of Copley Real Estate Advisors, Inc.
("Copley"), and certain other investors (collectively, the "Original
Investors").
All of the Communities and other assets of the Company are held by, and all
of the Company's operations are conducted through, the Operating Partnership
(either directly or through subsidiaries). The Company is the sole general
partner and also a limited partner of the Operating Partnership and, as of
September 30, 1996, owned an approximately 79.3% interest therein. The remaining
interests in the Operating Partnership are owned in the form of Units by the
other limited partners of the Operating Partnership (the "Limited Partners"). To
maintain the Company's qualifications as a REIT while realizing income from its
fee management and related service business, the Company's management operations
are conducted through the Management Company pursuant to the terms of management
agreements with the Operating Partnership and the Financing Partnership.
The Company was incorporated in Maryland in May 1994. The principal
executive offices of the Company are located at 6991 East Camelback Road, Suite
A-200, Scottsdale, Arizona 85251, telephone number: (602) 840-1040.
RISK FACTORS
Prospective investors and Limited Partners should carefully consider the
matters discussed under "Risk Factors" prior to making an investment decision
regarding the Common Shares offered hereby.
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TAX CONSIDERATIONS AND TAX STATUS OF THE COMPANY
The Company has elected to be taxed as a REIT under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with
its taxable period ending December 31, 1994. A REIT is a legal entity that holds
real estate interests and, through its payment of dividends, is able to reduce
substantially the incurrence of federal income tax at the corporate level,
allowing its shareholders to participate in real estate investments without the
"double taxation" of income that generally results from investment in a regular
corporation. REITs are subject to a number of organizational and operational
requirements. If the Company fails to qualify as a REIT in any taxable year, the
Company will be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates. See
"Risk Factors--Adverse Consequences of Failure to Qualify as a REIT; Partnership
Qualification" and "Federal Income Tax Considerations." Even if the Company
continues to qualify for taxation as a REIT, the Company may be subject to
certain federal, state and local taxes on its income and property.
REDEMPTION OF UNITS
Commencing one year after the date of acquisition of Units, Limited Partners
have the right (the "Redemption Right") to cause the Operating Partnership to
redeem all or a portion of their Units for cash equal to the fair market value
of an equivalent number of Common Shares at the time of such exchange, provided
that the Company at its option may elect to acquire any such Units presented for
redemption for the same amount of cash or Common Shares on a one-for-one basis.
The Company presently anticipates that it will elect to issue the Common Shares
pursuant to this Prospectus to acquire Units surrendered for redemption. Thus,
the Company may from time to time issue up to 182,685 Exchange Shares upon the
acquisition of the Units tendered for exchange by the Limited Partners. For the
Exchange Shares that the Company issues to a Limited Partner, the Company will
acquire such exchanging partner's Units. Consequently, with each exchange of
Units for Exchange Shares, the Company's interest in the Operating Partnership
will increase.
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS OR IN ANY ACCOMPANYING PROSPECTUS SUPPLEMENT, PROSPECTIVE
INVESTORS AND LIMITED PARTNERS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS
BEFORE MAKING AN INVESTMENT DECISION REGARDING THE SECURITIES OFFERED HEREBY.
TAX CONSEQUENCES OF REDEMPTION OF UNITS
The exercise by a Limited Partner of the Redemption Right generally will be
treated for tax purposes as a sale of such Units by such Limited Partner. Such a
sale will be fully taxable to the Limited Partner and such Limited Partner will
be treated as realizing for tax purposes an amount equal to the sum of the cash
or the value of the Exchange Shares received plus the amount of any Operating
Partnership liabilities allocable to the redeemed Units at the time of the
redemption. The gain or loss recognized by a Limited Partner will equal the
difference between the amount realized, as described in the preceding sentence,
and the Limited Partner's basis in the Units surrendered. It is possible that
the amount of gain recognized or even the tax liability resulting from such gain
could exceed the amount of cash and the value of other property (e.g., the value
of Exchange Shares) received upon such disposition. In addition, the ability of
a Limited Partner to sell a substantial number of Exchange Shares in order to
raise cash to pay tax liabilities associated with the redemption of Units may be
restricted due to the Company's relatively low trading volume, and, as a result
of fluctuations in the stock price, the price such holder receives for such
shares may not equal the value of the Units at the time of redemption.
POTENTIAL CHANGE IN INVESTMENT UPON REDEMPTION OF UNITS
If a Limited Partner exercises the right to require the redemption of its
Units, such Limited Partner may receive, at the option of the Company, cash or
Common Shares in exchange for the Units. If the Limited Partner receives cash,
the Limited Partner will no longer have any interest in the Company and will not
benefit from any potential increases in share price and will not receive any
future distributions from the Company (unless the Limited Partner currently owns
or acquires in the future additional Common Shares or Units). If the Limited
Partner receives Common Shares, the Limited Partner will become a stockholder of
the Company rather than a holder of Units in the Operating Partnership. Although
the nature of an investment in Common Shares is similar in certain respects to
an investment in Units, there are also differences between ownership of Units
and ownership of Common Shares. See "Redemption of Units--Comparison of
Ownership of Units and Common Shares."
ADVERSE CONSEQUENCES OF DEBT FINANCING
INABILITY TO SERVICE DEBT; RISKS OF REFINANCING. The Company is subject to
the risks normally associated with debt financing, including the risk that the
Company's cash flow will be insufficient to meet required payments of principal
and interest. Because the Company anticipates that only a portion of the
principal of the Company's indebtedness will be repaid prior to maturity and the
Company may not have on hand funds sufficient to repay indebtedness due at
maturity, it may be necessary for the Company to refinance debt through
additional debt financings or additional equity offerings. The Company's $131.0
million 7.98% mortgage financing securitized by certain Communities (the
"Mortgage Loan") will mature in 2001. The Company's Credit Facility will mature
in 1999 and additional outstanding mortgage indebtedness will mature between
1997 and 2001. If the Company were unable to refinance this indebtedness on
acceptable terms, the Company might be forced to dispose of properties upon
disadvantageous terms, which could result in losses to the Company and adversely
affect the cash available for distribution. In addition, if prevailing interest
rates or other factors at the time of a refinancing result in higher interest
rates on refinancings, the Company's interest expenses may increase, which
increase may adversely affect the Company's cash available for distribution and
its ability to pay distributions to shareholders. If the Company is unable to
meet its payment and other obligations, one or more of its properties could be
foreclosed upon or otherwise transferred to the mortgagee with a consequent loss
of income and asset value to the Company. See "Real Estate Investment Risks" and
"--Risks of Development, Construction and Acquisition Activities."
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RISK OF RISING INTEREST RATES. As of September 30, 1996, the Company had
$156.0 million of variable rate mortgage indebtedness and expects to continue
draw down upon the Credit Facility with respect to continued construction
financing for certain Communities. In addition, future indebtedness may also
bear interest at a variable rate. Accordingly, increases in interest rates could
increase the Company's interest expense, which would adversely affect the
Company's cash available for distribution to shareholders.
NO LIMITATIONS ON DEBT. As of September 30, 1996, the debt to total market
capitalization ratio of the Company was approximately 42.8%. The Company could
become more highly leveraged, resulting in an increase in debt service that
could adversely affect the Company's cash available for distribution to
shareholders and could increase the risk of default on the Company's
indebtedness.
The various risks relating to debt financing and the Company's debt
policies, considered in the aggregate, create a greater risk for the Company
than such risks and policies considered individually.
POTENTIAL DEFAULTS UNDER THE MORTGAGE LOAN. As of September 30, 1996, the
Financing Partnership has borrowed approximately $131.0 million in principal
amount under the Mortgage Loan. The payment and other obligations under the
Mortgage Loan are secured by first mortgage liens on 22 Communities. If the
Company fails to meet its obligations under the Mortgage Loan, the lender would
be entitled to foreclose on the Communities securing such debt, which would have
a material adverse effect on the Company and its ability to make expected
distributions and could threaten the continued viability of the Company.
INABILITY TO OBTAIN RELEASE OF PROPERTIES SECURING THE MORTGAGE LOAN. As
stated above, repayment of the Mortgage Loan is secured by a first mortgage lien
on certain Communities. The documents with respect to the Mortgage Loan contain
restrictions on the ability of the Company to obtain the release of a Community
securing the Mortgage Loan from the related lien. In the event the Company is
unable to obtain the release of a particular Community from the Mortgage Loan,
it would be unable to consummate a sale of such Community which might otherwise
be in the best interests of the Company.
RISKS WITH RESPECT TO REIT STATUS. It is a condition to the Mortgage Loan
that the Financing Partnership enter into a servicing arrangement on or before
the sixth anniversary of the issuance of the Mortgage Loan, as well as provide
evidence of refinancing availability six months prior to the Maturity Date.
Failure to enter into a service arrangement or provide evidence of refinancing
availability on a timely basis will result in the lender retaining all net cash
flow from the Communities securing the Mortgage Loan, which could result in a
loss of REIT status for the Company. Although no assurances can be given, the
Company expects to have a servicing arrangement in place and will be able to
provide evidence of refinancing availability prior to these aforementioned
dates.
CONFLICTS OF INTEREST
TAX CONSEQUENCES UPON SALE OR REFINANCING OF PROPERTIES. While the Company,
as the sole general partner of the Operating Partnership and the owner of the
sole general partner of the Financing Partnership, has the authority as to
whether and on what terms to sell or refinance an individual Community, those
members of the Company's management and Board of Directors of the Company who
hold Units, including Messrs. Evans, Withycombe and Berry, could potentially
influence the Company not to sell or refinance the Communities, even though such
sale might otherwise be financially advantageous to the Company, or may
influence the Company not to refinance a Community with a high level of debt,
because a sale or refinancing may result in different and more adverse tax
consequences to them than to the Company.
FAILURE TO ENFORCE TERMS OF CONTRIBUTIONS. As Original Investors and
recipients of cash in the Formation Transactions, Messrs. Evans, Withycombe and
Berry and the other executive officers of the Company and Mr. Azrack and Mr.
O'Connor, the designees on the Board of Directors of AEW and Copley,
respectively, have a conflict of interest with respect to their obligations as
directors or executive officers of the Company in enforcing the terms of the
agreements relating to such transactions. The failure to enforce the material
terms of those agreements, particularly the indemnification provisions and the
remedy provisions for breaches of representations and warranties, could result
in a monetary loss to the
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Company, which loss could have a material effect on the Company's financial
condition or results of operations.
CERTAIN PROPERTIES NOT INCLUDED IN COMPANY. Evans Withycombe has direct or
indirect interests in four multifamily apartment communities that were not
transferred to the Company at the time of its formation (collectively referred
to herein as the "Excluded Properties"). The Management Company manages certain
of the Excluded Properties for a fee pursuant to existing management agreements.
POLICIES WITH RESPECT TO CONFLICTS OF INTERESTS. The Company has adopted
certain policies designed to eliminate or minimize conflicts of interest. These
policies include a policy adopted by the Board of Directors that all
transactions in which executive officers or directors have a conflicting
interest must be approved by a majority of the disinterested directors of the
Company. However, there can be no assurance that these policies always will be
successful in eliminating the influence of such conflicts, and, if they are not
successful, decisions could be made that might fail to reflect fully the
interests of all shareholders.
REAL ESTATE INVESTMENT RISKS
GENERAL RISKS. Real property investments are subject to varying degrees of
risk. The yields available from equity investments in real estate depend on the
amount of income generated and expenses incurred. If the Company's communities
do not generate revenues sufficient to meet operating expenses, including debt
service and capital expenditures, the Company's cash flow and ability to make
distributions to its shareholders will be adversely affected. A multifamily
apartment community's revenues and value may be adversely affected by a number
of factors including: the national economic climate; the local economic climate
(which may be adversely impacted by plant closings, industry slowdowns, changing
demographics, military base closings and other factors); local real estate
conditions (such as oversupply of or reduced demand for apartments); the
perceptions by prospective residents of the safety, convenience and
attractiveness of the Communities or neighborhoods in which they are located and
the quality of local schools and other amenities; the ability of the owner to
provide adequate management, maintenance and insurance; and increased operating
costs (including real estate taxes and utilities). Certain significant
expenditures associated with each equity investment (such as mortgage payments,
if any, real estate taxes, insurance and maintenance costs) are generally not
reduced when circumstances cause a reduction in income from the investment. If a
property is mortgaged to secure payment of indebtedness, and if the Company is
unable to meet its mortgage payments, a loss could be sustained as a result of
foreclosure on the property or the exercise of other remedies by the mortgagee.
In addition, real estate values and income
from properties are also affected by such factors as applicable laws, including
tax laws, interest rate levels and the availability of financing.
DEPENDENCE ON PRIMARY MARKETS. The Communities are located in various
sub-markets in Phoenix and Tucson, Arizona and Riverside/San Bernardino,
California, and the Company's performance could be adversely affected by
economic conditions in, and other factors relating to, these geographic areas,
including supply and demand for apartments in these areas, zoning or other
regulatory conditions and competition from other available apartments and
alternative forms of housing. These and other factors or a decline in the
economy or real estate values in the Phoenix, Tucson and Southern California
markets may adversely affect the ability of the Company to make distributions to
its shareholders.
MARKET ILLIQUIDITY. Equity real estate investments are relatively illiquid.
Such illiquidity will tend to limit the ability of the Company to vary its
portfolio promptly in response to changes in economic or other conditions. In
addition, the Code limits the Company's ability to sell properties held for
fewer than four years, which may affect the Company's ability to sell properties
without adversely affecting returns to holders of the Common Shares.
OPERATING RISKS. The Communities will be subject to all operating risks
common to multifamily apartment communities in general, any and all of which
might adversely affect apartment occupancy or rental rates. Increases in
unemployment in the areas in which the communities owned or managed by the
Company are located might adversely affect multifamily apartment occupancy or
rental rates. Increases in
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operating costs due to inflation and other factors may not necessarily be offset
by increased rents. Residents may be unable or unwilling to pay rent increases.
If operating expenses increase, the local rental market may limit the extent to
which rents may be increased to meet increased expenses without decreasing
occupancy rates. If any of the above occurs, the Company's ability to make
distributions to shareholders could be adversely affected.
CHANGE IN LAWS. Increases in real estate taxes and income, service or
transfer taxes cannot always be passed through to residents in the form of
higher rents, and may adversely affect the Company's cash available for
distribution and its ability to make distributions to shareholders. Similarly,
changes in laws increasing the potential liability for environmental conditions
existing on properties or increasing the restrictions on discharges or other
conditions, as well as changes in laws affecting development, construction and
safety requirements, may result in significant unanticipated expenditures, which
would adversely affect the Company's cash available for distribution and its
ability to make distributions to shareholders. In addition, future enactment of
rent control or rent stabilization laws or other laws regulating multifamily
housing may reduce rental revenue or increase operating costs.
RISK OF INCREASED PROPERTY TAXES. The transactions undertaken to form the
Company may increase the risk that certain Communities will be reassessed for
purposes of the Maricopa and Pima County property taxes. In the event of such
reassessments, the Company could incur significant additional liabilities for
property taxes, thereby reducing cash available for distribution to
shareholders.
COMPETITION. There are numerous housing alternatives that compete with the
Communities in attracting residents. The Communities compete directly with other
multifamily rental apartments and single family homes that are available for
rent in the markets in which the Communities are located. The Communities also
compete for residents with new and existing homes and condominiums. In addition,
other competitors for development and acquisitions of properties may have
greater resources than the Company.
RISKS OF DEVELOPMENT, CONSTRUCTION AND ACQUISITION ACTIVITIES
The Company intends to actively continue development and construction of
multifamily apartment communities. Risks associated with the Company's
development and construction activities may include: development opportunities
may be abandoned; construction costs of a community may exceed original
estimates, possibly making the community uneconomical; occupancy rates and rents
at a newly completed community may not be sufficient to make the community
profitable; financing may not be available on favorable terms for development of
a community; and construction and lease-up may not be completed on schedule,
resulting in decreased revenues and increased interest expense. 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. Development activities are also 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.
The Company intends to continue actively to acquire multifamily apartment
communities. Acquisitions of multifamily apartment communities entail risks that
investments will fail to perform in accordance with expectations. Estimates of
the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may prove
inaccurate. In addition, there are general investment risks associated with any
new real estate investment.
The Company anticipates that future developments and acquisitions will be
financed, in whole or in part, under various construction loans, the Credit
Facility, other lines of credit, other forms of secured or unsecured financing
or through the issuance of additional equity by the Company. However, the
Company expects periodically to review its financing options regarding the
appropriate mix of debt and equity financing. Equity, rather than debt,
financing of future developments or acquisitions could have a dilutive effect on
the interests of existing shareholders of the Company. If new developments are
financed through construction loans, there is a risk that, upon completion of
construction, permanent financing for such
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communities may not be available or may be available only on disadvantageous
terms or that the cash flow from new communities will be insufficient to cover
debt service. If a newly developed or acquired community is unsuccessful, the
Company's losses may exceed its investment in the community. Any of the
foregoing could have a material adverse effect on the Company and its ability to
make anticipated distributions.
RISKS OF FEE MANAGEMENT BUSINESS
POSSIBLE TERMINATION OF MANAGEMENT CONTRACTS. The Management Company
intends to continue the management for a fee of properties owned by third
parties. While the Company will take advantage of its reputation and experience
as a property manager and accept property management assignments that it expects
to be profitable and which fit well with the Company's property portfolio, it
does not anticipate revenue growth and has experienced a revenue decline in this
segment of its business. Risks associated with the management of properties
owned by third parties include the risk that the management contracts (which are
generally cancelable upon a sale of a property or, in some cases, upon 30 days'
notice) will be terminated by the property owner or will be lost in connection
with a sale of such property, that contracts may not be renewed upon expiration
or may not be renewed on terms consistent with current terms and that the rental
revenues upon which management fees are based will decline as a result of
general real estate market conditions or specific market factors affecting
properties managed by the Management Company, resulting in decreased management
fee income.
