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PROSPECTUS
4,431,927 SHARES
[LOGO] EVANS WITHYCOMBE RESIDENTIAL, INC.
COMMON STOCK
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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, 1997, owned an
approximately 81.9% interest therein. The Company has entered into an
agreement to merge with Equity Residential Properties Trust. See "Recent
Development."
This Prospectus relates to (i) the possible issuance by the Company of
up to 4,431,927 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 4,431,927 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
4,431,927 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 8, 1997, the closing sale
price of the Common Shares as reported on the NYSE was $24.6875 per share.
THE COMMON SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" LOCATED AT PAGE 5 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.
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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.
_______________________________
The date of this Prospectus is December 15, 1997.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (the "Registration
Statement"), under the Securities Act of 1933, as amended (the "Securities
Act"), covering the securities offered hereby. This Prospectus omits certain
information and exhibits included in the Registration Statement, copies of
which may be obtained upon payment of a fee prescribed by the Commission or
may be examined free of charge at the principal office of the Commission in
Washington, D.C. 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 the Registration Statement, each statement being
qualified in all respects by such reference and the exhibits and schedules
thereto. For further information regarding the Company and the Common Shares
offered hereby, reference is hereby made to the Registration Statement,
including the exhibits and schedules thereto, 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 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.
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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/A for the fiscal year
ended December 31, 1996;
(2) the Company's Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 1997, June 30, 1997 and September 30,
1997;
(3) the Company's definitive proxy statement relating to the
Company's 1997 Annual Meeting of Shareholders;
(4) the Company's current reports on Form 8-K dated February 10,
1997, August 26, 1997 and August 27, 1997;
(5) 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; 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, 1997, the Company owned and
managed 51 stabilized multifamily apartment communities containing 14,747
units, of which 44 stabilized multifamily apartment communities are located
in Phoenix and Tucson, Arizona, containing a total of 12,349 units and seven
stabilized multifamily apartment communities are located in Southern
California containing a total of 2,398 units. The Company is also in
the process of developing or expanding four multifamily apartment communities
comprising 953 units in its Phoenix market. The Company is fully integrated
with expertise in development, acquisitions, construction and management of
apartment communities. 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").
Concurrently with the Initial Public Offering, the Company, through the
Financing Partnership, borrowed $102.0 million aggregate principal amount of
7.98% mortgage financing, under a loan with a total amount of up to $131
million securitized by certain Communities (the "Mortgage Loan").
Subsequently, the Company borrowed the remaining $29.0 million, so that, as
of June 30, 1995, the outstanding balance of the Mortgage Loan was $131
million. The Company also has a $150 million Credit Facility that is
unsecured (the "Credit Facility").
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, 1997, owned an approximately 81.9% 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 Management Company also
provides other services to third parties, including construction, development
and related services.
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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.
RECENT DEVELOPMENT
The Company has entered into a merger agreement with Equity Residential
Properties Trust ("EQR") providing for the merger of the Company with and
into EQR. Pursuant to the Merger, all outstanding Common Shares of the
Company will be exchanged for shares of beneficial interest, $.01 par value
per share, of EQR, at an exchange ratio of 0.50 common shares of EQR for each
Common Share.
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.
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
Generally, 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 4,431,927 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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RECENT DEVELOPMENT
MERGER WITH EQR
The Company has entered into an Agreement and Plan of Merger, dated as
of August 27, 1997 (the "Merger Agreement"), with Equity Residential
Properties Trust, a Maryland real estate investment trust ("EQR"), providing
for the merger of the Company with and into EQR (the "Merger"). Pursuant to
the Merger, all outstanding Common Shares of the Company will be exchanged
for shares of beneficial interest, $.01 par value per share, of EQR ("EQR
Common Shares"), at an exchange ratio of 0.50 EQR Common Shares for each
Common Share.
The consummation of the Merger is subject to the approval of the common
shareholders of both the Company and EQR. A Special Meeting of Shareholders
of the Company to vote on the Merger is scheduled to take place on December
23, 1997.
