<PAGE> 1
Filed pursuant to Rule 424(b)(5)
Registration Statement No. 333-40959
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED JANUARY 12, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 18, 1997)
8,000,000 SHARES
LOGO
LOGO
% SERIES A CONVERTIBLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
------------------------
Glenborough Realty Trust Incorporated (the "Company") is a self-administered
and self-managed real estate investment trust ("REIT") that owns a diversified
portfolio of 142 office, office/flex, industrial, retail, multi-family and hotel
properties located in 23 states throughout the country. In addition, two
Associated Companies (defined herein) provide comprehensive asset, partnership
and property management services for a diversified portfolio of 50 additional
properties that are not owned by the Company. The combined portfolios encompass
approximately 21.8 million rentable square feet in 24 states.
Dividends on the % Series A Convertible Preferred Stock, liquidation
preference $25.00 per share ("Series A Preferred Stock"), will be cumulative
from the date of original issue and will be payable quarterly in arrears on the
15th day (or the next succeeding business day) of January, April, July and
October of each year. Such dividends will be in an amount per share equal to the
greater of (i) $ per annum or (ii) the cash distributions (determined on
each of the quarterly dividend payment dates referred to above) on the shares of
the Company's common stock, par value $0.001 per share (the "Common Stock"),
into which a share of Series A Preferred Stock is convertible (equal to the
number of shares of Common Stock, or portion thereof, into which a share of
Series A Preferred Stock is convertible, multiplied by the most current
quarterly distribution on or before the applicable dividend payment date). The
first record date for determination of stockholders entitled to receive
dividends on the Series A Preferred Stock following completion of this offering
(the "Offering") is expected to be April 1, 1998 with respect to dividends for
the period from the date of issue of the Series A Preferred Stock through March
31, 1998. See "Description of Series A Preferred Stock -- Dividends."
Shares of Series A Preferred Stock are convertible at any time at the option
of the holders thereof into shares of Common Stock at an initial conversion
price of $ per share of Common Stock (equivalent to a conversion rate of
shares of Common Stock for each share of Series A Preferred Stock),
subject to adjustment in certain circumstances. See "Description of Series A
Preferred Stock -- Conversion Rights." On January 8, 1998, the last reported
sale price of the Common Stock on the New York Stock Exchange was $30.00 per
share. See "Price Range of Common Stock and Distribution History."
Except in certain instances relating to the preservation of the Company's
status as a REIT, the Series A Preferred Stock is not redeemable prior to
January , 2003. On and after January , 2003, the Series A Preferred Stock
may be redeemed at the option of the Company, in whole or in part, initially
at % of the Liquidation Preference (defined herein) per share and thereafter
at prices declining to 100% of the Liquidation Preference on and after January
, 2008, plus in each case accrued and unpaid distributions, if any, to the
redemption date. The Series A Preferred Stock has no stated maturity date and
will not be entitled to the benefit of any sinking fund. See "Description of
Series A Preferred Stock -- Redemption."
To assist the Company in maintaining its status as a REIT for federal income
tax purposes, no person or persons acting as a group may beneficially own more
than 9.9% of the value of the outstanding capital stock of the Company,
including the Series A Preferred Stock, with certain limited exceptions. See
"Description of Series A Preferred Stock -- Restrictions on Ownership."
Prior to this offering, there has been no public market for the Series A
Preferred Stock. The Series A Preferred Stock has been approved for listing on
the New York Stock Exchange, subject to official notice of issuance, under the
symbol "GLB Pr A."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THE ACCOMPANYING PROSPECTUS FOR
CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE SERIES A PREFERRED
STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
==========================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- ----------------------------------------------------------------------------------------------------------
Per Share.................................... $ $ $
Total(4)..................................... $ $ $
==========================================================================================================
</TABLE>
(1) Plus accrued dividends, if any, from January , 1998.
(2) The Company and the Operating Partnership have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(3) Before deducting expenses payable to the Company estimated at $500,000.
(4) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 1,200,000 shares of Series A Preferred Stock at the
initial public offering price per share, less the underwriting discount,
solely to cover over-allotments, if any. If such option is exercised in
full, the total price to public, underwriting discount and proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Series A Preferred Stock are offered severally by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, subject to approval of certain legal matters by counsel for
the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole or
in part. It is expected that delivery of the shares of Series A Preferred Stock
will be made against payment therefor on or about January , 1998 at the
offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167.
------------------------
BEAR, STEARNS & CO. INC.
SALOMON SMITH BARNEY
BANCAMERICA ROBERTSON STEPHENS
BT ALEX. BROWN
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JANUARY , 1998
THE INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OR
SERIES A PREFERRED STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-
COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. SEE "UNDERWRITING."
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following is qualified in its entirety by the more detailed information
and financial statements appearing elsewhere in this Prospectus Supplement and
the accompanying Prospectus and incorporated by reference herein and therein.
Unless indicated otherwise, the information contained in this Prospectus
Supplement assumes that the Underwriters' over-allotment option is not
exercised. As used herein, the term "Company" means Glenborough Realty Trust
Incorporated, a Maryland corporation, and its consolidated subsidiaries for the
periods from and after December 31, 1995 (the date the Company merged (the
"Consolidation") with and into Glenborough Corporation, a California corporation
("Old GC") and eight public limited partnerships (collectively with Old GC, the
"GRT Predecessor Entities") and the Company's predecessor partnerships and
companies for periods prior to the Consolidation, and the term "Operating
Partnership" means Glenborough Properties, L.P. in which the Company holds a 1%
interest as sole general partner and an approximate 91% limited partner
interest. Unless otherwise indicated, ownership percentages of the Common Stock
of the Company, par value $.001 per share (the "Common Stock") have been
computed on a fully converted basis, assuming an exchange of Operating
Partnership units for shares of Common Stock on a one-for-one basis and the
conversion of all Series A Preferred Stock into shares of Common Stock. This
Prospectus Supplement and the accompanying Prospectus, and the documents
incorporated herein and therein, contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934 (the "Exchange Act"), which statements
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" in the
accompanying Prospectus and elsewhere in this Prospectus Supplement and the
accompanying Prospectus.
THE COMPANY
The Company is a self-administered and self-managed REIT that owns a
diversified portfolio of 142 office, office/flex, industrial, retail,
multi-family and hotel properties (the "Properties") aggregating approximately
16.6 million square feet located in 23 states throughout the country. In
addition, two associated companies, Glenborough Corporation ("GC") and
Glenborough Hotel Group ("GHG," and together with GC, the "Associated
Companies"), provide comprehensive asset, partnership and property management
services for a diversified portfolio of 50 additional properties that are not
owned by the Company. The combined portfolios encompass approximately 21.8
million rentable square feet in 24 states. In addition, the Company is in the
process of acquiring in three separate transactions, each subject to a number of
contingencies, the Eaton & Lauth Portfolio, Capitol Center and the Pru-Bache
Portfolio (each as defined below, and collectively, the "Pending Acquisitions").
The Pending Acquisitions represent approximately 2,020,461 million square feet,
including 670 multi-family units, and an aggregate acquisition cost of
approximately $156.1 million. See "Recent Activities."
The Company's principal growth strategy is to capitalize on the opportunity
to acquire diversified portfolios or individual properties on attractive terms.
This strategy has evolved from the Company's predecessors' experience since 1978
in managing real estate partnerships and their assets and, since 1989, in
acquiring portfolios and management interests from third parties. In particular,
unlike most other REITs, which typically purchase specific types of properties
or properties located in regional markets, the Company seeks to purchase
portfolios of properties which are diversified by both property type and
location. The Company believes it can acquire such diversified portfolios at
attractive prices from partnerships as well as other REITs and life insurance
companies and other institutions because it can provide liquidity to portfolio
owners who might otherwise face a limited market for their diversified
portfolios, or are forced to liquidate through multiple sales of the individual
properties which can be more expensive and time consuming than the single sale
of the entire portfolio. Furthermore, the Company's UPREIT structure allows it
to address the current owners' tax concerns and structure transactions that may
defer taxable gains. The Operating Partnership has issued partnership units in
the Operating Partnership, which are redeemable for the Company's Common Stock,
to sellers in connection with the acquisition of Properties with a total
acquisition cost of over $250.0 million, excluding the Pending Acquisitions.
The Company believes its strategy of acquiring properties that are broadly
diversified with respect to asset type and location reduces the risks otherwise
associated with focusing on a single property type or a single geographic
region.
S-3
<PAGE> 4
The following table sets forth certain information with respect to the
Company's properties as of the date of this Prospectus Supplement, assuming that
the Pending Acquisitions had each been completed as of such date. For
information regarding only the Properties the Company owned as of the date of
this Prospectus Supplement, see "The Properties."
PRO FORMA PROPERTY TABLE BY PROPERTY TYPE(1)
<TABLE>
<CAPTION>
OCCUPANCY RATE
RENTABLE AS OF
TYPE OF PROPERTY SQ. FT. SEPTEMBER 30, 1997(2)
--------------------------------------------- ------------ ----------------------
<S> <C> <C>
Office....................................... 7,071,783 95%
Office/Flex.................................. 3,948,579 95
Industrial................................... 3,532,315 99
Retail....................................... 1,237,555 93
--
----------
Subtotal/Weighted Average.......... 15,790,232 96%
--
----------
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY RATE
AS OF
(UNITS/ROOMS) RENTABLE SQ. FT. SEPTEMBER 30, 1997
------------- ---------------- ---------------------
<S> <C> <C> <C>
Multi-family.................. 2,921 2,526,668 93 %
Hotels........................ 726 326,701 70 (3)
--
Subtotal Square Feet.......... 2,853,369
--
Total Square Feet... 18,643,601
==
</TABLE>
- ---------------
(1) Includes 23 properties expected to be acquired. See "Recent
Activities -- Pending Acquisitions."
(2) Represents economic occupancy as of September 30, 1997, except for the
Windsor Portfolio (defined herein) which is as of December 31, 1997, and the
Marion Bass Portfolio (defined herein) which is as of November 30, 1997.
(3) Represents average economic occupancy for the nine months ended September
30, 1997.
The Company commenced operations on December 31, 1995 through the merger of
eight public limited partnerships and a management company with and into the
Company. Since the Consolidation, the Company has:
- Completed four follow-on offerings of Common Stock in October 1996, March
1997, July 1997 and October 1997 (respectively, the "October 1996
Offering," the "March 1997 Offering," the "July 1997 Offering" and the
"October 1997 Offering"), resulting in aggregate gross proceeds of
approximately $562 million.
- Obtained a $250 million unsecured line of credit (the "Acquisition Credit
Facility") with Wells Fargo Bank, N.A. ("Wells Fargo Bank") which
replaced its $50 million secured line of credit. See "Recent
Activities -- Financing Activities."
- Completed approximately $1.2 billion of acquisitions, representing: (i)
41 office Properties, 43
office/flex Properties, 19 industrial Properties and six retail Properties
aggregating approximately 12,281,830 rentable square feet; (ii) 13
multi-family Properties aggregating 2,147 units and (iii) two hotels
aggregating 227 rooms. Upon closing of the Pending Acquisitions, the
Company will have completed property acquisitions aggregating a total
acquisition cost of approximately $1.3 billion.
- Increased its annualized quarterly distributions from $1.20 per share to
$1.68 per share.
After giving effect to the Offering, the Company's directors and seven
executive officers will collectively own or exercise voting control with respect
to approximately 6.8% of the Company's Common Stock, and will own or exercise
voting control with respect to approximately 5.8% of the Company's Common Stock,
assuming the exchange of all outstanding units of partnership interest in the
Operating Partnership into Common Stock and the conversion of all outstanding
shares of Series A Preferred Stock into Common Stock. The executive officers
have been with the Company or its predecessors for an average of ten years. The
Company and the Associated Companies employ an experienced staff of
approximately 500 employees who provide a full range of real estate services
from their headquarters in San Mateo, California and from 35 property management
offices.
S-4
<PAGE> 5
THE OFFERING
SECURITIES OFFERED............ 8,000,000 shares of Series A Preferred Stock.
DIVIDENDS..................... Cumulative commencing on the date of issue in
an amount per share equal to the greater of:
(i) $ per annum; or (ii) the cash
distributions (determined on each of the
quarterly dividend payment dates referred to
below) on the shares of Common Stock (or
portion thereof) into which a share of Series A
Preferred Stock is convertible, payable
quarterly in arrears on the 15th day of
January, April, July and October of each year,
commencing April 15, 1998 with respect to the
period commencing on the date of issue and
ending on March 31, 1998 (equal to the number
of shares of Common Stock, or portion thereof,
into which a share of Series A Preferred Stock
is convertible, multiplied by the most current
quarterly distribution on or before the
applicable dividend payment date). See
"Description of Series A Preferred Stock --
Dividends."
LIQUIDATION PREFERENCE........ $25.00 per share, plus an amount equal to
accumulated, accrued and unpaid dividends
(whether or not earned or declared). See
"Description of Series A Preferred
Stock -- Liquidation Preference."
RANKING....................... With respect to the payment of dividends and
amounts upon liquidation, the Series A
Preferred Stock will rank senior to the Common
Stock.
CONVERSION RIGHTS............. The shares of Series A Preferred Stock are
convertible, in whole or in part, at the option
of the holder at any time, unless previously
redeemed, into shares of Common Stock, at an
initial conversion price of $ per
share of Common Stock (equivalent to a
conversion rate of shares of Common
Stock for each share of Series A Preferred
Stock), subject to adjustment in certain
circumstances. See "Description of Series A
Preferred Stock -- Conversion Rights" and
"Conversion Price Adjustments."
REDEMPTION AT OPTION OF THE
COMPANY.................. The Series A Preferred Stock is not redeemable
prior to January , 2003. On and after January
, 2003, the Series A Preferred Stock may be
redeemed at the option of the Company, in whole
or in part, initially at % of the
Liquidation Preference per share and thereafter
at prices declining to 100% of the Liquidation
Preference on and after January , 2008, plus
in each case accrued and unpaid distributions,
if any, to the redemption date. See
"Description of Series A Preferred
Stock -- Redemption."
VOTING RIGHTS................. Holders of the Series A Preferred Stock
generally will have no voting rights. However,
if dividends on the Series A Preferred Stock
are in arrears for six quarterly dividend
periods, the holders of the Series A Preferred
Stock (voting separately as a single class with
holders of all other series of Parity Stock
(defined herein) upon which like voting rights
have been conferred and are exercisable) will
have the right to elect two additional
directors to serve on the Company's Board of
Directors until such dividend arrearage is
eliminated. In addition, certain changes that
would be materially adverse to the rights of
holders of the Series A Preferred Stock
S-5
<PAGE> 6
cannot be made without the affirmative vote of
holders of two-thirds of the outstanding Series
A Preferred Stock. See "Description of Series A
Preferred Stock -- Voting Rights."
LISTING....................... The Series A Preferred Stock has been approved
for listing on the New York Stock Exchange,
subject to official notice of issuance, under
the symbol "GLB Pr A."
USE OF PROCEEDS............... The net proceeds of the Offering will be used
primarily to fund in part the Pending
Acquisitions, repay indebtedness and for
general corporate purposes. See "Use of
Proceeds."
RESTRICTIONS ON OWNERSHIP..... To assist the Company in maintaining its status
as a REIT for federal income tax purposes,
ownership of more than 9.9% of the value of the
outstanding shares of Common Stock and
preferred stock of the Company, including the
Series A Preferred Stock offered hereby, is
restricted. See "Description of Series A
Preferred Stock -- Restrictions on Ownership"
and "Certain Federal Income Tax
Considerations."
RISK FACTORS.................. See "Risk Factors" in the accompanying
Prospectus for certain considerations relevant
to an investment in the Series A Preferred
Stock.
S-6
<PAGE> 7
THE COMPANY
The Company is a self-administered and self-managed REIT that owns a
diversified portfolio of 142 office, office/flex, industrial, retail,
multi-family and hotel Properties aggregating approximately 16.6 million square
feet located in 23 states throughout the country. In addition, two Associated
Companies provide comprehensive asset, partnership and property management
services for a diversified portfolio of 50 additional properties that are not
owned by the Company. The combined portfolios encompass 21.8 million rentable
square feet in 24 states.
The Company was incorporated in the state of Maryland on August 26, 1994.
On December 31, 1995, the Company completed the Consolidation in which the GRT
Predecessor Entities merged with and into the Company. A portion of the
Company's operations are conducted through the Operating Partnership, in which
the Company holds a 1% interest as the sole general partner and an approximate
91% limited partnership interest. The Company's executive offices are located at
400 South El Camino Real, Suite 1100, San Mateo, California 94402-1708, and its
telephone number is (650) 343-9300.
GROWTH STRATEGY
The Company seeks to achieve sustainable long-term growth in Funds from
Operations primarily through the following strategies:
- Acquiring diversified portfolios or individual properties on attractive
terms, often from public and private partnerships as well as from other
REITs and life insurance companies and other institutions;
- Improving the performance of the Properties in the Company's portfolio;
- Constantly reviewing the Company's current portfolio for opportunities to
redeploy capital from certain Properties into other properties which the
Company believes are more suited to its growth strategy and operating
goals; and
- Acquiring properties from entities controlled by GC, one of the
Associated Companies.
ACQUISITIONS
Acquisition Characteristics. The Company primarily seeks to acquire
diversified portfolios and individual properties with certain of the following
characteristics: (i) a stable stream of income, both historical and projected;
(ii) existing management fees and costs that, when internalized, would augment
the Company's investment return; (iii) generally constructed after 1980; (iv)
little or no exposure to hazardous materials; (v) prudent debt levels; (vi)
potential for substantial overhead savings; (vii) low-to-moderate vacancy
levels; (viii) diversified tenant risk; (ix) low-to-moderate deferred
maintenance; (x) substantial geographic overlap with the Company's existing
portfolio, to capitalize on the Company's existing management capabilities; and
(xi) comprised of office, office/flex, industrial, retail or multi-family
properties.
Portfolio Acquisitions. The Company seeks to grow by acquiring diversified
property portfolios, and believes there are significant acquisition
opportunities for such portfolios from public and private partnerships, other
REITs and life insurance companies and other institutions. For example,
according to Robert A. Stanger & Co., Inc. ("Stanger"), a substantial percentage
of public and private partnerships, representing original equity investments in
excess of $70 billion, own portfolios that are diversified geographically or by
property type or both. Furthermore, the Company believes that there is a limited
number of buyers who seek to purchase diversified portfolios. For example, most
REITs pursue a strategy that focuses either on specific property types or
geographic regions or both, and thus do not provide an outlet for bulk sales by
diversified portfolio owners. For a diversified portfolio seller that is seeking
to liquidate, an alternative to a bulk sale might be a gradual sell-off of
assets, which may require an extended period of time and/or be prohibitively
expensive.
The Company believes that, in particular, limited partnerships and the
limited partners in such partnerships face difficult liquidity alternatives.
According to Stanger, few of the private partnerships, and less than half of the
public partnerships, are traded in any active secondary market. The Company
believes the majority of the limited partners in these partnerships would be
interested in solutions providing liquidity. The principal options available to
such limited partners include: (i) selling their units for cash on the secondary
market, which according to Stanger, has a pricing structure that typically
discounts unit values relative to
S-7
<PAGE> 8
underlying asset values; and (ii) more recently, selling their units for cash to
large, well-financed investors who solicit limited partners to sell their
interests at prices that are higher than prevailing secondary market prices but
generally lower than the seller's underlying asset value. In addition to their
discounted pricing structure, these solutions may not be preferred by limited
partners who, as a result of past tax benefits or other factors, may incur
significant tax liabilities as a result of such sale.
The Company believes that it can acquire diversified portfolios on
attractive terms because, through the issuance of Common Stock or partnership
units in the Operating Partnership which may be redeemed for Common Stock, it
can provide owners with liquidity as well as address the owners' tax concerns
and structure transactions that may defer taxable gains. The Company has issued
partnership units in the Operating Partnership to sellers in connection with the
acquisition of Properties aggregating a total acquisition cost of over $250
million. By providing sellers with Common Stock or partnership units as partial
consideration in acquisition transactions, the Company reduces its need to raise
capital to finance such transactions.
Individual Property Acquisitions. From time to time the Company will
acquire individual properties that it believes will enhance the Company's
profitability and take advantage of existing management resources.
Possible Tender Offer Acquisitions. In addition to its current program of
negotiated portfolio and individual property acquisitions, the Company may
consider opportunities to acquire interests in portfolios and individual
properties through tender offers for public and private limited partnerships and
REITs. Depending upon the opportunity and the circumstances, such offers may be
made with or without the cooperation of their respective general partners or
boards of directors. See "Risk Factors -- Risks Relating to Tender Offers" in
the accompanying Prospectus.
INTERNAL GROWTH
The Company seeks to increase cash flow from its existing portfolio by: (i)
increasing the occupancy of all Properties that are not fully leased; (ii)
maintaining high occupancy rates; (iii) increasing economies of scale in
management and leasing activities; and (iv) controlling operating expenses and
capital expenditures.
REDEPLOYMENT OF ASSETS
The Company periodically reviews its current portfolio for opportunities to
redeploy capital from certain existing Properties into other properties which
the Company believes have characteristics more suited to its overall growth
strategy and operating goals. For example, the Company may: (i) sell properties
that the Company believes have matured beyond a point of significant future
growth potential and replace them with properties with higher growth potential;
and (ii) sell smaller or management intensive properties and replace them with
larger or more management-efficient properties. By redeploying assets in this
manner, the Company believes it can achieve certain economies of scale with
respect to staffing and overhead levels. See "Recent Activities -- Redeployment
of Assets."
THE ASSOCIATED COMPANIES
Glenborough Corporation. The Company seeks to acquire properties from
entities controlled by GC, a California corporation formerly known as
Glenborough Realty Corporation, which: (i) serves as general partner of several
real estate limited partnerships for whom it provides management services, asset
management and property management services; and (ii) provides property
management services for a limited portfolio of properties owned by unaffiliated
third parties, including asset management, property development, Securities and
Exchange Commission reporting, accounting, investor relations and property
management services. The Company is in the process of acquiring all the assets
of Prudential-Bache/Equitec Real Estate Partnership, of which GC is a co-general
partner. See "Recent Activities -- Pending Acquisitions."
Glenborough Hotel Group. The Company, through the Operating Partnership,
leases its hotel Properties to GHG. The Operating Partnership holds a first
mortgage on another hotel, which is managed by GHG under a contract with its
owner. GHG also manages one other hotel owned by a third party.
S-8
<PAGE> 9
RECENT ACTIVITIES
The following is a summary of the Company's acquisition and financing
activities since January 1, 1997.
Eaton & Lauth Portfolio. The Company is negotiating the terms of an
agreement to acquire a portfolio of nine office properties and five retail
properties aggregating 776,742 square feet and three multi-family properties
containing 670 units (the "Eaton & Lauth Portfolio") from a number of
partnerships in which affiliates of Eaton & Lauth serve as general partners. The
total acquisition cost, including capitalized costs, is expected to be
approximately $99.7 million, comprising: (i) approximately $68.8 million of
assumed debt, of which approximately $36.8 million is expected to be paid in
cash; and (ii) approximately $30.0 million of equity. The equity consideration
will consist of: (i) up to $10.0 million in the form of shares of Common Stock
or cash, with a maximum of $6.0 million of shares of Common Stock (based on a
negotiated per unit value of $25.00); and (ii) the balance in the form of
partnership units in the Operating Partnership (based on a negotiated per unit
value of $25.00). The Eaton & Lauth Portfolio properties are located in the
Indianapolis, Indiana area. This acquisition is subject to a number of
contingencies including the negotiation of terms of a definitive agreement,
satisfactory completion of due diligence and customary closing conditions. As a
result, there can be no assurance that this transaction will be completed.
EATON & LAUTH PORTFOLIO
<TABLE>
<CAPTION>
OCCUPANCY
RATE AS OF
YEAR RENTABLE NUMBER OF SEPTEMBER 30,
PROPERTY CITY ST COMPLETED SQ. FT. UNITS 1997(1)
- --------------------------------- -------------- ---- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
OFFICE
Clearvista One................. Indianapolis IN 1986 33,451 73%
Clearvista Two................. Indianapolis IN 1990 27,777 96
99 East Carmel Drive........... Carmel IN 1990 14,429 93
Crosspoint Four................ Fishers IN 1990 41,121 98
Meridian Park Shoppes.......... Carmel IN 1989 17,978 100
One Meridian Park Place........ Carmel IN 1988 28,354 91
Two Meridian Park Place........ Carmel IN 1989 40,000 100
Osram Sylvania................. Westfield IN 1990 45,265 100
Covance........................ Indianapolis IN 1990 263,000 100
--------- ---
TOTAL OFFICE..................... 511,375 97%
--------- ---
RETAIL
Cross Creek Centre............. Indianapolis IN 1989 76,908 96%
Geist Centre................... Indianapolis IN 1989 72,348 95
Woodfield Centre............... Indianapolis IN 1988 58,171 87
Broad Ripple Centre............ Indianapolis IN 1988 37,540 100
Metroplex Centre............... Indianapolis IN 1986 20,400 76
--------- ---
TOTAL RETAIL..................... 265,367 93%
--------- ---
MULTIFAMILY
Crosscreek Apartments.......... Indianapolis IN 1990 159,492 208 95%
Harcourt Club Apartments....... Indianapolis IN 1991 149,900 148 95
Island Club Apartments......... Indianapolis IN 1990 245,389 314 90
--------- --- ---
TOTAL MULTIFAMILY................ 554,781 670 93%
--------- --- ---
TOTAL EATON & LAUTH PORTFOLIO.... 1,331,523 670 94%
========= === ===
</TABLE>
- ---------------
(1) Represents economic occupancy.
S-9
<PAGE> 10
Capitol Center. The Company has entered into a definitive agreement to
acquire a 161,468 square foot office/flex complex (the "Capitol Center") located
in Des Moines, Iowa. The total acquisition cost, including capitalized costs, is
expected to be approximately $12.8 million, comprising: (i) $500,000 to
$1,000,000 in the form of 17,241 to 34,482 partnership units in the Operating
Partnership (based on an assumed per unit value of $29.00, which will be
determined using the 10-day average per share price of Common Stock as of the
closing date); (ii) approximately $4.3 million of assumed debt; and (iii) the
balance in cash. This acquisition is subject to a number of contingencies
including satisfactory completion of due diligence and customary closing
conditions. As a result, there can be no assurance that this acquisition will be
completed.
CAPITOL CENTER
<TABLE>
<CAPTION>
OCCUPANCY
RATE AS OF
YEAR RENTABLE SEPTEMBER 30,
PROPERTY CITY ST COMPLETED SQ. FT. 1997(1)
- ---------------------------------------------- ----------- ---- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
OFFICE
Capitol Center.............................. Des Moines IA 1984 161,468 100%
</TABLE>
- ---------------
(1) Represents economic occupancy.
PENDING ACQUISITIONS
Pru-Bache Portfolio. The Company has entered into a definitive agreement to
acquire all of the real estate assets of Prudential-Bache/Equitec Real Estate
Partnership, a California limited partnership in which the managing general
partner is Prudential-Bache Properties, Inc., and in which Glenborough
Corporation and Robert Batinovich, the Company's Chairman and Chief Executive
Officer, have served as co-general partners since March of 1994, but do not hold
a material equity or economic interest (the "Pru-Bache Portfolio"). The total
acquisition cost, including capitalized costs, is expected to be approximately
$43.6 million, which is to be paid entirely in cash. The Pru-Bache Portfolio
comprises four office buildings aggregating 405,825 square feet and one
office/flex property containing 121,645 square feet. This acquisition is subject
to a number of contingencies including approval of the acquisition by a majority
vote of the limited partners of Prudential-Bache/Equitec Real Estate
Partnership, satisfactory completion of due diligence and customary closing
conditions. As a result, there can be no assurance that this transaction will be
completed.
PRU-BACHE PORTFOLIO
<TABLE>
<CAPTION>
OCCUPANCY
RATE AS OF
YEAR RENTABLE SEPTEMBER 30,
PROPERTY CITY ST COMPLETED SQ. FT. 1997(1)
- --------------------------------------------- ----------- ---- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
OFFICE
Gateway Professional Center................ Sacramento CA 1985 50,556 96%
Park Plaza................................. Sacramento CA 1985 67,688 75
Montrose Office Park....................... Rockville MD 1980 186,680 89
Poplar Towers.............................. Memphis TN 1974 100,901 86
--
-------
TOTAL OFFICE................................. 405,825 84%
--
-------
OFFICE/FLEX
Totem Valley................................. Kirkland WA 1983 121,645 99%
--
-------
TOTAL PRU-BACHE PORTFOLIO.................... 527,470 90%
======= ==
</TABLE>
- ---------------
(1) Represents economic occupancy.
S-10
<PAGE> 11
1998 AND 1997 COMPLETED ACQUISITIONS
Windsor Portfolio. In January 1998, the Company acquired a portfolio of 13
suburban office Properties and one office/flex Property (the "Windsor
Portfolio") located in eight states. The Company acquired the Windsor Portfolio
from Windsor Realty Fund II, L.P., of which Windsor Advisor, LLC is the general
partner and DuPont Pension Fund Investments and Gid/S&S Limited Partnership are
limited partners, and other entities affiliated with Windsor Realty Fund II,
L.P. The Windsor Portfolio properties aggregate 3,383,240 net rentable square
feet, located in the eastern and mid-western United States and are concentrated
in suburban Washington, D.C., Chicago, Atlanta, Boston, Philadelphia, Tampa,
Florida and Cary, North Carolina. The total acquisition cost, including
capitalized costs, was approximately $423.2 million, comprised of: (i)
approximately $160.5 million in assumption of debt; (ii) approximately $150.0
million in borrowings under a $150 million loan agreement with Wells Fargo Bank
(the "Interim Loan"); and (iii) the balance in cash, including cash from
borrowings under the Acquisition Credit Facility.
Marion Bass Portfolio. In December 1997, the Company acquired 10
multi-family Properties (the "Marion Bass Portfolio") aggregating 1,385 units
from 14 limited partnerships each of whose general partner is Marion Bass Real
Estate Group. The total acquisition cost, including capitalized costs, was
approximately $58.3 million, comprising $23.5 million of assumed debt and the
balance in cash, including cash from borrowings under the Acquisition Credit
Facility. Of the 10 Marion Bass Portfolio Properties, six are located in
Charlotte, North Carolina, two are in Monroe, North Carolina, one is in Raleigh,
North Carolina and one is in Pineville, North Carolina.
Opus Portfolio. In December 1997, the Company acquired four office/flex
Properties and one office Property (the "Opus Portfolio") aggregating 289,874
square feet from four limited liability companies affiliated with Opus
Properties, LLC. The total acquisition cost, including capitalized costs, was
approximately $27.9 million, all of which was paid in cash, including cash from
borrowings under the Acquisition Credit Facility. Four of the Opus Portfolio
Properties are located in or near Tampa, Florida, and one is located in Denver,
Colorado.
Thousand Oaks. In December 1997, the Company acquired an office complex
consisting of three office buildings, aggregating 418,457 square feet ("Thousand
Oaks"). The total acquisition cost, including capitalized costs, was
approximately $51.3 million, which was paid entirely in cash, including cash
from borrowings under the Acquisition Credit Facility. The Thousand Oaks
property includes 10 acres suitable for the development of 182,000 square feet
of office space. Thousand Oaks is located in Memphis, Tennessee.
Bryant Lake. In November 1997, the Company acquired a 171,789 square-foot
office/flex building in Eden Prairie, Minnesota ("Bryant Lake"), from Outlook
Income Fund 9, a limited partnership in which GC is managing general partner.
Robert Batinovich is co-general partner of Outlook Income Fund 9 and holds an
indirect economic interest therein equal to an approximate 0.83% limited
partnership interest. Because of this affiliation, and consistent with the
Company's Board of Directors' policy, neither Robert Batinovich nor Andrew
Batinovich voted when the Board of Directors considered and acted to approve
this acquisition. The price paid for Bryant Lake equaled 100% of the appraised
value as determined by an independent appraiser. The total acquisition cost,
including capitalized costs, was approximately $9.4 million, comprising
approximately $4.6 million in the form of cash and the balance in the form of
assumption of debt.
Copley Properties. In October 1997, the Company acquired eight Properties
from six separate limited partnerships in which affiliates of AEW Capital
Management, L.P. (successors in interest to one or more affiliates of Copley
Advisors Inc.) serve as general partners (the "Copley Properties"). The total
acquisition cost, including capitalized costs, was approximately $63.7 million,
which was paid entirely in cash. The Copley Properties comprise 766,269 square
feet of industrial space, with one property located in Tempe, Arizona, one in
Anaheim, California, one in Columbia, Maryland and five in Las Vegas, Nevada.
Citibank Park. In September 1997, the Company acquired a 147,978
square-foot office building in Las Vegas, Nevada ("Citibank Park"). The total
acquisition cost, including capitalized costs, was approximately $23.3 million,
which consisted of: (i) approximately $1.66 million in the form of 61,211
partnership units in the Operating Partnership (based on an agreed per unit
value of $27.156); and (ii) the balance in cash.
S-11
<PAGE> 12
Advance Properties. In September 1997, the Company acquired from a group of
partnerships affiliated with The Advance Group a portfolio of 10 Properties
aggregating 755,006 square feet (the "Advance Properties"). The total
acquisition cost, including capitalized costs, was approximately $103.0 million,
which consisted of: (i) approximately $13.6 million in the form of 599,508
partnership units in the Operating Partnership (based on an agreed per unit
value of $22.625); (ii) approximately $7.4 million in assumption of debt; and
(iii) the balance in cash. The Advance Properties consist of five office
Properties and three office/flex Properties located in northern New Jersey and
Maryland and two industrial Properties located in northern New Jersey.
Concurrent with this acquisition, the Company entered into a joint venture with
The Advance Group for the development of selected new projects. This joint
venture owns 57 acres of land suitable for office and office/flex development of
up to 560,000 square feet.
T. Rowe Price Properties. In September 1997, the Company acquired from five
limited partnerships, two general partnerships and one private REIT, each
organized by affiliates of T. Rowe Price, a portfolio of 27 Properties
aggregating approximately 2,888,000 square feet (the "T. Rowe Price
Properties"). The total acquisition cost, including capitalized costs, was
approximately $146.8 million, which was paid entirely in cash. The T. Rowe Price
Properties consist of four office Properties, 12 office/flex Properties, eight
industrial Properties and three retail Properties located in 12 states.
Centerstone Property. In July 1997, the Company acquired an office property
containing 157,579 square feet (the "Centerstone Property") located in Irvine,
California. The total acquisition cost, including capitalized costs, was
approximately $30.4 million, which consisted of: (i) approximately $5.5 million
in the form of 275,000 partnership units in the Operating Partnership (based on
an agreed per unit value of $20.00); and (ii) the balance in cash.
CRI Properties. In June 1997, the Company acquired from Carlsberg Realty
Inc. a portfolio of three Properties, aggregating approximately 245,600 square
feet (the "CRI Properties"). The total acquisition cost, including capitalized
costs, was approximately $14.8 million, which was paid entirely in cash. The CRI
Properties consist of one office Property in California, and one office/flex
Property and one industrial Property in Arizona. The CRI Properties have been
managed by GC since November 1996.