TAX LIABILITIES. The Management Company is subject to federal and state
income tax on its taxable income at regular corporate rates. Any federal, state
or local income taxes that the Management Company is required to pay will reduce
the cash available for distribution by the Company to its shareholders.
POSSIBLE ADVERSE CONSEQUENCES OF LACK OF CONTROL OVER THE BUSINESS OF THE
MANAGEMENT COMPANY. The capital stock of the Management Company is divided into
two classes: voting common stock, 99% of which is held by Messrs. Evans and
Withycombe and 1% of which is held by the Operating Partnership, and nonvoting
common stock, 100% of which is held by the Operating Partnership. This ownership
structure is necessary to permit the Company to share in the income of the
Management Company and also maintain its status as a REIT. The board of
directors of the Management Company consists of members of management of the
Company. Messrs. Evans and Withycombe, as the holders of 99% of the voting
common stock, will retain the ability to elect the entire board of directors of
the Management Company after the terms of the initial directors expire. Although
the nonvoting common stock and voting common stock of the Management Company
held by the Company through the Operating Partnership will represent 99% of the
equity interests in such company, the Company will not be able to elect
directors and its ability to influence the day-to-day decisions of the
Management Company will therefore be limited. As a result, the boards of
directors and management of the Management Company may implement business
policies or decisions that would not have been implemented by persons controlled
by the Company and that are adverse to the interests of the Company, or which
could adversely impact the Company's net operating income and funds from
operations. The voting common stock held by Messrs. Evans and Withycombe is
subject to a requirement that is designed to ensure that such stock will be held
by officers of the Management Company.
POSSIBLE ADVERSE CONSEQUENCES OF REIT STATUS ON THE BUSINESS OF THE
MANAGEMENT COMPANY. Certain requirements for REIT qualification may in the
future limit the Company's ability to increase fee management operations
conducted and related services offered by the Management Company without
jeopardizing the Company's qualification as a REIT. See "--Adverse Consequences
of Failure to Qualify as a REIT; Partnership Qualification" and "Federal Income
Tax Considerations--Taxation of the Company."
POSSIBLE ADVERSE CONSEQUENCES OF LIMITS ON OWNERSHIP OF THE COMMON SHARES
In order to maintain its qualification as a REIT, not more than 50% in value
of the outstanding capital stock of the Company may be owned, actually or
constructively, by five or fewer individuals (as defined in
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the Code to include certain entities). In order to protect the Company against
the risk of losing its status as a REIT due to a concentration of ownership
among its shareholders, the Company has limited actual or constructive ownership
of its issued and outstanding capital stock by any single person (with certain
exceptions) to 9.8% of the outstanding Common Shares (the "Ownership Limit").
See "Description of Capital Stock--Restrictions on Ownership." Although the
Board of Directors presently has no intention of doing so, the Board of
Directors could waive this restriction if certain conditions are met. The
acquisition or transfer of Common Shares in breach of the limitation will be
void AB INITIO and, provided the Company has requested and received a ruling
from the Internal Revenue Service ("IRS") or an opinion of counsel to the effect
that such action would not jeopardize the Company's status as a REIT, the Common
Shares purportedly acquired or transferred will become subject to provisions in
the Company's Charter that, in effect, are designed to prohibit the person who
purported to acquire those shares from voting, receiving dividends or other
distributions, and participating in the appreciation in value of those shares.
In addition, Common Shares acquired or transferred in breach of the limitation
may be purchased by the Company for the lesser of the price paid and the market
price (as determined in the manner set forth in the Charter). See "Description
of Capital Stock--Restrictions on Ownership" for additional information
regarding the Ownership Limit.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; PARTNERSHIP QUALIFICATION
TAX LIABILITIES AS A CONSEQUENCE OF THE FAILURE TO QUALIFY AS A REIT. The
Company intends to operate so as to qualify as a REIT under the Code. Although
management of the Company believes that the Company is organized and will
operate in such a manner, no assurance can be given that the Company will
qualify or remain qualified as a REIT. Qualification as a REIT involves the
application of highly technical and complex Code provisions for which there are
only limited judicial and administrative interpretations. The complexity of
these provisions and of the applicable income tax regulations (the "Treasury
Regulations") that have been promulgated under the Code is greater in the case
of a REIT that holds its assets in partnership form. The determination of
various factual matters and circumstances not entirely within the Company's
control may affect the Company's ability to qualify as a REIT. For example, in
order to qualify as a REIT, at least 95% of the Company's gross income in any
year must be derived from qualifying sources and the Company must make
distributions to shareholders aggregating annually at least 95% of its REIT
taxable income (excluding capital gains). Principal payments on indebtedness of
the Company, as well as expenditures for capital improvements, generally are not
immediately deductible for purposes of computing REIT taxable income, and
therefore may result in the Company being required to borrow or issue additional
equity in order to make required distributions. There can be no assurance that
the Company will be able to obtain such debt or equity financing. In addition,
no assurance can be given that new legislation, regulations, administrative
interpretations or court decisions will not significantly change the tax laws or
the application thereof with respect to qualification as a REIT or the federal
income tax consequences of such qualification.
Among the requirements for REIT qualification is that the value of any one
issuer's securities held by a REIT may not exceed 5% of the value of the REIT's
total assets on certain testing dates. See "Federal Income Tax
Considerations--Taxation of the Company--Requirements for Qualification." The
Company believes that the value of the securities of the Management Company held
by the Company is less than 5% of the value of the Company's total assets, based
on the Company's belief regarding the maximum value that could be assigned to
the assets and net operating income contributions of the Management Company.
If the Company fails to qualify as a REIT, it will be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income, without reduction for dividends paid, at regular corporate rates. In
addition, unless entitled to relief under certain statutory provisions, the
Company will be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. The additional tax would
significantly reduce the cash flow available for distribution to shareholders.
See "Federal Income Tax Considerations--Failure to Qualify."
QUALIFICATION OF THE OPERATING PARTNERSHIP AND FINANCING PARTNERSHIP AS
PARTNERSHIPS FOR FEDERAL INCOME TAX PURPOSES; IMPACT ON REIT STATUS OF THE
COMPANY. If the IRS were to challenge successfully the tax
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status of the Operating Partnership or the Financing Partnership as partnerships
for federal income tax purposes, the Operating Partnership, the Financing
Partnership or both, as the case may be, would be treated as an association
taxable as a corporation. In such event, the character of the Company's assets
and items of gross income would change and preclude the Company from satisfying
the asset tests and possibly the income tests (as discussed below) and, in turn,
would prevent the Company from qualifying as a REIT. See "Federal Income Tax
Considerations--Taxation of the Company." In addition, the imposition of a
corporate tax on the Operating Partnership or the Financing Partnership would
significantly reduce the amount of cash available for distribution to the
Company and its shareholders. See "Federal Income Tax Considerations--Tax
Aspects of the Operating Partnership and Financing Partnership."
OTHER TAX LIABILITIES. Even if the Company qualifies as a REIT, it will be
subject to certain federal, state and local taxes on its income and property. In
particular, the Company will derive a portion of its operating cash flow from
the activities of the Management Company. The taxable income earned by the
Management Company, which will not qualify as a REIT, will be subject to
federal, state and local income tax. See "Federal Income Tax
Considerations--Other Tax Consequences."
CHANGES IN POLICIES WITHOUT SHAREHOLDER APPROVAL
The investment, financing, borrowing and distribution policies of the
Company and its policies with respect to all other activities, including growth,
debt, capitalization and operations, will be determined by the Board of
Directors. Although the Board of Directors has no present intention to do so,
these policies may be amended or revised at any time and from time to time at
the discretion of the Board of Directors without a vote of the shareholders of
the Company. A change in these policies could adversely affect the Company's
financial condition, results of operations or the market price of Common Shares.
EFFECT OF MARKET INTEREST RATES ON PRICE OF THE COMMON SHARES
One of the factors that will influence the market price of the Common Shares
in public markets will be the annual yield on the price paid for shares from
distributions by the Company. An increase in market interest rates may lead
prospective purchasers of the Common Shares to demand a higher annual yield from
future distributions. Such an increase in the required yield from distributions
may adversely affect the market price of the Common Shares.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers and
directors, particularly Messrs. Evans, Withycombe and Berry. The loss of their
services could have an adverse effect on the operations of the Company. The
Company does not have "key man" life insurance for Messrs. Evans, Withycombe and
Berry. Each of Messrs. Evans, Withycombe and Berry have entered into employment
agreements with the Company.
LIMITS ON CHANGES IN CONTROL
In addition to the Ownership Limit, certain provisions contained in the
Company's Charter and under Maryland law may have the effect of discouraging a
third party from making an acquisition proposal for the Company and may thereby
inhibit a change in control of the Company. For example, such provisions may (i)
deter tender offers for the Common Shares, which offers may be beneficial to
shareholders or (ii) deter purchases of large blocks of Common Shares, thereby
limiting the opportunity for shareholders to receive a premium for their Common
Shares over then-prevailing market prices. See "Description of Capital
Stock--Common Shares" and "Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws." These provisions include the following:
PREFERRED SHARES. The Charter authorizes the Board of Directors to issue up
to 10,000,000 preferred shares, par value $.01 (the "Preferred Shares" and,
together with the Common Shares, the "Shares"), in one or more classes and to
establish the preferences and rights (including the right to vote and the right
to
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convert into the Common Shares) of any class of Preferred Shares issued. No
Preferred Shares are currently issued or outstanding. See "Description of
Capital Stock--Preferred Shares."
STAGGERED BOARD. The Board of Directors of the Company has three classes of
directors. The term of the third class will expire in 1997 and 1999,
respectively (the terms of the first and second classes expired in 1995 and
1996, respectively, and such directors were re-elected to terms expiring in 1998
and 1999, respectively). Directors for each class will be chosen for a
three-year term upon the expiration of the term of the current class. The
affirmative vote of two-thirds of the outstanding Common Shares is required to
remove a director.
MARYLAND BUSINESS COMBINATION STATUTE. Under the Maryland General
Corporation Law ("MGCL"), certain "business combinations" (including the
issuance of equity securities) between a Maryland corporation and any person who
owns, directly or indirectly, 10% or more of the voting power of the
corporation's shares of capital stock (an "Interested Stockholder") must be
approved by a supermajority (80%) of voting shares. In addition, an Interested
Stockholder may not engage in a business combination for five years following
the date he or she became an Interested Stockholder.
MARYLAND CONTROL SHARE ACQUISITION. Maryland law provides that "control
shares" of a 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
eligible under the statute to be cast on the matter. "Control Shares" are voting
shares of beneficial interest which, if aggregated with all other such shares of
beneficial interest previously acquired by the acquiror, would entitle the
acquiror directly or indirectly to exercise voting power in electing directors
within one of the following ranges of voting power: (i) one-fifth or more but
less than one-third, (ii) one-third or more but less than a majority or (iii) a
majority of all voting power. Control Shares does not include shares of
beneficial interest the acquiring person is then entitled to vote as a result of
having previously obtained shareholder approval. A "control share acquisition"
means the acquisition of Control Shares, subject to certain exceptions.
If voting rights are not approved at a meeting of shareholders then, subject
to certain conditions and limitations, the issuer may redeem any or all of the
Control Shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for Control Shares are approved at a
shareholders meeting and the acquiror becomes entitled to vote a majority of the
shares of beneficial interest entitled to vote, all other shareholders may
exercise appraisal rights.
INFLUENCE OF EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS
As of September 30, 1996, all directors and executive officers of the
Company (including Messrs. Evans and Withycombe) as a group beneficially own
approximately 33.1% of the total issued and outstanding Common Shares and Units.
In addition, AEW and Copley and their affiliates own approximately 13.9% and
5.5%, respectively, of the total issued and outstanding Common Shares. Pursuant
to the terms of a Director Designation Agreement, (a) AEW has and Copley each
have the right to designate for nomination one director for a period of five
years following the initial public offering in August 1994, so long as it each
of them continues to hold at least a 7.5% interest in the Company (giving effect
to the exchange of all Units for Common Shares) and (b) Mr. Evans and Mr.
Withycombe each have the right to designate themselves to serve as directors of
the Company so long as each of them continues to hold a 7.5% interest in the
Company (giving effect to the exchange of all Units for Common Shares) or they
jointly hold a 12.5% interest in the Company (giving effect to the exchange of
all Units for Common Shares) and each of them continues to serve as an executive
officer of the Company. Pursuant to the Director Designation Agreement, each of
AEW, Mr. Evans and Mr. Withycombe have agreed to vote their Common Shares for
the persons nominated for director pursuant to the terms of the Director
Designation Agreement. Accordingly, such persons will have substantial influence
on the Company, which influence might not be consistent with the interests of
other shareholders, and may have a substantial influence on the outcome of any
matters submitted to the Company's shareholders for approval. In addition,
although there is no current agreement, understanding or arrangement for such
persons to act together on any
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matter, they could be in a position to exercise significant influence over the
affairs of the Company if they were to act together in the future.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local laws, ordinances and regulations, an
owner of real estate generally is liable for the costs of removal or remediation
of certain hazardous or toxic substances located on or in, or emanating from,
such property, as well as related costs of investigation and property damage.
Such laws often impose such liability without regard to whether the owner knew
of, or was responsible for, the presence of such hazardous or toxic substances.
The presence of such substances, or the failure to properly remediate such
substances, may adversely affect the owner's ability to sell or lease a property
or to borrow using such real estate as collateral. Other federal and state laws
require the removal or encapsulation of asbestos-containing material when such
material is in poor condition or in the event of construction, demolition,
remodeling or renovation. Other statutes may require the removal of underground
storage tanks. Noncompliance with these and other environmental, health or
safety requirements may result in the need to cease or alter operations at a
property. All of the properties that the Company owns have been subject to Phase
I environmental reports (which typically involve inspection without soil
sampling or ground water analysis). The Company is not aware of any
environmental liability that the Company's management believes would have a
material adverse effect on the Company's business, assets or results of
operations. No assurance, however, can be given that these reports reveal all
environmental liabilities, that no environmental conditions have occurred since
the time of the reports, or that no prior owner created any material
environmental condition not known to the Company.
Certain environmental laws impose liability on a previous owner of property
to the extent that hazardous or toxic substances were present during the prior
ownership period. A transfer of the property does not relieve an owner of such
liability. Thus, the Company may have liability with respect to properties
previously sold by its predecessors.
The Company believes that it is in compliance in all material respects with
all federal, state and local ordinances and regulations regarding hazardous or
toxic substances, and the Company has not been notified by any governmental
authority of any non-compliance, liability or other claim in connection with any
of its present or former properties. The Company will also endeavor to protect
itself from acquiring contaminated properties or properties with significant
compliance problems by obtaining site assessments and property reports at the
time of acquisition when it deems such investigations to be appropriate. There
is no guarantee, however, that these measures will successfully insulate the
Company from all such liabilities.
Electric transmission lines are located in the vicinity of the Communities.
Electric transmission lines are one of many sources of electro-magnetic fields
("EMFs") to which people may be exposed. Research into potential health impacts
associated with exposure to EMFs has produced inconclusive results.
Notwithstanding the lack of conclusive scientific evidence, some states now
regulate the strength of electric and magnetic fields emanating from electric
transmission lines, while others have required transmission facilities to
measure for levels of EMFs. In addition, the Company understands that lawsuits
have, on occasion, been filed (primarily against electric utilities) alleging
personal injuries resulting from exposure as well as fear of adverse health
effects. In addition, fear of adverse health effects from transmission lines has
been a factor considered in determining property values in obtaining financing
and in condemnation proceedings. Therefore, there is a potential for the value
of a property to be affected as a result of its proximity to a transmission line
and for the Company to be exposed to damage claims by persons exposed to EMFs.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND SIMILAR LAWS
Under the Americans with Disabilities Act of 1990, as amended (the "ADA"),
all places of public accommodation are required to meet certain Federal
requirements related to access and use by disabled persons. These requirements
became effective in 1992. Although management of the Company believes
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that the Communities are substantially in compliance with present requirements
of the ADA, the Company may incur additional costs of complying with the ADA. A
number of additional federal, state and local laws exist which also may require
modifications to the Communities, or restrict certain further renovations
thereof, with respect to access thereto by disabled persons. For example, the
Fair Housing Amendments Act of 1988, as amended (the "FHAA"), requires apartment
communities first occupied after March 13, 1990, to be accessible to the
handicapped. Noncompliance with the FHAA could result in the imposition of fines
or an award of damages to private litigants. The Company believes that the
Communities that are subject to the FHAA are in compliance in all material
respects with such law.
Additional legislation may impose further burdens or restriction on owners
with respect to access by disabled persons. The ultimate amount of the cost of
compliance with the ADA or such legislation is not currently ascertainable, and,
while such costs are not expected to have a material effect on the Company, such
costs could be substantial. Limitations or restrictions on the completion of
certain renovations may limit application of the Company's investment strategy
in certain instances or reduce overall returns on the Company's investments.
UNINSURED LOSS
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance with respect to all of the completed Communities, with
policy specifications, insured limits and deductibles customarily carried for
similar properties. The Company will carry similar insurance with respect to its
other properties, but with such exceptions as are appropriate given the
undeveloped nature of certain of these properties. There are, however, certain
types of losses (such as losses arising from acts of war or from earthquakes)
that are not generally insured because they are either uninsurable or not
economically insurable. Should an uninsured loss or a loss in excess of insured
limits occur, the Company could lose its capital invested in a property, as well
as the anticipated future revenues from such property and would continue to be
obligated on any mortgage indebtedness or other obligations related to the
property. Any such loss would adversely affect the Company and its ability to
make distributions.
EFFECT ON COMMON SHARE PRICE OF SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of Common Shares (including Common Shares
issued upon the exchange of Units), or the perception that such sales could
occur, could adversely affect prevailing market prices of the Common Shares.
Subject to certain adjustments, an aggregate of 182,685 additional Common Shares
may be issued to the Limited Partners (subject to the Ownership Limit) if they
exchange all their Units for Common Shares. In addition, as of September 30,
1996, the Company had granted options to purchase 942,250 Common Shares and
reserved for issuance an additional 887,750 Common Shares pursuant to the
Company's 1994 Stock Incentive Plan and Non-employee Directors Stock Plan, and
these shares will be available for sale in the public markets from time to time.