In connection with the Merger, the Operating Partnership has entered
into an Asset Contribution Agreement, dated as of August 27, 1997 (the "Asset
Contribution Agreement"), with ERP Operating Limited Partnership, an Illinois
limited partnership and affiliate of EQR ("ERP"), pursuant to which the
Operating Partnership agreed, subject to certain conditions, to contribute
all of its assets to ERP (the "Contribution") in exchange for units of
limited partnership interest in ERP ("ERP Units") following the Merger. In
consideration for the Contribution, the Operating Partnership shall receive a
number of ERP Units equal to the number of Units issued and outstanding
immediately prior to the effective time of the Contribution multiplied by
0.50.
The Contribution shall occur upon ERP giving notice to the Operating
Partnership at any time following the first to occur of (i) the date twelve
months after the Merger, (ii) the date on which EQR receives an opinion of a
nationally recognized tax counsel satisfactory to it or a ruling from the
Internal Revenue Service that the Contribution may be effected without
adversely affecting the qualification of the Merger as a tax-free
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"), or (iii) the date on which regulations are
promulgated by the Department of the Treasury which, in the opinion of a
nationally recognized tax counsel satisfactory to EQR, would permit the
Contribution to occur without adversely affecting the qualification of the
Merger as a tax-free reorganization within the meaning of Section 368 of the
Code. If ERP fails to give such notice by December 31, 1999, the Asset
Contribution Agreement shall terminate and the Operating Partnership shall
have no further obligations thereunder. The Contribution is also subject to
the approval of the limited partners of the Operating Partnership.
For additional information regarding the Merger, please refer to the
Company's Current Report on Form 8-K dated August 27, 1997 which is
incorporated by reference herein.
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)
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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 Mortgage Loan will mature in 2001 and additional outstanding
mortgage indebtedness will mature between 2001 and 2016. 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." The
Credit Facility is scheduled to terminate on the closing date of the Merger.
See "Recent Development--Merger with EQR."
RISK OF RISING INTEREST RATES. As of September 30, 1997, the Company
had $120 million of variable rate mortgage indebtedness and expects to
continue draw down upon the Credit Facility and certain construction loans
(which are expected to bear a floating interest rate) 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, 1997, the debt to total
market capitalization ratio of the Company was approximately 40.2%. 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, 1997, the
Financing Partnership has borrowed approximately $131 million in principal
amount under the Mortgage Loan. The
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payment and other obligations under the Mortgage Loan are secured by first
mortgage liens on 21 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. O'Connor,
the designee on the Board of Directors of AEW, which merged with Copley in
1996 to form AEW Capital Management L.P., 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 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 13 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.
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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 the Phoenix and Tucson area, 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 and Tucson 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 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
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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
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. 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.
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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. In connection with the Merger,
Messrs. Evans and Withycombe agreed to sell the stock of the Management
Company to certain officers of EQR.
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 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
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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
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
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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 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 and Berry.
Each of Messrs. Evans and Berry has entered into an employment agreement 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 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 terms of the first and second classes will expire
in 1998 and 1999, respectively. Directors for each class are 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.
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INFLUENCE OF EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS
As of September 30, 1997, all directors and executive officers of
the Company (including Messrs. Evans and Withycombe) as a group beneficially
own approximately 32.3% of the total issued and outstanding Common Shares and
Units. In addition, AEW, which merged with Copley in 1996 to form AEW
Capital Management L.P., and its affiliates own approximately 16.7% of the
total issued and outstanding Common Shares. Pursuant to the terms of a
Director Designation Agreement, (a) AEW has 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 AEW 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 has agreed to vote its or his 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 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
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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 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 4,431,927
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, 1997, the Company had granted options to
purchase 1,195,262 Common Shares and reserved for issuance an additional
724,738 Common Shares pursuant to the Company's 1994 Stock Incentive Plan,
and these shares will be available for sale in the public markets from time
to time. Furthermore, from such 724,738 reserved shares, approximately
82,800 shares of restricted stock were
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issued under such plan to certain officers of the Company on or about August
17, 1995. 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
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significant effect on the Common Shares and the rights and 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 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
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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, 1997, held an
approximately 80.9% 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 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.
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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 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
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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.
In connection with the Merger, the Partnership Agreement may be
amended to, among other things, allow EQR and ERP to serve as co-general
partners of the Operating Partnership upon the effectiveness of the Merger,
adjust each outstanding Unit by one half, eliminate certain restrictions that
the Partnership Agreement would place upon EQR and ERP as co-general partners
of the Operating Partnership, permit the Contribution pursuant to the Asset
Contribution Agreement and permit the dissolution of the Operating
Partnership upon the terms contained in the Asset Contribution Agreement.