CIGNA Properties. In April 1997, the Company acquired from two partnerships
formed and managed by affiliates of CIGNA a portfolio of six Properties,
aggregating approximately 616,000 square feet and 224 multi-family units (the
"CIGNA Properties"). The total acquisition cost, including capitalized costs,
was approximately $45.4 million, which was paid entirely in cash. The CIGNA
Properties consist of two office Properties, two office/flex Properties, a
shopping center and a multi-family Property, and are located in four states.
E&L Properties. In April 1997, the Company acquired from seven partnerships
and their general partner, a Southern California syndicator, a portfolio of 11
Properties, aggregating approximately 523,000 square feet, together with
associated management interests (the "E&L Properties"). The total acquisition
cost, including capitalized costs, was approximately $22.2 million, which
consisted of: (i) approximately $12.8 million of mortgage debt assumed; (ii)
approximately $6.7 million in the form of 352,197 partnership units in the
Operating Partnership (based on an agreed per unit value of $19.075); (iii)
approximately $633,000 in the form of approximately 33,198 shares of Common
Stock of the Company (based on an agreed per share value of $19.075); and (iv)
the balance in cash. The E&L Properties consist of one office Property, nine
office/flex Properties and one industrial Property, all located in Southern
California.
Riverview Property. In April 1997, the Company acquired from a private
seller a 15-story office property containing 227,129 square feet located in
Bloomington, Minnesota (the "Riverview Property"). The total acquisition cost,
including capitalized costs, was approximately $20.5 million, which was paid
entirely in cash.
Lennar Properties. In April 1997, the Company acquired from two limited
partnerships and one limited liability company managed by affiliates of Lennar
Partners a portfolio of three Properties, aggregating approximately 282,000
square feet (the "Lennar Properties"). The total acquisition cost, including
capitalized costs, was approximately $23.2 million, which was paid entirely in
cash. The Lennar Properties consist of one office Property located in Virginia
and one office/flex Property and one industrial Property, each located in
Massachusetts.
S-12
<PAGE> 13
Scottsdale Hotel. In February 1997, the Company acquired a 163-suite hotel
Property (the "Scottsdale Hotel"), which began operations in January 1996 and is
located in Scottsdale, Arizona. The total acquisition cost, including
capitalized costs, was approximately $12.1 million, which consisted of
approximately $4.6 million of mortgage debt assumed, and the balance in cash.
The Scottsdale Hotel and four of the Company's other hotel Properties are
marketed as Country Suites by Carlson.
OTHER ACQUISITION OPPORTUNITIES
Acquisition Pipeline. The Company maintains an active acquisition
department which identifies, evaluates, negotiates and consummates portfolio and
individual property investments. Currently, other than the Pending Acquisitions,
the Company has no potential acquisitions that it considers probable, but is
considering acquisitions involving, in the aggregate, in excess of $1.0 billion
in total capitalized costs. Any future acquisition would be subject to a number
of contingencies, including a review of the physical and economic
characteristics of the properties involved, negotiation of detailed terms and
formal documentation. There can be no assurance that any of the acquisitions
under consideration will ultimately be consummated. For example, in October 1997
the Company had entered into definitive agreements to acquire all of the assets
of Rancon IV and Rancon V. Prior to closing, and at the request of the general
partner of Rancon IV and Rancon V, the agreements were rescinded. See "Risk
Factors -- Risks Associated with Acquisitions" in the accompanying Prospectus.
Possible Tender Offer Acquisitions. In addition to its current program of
negotiated property and portfolio acquisitions, the Company intends to consider
opportunities to acquire interests in properties and portfolios of properties
through tender offers for public and private limited partnerships, and REITs.
Depending upon the opportunity and the circumstances, these offers may be made
with or without the cooperation of their respective general partners or boards
of directors. See "Risk Factors -- Risks Associated with Tender Offers" in the
accompanying Prospectus.
REDEPLOYMENT OF ASSETS
The Company periodically reviews its current portfolio of investments for
opportunities to redeploy capital from certain existing Properties or mortgage
receivables to other properties or investments that the Company believes have
characteristics more suited to its overall growth strategy and operating goals.
Consistent with this strategy, the Company sold from its retail portfolio six
Atlanta Auto Care Center properties and ten QuikTrip properties for an aggregate
sales price of approximately $13.1 million. The Company used the net proceeds
from the sale of such properties to fund the acquisition of properties which the
Company believes have greater growth potential. The Company also has entered
into definitive agreements to sell the Shannon Crossing Property, a retail
Property, and the Summer Breeze Property, a multi-family Property. These sales
are each subject to a number of contingencies, and there can be no assurance
that such sales will be consummated.
FINANCING ACTIVITIES
The Company seeks to utilize the most appropriate sources of capital for
acquisitions, development, joint ventures and capital improvements, which
sources include undistributed Funds from Operations, borrowings under its credit
facilities, issuances of unsecured or secured debt or equity securities or
partnership units in the Operating Partnership and/or bank and other
institutional borrowings. As of September 30, 1997, the Company's total debt
constituted approximately 31.3% of the total market capitalization of the
Company on a pro forma basis, after giving effect to the Offering, the use of
proceeds thereof, completion of the Pending Acquisitions, and certain other pro
forma adjustments. See "Selected Historical and Pro Forma Financial and Other
Data."
$250 Million Acquisition Credit Facility. In December 1997, the Company
replaced its $50 million secured line of credit with a new $250 million
unsecured Acquisition Credit Facility with Wells Fargo Bank. The Acquisition
Credit Facility has a three year term and bears interest on a sliding scale
ranging from
S-13
<PAGE> 14
LIBOR plus 0.8% to LIBOR plus 1.3%, which represents an annual rate that is
lower by at least 0.45% than the rate under the Company's previous $50 million
secured line of credit.
$150 Million Interim Loan. In January 1998, the Company closed a $150
million loan agreement with Wells Fargo Bank (the "Interim Loan"). The Interim
Loan bears interest at LIBOR plus 1.75% and has a term of three months with an
option to extend the term an additional three months. The purpose of the Interim
Loan is to fund certain acquisition activities.
Private Equity Issuance. In December 1997, the Company issued, subject to a
rescission right, approximately $14.1 million in the form of 433,361 partnership
units in the Operating Partnership and 72,564 shares of Common Stock (based on
an agreed per unit and per share value of $27.869) to acquire all of the limited
partnership interests of GRC Airport Associates, a California limited
partnership ("GRCAA"). GRCAA's sole asset consisted of one property that is
subject to a binding sales agreement, which, upon completion, is anticipated to
generate net cash proceeds of $14.1 million. By virtue of interests held
directly or indirectly in GRCAA, Robert Batinovich received approximately $2.2
million of the consideration paid for the GRCAA limited partnership interests in
the form of partnership units in the Operating Partnership. Consistent with the
Company's Board of Directors' policy, neither Robert Batinovich nor Andrew
Batinovich voted when the Board of Directors considered and acted to approve
this transaction. If the sale of GRCAA's property to the third party is not
completed by January 31, 1998, then the acquisition of the interest in GRCAA is
subject to rescission at the option of the Company.
October 1997 Offering. In October 1997, the Company completed a public
offering of 11,300,000 shares of its Common Stock at a price of $25.00 per
share. The net proceeds of approximately $267.7 million were used for the
acquisition of certain Properties, to repay approximately $142.8 million of
indebtedness and for general corporate purposes.
July 1997 Offering. In July, the Company completed a public offering of
6,980,000 shares of Common Stock at a price of $22.625 per share. The net
proceeds of approximately $149.3 million were used to fund acquisitions and for
general corporate purposes.
March 1997 Offering. In March 1997, the Company completed a public offering
of 3,500,000 shares of its Common Stock at a price of $20.25 per share. The net
proceeds of approximately $66.1 million were used for the acquisition of certain
Properties and to repay approximately $24.9 million of the then outstanding
balance under the Company's previous secured line of credit.
Increased Distributions. In January 1998, the Company announced a 31%
increase in its regular quarterly distribution from $.32 to $.42 per share of
Common Stock. See "Price Range of Common Stock and Distribution History."
S-14
<PAGE> 15
THE PROPERTIES
The Company owns a diversified portfolio of 142 office, office/flex,
industrial, retail, multi-family and hotel Properties located in 23 states
throughout the country. In addition, the Associated Companies provide
comprehensive asset, partnership and property management services for a
diversified portfolio of 50 additional properties that are not owned by the
Company. The following table lists the Properties owned by the Company as of the
date of this Prospectus Supplement excluding the Pending Acquisitions and the 50
additional properties.
<TABLE>
<CAPTION>
YEAR RENTABLE OCCUPANCY AS OF
PROPERTY CITY STATE COMPLETED SQ. FT. SEPTEMBER 30, 1997(1)
- --------------------------------------- ------------------ ----- --------- ---------- ---------------------
<S> <C> <C> <C> <C> <C>
OFFICE
Tradewinds Financial Center.......... Phoenix AZ 1986 17,778 90%
Vintage Pointe....................... Phoenix AZ 1985 56,112 86
Warner Village Medical............... Fountain Valley CA 1977 32,272 89
Hillcrest Office Plaza............... Fullerton CA 1974 34,623 91
Centerstone Plaza.................... Irvine CA 1988 157,579 97
University Tech Center............... Pomona CA 1986 100,516 96
Academy Professional Center.......... Rolling Hills CA 1974 29,185 81
Dallidet Professional Center......... San Luis Obispo CA 1993 23,051 76
Park Place........................... Clearwater FL 1986 164,538 97
Buschwood III........................ Tampa FL 1989 76,930 92
Employers Insurance of Wausau........ Temple Terrace FL 1997 79,393 100
Ashford Perimeter.................... Atlanta GA 1983 294,183 99
Powers Ferry Landing East............ Atlanta GA 1985 393,596 98
Oak Brook International.............. Oak Brook IL 1975 98,443 99
Oakbrook Terrace Corp. Center........ Oak Brook IL 1991 253,069 100
Columbia Center II................... Rosemont IL 1988 150,283 94
Embassy Plaza........................ Schaumburg IL 1986 141,373 88
Windsor Corporate Center............. Marlborough MA 1988 570,304 100
Westford Corporate Ctr............... Westford MA 1987 163,247 100
Montgomery Executive Center.......... Gaithersburg MD 1982 118,348 90
Rockwall I & II...................... Rockville MD 1985 340,419 85
Bond Street Building................. Farmington Hills MI 1986 40,595 93
Riverview Office Tower............... Bloomington MN 1973 227,129 97
University Club Tower................ St. Louis MO 1974 272,443 94
Woodlands Plaza...................... St. Louis MO 1993 71,209 98
Edinburgh Center..................... Cary NC 1991 115,030 93
One Professional Square.............. Omaha NE 1980 34,906 85
Regency Westpointe................... Omaha NE 1981 35,937 99
Morristown Medical Offices........... Bedminster NJ 1990 14,255 100
Bridgewater Exec. Qtrs............... Bridgewater NJ 1995 65,000 100
Frontier Exec. Qtrs. I............... Bridgewater NJ 1986 224,314 100
Frontier Exec. Qtrs. II.............. Bridgewater NJ 1987 41,880 100(2)
Gatehall I........................... Parsipanny NJ 1983 113,604 85
25 Independence Blvd................. Warren NJ 1989 106,879 100
Citibank Park........................ Las Vegas NV 1987 147,978 90
Lehigh Valley Executive Campus....... Allentown PA 1989 161,421 95
Thousand Oaks........................ Memphis TN 1990 418,457 92
Post Oak Place....................... Houston TX 1971 56,021 94
4500 Plaza........................... Salt Lake City UT 1983 70,001 100
700 South Washington................. Alexandria VA 1989 56,348 100
Cameron Run.......................... Alexandria VA 1991 143,707 100
2000 Corporate Ridge................. McLean VA 1985 255,980 100
Globe Building....................... Mercer Island WA 1979 24,779 97
--------- ---
TOTAL OFFICE........................... 5,993,115 96%
========= ===
</TABLE>
S-15
<PAGE> 16
<TABLE>
<CAPTION>
YEAR RENTABLE OCCUPANCY AS OF
PROPERTY CITY STATE COMPLETED SQ. FT. SEPTEMBER 30, 1997(1)
- --------------------------------------- ------------------ --------- ---
<S> <C> <C> <C> <C> <C>
OFFICE/FLEX
Hoover Industrial.................... Mesa AZ 1985 57,441 97%
Magnolia Industrial.................. Phoenix AZ 1984 35,385 100
Baseline Business Park............... Tempe AZ 1984 100,204 95
Kraemer Industrial Park.............. Anaheim CA 1974 55,246 89
Dominguez Industrial................. Carson CA 1973 85,120 98
Sandhill Industrial Park............. Carson CA 1975 90,922 100
Chatsworth Industrial Park........... Chatsworth CA 1975 29,764 100
Glassell Industrial Center........... Orange CA 1976 46,912 89
Dunn Way Industrial.................. Placentia CA 1968 59,832 85
Monroe Industrial.................... Placentia CA 1988 38,655 92
Rancho Bernardo...................... Rancho Bernardo CA 1982 52,865 88
Scripps Terrace...................... San Diego CA 1986 56,796 90
Tierrasanta Research Park............ San Diego CA 1985 104,234 78
San Dimas Industrial Center.......... San Dimas CA 1980 35,996 77
Upland Industrial.................... Upland CA 1978 27,414 100
ADS Alliance Data Systems............ Denver CO 1997 65,000 100
Valley Business Park................. Denver CO 1984 202,540 93
Atlantic Tech @ Regency Corp......... Brandon FL 1997 48,551 100
Newport Business Center.............. Deerfield Beach FL 1984 60,661 97
Cypress Creek Business Center........ Ft. Lauderdale FL 1982 66,372 98
Lake Point Business Park............. Orlando FL 1985 135,032 91
Fingerhut Call Center Facility....... Tampa FL 1996 48,840 100
PrimeCo Call Center Facility......... Tampa FL 1996 48,090 100
The Business Park.................... Gwinett County GA 1984 155,125 98
Oakbrook Corners..................... Norcross GA 1984 123,948 90
Park 100 -- Building 42.............. Indianapolis IN 1980 37,200 79
Fisher-Pierce........................ Weymouth MA 1988 79,825 100
Columbia Warehouse................... Columbia MD 1974 38,840 88
Germantown Business Center........... Germantown MD 1993 60,000 100
Winnetka Industrial Center........... Crystal MN 1982 188,260 100
Bryant Lake Business Center.......... Eden Prairie MN 1985 171,789 88
Riverview Industrial Park............ St. Paul MN 1978 120,510 100
Woodlands Tech Center................ St. Louis MO 1986 98,037 100
Fox Hollow Business Quarters......... Branchburg NJ 1987 42,173 100
Fairfield Business Quarters.......... Fairfield NJ 1978 42,762 100
Palms Business Centre III............ Las Vegas NV 1990 136,160 100
Palms Business Centre IV............. Las Vegas NV 1991 37,414 100
Palms Business Centre North.......... Las Vegas NV 1988 92,087 92
Palms Business Centre South.......... Las Vegas NV 1988 132,387 84
Post Palms........................... Las Vegas NV 1991 139,494 95
Clark Avenue......................... King of Prussia PA 1965 40,000 100
Valley Forge Corporate Center........ Norristown PA 1988 300,894 94
Walnut Creek Bus Center.............. Austin TX 1984 100,000 100
Kent Business Park................... Kent WA 1981 138,157 100
--------- ---
TOTAL OFFICE/FLEX...................... 3,826,934 94%
========= ===
INDUSTRIAL
Fifth Street Industrial.............. Phoenix AZ 1986 109,699 100%
Fairmont Commerce Center............. Tempe AZ 1980 83,200 100
East Anaheim......................... Anaheim CA 1986 106,232 100
Coronado Industrial.................. Anaheim CA 1975 95,732 100
Benicia Industrial Park.............. Benicia CA 1980 156,800 100
Belshaw Industrial................... Carson CA 1973 23,826 100
SkyPark Airport Parking.............. San Bruno CA 1970 216,780 100
Springdale Commerce Center........... Santa Fe Springs CA 1985 144,000 100
</TABLE>
S-16
<PAGE> 17
<TABLE>
<CAPTION>
YEAR RENTABLE OCCUPANCY AS OF
PROPERTY CITY STATE COMPLETED SQ. FT. SEPTEMBER 30, 1997(1)
- --------------------------------------- ------------------ --------- ---
<S> <C> <C> <C> <C> <C>
Burnham Industrial Warehouse......... Boca Raton FL 1980 71,168 100
Airport Perimeter Bus. Park.......... College Park GA 1982 119,797 90
Atlantic Industrial.................. Gwinett County GA 1975 187,843 100
Bonnie Lane Business Center.......... Elk Grove Village IL 1981 119,590 100
Navistar International Trans......... W. Chicago IL 1977 474,426 100
Glenn Avenue Business Ctr............ Wheeling IL 1981 82,000 100
Wood Dale Business Ctr............... Wood Dale IL 1979 89,718 88
Park 100-Building 46................. Indianapolis IN 1981 102,400 100
J.I. Case Equipment Corp............. Kansas City KS 1975 199,750 100
Southworth-Milton.................... Milford MA 1989 146,125 100
Navistar International Trans......... Baltimore MD 1962 274,000 100
Eatontown Industrial................. Eatontown NJ 1988 36,800 100
Jencraft Industrial.................. Totowa NJ 1967 120,943 100
J.I. Case Equipment Corp............. Memphis TN 1950 205,594 100
Pinewood Industrial.................. Arlington TX 1971 46,060 100
Mercantile I......................... Dallas TX 1970 236,092 95
Quaker Industrial.................... Dallas TX 1974 42,083 100
SeaTac II............................ Seattle WA 1984 41,657 100
--------- ---
TOTAL INDUSTRIAL....................... 3,532,315 99%
========= ===
RETAIL
Park Center.......................... Santa Ana CA 1979 73,500 97%
Sonora Plaza......................... Sonora CA 1974 162,126 99
Piedmont Plaza....................... Apopka FL 1985 151,000 98
River Run Shopping Center............ Miramar FL 1988 85,887 98
Westwood Plaza....................... Tampa FL 1984 99,304 99
Shannon Crossing..................... Atlanta GA 1981 64,039 96
Westbrook Commons.................... Westchester IL 1983 132,190 96
Goshen Plaza......................... Gaithersburg MD 1988 45,546 88
Auburn North......................... Auburn WA 1978 158,596 71
--------- ---
TOTAL RETAIL........................... 972,188 93%
========= ===
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY AS OF
YEAR RENTABLE SQ. FT. SEPTEMBER 30,
PROPERTY CITY STATE COMPLETED (UNITS) 1997(1)
- --------------------------------- ------------------ ----- --------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
MULTI-FAMILY
Overlook Apartments............ Scottsdale AZ 1988 188,432 (224) 92%
Summer Breeze.................. No. Hollywood CA 1981 73,284 (104) 99
Arrowood Crossing I & II....... Charlotte NC 1990 187,692 (200) 93
Sharonridge I & II............. Charlotte NC 1980 59,850 (75) 100
The Chase (Commonwealth)....... Charlotte NC 1986 105,360 (132) 97
The Courtyard.................. Charlotte NC 1985 60,500 (55) 93
The Landing on Farmhurst....... Charlotte NC 1986 98,000 (125) 96
Wendover Glen.................. Charlotte NC 1983 75,072 (96) 90
The Chase (Monroe)............. Monroe NC 1988 100,512 (120) 96
Willow Glen.................... Monroe NC 1981 104,040 (120) 97
Sabal Point I, II & III........ Pineville NC 1990 381,463 (374) 91
The Oaks....................... Raleigh NC 1985 68,256 (88) 85
Sahara Gardens................. Las Vegas NV 1983 277,056 (312) 91
Villas de Mission.............. Las Vegas NV 1979 192,370 (226) 96
---------
------- -----
TOTAL MULTI-FAMILY............. 1,971,887 (2,251) 93%
========= ======= =====
</TABLE>
S-17
<PAGE> 18
<TABLE>
<CAPTION>
RENTABLE
YEAR SQ. FT. UNITS/ OCCUPANCY AS OF
PROPERTY CITY STATE COMPLETED ROOMS ROOMS SEPTEMBER 30, 1997(1)
- --------------------------------- ------------ ----- --------- ---------- ------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
HOTELS
Country Inn and Suites by
Carlson...................... Scottsdale AZ 1995 80,568 163 58%
Country Suites by Carlson...... Tucson AZ 1986 61,552 157 77
Country Suites by Carlson...... Ontario CA 1985 54,019 120 76
Country Suites by Carlson...... Arlington TX 1986 56,200 132 74
Country Suites by Carlson...... Irving TX 1986 45,032 90 68
Country Inn and Suites by
Carlson...................... San Antonio TX 1997 29,330 64 64
----
--- -- -- -
---------
TOTAL HOTELS................... 326,701 726 70%
========= ======= =====
</TABLE>
- ---------------
(1) Represents economic occupancy as of September 30, 1997, except for the
Windsor Portfolio which is as of December 31, 1997, and the Marion Bass
Portfolio which is as of November 30, 1997.
(2) This property is 31% leased by the former owner of the Property for a period
of two years.
S-18
<PAGE> 19
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Series A Preferred
Stock offered hereby are expected to be approximately $191.5 million
(approximately $220.3 million if the over-allotment option is exercised in
full). The Company intends to contribute such proceeds to the Operating
Partnership for certain preferred limited partnership units in the Operating
Partnership, the economic terms of which will be substantially identical to the
Series A Preferred Stock. The Operating Partnership will be required to make all
required distributions on such preferred limited partnership units (which will
mirror the payments of dividends, including accrued and unpaid dividends upon
redemption, and of the liquidation preference amount on the Series A Preferred
Stock) prior to any distribution of cash or assets to the holders of Units in
the Operating Partnership. The Operating Partnership will use the net proceeds
to fund in part portions of the Pending Acquisitions, repay indebtedness and for
general corporate purposes.
The only indebtedness to be repaid with a portion of the net proceeds from
the Offering are a portion of the outstanding balance under the Interim Loan and
certain mortgage debt. Proceeds of such indebtedness were used primarily to fund
acquisition activities. As of January 8, 1998, the interest rate on the Interim
Loan was 7.38% and the initial maturity date was April 2, 1998, subject to a
three month extension, and the weighted average interest rate of the mortgage
debt to be repaid was 8.27% with maturity dates ranging from July 2003 to
January 2005.
S-19
<PAGE> 20
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
The Company's Common Stock is listed on the NYSE under the symbol "GLB." On
January 8, 1998, the last reported sale price per share of the Company's Common
Stock on the NYSE was $30.00. The following table sets forth the high and low
closing prices per share of the Company's Common Stock for the periods
indicated, as reported on the NYSE composite tape, and the distributions per
share paid by the Company with respect to the periods indicated.
<TABLE>
<CAPTION>
QUARTERLY PERIOD HIGH LOW DISTRIBUTIONS
------------------------------------------------- --- --- -------------
<S> <C> <C> <C>
1996
First Quarter.................................. $14 1/4 $13 0.30
Second Quarter................................. 15 1/8 13 1/2 0.30
Third Quarter.................................. 14 5/8 13 3/8 0.30
Fourth Quarter................................. 17 5/8 13 5/8 0.32
1997
First Quarter.................................. $20 1/2 $16 3/4 0.32
Second Quarter................................. 25 1/4 19 3/8 0.32
Third Quarter.................................. 283/16 225/16 0.32
Fourth Quarter................................. 30 1/8 24 1/4 0.42
1998
First Quarter(1)............................... $30 1/2 $2911/16 (1)
</TABLE>
- ---------------
(1) High and low stock closing prices through January 8, 1998. Distributions for
the quarter ended March 31, 1998 had not been declared as of January 8,
1998.
DISTRIBUTION POLICY
The Company currently intends to continue making regular quarterly
distributions on its Common Stock and to distribute amounts sufficient to
maintain its status as a REIT. Distributions are reviewed quarterly by the Board
of Directors and future distributions will depend upon factors deemed relevant
by the Board of Directors including operating performance, cash flow
requirements and other needs. Although the Company intends to continue to make
quarterly distributions to its stockholders, no assurance can be given as to the
amounts to be distributed in the future.
Although the Company believes that a portion of its distributions for 1998
will be classified as a return of capital for federal income tax purposes, it
cannot currently predict the portion of 1998 or future distributions that may be
so classified. See "Federal Income Tax Consequences -- Taxation of
Stockholders -- Taxation of Taxable Domestic Stockholders" in the accompanying
Prospectus.
S-20
<PAGE> 21
CAPITALIZATION
The following table sets forth the historical capitalization of the Company as
of September 30, 1997, and on a pro forma basis as if: (i) the transactions
acquiring the Windsor Portfolio, the Marion Bass Portfolio, the Opus Portfolio,
Thousand Oaks, Bryant Lake, the Copley Properties and the Pending Acquisitions;
(ii) the October 1997 Offering; (iii) certain debt financing transactions; and
(iv) the Offering and the application of the net proceeds therefrom as described
in "Use of Proceeds," had each been completed on September 30, 1997. This
capitalization table should be read in conjunction with all pro forma and
historical financial statements and notes thereto included in this Prospectus
Supplement and the accompanying Prospectus or incorporated herein by reference.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------
HISTORICAL PRO FORMA
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
DEBT:
Acquisition Credit Facility(1)..................... $ -- $ 187,745
Line of Credit(2).................................. 28,865 --
Mortgage loans(3).................................. 114,580 264,201
Interim unsecured loan(4).......................... 114,000 --
Interim Loan(5).................................... -- 90,279
----- -----
Total debt................................. 257,445 542,225
----- -----
MINORITY INTEREST(6)................................. 36,012 74,175
----- -----
STOCKHOLDERS' EQUITY:
Common Stock: $0.001 par value, 50,000,000 and
40,000,000 shares authorized, 20,174,692 and
31,730,817 issued and outstanding,
respectively(7)................................. 20 31
Series A Preferred Stock: $0.001 par value 0 and
10,000,000 shares authorized, 0 and 8,000,000
shares issued and outstanding,
respectively(8)................................. -- 191,500
Additional paid-in capital......................... 321,771 595,902
Deferred compensation.............................. (257) (257)
Retained deficit................................... (10,231) (15,476)
----- -----
Total stockholders' equity................. 311,303 771,700
----- -----
TOTAL CAPITALIZATION............................... $ 604,760 $1,388,100
===== =====
</TABLE>
- ---------------
(1) The pro forma balance reflects borrowings under the Acquisition Credit
Facility due to property acquisitions completed after September 30, 1997.
(2) The pro forma balance reflects the full repayment of the Company's previous
$50 million line of credit with the use of proceeds from the October 1997
Offering.
(3) The pro forma balance reflects the assumption of mortgage loans in
connection with the acquisitions of the Windsor Portfolio, the Marion Bass
Portfolio, Bryant Lake, the Eaton & Lauth Portfolio and Capitol Center and
the repayment of certain of these mortgage loans with the use of proceeds
from the Offering.
(4) The pro forma balance reflects the full repayment of a $114 million interim
unsecured loan with the use of proceeds from the October 1997 Offering.
(5) The pro forma balance reflects the Interim Loan and the partial repayment of
this loan with the use of proceeds from the Offering.
(6) The pro forma minority interest reflects the issuance of 1,467,042 units of
partnership interest in the Operating Partnership in connection with the
GRCAA transaction and the acquisitions of the Eaton & Lauth Portfolio and
Capitol Center.
(7) The pro forma outstanding Common Stock includes the issuance of 11,300,000
shares of Common Stock in connection with the October 1997 Offering.
(8) The pro forma outstanding Series A Preferred Stock includes the issuance of
8,000,000 shares of Series A Preferred Stock in connection with the
Offering.
S-21
<PAGE> 22
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
The following table sets forth selected financial and other data on a
historical, as adjusted and pro forma basis for the Company, and on a historical
combined basis for the GRT Predecessor Entities.
The following unaudited, pro forma consolidated balance sheet as of September
30, 1997 has been prepared to reflect: (i) all property acquisitions completed
in 1997 and in 1998 through the date hereof, as described under the caption
"Recent Activities -- 1998 and 1997 Completed Acquisitions;" (ii) the Pending
Acquisitions of the Pru-Bache Portfolio, the Eaton & Lauth Portfolio and Capitol
Center, as described under the caption "Recent Activities -- Pending
Acquisitions;" (iii) the Offering, and the application of the net proceeds
therefrom as set forth in "Use of Proceeds;" (iv) the October 1997 Offering and
the application of the net proceeds thereof; (v) debt assumed and borrowings
under the Interim Loan and the Acquisition Credit Facility, as described under
the caption "Recent Activities -- Financing Activities;" (vi) repayment of
certain mortgage loans, the Company's previous $50 million line of credit, a
$114 million interim unsecured loan and a portion of the Interim Loan; (vii) the
sale of one QuikTrip property and the Summer Breeze property and the use of
these sales proceeds for the repayment of related mortgage debt and for the
funding of certain property acquisitions; and (viii) the GRCAA transaction, as
described under the caption "Recent Activities -- Financing Activities," as if
each of such transactions had been completed on September 30, 1997.
The following unaudited, pro forma consolidated statements of operations for the
nine months ended September 30, 1997, and for the year ended December 31, 1996,
have been prepared to reflect: (i) all property acquisitions completed in 1997
and in 1998 through the date hereof, as described under the caption "Recent
Activities -- 1998 and 1997 Completed Acquisitions," and the property
acquisitions completed in 1996, as described in footnote one of the Notes and
Adjustments to Pro Forma Consolidated Balance Sheet as of September 30, 1997;
(ii) the Pending Acquisitions of the Pru-Bache Portfolio, the Eaton & Lauth
Portfolio and Capitol Center described under the caption "Recent Activities --
Pending Acquisitions;" (iii) the Offering and the application of the net
proceeds therefrom as set forth in "Use of Proceeds;" (iv) the October 1997
Offering, the July 1997 Offering, the March 1997 Offering, and the October 1996
Offering and the application of the respective net proceeds therefrom; (v) debt
assumed and borrowings under the Interim Loan and the Acquisition Credit
Facility, as described under the caption "Recent Activities -- Financing
Activities;" (vi) and the repayment of certain mortgage loans, the Company's
previous $50 million line of credit, a $114 million interim unsecured loan, a
portion of the Interim Loan; (vii) the sale of the two All American Industrial
Properties, the six Atlanta Auto Care Center properties, ten QuikTrip properties
and the Summer Breeze property, and use of sale proceeds for the repayment of
related mortgage debt and the funding of certain property acquisitions; (viii)
the collection on the Hovpark mortgage loan receivable; and (ix) the sale of
various properties held by the partnerships managed by the Associated Companies
to the Company as described under the caption "Recent Activities" and the sale
of various properties held by the partnerships managed by the Associated
Companies to third parties, as if each of such transactions had been completed
on January 1, 1996. In the opinion of management, all adjustments necessary to
reflect the effects of the transactions have been made.
The following unaudited as adjusted operating data, balance sheet data, and
other data have been prepared to reflect the Consolidation and related
transactions as if such transactions had occurred on January 1, 1994.
The pro forma selected financial and other data is unaudited and is not
necessarily indicative of the consolidated results which would have occurred if
the transactions had been consummated in the periods presented, or on any
particular date in the future, nor does it purport to represent the financial
position, results of operations or cash flows for future periods.
S-22
<PAGE> 23
The following table should be read in conjunction with the financial statements
and notes thereto included in this Prospectus Supplement and the accompanying
Prospectus or incorporated herein and therein by reference.
<TABLE>
<CAPTION>
AS OF AND FOR THE NINE MONTHS AS OF AND FOR THE YEAR ENDED DECEMBER 31,
ENDED SEPTEMBER 30, ---------------------------------------------------------------------
------------------------------------ PRO AS AS
PRO FORMA HISTORICAL HISTORICAL FORMA HISTORICAL ADJUSTED HISTORICAL ADJUSTED HISTORICAL
1997 1997 1996 1996 1996 1995 1995 1994 1994
---------- ---------- ---------- -------- ---------- -------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Rental Revenue........ $ 143,999 $ 35,899 $ 11,281 $185,072 $ 17,943 $13,495 $ 15,454 $12,867 $ 13,797
Fees and reimburse-
ments............... 572 572 199 199 311 260 16,019 260 13,327
Interest and other in-
come................ 1,117 2,374 944 934 1,401 982 2,698 1,109 3,557
Equity in earnings of
Associated Compa-
nies................ 2,221 1,942 1,363 1,627 1,598 1,691 -- 1,649 --
Total Revenues(1)..... 147,909 40,787 13,787 187,832 21,253 16,428 34,171 15,885 30,681
Property operating ex-
penses.............. 48,063 11,282 3,244 62,379 5,266 4,084 8,576 3,673 6,782
General and adminis-
trative............. 3,187 2,031 977 3,334 1,393 983 15,947 954 13,454
Interest expense...... 29,551 6,416 2,546 37,135 3,913 2,767 2,129 2,767 1,140
Depreciation and
Amortization........ 29,350 8,867 2,694 37,968 4,575 3,654 4,762 3,442 4,041
Income (loss) from op-
erations before mi-
nority interest and
extraordinary
income.............. 37,758 12,191 (2,911) 47,016 (1,131) 4,077 524 4,516 1,580
Net income (loss)
before preferred
stock
distributions(2).... $ 35,208 $ 11,502 $ (3,409) $ 43,677 $ (1,609) $ 3,796 $ 524 $(3,093) $ 1,580
Per common share(3):
Net income (loss)
before extraordi-
nary items........ $ 0.74 $ 0.79 $ (0.56) $ 0.89 $ (0.21) $ 0.66 -- $ 0.72 --
Net income(loss).... $ 0.74 $ 0.79 $ (0.60) $ 0.89 $ (0.24) $ 0.66 -- $ (0.54) --
Distributions(4).... $ 1.26 $ 0.96 $ 0.90 $ 1.68 $ 1.22 $ 1.20 -- $ 1.20 --
Preferred stock
distributions per
share............... $ 1.41 -- -- $ 1.88 -- -- -- -- --
Balance Sheet Data:
Net investment in real
estate.............. $1,373,836 $ 588,644 -- -- $161,945 -- $ 77,574 -- $ 63,994
Mortgage loans
receivable, net..... 3,622 3,622 -- -- 9,905 -- 7,465 -- 19,953
Total assets.......... 1,401,916 615,976 -- -- 185,520 -- 105,740 -- 117,321
Total debt............ 542,225 257,445 -- -- 75,891 -- 36,168 -- 17,906
Stockholders'
equity.............. 771,700 311,303 -- -- 97,600 -- 55,628 -- 80,558
Other Data:
EBIDA(5).............. $ 96,659 $ 27,474 $ 9,380 $122,119 $ 14,273 $11,361 $ 9,291 $11,258 $ 10,269
Cash flow provided by
(used for):
Operating
activities........ 64,887 17,312 2 83,357 4,138 4,656 (10,608) 5,742 22,426
Investing
activities........ 1,725 (373,001) (22,560) (964,306) (61,833) 3,263 8,656 1,710 (1,947)
Financing
activities........ (52,722) 357,104 18,581 881,976 54,463 (7,933) (17,390) (6,408) (2,745)
FFO(6)................ 56,042 20,021 7,545 71,237 11,491 9,638 7,162 9,536 9,129
CAD(7),(8)............ 52,648 17,846 6,959 66,725 10,497 8,856 3,237 8,754 6,919
Debt to total market
capitalization(9)... 31.3% 29.6% -- -- 29.5% -- -- -- --
<CAPTION>
HISTORICAL HISTORICAL
1993 1992
---------- ----------
<S> <<C> <C>
Operating Data:
Rental Revenue........ $ 13,546 $ 13,759
Fees and reimburse-
ments............... 15,439 14,219
Interest and other in-
come................ 3,239 3,150
Equity in earnings of
Associated Compa-
nies................ -- --
Total Revenues(1)..... 32,224 31,128
Property operating ex-
penses.............. 7,553 8,692
General and adminis-
trative............. 14,321 13,496
Interest expense...... 1,301 1,466
Depreciation and
Amortization........ 4,572 4,933
Income (loss) from op-
erations before mi-
nority interest and
extraordinary
income.............. 2,144 (2,139)
Net income (loss)
before preferred
stock
distributions(2).... $ 4,418 $ (2,681)
Per common share(3):
Net income (loss)
before extraordi-
nary items........ -- --
Net income(loss).... -- --
Distributions(4).... -- --
Preferred stock
distributions per
share............... -- --
Balance Sheet Data:
Net investment in real
estate.............. $ 70,245 $ 75,022
Mortgage loans
receivable, net..... 18,825 18,967
Total assets.......... 102,635 108,168
Total debt............ 12,172 15,350
Stockholders'
equity.............. 85,841 87,172
Other Data:
EBIDA(5).............. $ 10,326 $ 8,815
Cash flow provided by
(used for):
Operating
activities........ 12,505 6,891
Investing
activities........ (2,002) (1,437)
Financing
activities........ (8,927) (9,476)
FFO(6)................ 9,025 7,349
CAD(7),(8)............ 6,921 4,731
Debt to total market
capitalization(9)... -- --
</TABLE>
(footnotes appear on next page)
S-23
<PAGE> 24
(1) Pro forma amounts exclude gains on the disposition of property which are
recognized on an historical basis. Certain revenues which are included in
the historical combined amounts for 1995 and prior years are not included on
an as adjusted basis. These revenues are included in the financial
statements of the unconsolidated Associated Companies, on an as adjusted
basis, from which the Company receives lease payments and dividend income.