Furthermore, from such 887,750 reserved shares, approximately 82,800 shares of
restricted stock were issued under such plan to certain officers of the Company
on or about August 17, 1995. As of September 30, 1996, 75,473 shares of
restricted stock were outstanding. No prediction can be made about the effect
that future sales of the Common Shares will have on the market prices of shares.
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DESCRIPTION OF CAPITAL STOCK
The summary of the terms of the capital stock of the Company set forth below
does not purport to be complete and is subject to and qualified in its entirety
by reference to Maryland law and to the Charter (as defined below) and Bylaws of
the Company, copies of which are exhibits to the Registration Statement of which
this Prospectus is a part, as described in "Additional Information."
GENERAL
The Articles of Incorporation of the Company, as amended and supplemented
from time to time (the "Charter"), provide that the Company may issue up to
110,000,000 shares of capital stock, consisting of 100,000,000 shares of Common
Stock, par value $.01 per share, and 10,000,000 shares of Preferred Stock, par
value $.01 per share (the "Preferred Shares"). Under Maryland law, shareholders
generally are not liable for the corporation's debts or obligations.
COMMON SHARES
Subject to the preferential rights of any class of Preferred Shares, and to
the provision of the Company's Charter regarding the consequences of actually or
constructively owning Common Shares in violation of the Ownership Limit
Provision (as discussed below), holders of Common Shares are entitled to receive
distributions on such Common Shares if, as and when authorized and declared by
the Board of Directors of the Company out of assets legally available therefor
and to share ratably in the assets of the Company legally available for
distribution to its shareholders in the event of its liquidation, dissolution or
winding-up after payment of, or adequate provision for, all known debts and
liabilities of the Company. The Company intends to continue to make quarterly
distributions to holders of Common Shares.
Subject to the provisions of the Company's Charter regarding the
consequences of actually or constructively owning Common Shares in violation of
the Ownership Limit Provision and to the matters discussed under "Certain
Provisions of Maryland Law and of the Company's Charter and Bylaws--Control
Share Acquisitions," each outstanding Common Share entitles the holder to one
vote on all matters submitted to a vote of shareholders, including the election
of directors, and, except as otherwise required by law or except as provided
with respect to any other class or series of stock, the holders of such shares
will possess the exclusive voting power. There is no cumulative voting in the
election of directors, which means that the holders of a majority of the
outstanding Common Shares can elect all of the directors then standing for
election and the holders of the remaining shares will not be able to elect any
directors.
Holders of Common Shares have no conversion, sinking fund or redemption
rights, or preemptive rights to subscribe for any securities of the Company. See
"--Restrictions on Ownership."
Subject to the provisions of the Company's Charter regarding the
consequences of actually or constructively owning Common Shares in violation of
the Ownership Limit Provision, all Common Shares will have equal dividend,
distribution, liquidation and other rights and will have no preference,
appraisal or exchange rights.
Pursuant to the MGCL, a corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of shareholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes to be cast on the
matter) is set forth in the corporation's charter. The Company's Charter
provides that a majority of all of the votes to be cast is the required vote of
shareholders in such situations, except that any proposal (i) to permit
cumulative voting in the election of directors, (ii) to alter provisions of the
Company's Charter with respect to the classified Board, removal of directors,
amendment of the Bylaws, preemptive rights, indemnification of corporate agents
and limitation of liability of officers and directors, or (iii) that would
jeopardize the Company's status as a REIT for tax purposes, requires, in each
case, the approval of two-thirds of the Common Shares entitled to vote. In
addition, a number of other provisions of the MGCL could have a significant
effect on the Common Shares and the rights and
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obligations of holders thereof. See "Certain Provisions of Maryland Law and of
the Company's Charter and Bylaws."
PREFERRED SHARES
Preferred Shares may be issued from time to time, in one or more classes, as
authorized by the Board of Directors. Prior to issuance of shares of each class,
the Board of Directors is required by the MGCL and the Company's Charter to fix
for each such class, the terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption, as are permitted by
Maryland law. The Board could authorize the issuance of Preferred Shares with
terms and conditions which could have the effect of discouraging a takeover or
other transaction which holders of some, or a majority, of the Company's
outstanding shares might believe to be in their best interests or in which
holders of some, or a majority, of shares might receive a premium for their
shares over the market price of such shares. As of the date hereof, no Preferred
Shares are outstanding. If and when issued, the Preferred Shares will be subject
to the restrictions on ownership set forth below.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding shares may be owned, actually or constructively, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year and the 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). In addition, certain
income received by the Company from related parties will not be treated as
"rents from real property" in determining whether the Company satisfies the REIT
income tests. See "Federal Income Tax Considerations--Taxation of the
Company--Requirements for Qualification." Because the Board of Directors
believes it is essential for the Company to qualify as a REIT, the Board of
Directors has adopted, and the shareholders prior to the Company's initial
public offering approved, a provision in the Charter restricting the acquisition
of shares of the Company's capital stock (the "Ownership Limit Provision").
The Ownership Limit Provision provides that, subject to certain exceptions,
no shareholder may actually own, beneficially own (within the meaning of Section
13(d)(3) of the Exchange Act), or be deemed to own by virtue of the constructive
ownership provisions of the Code, more than the Ownership Limit, which is equal
to 9.8% of the lesser in value of the total number or value of the outstanding
Common Shares or Preferred Shares (or such other number or value of Preferred
Shares as the Board of Directors may determine in fixing the terms of the
Preferred Shares). The constructive ownership rules of the Code are complex and
may cause shares owned actually or constructively by two or more related
individuals and/ or entities to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.8% of the outstanding Common
Shares or 9.8% (or such other number or value) of the Preferred Shares (or the
acquisition of an interest in an entity which owns shares) by an individual or
entity could cause that individual or entity (or another individual or entity)
to own constructively in excess of 9.8% of the outstanding Common Shares or 9.8%
(or such other number or value) of the outstanding Preferred Shares, and thus
subject such shares to the Ownership Limit Provision. The Ownership Limit
Provision also prohibits the acquisition or transfer of Common Shares and
Preferred Shares if the acquisition or transfer would result in the outstanding
shares of capital stock of the Company being owned by fewer than 100 persons,
and prohibits actual or constructive ownership of capital stock if as a result
of such ownership the Company would violate the "five or fewer" rule discussed
above or would otherwise cause the Company to fail to qualify as a REIT.
The Board of Directors may in its sole discretion waive the Ownership Limit
with respect to a particular acquisition of actual or constructive ownership of
the Company's shares, provided certain conditions are met. The Board of
Directors is not required to consider a request for such waiver, and, as a
condition for granting such a waiver, the Board of Directors may require
opinions of counsel or rulings
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satisfactory to it and/or an undertaking from the applicant with respect to
preserving the REIT status of the Company.
Except as provided below, in the event of a transfer, acquisition or other
ownership of the Company's capital stock (including any constructive acquisition
or transfer or ownership) in violation of the Ownership Limit Provision, such
transfer, acquisition or ownership shall be null and void AB INITIO, and the
intended transferee or owner will acquire no rights to, or economic interest in,
the shares.
The Charter provides that, if the Board of Directors requests and receives a
ruling from the IRS or an opinion of counsel satisfactory to the Board of
Directors and is otherwise satisfied such actions can be taken without
jeopardizing the Company's REIT status, shares of the Company's capital stock
owned, actually or constructively, or transferred to or otherwise acquired,
actually or constructively, by a person in violation of the Ownership Limit
Provision ("Prohibited Shares") will become subject to a mechanism that, in
effect, is designed to prohibit the person who purported to acquire those shares
from voting, receiving dividends or other distributions, and participating in
the appreciation in value of those shares. In general, pursuant to this
mechanism, the Prohibited Shares would automatically be transferred to a trustee
of a trust, the beneficiary of which would be one or more charitable
organizations, at the close of business on the day preceding the violative
transaction. The intended owner of the Prohibited Shares would have no right to
vote or receive distributions on the Prohibited Shares, and generally would be
entitled to receive only the net proceeds from a sale of the Prohibited Shares,
or the purchase price paid by such person for the Prohibited Shares (or value as
of the date of the acquisition, in the case of an acquisition other than a
purchase), whichever is less. The Company will have a right to purchase the
Prohibited Shares for fair market value during a specified period. Until the
Board of Directors requests and receives a ruling from the IRS or an opinion of
counsel and is otherwise satisfied that implementation of these provisions will
not jeopardize the Company's REIT status, these provisions will not take effect
and attempted transfers or ownership of shares in violation of the Ownership
Limit Provision will be void AB INITIO.
The Ownership Limitation Provision contains an exception for Common Shares
acquired by AEW and Copley in the transactions undertaken in connection with the
formation of the Company (the "Formation Shares"), that are intended to prevent
such entities from violating the Ownership Limitation Provision as a result of
participating in such transactions. This exception continues to apply to
Formation Shares in the hands of a direct and indirect transferee of these
entities, provided the transferee is a qualified pension fund and other
conditions are met.
The Ownership Limit Provision will not be automatically removed even if the
REIT provisions of the Code are changed so as to remove any ownership
concentration limitation. Except as otherwise described above, any change of the
Ownership Limit Provision would require an amendment to the Charter. Such
amendment to the Charter requires the affirmative vote of holders owning a
majority of the outstanding shares entitled to vote, unless such amendment would
cause the Company to lose its status as a REIT for tax purposes, in which event
the affirmative vote of holders of two-thirds of the outstanding shares entitled
to vote would be required. In addition to preserving the Company's status as a
REIT, the Ownership Limit Provision may have the effect of precluding an
acquisition of control of the Company without the approval of the Board of
Directors.
All certificates representing Common Shares bear a legend referring to the
restrictions described above.
All persons who own a specified percentage (or more) of the outstanding
shares of the Company's capital stock must file a statement with the Company
containing information regarding their ownership of Common Shares, as set forth
in the Treasury Regulations. See "Federal Income Tax Considerations Taxation of
the Company--Requirements for Qualification."
TRANSFER AGENT AND REGISTRAR
Norwest Bank, Minnesota, National Association serves as the Company's
transfer agent and registrar.
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DESCRIPTION OF UNITS
GENERAL
All the Company's assets are held by, and all of its operations are
conducted through, the Operating Partnership (either directly or through
subsidiaries). The Company is the sole general partner and also a limited
partner of the Operating Partnership and as of September 30, 1996, held an
approximately 79.3% interest therein. The Company, in its capacity as general
partner, owns a number of Units equal to 1% of all Units outstanding, and holds
the balance of its Units in its capacity as a limited partner. Accordingly, the
Company is a limited partner and will have the rights of a limited partner
(including the voting and consent rights of a limited partner), with respect to
all Units held by the Company from time to time in excess of 1% of the total
number of Units outstanding.
The remaining Units are held by persons who contributed interests in certain
Communities and/or other assets to the Company or the Operating Partnership.
Holders of Units (other than the Company in its capacity as general partner)
hold a limited partnership interest in the Operating Partnership, and all
holders of Units (including the Company in its capacity as general partner) are
entitled to share in cash distributions from, and in the profits and losses of,
the Operating Partnership in proportion to their respective percentage interests
therein. Holders of Units will have the rights to which limited partners are
entitled under the Partnership Agreement and the Delaware Revised Uniform
Limited Partnership Act, as amended (the "Partnership Act"). The Units are not
listed on any exchange or quoted on any national market system. The Partnership
Agreement imposes certain restrictions on the transfer of Units, as described
below.
A summary of certain provisions of the Agreement of Limited Partnership of
the Operating Partnership (the "Partnership Agreement") and a description of the
material terms of the Units are set forth below. The following description does
not purport to be complete and is subject to and qualified in its entirety by
reference to applicable provisions of the Partnership Act and the Partnership
Agreement.
PURPOSES, BUSINESS AND MANAGEMENT
The purpose of the Operating Partnership includes the conduct of any
business that may be conducted lawfully by a limited partnership organized
pursuant to the Partnership Act, except that the Partnership Agreement requires
the business of the Operating Partnership to be conducted in such a manner that
will permit the Company to be classified as a REIT under Section 856 of the
Code, unless the general partner provides notice to the Operating Partnership
that it intends to cease or has ceased to qualify as a REIT. Subject to the
foregoing limitation, the Operating Partnership may enter into partnerships,
joint ventures or similar arrangements and may own interests in any other
entity.
In general, the Board of Directors of the Company, in its capacity as sole
general partner of the Operating Partnership, will manage the affairs of the
Operating Partnership by directing the affairs of the Company.
Under the Partnership Agreement, the Limited Partners have no authority to
transact business for, or participate in the management activities or decisions
of, the Operating Partnership. Consent of the holders of majority of the limited
partnership interests (including Units held by the General Partner) is required
in connection with a sale of all or substantially all of the assets of the
Operating Partnership or in connection with the termination or dissolution of
the Operating Partnership (until 2053).
The Partnership Agreement permits the Operating Partnership to take all
actions consistent with the purpose and business of the Operating Partnership,
except that the Operating Partnership is specifically precluded from taking
actions which, in the judgment of the Company, could adversely affect the
ability of the Company to qualify as a REIT, subject the Company to certain
income and excise taxes, or violate any law or regulation of any governmental
body or agency having jurisdiction over the Company or its securities, unless
the Company specifically consents in writing to such action.
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ABILITY TO ENGAGE IN OTHER BUSINESSES; CONFLICTS OF INTEREST
The Company may not conduct any business other than the business of the
Operating Partnership and activities incidental thereto. Other persons
(including officers, directors, employees, agents and other affiliates of the
Company) are not prohibited under the Partnership Agreement from engaging in
other business activities and are not be required to present any business
opportunities to the Operating Partnership, however, certain officers of the
Company (Messrs. Evans, Withycombe and Berry) have entered into employment
agreements with the Company, which include noncompetition provisions. In
addition, the Company, on behalf of the Operating Partnership, has adopted
certain policies regarding avoidance of conflicts of interest.
DISTRIBUTIONS
The Partnership Agreement provides for the quarterly distribution of
Available Cash (as such term is defined in the Partnership Agreement), as
determined in the manner provided in the Partnership Agreement, to the Company
and the Limited Partners in proportion to their percentage interests in the
Operating Partnership. Neither the Company nor the Limited Partners is entitled
to any preferential or disproportionate distributions of Available Cash.
BORROWING BY THE PARTNERSHIP
The Company is authorized to cause the Operating Partnership to borrow money
and to issue and guarantee debt as it deems necessary for the conduct of the
activities of the Operating Partnership. Such debt may be secured, among other
things, mortgages, deeds of trust, liens or encumbrances on properties of the
Operating Partnership.
LIABILITY OF GENERAL PARTNER AND LIMITED PARTNERS
The Company, as general partner of the Operating Partnership, will be liable
for all general recourse obligations of the Operating Partnership to the extent
not paid by the Operating Partnership. The Limited Partners are not required to
make additional contributions to the Operating Partnership. Assuming that a
Limited Partner does not take part in the control of the business of the
Operating Partnership and otherwise acts in conformity with the provisions of
the Partnership Agreement, the liability of the Limited Partner for obligations
of the Operating Partnership under the Partnership Agreement and the Partnership
Act is limited, subject to certain possible exceptions, generally to the loss of
the Limited Partner's investment in the Operating Partnership represented by its
Units. Under the Partnership Act, a Limited Partner may not receive a
distribution from the Operating Partnership if, at the time of the distribution
and after giving effect thereto, the liabilities of the Operating Partnership,
other than liabilities to parties on account of their interests in the Operating
Partnership and liabilities for which recourse is limited to specified property
of the Operating Partnership, exceed the fair value of the Operating
Partnership's assets, other than the fair value of any property subject to
nonrecourse liabilities of the Operating Partnership but only to the extent of
such liabilities. The Partnership Act provides that a Limited Partner who
receives a distribution knowing at the time that it violates the foregoing
prohibition is liable to the Operating Partnership for the amount of the
distribution. Unless otherwise agreed, such a Limited Partner will not be liable
for the return of such distribution after the expiration of three years from the
date of such distribution.
The Operating Partnership has qualified to conduct business in Arizona and
may in the future qualify in certain other jurisdictions. Maintenance of limited
liability may require compliance with certain legal requirements of those
jurisdictions and certain other jurisdictions. Limitations on the liability of a
Limited Partner for the obligations of a limited partnership have not been
clearly established in many jurisdictions. Accordingly, if it were determined
that the right, or exercise of the right by the Limited Partners, to make
certain amendments to the Partnership Agreement or to take other action pursuant
to the Partnership Agreement constituted "control" of the Operating
Partnership's business for the purposes of the statutes of any relevant
jurisdiction, the Limited Partners might be held personally liable for the
Operating
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Partnership's obligations. The Operating Partnership will operate in a manner
the general partner deems reasonable, necessary and appropriate to preserve the
limited liability of the Limited Partners.
EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER
The Partnership Agreement generally provides that the Company, as general
partner of the Operating Partnership, will incur no liability to the Operating
Partnership or any Limited Partner for losses sustained or liabilities incurred
as a result of errors in judgment or of any act or omission if the Company
carried out its duties in good faith. In addition, the Company is not
responsible for any misconduct or negligence on the part of its agents, provided
the Company appointed such agents in good faith. The Company may consult with
legal counsel, accountants, appraisers, management consultants, investment
bankers and other consultants and advisors, and any action it takes or omits to
take in reliance upon the opinion of such persons, as to matters that the
Company reasonably believes to be within their professional or expert
competence, shall be conclusively presumed to have been done or omitted in good
faith and in accordance with such opinion.
The Partnership Agreement also provides for indemnification of the Company,
the officers of the Company and such other persons (including affiliates of the
Company or Operating Partnership) as the Company may from time to time designate
against any judgments, penalties, fines, settlements and reasonable expenses
actually incurred by such person in connection with the proceeding subject to
certain limitations set forth in the Partnership Agreement.