See "Recent Development - Merger with EQR."
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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.
In connection with the Merger, the Operating Partnership has agreed
to contribute all of its assets to ERP in exchange for a number of ERP Units
equal to the number of Units issued and outstanding immediately prior to the
effective time of the Contribution multiplied by 0.50. See "Recent
Development - Merger with EQR."
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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 holds office initially for a term that
expired at the annual meeting of shareholders held in 1996 (and such
directors were reelected to terms expiring in 1999) and the remaining class
held office initially for a term that expired at the annual meeting of
shareholders to be held in 1997 (and such directors were reelected to terms
expiring in 2000). 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 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
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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 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 MGCL any business combination with
certain officers of the Company including Stephen O. Evans, F. Keith
Withycombe and Evans Withycombe, AEW 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
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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 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. 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
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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.
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REDEMPTION OF UNITS
Generally, 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.
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.
In connection with the Merger, certain amendments to the Partnership
Agreement have been proposed. See "Description of Units--Amendment of the
Partnership Agreement."
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FORM OF ORGANIZATION AND ASSETS OWNED
OPERATING PARTNERSHIP
The Operating Partnership is organized as a Delaware limited
partnership. The Operating Partnership owns interests (either directly or
through subsidiaries) in the Communities. The Management Company provides
construction, development and related services relating to the Company's
properties and to third parties.
COMPANY
The Company is a Maryland corporation. The Company has elected to be
taxed as a REIT under the Code, commencing with its taxable year ended
December 31, 1994, and intends to maintain its election as a REIT. With
certain limited exceptions, the Company's only asset is its interest in the
Operating Partnership, which gives the Company an indirect investment in the
Communities and the other assets owned by the Operating Partnership.
PURPOSE AND PERMITTED INVESTMENTS
OPERATING PARTNERSHIP
The Operating Partnership's purpose is to conduct any business that may
be lawfully conducted by a limited partnership organized pursuant to the
Partnership Act, provided that such business is to be conducted in a manner
that permits the Company to be qualified as a REIT unless the Company ceases
to qualify as a REIT. The Operating Partnership is authorized to perform any
and all acts for the furtherance of the purposes and business of the
Operating Partnership, provided that the Operating Partnership may not take,
or refrain from taking, any action which, in the judgment of the 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.
COMPANY
Under its Charter, the Company may engage in any lawful activity
permitted to be engaged in by a Maryland corporation pursuant to Maryland
law. However, under the Partnership Agreement, the Company, as general
partner, generally may not conduct any business other than the business of
the Operating Partnership and cannot own any assets, with certain limited
exceptions, other than its interest in the Operating Partnership and other
assets necessary to carry out its responsibilities under the Partnership
Agreement and its Charter.
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ADDITIONAL EQUITY
OPERATING PARTNERSHIP
The Operating Partnership is authorized to issue Units for any partnership
purpose at any time or from time to time for consideration and on such terms
and conditions as determined by the Company, as general partner, in its sole
discretion. Additionally, the Operating Partnership may issue Units and other
partnership interests (including partnership interests of different series or
classes that may be senior to Units) to the Company, as long as such interests
are issued in connection with an issuance by the Company of shares having
designations, preferences and other rights such that the economic interests of
such shares are substantially similar to those of the partnership interests
granted in connection therewith and proceeds raised in connection with the
issuance of such shares are contributed to the Operating Partnership. In
addition, the Operating Partnership will issue additional Units upon exercise
of the options granted pursuant to the Company's 1994 Stock Incentive Plan.
COMPANY
The Company is authorized to issue, in its discretion, additional equity
securities consisting of Common Shares or Preferred Shares; provided,
however, that the total number of equity securities outstanding may not
exceed the total number of authorized shares set forth in the Company's
Charter (I.E., not more than 100,000,000 Common Shares or 10,000,000
Preferred Shares). Additionally, the Company may issue additional Common
Shares upon exchange of Units for Common Shares, upon exercise of options
granted pursuant to the stock incentive plan for Common Shares or Units in
effect from time to time. As long as the Operating Partnership is in
existence, the proceeds of all equity capital raised by the Company will be
contributed to the Operating Partnership in exchange for interests in the
Operating Partnership.