(2) Historical 1996 and as adjusted 1994 net losses reflect $7,237 of
Consolidation and litigation costs incurred in connection with the
Consolidation. As adjusted 1994 data give effect to the Consolidation and
related transactions as if such transactions had occurred on January 1,
1994, whereas historical 1996 data reflect such transactions in the periods
they were expensed. The Consolidation and litigation costs were expensed on
January 1, 1996, the Company's first day of operations. Net loss in 1992
includes a non-recurring write down of $4,282 on GPI's investment in the
master agreement that resulted from GPI's in-substance foreclosure on the
AFP Partners' properties.
(3) Pro forma net income per common share is based upon pro forma weighted
average shares outstanding of 32,158,512 for the nine months ended September
30, 1997 and the year ended December 31, 1996 and does not assume conversion
of the Operating Partnership units or the Series A Preferred Stock into
shares of Common Stock as the effect of conversion would be anti-dilutive.
As adjusted net income per share is based upon as adjusted weighted average
shares outstanding of 5,753,709 for 1995 and 1994. The differences between
primary and fully diluted per share amounts, as well as the effects of
implementing Statement of Financial Accounting Standards No. 128 "Earnings
Per Share", are not material to reported amounts.
(4) Consists of distributions declared for the period then ended.
(5) EBIDA represents and is computed as earnings before interest expense,
depreciation, amortization, loss provisions and minority interests. The
Company believes that in addition to cash flows and net income, EBIDA is a
useful financial performance measurement for assessing the operating
performance of an equity REIT because, together with net income and cash
flows, EBIDA provides investors with an additional basis to evaluate the
ability of a REIT to incur and service debt and to fund acquisitions and
other capital expenditures. To evaluate EBIDA and the trends it depicts, the
components of EBIDA, such as rental revenues, rental expenses, real estate
taxes and general and administrative expenses, should be considered.
Excluded from EBIDA are financing costs such as interest as well as
depreciation and amortization, each of which can significantly affect a
REIT's results of operations and liquidity and should be considered in
evaluating a REIT's operating performance. Further, EBIDA does not represent
net income or cash flows from operating, financing and investing activities
as defined by generally accepted accounting principles and does not
necessarily indicate that cash flows will be sufficient to fund cash needs.
It should not be considered as an alternative to net income as an indicator
of the Company's operating performance or to cash flows as a measure of
liquidity.
(6) Funds from Operations ("FFO") represents income (loss) from operations
before minority interests and extraordinary items plus depreciation and
amortization except amortization of deferred financing costs and loss
provisions. In 1996, Consolidation and litigation costs were also added back
to net income to determine FFO. Management generally considers FFO to be a
useful financial performance measure of the operating performance of an
equity REIT because, together with net income and cash flows, FFO provides
investors with an additional basis to evaluate the ability of a REIT to
incur and service debt and to fund acquisitions and other capital
expenditures. FFO does not represent net income or cash flows from
operations as defined by GAAP and does not necessarily indicate that cash
flows will be sufficient to fund cash needs. It should not be considered as
an alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. FFO does not measure
whether cash flow is sufficient to fund all of the Company's cash needs
including principal amortization, capital improvements and distributions to
stockholders. FFO also does not represent cash flows generated from
operating, investing or financing activities as defined by GAAP. Further,
FFO as disclosed by other REITs may not be comparable to the Company's
calculation of FFO. Pro Forma FFO is presented assuming the Series A
Preferred Stock is not converted into Common Stock. If the Series A
Preferred Stock is assumed to be converted into Common Stock, pro forma FFO
would have been $67,292 and $86,237 for the nine months ended September 30,
1997 and the year ended December 31, 1996 respectively.
(7) Cash available for distribution ("CAD") represents net income (loss)
(computed in accordance with GAAP), excluding extraordinary gains or losses
or loss provisions, plus depreciation and amortization including
amortization of deferred financing costs, less lease commissions and capital
expenditures. CAD should not be considered an alternative to net income as a
measure of the Company's financial performance or to cash flow from
operating activities (computed in accordance with GAAP) as a measure of the
Company's liquidity, nor is it necessarily indicative of sufficient cash
flow to fund all of the Company's cash needs.
(8) CAD for the year ended December 31, 1995 excludes approximately $6,782 that
represents the net proceeds received from the prepayment of the Finley
mortgage loan and the repayment of the wrap note payable. Pro forma CAD is
presented assuming the Series A Preferred Stock is not converted into Common
Stock. If the Series A Preferred Stock is assumed to be converted into
Common Stock, pro forma CAD would have been $63,898 and $81,725 for the nine
months ended September 30, 1997 and the year ended December 31, 1996,
respectively.
(9) Debt to total market capitalization is calculated as total debt at period
end divided by total debt plus the market value of the Company's outstanding
common stock, on a fully converted basis, including conversion of the
Operating Partnership units and Series A Preferred Stock, based upon a sales
price of the Company's Common Stock of $29.00 per share on a pro forma basis
on September 30, 1997 and the closing price of the Common Stock of $27.69 on
September 30, 1997 and $17.625 on December 31, 1996 on an historical basis.
S-24
<PAGE> 25
PRO FORMA FINANCIAL INFORMATION
The following unaudited, pro forma consolidated balance sheet as of
September 30, 1997 has been prepared to reflect: (i) all property acquisitions
completed in 1997 and in 1998 through the date hereof, as described under
"Recent Activities -- 1998 and 1997 Completed Acquisitions;" (ii) the Pending
Acquisitions of the Pru-Bache Portfolio, the Eaton & Lauth Portfolio and Capitol
Center, as described under the caption "Recent Activities -- Pending
Acquisitions;" (iii) the Offering and the application of the net proceeds
therefrom as set forth in "Use of Proceeds;" (iv) the October 1997 Offering and
the application of the net proceeds therefrom; (v) debt assumed and borrowings
under the Interim Loan and the Acquisition Credit Facility, as described under
the caption "Recent Activities -- Financing Activities;" (vi) repayment of
certain mortgage loans, the Company's previous $50 million line of credit, a
$114 million interim unsecured loan and a portion of the Interim Loan; (vii) the
sale of one QuikTrip property and the Summer Breeze property and the use of
these sales proceeds for the repayment of related mortgage debt and for the
funding of certain property acquisitions (viii) the GRCAA transaction as
described under the caption "Recent Activities -- Financing
Activities -- Private Equity Issuance" as if each of such transactions had been
completed on September 30, 1997.
The following unaudited, pro forma consolidated statements of operations
for the nine months ended September 30, 1997 and for the year ended December 31,
1996 have been prepared to reflect: (i) all property acquisitions completed in
1997 and in 1998 through the date hereof, as described under "Recent
Activities -- 1998 and 1997 Completed Acquisitions," and the property
acquisitions completed in 1996, as described in footnote one of the Notes and
Adjustments to Pro Forma Consolidated Balance Sheet as of September 30, 1997;
(ii) the Pending Acquisitions of the Pru-Bache Portfolio, the Eaton & Lauth
Portfolio and Capitol Center described under "Recent Activities -- Pending
Acquisitions;" (iii) the Offering and the application of the net proceeds
therefrom as set forth in "Use of Proceeds;" (iv) the October 1997 Offering, the
July 1997 Offering, the March 1997 Offering and the October 1996 Offering and
the application of the respective net proceeds therefrom; (v) debt assumed and
borrowings under the Interim Loan and the Acquisition Credit Facility, as
described under the caption "Recent Activities -- Financing Activities;" (vi)
the repayment of certain mortgage loans, the Company's previous $50 million line
of credit, a $114 million interim unsecured loan, a portion of the Interim Loan;
(vii) the sale of the two All American Industrial Properties, the six Atlanta
Auto Care Center properties, ten QuikTrip properties and the Summer Breeze
property, and use of sale proceeds for the repayment of related mortgage debt
and the funding of certain property acquisitions; (viii) the collection on the
Hovpark mortgage loan receivable; and (ix) the sale of various properties held
by the partnerships managed by the Associated Companies to the Company as
described under "Recent Activities" and the sale of various properties held by
the partnerships managed by the Associated Companies to third parties, as if
each of such transactions had been completed on January 1, 1996.
These unaudited, pro forma consolidated financial statements should be read
in conjunction with the financial statements and related notes of the Company
included herein and in the Company's reports filed under the Exchange Act which
are incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus. In the opinion of management, all adjustments necessary to reflect
the effects of the transactions have been made.
The pro forma consolidated financial information is unaudited and is not
necessarily indicative of the results of which would have occurred if the
transactions had been consummated in the periods presented, or on any particular
date in the future, nor does it purport to represent the financial position,
results of operations, or cash flows for future periods.
S-25
<PAGE> 26
GLENBOROUGH REALTY TRUST INCORPORATED
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMPLETED PENDING REPAYMENT OF OTHER
HISTORICAL(1) TRANSACTIONS(2) ACQUISITIONS(3) OFFERING(4) DEBT(5) ADJUSTMENTS(6) PRO FORMA
------------- --------------- --------------- ----------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Rental property,
net........... $ 588,644 $ 633,820 $ 156,030 $ -- $ -- $ (4,658) $1,373,836
Investments in
Associated
Companies..... 7,567 -- -- -- -- -- 7,567
Mortgage loans
receivable,
net........... 3,622 -- -- -- -- -- 3,622
Cash and cash
equivalents... 2,770 4,064 (80,540) 191,500 (134,177) 17,383 1,000
Other Assets.... 13,373 2,518 -- -- -- -- 15,891
-------- -------- -------- -------- --------- ------- ----------
Total
Assets... $ 615,976 $ 640,402 $ 75,490 $ 191,500 $(134,177) $ 12,725 $1,401,916
======== ======== ======== ======== ========= ======= ==========
LIABILITIES
Acquisition
Credit
Facility...... $ -- $ 179,755 7,990 $ -- $ -- $ -- $ 187,745
Line of
Credit........ 28,865 (28,865) -- -- -- -- --
Mortgage
loans......... 114,580 183,940 36,280 -- (68,009) (2,590) 264,201
Interim Loan.... -- 150,000 -- -- (59,721) -- 90,279
Interim
unsecured
loan.......... 114,000 (114,000) -- -- -- -- --
Other
liabilities... 11,216 1,880 720 -- -- -- 13,816
-------- -------- -------- -------- --------- ------- ----------
Total
Liabilities... 268,661 372,710 44,990 -- (127,730) (2,590) 556,041
-------- -------- -------- -------- --------- ------- ----------
MINORITY INTEREST 36,012 -- 24,500 -- -- 13,663 74,175
-------- -------- -------- -------- --------- ------- ----------
STOCKHOLDERS'
EQUITY
Common stock.... 20 11 -- -- -- -- 31
Series A
Preferred
stock......... -- -- -- 191,500 -- -- 191,500
Additional
paid-in....... 321,771 267,681 6,000 -- -- 450 595,902
Deferred
compensation... (257) -- -- -- -- -- (257)
Retained
earnings...... (10,231) -- -- -- (6,447) 1,202 (15,476)
-------- -------- -------- -------- --------- ------- ----------
Total
Equity... 311,303 267,692 6,000 191,500 (6,447) 1,652 771,700
-------- -------- -------- -------- --------- ------- ----------
Total
liabilities
and
Stockholders'
Equity... $ 615,976 $ 640,402 $ 75,490 $ 191,500 $(134,177) $ 12,725 $1,401,916
======== ======== ======== ======== ========= ======= ==========
</TABLE>
S-26
<PAGE> 27
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
1. Reflects the historical consolidated balance sheet of the Company as of
September 30, 1997, which includes the acquisitions of the following
properties and property portfolios:
<TABLE>
<CAPTION>
PURCHASE PRICE
PROPERTY (IN 000'S) DATE ACQUIRED
------------------------------------------ -------------- -------------------
<S> <C> <C>
Citibank Park Property.................... $ 23,300 September 30, 1997
Advance Properties........................ 103,000 September 12, 1997
T. Rowe Price Properties.................. 146,800 September 12, 1997
Centerstone Property...................... 30,400 July 1, 1997
CRI Properties............................ 14,800 June 18, 1997
CIGNA Properties.......................... 45,400 April 29, 1997
E&L Properties............................ 22,200 April 18, 1997
Riverview Property........................ 20,500 April 14, 1997
Lennar Properties......................... 23,200 April 8, 1997
Scottsdale Hotel.......................... 12,100 February 28, 1997
Carlsberg Properties...................... 23,200 November 19, 1996
TRP Properties............................ 43,800 October 17, 1996
Bond Street Property...................... 3,200 September 24, 1996
Kash n' Karry Property.................... 1,600 August 2, 1996
San Antonio Hotel......................... 2,800 August 1, 1996
UCT Property.............................. 18,800 July 15, 1996
</TABLE>
Citibank Park. In September 1997, the Company acquired Citibank Park, a
147,978 square-foot office building in Las Vegas, Nevada. The total
acquisition cost, including capitalized costs, was approximately $23.3
million, which consisted of: (i) approximately $1.66 million in the form of
61,211 partnership units in the Operating Partnership (based on an agreed
per unit value of $27.156); and (ii) the balance in cash.
Advance Properties. In September 1997, the Company acquired from a group of
partnerships affiliated with The Advance Group, the Advance Properties, a
portfolio of 10 Properties aggregating 755,006 square feet. The total
acquisition cost, including capitalized costs, was approximately $103.0
million, which consisted of: (i) approximately $13.6 million in the form of
599,508 partnership units in the Operating Partnership (based on an agreed
per unit value of $22.625); (ii) approximately $7.4 million in assumption
of debt; and (iii) the balance in cash. The Advance Properties consist of
five office Properties and three office/flex Properties located in northern
New Jersey and Maryland and two industrial Properties located in northern
New Jersey. Concurrent with this acquisition, the Company entered into a
joint venture with The Advance Group for the development of selected new
projects. This joint venture owns 57 acres of land suitable for office and
office/flex development of up to 560,000 square feet.
T. Rowe Price Properties. In September 1997, the Company acquired from five
limited partnerships, two general partnerships and one private REIT, the T.
Rowe Price Properties, a portfolio of 27 properties aggregating
approximately 2,888,000 square feet. The total acquisition cost, including
capitalized costs, was approximately $146.8 million, which was paid
entirely in cash. The T. Rowe Price Properties consist of four office
Properties, 12 office/flex Properties, eight industrial Properties and
three retail Properties located in 12 states.
Centerstone Property. In July 1997, the Company acquired the Centerstone
Property, an office property containing 157,579 square feet located in
Irvine, California. The total acquisition cost, including capitalized
costs, was approximately $30.4 million, which consisted of: (i)
approximately $5.5 million in
S-27
<PAGE> 28
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA
CONSOLIDATED BALANCE SHEET (CONTINUED)
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
the form of 275,000 partnership units in the Operating Partnership (based
on an agreed per unit value of $20.00); and (ii) the balance in cash.
CRI Properties. In June 1997, the Company acquired from Carlsberg Realty
Inc. the CRI Properties, a portfolio of three Properties, aggregating
approximately 245,600 square feet. The total acquisition cost, including
capitalized costs, was approximately $14.8 million, which was paid entirely
in cash. The CRI Properties consist of one office Property in California
and one office/flex Property and one industrial Property in Arizona. The
CRI Properties have been managed by Glenborough Corporation, one of the
Associated Companies, since November 1996.
CIGNA Properties. In April 1997, the Company acquired from two partnerships
formed and managed by affiliates of CIGNA the CIGNA Properties, a portfolio
of six Properties, aggregating approximately 616,000 square feet and 224
multi-family units. The total acquisition cost, including capitalized
costs, was approximately $45.4 million, which was paid entirely in cash.
The CIGNA Properties consist of two office Properties, two office/flex
Properties, a shopping center and a multi-family Property, and are located
in four states.
E&L Properties. In April 1997, the Company acquired from seven partnerships
and their general partner, a Southern California syndicator the E&L
Properties, a portfolio of 11 Properties, aggregating approximately 523,000
square feet, together with associated management interests. The total
acquisition cost, including capitalized costs, was approximately $22.2
million, which consisted of: (i) approximately $12.8 million of mortgage
debt assumed; (ii) approximately $6.7 million in the form of 352,197
partnership units in the Operating Partnership (based on an agreed per unit
value of $19.075); (iii) approximately $633,000 in the form of
approximately 33,198 shares of Common Stock of the Company (based on an
agreed per share value of $19.075), and (iv) the balance in cash. The E&L
Properties consist of one office Property, nine office/flex Properties and
one industrial Property, all located in Southern California.
Riverview Property. In April 1997, the Company acquired from a private
seller the Riverview Property, a 15-story office property containing
227,129 square feet located in Bloomington, Minnesota. The total
acquisition cost, including capitalized costs, was approximately $20.5
million, which was paid entirely in cash.
Lennar Properties. In April 1997, the Company acquired from two limited
partnerships and one limited liability company managed by affiliates of
Lennar Partners the Lennar Properties, a portfolio of three Properties,
aggregating approximately 282,000 square feet. The total acquisition cost,
including capitalized costs, was approximately $23.2 million, which was
paid entirely in cash. The Lennar Properties consist of one office Property
located in Virginia and one office/flex Property and one industrial
Property, each located in Massachusetts.
Scottsdale Hotel. In February 1997, the Company acquired the Scottsdale
Hotel, a 163-suite hotel Property, which began operations in January 1996
and is located in Scottsdale, Arizona. The total acquisition cost,
including capitalized costs, was approximately $12.1 million, which
consisted of approximately $4.6 million of mortgage debt assumed, and the
balance in cash. The Scottsdale Hotel and four of the Company's other hotel
Properties are marketed as Country Suites by Carlson.
Carlsberg Properties. In November 1996, the Company acquired a portfolio of
six Properties (including one property on which the Company made a mortgage
loan which included a purchase option), aggregating approximately 342,000
square feet, together with associated management interests (the "Carlsberg
Properties"). The total acquisition cost including the mortgage loan and
capitalized costs, was
S-28
<PAGE> 29
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA
CONSOLIDATED BALANCE SHEET (CONTINUED)
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
approximately $23.2 million, which consisted of: (i) approximately $8.9
million of mortgage debt assumed; (ii) approximately $350,000 in the form
of 24,844 shares of Common Stock of the Company (based on a per share value
of $14.09); and (iii) the balance in cash. The Carlsberg Properties consist
of five office Properties and one retail Property, located in two states.
Concurrently with the Company's acquisition of the Carlsberg Properties,
one of the Associated Companies assumed management of a portfolio of 13
additional properties with an aggregate of one million square feet under a
venture with an affiliate of the seller. In June 1997, the Company acquired
three of these properties, the CRI Properties, for an aggregate purchase
price of $14.8 million.
TRP Properties. In October 1996, the Company acquired a portfolio of 12
Properties, aggregating approximately 784,000 square feet and 538
multi-family units, together with associated management interests (the "TRP
Properties"). The total acquisition cost, including capitalized costs, was
approximately $43.8 million, which consisted of: (i) approximately $16.3
million of mortgage debt assumed; (ii) approximately $760,000 in the form
of 52,387 partnership units in the Operating Partnership (based on a per
unit value of $14.50); (iii) approximately $2.6 million in the form of
182,000 shares of Common Stock of the Company (based on a per share value
of $14.50); and (iv) the balance in cash. The cash portion was financed
through advances under the Line of Credit. The TRP Properties consist of
three office, three office/flex, three industrial, one retail and two
multi-family Properties, located in six states.
Bond Street Property. In September 1996, the Company acquired a two-story,
40,595 square foot office building, in Farmington Hills, Michigan (the
"Bond Street Property"). The total acquisition cost, including capitalized
costs, was approximately $3.2 million, which consisted of approximately
$391,000 in the form of 26,067 partnership units in the Operating
Partnership (based on a per unit value of $15.00), and the balance paid in
cash.
Kash n' Karry Property. In August 1996, the Company also expanded an
existing shopping center in Tampa, Florida through a purchase-leaseback
transaction with the anchor tenant. The Company's initial acquisition cost,
including capitalized costs, was approximately $1.6 million, all of which
was paid in cash. In addition, the Company committed an additional $1.8
million for future expansion and tenant improvements, which the Company
expects will also be paid in cash.
San Antonio Hotel. In August 1996, the Company acquired a 64-room hotel
Property (the "San Antonio Hotel"), which is located in San Antonio, Texas.
The total acquisition cost, including capitalized costs, was approximately
$2.8 million, which was paid in cash.
UCT Property. In July 1996, the Company acquired a 23-story, 272,443 square
foot office building, in St. Louis, Missouri (the "UCT Property"). The
total acquisition cost, including capitalized costs, was approximately
$18.8 million, which consisted of approximately $350,000 in the form of
23,333 partnership units in the Operating Partnership (based on a per unit
value of $15.00), and the balance paid in cash.
Also reflects the sale of the six Atlanta Auto Care Center Properties and
nine of the ten QuikTrip Properties in June 1997 for an aggregate sales
price of approximately $12.0 million. The remaining QuikTrip Property was
sold in October 1997 for a sale price of approximately $1.1 million.
S-29
<PAGE> 30
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA
CONSOLIDATED BALANCE SHEET (CONTINUED)
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
2. Reflects the completed acquisitions of the following properties and property
portfolios:
<TABLE>
<CAPTION>
PURCHASE PRICE
(IN 000'S) DATE ACQUIRED
-------------- ------------------
<S> <C> <C>
Windsor Portfolio.......................... $423,200 January 8, 1998
Marion Bass Portfolio...................... 58,300 December 31, 1997
Opus Portfolio............................. 27,900 December 22, 1997
Thousand Oaks.............................. 51,300 December 18, 1997
Bryant Lake................................ 9,400 November 4, 1997
Copley Properties.......................... 63,700 October 24, 1997
</TABLE>
Windsor Portfolio. In January 1998, the Company acquired the Windsor
Portfolio from Windsor Realty Fund II, L.P., of which Windsor Advisor, LLC
is the general partner and DuPont Pension Fund Investments and Gid/S&S
Limited Partnership are limited partners, and other entities affiliated
with Windsor Realty Fund II, L.P. The Windsor Portfolio properties
aggregate 3,383,240 net rentable square feet, located in the eastern and
mid-western United States and are concentrated in suburban Washington,
D.C., Chicago, Atlanta, Boston, Philadelphia, Tampa, Florida and Cary,
North Carolina. The total acquisition cost, including capitalized costs,
was approximately $423.2 million, comprised of: (i) approximately $160.5
million in assumption of debt; (ii) approximately $150.0 million in
borrowings under the Interim Loan and; (iii) the balance in cash including
cash from borrowings under the Acquisition Credit Facility. See "Use of
Proceeds".
Marion Bass Portfolio. In December 1997, the Company acquired the Marion
Bass Portfolio aggregating 1,385 units from 14 limited partnerships each of
whose general partner is Marion Bass Real Estate Group. The total
acquisition cost, including capitalized costs, was approximately $58.3
million, comprising $23.5 million of assumed debt and the balance in cash,
including cash from borrowings under the Acquisition Credit Facility. Of
the 10 Marion Bass Portfolio Properties, six are located in Charlotte,
North Carolina, two are in Monroe, North Carolina, one is in Raleigh, North
Carolina and one is in Pineville, North Carolina.
Opus Portfolio. In December 1997, the Company acquired the Opus Portfolio
aggregating 289,874 square feet from four limited liability companies
affiliated with Opus Properties, LLC. The total acquisition cost, including
capitalized costs, was approximately $27.9 million, all of which was paid
in cash, including cash from borrowings under the Acquisition Credit
Facility. Four of the Opus Portfolio Properties are located in or near
Tampa, Florida, and one is located in Denver, Colorado.
Thousand Oaks. In December 1997, the Company acquired Thousand Oaks. The
total acquisition cost, including capitalized costs, was approximately
$51.3 million, which was paid entirely in cash, including cash from
borrowings under the Acquisition Credit Facility. The Thousand Oaks
property includes 10 acres suitable for the development of 182,000 square
feet of office space. Thousand Oaks is located in Memphis, Tennessee.
Bryant Lake. In November 1997, the Company acquired Bryant Lake from
Outlook Income Fund 9, a limited partnership in which GC is managing
general partner. Robert Batinovich is co-general partner of Outlook Income
Fund 9 and holds an indirect economic interest therein equal to an
approximate 0.83% limited partnership interest. Because of this
affiliation, and consistent with the Company's Board of Directors' policy,
neither Robert Batinovich nor Andrew Batinovich voted when the Board of
Directors considered and acted to approve this acquisition. The price paid
for Bryant Lake equaled 100% of the appraised value as determined by an
independent appraiser. The total acquisition cost, including
S-30
<PAGE> 31
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA
CONSOLIDATED BALANCE SHEET (CONTINUED)
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
capitalized costs, was approximately $9.4 million, comprising approximately
$4.6 million in the form of cash and the balance in the form of assumption
of debt.
Copley Properties. In October 1997, the Company acquired the Copley
Properties from six separate limited partnerships in which affiliates of
AEW Capital Management, L.P. (successors in interest to one or more
affiliates of Copley Advisors Inc.) serve as general partners. The total
acquisition cost, including capitalized costs, was approximately $63.7
million, which was paid entirely in cash. The Copley Properties comprise
766,269 square feet of industrial space, with one property located in
Tempe, Arizona, one in Anaheim, California, one in Columbia, Maryland and
five in Las Vegas, Nevada.
These acquisitions were funded with approximately $115.6 million of the net
proceeds from the October 1997 Offering, assumption of approximately $188.8
million of mortgage debt, approximately $150.0 million of the proceeds of
the Interim Loan and approximately $179.8 million of borrowings under the
Acquisition Credit Facility. The assumed mortgages bear interest at rates
of 7.25% to 8.70% and mature between 1999 and 2030 . The Acquisition Credit
Facility bears interest on a sliding scale ranging from LIBOR plus 0.8% to
LIBOR plus 1.3% (assumed to be 6.850% for the nine months ended September
30, 1997 and 6.525% for the year ended December 31, 1996). In connection
with obtaining the Acquisition Credit Facility, the Company paid fees of
$1,863,000 which are shown as a reduction of cash and an increase in other
assets.
The Interim Loan bears interest at LIBOR plus 1.75% (assumed to be 7.50%
for the nine months ended September 30, 1997 and 7.175% for the year ended
December 31, 1996) and has a term of three months with an option to extend
the term to three additional months. In connection with obtaining the
Interim Loan, the Company paid fees of $300,000 which are shown as a
reduction of cash and an increase in other assets.
Tenant security deposits of approximately $1,880,000 related to these
acquisitions are reflected as cash and other liabilities.
Also reflects $267.7 million of net proceeds from the October 1997 Offering
and the full repayment of a $114 million interim unsecured loan, $4.9
million of mortgage debt, and $28.9 million on the Company's previous $50
million Line of Credit. This Line of Credit has been replaced by the
Acquisition Credit Facility.
3. Reflects the pending acquisitions of the following properties and property
portfolios:
<TABLE>
<CAPTION>
PURCHASE
PRICE
(IN 000'S)
--------------
<S> <C>
Pru-Bache Portfolio................................................ $ 43,500
Eaton & Lauth Portfolio............................................ 99,700
Capitol Center..................................................... 12,800
</TABLE>
Pru-Bache Portfolio. The Company has entered into a definitive agreement to
acquire all of the real estate assets of Prudential-Bache/Equitec Real
Estate Partnership, a California limited partnership in which the managing
general partner is Prudential-Bache Securities, Inc., and in which
Glenborough Corporation and Robert Batinovich, the Company's Chairman and
Chief Executive Officer, have served as co-general partners since March of
1994, but do not hold a material equity or economic interest. The total
acquisition cost, including capitalized costs, is expected to be
approximately $43.6 million, which is to be paid entirely in cash. The
Pru-Bache Portfolio comprises four office buildings aggregating 405,825
square feet and one office/flex property containing 121,645 square feet.
This acquisition is subject to a number of contingencies including approval
of the acquisition by a majority vote of the limited partners of
Prudential-Bache/Equitec Real Estate
S-31
<PAGE> 32
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA
CONSOLIDATED BALANCE SHEET (CONTINUED)
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
Partnership, satisfactory completion of due diligence and customary closing
conditions. As a result, there can be no assurance that this transaction
will be completed.
Eaton & Lauth Portfolio. The Company is negotiating the terms of an
agreement to acquire the Eaton & Lauth Portfolio from a number of
partnerships in which affiliates of Eaton & Lauth serve as general
partners. The total acquisition cost, including capitalized costs, is
expected to be approximately $99.7 million, comprising: (i) approximately
$68.8 million of assumed debt, of which approximately $36.8 million is
expected to be paid in cash; and (ii) approximately $30.0 million of
equity. The equity consideration will consist of: (i) up to $10.0 million
in the form of shares of Common Stock or cash, with a maximum of $6.0
million of Common Stock (based on a negotiated per unit value of $25.00);
and (ii) the balance in the form of partnership units in the Operating
Partnership (based on a negotiated per unit value of $25.00). The Eaton &
Lauth Portfolio properties are located in the Indianapolis, Indiana area.
This acquisition is subject to a number of contingencies including the
negotiation of terms of a definitive agreement, satisfactory completion of
due diligence and customary closing conditions. As a result, there can be
no assurance that this transaction will be completed.
Capitol Center. The Company has entered into a definitive agreement to
acquire Capitol Center, a 161,468 square foot office/flex complex located
in Des Moines, Iowa. The total acquisition cost, including capitalized
costs, is expected to be approximately $12.8 million, comprising: (i)
$500,000 to $1,000,000 in the form of 17,241 to 34,482 partnership units in
the Operating Partnership (based on an assumed per unit value of $29.00
(which will be determined using the 10-day average per share price of
Common Stock as of the closing date)); (ii) approximately $4.3 million of
assumed debt; and (iii) the balance in cash. The accompanying Pro Forma
Consolidated Balance Sheet assumes the issuance of 17,241 partnership units
in the Operating Partnership. This acquisition is subject to a number of
contingencies including satisfactory completion of due diligence and
customary closing conditions. As a result, there can be no assurance that
this acquisition will be completed.
These acquisitions are expected to be funded with approximately $81.2
million of the net proceeds from the Offering (see Footnote 4), assumption
of approximately $36.3 million of mortgage debt, approximately $8.0 million
of borrowings on the Acquisition Credit Facility, the issuance of 960,000
Operating Partnership units with an aggregate approximate value of $24.0
million (based on $25.00 per unit value), the issuance of 17,241 Operating
Partnership units with an aggregate approximate value of $500,000 (based on
an assumed per unit value of $29.00 (which will be determined using the
10-day average per share price of Common Stock as of the closing date)),
and the issuance of 240,000 shares of Common Stock of the Company with an
aggregate approximate value of $6.0 million. These assumed mortgages bear
interest at rates of 6.00% to 8.82% and mature between 2005 and 2015.
Tenant security deposits of approximately $720,000 related to these
acquisitions are reflected as an increase in cash and other liabilities.
4. Reflects the net proceeds from the Offering of 8,000,000 shares of the
Company's Series A Preferred Stock at a price of $25.00 per share. In
connection with the Offering, the Company is expected to incur costs of
approximately $8.5 million.
5. Reflects the repayment of $68.0 million of certain mortgage debt and $59.7
million of borrowings on the Interim Loan. In conjunction with the
repayment of the mortgage debt, the Company will incur approximately $6.4
million in prepayment penalty fees. These fees are not reflected as an
expense in the accompanying pro forma consolidated statements of operations
for the nine months ended September 30, 1997 and the year ended December
31, 1996 as the expense will be recorded as an extraordinary item.
S-32
<PAGE> 33
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA
CONSOLIDATED BALANCE SHEET (CONTINUED)
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
However, the payment of the fees is shown as a use of cash on the
accompanying proforma consolidated balance sheet as of September 30, 1997.
6. Reflects the sale of one of the ten QuikTrip properties, the sale of the
Summer Breeze property and the GRCAA transaction. See "Recent
Activities -- Financing Activities - - Private Equity Issuance." Excludes
the sale of the Shannon Crossing property which will not occur until late
in calendar 1998.