REMOVAL OF THE GENERAL PARTNER, TRANSFER OF THE GENERAL PARTNER'S INTEREST
The Partnership Agreement provides that the Limited Partners may not remove
the Company as general partner of the Operating Partnership. In general, the
Company may not transfer or assign its general partnership interest nor sell all
or substantially all its assets, or enter into a merger unless (i) pursuant to
such a transaction the Limited Partners will not engage in a sale or exchange
for federal income tax purposes of their Units, or (ii) the sale or merger
includes the sale of all or substantially all of the assets of or the merger of
the Operating Partnership with partners of the Operating Partnership receiving
substantially the same consideration as holders of Shares.
RESTRICTIONS ON TRANSFER OF UNITS BY LIMITED PARTNERS
A Limited Partner may not transfer its Units without the prior consent of
the Company, with certain exceptions which include a transfer to an immediate
family member or an affiliate of the Limited Partner, a transfer upon the death
of a Limited Partner or a pledge to a lending institution as collateral for a
bona fide loan. A transferee of Units will be admitted to the Operating
Partnership as a substitute Limited Partner only with the consent of the Company
as general partner. If the general partner does not consent to the admission of
a transferee of Units as a substitute Limited Partner, the transferee will be
entitled to all the rights of an assignee of a limited partnership interest
under the Partnership Act, and will succeed to all economic rights and benefits
attributable to such Units, but will not become a Limited Partner or possess any
other rights of Limited Partners (including the right to vote, with such right
to vote remaining in the transferor).
ISSUANCE OF ADDITIONAL LIMITED PARTNERSHIP INTERESTS
The Company is authorized without the consent of the Limited Partners to
cause the Operating Partnership to issue additional Units to itself, to the
Limited Partners or to other persons for such consideration and on such terms
and conditions as the Company deems appropriate. In addition, the Company may
cause the Operating Partnership to issue to the Company additional partnership
interests in different series or classes, which may be senior to the Units, in
conjunction with an offering of securities of the Company having substantially
similar rights, in which the proceeds thereof are contributed to the Operating
Partnership. Consideration for additional partnership interests may be cash or
any property or other assets permitted by the Partnership Act. No Limited
Partner has preemptive, preferential or similar
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rights with respect to additional capital contributions to the Operating
Partnership or the issuance or sale of any partnership interests therein. In
addition, whenever the Company issues Common Shares, the Company will be
obligated to contribute any net proceeds therefrom to the Operating Partnership
and the Operating Partnership will be obligated to issue an equivalent number of
Units to the Company. Additional Units will be issued to the Company upon the
exercise of awards granted under the 1994 Stock Incentive Plan, and it is
expected that such Units will be purchased at a price equal to fair market
value. The Company will acquire the cash for such purchase from the sale of
Common Shares used to fund the award to the Operating Partnership.
MEETINGS; VOTING
Meetings of the Limited Partners may be called only by the Company, on its
own motion or upon written request of Limited Partners owning at least 25% of
the Units. Limited partners may vote either in person or by proxy at meetings.
Any action that is required or permitted to be taken by the Limited Partners of
the Operating Partnership may be taken either at a meeting of the Limited
Partners or without a meeting if consents in writing setting forth the action so
taken are signed by Limited Partners owning not less than the minimum number of
Units that would be necessary to authorize or take such action at a meeting of
the Limited Partners at which all Limited Partners entitled to vote on such
action were present. On matters in which Limited Partners are entitled to vote,
each Limited Partner (including the Company to the extent it holds Units of
limited partnership interest) will have a vote equal to the number of Units it
holds in the Operating Partnership. The Partnership Agreement does not provide
for annual meetings of the Limited Partners, and the Company does not anticipate
calling such meetings.
AMENDMENT OF THE PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed by the Company or by
Limited Partners owning at least 25% of the Units.
Generally, the Partnership Agreement may be amended with the approval of the
Company, as general partner, and holders of a majority or some greater
percentage of the Units, including Units held by the Company. As holder of over
75% of the limited partnership Units, the Company has the requisite ownership
interest to approve certain amendments without the consent of other Limited
Partners. However, certain amendments that would, among other things, (i)
convert a Limited Partner's interest into a general partner's interest, (ii)
modify the limited liability of a Limited Partner, (iii) alter the interest of a
partner to receive distributions or alter the allocations of profits or losses,
with certain limited exceptions, (iv) alter or modify the exchange right or
redemption amount described above, or (v) cause the termination of the Operating
Partnership at a time or on terms inconsistent with those set forth in the
Partnership Agreement, must be approved by the Company and each Limited Partner
that would be adversely affected by such an amendment.
Notwithstanding the foregoing, the Company, as general partner, has the
power, without the consent of the Limited Partners, to amend the Partnership
Agreement as may be required to (1) add to the obligations of the Company as
general partner or surrender any right or power granted to the Company as
general partner or any affiliate of the Company as General Partner for the
benefit of the Limited Partners, (2) reflect the admission, substitution,
termination or withdrawal of partners in accordance with the terms of the
Partnership Agreement, (3) establish the rights, powers, duties and preferences
of any additional partnership interests issued in accordance with the terms of
certain provisions of the Partnership Agreement, (4) reflect a change of an
inconsequential nature that does not materially adversely affect the Limited
Partners, or cure any ambiguity, correct or supplement any provisions of the
Partnership Agreement not inconsistent with law or with other provisions of the
Partnership Agreement, or make other changes concerning matters under the
Partnership Agreement that are not otherwise inconsistent with the Partnership
Agreement or law, (5) satisfy any requirements of federal or state law, (6)
reflect such changes as are reasonably necessary for the Company to maintain its
status as a REIT.
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DISSOLUTION, WINDING UP AND TERMINATION
The Operating Partnership will continue until December 31, 2093, unless
sooner dissolved and terminated. The Operating Partnership will be dissolved
prior to the expiration of its term, and its affairs wound up upon the
occurrence of the earliest of: (1) the withdrawal of the Company as general
partner without the permitted transfer of the Company's interest to a successor
general partner (except in certain limited circumstances); (2) the sale of all
or substantially all the Operating Partnership's assets and properties; (3) the
entry of a decree of judicial dissolution of the Operating Partnership pursuant
to the provisions of the Partnership Act or the entry of a final order for
relief in a bankruptcy proceeding of the general partner; (4) the entry of a
final judgment ruling that the general partner is bankrupt or insolvent; (5) the
merger or other combination of the Operating Partnership with or into another
entity; (6) (a) from and after the date of the Partnership Agreement through
December 31, 2053, an election by the Company, with the consent of the holders
of a majority of limited partnership interests (including limited partnership
interests held by the Company) and (b) on or after January 1, 2054, an election
by the Company, in its sole and absolute discretion. Upon dissolution, the
Company, as general partner, or any liquidator will proceed to liquidate the
assets of the Operating Partnership and apply the proceeds therefrom in the
order of priority set forth in the Partnership Agreement.
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S CHARTER AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and
the Company's Charter and Bylaws. The summary does not purport to be complete
and is subject to and qualified in its entirety by reference to the Company's
Charter and Bylaws, copies of which are filed as exhibits to the Registration
Statement of which this Prospectus is a part, and to Maryland law.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company's Charter provides that the initial number of directors of the
Company was three (3), which number may be increased or decreased pursuant to
the Bylaws of the Company but in no event shall be less than the minimum number
required by the MGCL, which in the case of the Company is three (3). The
Company's Bylaws currently provide that the number of directors of the Company
may be established by the Board of Directors but may not be fewer than the
minimum number required by the MGCL nor more than fifteen (15). The Company has
set the number of directors to seven (7). Any vacancy will be filled, at any
regular meeting or at any special meeting called for that purpose, by a majority
of the remaining directors, except that a vacancy resulting from an increase in
the number of directors will be filled by a majority of the entire board of
directors. Pursuant to the terms of the Charter, the directors are divided into
three classes. One class held office initially for a term that expired at the
annual meeting of shareholders held in 1995 (and such directors were re-elected
to terms expiring in 1998), another class held office initially for a term that
expired at the annual meeting of shareholders held in 1996 (and such directors
were re-elected to terms expiring in 1999) and the remaining class holds office
initially for a term expiring at the annual meeting of shareholders to be held
in 1997. As the term of each class expires, directors in that class will be
elected for a term of three years and until their successors are duly elected
and qualify. The Company believes that classification of the Board of Directors
will help to assure the continuity and stability of the Company's business
strategies and policies as determined by the Board of Directors.
The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its shareholders. At least two annual meetings of
shareholders, instead of one, will generally be required to effect a change in a
majority of the Board of Directors. Thus, the classified board provision could
increase the likelihood that incumbent directors will retain their positions.
See "Risk Factors--Limits on Changes in Control--Staggered Board." Holders of
voting shares will have no right to cumulative voting for the election of
directors. Consequently, at each annual meeting of shareholders, the
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holders of a majority of shares entitled to vote will be able to elect all of
the successors of the class of directors whose term expires at that meeting.
REMOVAL OF DIRECTORS
The Charter provides that a director may be removed with or without cause by
the affirmative vote of at least two-thirds of the votes entitled to be cast in
the election of directors, and by the vote required to elect a director, the
shareholders may fill a vacancy on the Board resulting from removal. This
provision, when coupled with the provision in the Bylaws authorizing the Board
of Directors to fill vacant directorships, could preclude shareholders from
removing incumbent directors except upon a substantial affirmative vote and
filling the vacancies created by such removal with their own nominees.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Charter limits the liability of the Company's directors and
officers to the Company and its shareholders to the fullest extent permitted
from time to time by Maryland law. Maryland law presently permits the liability
of directors and officers to a corporation or its shareholders for money damages
to be limited, except (i) to the extent that it is proved that the director or
officer actually received an improper benefit or profit, or (ii) to the extent
that a judgment or other final adjudication is entered in a proceeding based on
a finding that the director's or officer's action, or failure to act, was the
result of active and deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding. This provision does not limit the ability
of the Company or its shareholders to obtain other relief, such as an injunction
or rescission.
The Company's Charter and Bylaws require the Company to indemnify its
directors, officers and certain other parties to the fullest extent permitted
from time to time by Maryland law. The Charter also permits the Company to
indemnify employees, agents and other persons acting on behalf of or at the
request of the Company. The MGCL permits a corporation to indemnify its
directors, officers and certain other parties against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service to or at the request of the corporation, unless it is established
that: (i) the act or omission of the indemnified party was material to the
matter giving rise to the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty; (ii) the indemnified party actually
received an improper personal benefit; or (iii) in the case of any criminal
proceeding, the indemnified party had reasonable cause to believe that the act
or omission was unlawful. Indemnification may be made against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by the
director or officer in connection with the proceeding; provided, however, that
if the proceeding is one by or in the right of the corporation, indemnification
may not be made with respect to any proceeding in which the director or officer
has been adjudged to be liable to the corporation. In addition, a director or
officer may not be indemnified with respect to any proceeding charging improper
personal benefit to the director or officer in which the director or officer was
adjudged to be liable on the basis that personal benefit was improperly
received. The termination of any proceeding by conviction, or upon a plea of
nolo contendere or its equivalent, or an entry of any order of probation prior
to judgment, creates a rebuttable presumption that the director or officer did
not meet the requisite standard of conduct required for indemnification to be
permitted. It is the position of the Commission that indemnification of
directors and officers for liabilities arising under the Securities Act is
against public policy and is unenforceable pursuant to Section 14 of the
Securities Act.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who directly or indirectly beneficially owns ten
percent or more of the voting power of the corporation's shares or an affiliate
of the corporation who, at any time within the two-year period prior to the date
in question, was the beneficial owner of ten percent or more of the voting power
of the then-outstanding voting stock of the corporation (an "Interested
Shareholder") or
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an affiliate thereof are prohibited for five years after the most recent date on
which the Interested Shareholder became an Interested Shareholder. Thereafter,
any such business combination must be recommended by the Board of Directors of
such corporation and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding voting shares of the
corporation and (b) two-thirds of the votes entitled to be cast by holders of
outstanding voting shares of the corporation other than shares held by the
Interested Shareholder with whom the business combination is to be effected,
unless, among other things, the corporation's shareholders receive a minimum
price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Shareholder for its shares. These provisions of Maryland law do not apply,
however, to business combinations that are approved or exempted by the Board of
Directors of the corporation prior to the time that the Interested Shareholder
becomes an Interested Shareholder. The Board of Directors has exempted from
these provisions of the MCGL any business combination with certain officers of
the Company including Stephen O. Evans and F. Keith Withycombe, and Evans
Withycombe, AEW and Copley and all present or future affiliates or associates
of, or any other person acting in concert or as a group with, any of the
foregoing persons.
CONTROL SHARE ACQUISITIONS
The MGCL 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 of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control Shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
such person, or in respect of which such person is able to exercise or direct
the exercise of voting power, would entitle the acquiror directly or indirectly
to exercise voting power in electing directors within one of the following
ranges of voting power: (i) one-fifth or more but less than one-third, (ii)
one-third or more but less than a majority, or (iii) a majority of all voting
power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained shareholder approval.
A "control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of shareholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for control shares, as of the date of the last control share
acquisition or of any meeting of shareholders at which the voting rights of such
shares are considered and not approved. If voting rights for control shares are
approved at a shareholders meeting and, as a result, the acquiror becomes
entitled to vote a majority of the then outstanding shares entitled to vote, all
other shareholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid in the control share acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of dissenters'
rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws of
the corporation.
The Bylaws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions of Shares by any officer or
director of the Company and by Stephen O. Evans, F. Keith Withycombe, Evans
Withycombe, AEW and Copley and all present or future affiliates or
23
<PAGE>
associates of, or any other person acting in concert or as a group with, any of
the foregoing persons. There can be no assurance that such provision will not be
amended or eliminated at any point in the future.
AMENDMENTS TO THE CHARTER
The Company's Charter may be amended only by the affirmative vote of the
holders of not less than a majority of all of the votes entitled to be cast on
the matter, except that any proposal (i) to permit cumulative voting in the
election of directors; (ii) to alter provisions of the Company's Charter with
respect to the classified Board, removal of directors, amendment of the Bylaws,
preemptive rights, indemnification of corporate agents and limitation of
liability of officers and directors; or (iii) that would jeopardize the
Company's status as a REIT for tax purposes, requires, in each case, the
approval of two-thirds of the shares entitled to vote. The Company's Bylaws may
be amended by the affirmative vote of holders of not less than two-thirds of all
of the votes entitled to be cast on the matter. Subject to the right of the
shareholders to adopt, alter and repeal Bylaws, the Board of Directors is
authorized to adopt, alter or repeal the Bylaws.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
the holders of not less than a majority of all of the votes entitled to be cast
on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (a) with respect to an annual meeting
of shareholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by shareholders may be made only
(i) pursuant to the Company's notice of the meeting, (ii) by the Board of
Directors or (iii) by a shareholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws, and (b)
with respect to special meetings of shareholders, only the business specified in
the Company's notice of meeting may be brought before the meeting of
shareholders, and nominations of persons for election to the Board of Directors
may be made only (i) pursuant to the Company's notice of the meeting, (ii) by
the Board of Directors or (iii) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by a shareholder who
is entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the bylaws.
The provisions in the Charter on classification of the Board of Directors,
the business combination provisions of the MGCL and, control share acquisition
provisions of the MGCL, and the advance notice provisions of the Bylaws could
have the effect of discouraging a takeover or other transaction in which holders
of some, or a majority, of the shares might receive a premium for their shares
over the then prevailing market price or which such holders might believe to be
otherwise in their best interests.
REDEMPTION OF UNITS
Starting one year after the acquisition of Units, holders of Units may
exercise the Redemption Right with respect to all or a portion of their Units.
Following such exercise, the Operating Partnership will be required to redeem
the tendered Units for cash equal to the fair market value of an equivalent
number of Common Shares at the time of such exchange, provided that the Company
may elect to acquire any such Units presented for redemption for a similar
amount of cash or for Common Shares on a one-for-one basis (subject to certain
anti-dilution adjustments). The market value of the Common Shares for this
purpose will be equal to the average of the closing trading price, regular way,
of the Company's Common Shares (or substitute information, if no such closing
price is available) for the ten consecutive trading days before the day on which
the redemption notice was received by the Operating Partnership or, if such date
is not a business day, the first business day thereafter.
24
<PAGE>
The Company presently anticipates that it will elect to issue Common Shares
pursuant to this Prospectus to acquire Units surrendered for redemption and will
become the owner of the Units. With each such redemption, the Company's
percentage ownership interest in the Operating Partnership will increase. Such
an acquisition by the Company will be treated as a sale of the Units to the
Company for Federal income tax purposes. See "Federal Income Tax
Considerations--Tax Consequences of Exercise of Redemption Right." Upon
redemption, such Limited Partner's right to receive distributions with respect
to the Units redeemed will cease (but if such right is exchanged for Exchange
Shares, the Limited Partner will have rights as a shareholder of the Company
from the time of its acquisition of the Exchange Shares), and if all of its
Units are redeemed, such Limited Partner will have withdrawn as a partner of the
Operating Partnership and will no longer be a party to the Partnership
Agreement.
A Limited Partner must notify the Company, as the general partner of the
Operating Partnership, of its desire to require the Operating Partnership to
redeem Units by sending a notice in the form attached as an exhibit to the
Partnership Agreement, a copy of which is available from the Company. The
redemption generally will occur on the tenth day after the notice is delivered
by the Limited Partner, except that no redemption can occur if the delivery of
Exchange Shares would be prohibited under the provisions of the Charter designed
to protect the Company's qualification as a REIT.
COMPARISON OF OWNERSHIP OF UNITS AND COMMON SHARES
Generally, the nature of an investment in Common Shares is substantially
equivalent economically to an investment in Units in the Operating Partnership.
A holder of a Common Share receives the same distribution that a holder of a
Unit receives and shareholders and holders of Units generally share in the risks
and rewards of ownership in the enterprise being conducted by the Company
(through the Operating Partnership). However, there are some differences between
ownership of Units and ownership of Common Shares, some of which may be material
to investors.