BORROWING POLICIES
OPERATING PARTNERSHIP
The Operating Partnership has no restrictions on borrowings, and the
Company, as general partner, has full power and authority to borrow money on
behalf of the Operating Partnership.
COMPANY
The Company is not restricted under its Charter or Bylaws from incurring
borrowings. The Company anticipates that any additional borrowings would be
made through the Operating Partnership, although the Company might incur
indebtedness, the proceeds of which would be reloaned to the Operating
Partnership.
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MANAGEMENT CONTROL
OPERATING PARTNERSHIP
All management powers over the business and affairs of the Operating
Partnership are vested in the Company, as general partner. No Limited
Partner of the Operating Partnership has any right to participate in or
exercise control or management power over the business and affairs of the
Operating Partnership. The Limited Partners have the right to vote on
certain matters described under Voting Rights below. The general partner may
not be removed by the Limited Partners with or without cause.
COMPANY
The Board of Directors has exclusive control over the Company's business
and affairs subject only to the restrictions in the Charter and Bylaws and
the Partnership Agreement. The Board of Directors is divided into three
classes. At each annual meeting of the shareholders, the successors of the
class of directors whose terms expire at that meeting will be elected. The
policies adopted by the Board of Directors may be altered or eliminated
without a vote 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.
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MANAGEMENT LIABILITY AND INDEMNIFICATION
OPERATING PARTNERSHIP
As a matter of Delaware law, the general partner has liability for the
payment of the obligations and debts of the Operating Partnership unless
limitations upon such liability are stated in the document or instrument
evidencing the obligation. Under the Partnership Agreement, the Operating
Partnership has agreed to indemnify the Company, as general partner, any
officer of the Operating Partnership of the Company, as general partner, and
such other persons as the Company may designate from and against all losses,
claims, damages, liabilities, joint or several, expenses (including legal
fees and expenses), judgments, fines, settlements and other amounts arising
from any and all claims, demands, actions, suits or proceedings, civil,
criminal, administrative or investigative, that relate to the operation of
the Operating Partnership in which such person is involved, or is threatened
to be involved, unless it is established that (i) the act or omission of such
person was material to the matter giving rise to the proceeding and either
was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) such party actually received an improper personal benefit;
or (iii) in the case of any criminal proceeding, such party had reasonable
cause to believe the act or omission was unlawful. The reasonable expenses
incurred by an indemnitee may be reimbursed by the Operating Partnership in
advance of the final disposition of the proceeding upon receipt by the
Operating Partnership of a written affirmation by such indemnitee of his, her
or its good faith belief that the standard of conduct necessary for
indemnification has been met and a written undertaking by such indemnitee to
repay the amount reimbursed if it is determined that such standard was not
met.
COMPANY
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. Maryland law
presently permits the liability of directors and officers to a corporation or
its shareholders for money damages to be limited, except (a) to the extent
that it is proved that the director or officer actually received an improper
benefit or profit or (b) 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. The Charter
of the Company contains a provision consistent with the foregoing. The
Company has 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.
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ANTITAKEOVER PROVISIONS
OPERATING PARTNERSHIP
Except in limited circumstances, the general partner of the Operating
Partnership has exclusive management power over the business and affairs of
the Operating Partnership. The Company may not be removed as general partner
by the Limited Partners with or without cause. Under the Partnership
Agreement, the Company, as a general partner, may, in its sole discretion,
prevent a transferee of a Unit from becoming a substituted Limited Partner
pursuant to the Partnership Agreement. The general partner may exercise this
right of approval to deter, delay or hamper attempts by persons to acquire a
controlling interest in the Operating Partnership. Additionally, the
Partnership Agreement contains restrictions on the ability of Limited
Partners to transfer their Units.
COMPANY
The Charter and Bylaws of the Company contain a number of provisions
that may have the effect of delaying or discouraging an unsolicited proposal
for the acquisition of the Company or the removal of incumbent management.