S-33
<PAGE> 34
GLENBOROUGH REALTY TRUST INCORPORATED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OTHER
COMPLETED PENDING DEBT TRANS- ADJUST- PRO
HISTORICAL(1) TRANSACTIONS(2) ACQUISITIONS(3) ACTIONS(4) MENTS(5) FORMA
------------- --------------- --------------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Rental revenue........ $35,899 $93,794 $15,781 $ -- $ (1,475) $143,999
Equity in earnings of
Associated
Companies.......... 1,942 -- -- -- 279 2,221
Fees, interest and other
income................ 1,739 -- -- -- (50) 1,689
---------- ------- ------- ------- -------- ----------
Total
Revenue..... 39,580 93,794 15,781 -- (1,246) 147,909
---------- ------- ------- ------- -------- ----------
OPERATING EXPENSES
Operating expenses.... 11,282 31,858 5,272 -- (349) 48,063
General and
administrative..... 2,031 986 170 -- -- 3,187
Depreciation and
amortization....... 8,867 17,662 3,121 -- (300) 29,350
Interest expense...... 6,416 27,281 2,540 (6,266) (420) 29,551
---------- ------- ------- ------- -------- ----------
Total
operating
expenses.... 28,596 77,787 11,103 (6,266) (1,069) 110,151
---------- ------- ------- ------- -------- ----------
Income from operations
before minority
interest........... 10,984 16,007 4,678 6,266 (177) 37,758
Minority interest..... (689) -- -- -- (1,861) (2,550)
---------- ------- ------- ------- -------- ----------
Net income(6)......... $10,295 $16,007 $ 4,678 $ 6,266 $ (2,038) $ 35,208
========== ======= ======= ======= ======== ==========
Preferred Dividends... -- -- -- -- (11,250) (11,250)
---------- ------- ------- ------- -------- ----------
Net income allocable
to common
shareholders....... $10,295 $16,007 $ 4,678 $ 6,266 $(13,288) $ 23,958
========== ======= ======= ======= ======== ==========
Primary net income per
common share(7).... $ 0.71 $ 0.74
========== ==========
Primary weighted
average common
shares
outstanding(7)..... 14,512,987 32,158,512
========== ==========
</TABLE>
S-34
<PAGE> 35
GLENBOROUGH REALTY TRUST INCORPORATED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OTHER
COMPLETED PENDING DEBT TRANS- ADJUST- PRO
HISTORICAL(1) TRANSACTIONS(2) ACQUISITIONS(3) ACTIONS(4) MENTS(5) FORMA
------------- --------------- --------------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Rental revenue........ $17,943 $149,577 $20,252 $ -- $(2,700) $185,072
Equity in earnings of
Associated
Companies.......... 1,598 -- -- -- 29 1,627
Fees, interest and
other income....... 1,391 -- -- -- (258) 1,133
--------- -------- ------- ------- -------- ----------
Total
Revenue..... 20,932 149,577 20,252 -- (2,929) 187,832
--------- -------- ------- ------- -------- ----------
OPERATING EXPENSES
Operating expenses.... 5,266 50,534 7,194 -- (615) 62,379
General and
administrative..... 1,393 1,714 227 -- -- 3,334
Depreciation and
amortization....... 4,575 29,794 4,161 -- (562) 37,968
Interest expense...... 3,913 36,585 3,361 (5,986) (738) 37,135
--------- -------- ------- ------- -------- ----------
Total
operating
expenses.... 15,147 118,627 14,943 (5,986) (1,915) 140,816
--------- -------- ------- ------- -------- ----------
Income from operations
before minority
interest........... 5,785 30,950 5,309 5,986 (1,014) 47,016
Minority interest..... (292) -- -- -- (3,047) (3,339)
--------- -------- ------- ------- -------- ----------
Net income(6)......... $5,493 $30,950 $5,309 $5,986 $(4,061) $43,677
--------- -------- ------- ------- -------- ----------
Preferred Dividends... -- -- -- -- (15,000) (15,000)
--------- -------- ------- ------- -------- ----------
Net income allocable
to common
shareholders....... $5,493 $30,950 $5,309 $5,986 $(19,061) $28,677
--------- -------- ------- ------- -------- ----------
Primary net income per
common share(7).... $0.83 $0.89
--------- ----------
Primary weighted
average common
shares
outstanding(7)..... 6,632,707 32,158,512
--------- ----------
</TABLE>
S-35
<PAGE> 36
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS)
1. Reflects the historical consolidated operations of the Company for the nine
months ended September 30, 1997, excluding the gains on the sale of property
and the collection of a mortgage loan receivable totaling $1,207, and
reflects the historical consolidated operations of the Company for the year
ended December 31, 1996, excluding the gain on the sale of property of $321,
an extraordinary loss on refinancing of debt of $186, consolidation costs of
$6,082 and litigation costs of $1,155. Consolidation and litigation costs are
all related to the formation of the Company and are non-recurring.
2. Reflects the historical operations of the Windsor Portfolio, Marion Bass
Portfolio, Opus Portfolio, Thousand Oaks, Bryant Lake and Copley Properties
(collectively the "Recent 1997 Acquisitions") for the nine months ended
September 30, 1997, as well as the historical operations of the Citibank Park
Property, Advance Properties, T. Rowe Price Properties, Centerstone Property,
CRI Properties, CIGNA Properties, E&L Properties, Riverview Property, Lennar
Properties and the Scottsdale Hotel (collectively, the "Prior 1997
Acquisitions") for the nine months ended September 30, 1997 or portion of
1997 prior to acquisition.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
(OR PORTION OF 1997 PRIOR TO ACQUISITION)
--------------------------------------------------------------------------------------------------
WINDSOR MARION BASS OPUS THOUSAND COPLEY PRIOR 1997 COMBINED
PORTFOLIO PORTFOLIO PORTFOLIO OAKS BRYANT LAKE PROPERTIES ACQUISITIONS TOTAL
---------- ----------- --------- -------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........... $ 40,713 $ 7,160 $ 796 $ 4,658 $ 1,298 $5,115 $ 34,054 $ 93,794
Operating
expenses......... (15,195) (2,804) -- (1,776) (490) (1,010) (10,583) (31,858)
-------- -------- -------- ------- ------
$ 25,518 $ 4,356 $ 796 $ 2,882 $ 808 $4,105 $ 23,471 $ 61,936
======== ======== ======== ======= ======
</TABLE>
Reflects the historical operations of the Recent 1997 Acquisitions and the
Prior 1997 Acquisitions for the year ended December 31, 1996 and the
historical operations of the Carlsberg Properties, TRP Properties, Bond
Street Property, Kash n' Karry Property, San Antonio Hotel and UCT Property
(collectively, the "1996 Acquisitions") for the portion of 1996 prior to
acquisition.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
(OR PORTION OF 1996 PRIOR TO ACQUISITION)
----------------------------------------------------------------------------
WINDSOR MARION BASS OPUS THOUSAND COPLEY
PORTFOLIO PORTFOLIO PORTFOLIO OAKS BRYANT LAKE PROPERTIES
------------ ----------- --------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 53,738 $ 9,351 $ 80 $ 5,778 $ 1,778 $ 6,460
Operating expenses............ (19,914) (3,271) -- (2,164) (612) (1,216)
-------- ------- -------- ------- ------ -------
$ 33,824 $ 6,080 $ 80 $ 3,614 $ 1,166 $ 5,244
======== ======= ======== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
(OR PORTION OF 1996 PRIOR TO ACQUISITION)
----------------------------------------------------------------------------
PRIOR 1997 1996 COMBINED
ACQUISITIONS ACQUISITIONS TOTAL
------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 60,449 $11,943 $ 149,577
Operating expenses............ (19,033) (4,324) (50,534)
-------- ------- --------
$ 41,416 $ 7,619 $ 99,043
======== ======= ========
</TABLE>
The results of operations of the Windsor Portfolio for the year ended
December 31, 1996 include estimates for certain properties not acquired by
Windsor until 1997.
The results of operations of the Opus Portfolio reflect the period from the
date of completion to the end of the periods presented. All properties are
single tenant buildings under triple net leasing arrangements for which the
tenant is responsible for the payment of all operating expenses.
S-36
<PAGE> 37
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS)
Certain of the T. Rowe Price Properties' operating results reflect the year
ended September 30, 1996 rather than December 31, 1996. These have been
combined as if the year ends of all properties were the same. In the
opinion of management, the operations of these properties is not seasonal.
Also, reflects estimated annual depreciation and amortization, based upon
estimated useful lives of 30-40 years on a straight-line basis and
estimated pro forma general and administrative expenses related to these
acquisitions.
Also, reflects the estimated pro forma interest on the mortgage debt
assumed in connection with the acquisition of the Windsor Portfolio, Marion
Bass Portfolio, Advance Properties, E&L Properties, Scottsdale Hotel, TRP
Properties and Carlsberg Properties; the Interim Loan and the pro forma
advances under the Acquisition Credit Facility in connection with the
various 1998, 1997 and 1996 completed property acquisitions. The estimated
interest on the mortgage loans assumed is based upon an assumed weighted
average rate of 7.72%. The Acquisition Credit Facility bears interest on a
sliding scale ranging from LIBOR plus 0.8% to LIBOR plus 1.3% (assumed to
be 6.850% for the nine months ended September 30, 1997 and 6.525% for the
year ended December 31, 1996). A 1/8% change in LIBOR would cause the
interest expense on the outstanding pro forma balance of the Acquisition
Credit Facility as of September 30, 1997 to change by $235 on an annualized
basis. The Interim Loan bears interest at LIBOR plus 1.75% (assumed to be
7.50% for the nine months ended September 30, 1997 and 7.175% for the year
ended December 31, 1996.) A 1/8% change in LIBOR would cause the interest
expense on the outstanding pro forma balance of the Interim Loan as of
September 30, 1997 to change by $113 on an annualized basis.
3. Reflects the historical operations of the Pru-Bache Portfolio, Eaton & Lauth
Portfolio and Capitol Center (the "Pending Acquisitions") for the nine months
ended September 30, 1997 and for the year ended December 31, 1996,
respectively.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
-----------------------------------------------------------
PRU-BACHE EATON & LAUTH COMBINED
PROPERTIES PORTFOLIO CAPITOL CENTER TOTAL
--------- ------------- -------------- --------
<S> <C> <C> <C> <C>
Revenues........................... $ 5,242 $ 8,762 $ 1,777 $15,781
Operating expenses................. (1,915) (2,593) (764) (5,272)
------- ------- ------- -------
$ 3,327 $ 6,169 $ 1,013 $10,509
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------------------------------------------------
PRU-BACHE EATON & LAUTH COMBINED
PROPERTIES PORTFOLIO CAPITOL CENTER TOTAL
--------- ------------- -------------- --------
<S> <C> <C> <C> <C>
Revenues........................... $ 6,379 $11,512 $ 2,361 $20,252
Operating expenses................. (2,682) (3,470) (1,042) (7,194)
------- ------- ------- -------
$ 3,697 $ 8,042 $ 1,319 $13,058
======= ======= ======= =======
</TABLE>
Also, reflects estimated annual depreciation and amortization, based upon
estimated useful lives of 30 years on a straight-line basis and estimated
general and administrative expenses related to these acquisitions.
S-37
<PAGE> 38
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS)
Also, reflects the estimated interest on the assumption of approximately
$36,300 in debt in connection with the acquisition of the Eaton & Lauth
Portfolio and Capitol Center. The weighted average interest rate on the
assumed debt is 7.83%.
4. Reflects the estimated pro forma interest and the related effect on loan
fee amortization expense on the repayment of the Company's original secured
bank line with the borrowings on the Company's previous line of credit for
the year ended December 31, 1996. Also, reflects the estimated pro forma
interest and the related effect on loan fee amortization expense on the
repayment of the previous line of credit, a $114 million interim unsecured
loan, certain mortgage debt and a portion of the Interim Loan from proceeds
from the October 1997 Offering and the Offering for the nine months ended
September 30, 1997 and the year ended December 31, 1996. Also reflects the
pro forma loan fee amortization expense and unused facility fees related to
the Acquisition Credit Facility for each of the periods presented. These
transactions result in a net decrease in interest expense consisting of the
following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Interest differential.............................. $ 3,115 $ 5,739
Interest on repayments............................. (9,652) (12,158)
Amortization of new loan fees...................... 267 414
Amortization of old loan fees...................... (66) (74)
Unused Acquisition Credit Facility fees............ 70 93
------- --------
$(6,266) $ (5,986)
======= ========
</TABLE>
The Interim Loan bears interest at LIBOR plus 1.75% (assumed to be 7.50%
for the nine months ended September 30, 1997 and 7.175% for the year ended
December 31, 1996) and has a term of three months with an option to extend
the term to three additional months.
A $114 million interim unsecured loan and the Company's previous line of
credit have no net impact on pro forma interest expense as these loans were
repaid in full from proceeds of the October 1997 Offering.
The amortization of the new loan fees is based upon total estimated fees
and costs of approximately $2,163 over the respective terms of the related
Acquisition Credit Facility and the Interim Loan. The unused Acquisition
Credit Facility fees are based upon 0.15% of the pro forma unused
Acquisition Credit Facility capacity as of September 30, 1997 of
approximately $62.
S-38
<PAGE> 39
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS)
5. Reflects the following adjustments:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Rental Revenue
Elimination of revenues of sold properties.......... $ (1,475) $ (2,700)
======= =====
Equity in earnings of the Associated Companies
GHG
Addition of the Scottsdale & San Antonio
Hotels......................................... 77 10
Disposition of properties from the managed
portfolio...................................... (27) (93)
GC
Addition of the Carlsberg fee managed
properties..................................... -- 141
Elimination of revenues related to sale of
properties managed by the Associated
Companies...................................... (1,228) (1,852)
Elimination of expenses related to sale of
properties managed by the Associated
Companies...................................... 1,667 1,846
------- -----
Net decrease in income......................... 489 52
Provision for income taxes..................... (210) (23)
------- -----
Net decrease in equity in earnings to the Company..... $ 279 $ 29
======= =====
Fees, interest and other income
Additional Interest on Grunow note receivable
relating to the Carlsberg Properties acquisition
at 11% per annum................................. $ -- $ 347
Reduction of interest due to collection of Hovpark
note receivable at 8% per annum.................. (50) (605)
------- -----
Net decrease in fees, interest and other income....... $ (50) $ (258)
======= =====
Operating expenses
Elimination of expenses of Sold Properties.......... $ (375) $ (700)
Additional expenses of the E&L Properties........... 26 85
------- -----
Net decrease in operating expenses.................... $ (349) $ (615)
======= =====
Depreciation and amortization
Elimination of expenses of Sold Properties.......... $ (300) $ (562)
======= =====
Interest expense and loan fee amortization expense
reduction due to repayment of mortgage debt from
proceeds from Sold Properties....................... $ (420) $ (738)
======= =====
</TABLE>
Excludes the effects of the sale of the Shannon Crossing Property
which will not occur until late 1998.
S-39
<PAGE> 40
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES AND ADJUSTMENTS TO PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS)
6. The pro forma taxable income before dividends paid deduction for the
Company for the nine months ended September 30, 1997 and for the year ended
December 31, 1996 is calculated as follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Pro forma net income from operations.................. $ 35,208 $ 43,677
Add: GAAP basis depreciation and amortization....... 29,350 37,968
Less: Tax basis depreciation and amortization....... (21,249) (28,199)
Other book-to-tax differences....................... (900) 255
------- -------
Pro forma taxable income............................ $ 42,409 $ 53,701
======= =======
</TABLE>
7. Primary per share amounts reflect the dilutive effects of outstanding stock
options on a historical basis as of September 30, 1997 and December 31,
1996, respectively based upon the average price per common share for the
period presented. Pro forma primary per share amounts for the same periods
assume an average price per share of $29.00. On an historical basis, there
was no dilutive effect resulting from the outstanding stock options for the
year ended December 31, 1996. The effects of the conversion of Operating
Partnership units and Series A Preferred Stock into Common Stock are either
anti-dilutive or not material in all periods presented.
The impact on reported per share amounts resulting from the adoption of
Statement of Financial Accounting Standards No. 128 -- "Earnings Per Share"
will not be material.
S-40
<PAGE> 41
DESCRIPTION OF SERIES A PREFERRED STOCK
The following summary sets forth the material terms and provisions of the
Series A Preferred Stock, and is qualified in its entirety by reference to the
terms and provisions of the Articles Supplementary relating to the Series A
Preferred Stock and the Company's Charter as amended, which are incorporated by
reference herein. The following description of the particular terms of the
Series A Preferred Stock supplements, and to the extent inconsistent therewith
replaces, the description of the general terms and provisions of the Preferred
Stock set forth in the accompanying Prospectus, to which description reference
is hereby made. Capitalized terms used below but not defined shall have the
meanings ascribed to them in the accompanying Prospectus.
GENERAL
Subject to limitations prescribed by Maryland law and the Company's
Charter, the Board of Directors is authorized to classify or reclassify and
issue, from the authorized but unissued capital stock of the Company, Preferred
Stock in such classes or series as the Board of Directors may determine and to
establish from time to time the number of shares of Preferred Stock to be
included in any such series and to fix the designation and any preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of the shares
of each such series. Thus, without stockholder approval, the Company could
authorize the issuance of Preferred Stock with voting, conversion and other
rights that could dilute the voting power and other rights of the holders of
Common Stock and Series A Preferred Stock.
The Board of Directors has authorized the Company to classify and issue the
Series A Preferred Stock. When issued, the Series A Preferred Stock will be
validly issued, fully paid and nonassessable. The holders of the Series A
Preferred Stock will have no preemptive rights with respect to any shares of the
capital stock of the Company or any other securities of the Company convertible
into or carrying rights or options to purchase any such shares. The Series A
Preferred Stock will not be subject to any sinking fund or other obligation of
the Company to redeem or retire the Series A Preferred Stock.
The transfer agent, registrar, dividend disbursing agent, conversion agent
and redemption agent for the Series A Preferred Stock, and the transfer agent,
registrar and distribution disbursing agent for the Common Stock is, Registrar
and Transfer Company, 10 Commerce Drive, Cranford, New Jersey 07016 (the
"Registrar and Transfer Agent").
The Series A Preferred Stock has been approved for listing on the New York
Stock Exchange, subject to official notice of issuance under the symbol "GLB Pr
A." The Common Stock issuable upon conversion or redemption of the Series A
Preferred Stock is listed on the NYSE under the symbol "GLB."
RANKING
The Series A Preferred Stock will rank senior to the Junior Stock (as
defined below), including the Common Stock, with respect to payment of dividends
and amounts upon liquidation, dissolution or winding up of the Company. While
any shares of Series A Preferred Stock are outstanding, the Company may not
authorize, create or increase the authorized amount of any class or series of
stock that ranks prior to or senior to the shares of Series A Preferred Stock
with respect to the payment of dividends or amounts upon liquidation,
dissolution or winding up without the consent of the holders of two-thirds of
the outstanding shares of Series A Preferred Stock and all other shares of
Voting Preferred Shares (defined below), voting as a single class. However, the
Company may create additional classes of stock, increase the authorized number
of shares of Preferred Stock or issue series of Preferred Stock ranking junior
to or on a parity with the Series A Preferred Stock with respect, in each case,
to the payment of dividends and amounts upon liquidation, dissolution and
winding up of the Company (a "Parity Stock") without the consent of any holder
of Series A Preferred Stock. See "Voting Rights" below.
S-41
<PAGE> 42
DIVIDENDS
Holders of shares of Series A Preferred Stock will be entitled to receive,
when, as and if declared by the Board of Directors of the Company, out of funds
of the Company legally available for payment thereof, cumulative cash dividends
payable in an amount per share equal to the greater of: (i) $ per
annum; or (ii) the cash distributions (determined on each of the quarterly
dividend payment dates referred to below) on the shares of Common Stock (or
portion thereof) into which a share of Series A Preferred Stock is convertible
(equal to the number of shares of Common Stock, or portion thereof, into which a
share of Series A Preferred Stock is convertible, multiplied by the most current
quarterly distribution on or before the applicable dividend payment date).
Dividends on the Series A Preferred Stock will be payable quarterly in arrears
on the 15th day (or the next succeeding business day) of January, April, July
and October, commencing April 15, 1998 with respect to the period commencing on
the date of issue and ending March 31, 1998 (and, in the case of any accumulated
or accrued but unpaid dividends, at such additional times and for such interim
periods, if any, as determined by the Board of Directors). Each such dividend
will be payable to holders of record as they appear on the stock records of the
Company at the close of business on such record dates, which will be no more
than 60 nor less than 20 days prior to the payment dates thereof, as shall be
fixed by the Board of Directors of the Company. Dividends will accrue from the
date of original issuance of the Series A Preferred Stock. Dividends will be
cumulative from such date, whether or not in any dividend period or periods such
dividends shall be declared or there shall be funds of the Company legally
available for the payment of such dividends. Accumulated dividends on shares of
Series A Preferred Stock will not bear interest. The first dividend will be for
less than a full quarter. Such dividend and any other dividends payable on the
Series A Preferred Stock for any period less than a full dividend period will be
computed pro-rata on the basis of twelve 30-day months and a 360-day year.
No dividend will be declared or paid or other distribution of cash or other
property declared or made directly by the Company or any person acting on behalf
of the Company on any Parity Stock unless full cumulative dividends have been
declared and paid or are contemporaneously declared and funds sufficient for
payment set aside on the Series A Preferred Stock for all prior and
contemporaneous dividend periods; provided, however, if accumulated and accrued
dividends on the Series A Preferred Stock for all prior and contemporaneous
dividend periods have not been paid in full, then any dividend declared on the
Series A Preferred Stock for any dividend period and on any Parity Stock will be
declared ratably in proportion to accumulated, accrued and unpaid dividends on
the Series A Preferred Stock and the Parity Stock.
Neither the Company nor any person acting on behalf of the Company will:
(i) declare, pay or set apart funds for the payment of any dividend or other
distribution of cash or other property declared or made directly or indirectly
by the Company or any such affiliate or person with respect to any Junior Stock;
or (ii) redeem, purchase or otherwise acquire for consideration any Junior Stock
through a sinking fund or otherwise (other than a redemption or purchase or
other acquisition of shares of Common Stock made for purposes of an employee
incentive or benefit plan of the Company or any subsidiary or as provided under
the Charter to protect the Company's status as a REIT); or (iii) pay or
distribute any cash or other property for the benefit of any holder of Junior
Stock in respect thereof, directly or indirectly, unless (a) all cumulative
dividends with respect to the Series A Preferred Stock and any Parity Stock at
the time such dividends are payable have been paid or such dividends have been
declared and funds have been set apart for payment of such dividends and (b)
sufficient funds have been paid or set apart for the payment of the dividend for
the current dividend period with respect to the Series A Preferred Stock and any
Parity Stock. The foregoing limitations do not restrict the Company's ability to
take the foregoing actions with respect to any Parity Stock.
As used herein: (i) the term "dividend" does not include dividends payable
solely in shares of Junior Stock on Junior Stock; or in options, warrants or
rights to holders of Junior Stock to subscribe for or purchase any Junior Stock;
and (ii) the term "Junior Stock" means the Common Stock, and any other class of
capital stock of the Company now or hereafter issued and outstanding that ranks
junior to the Series A Preferred Stock as to the payment of dividends or amounts
upon liquidation, dissolution or winding up of the Company.
S-42
<PAGE> 43
REDEMPTION
The Series A Preferred Stock is not redeemable prior to January , 2003.
On and after January , 2003, the shares of Series A Preferred Stock may be
redeemed at the option of the Company, in whole or from time to time in part, at
the following percentages of the Liquidation Preference if redeemed during the
twelve-month period beginning January of the year indicated below, plus, in each
case, all dividends accrued and unpaid on the Series A Preferred Stock to the
date fixed for such redemption (the "Redemption Date"), upon giving notice as
provided below:
<TABLE>
<CAPTION>
REDEMPTION PRICE PER
YEAR SHARE OF SERIES A PREFERRED STOCK
-------------------------------------------------- ----------------------------------
<S> <C>
2003.............................................. %
2004.............................................. %
2005.............................................. %
2006.............................................. %
2007.............................................. %
2008 and thereafter............................... 100.000%
</TABLE>
Notice of redemption will be mailed, not less than 30 nor more than 60 days
prior to the date fixed for redemption, to each holder of record of shares of
Series A Preferred Stock to be redeemed, notifying such holder of the Company's
election to redeem such shares, stating the Redemption Date, the redemption
price, the number of shares to be redeemed (and, if fewer than all the shares
are to be redeemed, the number of shares to be redeemed from such holder) and
the place(s) where the shares are to be surrendered for payment. If fewer than
all of the outstanding shares of Series A Preferred Stock are to be redeemed,
the shares to be redeemed will be determined pro rata or by lot or in such other
manner as prescribed by the Company's Board of Directors. In addition, the
Company may redeem Series A Preferred Stock in certain circumstances relating to
the maintenance of its ability to qualify as a REIT for federal income tax
purposes.
On the Redemption Date, the Company must pay in cash on each share of
Series A Preferred Stock to be redeemed any accumulated, accrued and unpaid
dividends, if any, on the Redemption Date, whether or not earned or declared. In
the case of a Redemption Date falling after a dividend record date and prior to
the related dividend payment date, the holders of the Series A Preferred Stock
at the close of business on such record date will be entitled to receive the pro
rata dividend payable on such shares on the corresponding dividend payment date,
notwithstanding the redemption of such shares following such dividend record
date. Except as provided for in the preceding sentences, no payment or allowance
will be made for accumulated or accrued dividends on any shares of Series A
Preferred Stock called for redemption or on the shares of Common Stock issuable
upon such redemption.
In the event that full cumulative dividends on the Series A Preferred Stock
and any Parity Stock have not been paid or declared and set apart for payment,
the Series A Preferred Stock may not be redeemed in part and the Company may not
purchase or acquire shares of Series A Preferred Stock otherwise than pursuant
to a purchase or exchange offer made on the same terms to all holders of shares
of Series A Preferred Stock.
On and after the Redemption Date, provided that the Company has made
available at the office of the Registrar and Transfer Agent a sufficient number
of shares of Common Stock and/or an amount of cash to effect the redemption,
dividends will cease to accumulate or accrue on the Series A Preferred Stock
called for redemption (except that, in the case of a Redemption Date after a
dividend record date and prior to the related dividend payment date, holders of
Series A Preferred Stock on the dividend record date will be entitled on such
dividend payment date to receive the dividend payable on such shares), such
shares shall no longer be deemed to be outstanding and all rights of the holders
of such shares of Series A Preferred Stock shall cease except the right to
receive the shares of Common Stock upon such redemption and/or any cash payable
upon such redemption, without interest from the date of such redemption. At the
close of business on the Redemption Date, each holder of Series A Preferred
Stock to be redeemed (unless the Company defaults in the delivery of the Common
Stock or cash) will be, without any further action, deemed a holder of the
number
S-43
<PAGE> 44
of shares of Common Stock and/or the amount of cash for which such Series A
Preferred Stock is redeemable.
Fractional shares of Common Stock will not be issued upon redemption of the
Series A Preferred Stock, but, in lieu thereof, the Company will pay an amount
in cash based on the current market price of the Common Stock on the day prior
to the redemption date.
LIQUIDATION PREFERENCE
The holders of shares of Series A Preferred Stock will be entitled to
receive in the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, $25.00 per share of Series A
Preferred Stock plus an amount per share of Series A Preferred Stock equal to
all dividends (whether or not earned or declared) accumulated, accrued and
unpaid thereon to the date of final distribution to such holders (the
"Liquidation Preference"), and no more.
Until the holders of the Series A Preferred Stock have been paid the
Liquidation Preference in full, no payment will be made to any holder of Junior
Stock upon the liquidation, dissolution or winding up of the Company. If, upon
any liquidation, dissolution or winding up of the Company, the assets of the
Company, or proceeds thereof, distributable among the holders of the shares of
Series A Preferred Stock are insufficient to pay in full the Liquidation
Preference and the liquidation preference with respect to any other shares of
Parity Stock, then such assets, or the proceeds thereof, will be distributed
among the holders of shares of Series A Preferred Stock and such Parity Stock
ratably in accordance with the respective amounts which would be payable on such
shares of Series A Preferred Stock and such Parity Stock if all amounts payable
thereon were paid in full. Neither a consolidation or merger of the Company with
another corporation, a statutory share exchange by the Company nor a sale or
transfer of all or substantially all of the Company's assets will be considered
a liquidation, dissolution or winding up, voluntary or involuntary, of the
Company. In determining whether a distribution (other than upon voluntary or
involuntary liquidation) by dividend, redemption or other acquisition of shares
of stock of the Company or otherwise is permitted under the Maryland General
Corporation Law, no effect shall be given to amounts that would be needed, if
the Company were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of holders of shares of stock of the
Company whose preferential rights upon dissolution are superior to those
receiving the distribution.
VOTING RIGHTS
Except as indicated below, the holders of Series A Preferred Stock will
have no voting rights.
If and whenever six quarterly dividends (whether or not consecutive)
payable on the Series A Preferred Stock or any other Parity Stock are in
arrears, whether or not earned or declared, the number of directors then
constituting the Board of Directors of the Company will be increased by two and
the holders of Series A Preferred Stock, voting together as a single class with
the holders of any other series of Parity Stock (any such other series, the
"Voting Preferred Shares"), will have the right to elect two additional
directors to serve on the Company's Board of Directors at an annual meeting of
stockholders or a properly called special meeting of the holders of the Series A
Preferred Stock and such Voting Preferred Shares and at each subsequent annual
meeting of stockholders or special meeting held in place thereof at which the
directors are to be elected, and which directors, as a qualification for
election, will agree to resign effective upon such time as all such dividends in
arrears and dividends for the current quarterly period on the Series A Preferred
Stock and such Voting Preferred Stock have been paid or declared and set aside
for payment.
The approval of two-thirds of the outstanding Series A Preferred Stock and
all other series of Voting Preferred Shares, similarly affected, voting as a
single class regardless of series, either at a meeting of stockholders or by
written consent, is required in order to amend the Charter and Articles
Supplementary to affect materially and adversely the rights, preferences or
voting powers of the holders of the Series A Preferred Stock or the Voting
Preferred Shares or to authorize, create, or increase the authorized amount of,
any class of stock having rights prior to or senior to the Series A Preferred
Stock with respect to the payment of dividends or amounts upon liquidation,
dissolution or winding up (provided that if such amendment affects materially
S-44
<PAGE> 45
and adversely the rights, preferences, privileges or voting powers of one or
more but not all of the series of Preferred Shares, the consent of the holders
of at least two-thirds of the outstanding shares of each such series affected is
required in lieu of (or, if such consent is required by law, in addition to) the
consent of the holders of two-thirds of the Preferred Shares as a class).
However, the Company may create additional classes of Parity and Junior Stock,
increase the authorized number of shares of Parity and Junior Stock and issue
additional series of Parity and Junior Stock without the consent of any holder
of Series A Preferred Stock.
The holders of Series A Preferred Stock will not be entitled to vote on any
merger or consolidation involving the Company or a sale of all or substantially
all of the assets of the Company, irrespective of the effect that such merger,
consolidation or sale may have upon the rights, preferences or voting power of
the holders of the Series A Preferred Stock or of the Voting Preferred Stock.
See "-- Conversion Price Adjustments" below.
CONVERSION RIGHTS
Shares of Series A Preferred Stock will be convertible, in whole or in
part, at any time, at the option of the holder thereof, into authorized but
previously unissued shares of Common Stock at an initial conversion price of
$ per share of Common Stock (equivalent to a conversion rate of of a
share of Common Stock for each share of Series A Preferred Stock), subject to
adjustment as described below ("Conversion Price"). The right to convert Series
A Preferred Stock called for redemption will terminate at the close of business
on the Redemption Date. For information as to notices of redemption, see
"Redemption" above.
Conversion of shares of Series A Preferred Stock, or a specified portion
thereof, may be effected by delivering certificates evidencing such shares,
together with written notice of conversion and a proper assignment of such
certificates to the Company or in blank, to the office of the Company at 400
South El Camino Real, 11th Floor, San Mateo, California 94402 or to the office
of the Registrar and Transfer Agent at 10 Commerce Drive, Cranford, New Jersey
07016.
Each conversion will be deemed to have been effected immediately prior to
the close of business on the date on which the certificates for Series A
Preferred Stock shall have been surrendered and notice shall have been received
by the Company as aforesaid (and if applicable, payment of any amount equal to
the dividend payable on such shares shall have been received by the Company as
described below) and the conversion shall be at the Conversion Price in effect
at such time and on such date.
Holders of Series A Preferred Stock at the close of business on a dividend
record date will be entitled to receive the dividend payable on such shares on
the corresponding dividend payment date notwithstanding the conversion of such
shares following such dividend record date and prior to such dividend payment
date. However, Series A Preferred Stock surrendered for conversion during the
period between the close of business on any dividend record date and the opening
of business on the corresponding dividend payment date (except shares converted
after the issuance of a notice of redemption with respect to a Redemption Date
during such period or coinciding with such dividend payment date, which will be
entitled to such dividend) must be accompanied by payment of an amount equal to
the dividend payable on such shares on such dividend payment date. A holder of
Series A Preferred Stock on a dividend record date who (or whose transferee)
tenders any such shares for conversion into shares of Common Stock on such
dividend payment date will receive the dividend payable by the Company on such
shares of Series A Preferred Stock on such date, and the converting holder need
not include payment of the amount of such dividend upon surrender of Series A
Preferred Stock for conversion. Except as provided above, the Company will make
no payment or allowance for unpaid dividends, whether or not in arrears, on
converted shares or for dividends on the Common Stock issued upon such
conversion.
Fractional shares of Common Stock are not to be issued upon conversion but,
in lieu thereof, the Company will pay a cash adjustment based on the closing
price of the Common Stock on the New York Stock Exchange on the trading day
prior to the conversion date.
S-45
<PAGE> 46
CONVERSION PRICE ADJUSTMENTS
The Conversion Price is subject to adjustment upon certain events,
including: (i) the payment of dividends (and other distributions) payable in
Common Stock on any class of shares of capital stock of the Company; (ii) the
issuance to all holders of Common Stock of certain rights or warrants entitling
them to subscribe for or purchase Common Stock at a price per share less than
the fair market value (as defined in the Articles Supplementary) per share of
Common Stock (but excluding issuances of Common Stock pursuant to the Company's
dividend reinvestment plan); (iii) subdivisions, combinations and
reclassifications of Common Stock; and (iv) distributions to all holders of
Common Stock of evidences of indebtedness of the Company or of assets (including
securities or cash, but excluding those dividends, rights, warrants and
distributions referred to in clause (i), (ii) or (iii) above and excluding cash
dividends out of current or accumulated funds from operations to the extent the
same result in a payment of an equal cash dividend to the holders of shares of
Series A Preferred Stock). In addition to the foregoing adjustments, the Company
will be permitted to make such reductions in the Conversion Price as it
considers to be advisable in order that any event treated for federal income tax
purposes as a dividend of stock or stock rights will not be taxable to the
holders of the Common Stock, or, if that is not possible, to diminish any income
taxes that are otherwise payable because of such event.