The information below highlights a number of the significant differences
between the Operating Partnership and the Company relating to, among other
things, form of organization, permitted investments, policies and restrictions,
management structure, compensation and fees, investor rights and Federal income
taxation, and compares certain legal rights associated with the ownership of
Units and Common Shares, respectively. These comparisons are intended to assist
Limited Partners of the Operating Partnership in understanding how their
investment will be changed if their Units are exchanged for Common Shares.
HOLDERS OF UNITS SHOULD CAREFULLY REVIEW THE BALANCE OF THIS PROSPECTUS AND THE
REGISTRATION STATEMENT AND THE EXHIBITS THERETO OF WHICH THIS PROSPECTUS IS A
PART AND ANY APPLICABLE PROSPECTUS SUPPLEMENT FOR ADDITIONAL IMPORTANT
INFORMATION ABOUT THE COMPANY.
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP COMPANY
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
FORM OF ORGANIZATION AND ASSETS OWNED
- ------------------------------------------------------------------------------------------------------------------
The Operating Partnership is organized as a Delaware The Company is a Maryland corporation. The Company has
limited partnership. The Operating Partnership owns elected to be taxed as a REIT under the Code,
interests (either directly or through subsidiaries) in commencing with its taxable year ended December 31,
the Communities. The Management Company provides 1994, and intends to maintain its election as a REIT.
construction, development and related services With certain limited exceptions, the Company's only
relating to the Company's properties and to third asset is its interest in the Operating Partnership,
parties. which gives the Company an indirect investment in the
Communities and the other assets owned by the
Operating Partnership.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP COMPANY
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
PURPOSE AND PERMITTED INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------
The Operating Partnership's purpose is to conduct any Under its Charter, the Company may engage in any lawful
business that may be lawfully conducted by a limited activity permitted to be engaged in by a Maryland
partnership organized pursuant to the Partnership Act, corporation pursuant to Maryland law. However, under
provided that such business is to be conducted in a the Partnership Agreement, the Company, as general
manner that permits the Company to be qualified as a partner, generally may not conduct any business other
REIT unless the Company ceases to qualify as a REIT. than the business of the Operating Partnership and
The Operating Partnership is authorized to perform any cannot own any assets, with certain limited
and all acts for the furtherance of the purposes and exceptions, other than its interest in the Operating
business of the Operating Partnership, provided that Partnership and other assets necessary to carry out
the Operating Partnership may not take, or refrain its responsibilities under the Partnership Agreement
from taking, any action which, in the judgment of the and its Charter.
general partner could (i) adversely affect the ability
of the Company to continue to qualify as a REIT, (ii)
subject the Company to certain income and excise
taxes, or (iii) violate any law or regulation of any
governmental body or agency (unless such action, or
inaction, is specifically consented to by the
Company). Subject to the foregoing, the Operating
Partnership may invest in or enter into partnerships,
joint ventures, or similar arrangements.
ADDITIONAL EQUITY
- ------------------------------------------------------------------------------------------------------------------
The Operating Partnership is authorized to issue Units The Company is authorized issue, in its discretion,
for any partnership purpose at any time or from time additional equity securities consisting of Common
to time for consideration and on such terms and Shares or Preferred Shares; provided, however, that
conditions as determined by the Company, as general the total number of equity securities outstanding may
partner, in its sole discretion. Additionally, the not exceed the total number of authorized shares set
Operating Partnership may issue Units and other forth in the Company's Charter (I.E., not more than
partnership interests (including partnership interests 100,000,000 Common Shares or 10,000,000 Preferred
of different series or classes that may be senior to Shares). Additionally, the Company may issue
Units) to the Company, as long as such interests are additional Common Shares upon exchange of Units for
issued in connection with an issuance by the Company Common Shares, upon exercise of options granted
of shares having designations, preferences and other pursuant to the stock incentive plan for Common Shares
rights such that the economic interests of such shares or Units in effect from time to time. As long as the
are substantially similar to those of the partnership Operating Partnership is in existence, the proceeds of
interests granted in connection therewith and proceeds all equity capital raised by the Company will be
raised in connection with the issuance of such shares contributed to the Operating Partnership in exchange
are contributed to the Operating Partnership. In for interests in the Operating Partnership.
addition, the Operating Partnership will issue
additional Units upon exercise of the options granted
pursuant to the Company's 1994 Stock Incentive Plan.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP COMPANY
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
BORROWING POLICIES
- ------------------------------------------------------------------------------------------------------------------
The Operating Partnership has no restrictions on The Company is not restricted under its Charter or
borrowings, and the Company, as general partner, has Bylaws from incurring borrowings. The Company
full power and authority to borrow money on behalf of anticipates that any additional borrowings would be
the Operating Partnership. made through the Operating Partnership, although the
Company might incur indebtedness, the proceeds of
which would be reloaned to the Operating Partnership.
MANAGEMENT CONTROL
- ------------------------------------------------------------------------------------------------------------------
All management powers over the business and affairs of The Board of Directors has exclusive control over the
the Operating Partnership are vested in the Company, Company's business and affairs subject only to the
as general partner. No Limited Partner of the restrictions in the Charter and Bylaws and the
Operating Partnership has any right to participate in Partnership Agreement. The Board of Directors is
or exercise control or management power over the divided into three classes. At each annual meeting of
business and affairs of the Operating Partnership. The the shareholders, the successors of the class of
Limited Partners have the right to vote on certain directors whose terms expire at that meeting will be
matters described under "Voting Rights" below. The elected. The policies adopted by the Board of
general partner may not be removed by the Limited Directors may be altered or eliminated without a vote
Partners with or without cause. of the shareholders. Accordingly, except for their
vote in the elections of directors, shareholders have
no control over the ordinary business policies of the
Company. The Board of Directors may change the
Company's policy of maintaining its status as a REIT,
without the approval of the Company's shareholders.
MANAGEMENT LIABILITY AND INDEMNIFICATION
- ------------------------------------------------------------------------------------------------------------------
As a matter of Delaware law, the general partner has The Company's Charter and Bylaws require the Company to
liability for the payment of the obligations and debts indemnify its directors, officers and certain other
of the Operating Partnership unless limitations upon parties to the fullest extent permitted from time to
such liability are stated in the document or time by Maryland law. The Charter also permits the
instrument evidencing the obligation. Under the Company to indemnify employees, agents and other
Partnership Agreement, the Operating Partnership has persons acting on behalf of or at the request of the
agreed to indemnify the Company, as general partner, Company. The MGCL permits a corporation to indemnify
any officer of the Operating Partnership of the its directors, officers and certain other parties
Company, as general partner, and such other persons as against judgments, penalties, fines, settlements and
the Company may designate from and against all losses, reasonable expenses actually incurred by them in
claims, damages, liabilities, joint or several, connection with any proceeding to which they may be
expenses (including legal fees and expenses), made a party by reason of their service to or at the
judgments, fines, settlements and other amounts request of the corporation, unless it is established
arising from any and all claims, demands, actions, that: (i) the act or omission of the indemnified party
suits or proceedings, civil, criminal, administrative was material to the matter giving rise to the
or investigative, that relate to the operation of the proceeding and was committed in bad faith or was the
Operating Partnership in which such person is result of active and deliberate dishonesty;
involved, or is
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP COMPANY
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
threatened to be involved, unless it is established (ii) the indemnified party actually received an
that (i) the act or omission of such person was improper personal benefit; or (iii) in the case of any
material to the matter giving rise to the proceeding criminal proceeding, the indemnified party had
and either was committed in bad faith or was the reasonable cause to believe that the act or omission
result of active and deliberate dishonesty; (ii) such was unlawful. Maryland law presently permits the
party actually received an improper personal benefit; liability of directors and officers to a corporation
or (iii) in the case of any criminal proceeding, such or its shareholders for money damages to be limited,
party had reasonable cause to believe the act or except (a) to the extent that it is proved that the
omission was unlawful. The reasonable expenses director or officer actually received an improper
incurred by an indemnitee may be reimbursed by the benefit or profit or (b) if a judgment or other final
Operating Partnership in advance of the final adjudication is entered in a proceeding based on a
disposition of the proceeding upon receipt by the finding that the director's or officer's action, or
Operating Partnership of a written affirmation by such failure to act, was the result of active and
indemnitee of his, her or its good faith belief that deliberate dishonesty and was material to the cause of
the standard of conduct necessary for indemnification action adjudicated in the proceeding. The Charter of
has been met and a written undertaking by such the Company contains a provision consistent with the
indemnitee to repay the amount reimbursed if it is foregoing. The Company has entered into
determined that such standard was not met. indemnification agreements with each of its executive
officers and directors. The indemnification agreements
require, among other things, that the Company
indemnify its officers and directors to the fullest
extent permitted by the MGCL, and advance to the
officers and directors all related expenses, subject
to reimbursement if it is subsequently determined that
indemnification is not permitted. The Company must
also indemnify and advance all expenses incurred by
officers and directors seeking to enforce their rights
under the indemnification agreements.
ANTITAKEOVER PROVISIONS
- ------------------------------------------------------------------------------------------------------------------
Except in limited circumstances, the general partner of The Charter and Bylaws of the Company contain a number
the Operating Partnership has exclusive management of provisions that may have the effect of delaying or
power over the business and affairs of the Operating discouraging an unsolicited proposal for the
Partnership. The Company may not be removed as general acquisition of the Company or the removal of incumbent
partner by the Limited Partners with or without cause. management. These provisions include, among others:
Under the Partnership Agreement, the Company, as a (1) a staggered Board of Directors; (2) authorized
general partner, may, in its sole discretion, prevent shares of stock that may be issued, in the discretion
a transferee of a Unit from becoming a substituted of the Board of Directors, as Preferred Shares with
Limited Partner pursuant to the Partnership Agreement. superior voting rights to the Common Shares; (3) a
The general partner may exercise this right of requirement that directors may be removed only by a
approval to deter, delay or hamper attempts by persons vote of holders of at least two-thirds of the votes
to acquire a controlling interest in the Operating entitled to be cast in the election of directors; (4)
Partnership. Additionally, the Partnership Agreement advance notice required in order to nominate persons
contains restrictions on the ability of Limited for election to the Board of Directors or to propose
Partners to transfer their Units. business to be considered by shareholders at a
shareholder's meeting; and
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP COMPANY
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
(5) provisions designed to avoid concentration of
share ownership in a manner that would jeopardize the
Company's status as a REIT under the Code. See
"Description of Capital Stock-- Restrictions on
Ownership" and "Risk Factors-- Limits on Changes in
Control."
VOTING RIGHTS
- ------------------------------------------------------------------------------------------------------------------
Under the Partnership Agreement, the Limited Partners Each outstanding Common Share entitles the holder
have voting rights only with respect to certain thereof to one vote on all matters submitted to
limited matters. Consent of the holders of or majority shareholders for vote, including the election of
of the Units (including the Units held by the general directors. See "Description of Capital Stock--Common
partner) is required in connection with a sale of all Shares." Shareholders of the Company have the right to
or substantially all of the assets of the Operating vote on, among other things, a merger of the Company,
Partnership or in connection with the termination or amendments to the Charter and the dissolution of the
dissolution of the Operating Partnership (until 2053) Company. Certain amendments to the Charter require the
and with respect to certain amendments to the affirmative vote of not less than two-thirds of votes
Partnership Agreement. The Company, as general entitled to be cast on the matter. The Charter permits
partner, currently holds more than a majority of the the Board of Directors to classify and issue Preferred
Units and therefore has the requisite ownership Shares in one or more series having voting power which
interest to consent to such matters. may differ from that of the Common Shares.
AMENDMENT OF THE PARTNERSHIP AGREEMENT OR THE CHARTER
- ------------------------------------------------------------------------------------------------------------------
The Partnership Agreement may be amended through a Except as described below, amendments to the Charter
proposal by the general partner or any Limited must be approved by the Board of Directors and by the
Partners holding 25% or more of the Units. Such vote of the holders of at least a majority of the
proposal, in order to be effective, must be approved shares entitled to vote thereon. Proposals that would
by the general partner and by the holders of at least (i) cause the Company not to qualify as a REIT, or to
a majority of the outstanding limited partnership (ii) alter Charter provisions relating to the
Units. Certain amendments that affect the fundamental classification or removal of directors, preemptive
rights of a Limited Partner must be approved by each rights, indemnification, limitation of liability or
Limited Partner adversely affected by the amendment. amendments to the Charter or Bylaws, require the
Currently, as holder of over 75% of the Units, the affirmative vote of holders of not less than
Company has the requisite ownership interest to two-thirds of the shares entitled to vote thereon.
approve certain amendments without the consent of
other Limited Partners. In addition, the general
partner may, without the consent of the Limited
Partners, amend the Partnership Agreement as to
certain limited matters enumerated in the Partnership
Agreement. See "Description of Units-- Amendment of
the Partnership Agreement."
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP COMPANY
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
COMPENSATION, FEES AND DISTRIBUTIONS
- ------------------------------------------------------------------------------------------------------------------
The Company, as general partner, does not receive any The officers and directors of the Company receive
compensation for its services as general partner of compensation for their services.
the Operating Partnership. As a partner in the
Operating Partnership, however, the Company has the
same right to allocations and distributions as other
partners of the Operating Partnership. In addition,
the Operating Partnership is responsible for all
expenses incurred relating to the Operating
Partnership's ownership of its assets and the
operation of the Operating Partnership and reimburses
the Company, as general partner, for such expenses
paid by the Company. The employees of the Operating
Partnership receive compensation for their services.
LIABILITY OF INVESTORS
- ------------------------------------------------------------------------------------------------------------------
Under the Partnership Agreement and applicable state The MCGL provides that no shareholder of a corporation
law, the liability of the Limited Partners for the will be personally liable for any obligations such
Operating Partnership's debts and obligations is corporation. Generally the liability of the
generally limited to the amount of their investment in stockholders for the Company's debts and obligations
the Operating Partnership. is limited to the amount of their investment in the
Company.
NATURE OF INVESTMENT
- ------------------------------------------------------------------------------------------------------------------
The Units constitute equity interests entitling each The Common Shares constitute equity interests in the
Limited Partner to such partner's pro rata share of Company. The Company is entitled to receive its pro
cash distributions made to the partners of the rata share of distributions made by the Operating
Operating Partnership. The Operating Partnership may Partnership with respect to the Units it holds, and
retain and reinvest proceeds of the sale of property each shareholder will be entitled to its pro rata
or excess refinancing proceeds in its business. share of any dividends or distributions paid with
respect to the Common Shares. The dividends payable to
the shareholders are not fixed in amount and are only
paid if, when and as declared by the Board of
Directors. In order to qualify as a REIT, the Company
generally must distribute at least 95% of its taxable
income (excluding capital gains).
LIQUIDITY
- ------------------------------------------------------------------------------------------------------------------
Limited Partners may not transfer their Units without The Exchange Shares will be freely transferable as
the consent of the general partner and, because no registered securities under the Securities Act,
trading market exists for the Units, the Units are subject to the Ownership Limit Provisions in the
illiquid. Subject to certain limitations, a Limited Company's Charter and to prospectus delivery and other
Partner may assign its economic rights in its Units requirements for registered securities. The Common
without the Shares are listed on the NYSE.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP COMPANY
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Company's consent, but the Company may in its sole and The breadth and strength of this market will depend,
absolute discretion, refuse to admit the transferee as among other things, upon the number of Common Shares
a substituted Limited Partner. Beginning one year from outstanding, the Company's financial results and
the date of acquisition of the Units, each Limited prospects, the general interest in the Company's
Partner has the right to cause the Operating Common Shares and other real estate investments and
Partnership to redeem its Units for cash or, at the the Company's dividend yield compared to that of other
discretion of the Company, for Common Shares. debt and equity securities.
FEDERAL INCOME TAXATION
- ------------------------------------------------------------------------------------------------------------------
The Operating Partnership is not subject to Federal The Company has elected to be taxed as a REIT beginning
income taxes. Instead, each holder of Units includes with its fiscal year ended December 31, 1994. So long
its allocable share of the Operating Partnership's as it qualifies as a REIT, the Company will be
taxable income or loss in determining its individual permitted to deduct distributions paid to its
federal income tax liability. The maximum federal shareholders, which effectively will reduce the
income tax rate for individuals under current law "double taxation" that typically results when a
(without taking into account the phase-out of corporation earns income and distributes that income
exemptions and other adjustments) is 39.6%. to its shareholders in the form of dividends. A
qualified REIT, however, is subject to federal income
tax on income that is not distributed and also may be
subject to federal income and excise taxes in certain
circumstances. The maximum federal income tax rate for
corporations under current law is 35%, but in certain
circumstances a REIT is subject to a 100% tax on
certain kinds of income.
Income and loss from the Operating Partnership generally Dividends paid by the Company will be treated as
is subject to the "passive activity" limitations. "portfolio" income and cannot be offset with losses
Under the "passive activity" rules, income and loss from "passive activities." The maximum federal income
from the Operating Partnership that is considered tax rate for individuals under current law (without
"passive income" generally can be offset against taking into account the phase-out of exemptions and
income and loss from other investments that constitute other adjustments) is 39.6%.
"passive activities" (unless the Operating Partnership
is considered a "publicly traded partnership," in
which case income and loss from the Operating
Partnership can only be offset against other income
and loss from the Operating Partnership). Income of
the Operating Partnership, however, attributable to
dividends from the Management Company or interest paid
by the Management Company does not qualify as passive
income and cannot be offset with losses and deductions
from a "passive activity."
Cash distributions from the Operating Partnership are Distributions that are designated as capital gain
not taxable to a holder of Units except to the extent dividends generally will be taxed as long-term capital
they exceed such holder's basis in its interest in the gain, subject to certain limitations. Distributions in
Operating Partnership (which will excess of current or accumulated
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP COMPANY
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
include such holder's allocable share of the Operating earnings and profits will be treated as a non- taxable
Partnership's nonrecourse debt). Distributions made by return of basis to the extent of a shareholder's
the Company to its taxable domestic shareholders out adjusted basis in its Common Shares, with the excess
of current or accumulated earnings and profits will be taxed as capital gain.
taken into account by them as ordinary income.