These provisions include, among others: (1) a staggered Board of Directors;
(2) authorized shares of stock that may be issued, in the discretion of the
Board of Directors, as Preferred Shares with superior voting rights to the
Common Shares; (3) a requirement that directors may be removed only by a vote
of holders of at least two-thirds of the votes entitled to be cast in the
election of directors; (4) advance notice required in order to nominate
persons for election to the Board of Directors or to propose business to be
considered by shareholders at a shareholder's meeting; and (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
OPERATING PARTNERSHIP
Under the Partnership Agreement, the Limited Partners have voting rights
only with respect to certain limited matters. Consent of the holders of or
majority of the Units (including the 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) and with respect to
certain amendments to the Partnership Agreement. The Company, as general
partner, currently holds more than a majority of the Units and therefore has
the requisite ownership interest to consent to such matters.
COMPANY
Each outstanding Common Share entitles the holder thereof to one vote on
all matters submitted to shareholders for vote, including the election of
directors. See "Description of Capital Stock--Common Shares." Shareholders of
the Company have the right to vote on, among other things, a merger of the
Company, amendments to the Charter and the dissolution of the Company.
Certain amendments to the Charter require the affirmative vote of not less
than two-thirds of votes entitled to be cast on the matter. The Charter
permits the Board of Directors to classify and issue Preferred Shares in one
or more series having voting power which may differ from that of the Common
Shares.
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AMENDMENT OF THE PARTNERSHIP AGREEMENT OR THE CHARTER
OPERATING PARTNERSHIP
The Partnership Agreement may be amended through a proposal by the
general partner or any Limited Partners holding 25% or more of the Units.
Such proposal, in order to be effective, must be approved by the general
partner and by the holders of at least a majority of the outstanding limited
partnership Units. Certain amendments that affect the fundamental rights of
a Limited Partner must be approved by each Limited Partner adversely affected
by the amendment. Currently, as holder of over 75% of the Units, the Company
has the requisite ownership interest to 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."
COMPANY
Except as described below, amendments to the Charter must be approved by
the Board of Directors and by the vote of the holders of at least a majority
of the shares entitled to vote thereon. Proposals that would (i) cause the
Company not to qualify as a REIT, or to (ii) alter Charter provisions
relating to the classification or removal of directors, preemptive rights,
indemnification, limitation of liability or amendments to the Charter or
Bylaws, require the affirmative vote of holders of not less than two-thirds
of the shares entitled to vote thereon.
COMPENSATION, FEES AND DISTRIBUTIONS
OPERATING PARTNERSHIP
The Company, as general partner, does not receive any compensation for its
services as general partner of 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.
COMPANY
The officers and directors of the Company receive compensation for their
services.
LIABILITY OF INVESTORS
OPERATING PARTNERSHIP
Under the Partnership Agreement and applicable state law, the liability
of the Limited Partners for the Operating Partnership's debts and obligations
is generally limited to the amount of their investment in the Operating
Partnership.
COMPANY
The MGCL provides that no shareholder of a corporation will be
personally liable for any obligations such corporation. Generally the
liability of the stockholders for the Company's debts and obligations is
limited to the amount of their investment in the Company.
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NATURE OF INVESTMENT
OPERATING PARTNERSHIP
The Units constitute equity interests entitling each Limited Partner to
such partner's pro rata share of cash distributions made to the partners of
the Operating Partnership. The Operating Partnership may retain and reinvest
proceeds of the sale of property or excess refinancing proceeds in its
business.
COMPANY
The Common Shares constitute equity interests in the Company. The
Company is entitled to receive its pro rata share of distributions made by
the Operating Partnership with respect to the Units it holds, and each
shareholder will be entitled to its pro rata 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
OPERATING PARTNERSHIP
Limited Partners may not transfer their Units without the consent of the
general partner and, because no trading market exists for the Units, the Units
are illiquid. Subject to certain limitations, a Limited Partner may assign its
economic rights in its Units without the Company's consent, but the Company may
in its sole and absolute discretion, refuse to admit the transferee as a
substituted Limited Partner. Beginning one year from the date of acquisition
of the Units, each Limited Partner has the right to cause the Operating
Partnership to redeem its Units for cash or, at the discretion of the Company,
for Common Shares.