In case the Company shall be a party to any transaction (including, without
limitation, a merger, consolidation, statutory share exchange, tender offer for
all or substantially all of the shares of Common Stock or sale of all or
substantially all of the Company's assets), in each case as a result of which
shares of Common Stock will be converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
share of Series A Preferred Stock, if convertible after the consummation of the
transaction, will thereafter be convertible into the kind and amount of shares
of stock, securities and other property receivable (including cash or any
combination thereof) upon the consummation of such transaction by a holder of
that number of shares or fraction thereof of Common Stock into which one share
of Series A Preferred Stock was convertible immediately prior to such
transaction (assuming such holder of Common Stock failed to exercise any rights
of election and received per share the kind and amount of stock, securities and
other property (including cash or any combination thereof) received per share by
a plurality of non-electing shares). The Company may not become a party to any
such transaction unless the terms thereof are consistent with the foregoing.
No adjustment of the Conversion Price is required to be made in any case
until cumulative adjustments amount to 1% or more of the Conversion Price. Any
adjustments not so required to be made will be carried forward and taken into
account in subsequent adjustments.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% of
the value of its outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year) or during a proportionate part of a shorter taxable year. To enable the
Company to continue to qualify as a REIT, the Charter restricts the acquisition
of shares of Common Stock and Preferred Stock. The Charter provides that,
subject to certain exceptions specified in the Charter, no stockholder may own,
or be deemed to own by virtue of the attribution provisions of the Code, more
than 9.9% of the value of the outstanding Common Stock and Preferred Stock,
including the Series A Preferred Stock offered hereby, of the Company. See
"Description of Common Stock -- Restrictions on Transfer" in the accompanying
Prospectus.
S-46
<PAGE> 47
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations is based
on current law, is for general information only, and is not tax advice. This
discussion supplements, and to the extent inconsistent therewith, supersedes the
discussion set forth in the accompanying Prospectus under the heading "Federal
Income Tax Consequences." Furthermore, this discussion does not purport to deal
with all aspects of taxation that may be relevant to particular shareholders in
light of their personal investment or tax circumstances, or to certain types of
stockholders (including insurance companies, tax-exempt organizations, financial
institutions or broker dealers, foreign corporations and persons who are not
citizens or residents of the United States) subject to special treatment under
the federal income tax laws. This discussion does not discuss foreign, state, or
local taxation, and this discussion only deals with shares of Series A Preferred
Stock held as "capital assets" within the meaning of Section 1221 of the Code.
This Prospectus Supplement does not address the taxation of the Company or
the impact on the Company of its election to be taxed as a REIT. Such matters
are addressed in the accompanying Prospectus under "Federal Income Tax
Consequences -- Taxation of the Company." Prospective investors should consult,
and must depend on, their own tax advisors regarding the federal, state, local,
foreign and other tax consequences of holding and disposing of Series A
Preferred Stock.
Dividends, Other Distributions and Adjustments in Conversion Price. For a
discussion regarding the taxation of dividends and other distributions, see
"Federal Income Tax Consequences -- Taxation of Stockholders" in the
accompanying Prospectus. In addition, holders of Series A Preferred Stock may be
deemed, in certain circumstances, to have received a dividend (without a
corresponding cash distribution) upon an adjustment in the Conversion Price that
is attributable to distributions on shares of Common Stock. See "Description of
Series A Preferred Stock -- Conversion Price Adjustments."
Backup Withholding. For a discussion of backup withholding, see "Federal
Income Tax Consequences -- Taxation of Stockholders -- Backup Withholding" in
the accompanying Prospectus.
Sale or Exchange of Series A Preferred Stock. Upon the sale or exchange of
Series A Preferred Stock to a party other than the Company, a holder of Series A
Preferred Stock will realize a gain or loss measured by the difference between
the amount realized on the sale or other disposition and the holder's adjusted
tax basis in the Series A Preferred Stock. Any gain or loss realized will
generally be capital gain or loss. The recently enacted Taxpayer Relief Act of
1997 made certain changes to the Code with respect to the taxation of capital
gains of noncorporate taxpayers. In general, the maximum tax rate for
noncorporate taxpayers on long-term capital gain has been lowered to 20% from
the previous 28% rate with respect to capital assets (including the Series A
Preferred Stock), but only if they have been held for more than 18 months at the
time of disposition. Capital gain on assets sold on or after July 29, 1997,
having a holding period of more than one year but not more than 18 months will
be taxed as "mid-term gain" at a maximum 28% rate.
Redemption of Series A Preferred Stock. The treatment to be accorded to any
redemption by the Company of Series A Preferred Stock can only be determined on
the basis of particular facts as to each holder of Series A Preferred Stock at
the time of redemption. In general, a holder of Series A Preferred Stock will
recognize capital gain or loss measured by the difference between the amount
realized by the holder upon the redemption and such holder's adjusted tax basis
in the Series A Preferred Stock redeemed (provided the shares of Series A
Preferred Stock are held as a capital asset) if such redemption: (i) results in
a "complete termination" of the holder's interest in all classes of shares of
the Company under Section 302(b)(3) of the Code; (ii) is "substantially
disproportionate" with respect to the holder's interest in the Company under
Section 302(b)(2) of the Code (which will not be the case if only Series A
Preferred Stock are redeemed, since they generally do not have voting rights);
or (iii) is "not essentially equivalent to a dividend" with respect to the
holder of Series A Preferred Stock under Section 302(b)(1) of the Code. In
determining whether any of these tests have been met, shares considered to be
owned by the holder by reason of certain constructive ownership rules set forth
in the Code, as well as shares actually owned, must generally be taken into
account. Because the determination as to whether any of the alternative tests of
Section 302(b) of the Code will be satisfied with respect to any particular
holder of Series A Preferred Stock depends upon the facts and circumstances at
the time when the determination must be made, prospective investors are advised
to consult their own tax advisors to determine such tax treatment.
S-47
<PAGE> 48
Conversion of Series A Preferred Stock. Generally, no gain or loss will be
recognized by a holder that converts Series A Preferred Stock into shares of
Common Stock. Such holder's tax basis in the shares of Common Stock received
upon the conversion will be the same as the holder's tax basis in the converted
shares of Series A Preferred Stock, reduced by any cash received in lieu of a
fractional share of Common Stock. Such holder's holding period for such shares
of Common Stock will include the holder's holding period for the converted
shares of Series A Preferred Stock. A holder receiving cash in lieu of a
fractional share of Common Stock will generally recognize gain or loss equal to
the difference between the amount of cash so received and the holder's tax basis
in the converted shares of Series A Preferred Stock allocable to such fractional
share of Common Stock.
S-48
<PAGE> 49
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Bear, Stearns &
Co. Inc. ("Bear Stearns"), Smith Barney Inc., BancAmerica Robertson Stephens and
BT Alex. Brown Incorporated are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase from the Company the number of shares
of Series A Preferred Stock set forth opposite their respective names below. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent, and that the Underwriters are committed
to purchase all of such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF SERIES A
UNDERWRITER PREFERRED STOCK
------------------------------------------------------------- ----------------
<S> <C>
Bear, Stearns & Co. Inc......................................
Smith Barney Inc.............................................
BancAmerica Robertson Stephens...............................
BT Alex. Brown Incorporated..................................
---------
Total.............................................. 8,000,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the Series A Preferred Stock to the public at the public offering price
set forth on the cover page of this Prospectus Supplement and to certain dealers
at that price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share on sales to certain other dealers. After the initial
offering to the public, the public offering price, concession and discount may
be changed.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus Supplement, to purchase up to 1,200,000
additional shares of Common Stock (the "Option Shares") to cover
over-allotments, if any, at the public offering price per share set forth on the
cover page of this Prospectus Supplement, less the underwriting discount. If the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage of total Option Shares that the number of shares of Common Stock to
be purchased by it shown in the foregoing table bears to the number of shares of
Series A Preferred Stock initially offered hereby.
In the Underwriting Agreement, the Company and the Operating Partnership
have agreed to indemnify the several Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments the Underwriters may be required to make in respect
thereof.
The Company and the Operating Partnership have agreed not to, directly or
indirectly, issue, sell, offer or agree to sell, grant any option to purchase,
or otherwise dispose (or announce any offer, sale, grant of an option to
purchase or other disposition) of, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock for a period of
60 days after the date of this Prospectus Supplement without the prior written
consent of Bear Stearns (except for issuances by the Company upon the exercise
of outstanding stock options, in connection with bona fide acquisitions of real
property or interests therein, of shares of Common Stock or partnership units in
the Operating Partnership such that the aggregate number of shares of Common
Stock issued, or which may be issued upon conversion or exchange of such units,
will not exceed 3,500,000).
S-49
<PAGE> 50
In order to facilitate an offering of Series A Preferred Stock, certain
persons participating in the Offering may engage in transactions that stabilize,
maintain, or otherwise affect the price of the Series A Preferred Stock or
Common Stock during and after the Offering. Specifically, the Underwriters may
over-allot or otherwise create short positions in the Series A Preferred Stock
or Common Stock for their own accounts by selling more shares of Series A
Preferred Stock than have been sold to them by the Company. The Underwriters may
elect to cover any such short position by purchasing shares of Series A
Preferred Stock or Common Stock in the open market or by exercising any
over-allotment option granted to the Underwriters to acquire additional shares
of Series A Preferred Stock. In addition, such persons may stabilize or maintain
the price of the Series A Preferred Stock or Common Stock by bidding for or
purchasing shares of Series A Preferred Stock or Common Stock in the open market
and may impose penalty bids, under which selling concessions allowed to
syndicate members or other broker-dealers participating in the Offering are
reclaimed if shares of Series A Preferred Stock previously distributed in the
Offering are repurchased in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price of the Series A Preferred Stock or Common Stock at a level above
that which might otherwise prevail in the open market. The imposition of a
penalty bid may also affect the price of the Series A Preferred Stock or Common
Stock to the extent that it discourages resales thereof. No representation is
made as to the magnitude or effect of any such stabilization or other
transactions. Such transactions may be effected on the NYSE or otherwise and, if
commenced, may be discontinued at any time.
The Series A Preferred Stock has been approved for listing on the New York
Stock Exchange, subject to official notice of issuance. The Series A Preferred
Stock is a new issue of securities with no established trading market. The
Company has been advised by the Representatives of the Underwriters that the
Representatives intend to make a market in the Series A Preferred Stock but are
not obligated to do so and may discontinue market making at any time without
notice. No assurance can be given as to the liquidity of the trading market for
the Series A Preferred Stock. The Common Stock issuable upon conversion or
redemption of the Series A Preferred Stock is listed on the NYSE.
Bear Stearns and BancAmerica Robertson Stephens have provided various
financial advisory services to the Company or affiliates of the Company, for
which they have received customary compensation. Bear, Stearns Funding, Inc., an
affiliate of Bear Stearns, has loaned the Company $20,000,000 at an interest
rate of 7.57% with a maturity date of January 1, 2006. Bear, Stearns Funding,
Inc. has also made certain loans to limited partnerships for which GC provides
management services.
S-50
<PAGE> 51
LEGAL MATTERS
The legality of the Series A Preferred Stock offered by this Prospectus
Supplement will be passed upon for the Company by Morrison & Foerster LLP, Palo
Alto, California, and certain matters will be passed upon for the Underwriters
by Latham & Watkins, San Francisco, California. Morrison & Foerster LLP will
rely upon the opinion of Hogan & Hartson LLP, Baltimore, Maryland as to certain
matters of Maryland law. In addition, Morrison & Foerster LLP will provide an
opinion as the basis of the description of federal income tax consequences
contained in the accompanying Prospectus in the section entitled "Federal Income
Tax Consequences."
EXPERTS
The financial statements of the Company, the GRT Predecessor Entities,
Glenborough Hotel Group, Atlantic Pacific Assurance Company Limited and
Glenborough Inland Realty Corporation and related financial statement schedules
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996, incorporated by reference herein, have been audited by Arthur Andersen
LLP, independent public accountants, to the extent and for the periods indicated
in their reports, and have been incorporated herein in reliance on such reports
given on the authority of that firm as experts in accounting and auditing.
In addition, the respective statements of revenues and certain expenses of
the Eaton & Lauth Portfolio, the Pru-Bache Portfolio and Bryant Lake, the Marion
Bass Portfolio, the Windsor Portfolio, the Opus Portfolio and Thousand Oaks
included in this Prospectus Supplement, to the extent and for the periods
indicated in their reports, have also been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance on such
reports given on the authority of that firm as experts in accounting and
auditing.
In addition, the respective statements of revenues and certain expenses of
the UCT Property, the TRP Properties, the Carlsberg Properties, the CIGNA
Properties, the E&L Properties, the Lennar Properties, the Riverview Property,
the T. Rowe Price Properties, and the Centerstone Property, the Advance
Properties, Citibank Park, the Copley Properties, the Marion Bass Portfolio, the
Windsor Portfolio, the Opus Portfolio, Thousand Oaks, the CRI Properties and
Bryant Lake included in various Current Reports on Form 8-K/A and Form 8-K,
incorporated by reference herein, have also been audited by Arthur Andersen LLP,
independent public accountants, to the extent and for the periods indicated in
their reports, and have been incorporated herein, in reliance on such reports
given on the authority of that firm as experts in accounting and auditing.
S-51
<PAGE> 52
GLENBOROUGH REALTY TRUST INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
</TABLE>
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
OF THE WINDSOR PORTFOLIO, GROUPS A AND B
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-3
Combined Statements of Revenues and Certain Expenses of the Windsor Portfolio, Groups
A and B, for the year ended December 31, 1996 and the nine months ended September
30, 1997, respectively.............................................................. F-4
Notes to Combined Statements of Revenues and Certain Expenses of the Windsor
Portfolio, Groups A and B, for the year ended December 31, 1996 and the nine months
ended September 30, 1997, respectively.............................................. F-5
</TABLE>
COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
OF THOUSAND OAKS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-7
Combined Statement of Revenues and Certain Expenses of Thousand Oaks for the nine
months ended September 30, 1997 and for the year ended December 31, 1996............ F-8
Notes to Combined Statement of Revenues and Certain Expenses of Thousand Oaks for the
nine months ended September 30, 1997 and for the year ended December 31, 1996....... F-9
</TABLE>
COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
OF THE MARION BASS PORTFOLIO
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-10
Combined Statement of Revenues and Certain Expenses of the Marion Bass Portfolio for
the nine months ended September 30, 1997 and for the year ended December 31, 1996... F-11
Notes to Combined Statement of Revenues and Certain Expenses of the Marion Bass
Portfolio for the nine months ended September 30, 1997 and for the year ended
December 31, 1996................................................................... F-12
</TABLE>
COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
OF THE OPUS PORTFOLIO
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-13
Combined Statement of Revenues and Certain Expenses of the Opus Portfolio for the nine
months ended September 30, 1997..................................................... F-14
Notes to Combined Statement of Revenues and Certain Expenses of the Opus Portfolio for
the nine months ended September 30, 1997............................................ F-15
</TABLE>
F-1
<PAGE> 53
COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
OF THE EATON & LAUTH PORTFOLIO
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-16
Combined Statement of Revenues and Certain Expenses of the Eaton & Lauth Portfolio for
the nine months ended September 30, 1997 and for the year ended December 31, 1996... F-17
Notes to Combined Statement of Revenues and Certain Expenses of the Eaton & Lauth
Portfolio for the nine months ended September 30, 1997 and for the year ended
December 31, 1996................................................................... F-18
</TABLE>
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
OF THE PRU-BACHE PORTFOLIO AND BRYANT LAKE
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-20
Combined Statements of Revenues and Certain Expenses of the Pru-Bache Portfolio and
Bryant Lake for the nine months ended September 30, 1997 and for the years ended
December 31, 1996, 1995 and 1994.................................................... F-21
Notes to Combined Statements of Revenues and Certain Expenses of the Pru-Bache
Portfolio and Bryant Lake for the nine months ended September 30, 1997 and for the
years ended December 31, 1996, 1995 and 1994........................................ F-22
</TABLE>
F-2
<PAGE> 54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Glenborough Realty Trust Incorporated:
We have audited the accompanying combined statements of revenues and
certain expenses of the Windsor Portfolio, Groups A and B, as defined in Note 1,
for the year ended December 31, 1996 and the nine months ended September 30,
1997, respectively. These combined financial statements are the responsibility
of the management of the Company. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying combined statements of revenues and certain expenses have
been prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and are not intended
to be a complete presentation of the revenues and expenses of the Windsor
Portfolio, Groups A and B.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the revenues and certain expenses of the
Windsor Portfolio, Groups A and B for the year ended December 31, 1996 and the
nine months ended September 30, 1997, respectively, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 8, 1998
F-3
<PAGE> 55
GLENBOROUGH REALTY TRUST INCORPORATED
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES OF
THE WINDSOR PORTFOLIO, GROUPS A AND B
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROUP A GROUP B
NINE MONTHS ENDED GROUP A NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
1997 DECEMBER 31, 1996 1997
(UNAUDITED) (AUDITED) (AUDITED)
----------------- ----------------- -----------------
<S> <C> <C> <C>
REVENUES................................ $18,959 $24,733 $21,754
CERTAIN EXPENSES
Operating............................. 5,260 6,852 5,657
Real estate taxes..................... 1,890 2,335 2,388
------- ------- -------
7,150 9,187 8,045
------- ------- -------
REVENUES IN EXCESS OF CERTAIN
EXPENSES.............................. $11,809 $15,546 $13,709
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 56
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES OF
THE WINDSOR PORTFOLIO, GROUPS A AND B
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICY.
Property Acquired -- The accompanying combined statements of revenues and
certain expenses include the operations (see "Basis of Presentation" below) of
the properties listed below (collectively, the "Windsor Portfolio") acquired by
the Company from Windsor Realty Fund II, L.P., an unaffiliated third party.
<TABLE>
<CAPTION>
PROPERTY CITY STATE TYPE
----------------------------------------- ------------ ----- ------------
<S> <C> <C> <C>
GROUP A
Windsor Corporate Center............... Marlborough MA Office
Valley Forge Corporate Center.......... Norristown PA Office/Flex
Lehigh Valley Executive Campus......... Allentown PA Office
2000 Corporate Ridge................... McLean VA Office
Powers Ferry Landing East.............. Atlanta GA Office
Park Place............................. Clearwater FL Office
GROUP B
Cameron Run............................ Alexandria VA Office
Rockwall I and II...................... Rockville MD Office
Ashford Perimeter...................... Atlanta GA Office
Edinburgh Center....................... Cary NC Office
Oak Brook International................ Oakbrook IL Office
Oakbrook Terrace Corporate Center
III................................. Oakbrook IL Office
Embassy Plaza.......................... Schaumburg IL Office
Columbia Center II..................... Rosemont IL Office
</TABLE>
Basis of Presentation -- The accompanying combined statements of revenues
and certain expenses are not intended to be a complete presentation of the
actual operations of the Windsor Portfolio for the periods presented. Certain
expenses may not be comparable to the expenses expected to be incurred by the
Company in the future operations of the Windsor Portfolio; however, the Company
is not aware of any material factors relating to the Windsor Portfolio that
would cause the reported financial information not to be indicative of future
operating results. Extended expenses consist of property management fees,
interest expense, depreciation and amortization and other costs not directly
related to the future operations of the Windsor Portfolio.
These combined financial statements have been prepared for the purpose of
complying with certain rules and regulations of the Securities and Exchange
Commission.
Revenue Recognition -- All leases are classified as operating leases.
Rental revenue is recognized as earned over the terms of the leases.
F-5
<PAGE> 57
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES OF
THE WINDSOR PORTFOLIO, GROUPS A AND B (CONTINUED)
2. LEASING ACTIVITY
The minimum future rental revenues from leases in effect as of October 1,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------------------------------------ --------
<S> <C>
1997 (three months)............................................... $ 11,695
1998.............................................................. 45,401
1999.............................................................. 39,209
2000.............................................................. 32,741
2001.............................................................. 27,001
2001.............................................................. 18,355
Thereafter........................................................ 24,951
--------
Total................................................... $199,353
========
</TABLE>
In addition to minimum rental payments, tenants pay reimbursements for
their pro rata share of specified operating expenses, which amounted to $2,451
(unaudited) for the nine months ended September 30, 1997 and $3,083 for the year
ended December 31, 1996 for Group A, and $3,533 for the nine months ended
September 30, 1997 for Group B. Certain leases contain lessee renewal options.
F-6
<PAGE> 58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Glenborough Realty Trust Incorporated:
We have audited the accompanying combined statement of revenues and certain
expenses of Thousand Oaks, as defined in Note 1, for the year ended December 31,
1996. This combined financial statement is the responsibility of the management
of the Company. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying combined statement of revenues and certain expenses has
been prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and is not intended
to be a complete presentation of the revenues and expenses of Thousand Oaks.
In our opinion, the combined financial statement referred to above presents
fairly, in all material respects, the revenues and certain expenses of Thousand
Oaks for the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 8, 1998
F-7
<PAGE> 59
GLENBOROUGH REALTY TRUST INCORPORATED
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES OF
THOUSAND OAKS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
REVENUES.................................................... $ 4,658 $ 5,778
CERTAIN EXPENSES
Operating................................................. 454 605
Real estate taxes......................................... 1,322 1,559
------- -------
1,776 2,164
------- -------
REVENUES IN EXCESS OF CERTAIN EXPENSES...................... $ 2,882 $ 3,614
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE> 60
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES OF
THOUSAND OAKS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICY.
Property Acquired -- The accompanying combined statements of revenues and
certain expenses include the operations (see "Basis of Presentation" below) of
the Thousand Oaks property located in Memphis, Tennessee, acquired by the
Company from an unaffiliated third party.
Basis of Presentation -- The accompanying combined statements of revenues
and certain expenses are not intended to be a complete presentation of the
actual operations of Thousand Oaks for the periods presented. Certain expenses
may not be comparable to the expenses expected to be incurred by the Company in
the future operations of Thousand Oaks; however, the Company is not aware of any
material factors relating to Thousand Oaks that would cause the reported
financial information not to be indicative of future operating results. Extended
expenses consist of property management fees, interest expense, depreciation and
amortization and other costs not directly related to the future operations of
Thousand Oaks.
These combined financial statements have been prepared for the purpose of
complying with certain rules and regulations of the Securities and Exchange
Commission.
Revenue Recognition -- All leases are classified as operating leases.
Rental revenue is recognized as earned over the terms of the leases.
2. LEASING ACTIVITY
The minimum future rental revenues from leases in effect as of October 1,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------------------------------------- -------
<S> <C>
1997 (three months)................................................ $ 2,055
1998............................................................... 5,873
1999............................................................... 4,881
2000............................................................... 4,020
2001............................................................... 2,490
2002............................................................... 204
Thereafter......................................................... --
-------
Total.................................................... $19,523
=======
</TABLE>
In addition to minimum rental payments, tenants pay reimbursements for
their pro rata share of specified operating expenses, which amounted to $255
(unaudited) for the nine months ended September 30, 1997 and $383 for the year
ended December 31, 1996. Certain leases contain lessee renewal options.
F-9
<PAGE> 61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Glenborough Realty Trust Incorporated:
We have audited the accompanying combined statement of revenues and certain
expenses of the Marion Bass Portfolio, as defined in Note 1, for the year ended
December 31, 1996. This combined financial statement is the responsibility of
the management of the Company. Our responsibility is to express an opinion on
this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying combined statement of revenues and certain expenses has
been prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and is not intended
to be a complete presentation of the revenues and expenses of the Marion Bass
Portfolio.
In our opinion, the combined financial statement referred to above presents
fairly, in all material respects, the revenues and certain expenses of the
Marion Bass Portfolio for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 8, 1998
F-10
<PAGE> 62
GLENBOROUGH REALTY TRUST INCORPORATED
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES OF
THE MARION BASS PORTFOLIO
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
REVENUES............................................. $ 7,160 $ 9,351
CERTAIN EXPENSES
Operating.......................................... 2,410 2,733
Real estate taxes.................................. 394 538
------- -------
2,804 3,271
------- -------
REVENUES IN EXCESS OF CERTAIN EXPENSES............... $ 4,356 $ 6,080
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-11
<PAGE> 63
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES OF
THE MARION BASS PORTFOLIO
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICY.
Property Acquired -- The accompanying combined statements of revenues and
certain expenses include the operations (see "Basis of Presentation" below) of
the properties listed below (collectively, the "Marion Bass Portfolio") acquired
by the Company from an unaffiliated third party.
<TABLE>
<CAPTION>
PROPERTY CITY STATE TYPE
------------------------------------------- ---------- ----- -------------
<S> <C> <C> <C>
Sabal Point I, II, and III................. Pineville NC Multi-Family
Arrowood Crossing I and II................. Charlotte NC Multi-Family
The Chase (Commonwealth)................... Charlotte NC Multi-Family
Landing on Farmhurst....................... Charlotte NC Multi-Family
Wendover Glen.............................. Charlotte NC Multi-Family
Sharonridge I and II....................... Charlotte NC Multi-Family
The Courtyard.............................. Charlotte NC Multi-Family
The Chase (Monroe)......................... Monroe NC Multi-Family
Willow-Glen................................ Monroe NC Multi-Family
The Oaks................................... Raleigh NC Multi-Family
</TABLE>
Basis of Presentation -- The accompanying combined statements of revenues
and certain expenses are not intended to be a complete presentation of the
actual operations of the Marion Bass Portfolio for the periods presented.
Certain expenses may not be comparable to the expenses expected to be incurred
by the Company in the future operations of the Marion Bass Portfolio; however,
the Company is not aware of any material factors relating to the Marion Bass
Portfolio that would cause the reported financial information not to be
indicative of future operating results. Extended expenses consist of property
management fees, interest expense, depreciation and amortization and other costs
not directly related to the future operations of the Marion Bass Portfolio.
These combined financial statements have been prepared for the purpose of
complying with certain rules and regulations of the Securities and Exchange
Commission.
Revenue Recognition -- All leases are classified as operating leases.
Rental revenue is recognized as earned over the terms of the leases. All tenant
leases in effect as of October 1, 1997 generally expire within a period of less
than one year.
F-12
<PAGE> 64
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Glenborough Realty Trust Incorporated:
We have audited the accompanying combined statement of revenues and certain
expenses of the Opus Portfolio, as defined in Note 1, for the nine months ended
September 30, 1997. This combined financial statement is the responsibility of
the management of the Company. Our responsibility is to express an opinion on
this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying combined statement of revenues and certain expenses has
been prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and is not intended
to be a complete presentation of the revenues and expenses of the Opus
Portfolio.
In our opinion, the combined financial statement referred to above presents
fairly, in all material respects, the revenues and certain expenses of the Opus
Portfolio for the nine months ended September 30, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 8, 1998
F-13
<PAGE> 65
GLENBOROUGH REALTY TRUST INCORPORATED
COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES OF
THE OPUS PORTFOLIO
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997
-----------------
<S> <C>
REVENUES..................................................................... $ 796
CERTAIN EXPENSES............................................................. --
----------
REVENUES IN EXCESS OF CERTAIN EXPENSES....................................... $ 796
==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-14
<PAGE> 66
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES TO COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES OF
THE OPUS PORTFOLIO
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICY
Property Acquired -- The accompanying combined statement of revenues and
certain expenses includes the operations (see "Basis of Presentation" below) of
the properties listed below (collectively, the "Opus Portfolio") acquired by the
Company from an unaffiliated third party.
<TABLE>
<CAPTION>
DATE OF
PROPERTY CITY STATE TYPE COMPLETION
-------------------- ---------------- ----- ------------ ---------------
<S> <C> <C> <C> <C>
Wausau.............. Temple Terrace FL Office April 1997
Fingerhut........... Tampa FL Office/Flex January 1997
Primeco............. Tampa FL Office/Flex October 1996
Atlantic Tech....... Brandon FL Office/Flex January 1998
ADS-Alliance........ Denver CO Office/Flex September 1997
</TABLE>
Basis of Presentation -- The accompanying combined statement of revenues
and certain expenses is not intended to be a complete presentation of the actual
operations of the Opus Portfolio for the periods presented. Amounts at September
30, 1997 include the operations for the properties for the period from the
earlier of January 1, 1997 or date of completion to September 30, 1997. All
properties are single tenant buildings under triple net leasing arrangements for
which the tenant is responsible for the payment of all operating expenses.
This combined financial statements has been prepared for the purpose of
complying with certain rules and regulations of the Securities and Exchange
Commission.
Revenue Recognition -- All leases are classified as operating leases.
Rental revenue is recognized as earned over the terms of the leases.
2. LEASING ACTIVITY
The minimum future rental revenues from leases in effect as of October 1,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------------------------------------- -------
<S> <C>
1997 (three months)................................................ $ 549
1998............................................................... 2,738
1999............................................................... 2,738
2000............................................................... 2,738
2001............................................................... 2,738
2002............................................................... 2,738
Thereafter......................................................... 12,227
--------
Total.................................................... $26,466
========
</TABLE>
F-15
<PAGE> 67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Glenborough Realty Trust Incorporated:
We have audited the accompanying combined statement of revenues and certain
expenses of the Eaton & Lauth Portfolio, as defined in Note 1, for the year
ended December 31, 1996. This combined financial statement is the responsibility
of the management of the Company. Our responsibility is to express an opinion on
this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying combined statement of revenues and certain expenses has
been prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and is not intended
to be a complete presentation of the revenues and expenses of the Eaton & Lauth
Portfolio.
In our opinion, the combined financial statement referred to above presents
fairly, in all material respects, the revenues and certain expenses of the Eaton
& Lauth Portfolio for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 8, 1998
F-16
<PAGE> 68
GLENBOROUGH REALTY TRUST INCORPORATED
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES OF
THE EATON & LAUTH PORTFOLIO
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
REVENUES.................................. $8,762 $11,512
CERTAIN EXPENSES
Operating............................... 1,762 2,204
Real estate taxes....................... 831 1,266
------ ------
2,593 3,470
------ ------
REVENUES IN EXCESS OF CERTAIN EXPENSES.... $6,169 $ 8,042
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE> 69
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES OF
THE EATON & LAUTH PORTFOLIO
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICY
Property Acquired -- The accompanying combined statements of revenues and
certain expenses include the operations (see "Basis of Presentation" below) of
the Eaton & Lauth Portfolio to be acquired by the Company from an unaffiliated
third party.
<TABLE>
<CAPTION>
PROPERTY CITY STATE TYPE
----------------------------------------- ------------- ----- -------------
<S> <C> <C> <C>
Clearvista One........................... Indianapolis IN Office
Clearvista Two........................... Indianapolis IN Office
99 East Carmel Drive..................... Carmel IN Office
Crosspoint Four.......................... Fishers IN Office
Meridian Park Shoppes.................... Carmel IN Office
One Meridian Park Place.................. Carmel IN Office
Two Meridian Park Place.................. Carmel IN Office
Osram Sylvania, Inc...................... Westfield IN Office
Covance.................................. Indianapolis IN Office
Cross Creek Centre....................... Indianapolis IN Retail
Geist Centre............................. Indianapolis IN Retail
Woodfield Centre......................... Indianapolis IN Retail
Broad Ripple Centre...................... Indianapolis IN Retail
Metroplex Centre......................... Indianapolis IN Retail
Crosscreek Apartments.................... Indianapolis IN Multi-Family
Harcourt Club Apartments................. Indianapolis IN Multi-Family
Island Club Apartments................... Indianapolis IN Multi-Family
</TABLE>
Basis of Presentation -- The accompanying combined statements of revenues
and certain expenses are not intended to be a complete presentation of the
actual operations of the Eaton & Lauth Portfolio for the periods presented.
Certain expenses may not be comparable to the expenses expected to be incurred
by the Company in the future operations of the Eaton & Lauth Portfolio; however,
the Company is not aware of any material factors relating to the Eaton & Lauth
Portfolio that would cause the reported financial information not to be
indicative of future operating results. Extended expenses consist of property
management fees, interest expense, depreciation and amortization and other costs
not directly related to the future operations of the Eaton & Lauth Portfolio.
Osram Sylvania, Inc. and Covance are single tenant buildings under triple
net leasing arrangements for which the tenant is responsible for the payment of
all operating expenses. The accompanying combined statements of revenues and
certain expenses exclude the operating expenses and related revenues for these
two buildings.
These combined financial statements have been prepared for the purpose of
complying with certain rules and regulations of the Securities and Exchange
Commission.
Revenue Recognition -- All leases are classified as operating leases.
Rental revenue is recognized as earned over the terms of the leases.
F-18
<PAGE> 70
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES OF
THE EATON & LAUTH PORTFOLIO (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
2. LEASING ACTIVITY
The minimum future rental revenues from leases in effect as of October 1,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------------------------------------- -------
<S> <C>
1997 (three months)................................................ $ 1,512
1998............................................................... 5,158
1999............................................................... 4,686
2000............................................................... 3,216
2001............................................................... 1,559
2002............................................................... 978
Thereafter......................................................... 2,402
-------
Total.................................................... $19,511
=======
</TABLE>
In addition to minimum rental payments, tenants pay reimbursements for
their pro rata share of specified operating expenses, which amounted to $802
(unaudited) for the nine months ended September 30, 1997 and $1,167 for the year
ended December 31, 1996. Certain leases contain lessee renewal options.
F-19
<PAGE> 71
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Glenborough Realty Trust Incorporated
We have audited the accompanying combined statements of revenues and
certain expenses of the Pru-Bache Portfolio and Bryant Lake as defined in Note
1, for each of the three years ended December 31, 1996, 1995 and 1994. These
combined financial statements are the responsibility of the management of the
Company. Our responsibility is to express an opinion on these combined financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying combined statements of revenues and certain expenses have
been prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and are not intended
to be a complete presentation of the revenues and expenses of the Pru-Bache
Portfolio and Bryant Lake.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the revenues and certain expenses of the
Pru-Bache Portfolio and Bryant Lake for each of the three years ended December
31, 1996, 1995 and 1994, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Francisco, California
October 10, 1997
F-20
<PAGE> 72
GLENBOROUGH REALTY TRUST INCORPORATED
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES OF
THE PRU-BACHE PORTFOLIO AND BRYANT LAKE
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
AND EACH OF THE THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31
SEPTEMBER 30, 1997 ------------------------
(UNAUDITED) 1996 1995 1994
------------------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES.............................................. $6,540 $8,157 $8,241 $8,111
CERTAIN EXPENSES
Operating........................................... 1,643 2,267 2,285 2,144
Real estate taxes................................... 762 1,027 962 962
------ ------ ------ ------
2,405 3,294 3,247 3,106
------ ------ ------ ------
REVENUES IN EXCESS OF CERTAIN EXPENSES................ $4,135 $4,863 $4,994 $5,005
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE> 73
GLENBOROUGH REALTY TRUST INCORPORATED
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES OF
THE PRU-BACHE PORTFOLIO AND BRYANT LAKE
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
AND EACH OF THE THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICY.