Each year, holders of Units will receive a Schedule K-1 Each year, shareholders of the Company will receive a
tax form containing detailed tax information for Form 1099 used by REITs to report dividends paid to
inclusion in preparing their federal income tax their stockholders.
returns.
Holders of the Units are required, in some cases, to Shareholders who are individuals generally will not be
file state income tax returns and/or pay state income required to file state income tax returns and/or pay
taxes in the states in which the Operating Partnership state income taxes outside of their states of
owns property, even if they are not residents of those residence with respect to the Company's operations and
states. distributions. The Company may be required to pay
state income taxes in certain states.
</TABLE>
32
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material federal income tax considerations
regarding the offering of Common Shares pursuant to this Prospectus (the
"Offering") is based on current law, is for general information only and is not
tax advice. This discussion does not purport to deal with all aspects of
taxation that may be relevant to particular Limited Partners and shareholders in
light of their personal investment or tax circumstances, or to certain types of
Limited Partners and shareholders including insurance companies, tax-exempt
organizations (except to the extent discussed under the heading "Taxation of
Tax-Exempt Shareholders"), financial institutions or broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States
(except to the extent discussed under the heading "--Taxation of Non-U.S.
Shareholders"), which are subject to special treatment under the federal income
tax laws.
EACH LIMITED PARTNER AND/OR PROSPECTIVE PURCHASER OF COMMON SHARES IS URGED
TO CONSULT WITH ITS OWN TAX ADVISOR TO DETERMINE THE IMPACT OF SUCH PROSPECTIVE
PURCHASER'S PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF THE
EXERCISE OF ITS REDEMPTION RIGHTS, AND OF THE PURCHASE, OWNERSHIP AND SALE OF
COMMON SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH EXERCISE,
PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAX CONSEQUENCES OF EXERCISE OF REDEMPTION RIGHT
TAX TREATMENT OF REDEMPTION OF UNITS. In the event that a Limited Partner
exercises its Redemption Right, it is generally anticipated that the Company
will exercise its right to acquire the Limited Partner's Units in exchange for
Exchange Shares. In that event, such acquisition will treated as a sale of the
Unit surrendered and will be fully taxable to the exchanging Limited Partner.
Such exchanging Limited Partner will be treated as realizing an amount equal to
the value of the Exchange Shares received plus the amount of liabilities
allocable to the exchanged Units at the time of the exchange. The difference
between the amount realized and the Limited Partner's basis in its Units
surrendered gives rise to gain or loss for federal income tax purposes. See
"--Character of Gain or Loss," below.
If the Company does not elect to assume the obligation to acquire a Limited
Partner's Units, the Operating Limited Partnership is required to redeem such
Units for cash. If the Operating Limited Partnership redeems Units for cash that
the Company contributes to the Operating Limited Partnership, the redemption
likely would be treated as a sale of such Units to the Company in a fully
taxable transaction, although the matter is not free from doubt. In that event,
the exchanging Limited Partner would be treated as discussed in the immediately
preceding paragraph. If, instead, the Operating Partnership chooses to redeem a
Limited Partner's Units for cash that is not contributed by the Company, the tax
consequences would be the same as described in the previous sentence, except
that if the Operating Partnership redeems less than all of a Limited Partner's
Units, the transaction would not be treated as a sale of the Units surrendered,
and the Limited Partner would recognize no taxable loss and would recognize
taxable gain only to the extent that the cash, plus the share of liabilities
allocable to the redeemed Units, exceeded the Limited Partner's basis in all
such Limited Partner's Units immediately before the redemption.
The tax liability resulting from gain recognized as a result of the exercise
of the Redemption Right could exceed the amount of cash and the value of any
Exchange Shares received upon the disposition.
CHARACTER OF GAIN OR LOSS. Gain or loss recognized upon the exercise of the
Redemption Right generally will be capital gain or loss if the surrendered Units
were held as a capital asset, and generally will be long-term capital gain or
loss if the holding period of the Units (including in certain cases the holding
period of interests exchanged for Units) exceeds one year at the time of the
sale. However, if any amount realized upon the sale of Units is attributable to
a holder's share of "unrealized receivables" (as defined in Section 751 of the
Code) of the Operating Partnership, a portion of such gain may be treated as
ordinary income. The term "unrealized receivables" includes amounts that would
be subject to recapture as
33
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ordinary income if the Operating Partnership sold its assets for fair market
value at the time of the sale of the Units.
BASIS IN UNITS SURRENDERED. A Limited Partner's basis in its Units
generally will equal such Limited Partner's initial basis in such Units,
increased by (a) its share of Operating Partnership taxable and tax-exempt
income and (b) its share of increases in nonrecourse liabilities incurred by the
Operating Partnership, if any (including the Operating Partnership's share of
nonrecourse liabilities of the Financing Partnership), and decreased (but not
below zero) by (i) its share of Operating Partnership distributions, (ii) its
share of decreases in nonrecourse liabilities of the Operating Partnership
(including the Operating Partnership's share of nonrecourse liabilities of the
Financing Partnership), (iii) its share of losses of the Operating Partnership,
and (iv) its share of nondeductible expenditures of the Operating Partnership
that are not chargeable to capital. A Limited Partner surrendering less than all
of its Units at one time will allocate a pro rata portion of its aggregate basis
in all of its Units to the Units surrendered.
POTENTIAL APPLICATION OF DISGUISED SALE REGULATIONS TO REDEMPTION OF
UNITS. A redemption of Units issued in the Formation Transactions within two
years of the Formation Transactions may cause the original transfer of property
to the Operating Partnership in exchange for such Units to be treated as a
"disguised sale" of property. Section 707 of the Code and the Treasury
Regulations thereunder (the "Disguised Sale Regulations") generally provide
that, unless one of the prescribed exceptions is applicable, a partner's
contribution of property to a partnership and a simultaneous or subsequent
transfer of money or other consideration (including the assumption of or taking
subject to a liability) from the partnership to the partner will be presumed to
be a sale, in whole or in part, of such property by the partner to the
partnership. Further, the Disguised Sale Regulations provide generally that in
the absence of an applicable exception, transfers of money or other
consideration between a partnership and a partner that are made within two years
of each other are presumed to be a sale unless the facts and circumstances
clearly establish that either the transfers do not constitute a sale or an
exception to disguised sale treatment applies.
If the Redemption Right is exercised within two years of the date of
consummation of the Formation Transactions, and the Company does not exercise
its right to acquire the Units, then it is likely that the Disguised Sale
Regulations will apply to the Formation Transactions and the proceeds of the
redemption will be treated as part of the disguised sale. In the event the
Disguised Sale Regulations were determined to apply with respect to the exercise
of a Redemption Right, the exercising Limited Partner would be treated as though
it sold property to the Operating Partnership on the date of the consummation of
the Formation Transactions and received on such date an obligation of the
Operating Partnership to transfer money or other consideration to it. Gain
realized as a result of the deemed sale may qualify for installment reporting
under Section 453 of the Code, subject to certain limitations.
TAXATION OF THE COMPANY
GENERAL. The Company has made an election to be taxed as a REIT under
Sections 856 and 860 of the Code, commencing with its taxable year ending
December 31, 1994. The Company believes that it is organized and operates 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 will operate in a manner so as to qualify or remain qualified.
The sections of the Code and Treasury Regulations governing REITs are highly
technical and complex. The following sets forth the material aspects of the
sections that govern the federal income tax treatment of a REIT and its
shareholders. This summary is qualified in its entirety by the applicable Code
provisions, Treasury Regulations and rules promulgated thereunder, and
administrative and judicial interpretations thereof.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to shareholders. This treatment substantially eliminates the "double
taxation" (at the corporate and shareholder levels) of income that generally
results from an investment in a regular corporation. However, the Company will
be subject to federal income tax
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as follows: First, the Company will be taxed at regular corporate rates on any
undistributed "REIT taxable income" (as defined below), 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 to the extent that tax exceeds its regular tax. Third, if the Company
has (i) net income from the sale or other disposition of "foreclosure property"
(generally, property acquired by reason of default on indebtedness held by the
Company) that is held primarily for sale to customers in the ordinary course
business or (ii) other nonqualifying income from foreclosure property, it will
be subject to tax at the highest corporate rate on such income. Fourth, if the
Company has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business, other than foreclosure property),
such income will be subject to a 100% tax. Fifth, if the Company should fail to
satisfy the 75% gross income test or the 95% gross income test (as discussed
below), but has nonetheless maintained its qualification as a REIT because
certain other requirements have been met, it will be subject to a 100% tax on an
amount equal to (a) the greater of the amount by which the Company fails the 75%
or 95% test, multiplied by (b) a fraction intended to reflect the Company's
profitability. Sixth, if the Company should fail to distribute during each
calendar year at least the sum (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, with respect to any asset (a "Built-in Gain
Asset") acquired by the Company from a corporation which is or has been a C
corporation (I.E., generally a corporation subject to full corporate-level tax)
in certain transactions in which the basis of the Built-in Gain Asset in the
hands of the Company is determined by reference to the basis of the asset in the
hands of the C corporation, if the Company recognizes gain on the disposition of
such asset during the 10-year period (the "Recognition Period") beginning on the
date on which such asset was acquired by the Company, then, to the extent of the
Built-in Gain (I.E., the excess of (a) the fair market value of such asset over
(b) the Company's adjusted basis in such asset, determined as of the beginning
of the Recognition Period), such gain will be subject to tax at the highest
regular corporate rate pursuant to IRS regulations that have not yet been
promulgated.
REQUIREMENTS FOR QUALIFICATION. 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 Sections 856 through 859 of the Code; (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) in which during the last half of each taxable year not
more than 50% in value of its outstanding stock is owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities); and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) to (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
Conditions (v) and (vi) will not apply until after the first taxable year for
which an election is made to be taxed as a REIT.
The Company believes that it has issued sufficient shares to allow it to
satisfy conditions (v) and (vi). In addition, the Company's Charter provides for
restrictions regarding the transfer and ownership of shares, which restrictions
are intended to assist the Company in continuing to satisfy the share ownership
requirements described in (v) and (vi) above. Such transfer and ownership
restrictions are described in "Description of Capital Stock--Restrictions on
Ownership." These restrictions may not ensure that the Company will, in all
cases, be able to satisfy the Share Ownership requests described alone. If the
Company fails to satisfy such share ownership requests, the Company's status as
a REIT will terminate. See "Failure to Qualify."
To monitor the Company's compliance with the share ownership requirements,
the Company is required to maintain records regarding the actual ownership of
its shares. To do so, the Company must demand written statements each year from
the record holders of certain percentages of its shares of stock
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in which the record holders are to disclose the actual owners of the shares
(I.E., the persons required to include in gross income the REIT dividends). A
REIT with 2,000 or more record shareholders must demand statements from record
holders of 5% or more of its shares, one with less than 2,000, but more than 200
record shareholders must demand statements from record holders of 1% or more of
the shares, while a REIT with 200 or fewer record shareholders must demand
statements from record holders of 0.5% or more of the shares. A list of those
persons failing or refusing to comply with this demand must be maintained as
part of the Company's records. A shareholder who fails or refuses to comply with
the demand must submit a statement with its tax return disclosing the actual
ownership of the shares and certain other information.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership shall retain the same character in
the hands of the REIT for purposes of Section 856 of the Code, including
satisfying the gross income tests and the assets tests, discussed below. 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
such items of the Financing Partnership and any other partnership in which the
Operating Partnership has a direct or indirect interest) are treated as assets,
liabilities and items of income of the Company for purposes of applying the
requirements described herein. A summary of certain rules governing the federal
income taxation of partnerships and their partners is provided below in "--Tax
Aspects of the Operating Partnership and Financing Partnership." The Company
controls the Operating Partnership and the Financing Partnership and believes it
operates them in a manner consistent with the requirements for qualification as
a REIT, and intends to continue to operate these in such a manner. However,
there can be no assurance that the Company has actually operated or will
actually operate such partnerships in a manner that has satisfied or will
satisfy the REIT provisions of the Code.
The Company owns an indirect 1% interest as a general partner in the
Financing Partnership, which will be held through Evans Withycombe Finance,
Inc., a wholly owned subsidiary of the Company that will be organized and
operated as a "qualified REIT subsidiary" within the meaning of the Code.
Qualified REIT subsidiaries are not treated as separate entities from their
parent REIT for federal income tax purposes. Instead, all assets, liabilities
and items of income, deduction and credit of Evans Withycombe Financing, Inc.
are treated as assets, liabilities and items of the Company. Evans Withycombe
Financing, Inc., therefore, is not subject to federal corporate income taxation,
although it may be subject to state or local taxation. In addition, the
Company's ownership of the voting stock of Evans Withycombe Financing, Inc. will
not violate the general restriction against ownership of more than 10% of the
voting securities of any issuer.
INCOME TESTS. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from certain sales of real
property held primarily for sale) for each taxable year must be derived directly
or indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain circumstances,
interest) or from certain types of temporary investments. Second, at least 95%
of the Company's gross income (excluding gross income from certain sales of real
property held primarily for sale) for each taxable year must be derived from
items of income that qualify under the 75% test, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing). Third, gain from the sale or other disposition of stock or
securities held for less than one year, gain from certain sales of real property
held primarily for sale and gain from the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must represent less than 30% of the Company's
gross income for each taxable year.
Rents received by the Company qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or
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accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. Second, rents received from a tenant will not qualify as "rents from
real property" in satisfying the gross income test if the Company, or an owner
of 10% or more of the Company, actually or constructively owns 10% or more of
such tenant (a "Related Party Tenant"). Third, if rent attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." Finally, for rents received to qualify as "rents from real property,"
the Company generally must not operate or manage the property or furnish or
render services to the tenants of such property, other than through an
independent contractor from whom the Company derives no revenue, provided,
however, the Company may directly perform certain services that are "usually or
customarily rendered" in connection with the rental of space for occupancy only
and not otherwise considered "rendered to the occupant" of the property. The
Company does not believe that it (i) charges rent for any property that is based
in whole or in part on the income or profits of any person (except by reason of
being based on a percentage of receipts or sales, as described above), (ii)
rents property to a Related Party Tenant, (iii) derives rental income
attributable to personal property (other personal property leased in connection
with the lease of real property, the amount of which is considered under the
applicable Treasury Regulations to be less than 15% of the total rent received
under the lease), or (iv) performs services considered to be rendered to the
occupant of the property, other than through an independent contractor from whom
the Company derives no revenue.
The Company regularly monitors the activities to ensure that the foregoing
tests are satisfied. The Company believes that the aggregate amount of any
nonqualifying income in any taxable year has not exceeded and will not exceed
the limits on nonqualifying income under the gross income tests.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions generally will be available if (i) the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, (ii) the
Company attaches to its return for that year a schedule of the nature and amount
of each item of its income, and (iii) any incorrect information on the schedule
was not due to fraud with intent to evade tax. However, in the event the Company
does not meet these tests, the Company would not be entitled to the benefit of
these relief provisions. If these relief provisions are inapplicable to a
particular set of circumstances involving the Company, the Company will not
qualify as a REIT. As discussed above in "--General," even if these relief
provisions apply, a tax would be imposed with respect to the excess
nonqualifying income. There are no comparable relief provisions which could
mitigate the consequences of a failure to satisfy the 30% gross income test.
ASSET TESTS. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets, stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the Company, cash, cash items and government securities.
Second, not more than 25% of Company's total assets may be represented by
securities other than those included in the 75% asset test. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities. In applying these tests, the Company will be
deemed to own a proportionate share of any assets owned, directly or indirectly,
by the Operating Partnership based on its capital interest in the Operating
Partnership and the Operating Partnership's direct or indirect capital interest
in any other partnership, including the Financing Partnership.
The Company believes that it has complied and will continue to comply with
the asset tests. Substantially all of the Company's investments are in the
properties owned by the Operating Partnership and Financing Partnership, which
represent qualifying real estate assets. The Company's proportionate share of
the Management Company's voting and nonvoting common stock owned by the
Operating Partnership also is within the permissible range, since these
interests do not exceed a 10% voting interest. In addition, the Company believes
that the value of its interests in the stock of the Management Company
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will be less than the permitted 5% of the total value of the Company's assets.
There can be no assurance that the IRS will not contend that the value of the
securities of the Management Company held by the Company (through the Operating
Partnership) exceeds the 5% value limitation.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its shareholders in an amount at least equal to (i) the sum of (a) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (b) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of certain
items of noncash income. "REIT taxable income" for any year means the taxable
income of the Company for such year (excluding any net income derived either
from property held primarily for sale to customers or from foreclosure
property), subject to certain adjustments provided in the REIT provision of the
Code. In addition, if the Company disposes of any Built-in Gain Asset during
such asset's Recognition Period, the Company will be required, pursuant to IRS
regulations which have not yet been promulgated, to distribute at least 95% of
the Built-in Gain (after tax), if any, recognized on the disposition of such
asset. Such distributions must be paid in the taxable year to which they relate,
or in the following taxable year if declared before the Company timely files its
tax return for such year and if paid on or before the first regular dividend
payment after such declaration. The Company intends to make, and to cause the
Operating Partnership and Financing Partnership to make, timely distributions
sufficient to satisfy these annual distribution requirements. To the extent that
the Company does not distribute all of its net capital gain or distributes at
least 95%, but less than 100%, of its REIT taxable income, as adjusted, it will
be subject to tax thereon at regular capital gain and ordinary corporate tax
rates.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the distribution requirements described
above due to timing differences between the actual receipt of income and actual
payment of deductible expenses and the inclusion of such income and deduction of
such expenses in arriving at taxable income of the Company, or if nondeductible
capital expenditures such as principal amortization or capital expenditures
exceed the amount of noncash deductions. In the event that such timing
differences occur, in order to meet the distribution requirements, the Company
may find it necessary to arrange, or to cause the Operating Partnership or
Financing Partnership to arrange, for short-term, or possibly long-term,
borrowing, to sell assets, or to pay dividends in the form of taxable stock
dividends. In this regard, the 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.