COMPANY
The Exchange Shares will be freely transferable as registered securities
under the Securities Act, subject to the Ownership Limit Provisions in the
Company's Charter and to prospectus delivery and other requirements for
registered securities. The Common Shares are listed on the NYSE. The
breadth and strength of this market will depend, among other things, upon the
number of Common Shares outstanding, the Company's financial results and
prospects, the general interest in the Company's Common Shares and other real
estate investments and the Company's dividend yield compared to that of other
debt and equity securities.
FEDERAL INCOME TAXATION
OPERATING PARTNERSHIP
The Operating Partnership is not subject to Federal income taxes.
Instead, each holder of Units includes its allocable share of the Operating
Partnership's taxable income or loss in determining its individual federal
income tax liability. The maximum federal income tax rate for individuals
under current law (without taking into account the phase-out of exemptions
and other adjustments) is 39.6%.
COMPANY
The Company has elected to be taxed as a REIT beginning with its fiscal
year ended December 31, 1994. So long as it qualifies as a REIT, the Company
will be permitted to deduct distributions paid to its shareholders, which
effectively will reduce the "double taxation" that typically results when a
corporation earns income and distributes that income 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.
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OPERATING PARTNERSHIP
Income and loss from the Operating Partnership generally is subject to
the passive activity limitations. Under the "passive activity" rules, income
and loss from the Operating Partnership that is considered "passive income"
generally can be offset against income and loss from other investments that
constitute "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."
COMPANY
Dividends paid by the Company will be treated as "portfolio" income and
cannot be offset with losses from "passive activities." The maximum federal
income tax rate for individuals under current law (without taking into
account the phase-out of exemptions and other adjustments) is 39.6%.
OPERATING PARTNERSHIP
Cash distributions from the Operating Partnership are not taxable to a
holder of Units except to the extent they exceed such holder's basis in its
interest in the Operating Partnership (which will include such holder's
allocable share of the Operating Partnership's nonrecourse debt).
COMPANY
Distributions made by the Company to its taxable domestic shareholders
out of current or accumulated earnings and profits will be taken into account
by them as ordinary income. Distributions that are designated as capital gain
dividends generally will be taxed as long-term capital gain, subject to
certain limitations. Distributions in excess of current or accumulated
earnings and profits will be treated as a non-taxable return of basis to the
extent of a shareholder's adjusted basis in its Common Shares, with the
excess taxed as capital gain.
OPERATING PARTNERSHIP
Each year, holders of Units will receive a Schedule K-1 tax form
containing detailed tax information for inclusion in preparing their federal
income tax returns.
COMPANY
Each year, shareholders of the Company will receive a Form 1099 used by
REITs to report dividends paid to their stockholders.
OPERATING PARTNERSHIP
Holders of the Units are required, in some cases, to file state income
tax returns and/or pay state income taxes in the states in which the
Operating Partnership owns property, even if they are not residents of those
states.
COMPANY
Shareholders who are individuals generally will not be required to file
state income tax returns and/or pay state income taxes outside of their
states of residence with respect to the Company's operations and
distributions. The Company may be required to pay state income taxes in
certain states.
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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
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receivables" includes amounts that would be subject to recapture as 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 as follows:
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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 above. 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 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
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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 in such a manner. However, there
can be no assurance that the Company has actually operated 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 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,
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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 compiled 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 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
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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
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
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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."
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
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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 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.
44
<PAGE>
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 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.
45
<PAGE>
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, including 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 quality 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 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
46
<PAGE>
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 relation
ships 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
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.
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<PAGE>
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.
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<PAGE>
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 9, 1997 and, except as
otherwise indicated, based upon the records of the transfer agent of the
Units, Norwest Bank Minnesota, 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.
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 Title Offering (1)(2) Shares Offered Offering (2)(3)
---- ----- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Stephen O. Evans Chairman of the Board 3,159,702(4) 2,859,450(3) 300,252
and Chief Executive
Officer
F. Keith Withycombe Director 3,018,352(5) 2,719,200(3) 299,152
Richard G. Berry President, Chief 174,870 110,000(6) 64,870
Operating Officer and
Director
Paul R. Fannin Senior Vice President, 1,678,979 1,632,114(7) 46,865
Chief Financial Officer,
Treasurer and Secretary
Jay E. Northrop Senior Vice President - 50,670 2,585 48,085
Property Management
G. Edward O'Clair Senior Vice President - 56,248 4,724 51,524
Construction
EW Investments --- 1,632,114 1,632,114 ---
Limited Partnership
Herberger Enterprises, --- 219,325 219,325 ---
Inc.