Property Acquired -- The accompanying combined statements of revenues and
certain expenses include the operations (see "Basis of Presentation" below) of
the properties listed below (collectively the "Pru-Bache Portfolio and Bryant
Lake") acquired by the Company from affiliates:
<TABLE>
<CAPTION>
PROPERTY CITY STATE TYPE
------------------------------------------- ------------- ----- ------------
<S> <C> <C> <C>
Bryant Lake Business Center................ Eden Prairie MN Office/Flex
Gateway Professional Center................ Sacramento CA Office
Park Plaza................................. Sacramento CA Office
Montrose Office Park....................... Rockville MD Office
Poplar Towers.............................. Memphis TN Office
Totem Valley............................... Kirkland WA Office/Flex
</TABLE>
Basis of Presentation -- The accompanying combined statements of revenues
and certain expenses are not intended to be a complete presentation of the
actual operations of the Pru-Bache Portfolio and Bryant Lake for the periods
presented. Certain expenses may not be comparable to the expenses expected to be
incurred by the Company in the future operations of the Pru-Bache Portfolio and
Bryant Lake; however, the Company is not aware of any material factors relating
to the Pru-Bache Portfolio and Bryant Lake that would cause the reported
financial information not to be indicative of future operating results. Excluded
expenses consist of property management fees, interest expense, depreciation and
amortization and other costs not directly related to the future operations of
the Pru-Bache Portfolio and Bryant Lake.
These combined financial statements have been prepared for the purpose of
complying with certain rules and regulations of the Securities and Exchange
Commission.
Revenue Recognition -- All leases are classified as operating leases.
Rental revenue is recognized as earned over the terms of the leases.
2. LEASING ACTIVITY
The minimum future rental revenues from leases in effect as of October 1,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
----------------------------------------------------------- -------
<S> <C>
1997 (three months)........................................ $ 1,945
1998....................................................... 7,551
1999....................................................... 6,258
2000....................................................... 4,545
2001....................................................... 3,191
2002....................................................... 1,614
Thereafter................................................. 5,608
-------
Total............................................ 30,712
=======
</TABLE>
In addition to minimum rental payments, tenants pay reimbursements for
their pro rata share of specified operating expenses, which amounted to $894
(unaudited) for the nine months ended September 30, 1997 and $1,174, $1,282 and
$1,184 for the years ended December 31, 1996, 1995 and 1994, respectively.
Certain leases contain lessee renewal options.
F-22
<PAGE> 74
PROSPECTUS
$1,088,702,500
<TABLE>
<S> <C> <C>
LOGO LOGO
</TABLE>
PREFERRED STOCK, COMMON STOCK AND WARRANTS
------------------------
Glenborough Realty Trust Incorporated (the "Company") may from time to time
offer in one or more series or classes (i) shares or fractional shares of its
preferred stock, par value $.001 (the "Preferred Stock"), (ii) shares of its
common stock, par value $0.001 per share (the "Common Stock") and (iii) warrants
to purchase shares of Preferred Stock or Common Stock (the "Warrants") in
amounts, at prices and on terms to be determined at the time of offering, with
an aggregate public offering price of up to $1,088,702,500. The Preferred Stock,
Common Stock and Warrants (collectively, the "Offered Securities") may be
offered, separately or together, in separate series in amounts, at prices and on
terms to be set forth in one or more supplements to the Prospectus (each a
"Prospectus Supplement").
The specific terms of the Offered Securities in respect to which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable: (i) in the case of Preferred
Stock, the specific title and stated value, any dividend, liquidation,
redemption, conversion, voting and other rights, and any initial public offering
price; (ii) in the case of Common Stock, the specific title and stated value and
any initial public offering price; and (iii) in the case of Warrants, the
duration, offering price, exercise price and detachability. In addition, such
specific terms may include limitations on direct or beneficial ownership and
restrictions on transfer of the Offered Securities, in each case as may be
appropriate to preserve the status of the Company as a real estate investment
trust ("REIT") for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States Federal Income Tax Consequences relating
to, and any listing on a securities exchange of, the Offered Securities covered
by such Prospectus Supplement.
The Offered Securities may be offered directly, through agents designated
from time to time by the Company or the Operating Partnership, or to or through
underwriters or dealers. If any agents or underwriters are involved in the sale
of any of the Offered Securities, their names, and any applicable purchase
price, fee, commission or discount arrangement between or among them, will be
set forth or will be calculable from the information set forth in the applicable
Prospectus Supplement. See "Plan of Distribution." No Offered Securities may be
sold without delivery of the applicable Prospectus Supplement describing the
method and terms of the offering of such Offered Securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE OFFERED SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is December 18, 1997.
<PAGE> 75
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR AN APPLICABLE PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE OPERATING
PARTNERSHIP OR ANY UNDERWRITER, DEALER OR AGENT. THIS PROSPECTUS AND ANY
APPLICABLE PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS OR
ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THE OPERATING PARTNERSHIP SINCE THE DATE HEREOF OR
THEREOF.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith the Company files proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement, and exhibits and schedules forming a part thereof and the reports,
proxy statements and other information filed with the Commission in accordance
with the Exchange Act can be inspected and copied at the Commission's Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: Seven World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The address of the Commission's Web Site is
(http://www.sec.gov). In addition, the Common Stock is listed on the New York
Stock Exchange and similar information concerning the Company can be inspected
and copied at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005.
The Company has filed with the Commission registration statements on Form
S-3 (the "Registration Statements") (of which this Prospectus is a part) under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Offered Securities. This Prospectus does not contain all of the information
set forth in the Registration Statements, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. Statements
contained in this Prospectus as to the contents of any contract or other
documents are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statements, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
regarding the Company and the Offered Securities, reference is hereby made to
the Registration Statements and such exhibits and schedules which may be
obtained from the Commission at its principal office in Washington, D.C., upon
payment of the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the
Exchange Act with the Commission and are incorporated herein by reference:
a. The Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
b. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997;
c. The Company's Current Reports on Form 8-K, filed with the
Commission on February 5, 1997, March 19, 1997, April 23, 1997, April 24,
1997, April 25, 1997, May 2, 1997, July 15, 1997, July 28, 1997, September
29, 1997, October 15, 1997, October 17, 1997, October 23, 1997, November 7,
1997, November 10, 1997 and December 18, 1997, respectively;
d. The Company's Current Reports on Form 8-K/A, filed with the
Commission on February 24, 1997, May 14, 1997, August 8, 1997, and October
17, 1997, respectively;
e. The description of the Registrant's Common Stock contained in the
Company's Registration Statement on Form 8-A (File No. 1-14162).
All documents filed by the Company and the Operating Partnership pursuant
to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the
date of this Prospectus and prior to the termination of the offering of the
Offered Securities shall be deemed to be incorporated by reference in this
Prospectus and to be part hereof from the date of filing such documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in the applicable Prospectus Supplement) or in any other subsequently filed
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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 (or in the applicable Prospectus
Supplement).
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such information, unless such exhibits are
specifically incorporated by reference in such information) will be provided
without charge to each person, including any beneficial owner, to whom this
Prospectus is delivered upon written or oral request. Requests should be
directed to the Vice President, Capital Markets, Glenborough Realty Trust
Incorporated, 400 South El Camino Real, Suite 1100, San Mateo, California
94402-1708, telephone number (650) 343-9300.
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As used herein, the term "Company" means Glenborough Realty Trust
Incorporated, a Maryland real estate investment trust, and its consolidated
subsidiaries for the periods from and after December 31, 1995 (the date of the
merger of eight public limited partnerships and Glenborough Corporation, a
California corporation, (the "Predecessors") with and into the Company (the
"Consolidation")). This Prospectus and the documents incorporated herein contain
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which statements involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
Unless otherwise indicated, ownership percentages of the Company's Common Stock
have been computed on a fully converted basis, using an exchange of Operating
Partnership units for Common Stock on a one-for-one basis.
THE COMPANY
The Company is a self-administered and self-managed real estate investment
trust (a "REIT") for federal income tax purposes that owns a portfolio of 111
office, office/flex, industrial, retail, multifamily and hotel properties (the
"Properties") located in 22 states throughout the country, as of the date of
this Prospectus. The Company's principal growth strategy is to capitalize on the
opportunity to acquire diversified portfolios or individual properties on
attractive terms. This strategy has evolved from the Company's predecessors'
experience since 1978 in managing real estate partnerships and their assets and,
since 1989, in acquiring management interests from third parties. In addition,
two associated companies (the "Associated Companies") provide comprehensive
asset, partnership and property management services for 53 other properties that
are not owned by the Company.
A portion of the Company's operations is conducted through a subsidiary
operating partnership (the "Operating Partnership"), in which the Company holds
a 1% interest as the sole general partner and in which the Company holds an
approximate 93% limited partner interest, as of the date of this Prospectus.
The Common Stock is listed on the New York Stock Exchange under the Symbol
"GLB." The Company commenced operations on December 31, 1995, through the merger
of eight public limited partnerships and a management company with and into the
Company. The Company's executive offices are located at 400 South El Camino
Real, Suite 1100, San Mateo, California 94402-1708 and its telephone number is
(650) 343-9300.
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RISK FACTORS
Prospective investors should read this entire Prospectus and the applicable
Prospectus Supplement carefully, including all appendices and supplements hereto
and thereto, and should consider carefully the following factors before
purchasing the Offered Securities offered hereby.
RISKS ASSOCIATED WITH ACQUISITIONS
Risks Associated with the Addition of a Substantial Number of New Properties
The Company is currently experiencing a period of rapid growth. Since the
Consolidation on December 31, 1995, the Company has invested approximately
$607.8 million in properties. The Company's ability to manage its growth
effectively will require it to apply successfully its experience managing its
existing portfolio to new markets and to an increased number of properties.
There can be no assurance that the Company will be able to manage these
operations effectively. The Company's inability to effectively manage its
expansion could have an adverse effect on the Company's results of operations
and financial condition.
Acquisitions Could Adversely Affect Operations or Stock Value
Consistent with its growth strategy, the Company is continually pursuing
and evaluating potential acquisition opportunities, and is from time to time
actively considering the possible acquisition of specific properties, which may
include properties managed or controlled by one of the Associated Companies or
owned by affiliated parties. It is possible that one or more of such possible
future acquisitions, if completed, could adversely affect the Company's funds
from operations or cash available for distribution, in the short term or the
long term or both, or increase the Company's debt, or be perceived negatively
among investors such that such an acquisition could be followed by a decline in
the market value of the Common Stock.
Assumption of General Partner Liabilities
The Company and its predecessors have acquired a number of their properties
by acquiring partnerships that own the properties or by first acquiring general
partnership interests and at a later date acquiring the properties, and the
Company may pursue acquisitions in this manner in the future. When the Company
uses this acquisition technique, a subsidiary of the Company becomes a general
partner. As a general partner the Company's subsidiary becomes generally liable
for the debts and obligations of the partnership, including debts and
obligations that may be contingent or unknown at the time of the acquisition. In
addition, the Company's subsidiary assumes obligations under the partnership
agreements, which may include obligations to make future contributions for the
benefit of other partners. The Company undertakes detailed due diligence reviews
to ascertain the nature and extent of obligations that its subsidiary will
assume when it becomes a general partner, but there can be no assurance that the
obligations assumed will not exceed the Company's estimates or that the assumed
liabilities will not have an adverse effect on the Company's results of
operations or financial condition. In addition, an Associated Company may enter
into management agreements pursuant to which it assumes certain obligations as
manager of properties. There can be no assurance that these obligations will not
have an adverse effect on the Associated Companies' results of operations or
financial condition, which could adversely affect the value of the Company's
preferred stock interest in those companies.
Risks Relating to Tender Offers
The Company may, as part of its growth strategy, acquire properties and
portfolios of properties through tender offer acquisitions of interests in
public and private partnerships. Tender offers often result in competing tender
offers, as well as litigation initiated by limited partners in the subject
partnerships or by competing bidders. Due to the inherent uncertainty of
litigation, the Company could be subject to adverse judgments in substantial
amounts. As the Company has not yet attempted an acquisition through the tender
offer process, and because of competing offers and possible litigation, there
can be no assurance that, if undertaken, the Company would be successful in
acquiring properties through a tender offer or that the tender offer process
would not result in litigation and a significant judgment adverse to the
Company.
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Conflict of Interest
The Company has acquired, and from time to time may acquire, properties
from partnerships that Robert Batinovich, the Company's Chief Executive Officer,
and Andrew Batinovich, the Company's President and Chief Operating Officer,
control, and in which they and members of their families have substantial
interests. It is also possible that the Company may enter into transactions to
acquire other properties controlled by these individuals or in which they or
members of their families have substantial interests in the future. These
transactions involve or will involve conflicts of interest. These transactions
may provide substantial economic benefits such as the payments or unit
issuances, relief or deferral of tax liabilities, relief of primary or secondary
liability for debt, and reduction in exposure to other property-related
liabilities. Despite the presence of appraisals or fairness opinions or review
by parties who have no interest in the transactions, the transactions will not
be the product of arm's-length negotiation and there can be no assurance that
these transactions will be as favorable to the Company as transactions that the
Company negotiates with unrelated parties or will not result in undue benefit to
Robert and Andrew Batinovich and members of their families. Neither Robert
Batinovich nor Andrew Batinovich has guaranteed that any properties acquired
from entities they control or in which they or their families have a significant
interest will be as profitable as other investments made by the Company or will
not result in losses.
DEPENDENCE ON EXECUTIVE OFFICERS
The Company is dependent on the efforts of Robert and Andrew Batinovich,
its Chief Executive Officer and its President and Chief Operating Officer,
respectively, and of its other executive officers. The loss of the services of
any of them could have an adverse effect on the results of operations and
financial condition of the Company. Each of Robert and Andrew Batinovich have
entered into employment agreements with the Company.
CERTAIN TAX RISKS
General
The Company has elected to be treated as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"), commencing with its taxable year ended
December 31, 1996. No assurance can be given, however, that the Company will be
able to operate in a manner which will permit it to maintain its status as a
REIT. Qualification as a REIT involves the satisfaction of numerous requirements
(some on an annual and quarterly basis) established under highly technical and
complex Code provisions for which only limited judicial or administrative
interpretation exists, and involves the determination of various factual matters
and circumstances not entirely within the Company's control. The Company
receives nonqualifying management fee income and owns nonqualifying preferred
stock in the Associated Companies. As a result, the Company may approach the
income and asset test limits imposed by the Code and could be at risk of not
satisfying those tests. In order to avoid exceeding the asset test limit, for
example, the Company may have to reduce its interest in the Associated
Companies. The Company is relying on the opinion of its tax counsel regarding
its ability to qualify as a REIT. This legal opinion is not binding on the
Internal Revenue Service ("IRS"). See "Federal Income Tax
Consequences -- Taxation of the Company."
Consequences of Failure to Qualify as a REIT
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at corporate rates. Moreover,
unless entitled to relief under certain statutory provisions, the Company also
would be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. This treatment would
reduce the net earnings of the Company available for investment or distribution
to stockholders because of the additional tax liability to the Company for the
years involved. In addition, distributions to stockholders would no longer be
required to be made. See "Federal Income Tax Consequences -- Failure to
Qualify."
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Even if the Company continues to qualify as a REIT, it will be subject to
certain federal, state and local taxes on its income and property. See "Federal
Income Tax Consequences -- Taxation of the Company."
Possible Changes in Tax Laws
Income tax treatment of REITs may be modified, prospectively or
retroactively, by legislative, judicial or administrative action at any time. No
assurance can be given that legislation, regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to the qualification as a REIT or the federal income tax
consequences of this qualification. In addition to any direct effects the
changes might have, the changes might also indirectly affect the market value of
all real estate investments, and consequently the ability of the Company to
realize its investment objectives.
RISKS RELATING TO REAL ESTATE
Environmental Matters
Under federal, state and local laws, ordinances and regulations relating to
protection of the environment ("Environmental Laws"), a current or previous
owner or operator of real estate may be liable for contamination resulting from
the presence or discharge of petroleum products or other hazardous or toxic
substances at such property, and may be required to investigate and clean-up
such contamination at such property or such contamination which has migrated
from such property. Such laws typically impose liability and clean-up
responsibility without regard to whether the owner or operator knew of, or was
responsible for, the presence of such contamination, and the liability under
such laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation of responsibility. In
addition, the owner or operator of a property may be subject to claims by third
parties based on personal injury, property damage and/or other costs, including
investigation and clean-up costs, resulting from environmental contamination
present at or emanating from such property. Environmental Laws may also impose
restrictions on the manner in which a property may be used or transferred or in
which businesses may be operated, and these restrictions may require
expenditures. Under the Environmental Laws, any person who arranges for the
transportation, disposal or treatment of hazardous or toxic substances may also
be liable for the costs of investigation or clean-up of such substances at the
disposal or treatment facility, whether or not such facility is or ever was
owned or operated by such person.
Environmental Laws also govern the presence, maintenance and removal of
asbestos-containing building materials ("ACM"). Such laws require that ACM be
properly managed and maintained, that those who may come into contact with ACM
be adequately apprised and trained, and that special precautions, including
removal or other abatement, be undertaken in the event ACM is disturbed during
renovation or demolition of a building. Such laws may impose fines and penalties
on building owners or operators for failure to comply with these requirements
and may allow third parties to seek recovery from owners or operators for
personal injury associated with exposure to asbestos fibers.
Some of the Properties are leased or have been leased, in part, to owners
and operators of dry cleaners that operate on-site dry cleaning plants, or to
owners or operators of other businesses that use, store or otherwise handle
petroleum products or other hazardous or toxic substances. Some of these
Properties contain, or may have contained, underground storage tanks for the
storage of petroleum products and other hazardous or toxic substances. These
operations create a potential for the release of petroleum products or other
hazardous or toxic substances. Some of the Properties are adjacent to or near
other properties that have contained or currently contain underground storage
tanks used to store petroleum products or other hazardous or toxic substances.
In addition, certain of the Properties are on, or are adjacent to or near other
properties upon which others, including former owners or tenants of the
Properties, have engaged or may in the future engage in activities that may
release petroleum products or other hazardous or toxic substances.
All of the Properties presently owned by the Company have been subject to
Phase I environmental assessments by independent environmental consultants. Some
of the Phase I environmental assessments recommended further investigations in
the form of Phase II environmental assessments, including soil and groundwater
sampling, and all of these investigations have been completed by the Company or
are in the
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process of being completed. Certain of the Properties owned by the Company have
been found to contain ACMs. The Company believes that these materials have been
adequately contained and that an ACM operations and maintenance program has been
implemented or is in the process of being implemented for the Properties found
to contain ACMs.
Some, but not all, of the properties owned by partnerships managed by the
Associated Companies have been subject to Phase I environmental assessments by
independent environmental consultants. The Associated Companies determine on a
case-by-case basis whether to obtain Phase I environmental assessments on these
properties and whether to undertake further investigation or remediation.
Certain of these properties contain ACMs. In each case the responsible
Associated Company believes that these materials have been adequately contained
and that an ACM operations and maintenance program has been implemented for the
properties found to contain ACMs.
Some properties previously owned by the Company were leased in whole or in
part to an operator of auto care centers which include oil change and tune-up
facilities, or were operated as convenience stores which sell petroleum-based
fuels. These properties and some of the Properties contain, and/or may have
contained in the past, underground storage tanks for the storage of petroleum
products and/or other hazardous or toxic substances which create a potential for
release of petroleum products and/or other hazardous or toxic substances. Some
of the Properties owned by the Company are adjacent to or near properties that
have contained in the past or currently contain, underground storage tanks used
to store petroleum products or other hazardous or toxic substances. Several of
the Properties have been contaminated with petroleum products or other hazardous
or toxic substances from on-site operations or operations on adjacent or nearby
properties. In addition, certain of the Properties are on, adjacent to or near
properties upon which others have engaged or may in the future engage in
activities that may release petroleum products or other hazardous or toxic
substances.
Although tenants of the Properties owned by the Company generally are
required by their leases to operate in compliance with all applicable federal,
state and local environmental laws, ordinances and regulations and to indemnify
the Company against any environmental liability arising from the tenants'
activities on the Properties, the Company could nevertheless be subject to
environmental liability relating to its management of the Properties or strict
liability by virtue of its ownership interest in the Properties and there can be
no assurance that the tenants would satisfy their indemnification obligations
under the leases. There can be no assurance that any environmental assessments
of the Properties owned by the Company, properties being considered for
acquisition by the Company, or the properties owned by the partnerships managed
by the Associated Companies have revealed all potential environmental
liabilities, that any prior owner or prior or current operator of such
properties did not create an environmental condition not known to the Company or
that an environmental condition does not otherwise exist as to any one or more
of such properties that could have an adverse effect on the Company's results of
operations and financial condition, either directly (with respect to properties
owned by the Company), or indirectly (with respect to properties owned by
partnerships managed by an Associated Company) by adversely affecting the
financial condition of the Associated Company and thus the value of the
Company's preferred stock interest in the Associated Company. Moreover, there
can be no assurance that (i) future environmental laws, ordinances or
regulations will not have an adverse effect on the Company's results of
operations and financial condition or (ii) the current environmental condition
of such properties will not be affected by tenants and occupants of such
properties, by the condition of land or operations in the vicinity of the
properties (such as the presence of underground storage tanks), or by third
parties unrelated to the Company.
The Company's operating costs may be affected by the obligation to pay for
the cost of complying with existing Environmental Laws as well as the cost of
complying with future legislation. In addition, the presence of petroleum
products or other hazardous or toxic substances at any of the Properties owned
by the Company, or the failure to remediate such property properly, may
adversely affect the Company's ability to borrow by using such real property as
collateral. The cost of defending against claims of liability and the cost of
complying with Environmental Laws, including investigation or clean-up of
contaminated property, could materially adversely affect the Company's results
of operations and financial condition.
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Risks Related to Ownership and Financing of Real Estate
The Company is subject to risks generally incidental to the ownership of
real estate, including changes in general economic or local conditions, changes
in supply of or demand for similar or competing properties in an area, the
impact of environmental protection laws, changes in interest rates and
availability of financing which may render the sale or financing of a property
difficult or unattractive, changes in tax, real estate and zoning laws, and the
creation of mechanics' liens or similar encumbrances placed on the property by a
lessee or other parties without the Company's knowledge and consent. Should any
of these events occur, there could be an adverse effect on the Company's results
of operations and financial condition.
Availability of Real Estate for Acquisitions
The Company's growth is dependent upon acquisitions. There can be no
assurance that properties will be available for acquisition or, if available,
that the Company will be able to purchase such properties on favorable terms. If
such acquisitions are not available it could have a negative impact on the
growth of the Company, which could have an adverse effect on the performance of
the Company's Common Stock.
Competition for Acquisition of Real Estate
The Company faces competition from other businesses, individuals, fiduciary
accounts and plans and other entities in the acquisition, operation and sale of
its properties. Some of the Company's competitors are larger and have greater
financial resources than the Company. This competition may result in a higher
cost for properties the Company wishes to purchase.
Competition for Tenants
The Company is subject to the risk that when space becomes available at its
properties the leases may not be renewed, the space may not be let or relet, or
the terms of the renewal or reletting (including the cost of required
renovations or concessions to tenants) may be less favorable to the Company.
Although the Company has established annual property budgets that include
estimates of costs for renovation and reletting expenses that it believes are
reasonable in light of each property's situation, no assurance can be given that
these estimates will sufficiently cover these expenses. If the Company is unable
to promptly lease all or substantially all of the space at its properties, if
the rental rates are significantly lower than expected, or if the Company's
reserves for these purposes prove inadequate, then there could be an adverse
effect on the Company's results of operations and financial condition.
Tenants' Defaults
The ability of the Company to manage its assets is subject to federal
bankruptcy laws and state laws affecting creditors' rights and remedies
available to real property owners. In the event of the financial failure or
bankruptcy of a tenant, there can be no assurance that the Company could
promptly recover the tenant's premises from the tenant or from a trustee or
debtor-in-possession in any bankruptcy proceeding filed by or against that
tenant, or that the Company would receive rent in the proceeding sufficient to
cover its expenses with respect to the premises. In the event of the bankruptcy
of a tenant, the Company will be subject to the provisions of the federal
bankruptcy code, which in some instances may restrict the amount and
recoverability of claims held by the Company against the tenant. If any tenant
defaults on its obligations to the Company, there could be an adverse effect on
the Company's results of operations and financial condition.
Management, Leasing and Brokerage Risks; Lack of Control of Associated
Companies
The Company is subject to the risks associated with the property
management, leasing and brokerage businesses. These risks include the risk that
management contracts or service agreements may be terminated, that contracts
will not be renewed upon expiration or will not be renewed on terms consistent
with current terms, and that leasing and brokerage activity generally may
decline. Acquisition of properties by the Company from the Associated Companies
could result in a decrease in revenues to the Associated Companies and a
corresponding decrease in dividends received by the Company from the Associated
Companies. Each of
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these developments could have an adverse effect on the Company's results of
operations and financial condition.
To maintain the Company's status as a REIT while realizing income from the
Company's third-party management business, the capital stock of Glenborough
Hotel Group, a Nevada corporation ("GHG") and Glenborough Corporation, a
California corporation ("GC," and together with GHG, the "Associated Companies")
(which conduct the Company's third-party management, leasing and brokerage
businesses) is divided into two classes. All of the voting common stock of the
Associated Companies, representing 5% of the total equity of GC, and 25% of the
total equity of GHG, is held by individual stockholders. Nonvoting preferred
stock representing the remaining equity of each Associated Company is held
entirely by the Company. Although the Company holds a majority of the equity
interest in each Associated Company, the Company is not able to elect directors
of any Associated Company and, consequently, the Company has no ability to
influence the day-to-day decisions of each entity.
Uninsured Loss
The Company or in certain instances tenants of the properties carry
comprehensive liability, fire and extended coverage with respect to the
Company's properties, with policy specification and insured limits customarily
carried for similar properties. There are, however, certain types of losses
(such as from earthquakes and floods) that may be either uninsurable or not
economically insurable. Further, certain of the properties are located in areas
that are subject to earthquake activity and floods. Should a property sustain
damage as a result of an earthquake or flood, the Company may incur losses due
to insurance deductibles, co-payments on insured losses or uninsured losses.
Should an uninsured loss occur, the Company could lose some or all of its
capital investment, cash flow and anticipated profits related to one or more
properties, which could have an adverse effect on the Company's results of
operations and financial condition.
Illiquidity of Real Estate
Real estate investments are relatively illiquid and, therefore, will tend
to limit the ability of the Company to vary its portfolio promptly in response
to changes in economic or other conditions. In addition, the Code and individual
agreements with sellers of properties place limits on the Company's ability to
sell properties, which may adversely affect returns to holders of Common Stock.
Twenty-four of the properties owned by the Operating Partnership were acquired
on terms and conditions under which they can be disposed of only in a like-kind
exchange or other non-taxable transaction.
Potential Liability Under the Americans With Disabilities Act
As of January 26, 1992, all of the Company's properties were required to be
in compliance with the Americans With Disabilities Act (the "ADA"). The ADA
generally requires that places of public accommodation be made accessible to
people with disabilities to the extent readily achievable. Compliance with the
ADA requirements could require removal of access barriers and non-compliance
could result in imposition of fines by the federal government, an award of
damages to private litigants and/or a court order to remove access barriers.
Because of the limited history of the ADA, the impact of its application to the
Company's properties, including the extent and timing of required renovations,
is uncertain. Pursuant to certain lease agreements with tenants in certain of
the "single-tenant" Properties, the tenants are obligated to comply with the ADA
provisions. If the Company's costs are greater than anticipated or tenants are
unable to meet their obligations, there could be an adverse effect on the
Company's results of operations and financial condition.
ADDITIONAL CAPITAL REQUIREMENTS
The Company's future growth depends in large part upon its ability to raise
additional capital on satisfactory terms or at all. There can be no assurance
that the Company will be able to raise sufficient capital to achieve its
objectives. If the Company were to raise additional capital through the issuance
of additional equity securities, or securities convertible into or exercisable
for equity securities, the interests of holders of the
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Offered Securities could be diluted. Likewise, the Company's Board of Directors
is authorized to cause the Company to issue Preferred Stock in one or more
series and to determine the distributions and voting and other rights of the
Preferred Stock. Accordingly, the Board of Directors may authorize the issuance
of Preferred Stock with voting, distribution and other similar rights which
could be dilutive to or otherwise adversely affect the interests of holders of
Offered Securities. If the Company were to raise additional capital through debt
financing, the Company will be subject to the risks described below, among
others.
LIMITATION ON OWNERSHIP OF COMMON STOCK MAY PRECLUDE ACQUISITION OF CONTROL
Provisions of the Company's Articles of Incorporation are designed to
assist the Company in maintaining its qualification as a REIT under the Code by
preventing concentrated ownership of the Company which might jeopardize REIT
qualification. Among other things, these provisions provide that (a) any
transfer or acquisition of Common Stock that would result in the
disqualification of the Company as a REIT under the Code will be void, and (b)
if any person attempts to acquire shares of Common Stock that after the
acquisition would cause the person to own or to be deemed to own, by operation
of certain attribution rules set out in the Code, an amount of Common Stock in
excess of a predetermined limit, which, pursuant to Board action, currently is
9.9% of the outstanding shares of Common Stock (the "Ownership Limitation" and
as to the Common Stock, the transfer of which would cause any person to actually
own Common Stock in excess of the Ownership Limitation, the "Excess Shares"),
the transfer shall be void and the Common Stock subject to the transfer shall
automatically be transferred to an unaffiliated trustee for the benefit of a
charitable organization designated by the Board of Directors of the Company
until sold by the trustee to a third party or purchased by the Company. Robert
Batinovich, his spouse and children (including Andrew Batinovich) and
individuals or entities whose ownership of Common Stock is attributed to Robert
Batinovich in determining the number of shares of Common Stock owned by him for
purposes of compliance with Section 856 of the Code (the "Attributed Owners"),
are exempt from these restrictions, but are prohibited from acquiring shares of
Common Stock if, after the acquisition, they would own in excess of 9.9% of the
outstanding shares of Common Stock. This limitation on the ownership of Common
Stock may have the effect of precluding the acquisition of control of the
Company by a third party without the consent of the Board of Directors. If the
Board of Directors waives the Ownership Limitation for any person, the Ownership
Limitation shall be proportionally and automatically reduced with regard to all
other persons such that no five persons may own more than 50% of the Common
Stock (the aggregate Ownership Limitations as to all of these persons, as
adjusted, the "Adjusted Ownership Limitation"). See "Description of Common
Stock -- Restrictions on Ownership and Transfer of Common Stock" and "Federal
Income Tax Consequences."
LITIGATION RELATED TO CONSOLIDATION
Recent business reorganizations sponsored by others involving the
conversion of partnerships into corporations have given rise to a number of
investor lawsuits. These lawsuits have included claims against the general
partners of the participating partnerships, the partnerships themselves and
related persons involved in the structuring of or benefiting from the conversion
or reorganization, as well as claims against the surviving entity and its
directors and officers. The lawsuits have included, among others, claims that
the structure of the reorganizations, as well as the manner in which they were
submitted for investor approval, involved violations of federal and state
securities laws, common law fraud and negligent misrepresentations, breaches of
fiduciary duty, unfair and deceptive trade practices, negligence and waste,
breaches of the partnership documents of the participating partnerships, failure
to comply with applicable reporting requirements, violations of the rules of the
NASD on suitability and fair practices, and violations of the Racketeer
Influenced and Corrupt Organizations Act. Two lawsuits have been filed
contesting the fairness of the Consolidation, one in California state court and
one in federal court. A settlement of the state court action has been approved
by the court, but objectors to the settlement have appealed that approval. The
Company and the other defendants in the state court action have filed a
responsive brief, the objectors subsequently filed a reply brief and requested a
hearing which has not yet been scheduled. Plaintiffs in the federal court action
have agreed voluntarily to take the action off calendar pending resolution of
the state court action.
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From time to time the Company is involved in other litigation arising out
of its business activities. It is possible that this litigation and the other
litigation previously described could result in significant losses in excess of
amounts reserved, which could have an adverse effect on the Company's results of
operations and the financial condition of the Company.
CHAPTER 11 REORGANIZATION OF PARTNERSHIP CONSOLIDATION BY SENIOR MANAGEMENT
Robert and Andrew Batinovich, two of the senior officers of the Company,
were also senior members of a management team that formed a publicly registered
limited partnership in 1986 to consolidate a number of predecessor partnerships.
That public partnership was involved in litigation with its primary creditor and
in order to prevent foreclosure filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code in May of 1992. The public
partnership, the primary subsidiary of which is GPA, Ltd., which owns an
approximately 1.9% limited partner interest in the Operating Partnership along
with other substantial real estate assets, settled the litigation and obtained
confirmation of a plan of reorganization in January 1994.
OTHER RISKS
Debt Financing
The Company intends to incur additional indebtedness in the future,
including through borrowings under a credit facility, if a credit facility is
available, to finance property acquisitions. As a result, the Company expects to
be subject to risks associated with debt financing, including the risk that
interest rates may increase, the risk that the Company's cash flow will be
insufficient to meet required payments on its debt and the risk that the Company
may be unable to refinance or repay the debt as it comes due. The Company's
current $50 million secured revolving line of credit with Wells Fargo Bank, N.A.
provides that distributions may not exceed 90% of funds from operations and
that, in the event of a failure to pay principal or interest on borrowings
thereunder when due (subject to any applicable grace period), the Company and
its subsidiaries may not pay any distributions on the Common Stock or the
Preferred Stock. If the Company is unable to obtain acceptable financing to
repay indebtedness at maturity, the Company may have to sell properties to repay
indebtedness or properties may be foreclosed upon, which could have an adverse
effect on the Company's results of operations and financial condition.
Board of Directors May Change Investment Policies
The descriptions in this Prospectus of the major policies and the various
types of investments to be made by the Company reflect only the current plans of
the Company's Board of Directors. The Company's Board of Directors may change
the investment policies of the Company without a vote of the stockholders. If
the Company changes its investment policies, the risks and potential rewards of
an investment in the Company may also change. In addition, the methods of
implementing the Company's investment policies may vary as new investment
techniques are developed.
Effect of Market Interest Rates on Price of Common Stock
One of the factors that may influence the market price of the shares of
Common Stock in public markets will be the annual yield on the price paid for
shares of Common Stock from distributions by the Company. An increase in market
interest rates may lead prospective purchasers of the Common Stock to seek a
higher annual yield from their investments. Such circumstances may adversely
affect the market price of the Common Stock.
Year 2000 Compliance
The Company utilizes a number of computer software programs and operating
systems across its entire organization, including applications used in financial
business systems and various administrative functions. To the extent that the
Company's software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000" and beyond, some level
of modification, or replacement of such
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applications will be necessary. The Company has completed its identification of
applications that are not yet "Year 2000" compliant and has commenced
modification or replacement of such applications, as necessary. Given
information known at this time about the Company's systems that are
non-compliant, coupled with the Company's ongoing, normal course-of-business
efforts to upgrade or replace critical systems, as necessary, management does
not expect Year 2000 compliance costs to have any material adverse impact on the
Company's liquidity or ongoing results of operations. No assurance can be given,
however, that all of the Company's systems will be Year 2000 compliant or that
compliance costs or the impact of the Company's failure to achieve substantial
Year 2000 compliance will not have a material adverse effect on the Company's
future liquidity or results of operations.
Shares Available for Future Sale
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or future conversions or exercises of securities for
future sales, including shares of Common Stock issuable upon exchange of
Operating Partnership units, will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock, or
the perception that such sales could occur, may adversely affect the prevailing
market price for the Common Stock.