Under certain circumstances, the Company may be able to rectify a failure to
meet the above distribution requirements for a year by paying "deficiency
dividends" to shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. The Company will,
however, be required to pay interest based upon the amount of any deduction
taken for deficiency dividends.
Furthermore, if the Company should fail to distribute each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain income for such year and (iii) any undistributed taxable
income from prior periods, the Company will be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed. Any
REIT taxable income and capital gains on which tax is imposed for any year is
treated as an amount distributed during that year for purposes of this excise
tax.
FAILURE TO QUALIFY
If the Company should fail 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
rates applicable to regular C corporations. Distributions to shareholders in any
year in which the Company fails to qualify as a REIT will not be deductible by
the Company nor will they be required to be made. As a result, the Company's
failure to qualify as a REIT will reduce the cash
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available for distribution by the Company to shareholders. In addition, if the
Company fails to qualify as a REIT, all distributions to shareholders will be
taxable as ordinary income to the extent of the Company's current and
accumulated earnings and profits, and, subject to certain limitations in the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company will also be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost. It is not possible
to state whether in all circumstances the Company would be entitled to such
statutory relief.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic shareholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income and will not be eligible for the dividends
received deduction for corporations. Distributions that are designated as
capital gain dividends will be taxed as long-term capital gain (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 shareholder has held its shares.
However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will be treated as tax-free returns of
capital to the extent of the shareholder's basis in the shares, and will reduce
the adjusted basis of such shares. To the extent distributions in excess of
current and accumulated earnings and profits exceed the basis of a shareholder's
shares they will be included in income as long-term capital gain (or short-term
capital gain if the shares have been held for one year or less), assuming the
shares are a capital asset in the hands of the shareholder. In addition, any
dividend declared by the Company in October, November or December of any year
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by the Company and received by the shareholder on
December 31 of such year, provided that the dividend is actually paid by the
Company during January of the following calendar year. Shareholders may not
include in their individual income tax returns any net operating losses or
capital losses of the Company.
Upon any sale or other disposition of shares, a domestic shareholder will
recognize gain or loss for federal income tax purposes in an amount equal to the
difference between (i) the amount of cash and the fair market value of any
property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares for tax purposes. In general, provided the shares
were held as a capital asset, any gain or loss realized on a taxable disposition
of shares will be treated as long-term capital gain or loss if the shares have
been held for more than twelve months and otherwise as short-term capital gain
or loss. However, any loss upon a sale or exchange of shares by a shareholder
who has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such shareholder as
long-term capital gain.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company reports to its domestic shareholders and the IRS the amount of
dividends paid with respect to each calendar year, and the amount of tax
withheld therefrom, if any. Under the backup withholding rules, a shareholder
may be subject to backup withholding at a rate of 31% with respect to dividends
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A shareholder that does not provide the Company with its
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. Any amount withheld under the backup withholding rules will be
creditable against the shareholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions made
to any shareholders who fail to certify to their non-foreign status to the
Company. See "--Taxation of Non-U.S. Shareholders."
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TAXATION OF TAX-EXEMPT SHAREHOLDERS
The IRS has ruled that amounts distributed as dividends by a REIT do not
constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling, dividend income from the Company should
not, subject to certain exceptions described below, be UBTI to a qualified plan,
IRA or other tax-exempt entity (a "Tax-Exempt Shareholder") provided the
Tax-Exempt Shareholder has not held its shares as "debt financed property"
within the meaning of Section 514 of the Code and the shares are not otherwise
used in an unrelated trade or business of the Tax-Exempt Shareholder. Similarly,
income from the sale of Common Shares should not, subject to certain exceptions
described below, constitute UBTI unless the Tax-Exempt Shareholder has held such
Common Shares as a dealer (under Section 512(b)(5)(B) of the Code) or as
"debt-financed property."
For Tax-Exempt Shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their tax advisors concerning these
"set-aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by the
Company shall be treated as UBTI to certain trusts if the Company is treated as
a "pension held REIT." A trust will be subject to this rule if it (i) is
described in Section 401(a) of the Code, (ii) is tax-exempt under Section 501(a)
of the Code, and (iii) holds more than 10% (by value) of the interests in the
REIT. Tax-exempt pension funds that are described in Section 401(a) of the Code
are referred to below as "qualified trusts."
The Company will be treated as a "pension held REIT" if (i) it would not
have qualified as a REIT but for the fact that Section 856(h)(3) of the Code
provides that stock owned by qualified trusts shall be treated, for purposes of
the "five or fewer" shareholder requirement (discussed above), as owned by the
beneficiaries of the trust (rather than by the trust itself), and (ii) either
(a) at least one such qualified trust holds more than 25% (by value) of the
interests in the Company, or (b) one or more such qualified trusts, each of whom
owns more than 10% (by value) of the interests in the Company, hold in the
aggregate more than 50% (by value) of the interests in the Company.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, "Non-U.S. Shareholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United States
federal income tax law and does not address state, local or foreign tax
consequences that may be relevant to a Non-U.S. Shareholder in light of its
particular circumstances. In addition, this discussion is based on current law,
which is subject to change, and assumes that the Company qualifies for taxation
as a REIT. Prospective Non-U.S. Shareholders should consult with their own tax
advisors to determine the impact of federal, state, local and foreign income and
other tax laws with regard to an investment in Common Shares, including any
reporting requirements.
DISTRIBUTIONS. Distributions by the Company to a Non-U.S. Shareholder that
are neither attributable to gain from sales or exchanges by the Company of
United States real property interests nor designated by the Company as capital
gains dividends will be treated as dividends of ordinary income to the extent
that they are made out of current or accumulated earnings and profits of the
Company. Such distributions generally will be subject to withholding of United
States federal income tax at a 30% rate on the total amount distributed unless
an applicable income tax treaty reduces or eliminates that tax. However,
dividends that are "effectively connected" with the conduct of a trade or
business by the Non-U.S. Shareholder will be subject to tax on a net basis at
graduated rates, in the same manner as domestic shareholders are taxed with
respect to such dividends, and are generally not subject to withholding. Any
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such "effectively connected" dividends received by a Non-U.S. Shareholder that
is a corporation may also be subject to an additional branch profits tax at a
30% rate or such lower rate as may be specified by an applicable income tax
treaty.
Pursuant to current Treasury regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of ascertaining the requirement of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury regulations not currently in effect, however, a Non-U.S.
Shareholder who seeks to claim the benefit of an applicable treaty rate would be
required to satisfy certain certification and other requirements. Under certain
treaties, lower withholding rates generally applicable to dividends do not apply
to dividends from a REIT, such as the Company. A Non-U.S. Shareholder must file
a properly completed and executed IRS Form 4224 with the Company's withholding
agent certifying that the investment to which the distribution relates is
effectively connected with the conduct of a United States trade or business of
such Non-U.S. Shareholder in order to qualify for the exemption from withholding
under the effectively connected income exemption discussed above.
Distributions that are neither attributable to gain from sales or exchanges
by the Company of United States real property interests nor designated by the
Company as capital gains dividends and that are in excess of current or
accumulated earnings and profits of the Company will not be taxable to a
Non-U.S. Shareholder to the extent that they do not exceed the adjusted basis of
the shareholder's Common Shares, but rather will reduce the adjusted basis of
such Common Shares. To the extent such distributions in excess of the Company's
current and accumulated earnings and profits exceed the adjusted basis of a
Non-U.S. Shareholder's Common Shares, they will give rise to gain from the sale
or exchange of the Common Shares, the tax treatment of which is described below.
If it cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of current or accumulated earnings and
profits, the distribution will generally be treated as a dividend subject to
withholding. However, amounts thus withheld are generally refundable if it is
subsequently determined that such distribution was, in fact, in excess of
current or accumulated earnings and profits of the Company.
Distributions to a Non-U.S. Shareholder that are designated by the Company
at the time of distribution as capital gains dividends (other than those
attributable to gain from sales or exchanges by the Company of United States
real property interests) generally will not be subject to United States federal
income taxation unless (i) the investment in the Common Shares is effectively
connected with the Non-U.S. Shareholder's United States trade or business, in
which case the Non-U.S. Shareholder will be subject to the same treatment as
domestic shareholders with respect to such gain (except that a shareholder that
is a foreign corporation may also be subject to the 30% branch profits tax, as
discussed above), or (ii) the Non-U.S. Shareholder is a nonresident alien
individual who is present in the United States for 183 days or more during the
taxable year and either has a "tax home" in the United States or sold his shares
under circumstances where the sale is attributable to a U.S. office, in which
case the nonresident alien individual will be subject a 30% tax on the
individual's capital gains.
Distributions to a Non-U.S. Shareholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests will
be treated as income that is effectively connected with a United States trade or
business of the Non-U.S. Shareholder. Non-U.S. Shareholders would thus generally
be taxed on such distributions at the same rates applicable to domestic
shareholders (subject to a special alternative minimum tax in the case of
nonresident alien individuals). Also, such gain may be subject to a 30% branch
profits tax in the hands of a corporate Non-U.S. Shareholder that is not
entitled to a treaty exemption or rate reduction. The Company is required to
withhold 35% of any such distribution, and the withheld amount is creditable
against the Non-U.S. Shareholder's United States federal income tax liability
SALE OF COMMON SHARES. Gain recognized by a Non-U.S. Shareholder upon a
sale or other disposition of Common Shares generally will not be subject to
United States federal income tax unless (i) the Company is not a "domestically
controlled REIT," or (ii) the investment in the Common Shares is effectively
connected with the Non-U.S. Shareholder's United States trade or business or
(iii) in the case of
41
<PAGE>
a Non-U.S. Shareholder who is a nonresident alien individual, the individual is
present in the United States for 183 days or more during the taxable year and
either has a "tax home" in the United States or sold his shares under
circumstances where the sale is attributable to a U.S. office. A domestically
controlled REIT is defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. The Company currently believes that it is a
domestically controlled REIT. In the circumstances described above in clauses
(i) and (ii), the Non-U.S. Shareholders will generally be subject to the same
treatment as domestic shareholders with respect to such gain (subject to a
special alternative minimum tax in the case of nonresident alien individuals in
the circumstances described above in clause (i) and, in the case of foreign
corporations, subject to the possible application of the 30% branch profits tax,
discussed above). In the circumstances described above in clause (iii), the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gain.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Company must report
annually to the IRS and to each Non-U.S. Shareholder the amount of distributions
subject to withholding as described above and the tax withheld with respect to
such distributions, regardless of whether withholding is actually required.
Copies of the information returns reporting such distributions and withholding
may also be made available to the tax authorities in the country in which the
Non-U.S. Shareholder resides under the provisions of an applicable income tax
treaty. Additional issues may arise pertaining to information reporting and
backup withholding for Non-U.S. Shareholders. Non-U.S. Shareholders should
consult their tax advisors with regard to U.S. information reporting and backup
withholding.
TAX RISKS ASSOCIATED WITH OWNING INTERESTS IN PARTNERSHIPS
The Company owns interests in various partnerships, including the Operating
Partnership and the Finance Partnership. The ownership of an interest in a
partnership may involve special tax risks, incuding the possible challenge by
the IRS of (i) allocations of income and expense items, which could affect the
computation of taxable income of the Company and (ii) the status of a
partnership as a partnership (as opposed to an association taxable as a
corporation) for federal income tax purposes. If a partnership is treated as an
association taxable as a corporation for federal income tax purposes, the
partnership would be treated as a taxable entity. In addition, in such a
situation, (i) if the Company owned more than 10% of the outstanding voting
securities of such partnership, or the value of such securities exceeded 5% of
the value of the Company's assets, such as in the case of the Operating
Partnership and the Finance Partnership, the Company would fail to satisfy the
asset tests described above and would therefore fail to qualify as a REIT, (ii)
distributions from any of the partnerships to the Company would be treated as
dividends, which are not taken into account in satisfying the 75% gross income
test described above and would, therefore, preclude the Company from satisfying
such test, (iii) the interest in any of the partnerships held by the Company
would not qualify as a "real estate asset," which would preclude the Company
from meeting the 75% asset test described above and (iv) the Company would not
be able to deduct its share of any losses generated by the partnerships in
computing its taxable income. See
"-- Failure to Qualify" for a discussion of the effect of the Company's failure
to meet such tests for a taxable year.
Although the Company believes they will be so treated, the Operating
Partnership and the Financing Partnership have not requested, and do not intend
to request, rulings from the IRS that they will be treated as partnerships for
federal income tax purposes. No assurance can be given that the IRS will not
challenge the status of the Operating Partnership or the Financing Partnership
as a partnership for federal income tax purposes. If such challenge were
sustained by a court, the Operating Partnership and/or the Financing Partnership
could be treated as corporations for federal income tax purposes.
OTHER TAX CONSEQUENCES
The Company and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
42
<PAGE>
discussed above. Consequently, prospective shareholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
The Management Company does not qualify as a REIT, and therefore it is
subject to federal, state and local taxes on its income.
ERISA CONSIDERATIONS
The following is intended to be a summary only and is not a substitute for
careful planning with a professional. EMPLOYEE BENEFIT PLANS SUBJECT TO ERISA
AND THE CODE CONSIDERING PURCHASING THE COMMON SHARES SHOULD CONSULT WITH THEIR
OWN TAX OR OTHER APPROPRIATE COUNSEL REGARDING THE APPLICATION OF ERISA AND THE
CODE TO THEIR PURCHASE OF THE COMMON SHARES. Plans should also consider the
entire discussion under the heading of "Federal Income Tax Considerations," as
material contained therein is relevant to any decision by a Plan to purchase the
Common Shares.
FIDUCIARY CONSIDERATIONS
Certain employee benefit plans and individual retirement accounts and
individual retirement annuities ("IRAs") (collectively, "Plans") are subject to
various provisions of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the Code. Before investing in the Common Shares of the
Company, a Plan fiduciary should ensure that such investment is in accordance
with ERISA's general fiduciary standards. In making such a determination, a Plan
fiduciary should ensure that the investment is in accordance with the governing
instruments and the overall policy of the Plan, and that the investment will
comply with the diversification and composition requirements of ERISA. In
addition, provisions of ERISA and the Code prohibit certain transactions in Plan
assets that involve persons who have specified relationships with a Plan
("disqualified persons"). The consequences of such prohibited transactions
include the imposition of excise taxes, disqualifications of IRAs and other
liabilities. A Plan fiduciary should ensure that any investment in the Common
Shares will not constitute such a prohibited transaction.
PLAN ASSETS ISSUES
A prohibited transaction may occur if the assets of the Company are deemed
to be assets of the investing Plans and disqualified persons deal with such
assets. In certain circumstances where a Plan holds an interest in an entity,
the assets of the entity are deemed to be Plan assets (the "look-through rule").
Under such circumstances, any person that exercises authority or control with
respect to the management or disposition of such assets is a Plan fiduciary.
Plan assets are not defined in ERISA or the Code, but the United States
Department of Labor has issued Regulations, effective March 13, 1987 (the
"Regulations"), that outline the circumstances under which a Plan's interest in
an entity will be subject to the look-through rule.
The Regulations apply only to the purchase by a Plan of an "equity interest"
in an entity, such as common stock of a REIT. The Regulations provide that the
look-through rule does not apply if (i) the equity interest is a "publicly
offered security," (ii) the equity interest is a security issued by an
investment company registered under the Investment Company Act of 1940, (iii)
the equity interest is in an entity that is an operating company or (iv) benefit
plan investment in the entity is not "significant."
Under the Regulations, a "publicly offered security" is a security that is
(i) freely transferable, (ii) part of a class of securities that is widely-held
and (iii) either (a) part of a class of securities that is registered under
section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or (b) sold to a Plan as part of an offering of securities to
the public pursuant to an effective registration statement under the Securities
Act and the class of securities of which such security is a part is registered
under the Exchange Act within 120 days (or such longer period allowed by the
Commission) after the end of the fiscal year of the issuer during which the
offering of such securities to the public occurred. Whether a security is
considered "freely transferable" depends on the facts and circumstances of each
case. Generally, if the security is part of an offering in which the minimum
investment is $10,000 or less, any
43
<PAGE>
restriction on or prohibition against any transfer or assignment of such
security for the purposes of preventing a termination or reclassification of the
entity for federal or state tax purposes will not of itself prevent the security
from being considered freely transferable. A class of securities is considered
"widely held" if it is a class of securities that is owned by 100 or more
investors independent of the issuer and of one another.
The Company believes that the Common Shares, other than those initially
acquired and held by AEW and Copley, meet the criteria of the publicly-offered
securities exception to the look-through rule. First, the Common Shares will be
considered to be freely transferable, as the minimum investment will be less
than $10,000 and the only restrictions upon its transfer are those required
under federal tax laws to maintain the Company's status as a REIT. Second, the
Company believes that the Common Shares are held by 100 or more investors and
that at least 100 or more of these investors are independent of the Company and
of one another. Third, the Common Shares will be both (a) part of an offering of
securities to the public pursuant to an effective registration statement under
the Securities Act and will be registered under the Exchange Act within 120 days
after the end of the fiscal year of the Company during which the offering of
such securities to the public occurs and (b) part of a class of securities
registered under Section 12 of the Exchange Act. Accordingly, the Company
believes that if a Plan purchases the Common Shares, the Company's assets should
not be deemed to be Plan assets and, therefore, that any person who exercises
authority or control with respect to the Company's assets should not be a Plan
fiduciary. For the shares initially acquired by AEW and Copley, the Company, AEW
and Copley will be relying on other exceptions, as noted above, to the
look-through rule.
The look-through rule will also apply in determining whether the assets of
the Operating Partnership are deemed to be plan assets. The Units are not
publicly offered securities. Nevertheless, if the applicable exceptions
described above are satisfied, the indirect investment in the Operating
Partnership by ERISA Plans or other plans subject to Code Section 4975 through
their ownership of the Common Shares should not cause the assets of the
Operating Partnership to be considered plan assets of such shareholders.
SELLING STOCKHOLDERS
Those persons who may receive Exchange Shares upon exchange of Units are
referred to herein as "Selling Stockholders."