Gary K. Herberger --- 135,420 135,420 ---
Judd R. Herberger --- 145,420 145,420 ---
The Evans Family --- 135,550 135,550 ---
Limited Liability
Company
EW/SWS Investors --- 137,082 137,082 ---
Limited Partnership
PGB Investment Corporation --- 100,000 100,000 ---
EW Lakewood Limited --- 92,857 92,857 ---
Partnership
49
<PAGE>
Common Shares/Units Units Beneficially Common Shares
Beneficially Owned/Maximum Beneficially
Owned Prior to the Number of Exchange Owned Following the
Name Title Offering (1)(2) Shares Offered Offering (2)(3)
---- ----- ------------------- ------------------- -------------------
EW Cottonwood/Tempe --- 47,310 47,310 ---
Limited Partnership
EW Kachina Limited --- 44,638 44,638 ---
Partnership
Derbes Family Trust --- 31,821 31,821 ---
F. James McDonald --- 24,672 24,672 ---
Lincoln Trust Company --- 15,428 15,428 ---
for Pamela Margaret
Parker Revocable
Living Trust,
Dated 1/23/91
Lincoln Trust Company --- 12,042 12,042 ---
Custodian for John T.
Potts, Jr., Inc. Money
Purchase Pension Plan
Martin F.C. Emmett --- 9,722 9,722 ---
Raymond C. Firestone --- 9,722 9,722 ---
Co.
The Andrew J. & Joan --- 8,986 8,986 ---
K. Chitiea Trust U/A
dated 9/27/77
Josephine B. Weiss --- 8,819 8,819 ---
Dolores Watley Trust --- 8,259 8,259
Anne C. Shire --- 7,206 7,206 ---
Robert D. & Diane M. --- 6,111 6,111 ---
Greenlee
John Shoecraft --- 5,497 5,497 ---
Richard L. Knowlton --- 4,864 4,864 ---
Jettie M. Kelly --- 4,861 4,861 ---
Irving J. Shwayder --- 4,861 4,861 ---
David Donaldson Trust --- 4,583 4,583 ---
L. Dale Watley Trust --- 4,583 4,583 ---
Donald Conklin --- 4,139 4,139 ---
Barbara A. Woodhull --- 3,958 3,958 ---
J. Lawrence Shane --- 3,056 3,056 ---
50
<PAGE>
Common Shares/Units Units Beneficially Common Shares
Beneficially Owned/Maximum Beneficially
Owned Prior to the Number of Exchange Owned Following the
Name Title Offering (1)(2) Shares Offered Offering (2)(3)
---- ----- ------------------- ------------------- -------------------
Donald L. Staheli --- 3,056 3,056 ---
Sue R. Fisher & Company --- 2,430 2,430 ---
McLane Fisher --- 2,065 2,065 ---
Ramon L. Humke --- 1,528 1,528 ---
Carl Hoffman --- 535 535 ---
The Arizona --- 38,000 38,000 ---
Community
Foundation, Inc.(8)
Arizona Science --- 1,000 1,000 ---
Center(8)
All Saints Episcopal --- 6,000 6,000 ---
Day School(9)
United States Air Force --- 1,000 1,000 ---
Academy Association of
Graduates(9)
</TABLE>
- ---------------------------
(1) Includes beneficial ownership of Units by each Selling Stockholder and,
with respect to the following Selling Stockholders, the beneficial
ownership of Common Shares in the following amounts: Mr. Evans-300,252;
Mr. Withycombe-299,152; Mr. Berry-64,870; Mr. Fannin-46,865;
Mr. Northrop-48,085; Mr. O'Clair-51,524.
(2) The number of Common Shares beneficially owned includes options
exercisable within 60 days in the following amounts: Mr. Evans-161,250;
Mr. Withycombe-195,000; Mr. Berry-62,250; Mr. Fannin-33,750;
Mr. Northrop-28,750; Mr. O'Clair-31,875.
(3) 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.