USE OF PROCEEDS
Unless otherwise indicated in the applicable Prospectus Supplement, the
Company intends to invest the net proceeds from any sale of the Offered
Securities for general corporate purposes including, without limitation, the
acquisition and development of properties and the repayment of debt. Net
proceeds from the sale of the Offered Securities initially may be temporarily
invested in short-term securities.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the year ended
December 31, 1996 and for the nine-month period ended September 30, 1997 was
2.56x and 2.90x, respectively. Prior to the Consolidation, the Company's
Predecessors' combined ratio of earnings to fixed charges for 1992, 1993, 1994
and 1995 was (0.37x), 2.67x, 2.58x and 1.41x, respectively. The ratio of
earnings to fixed charges is computed as income from operations, before minority
interest, income taxes and extraordinary items, plus fixed charges (primarily
interest expense) divided by fixed charges. The ratio of earnings to fixed
charges was less than 1.0 in 1992 due to a non-recurring loss provision that did
not affect cash flow. To date, the Company has not issued any shares of
preferred stock; therefore, the ratios of earnings to combined fixed charges and
preferred share dividends are unchanged from the ratios presented in this
section.
DESCRIPTION OF PREFERRED STOCK
Subject to limitations prescribed by Maryland law and the Company's
Articles of Incorporation and Articles Supplementary (collectively, the
"Charter"), the Board of Directors is authorized to issue, from the authorized
but unissued capital stock of the Company, Preferred Stock in such classes or
series as the Board of Directors may determine and to establish from time to
time the number of shares of Preferred Stock to be included in any such class or
series and to fix the designation and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of the shares of any such class or
series, and such other subjects or matters as may be fixed by resolution of the
Board of Directors. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company.
Preferred Stock, upon issuance against full payment of the purchase price
therefor, will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock will be described in the
Prospectus Supplement relating to that class or series, including a Prospectus
Supplement providing that Preferred Stock may be issuable upon the exercise of
Warrants issued by the Company. The description of Preferred Stock set forth
below and the description of the terms of a particular class or series of
Preferred
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Stock set forth in a Prospectus Supplement do not purport to be complete and are
qualified in their entirety by reference to the articles supplementary relating
to that class or series.
The rights, preferences, privileges and restrictions of the Preferred Stock
of each class or series will be fixed by the articles supplementary relating to
such class or series. A Prospectus Supplement, relating to each class or series,
will specify the terms of the Preferred Stock as follows:
(1) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the
liquidation preference per share and the offering price of such Preferred
Stock;
(3) The dividend rate(s), period(s), and/or payment date(s) or
method(s) of calculation thereof applicable to such Preferred Stock;
(4) Whether such Preferred Stock is cumulative or not and, if
cumulative, the date from which dividends on such Preferred Stock shall
accumulate;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) The provision for a sinking fund, if any, for such Preferred
Stock;
(7) The provision for redemption, if applicable, of such Preferred
Stock;
(8) Any listing of such Preferred Stock on any securities exchange;
(9) The terms and conditions, if applicable, upon which such Preferred
Stock will be converted into Common Stock of the Company, including the
conversion price (or manner of calculation thereof);
(10) A discussion of any material federal income tax consequences
applicable to such Preferred Stock;
(11) Any limitations on direct or beneficial ownership and
restrictions on transfer, in each case as may be appropriate to preserve
the status of the Company as a REIT;
(12) The relative ranking and preferences of such Preferred Stock as
to dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company;
(13) Any limitations on issuance of any class or series of preferred
stock ranking senior to or on a parity with such class or series of
Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company;
(14) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock; and
(15) Any voting rights of such Preferred Stock.
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Company, rank: (i) senior to all classes or
series of Common Stock and Excess Stock of the Company, and to all equity
securities ranking junior to such Preferred Stock with respect to dividend
rights or rights upon liquidation, dissolution or winding up of the Company;
(ii) on a parity with all equity securities issued by the Company the terms of
which specifically provide that such equity securities rank on a parity with the
Preferred Stock with respect to dividends rights or rights upon liquidation,
dissolution or winding up of the Company; and (iii) junior to all equity
securities issued by the Company the terms of which specifically provide that
such equity securities rank senior to the Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company.
The terms and conditions, if any, upon which shares of any class or series
of Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include the
number of shares of Common Stock into which the Preferred Stock is convertible,
the conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether
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conversion will be at the option of the holders of the Preferred Stock or the
Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such Preferred
Stock.
All certificates representing shares of Preferred Stock will bear a legend
referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% of the outstanding Common Stock and Preferred Stock (or
1% if there are fewer than 2,000 stockholders) must file an affidavit with the
Company containing the information specified in the Charter within 30 days after
December 31 of each year. In addition, each stockholder shall upon demand be
required to disclose to the Company in writing such information with respect to
the direct, indirect and constructive ownership of shares as the Board of
Directors deems necessary to determine the Company's status as a real estate
investment trust and to insure compliance with the Ownership Limit.
The articles supplementary, if applicable, for the Offered Securities may
also contain provisions that further restrict the ownership and transfer of the
Offered Securities. The applicable Prospectus Supplement will specify any
additional ownership limitation relating to the Offered Securities.
DESCRIPTION OF COMMON STOCK
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that Common Stock will be
issuable upon conversion of Preferred Stock or upon the exercise of Warrants
issued by the Company. This description is in all respects subject to and
qualified in its entirety by reference to the applicable provisions of the
Company's Charter and its Bylaws. The Common Stock is listed on the New York
Stock Exchange under the symbol "GLB." Registrar and Transfer Company is the
Company's transfer agent.
GENERAL
The Company's Charter authorizes the Company to issue up to 50,000,000
shares of Common Stock with a par value of $.001 per share. There were
31,474,692 shares of Common Stock issued and outstanding, and no shares of
Excess Stock were issued and outstanding as of the date of this Prospectus.
Under Maryland law, stockholders generally are not liable for the Company's
debts or obligations.
The holders of shares of Common Stock are entitled to one vote per share on
all matters voted on by stockholders, including election of directors, and,
except as provided in the Charter in respect of any other class of or series of
stock, the holders of these shares exclusively possess all voting power. The
Charter does not provide for cumulative voting in the election of directors.
Subject to any preferential rights of any outstanding shares or series of stock,
holders of shares of Common Stock are entitled to receive distributions, when
and as declared by the Board of Directors, out of funds legally available
therefor. Upon any liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive pro rata all assets of the
Company legally available for distribution to its stockholders after payment of,
or adequate provisions for, all known debts and liabilities of the Company. All
shares of Common Stock now outstanding are fully paid and nonassessable, as will
be the shares of Common Stock offered by this Prospectus or any Prospectus
Supplement when issued. The holders of the Common Stock offered hereby will have
no preemptive rights to subscribe to additional stock or securities issued by
the Company at a subsequent date.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF COMMON STOCK
For the Company to qualify as a REIT under the Code, not more than 50% of
the value of its outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year) or during a proportionate part of a shorter taxable year (the
"closely-held test"). Shares of capital stock must be beneficially owned by 100
or more persons during at least 335 days of a taxable year of 12 months (other
than
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the first year) or during a proportionate part of a shorter taxable year (the
"100 person test"). See "Federal Income Tax Consequences -- 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 Charter, subject to certain exceptions, provides that no
holder, other than Robert Batinovich and the individuals or entities whose
ownership of shares of Common Stock is attributed to Mr. Batinovich under the
Code (the "Attributed Owners"), may own an amount of Common Stock in excess of
the Ownership Limitation, which, pursuant to Board action, currently is 9.9% of
the outstanding shares of Common Stock. A qualified trust (as defined in the
Charter) generally may own up to 9.9% of the outstanding shares of Common Stock.
The Ownership Limitation provides that Robert Batinovich and the Attributed
Owners may hold up to 9.9% of the outstanding shares of Common Stock, including
shares which Robert Batinovich and the Attributed Owners may acquire pursuant to
an option held by GPA, Ltd. or Mr. Batinovich to cause the Company to redeem
their respective partnership interests in the Operating Partnership, assuming
GPA, Ltd. then dissolves and distributes these shares to the partners of GPA,
Ltd.
The Board of Directors may waive the Ownership Limitation if evidence
satisfactory to the Board of Directors and the Company's tax counsel is
presented that such ownership will not jeopardize the Company's status as a
REIT. As a condition to such waiver, the Board of Directors may require opinions
of counsel satisfactory to it and/or an undertaking from the applicant with
respect to preserving the REIT status of the Company. The Ownership Limitation
will not apply if the Board of Directors and the stockholders determine that it
is no longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT. Any transfer of Common Stock that would (a)
create actual or constructive ownership of Common Stock in excess of the
Ownership Limitation, (b) result in the Company failing the 100 person test, or
(c) result in the Company failing the closely-held test, shall be null and void,
and the intended transferee will acquire no rights to the Common Stock.
The Charter also provides that Common Stock involved in a transfer or
change in capital structure that results in a person (other than Robert
Batinovich and the Attributed Owners) owning in excess of the Ownership
Limitation or would cause the Company to fail either the closely-held test or
the 100 person test will automatically be transferred to a trustee for the
benefit of a charitable organization until purchased by the Company or sold to a
third party without violation of the Ownership Limitation. While held in trust,
the Excess Shares will remain outstanding for purposes of any stockholder vote
or the determination of a quorum for such vote and the trustee will be empowered
to vote the Excess Shares. Excess Shares shall be entitled to distributions,
provided that such distributions shall be paid to a charitable organization
selected by the Board of Directors as beneficiary of the trust. The trustee may
transfer the Excess Shares to any individual (a "Permitted Transferee") whose
ownership of Common Stock would be permitted under the Ownership Limitation and
would not cause the Company to fail the closely-held test. In addition, the
Company would have the right, for a period of 90 days, to purchase all or any
portion of the Excess Shares from the trustee at the lesser of: (i) where (a)
the intended transferee gave value for the Excess Shares, the price paid for the
Excess Shares by the intended transferee or (b) average of the intended
transferee did not give value for the Excess Shares, the price per share equal
to the average of the market price for the Common Stock for the five consecutive
trading days ending on the date of the purported transfer to the intended
transferee; and (ii) the closing market price for the Common Stock for the five
consecutive trading days ending the date the Company exercises its option to
purchase. The intended transferee would be entitled to receive from the trustee
the lesser of: (i) where (a) the intended transferee gave value for the Excess
Shares, the price paid for the Excess Shares by the intended transferee or (b)
the intended transferee did not give value for the Excess Shares, the price per
share equal to the average of the closing market price for the Common Stock for
the five consecutive trading days ending on the date of the purported transfer
to the intended transferee; and (ii) the price per share received by the trustee
from the transfer of the Excess Shares to a Permitted Transferee.
The Ownership Limitation will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration limitation is
increased. Except as otherwise described above, any change in the Ownership
Limitation would require an amendment to the Charter. Such amendments require
the affirmative vote of stockholders owning a majority of the outstanding Common
Stock. In addition to preserving the Company's status as a REIT, the
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Ownership Limitation may have the effect of precluding an acquisition of control
of the Company by a third party without the approval of the Board of Directors.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
All stockholders of record who own 5% or more of the value of the
outstanding Common Stock (or 1% if there are fewer than 2,000 stockholders of
record but more than 200, or 1/2% if there are 200 or fewer stockholders of
record) must file written notice with the Company containing the information
specified in the Charter by January 30 of each year. In addition, each
stockholder shall upon demand be required to disclose to the Company in writing
such information with respect to the direct, indirect and constructive ownership
of Common Stock as the Board of Directors deems necessary to determine the
effect, if any, of such ownership on the Company's status as a REIT and to
ensure compliance with the Ownership Limitation. The Company intends to use its
best efforts to enforce the Ownership Limitation and will make prohibited
transferees aware of their obligation to pay over any distributions received,
will not give effect on its books to prohibited transfers, will institute
proceedings to enjoin any transfer violating the Ownership Limitation, and will
declare all votes of prohibited transferees invalid.
DESCRIPTION OF WARRANTS
The Company has no Warrants outstanding (other than options issued under
the Company's employee stock option plan). The Company may issue Warrants for
the purchase of Preferred Stock or Common Stock. Warrants may be issued
independently or together with any other Offered Securities offered by any
Prospectus Supplement and may be attached to or separate from such Offered
Securities. Each series of Warrants will be issued under a separate warrant
agreement (each, a "Warrant Agreement") to be entered into between the Company
and a warrant agent specified in the applicable Prospectus Supplement (the
"Warrant Agent"). The Warrant Agent will act solely as an agent of the Company
in connection with the Warrants of such series and will not assume any
obligation or relationship of agency or trust for or with any provisions of the
Warrants offered hereby. Further terms of the Warrants and the applicable
Warrant Agreements will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the
Warrants in respect of which this Prospectus is being delivered, including,
where applicable, the following:
(1) The title of such Warrants;
(2) The aggregate number of such Warrants;
(3) The price or prices at which such Warrants will be issued;
(4) The designation, number of terms of the shares of Preferred Stock
or Common Stock purchasable upon exercise of such Warrants;
(5) The designation and terms of the Offered Securities, if any, with
which such Warrants are issued and the number of such Warrants issued with
each such Offered Security;
(6) The date, if any, on and after which such Warrants and the related
Preferred Stock or Common Stock will be separately transferable;
(7) The price at which each share of Preferred Stock or Common Stock
purchasable upon exercise of such Warrants may be purchased;
(8) The date on which the right to exercise such Warrants shall
commence and the date on which such right shall expire;
(9) The minimum or maximum amount of such Warrants which may be
exercised at any one time;
(10) Information with respect to book-entry procedures, if any;
(11) A discussion of certain federal income tax consequences; and
(12) Any other terms of such Warrants, including terms, procedures and
limitations relating to the exchange and exercise of such Warrants.
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CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS
Certain provisions of the Company's Charter and Bylaws might discourage
certain types of transactions that involve an actual or threatened change in
control of the Company that might involve a premium price for the Company's
capital stock or otherwise be in the best interest of the stockholders. See
"Description of Common Stock -- Restrictions on Ownership and Transfer of Common
Stock." The issuance of shares of preferred stock or other capital stock by the
Board of Directors may also have the effect of delaying, depriving or preventing
a change in control of the Company. The Bylaws of the Company contain certain
advance notice requirements in the nomination of persons for election to the
Board of Directors which could have the effect of discouraging a takeover or
other transaction in which holders of some, or a majority, of the Common Stock
might receive a premium for their Common Stock over the prevailing market price,
or which such holders might believe to be otherwise in their best interests.
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FEDERAL INCOME TAX CONSEQUENCES
The following summary of material federal income tax consequences is based
on current law and does not purport to deal with all aspects of taxation that
may be relevant to particular stockholders in light of their personal investment
or tax circumstances, or to certain types of stockholders (including insurance
companies, financial institutions and broker-dealers) subject to special
treatment under the federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF THE OFFERED SECURITIES.
The Company believes that since January 1, 1996, it has operated in a
manner that permits it to satisfy the requirements for taxation as a REIT under
the applicable provisions of the Code. The Company intends to continue to
operate to satisfy such requirements. No assurance can be given, however, that
such requirements will be met.
The provisions of the Code and regulations thereunder relating to
qualification and operation as a REIT are highly technical and complex. The
following sets forth the material aspects of the laws that govern the federal
income tax treatment of a REIT and its stockholders. This summary is qualified
in its entirety by the applicable Code provisions, rules and regulations
thereunder, and administrative and judicial interpretations thereof. Morrison &
Foerster LLP has acted as tax counsel to the Company in connection with the
Company's election to be taxed as a REIT.
In the opinion of Morrison & Foerster LLP, commencing with the Company's
taxable year that ended on December 31, 1996, the Company has been organized in
conformity with the requirements for qualification as a REIT, and its method of
operation has and will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to meet,
through actual annual operating results, distribution levels and diversity of
stock ownership, and various qualification tests imposed under the Code
discussed below, the results of which will not be reviewed by Morrison &
Foerster LLP. Accordingly, no assurance can be given that the actual results of
the Company's operations for any particular taxable year will satisfy such
requirements. See "-- Failure to Qualify."
In brief, if certain detailed conditions imposed by the REIT provisions of
the Code are satisfied, entities, such as the Company, that invest primarily in
real estate and that otherwise would be treated for federal income tax purposes
as corporations, are generally not taxed at the corporate level on their "REIT
Taxable Income" (generally the REIT's taxable income adjusted for, among other
things, the disallowance of the dividends-received deduction generally available
to corporations) that is currently distributed to stockholders. This treatment
substantially eliminates the "double taxation" (i.e., taxation at both the
corporate and stockholder levels) that generally results from investing in
corporations.
If the Company fails to qualify as a REIT in any year, however, it will be
subject to federal income tax as if it were a domestic corporation, and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. In this event, the Company could be subject to potentially
significant tax liabilities and the amount of cash available for distribution to
its stockholders could be reduced.
TAXATION OF THE COMPANY
General
In any year in which the Company qualifies as a REIT, in general, it will
not be subject to federal income tax on that portion of its net income that it
distributes to stockholders. However, the Company will be subject to federal
income tax as follows: First, the Company will be taxed at regular corporate
rates on any undistributed REIT Taxable Income, including undistributed net
capital gains. (However, a REIT can elect to "pass through" any of its taxes
paid on its undistributed net capital gain to its stockholders on a pro rata
basis). Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax"
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on its items of tax preference. Third, if the Company has: (i) net income from
the sale or other disposition of "foreclosure property" which is held primarily
for sale to customers in the ordinary course of business; or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income. Fourth, if 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 property held for at least four years, foreclosure
property and property involuntarily converted), 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), and has nonetheless
maintained its qualification as a REIT because certain other requirements have
been met, it will be subject to a 100% tax on an amount equal to (a) the gross
income attributable to the greater of the amount by which the Company fails the
75% gross income test or the 95% gross income test, multiplied by (b) a fraction
intended to reflect the Company's profitability. Sixth, if the Company should
fail to distribute during each calendar year at least the sum of: (i) 85% of its
ordinary income for such year; (ii) 95% of its capital gain net income for such
year; and (iii) any undistributed taxable income from prior periods, the Company
would be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. Seventh, if the Company acquires any
asset from a C corporation (i.e., generally a corporation subject to full
corporate-level tax) in a transaction in which the basis of the asset in the
Company's hands is determined by reference to the basis of the asset (or any
other property) in the hands of the C corporation, and the Company recognizes
gain on the disposition of such asset during the 10 year period beginning on the
date on which such asset was acquired by the Company, then, to the extent of any
built-in gain at the time of acquisition, such gain will be subject to tax at
the highest regular corporate rate.
Requirements for Qualification
The Code defines a REIT as a corporation, trust or association (1) which is
managed by one or more trustees or directors; (2) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (3) which would be taxable as a domestic corporation, but
for Sections 856 through 860 of the Code; (4) which is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(5) the beneficial ownership of which is held by 100 or more persons (the "100
person test"); (6) not more than 50% in value of the outstanding stock of which
is owned, directly or indirectly, by five or fewer individuals (as defined in
the Code) at any time during the last half of each taxable year (the
"closely-held test"); and (7) which meets certain other tests, described below,
regarding the nature of income and assets. The Code provides that conditions (1)
to (4), inclusive, must be met during the entire taxable year and that condition
(5) must be met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months. Conditions
(5) and (6) will not apply until after the first taxable year for which an
election is made by the Company to be taxed as a REIT. In addition, beginning in
1998, a REIT's failure to satisfy condition (6) during a taxable year will not
result in its disqualification as a REIT under the Code for such taxable year as
long as (i) the REIT satisfies the stockholder demand statement requirements
described in the succeeding paragraph and (ii) the REIT did not know, and
exercising due diligence, would not have known, whether it had failed condition
(6). Furthermore, a REIT must also report its income, for federal income tax
purposes, based on the calendar year.
In order to assist the Company in complying with the 100 person test and
the closely-held test, the Company has placed certain restrictions on the
transfer of the Common Stock and the Company's preferred stock to prevent
further concentration of stock ownership. See "Description of Common Stock --
Restrictions on Transfer." Moreover, to evidence compliance with these
requirements, the Company must maintain records which disclose the actual
ownership of its outstanding Common Stock and preferred stock. In fulfilling its
obligations to maintain records, the Company must and will demand written
statements each year from the record holders of designated percentages of its
Common Stock and preferred stock disclosing the actual owners of such Common
Stock and preferred stock. A list of those persons failing or refusing to comply
with such demand must be maintained as part of the Company's records. A
stockholder failing or refusing to comply with the Company's written demand must
submit with his or her tax returns a similar statement disclosing the actual
ownership of Common Stock and preferred stock and certain other information. In
addition, the Company's Charter provides restrictions regarding the transfer of
its shares that are intended to
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assist the Company in continuing to satisfy the share ownership requirements.
See "Description of Common Stock -- Restrictions on Ownership and Transfer of
Common Stock." Furthermore, the Company reports its income, for federal income
tax purposes, based on the calendar year.
Although the Company intends to satisfy the stockholder demand letter rules
described in the preceding paragraph, beginning in 1998, its failure to satisfy
these requirements will not result in its disqualification as a REIT but may
result in the imposition of IRS penalties against the Company.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of a partnership shall retain the same character in the
hands of a partner qualifying as a REIT for purposes of Section 856 of the Code,
including satisfying the gross income tests and the asset tests, described
below. Thus, the Company's proportionate share of the assets, liabilities and
items of income of the Operating Partnership will be treated as assets,
liabilities and items of income of the Company for purposes of applying the
requirements described below.
Asset Tests
At the close of each quarter of the Company's taxable year, the Company
must satisfy two tests relating to the nature of its assets. First, at least 75%
of the value of the Company's total assets must be represented by interests in
real property, interests in mortgages on real property, shares in other REITs,
cash, cash items and government securities (as well as certain temporary
investments in stock or debt instruments purchased with the proceeds of new
capital raised by the Company). Second, although the remaining 25% of the
Company's assets generally may be invested without restriction, securities in
this class may not exceed either: (i) 5% of the value of the Company's total
assets as to any one non-government issuer; or (ii) 10% of the outstanding
voting securities of any one issuer. The Company's investment in real property
through its interest in the Operating Partnership constitutes qualified assets
for purposes of the 75% asset test. In addition, the Company may own 100% of
"qualified REIT subsidiaries," which are, in general, corporate subsidiaries
100% owned by a REIT. All assets, liabilities, and items of income, deduction
and credit of a qualified REIT subsidiary will be treated as owned and realized
directly by the Company.
The Company has analyzed the impact of its ownership interests in the
Associated Companies on its ability to satisfy the asset tests. Based upon its
analysis of the estimated value of the Company's total assets as well as its
estimate of the value of the respective nonvoting preferred stock interests in
the Associated Companies, the Company believes that none of such preferred stock
interests will exceed 5% of the value of the Company's total assets on the last
day of any calendar quarter in 1996. The Company intends to monitor compliance
with the 5% test on a quarterly basis and believes that it will be able to
manage its operations in a manner to comply with the tests, either by managing
the amount of its qualifying assets or reducing its interests in the Associated
Companies, although there can be no assurance that such steps will be
successful. In rendering its opinion as to the qualification of the Company as a
REIT, counsel has relied upon the Company's representation as to the value of
its assets and the value of its interests in the Associated Companies. Counsel
has discussed with the Company its valuation analysis and the future actions
available to it to comply with the 5% tests but it has not independently
verified the valuations.
Gross Income Tests
There are three separate percentage tests (two beginning in 1998) relating
to the sources of the Company's gross income which must be satisfied for each
taxable year. For purposes of these tests, where the Company invests in a
partnership, the Company will be treated as receiving its share of the income
and loss of the partnership, and the gross income of the partnership will retain
the same character in the hands of the Company as it has in the hands of the
partnership. See "-- Tax Aspects of the Company's Investment in the Operating
Partnerships -- General."
The 75% Test. At least 75% of the Company's gross income for the taxable
year must be "qualifying income." Qualifying income generally includes:(i)
"rents from real property" (except as modified below);
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(ii) interest on obligations collateralized by mortgages on, or interests in,
real property; (iii) gains from the sale or other disposition of interests in
real property and real estate mortgages, other than gain from property held
primarily for sale to customers in the ordinary course of the Company's trade or
business ("dealer property"); (iv) dividends or other distributions on shares in
other REITs, as well as gain from the sale of such shares; (v) abatements and
refunds of real property taxes; (vi) income from the operation, and gain from
the sale, of property acquired at or in lieu of a foreclosure of the mortgage
collateralized by such property ("foreclosure property"); and (vii) commitment
fees received for agreeing to make loans collateralized by mortgages on real
property or to purchase or lease real property.
For purposes of determining whether the Company complies with the 75% test
and 95% test (described below), gross income does not include income from
prohibited transactions. See "-- Tax Aspects of the Company's Investment in the
Operating Partnership -- Sale of Properties."
In addition, rents received from a tenant will not qualify as rents from
real property in satisfying the 75% test (or the 95% test described below) if
the Company, or an owner of 10% or more of the Company, directly or
constructively owns 10% or more of such tenant (a "related party tenant"). In
addition, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as rents from real property. Moreover, an amount received or accrued
generally will not qualify as rents from real property (or as interest income)
for purposes of the 75% and 95% gross income tests if it is based in whole or in
part on the income or profits of any person. Rent or interest will not be
disqualified, however, solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Finally, for rents received to qualify as
rents from real property, the Company generally must not operate or manage the
property or furnish or render services to tenants, other than through an
"independent contractor" from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent that
the services provided by the Company are "usually or customarily rendered" in
connection with the rental of space for occupancy only, and are not otherwise
considered "rendered to the occupant." For both the related party tenant rules
and determining whether an entity qualifies as an independent contractor,
certain attribution rules of the Code apply, pursuant to which shares of a REIT
held by one entity are deemed held by another.
Under prior law, if a REIT provides impermissible services to its tenants,
all of the rent from those tenants would have been disqualified from satisfying
the 75% test and 95% test (described below). Beginning in 1998, rents will not
be disqualified if a REIT provides de minimis, impermissible services. For this
purpose, services provided to tenants of a property are considered de minimis
where income derived from the services rendered equals 1% or less of all income
derived from the property (threshold determined on a property-by-property
basis). For purposes of this 10% threshold, the amount treated as received for
any service shall not be less than 150% of the direct cost of the Company in
furnishing or rendering the services.
The Company will be deemed to provide certain services which are actually
provided by the Operating Partnership (which is not an independent contractor of
the Company) with respect to properties owned by the Operating Partnership. The
Company believes that the services provided by the Operating Partnership are
usually or customarily rendered in connection with the rental of space of
occupancy only, and therefore that the provision of such services will not cause
the rents received with respect to its properties to fail to qualify as rents
from real property for purposes of the 75% test and 95% test (described below).
The Company does not intend to rent to related party tenants or to charge rents
that would not qualify as rents from real property because the rents are based
on the income or profits of any person (other than rents that are based on a
fixed percentage or percentages of receipts or sales).
Pursuant to the percentage leases ("Percentage Leases"), GHG leases from
the Operating Partnership the land, buildings, improvements, furnishings, and
equipment comprising the Hotels for a five-year period with a five-year renewal
option. The Percentage Leases provide that the lessee will be obligated to pay
to the Operating Partnership (a) the greater of a fixed rent (the "Base Rent")
or a percentage rent (the "Percentage Rent") (collectively, the "Rents") and (b)
certain other amounts, including interest accrued on any late payments or
charges (the "Additional Charges"). The Percentage Rent is calculated by
multiplying fixed percentages by the gross revenues from the operations of the
Hotels in excess of certain levels. The Base Rent
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accrues and is required to be paid monthly. Percentage Rent is due quarterly;
however, the lessee will not be in default for non-payment of Percentage Rent
due in any calendar year if the lessee pays, within 90 days of the end of the
calendar year, the excess of Percentage Rent due and unpaid over the Base Rent
with respect to such year.
In order for the Base Rent, the Percentage Rent, and the Additional Charges
to constitute rents from real property, the Percentage Leases must be respected
as true leases for federal income tax purposes and not treated as service
contracts, joint ventures or some other type of arrangement. The determination
of whether the Percentage Leases are true leases depends on an analysis of all
the surrounding facts and circumstances. In making such a determination, courts
have considered a variety of factors, including the following: (a) the intent of
the parties, (b) the form of the agreement, (c) the degree of control over the
property that is retained by the property owner (e.g., whether the lessee has
substantial control over the operation of the property or whether the lessee was
required simply to use its best efforts to perform its obligations under the
agreement), and (d) the extent to which the property owner retains the risk of
loss of the property (e.g., whether the lessee bears the risk of increases in
operating expenses or the risk of damage to the property).
In addition, Section 7701(e) of the Code provides that a contract that
purports to be a service contract (or a partnership agreement) is treated
instead as a lease of property if the contract is properly treated as such,
taking into account all relevant factors, including whether or not: (a) the
service recipient is in physical possession of the property, (b) the service
recipient controls the property, (c) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely to be dedicated to the service recipient for a substantial portion of the
useful life of the property, the recipient shares the risk that the property
will decline in value, the recipient shares in any appreciation in the value of
the property, the recipient shares in savings in the property's operating costs,
or the recipient bears the risk of damage to or loss of the property), (d) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract, (e) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient, and
(f) the total contract price does not substantially exceed the rental value of
the property for the contract period. Since the determination of whether a
service contract should be treated as a lease is inherently factual, the
presence or absence of any single factor may not be dispositive in every case.
Counsel is of the opinion that the Percentage Leases will be treated as
true leases for federal income tax purposes. Such opinion is based, in part, on
the following facts: (a) the Operating Partnership and the lessee intend for
their relationship to be that of a lessor and lessee and such relationship will
be documented by lease agreements, (b) the lessee has the right to exclusive
possession and use and quiet enjoyment of the Hotels during the term of the
Percentage Leases, (c) the lessee bears the cost of, and will be responsible
for, day-to-day maintenance and repair of the Hotels, other than the cost of
maintaining underground utilities, structural elements and exterior painting,
and will dictate how the Hotels are operated, maintained, and improved, (d) the
lessee bears all of the costs and expenses of operating the Hotels (including
inventory costs) during the term of the Percentage Leases (other than real
property taxes, personal property taxes on property owned by the Operating
Partnership, casualty insurance and the cost of replacement or refurbishment of
furniture, fixtures and equipment, to the extent such costs do not exceed the
allowance for such costs provided by the Operating Partnership under the
Percentage Leases), (e) the lessee will benefit from any savings in the costs of
operating the Hotels during the term of the Percentage Leases, (f) in the event
of damage or destruction to a Hotel which renders the Hotel unsuitable for
continued use, the lessee will be at economic risk because the Operating
Partnership can elect to terminate the Percentage Lease as to such Hotel, in
which event the lessee can elect to rebuild at its cost less any insurance
proceeds, or accept such termination, (g) the lessee will indemnify the
Partnership against all liabilities imposed on the Partnership during the term
of the Percentage Leases by reason of: (i) injury to persons or damage to
property occurring at the Hotels; or (ii) the lessee's use, management,
maintenance or repair of the Hotels, (h) the lessee is obligated to pay
substantial fixed rent for the period of use of the Hotels, and (i) the lessee
stands to incur substantial losses (or reap substantial gains) depending on how
successfully it operates the Hotels. The Company has represented that the lessee
has and will have its own employees, physically distinct and separate office
space, furniture and equipment, and
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directors. Further, the Company has represented that neither the Company nor the
Operating Partnership will furnish or render services to either the lessee or
its customers.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Percentage Leases that discuss whether such
leases constitute true leases for federal income tax purposes. Therefore, the
opinion of counsel with respect to the relationship between the Operating
Partnership and the lessee is based upon all of the facts and circumstances, and
rulings and judicial decisions involving situations that are considered to be
analogous. Opinions of counsel are not binding upon the IRS or any court, and
there can be no assurance that the IRS will not assert successfully a contrary
position. If the Percentage Leases are recharacterized as service contracts or
partnership agreements, rather than true leases, part or all of the payments
that the Partnership receives from the lessee may not be considered rent or may
not otherwise satisfy the various requirements for qualification as rents from
real property. In that case, the Company likely would not be able to satisfy
either the 75% test or 95% test (described below) and, as a result, could lose
its REIT status.
In order for the Rents to constitute rents from real property, several
other requirements also must be satisfied. One requirement is that the Rents
attributable to personal property leased in connection with the lease of the
real property comprising a Hotel must not be greater than 15% of the Rents
received under the Percentage Lease. The Rents attributable to the personal
property in a Hotel is the amount that bears the same ratio to total rent for
the taxable year as the average of the adjusted bases of the personal property
in the Hotel at the beginning and at the end of the taxable year bears to the
average of the aggregate adjusted bases of both the real and personal property
comprising the Hotel at the beginning and at the end of such taxable year (the
"Adjusted Basis Ratio"). Management has obtained an appraisal of the personal
property at each Hotel indicating that the appraised value of the personal
property at each Hotel is less than 15% of the value at which such Hotel is
acquired. However, the Company has represented that the Operating Partnership
will in no event acquire additional personal property for a Hotel to the extent
that such acquisition would cause the Adjusted Basis Ratio for that Hotel to
exceed 15%. There can be no assurance, however, that the Service would not
assert that the personal property acquired from a particular partnership had a
value in excess of the appraised value, or that a court would not uphold such
assertion. If such a challenge were successfully asserted, the Company could
fail the 15% Adjusted Basis Ratio as to one or more of the Percentage Leases,
which in turn potentially could cause it to fail to satisfy the 75% test or the
95% (described below) and thus could lose its REIT status.
Another requirement for qualification of the Rents as rents from real
property is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however, will qualify
as rents from real property if it is based on percentages of receipts or sales
and the percentages (a) is fixed at the time the Percentage Leases are entered
into, (b) is not renegotiated during the term of the Percentage Leases in a
manner that has the effect of basing Percentage Rent on income or profits, and
(c) conforms with normal business practice. More generally, the Percentage Rent
will not qualify as rents from real property if, considering the Percentage
Leases and all the surrounding circumstances, the arrangement does not conform
with normal business practice, but is in reality used as a means of basing the
Percentage Rent on income or profits. Since the Percentage Rent is based on
fixed percentages of the gross revenues from the Hotels that are established in
the Percentage Leases, and the Company has represented that the percentages (i)
will not be renegotiated during the terms of the Percentage Leases in a manner
that has the effect of basing the Percentage Rent on income or profit and (ii)
conform with normal business practice, the Percentage Rent should not be
considered based in whole or in part on the income or profits of any person.
Furthermore, the Company has represented that, with respect to other hotel
properties that it acquires in the future, it will not charge rent for any
property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a fixed percentage of gross revenue,
as described above).