The following table provides, as of December 10, 1996, the names of and
maximum number of Exchange Shares to be owned by each Selling Stockholder. Since
the Selling Stockholders may sell all, or some or none of their Exchange Shares,
no estimate can be made of the aggregate number of such Exchange Shares that are
to be offered hereby or that will be owned by each Selling Stockholder upon
completion of the offering to which this Prospectus relates. Except for the
Units held by the Phoenix Art Museum, the Units held by each of the Selling
Stockholders were issued to such holders on December 12, 1995 in connection with
the acquisition of an apartment community by the Company. The holders of such
Units have the right to redeem such Units commencing one year following the date
of the acquisition of the Units (i.e., December 12, 1996).
44
<PAGE>
The Exchange Shares offered by this Prospectus may be offered from time to
time by the Selling Stockholders named below:
<TABLE>
<CAPTION>
COMMON SHARES/UNITS UNITS BENEFICIALLY COMMON SHARES
BENEFICIALLY OWNED/MAXIMUM BENEFICIALLY
OWNED PRIOR TO THE NUMBER OF EXCHANGE OWNED FOLLOWING THE
NAME OFFERING SHARES OFFERED OFFERING(1)
- --------------------------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C>
Timothy L. Strader..................... 14,863 14,863 --
Anthony M. Vitti....................... 14,856 14,856 --
Legacy Investors-86.................... 46 46 --
McKinley Stoneridge, L.P............... 77,038 77,038 --
Brookfield Development, Inc............ 73,582 73,582 --
Phoenix Art Museum..................... 2,300 2,300 --
------- ------- ------
Total:............................. 182,685 182,685 --
------- ------- ------
------- ------- ------
</TABLE>
- ------------------------
(1) Assumes all Units held by the Selling Stockholders are exchanged for
Exchange Shares, and that all such Exchange Shares are resold pursuant to
this Prospectus. Also assumes that no transactions with respect to the
Common Shares or Units occur other than the transactions registered pursuant
to the Registration Statement of which this Prospectus is a part. Under the
preceding assumptions, no Selling Stockholder will own more than 1% of the
outstanding Common Shares following the Offering.
PLAN OF DISTRIBUTION
This Prospectus relates to (i) the possible issuance by the Company of the
Exchange Shares if, and to the extent that, holders of Units tender such Units
for redemption, and (ii) the offer and sale from time to time of any Exchange
Shares that may be issued to such Limited Partners. The Company has registered
the Exchange Shares for sale to provide the holders thereof with freely tradable
securities, but registration of such Exchange Shares does not necessarily mean
that any of such shares will be offered or sold by the holders thereof.
The Company will not receive any proceeds from the offering by the Selling
Stockholders or from the issuance of the Exchange Shares to holders of Units
upon receiving a notice of redemption (but it may acquire from such holders the
Units tendered). The Exchange Shares may be sold from time to time to purchasers
directly by any of the Selling Stockholders. Alternatively, the Selling
Stockholders may from time to time offer the Exchange Shares through dealers or
agents, who may receive compensation in the form of commissions from the Selling
Stockholders and/or the purchasers of Exchange Shares for whom they may act as
agent. The Selling Stockholders and any dealers or agents that participate in
the distribution of Exchange Shares may be deemed to be "underwriters" within
the meaning of the Securities Act and any profit on the sale of Exchange Shares
by them and any commissions received by any such dealers or agents might be
deemed to be underwriting commissions under the Securities Act.
At a time a particular offer of Exchange Shares is made by the Selling
Stockholders, a Prospectus Supplement, if required, will be distributed that
will set forth the name and names of any dealers or agents and any commissions
of other terms constituting compensation from the Selling Stockholders and any
other required information. The Exchange Shares may be sold from time to time at
varying prices determined at the time of sale or at negotiated prices.
In order to comply with the securities laws of certain states, if
applicable, the Exchange Shares may be sold by the Selling Stockholders only
through registered or licensed brokers or dealers. In addition, in certain
states, the Exchange Shares may not be sold unless they have been registered or
qualified for sale in such state or an exemption from such registration or
qualification requirement is available and is complied with.
The Company may from time to time issue up to 182,685 Exchange Shares upon
the acquisition of the Units exchanged therefor. The Company will acquire one
Unit in exchange for each Exchange Share that
45
<PAGE>
the Company may issue to Limited Partners pursuant to a Registration Statement
of which this Prospectus is a part. Consequently, with each exchange the
Company's interest in the Operating Partnership will increase.
The securities may be sold in (a) a block trade in which the broker or
dealer so engaged will attempt to sell the securities as agent but may position
and resell a portion of the block as principal to facilitate the transaction,
(b) transactions in which a broker or dealer acts as principal and resells the
securities for its account pursuant to this Prospectus, (c) an exchange
distribution in accordance with the rules of such exchange, and (d) ordinary
brokerage transactions and transactions in which the broker solicits purchases.
In effecting sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate. Certain Selling
Stockholders also may, from time to time, authorize underwriters acting as their
agents to offer and sell securities upon such terms and conditions as shall be
set forth in any prospectus supplement. Underwriters, brokers or dealers will
receive commissions or discounts from Selling Stockholders in amounts to be
negotiated immediately prior to sale. Such underwriters, brokers or dealers and
any other participating brokers or dealers may be deemed to be "underwriters"
within the meaning of the Securities Act in connection with such sales and any
discounts and commissions received by them and any profit realized by them on
the resale of the securities may be deemed to be underwriting discounts and
commissions under the Securities Act.
There is no assurance that any of the Selling Stockholders will offer for
sale or sell any or all of the securities covered by this Prospectus.
LEGAL MATTERS
Certain legal matters and certain tax matters described in "Federal Income
Tax Considerations" will be passed upon for the Company by Gibson, Dunn &
Crutcher LLP, Los Angeles, California and the validity of the Common Shares
offered hereby will be passed upon for the Company by Ballard Spahr Andrews &
Ingersoll, Baltimore, Maryland. Gibson, Dunn & Crutcher LLP will rely as to
certain matters of Maryland law, including the validity of the Common Shares, on
the opinion of Ballard Spahr Andrews & Ingersoll.
EXPERTS
The consolidated financial statements of the Company and Evans Withycombe
Residential Group (the predecessor to the Company) in the Company's Annual
Report (Form 10-K) for the year ended December 31, 1995, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
46
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY SELLING STOCKHOLDER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information.......................... 1
Incorporation of Certain Information by
Reference.................................... 1
Prospectus Summary............................. 2
Risk Factors................................... 4
Description of Capital Stock................... 14
Description of Units........................... 17
Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws................. 21
Redemption of Units............................ 24
Federal Income Tax Considerations.............. 33
ERISA Considerations........................... 43
Selling Stockholders........................... 44
Plan of Distribution........................... 45
Legal Matters.................................. 46
Experts........................................ 46
</TABLE>
182,685 SHARES
[LOGO]
EVANS WITHYCOMBE
RESIDENTIAL, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
DECEMBER 27, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with the
issuance and distribution of the securities registered hereby, all of which will
be paid by the Registrant.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee............................................... $ 1,198
Legal fees and expenses*........................................... 45,000
Accounting fees and expenses*...................................... 5,000
Blue sky fees and expenses*........................................ 7,500
Miscellaneous expenses*............................................ 5,302
---------
Total:......................................................... $ 64,000
---------
---------
</TABLE>
- ------------------------
* Estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Charter limits the liability of the Company's directors and
officers the Company and its shareholders to the fullest extent permitted from
time to time by Maryland law. Maryland law presently permits the liability of
directors and officers to a corporation or its shareholders for money damages to
be limited, except (i) to the extent that it is proved that the director or
officer actually received an improper benefit or profit or (ii) if a judgment or
other final adjudication is entered in a proceeding based on a finding that the
director's or officer's action, or failure to act, was the result of active and
deliberate dishonesty and was material to the cause of action adjudicated in the
proceeding. This provision does not limit the ability of the Company or its
shareholders to obtain other relief, such as an injunction or rescission.
The Company's Charter and Bylaws require the Company to indemnify its
directors and officers to the fullest extent permitted from time to time by
Maryland law. The Charter also permits the Company to indemnify employees,
agents and other persons acting on behalf of or at the request of the Company.
The MGCL permits a corporation to indemnify its directors, officers and certain
other parties against judgments, penalties, fines, settlements and reasonable
expenses actually incurred by them in connection with any proceeding to which
they may be made a party by reason of their service to or at the request of the
corporation, unless it is established that the act or omission of the
indemnified party was material to the matter giving rise to the proceeding and
(i) was committed in bad faith or was the result of active and deliberate
dishonesty, (ii) the indemnified party actually received an improper personal
benefit, or (iii) in the case of any criminal proceeding, the indemnified party
had reasonable cause to believe that the act or omission was unlawful.
Indemnification may be made against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by the director or officer in connection
with the proceeding; provided, however, that if the proceeding is one by or in
the right of the corporation, indemnification may not be made with respect to
any proceeding in which the director or officer has been adjudged to be liable
to the corporation. In addition, a director or officer may not be indemnified
with respect to any proceeding charging improper personal benefit to the
director or officer in which the director or officer was adjudged to be liable
on the basis that personal benefit was improperly received. The termination of
any proceeding by conviction, or upon a plea of nolo contendere or its
equivalent, or an entry of any order of probation prior to judgment, creates a
rebuttable presumption that the director or officer did not meet the requisite
standard of conduct required for indemnification to be permitted. It is the
position of the Securities and Exchange Commission that indemnification of
directors and officers for liabilities arising under the Securities Act is
against public policy and is unenforceable pursuant to Section 14 of the
Securities Act.
II-1
<PAGE>
The Agreement of Limited Partnership of the Operating Partnership also
provides for indemnification of the Company, or any director or officer of the
Company, in its capacity as general partner of the Partnership, from and against
all losses, claims, damages, liabilities, joint or several, expenses (including
legal fees), fines, settlements and other amounts incurred in connection with
any actions relating to the operations of the Operating Partnership as set forth
in the Operating Partnership Agreement.
The Company entered into indemnification agreements with each of its
executive officers and directors. The indemnification agreements require, among
other things, that the Company indemnify its officers and directors to the
fullest extent permitted by the MGCL, and advance to the officers and directors
all related expenses, subject to reimbursement if it is subsequently determined
that indemnification is not permitted. The Company must also indemnify and
advance all expenses incurred by officers and directors seeking to enforce their
rights under the indemnification agreements, and cover officers and directors
under the Company's directors and officers' liability insurance. Although the
form of indemnification agreement offers substantially the same scope of
coverage afforded by provisions in the Charter and the Bylaws, it provides
greater assurance to directors and officers that indemnification will be
available, because, as a contract, it cannot be modified unilaterally in the
future by the Board of Directors or by the shareholders to eliminate the rights
it provides.
ITEM 16. EXHIBITS.
See Exhibit Index attached hereto on page II-5 and incorporated herein by
reference.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933 (the "Securities
Act"), 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 therein thereby and the offering of such securities
at the time shall be deemed to be the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised 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. 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
matters 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.
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement;
II-2
<PAGE>
(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 paragraphs (a)(i) and (a)(ii) do 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 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(b) 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.
(c) 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.
II-3
<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 Amendment No. 2 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Scottsdale, State of Arizona, on this 27th day
of December, 1996.
EVANS WITHYCOMBE RESIDENTIAL, INC.
By: /s/ PAUL R. FANNIN
-----------------------------------------
Paul R. Fannin
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
* Chairman of the Board of
- ------------------------------ Directors and Chief
Stephen O. Evans Executive Officer December 27, 1996
(Principal Executive
Officer)
*
- ------------------------------ President, Chief Operating December 27, 1996
F. Keith Withycombe Officer and Director
/s/ PAUL R. FANNIN Senior Vice President and
- ------------------------------ Chief Financial Officer
Paul R. Fannin (Principal Financial and December 27, 1996
Accounting Officer)
*
- ------------------------------ Executive Vice President December 27, 1996
Richard G. Berry and Director
*
- ------------------------------ Director December 27, 1996
Joseph F. Azrack
*
- ------------------------------ Director December 27, 1996
G. Peter Bidstrup
*
- ------------------------------ Director December 27, 1996
Joseph W. O'Connor
*
- ------------------------------ Director December 27, 1996
John O. Theobald II
*By: PAUL R. FANNIN
----------------------------------
Paul R. Fannin
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ --------------------------------------------------------------------------------------------------------
<C> <S>
4.1 Articles of Amendment and Restatement of the Registrant (previously filed as Exhibit No. 3.1 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by
reference).
4.2 Amended and Restated Bylaws of the Registrant (previously filed as Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference).
5.1 Opinion and consent of Ballard Spahr Andrews & Ingersoll regarding the validity of the Common Stock
being registered.
10.1* Credit Agreement, dated as of September 24, 1996, by and among Evans Withycombe Residential L.P., Bank
One, Arizona, NA, as administrative agent, and Bank of America National Trust and Savings Association
and Wells Fargo Bank, National Association, as co-agents.
23.1 Consent of Ballard Spahr Andrews & Ingersoll (contained in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, independent auditors.
23.3 Consent of Ernst & Young LLP, independent auditors.
24.1* Power of Attorney.
</TABLE>
- ------------------------
* Previously filed.
II-5
<PAGE>
[LETTERHEAD]
December 19, 1996
Evans Withycombe Residential, Inc.
6991 East Camelback Road
#A-200
Scottsdale, Arizona 85251
Re: Evans Withycombe Residential, Inc. - Registration Statement on
Form S-3 pertaining to One Hundred Eighty Two Thousand Six
Hundred Eighty-Five (182,685) Shares of Common Stock, par value
One Cent ($.01) per Share (the "Shares")
----------------------------------------------------------------
Ladies and Gentlemen:
In connection with the registration of the Shares under the Securities
Act of 1933, as amended (the "Act"), by Evans Withycombe Residential, Inc., a
Maryland corporation (the "Corporation") on Form S-3 filed with the Securities
and Exchange Commission (the "Commission") on December 13, 1996 as amended by
Amendment No. 1 filed with the Commission on December 17, 1996 (collectively,
the "Registration Statement"), you have requested our opinion with respect to
the matters set forth below.
We have acted as special Maryland corporate counsel for the
corporation in connection with the matters described herein. In our capacity as
special Maryland corporate counsel to the Corporation, we have reviewed and are
familiar with the proceedings taken by the Corporation in connection with the
authorization of the Shares. In addition, we have relied upon certificates and
advice from the officers of the Corporation upon which we believe we are
justified in relying and on various certificates from, and documents recorded
with, the State Department of Assessments and Taxation of Maryland (the "SDAT"),
including the charter of the Corporation (the "Charter"), consisting of Articles
of Incorporation filed with the SDAT on May 24, 1995 and Articles of Amendment
and Restatement filed with the SDAT on August 11, 1994. We have also examined
Bylaws of the Corporation adopted as of May 25, 1994, Amended and Restated
Bylaws of the Corporation adopted as of August 14, 1994 and resolutions of the
Board of Directors of the Corporation adopted on or before the date hereof and
in full
<PAGE>
Evans Withycombe Residential, Inc.
December 19, 1996
Page 2
force and effect on the date hereof; and such laws, records, documents,
certificates, opinions and instruments as we deem necessary to render this
opinion.
We have assumed the genuineness of all signatures, and the
authenticity of all documents submitted to us as originals and the conformity of
the originals of all documents submitted to us as certified, photostatic or
conformed copies. In addition, we have assumed that each person executing any
instrument, document or certificate referred to herein on behalf of any party is
duly authorized to do so.
Based on the foregoing and subject to the assumptions and
qualifications set forth herein, it is our opinion that, as of the date of this
letter: (1) all of the Shares have been duly authorized and reserved for
issuance upon and in consideration of redemption of units of limited partnership
("Units") of Evans Withycombe Residential L.P., a Delaware limited partnership
of which the Corporation is the sole general partner (the "Operating
Partnership"); and (ii) upon being authorized for issuance by the Board of
Directors of the Corporation to holders of Units in redemption of such Units,
and issued, delivered and paid for, in accordance with and subject to the terms
and conditions of the Amended and Restated Agreement of Limited Partnership of
the Operating Partnership (the "Partnership Agreement"), the Shares will be
validly issued, fully paid and non-assessable.
We consent to your filing this opinion as an exhibit to the
Registration Statement, and further consent to the filing of this opinion as an
exhibit to the applications to securities commissioners for the various states
of the United States for registration of the Shares. We also consent to the
identification of our firm as Maryland counsel to the Company in the section of
the Prospectus (which is part of the Registration Statement) entitled "Legal
Matters".
The opinions set forth herein are limited to the current laws of the
State of Maryland and we express no opinion with respect to any laws other than
the laws of the State of Maryland. Furthermore, the opinions presented in this
letter are limited to the matters specifically set forth herein and no other
opinion shall be inferred beyond the matters expressly stated.
The opinions expressed in this letter are solely for your use and may
not be relied upon by any other person without our prior written consent.
Very truly yours,
/s/ Ballard Spahr Andrews
& Ingersoll
<PAGE>
EXHIBIT (23.2)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3), as amended, and related Prospectus of Evans
Withycombe Residential, Inc. for the registration of 182,685 shares of its
common stock and to the incorporation by reference therein of our report dated
January 19, 1996, with respect to the consolidated financial statements and
schedule of Evans Withycombe Residential, Inc. and Evans Withycombe Residential
Group included in its Annual Report (Form 10-K) for the year ended December 31,
1995, filed with the Securities and Exchange Commission.
Ernst & Young LLP
Phoenix, Arizona
December 24, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
of Evans Withycombe Residential, Inc. on Form S-3, as amended (File No.
333-17805), and the related Prospectus, of our reports dated December 17, 1996
with respect to the Statements of Excess of Revenues over Specific Operating
Expenses of Parkview Terrace Club Apartments and Redlands Lawn & Tennis Club
Apartments for the year ended December 31, 1995, in the Current Report of Evans
Withycombe Residential, Inc. on Form 8-K, dated December 24, 1996.
Ernst & Young, LLP
Phoenix, Arizona
December 24, 1996