(4) Includes 730,899 Units that Mr. Evans owns as an individual and Units held
by the following partnerships in the following amounts as to which
Mr. Evans may be deemed to be the beneficial owner pursuant to Rule 13d-3
under the Exchange Act because he has or shares (with Mr. Withycombe
except with respect to Units held by The Evans Family Limited Liability
Company) investment and/or voting power: (a) EW Investments Limited
Partnership--1,632,114; (b) EW/SWS Investors Limited Partnership--137,082;
(c) EW Cottonwood/Tempe Limited Partnership--47,310; (d) EW Kachina Limited
Partnership--44,638; (e) EW Lakewood Limited Partnership--92,857; (f) The
Evans Family Limited Liability Company--135,550. Mr. Evans disclaims
beneficial ownership of all shares other than his proportionate share of
those in which he has a pecuniary interest. Does not include 39,000 Units
to be transferred by Mr. Evans to two unaffiliated charitable foundations
immediately following the date of this Prospectus. Following such
donation, Mr. Evans intends to transfer the balance of the Units that
he owns as an individual to the Evans Family Revocable Living
Trust.
(5) Includes 765,199 Units that Mr. Withycombe owns as an individual and Units
held by the following partnerships in the following amounts as to which
Mr. Withycombe may be deemed to be the beneficial
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<PAGE>
owner pursuant to Rule 13d-3 under the Exchange Act because he has or
shares (with Mr. Evans) investment and/or voting power: (a) EW Investments
Limited Partnership--1,632,114; (b) EW/SWS Investors Limited
Partnership--137,082; (c) EW Cottonwood/Tempe Limited Partnership--47,310;
(d) EW Kachina Limited Partnership--44,638; (e) EW Lakewood Limited
Partnership--92,857. Mr. Withycombe disclaims beneficial ownership of all
shares other than his proportionate share of those in which he has a
pecuniary interest. Does not include 7,000 Units to be transferred by
Mr. Withycombe to two unaffiliated charities immediately following the date
of this Prospectus.
(6) Includes 110,000 Units held by EW Investments Limited Partnership as to
which Units Mr. Berry may be deemed to be the beneficial owner pursuant to
Rule 13d-3 under the Exchange Act because he has or shares investment
and/or voting power. Mr. Berry disclaims beneficial ownership of all
shares other than his proportionate share of those in which he has a
pecuniary interest.
(7) Includes 1,632,114 Units held by EW Investments Limited Partnership as to
which Units Mr. Fannin may be deemed to be the beneficial owner pursuant
to Rule 13d-3 under the Exchange Act because he has or shares (with
Messrs. Evans and Withycombe) investment and/or voting power. Mr. Fannin
disclaims beneficial ownership of all shares other than his proportionate
share of those in which he has a pecuniary interest.
(8) Represents Units to be donated by Stephen O. Evans to such Selling
Stockholder after December 9, 1997.
(9) Represents Units to be donated by F. Keith Withycombe to such Selling
Stockholder after December 9, 1997.
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<PAGE>
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 4,431,927 Exchange Shares
upon the acquisition of the Units exchanged therefor. The Company will
acquire one Unit in exchange for each Exchange Share that 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.
53
<PAGE>
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 Evans Withycombe Residential,
Inc. (the Company) and Evans Withycombe Residential Group (the predecessor to
the Company) appearing in the Company's Annual Report (Form 10-K/A)
for the year ended December 31, 1996, 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.
54
<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 THEREOF.
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TABLE OF CONTENTS
Page
----
Available Information.......................... 1
Incorporation of Certain
Information by Reference...................... 2
Prospectus Summary............................. 3
Recent Development............................. 5
Risk Factors................................... 5
Description of Capital Stock................... 16
Description of Units........................... 19
Certain Provisions of Maryland Law and of
the Company's Charter and Bylaws.............. 24
Redemption of Units............................ 28
Federal Income Tax Considerations.............. 37
ERISA Considerations........................... 46
Selling Stockholders........................... 49
Plan of Distribution........................... 53
Legal Matters.................................. 54
Experts........................................ 54
4,431,927
SHARES
[Logo]
EVANS WITHYCOMBE
RESIDENTIAL, INC.
COMMON STOCK
________________
PROSPECTUS
________________
DECEMBER 15, 1997