As described above, a further requirement, under the related party tenant
rules, for qualification of Rents as rents from real property limits the
relationship between the Company and its tenants. In the case of a corporate
tenant, the Company must not own 10% or more of the total combined voting power
of the tenant's stock and must not own 10% or more of the total number of shares
of all classes of the tenant's stock
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outstanding. In the case of a tenant that is not a corporation, the Company must
not own 10% or more in interest of the tenant's assets or net profits. The
Company intends to limit its ownership interest in GHG to nonvoting preferred
stock which will constitute less than 10% of the total number of outstanding
shares of GHG stock. The common stock of GHG, which is the only voting stock of
GHG, will be owned by persons who are not related to the Company within the
definition in the applicable statute. The common stockholders will have a
significant economic interest in GHG and will elect the board of directors of
GHG. Based upon the foregoing, counsel is of the opinion that rental payments
from GHG will not constitute rentals from a party related to the Company.
The Company will receive nonqualifying management fee income. As a result,
the Company may approach the income test limits and could be at risk of not
satisfying such tests and thus not qualifying as a REIT. Counsel's opinion is
based on the Company's representation that the actual amount of nonqualifying
income will not exceed such limits.
The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of the Company's gross income for the taxable
year must be derived from the above-described qualifying income, or from
dividends, interest or gains from the sale or disposition of stock or other
securities that are not dealer property. Dividends and interest on any
obligation not collateralized by an interest on real property are included for
purposes of the 95% test, but not for purposes of the 75% test. Furthermore,
income earned on interest rate swaps and caps entered into as liability hedges
against variable rate indebtedness qualify for the 95% test (but not the 75%
test). Beginning in 1998, income earned on liability hedges against all of a
REIT's indebtedness, such as options, futures, and forward contracts, will
qualify for the 95% test (but not the 75% test). In certain cases, Treasury
Regulations treat a debt instrument and a liability hedge as a synthetic debt
instrument for all purposes of the Code. If a liability hedge entered into by a
REIT is subject to these rules, income earned thereon will operate to reduce its
interest expense, and, therefore such income will not affect the REIT's
compliance with either the 75% or 95% tests.
Even if the Company fails to satisfy one or both of the 75% or 95% tests
for any taxable year, it may still qualify as a REIT for such year if it is
entitled to relief under certain provisions of the Code. These relief provisions
will generally be available if: (i) the Company's failure to comply was due to
reasonable cause and not to willful neglect; (ii) the Company reports the nature
and amount of each item of its income included in the 75% and 95% tests on a
schedule attached to its tax return; and (iii) any incorrect information on this
schedule is not due to fraud with intent to evade tax. It is not possible,
however, to state whether in all circumstances the Company would be entitled to
the benefit of these relief provisions. If these relief provisions apply, the
Company will, however, still be subject to a special tax upon the greater of the
amount by which it fails either the 75% or 95% test for that year.
The 30% Test. Prior to 1998, the Company must have derived less than 30% of
its gross income for each taxable year from the sale or other disposition of:
(i) real property held for less than four years (other than foreclosure property
and involuntary conversions); (ii) stock or securities held for less than one
year; and (iii) property in a "prohibited transaction." The 30% test has been
repealed effective for tax years beginning after December 31, 1997.
ANNUAL DISTRIBUTION REQUIREMENTS
The Company, in order to qualify as a REIT, is required to make
distributions (other than capital gain distributions) to its stockholders each
year in an amount at least equal to (A) the sum of: (i) 95% of the Company's
REIT Taxable Income (computed without regard to the dividends paid deduction and
the REIT's net capital gain); and (ii) 95% of the net income (after tax), if
any, from foreclosure property, minus (B) the sum of certain items of non-cash
income. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Company timely
files its tax return for such year and if paid on or before the first regular
distribution payment after such declaration. To the extent that the Company does
not distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its REIT Taxable Income, as adjusted, it will be subject to tax on
the undistributed amount at regular capital gains or ordinary corporate tax
rates, as the case may be. (However, beginning in 1998, a REIT can elect to
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"pass through" any of its taxes paid on its undistributed net capital gain to
its shareholders on a pro rata basis.) Furthermore, if the REIT should fail to
distribute during each calendar year at least the sum of: (i) 85% of its
ordinary income for such year; (ii) 95% of its net capital gain for such year;
and (iii) any undistributed taxable income from prior periods, the REIT would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. For such purposes, dividends declared to
shareholders of record in October, November, or December of one calendar year
and paid by January 31 of the following calendar year are deemed paid as of
December 31 of the initial calendar year.
The Company believes that it has made and will make timely distributions
sufficient to satisfy the annual distribution requirements. In this regard, the
partnership agreement of the Operating Partnership authorizes the Company, as
general partner, to take such steps as may be necessary to cause the Operating
Partnership to distribute to its partners an amount sufficient to permit the
Company to meet these distribution requirements. It is possible that in the
future the Company may not have sufficient cash or other liquid assets to meet
the 95% distribution requirement, due to timing differences between the actual
receipt of income and actual payment of expenses on the one hand, and the
inclusion of such income and deduction of such expenses in computing the
Company's REIT taxable income on the other hand. Further, as described below, it
is possible that, from time to time, the Company may be allocated a share of net
capital gain attributable to the sale of depreciated property that exceeds its
allocable share of cash attributable to that sale. To avoid any problem with the
95% distribution requirement, the Company will closely monitor the relationship
between its REIT Taxable Income and cash flow and, if necessary, will borrow
funds (or cause the Operating Partnership or other affiliates to borrow funds)
in order to satisfy the distribution requirement. The Company (through the
Operating Partnership) may be required to borrow funds at times when market
conditions are not favorable.
If the Company fails to meet the 95% distribution requirement as a result
of an adjustment to the Company's tax return by the IRS, the Company may
retroactively cure the failure by paying a "deficiency dividend" (plus
applicable penalties and interest) within a specified period.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify will not be deductible by the Company, nor will they be
required to be made. In such event, to the extent of the Company's current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and, subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless entitled to relief under specific statutory provisions, the Company will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether the Company would be entitled to such statutory relief.
TAX ASPECTS OF THE COMPANY'S INVESTMENT IN THE OPERATING PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable solely to the Company's investment in the Operating
Partnership.
General
The Company holds a direct ownership interest in the Operating Partnership.
In general, partnerships are "pass-through" entities which are not subject to
federal income tax. Rather, partners are allocated their proportionate shares of
the items of income, gain, loss, deduction and credit of a partnership, and are
potentially subject to tax thereon, without regard to whether the partners
receive a distribution from the partnership. The Company includes its
proportionate share of the foregoing Operating Partnership items for purposes of
the various REIT income tests and in the computation of its REIT Taxable Income.
See "-- Requirements for Qualification" and "-- Gross Income Tests." Any
resultant increase in the Company's REIT Taxable Income increases its
distribution requirements (see "-- Requirements for Qualification" and
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"-- Annual Distribution Requirements"), but is not subject to federal income tax
in the hands of the Company provided that such income is distributed by the
Company to its stockholders. Moreover, for purposes of the REIT asset tests (see
"-- Requirements for Qualification" and "-- Asset Tests"), the Company includes
its proportionate share of assets held by the Operating Partnership.
Tax Allocations with Respect to Certain Properties
Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership, must be allocated in
a manner such that the contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain or
unrealized loss is generally equal to the difference between the fair market
value of contributed property at the time of contribution and the adjusted tax
basis of such property at the time of contribution (a "Book-Tax Difference").
Such allocations are solely for federal income tax purposes and do not affect
the book capital accounts or other economic or legal arrangements among the
partners. The Operating Partnership was formed by way of contributions of
appreciated property. Consequently, the partnership agreement of the Operating
Partnership requires such allocations to be made in a manner consistent with
Section 704(c) of the Code.
In general, the limited partners of the Operating Partnership will be
allocated lower amounts of depreciation deductions for tax purposes and
increased taxable income and gain on sale by the Operating Partnership of the
contributed assets. This will tend to eliminate the Book-Tax Difference over the
life of the Operating Partnership. However, the special allocation rules under
Section 704(c) of the Code do not always entirely rectify the Book-Tax
Difference on an annual basis or with respect to a specific taxable transaction
such as a sale. Thus, the carryover basis of the contributed assets in the hands
of the Operating Partnership may cause the company to be allocated lower
depreciation and other deductions, and possibly greater amounts of taxable
income in the event of a sale of such contributed assets in excess of the
economic or book income allocated to it as a result of such sale. This may cause
the Company to recognize taxable income in excess of cash proceeds, which might
adversely affect the Company's ability to comply with the REIT distribution
requirements. See "-- Requirements for Qualification" and "-- Annual Distributon
Requirements." In addition, the application of Section 704(c) of the Code to the
Operating Partnership is not entirely clear and may be affected by authority
that may be promulgated in the future.
Basis in Operating Partnership Interest
The Company's adjusted tax basis in its partnership interest in the
Operating Partnership generally: (i) is equal to the amount of cash and the
basis of any other property contributed to the Operating Partnership by the
Company; (ii) is increased by (a) its allocable share of the Operating
Partnership's income and (b) increases in its allocable share of indebtedness of
the Operating Partnership and; (iii) is reduced, but not below zero, by the
Company's allocable share of (a) the Operating Partnership's losses and (b) the
amount of cash distributed to the Company, and by constructive distributions
resulting from a reduction in the Company's share of indebtedness of the
Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's losses would reduce the adjusted tax basis of the Company's
partnership interest in the Operating Partnership below zero, the recognition of
such losses will be deferred until such time as the recognition of such loss
would not reduce the Company's adjusted tax basis below zero. To the extent that
the Operating Partnership's distributions, or any decrease in the Company's
share of the indebtedness of the Operating Partnership (each such decrease being
considered a constructive cash distribution to the partners), would reduce the
Company's adjusted tax basis below zero, such distributions (including such
constructive distributions) constitute taxable income to the Company. Such
distributions and constructive distributions will normally be characterized as a
capital gain, and if the Company's partnership interest in the Operating
Partnership has been held for longer than the long-term capital gain holding
period (currently one year), the distributions and constructive distributions
will constitute long-term capital gains.
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Sale of Properties
Generally, any gain realized by the Operating Partnership on the sale of
property held by the Operating Partnership will be capital gain, except for any
portion of such gain that is treated as depreciation or cost recovery recapture.
The Company's share of any gain realized by the Operating Partnership on the
sale of any dealer property generally will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. See "Taxation of
the Company" and "-- Requirements for Qualification" and "-- Gross Income
Tests -- The 95% Test." Under existing law, whether property is dealer property
is a question of fact that depends on all the facts and circumstances with
respect to the particular transaction. The Operating Partnership intends to hold
its properties for investment with a view to long-term appreciation, to engage
in the business of acquiring, developing, owning and operating its properties,
and to make such occasional sales of properties as are consistent with the
Company's investment objectives. Based upon such investment objectives, the
Company believes that in general the Operating Partnership's properties should
not be considered dealer property and that the amount of income from prohibited
transactions, if any, will not be material.
TAXATION OF STOCKHOLDERS
Taxation of Taxable Domestic Stockholders
As used herein, the term "U.S. Stockholder" means a holder of shares of
Company stock who (for U.S. federal income tax purposes): (i) is a citizen or
resident of the United States; (ii) is a corporation, partnership, or other
entity created or organized in or under the laws of the United States or of any
political subdivision thereof; (iii) is an estate the income of which is subject
to United States Federal income taxation regardless of its source; or (iv) is a
trust whose administration is subject to the primary supervision of a United
States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust. Notwithstanding the
preceding sentence, to the extent provided in regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date that elect to continue to be treated as United States persons, shall also
be considered U.S. Stockholders.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction otherwise available with respect
to dividends received by U.S. Stockholders that are corporations. Distributions
made by the Company that are properly designated by the Company as capital gain
dividends will be taxable to taxable U.S. Stockholders as gains (to the extent
that they do not exceed the Company's actual net capital gain for the taxable
year) from the sale or disposition of a capital asset. Depending on the period
of time the Company held the assets which produced such gains, and on certain
designations, if any, which may be made by the Company, such gains may be
taxable to noncorporate U.S. stockholders at a 20%, 25% or 28% rate. U.S.
Stockholders that are corporations may, however, be required to treat up to 20%
of certain capital gain dividends as ordinary income. To the extent that the
Company makes distributions (not designated as capital gain dividends) in excess
of its current and accumulated earnings and profits, such distributions will be
treated first as a tax-free return of capital to each U.S. Stockholder, reducing
the adjusted basis which such U.S. Stockholder has in his shares of Company
Stock for tax purposes by the amount of such distribution (but not below zero),
with distributions in excess of a U.S. Stockholder's adjusted basis in his
shares taxable as capital gain, provided that the shares have been held as a
capital asset (which, with respect to a non-corporate U.S. Stockholder, will be
taxable as long-term capital gain if the shares have been held for more than
eighteen months, mid-term capital gain if the shares have been held for more
than one year but not more than eighteen months, or short-term capital gain if
the shares have been held for one year or less). Dividends declared by the
Company in October, November, or December of any year and payable to a
stockholder of record on a specified date in any such month shall be treated as
both paid by the Company and received by the stockholder on December 31st of
such year; provided that the dividend is actually paid by the Company on or
before January 31st of the following calendar year. Stockholders may not include
in their own income tax returns any net operating losses or capital losses of
the Company.
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Distributions made by the Company and gain arising from the sale of
exchange by a U.S. Stockholder of shares of Company stock will not be treated as
passive activity income, and, as a result, U.S. Stockholders generally will not
be able to apply any "passive losses" against such income or gain. Distributions
made by the Company (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of computing the
investment interest limitation. Gain arising from the sale or other disposition
of Company stock (or distributions treated as such), will not be treated as
investment income under certain circumstances.
The Company may elect to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains. In such event, the Company would pay
tax on such retained net long-term capital gains. In addition to the extent
designated by the Company, a U.S. Stockholder generally would: (i) include its
proportionate share of such undistributed long-term capital gains in computing
its long-term capital gains in its return for its taxable year in which the last
day of the Company's taxable year falls (subject to certain limitations as to
the amount so includable); (ii) be deemed to have paid the capital gains tax
imposed on the Company on the designated amounts included in such U.S.
Stockholder's long-term capital gains; (iii) receive a credit or refund for such
amount of tax deemed paid by it; (iv) increase the adjusted basis of its Shares
by the difference between the amount of such includable gains and the tax deemed
to have been paid by it; and (v), in the case of a U.S. Stockholder that is a
corporation, appropriately adjust its earnings and profits for the retained
capital gains in accordance with Treasury Regulations to be prescribed by the
IRS.
Upon any sale or other disposition of Common Stock, a U.S. Stockholder will
recognize gain or loss for federal income tax purposes in an amount equal to the
difference between: (i) the amount of cash and the fair market value of any
property received on such sale or other disposition; and (ii) the holder's
adjusted basis in such shares of Common Stock for tax purposes. Such gain or
loss will be capital gain or loss if the shares have been held by the U.S.
Stockholder as a capital asset and, with respect to a non-corporate U.S.
Stockholder, will be mid-term or long-term gain or loss if such shares have been
held for more than one year or more than eighteen months, respectively. In
general, any loss recognized by a U.S. Stockholder upon the sale or other
disposition of shares of Common Stock that have been held for six months or less
(after applying certain holding period rules) will be treated as a long-term
capital loss, to the extent of capital gain dividends received by such U.S.
Stockholder from the Company which were required to be treated as long-term
capital gains.
Backup Withholding
The Company will report to its domestic stockholders and to the IRS the
amount of dividends paid during each calendar year, and the amount of tax
withheld, if any, with respect thereto. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid and redemption proceeds unless such stockholder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules.
Notwithstanding the foregoing, the Company will institute backup withholding
with respect to a stockholder when instructed to do so by the IRS. A stockholder
that does not provide the Company with his correct taxpayer identification
number may also be subject to penalties imposed by the IRS. Any amount paid as
backup withholding will be creditable against the stockholder's federal income
tax liability.
Taxation of Tax-Exempt Stockholders
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not constitute
unrelated business taxable income ("UBTI"). Revenue rulings, however, are
interpretive in nature and are subject to revocation or modification by the IRS.
Based upon the ruling and the analysis therein, distributions by the Company to
a stockholder that is a tax-exempt entity should not constitute UBTI, provided
that the tax exempt entity has not financed the acquisition of its shares of
Common Stock with "acquisition indebtedness" within the meaning of the Code, and
that the shares of the Company's stock are not otherwise used in an unrelated
trade or business of the tax-exempt entity. In addition, REITs generally treat
the beneficiaries of qualified pension trusts as the beneficial owners of REIT
shares
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owned by such pension trusts for purposes of determining if more than 50% of the
REIT's shares are owned by five or fewer individuals. However, if a pension
trust owns more than 10% of the REIT's shares, it can be subject to UBTI on all
or a portion of REIT dividends made to it, if the Company is treated as a
"pension-held REIT." In view of the Ownership Limitation, the Company does not
expect to be treated as a "pension-held REIT." See "Description of Common
Stock -- Restrictions on Transfer." Consequently, a pension trust stockholder
should not be subject to UBTI on dividends that it receives from the Company.
However, because the Common Stock is publicly traded, no assurance can be given
to this effect.
Taxation of Foreign Stockholders
The rules governing United States federal income taxation of the ownership
and disposition of Company stock by persons that are nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt
is made herein to provide more than a summary of such rules. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of federal, state, local and any foreign income tax laws with regard
to an investment in the Company, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company or the Operating Partnership of "United States real property
interests" ("USRPIs"), as defined in the Code, and not designated by the Company
as capital gain dividends will be treated as dividends of ordinary income to the
extent they are made out of current or accumulated earnings and profits of the
Company. Unless such distributions are effectively connected with the Non-U.S.
Stockholder's conduct of a U.S. trade or business (or, if an income tax treaty
applies, is attributable to a U.S. permanent establishment of the Non-U.S.
Stockholder), the gross amount of the distributions will ordinarily be subject
to U.S. withholding tax at a 30% or lower treaty rate, if applicable. In
general, Non-U.S. Stockholders will not be considered engaged in a U.S. trade or
business (or, in the case of an income tax treaty, as having a U.S. permanent
establishment) solely by reason of their ownership of the Company's stock. If
income on the Company's stock is treated as effectively connected with the
Non-U.S. Stockholder's conduct of a U.S. trade or business (or, if an income tax
treaty applies, is attributable to a U.S. permanent establishment of the
Non-U.S. Stockholder), the Non-U.S. Stockholder generally will be subject to a
tax at graduated rates, in the same manner as U.S. stockholders are taxed with
respect to such distributions (and may also be subject to the 30% branch profits
tax in the case of a stockholder that is a foreign corporation). The Company
expects to withhold U.S. income tax at the rate of 30% on the gross amount of
any distributions of ordinary income made to a Non-U.S. Stockholder unless: (i)
a lower treaty rate applies and proper certification is provided; or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 with the Company claiming that the
distribution is effectively connected with the Non-U.S. Stockholder's conduct of
a U.S. trade or business (or, if an income tax treaty applies, is attributable
to a U.S. permanent establishment of the Non-U.S. Stockholder).
Pursuant to 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 certain income
tax treaties, lower withholding rates generally applicable to dividends do not
apply to dividends from a REIT, such as the Company. Under recently promulgated
Temporary Treasury Regulations, certain Non-U.S. Stockholders who seek to claim
the benefit of an applicable treaty rate will be required to satisfy certain
residency requirements. In addition, certain certification and disclosure
requirements must be satisfied under the effectively connected income and
permanent establishment exemptions discussed in the preceding paragraph.
Unless the Company's stock constitutes a USRPI, distributions in excess of
current and accumulated earnings and profits of the Company will not be taxable
to a stockholder to the extent that such distributions do not exceed the
adjusted basis of the stockholder's shares but rather will reduce the adjusted
basis of such shares. To the extent that such distributions exceed the adjusted
basis of a Non-U.S. Stockholder's shares of the Company's capital stock, such
distributions will give rise to tax liability if the Non-U.S. Stockholder would
otherwise be subject to tax on any gain from the sale or disposition of his
shares, as described below. If it cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, the distributions will be subject
to withholding at the same rate
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as dividends. If, however, the Company's stock is treated as a USRPI, then
unless otherwise treated as a dividend for withholding tax purposes as described
below, any distributions in excess of current or accumulated earnings and
profits will generally be subject to 10% withholding and, to the extent such
distributions also exceed the adjusted basis of a Non-U.S. Stockholder's stock,
they will also give rise to gain from the sale or exchange of the stock, the tax
treatment of which is described below.
Distributions that are designated by the Company at the time of
distribution as capital gain dividends (other than those arising from the
disposition of a USRPI) generally will not be subject to taxation, unless: (i)
investment in the shares is effectively connected with the Non-U.S.
Stockholder's United States trade or business (or, if an income tax treaty
applies, it is attributable to a United States permanent establishment of the
Non-U.S. Stockholder), in which case the Non-U.S. Stockholder will be subject to
the same treatment as U.S. stockholders with respect to such gain (except that a
stockholder that is a foreign corporation may also be subject to the 30% branch
profits tax); or (ii) the Non-U.S. Stockholder is a non-resident alien
individual whose is present in the United States for 183 days or more during the
taxable year and either has a "tax home" in the United States or sold his or her
shares under circumstances in which the sale was attributable to a U.S. office,
in which case the non-resident alien individual will be subject to a 30% tax on
the individual's capital gains.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of USRPIs
("USRPI Capital Gains"), such a properties beneficially owned by the Company
(including property held by the Operating Partnership), will be taxed to a
Non-U.S. Stockholder under the provisions of the Foreign Investment in Real
Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed
to a Non-U.S. Stockholder as gain effectively connected with a U.S. trade or
business regardless or whether such dividends are designated as capital gain
dividends. Non-U.S. Stockholders would thus be taxed at the normal capital gain
rates applicable to U.S. stockholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals) on such distributions. Also, distributions of USRPI Capital Gains
may be subject to a 30% branch profits tax in the hands of a foreign corporate
stockholder not entitled to treaty exemption or rate reduction. The Company is
required by applicable Treasury Regulations to withhold 35% of any distribution
consisting of USRPI Capital Gains. This amount may be creditable against the
Non-U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares of Company
stock will generally not be taxed under FIRPTA if the shares do not constitute a
USRPI. Shares of the Company will not be considered a USRPI if the Company is a
"domestically controlled REIT," or if the shares are part of a class of stock
that is regularly traded on an established securities market and the holder
owned less 5% of the class of stock sold during a specified testing period. A
"domestically controlled REIT" is defined generally as a real estate investment
trust in which at all times during a specified testing period less than 50% in
value of the stock was held directly or indirectly by foreign persons. The
Company believes that it is a "domestically controlled REIT," and therefore the
sale of shares will not be subject to taxation under FIRPTA. If the gain on the
sale of shares were to be subject to taxation under FIRPTA, the Non-U.S.
Stockholder would be subject to the same treatment as U.S. stockholders with
respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals),
and the purchaser of the stock may be required to withhold 10% of the purchase
price and remit such amount to the IRS. However, since the Company's Common
Stock is publicly traded, no assurance can be given to this effect.
Gain not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if:
(i) investment in the shares is effectively connected with a U.S. trade or
business of the Non-U.S. Stockholder (or, if an income tax treaty applies, is
attributable to a U.S. permanent establishment of the Non-U.S. Stockholder), in
which case the Non-U.S. Stockholder will be subject to the same treatment as
U.S. stockholders with respect to such gain; or (ii) the Non-U.S. Stockholder is
a nonresident alien individual who was present in the U.S. for 183 days or more
during the taxable year and has a "tax home" in the U.S., in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains. If the gain on the sale of shares were to be subject to taxation
under FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as
U.S.
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stockholders with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals).
If the proceeds of a disposition of shares of Company stock are paid by or
through a U.S. office of a broker, the payment is subject to information
reporting and backup withholding unless the disposing Non-U.S. Stockholder
certifies as to his name, address and non-U.S. status or otherwise establishes
an exemption. Generally, U.S. information reporting and backup withholding will
not apply to a payment of disposition proceeds if the payment is made outside
the U.S. through a non-U.S. office of a non-U.S. broker. U.S. information
reporting requirements (but not backup withholding) will apply, however, to a
payment of disposition proceeds outside the U.S. if: (i) the payment is made
through an office outside the U.S. of a broker that is either (a) a U.S. person,
(b) a foreign person that derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the U.S. or (c) a "controlled
foreign corporation" for U.S. federal income tax purposes; and (ii) the broker
fails to obtain documentary evidence that the stockholder is a Non-U.S.
Stockholder and that certain conditions are met or that the Non-U.S. Stockholder
otherwise is entitled to an exemption.
Final regulations dealing with withholding tax on income paid to foreign
persons and related matters (the "New Withholding Regulations") were recently
promulgated. In general, the New Withholding Regulations do not significantly
alter the substantive withholding and information reporting requirements
described above, but unify current certification procedures and forms and
clarify reliance standards. For example, the New Withholding Regulations adopt a
certification rule under which a Non-U.S. stockholder who wishes to claim the
benefit of an applicable treaty rate with respect to dividends received from a
U.S. corporation will be required to satisfy certain certification and other
requirements. In addition, the New Withholding Regulations require a corporation
that is a REIT to treat as a dividend the portion of a distribution that is not
designated as a capital gain dividend or return of basis and apply the 30%
withholding tax (subject to any applicable deduction or exemption) to such
portion, and to apply the FIRPTA withholding rules (discussed above) with
respect to the portion of the distribution designed by the REIT as capital gain
dividend. The New Withholding Regulations will generally be effective for
payments made after December 31, 1998, subject to certain transition rules.
EXCEPT AS PROVIDED IN THIS PARAGRAPH, THE DISCUSSION SET FORTH ABOVE IN
"TAXATION OF FOREIGN STOCKHOLDERS" DOES NOT TAKE THE NEW WITHHOLDING REGULATIONS
INTO ACCOUNT. PROSPECTIVE NON-U.S. STOCKHOLDERS ARE STRONGLY URGED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW WITHHOLDING REGULATIONS.
Possible Legislative or Other Actions Affecting Tax Consequences
Prospective investors should recognize that the present federal income tax
treatment of an investment in the Company may be modified by legislative,
judicial or administrative action at any time, and that any such action may
affect investments and commitments previously made. The rules dealing with
federal income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the U.S. Treasury Department, resulting
in revisions or regulations and revised interpretations of established concepts
as well as statutory changes. Revisions in federal tax laws and interpretations
thereof could adversely affect the tax consequences of an investment in the
Company.
State Tax Consequences and Withholding
The Company and its stockholders 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 stockholders may not conform to the federal income tax consequences
discussed above. Several states in which the Company may conduct business treat
REITs as ordinary corporations. The Company does not believe, however, that
stockholders will be required to file state tax returns, other than in their
respective states of residence, as a result of the ownership of shares of the
Company's capital stock. However, prospective stockholders should consult their
own tax advisors regarding the effect of state and local tax laws on an
investment in the Company.
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EACH INVESTOR IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE OWNERSHIP AND SALE
OF COMMON STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REAL ESTATE INVESTMENT
TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES
OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters for
public offering and sale by them or may sell the Offered Securities to investors
directly or through agents, which agents may be affiliated with the Company. Any
such underwriter or agent involved in the offer and sale of the Offered
Securities will be named in the applicable Prospectus Supplement. Direct sales
to investors may be accomplished through subscription offerings or concurrent
rights offerings to the Company's stockholders and direct placements to third
parties.
Sales of Offered Securities offered pursuant to any applicable Prospectus
Supplement may be effected from time to time in one or more transactions on the
New York Stock Exchange or in negotiated transactions or any combination of such
methods of sale, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at other negotiated prices.
Underwriters may offer and sell Offered Securities at a fixed price or
prices which may be changed, at prices related to the prevailing market prices
at the time of sale, or at negotiated prices. The Company also may offer and
sell the Offered Securities in exchange for one or more of its then outstanding
issues of debt or convertible debt securities. The Company also may, from time
to time, authorize underwriters acting as the Company's agents to offer and sell
the Offered Securities upon the terms and conditions as set forth in the
applicable Prospectus Supplement. In connection with the sale of Offered
Securities, underwriters may be deemed to have received compensation from the
Company in the form of underwriting discounts or commissions and may also
receive commissions from purchasers of Offered Securities for whom they may act
as agent. Underwriters may sell Offered Securities to or through dealers, and
such dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Offered Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters, dealers
and agents participating in the distribution of the Offered Securities may be
deemed to be underwriters, and any discounts and commissions received by them
and any profit realized by them on resale of the Offered Securities may be
deemed to be underwriting discounts and commissions under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Company, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act. Any such
indemnification agreements will be described in the applicable Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, each
series of Offered Securities will be a new issue with no established trading
market, other than the Common Stock which is listed on the New York Stock
Exchange. Any shares of Common Stock sold pursuant to a Prospectus Supplement
will be listed on such exchange, subject to official notice of issuance. The
Company may elect to list any series of Preferred Stock or Warrants on any
exchange, but is not obligated to do so. It is possible that one or more
underwriters may make a market in a series of Offered Securities, but will not
be obligated to do so and may discontinue any market making at any time without
notice. Therefore, no assurance can be given as to the liquidity of the trading
market for the Offered Securities.
If so indicated in the applicable Prospectus Supplement, the Company may
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Offered Securities from the Company
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at the public offering price set forth in such Prospectus Supplement pursuant to
Delayed Delivery Contracts ("Contracts") providing for payment and delivery on
the date or dates stated in such Prospectus Supplement. Each Contract will be
for an amount not less than, and the aggregate principal amount of Offered
Securities sold pursuant to Contracts shall be not less nor more than, the
respective amounts stated in the applicable Prospectus Supplement. Institutions
with whom Contracts, when authorized, may be made include commercial and savings
banks, insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions but will in all cases be subject
to the approval of the Company. Contracts will not be subject to any conditions
except: (i) the purchase by an institution of the Offered Securities covered by
its Contracts shall not at the time of delivery be prohibited under the laws of
any jurisdiction in the U.S. to which such institution is subject; and (ii) if
the Offered Securities are being sold to underwriters, the Company shall have
sold to such underwriters the total principal amount of the Offered Securities
less the principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for, the Company and its
subsidiaries in the ordinary course of business.
In order to facilitate an offering of Offered Securities, certain persons
participating in the offering may engage in transactions that stabilize,
maintain, or otherwise affect the price of the Offered Securities during and
after the offering. Specifically, the underwriters may over-allot or otherwise
create a short position in the Offered Securities for their own account by
selling more Offered Securities than have been sold to them by the Company. The
underwriters may elect to cover any such short position by purchasing Offered
Securities in the open market or by exercising any over-allotment option granted
to the underwriters. In addition, such persons may stabilize or maintain the
price of the Offered Securities by bidding for or purchasing Offered Securities
in the open market and may impose penalty bids, under which selling concessions
allowed to syndicate members or other broker-dealers participating in the
offering are reclaimed if Offered Securities previously distributed in the
offering are repurchased in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price of the Offered Securities at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
affect the price of the Offered Securities to the extent that it discourages
resales thereof. No representation is made as to the magnitude or effect of any
such stabilization or other transactions. Such transactions may be effected on
the New York Stock Exchange or otherwise and, if commenced, may be discontinued
at any time.
EXPERTS
The financial statements of the Company, the GRT Predecessor Entities,
Glenborough Hotel Group, Atlantic Pacific Assurance Company Limited and
Glenborough Inland Realty Corporation and related financial statement schedules
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996, incorporated by reference herein, have been audited by Arthur Andersen
LLP, independent public accountants, to the extent and for the periods indicated
in their reports, and have been incorporated herein in reliance on such reports
given on the authority of that firm as experts in accounting and auditing.
In addition, the respective statements of revenues and certain expenses of
the UCT Property, the TRP Properties, the Carlsberg Properties, the CIGNA
Properties, the E&L Properties, the Lennar Properties, the Riverview Property,
the T. Rowe Price Properties, the Centerstone Property, the Advance Properties
and Citibank Park, included in various Current Reports on Form 8-K and Form
8-K/A, incorporated by reference herein, have also been audited by Arthur
Andersen LLP, independent public accountants, to the extent and for the periods
indicated in their reports, and have been incorporated herein, in reliance on
such reports given on the authority of that firm as experts in accounting and
auditing.
35
<PAGE> 109
LEGAL MATTERS
The validity of the Offered Securities will be passed upon for the Company
by Morrison & Foerster LLP, Palo Alto, California. In addition, the description
of the Company's qualifications and taxation as a REIT under the Code contained
in the Prospectus under the caption "Federal Income Tax Consequences" is based
upon the opinion of Morrison & Foerster LLP. Certain matters will be passed upon
for any underwriters, agents or dealers by Latham & Watkins, San Francisco,
California.
36
<PAGE> 110
APPENDIX - DESCRIPTION OF GRAPHICS
Inside Front Cover
Map of the United States indicating the location of owned portfolios, portfolios
controlled by the Associated Companies and proposed acquisitions.
Pie chart indicating pro forma contribution to net operating income by property
type: Retail 7%, Multi-Family 9%, Industrial 8%, Office/Flex 18%, Office 54%
and Hotel 4%.
Pie chart indicating pro forma square footage by property type: Retail 7%, Hotel
2%, Office 38%, Office/Flex 21%, Industrial 19% and Multi-Family 13%.
Inside Back Cover
Six photographs of recent property acquisitions (Embassy Plaza, Schaumburg, IL,
2000 Corporate Ridge, McLean, VA, Cameron Run, Alexandria, VA, Arrowood
Crossing, Charlotte, NC, Rockwall II, Rockville, MD and Thousand Oaks,
Memphis, TN.).
<PAGE> 111
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE OFFERING
COVERED BY THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THIS PROSPECTUS
SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS CONSTITUTES AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE SERIES A PREFERRED STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT, THE
ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Supplement Summary............ S-3
The Company.............................. S-7
Recent Activities........................ S-9
The Properties........................... S-15
Use of Proceeds.......................... S-19
Price Range of Common Stock and
Distribution History................... S-20
Capitalization........................... S-21
Selected Historical and Pro Forma
Financial and Other Data............... S-22
Pro Forma Financial Information.......... S-25
Description of Series A Preferred
Stock.................................. S-41
Certain Federal Income Tax
Consideration.......................... S-47
Underwriting............................. S-49
Legal Matters............................ S-51
Experts.................................. S-51
Index to Financial Information........... F-1
PROSPECTUS
Available Information.................... 3
Incorporation of Certain Documents by
Reference.............................. 3
The Company.............................. 5
Risk Factors............................. 6
Use of Proceeds.......................... 14
Ratio of Earnings to Fixed Charges....... 14
Description of Preferred Stock........... 14
Description of Common Stock.............. 16
Description of Warrants.................. 18
Certain Provisions of the Company's
Charter and Bylaws..................... 19
Federal Income Tax Consequences.......... 20
Plan of Distribution..................... 34
Experts.................................. 35
Legal Matters............................ 36
</TABLE>
======================================================
======================================================
8,000,000 SHARES
LOGO
LOGO
% SERIES A PREFERRED STOCK
------------------
PROSPECTUS SUPPLEMENT
------------------
BEAR, STEARNS & CO. INC.
SALOMON SMITH BARNEY
BANCAMERICA ROBERTSON STEPHENS
BT ALEX. BROWN
JANUARY , 1998
======================================================
