<PAGE>
REGISTRATION NO. 333-36053
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ERP OPERATING LIMITED PARTNERSHIP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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ILLINOIS 6513 36-3894853
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
TWO NORTH RIVERSIDE PLAZA, SUITE 400
CHICAGO, IL 60606
(312) 474-1300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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DOUGLAS CROCKER II
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OF THE GENERAL PARTNER, EQUITY RESIDENTIAL PROPERTIES TRUST
TWO NORTH RIVERSIDE PLAZA, SUITE 400
CHICAGO, IL 60606
(312) 474-1300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
ERROL R. HALPERIN, ESQ. KENNETH M. DORAN, ESQ.
HAL M. BROWN, ESQ. GIBSON, DUNN & CRUTCHER LLP
RUDNICK & WOLFE 333 SOUTH GRAND AVENUE
203 NORTH LASALLE STREET, SUITE 1800 LOS ANGELES, CALIFORNIA 90071
CHICAGO, ILLINOIS 60601 (213) 229-7000
(312) 368-4000 (213) 229-7520 (TELECOPIER)
(312) 236-7516 (TELECOPIER)
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<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSENT SOLICITATION
---------------
ERP OPERATING LIMITED PARTNERSHIP
PROSPECTUS
---------------
ERP OPERATING LIMITED PARTNERSHIP
INFORMATION STATEMENT
This Consent Solicitation/Prospectus/Information Statement is being
furnished to the holders of the units of limited partnership interest of Evans
Withycombe Residential, L.P., a Delaware limited partnership ("EWRLP"), in
connection with the consent solicitation on behalf of the Board of Directors
("EWR Board of Directors") of Evans Withycombe Residential, Inc., a Maryland
corporation ("EWR"), as general partner, of EWRLP on the following proposals:
(i) the contribution of all of the assets, subject to its liabilities
("Asset Contribution") of EWRLP in exchange for units of limited
partnership interest ("ERP Units") in ERP Operating Limited Partnership, an
Illinois limited partnership ("ERP"), pursuant to an Asset Contribution
Agreement dated August 27, 1997 by and between ERP and EWRLP (the "Asset
Contribution Agreement") on the terms and conditions set forth herein;
(ii) approval of an amendment to the Amended and Restated Agreement of
Limited Partnership of EWRLP ("EWRLP Partnership Agreement") dated August
17, 1994 (the "EWRLP Amendment") in connection with the merger of EWR into
Equity Residential Properties Trust, a Maryland real estate investment
trust ("EQR"), (the "Merger") and the Asset Contribution; and
(iii) the dissolution of EWRLP on the terms and conditions stated herein.
This Consent Solicitation/Prospectus/Information Statement is also being
furnished to holders of units of limited partnership interests in EWRLP
("EWRLP Units") who are hereby offered the opportunity to contribute their
EWRLP Units to ERP in exchange for ERP Units.
This Consent Solicitation/Prospectus/Information Statement is being
furnished to holders of ERP Units to inform such holders of the proposed
adoption by the Chairman of the Board of EQR, as attorney in fact for the
limited partners of ERP, of an amendment to the Fourth Amended and Restated
Limited Partnership Agreement of ERP (the "ERP Partnership Agreement") to
expand the ability of EQR to conduct business other than as the general
partner of ERP.
This Consent Solicitation/Prospectus/Information Statement is first being
mailed to all of the holders of ERP Units and all of the holders of EWRLP
Units on or about November 24, 1997. Certain capitalized terms herein are
defined in the Glossary, beginning at page G-1.
In considering whether to consent to the Asset Contribution and whether to
participate in the offer to holders of EWRLP Units to contribute their EWRLP
Units to ERP in exchange for a number of ERP Units equal to the number of
EWRLP Units so exchanged multiplied by 0.5 (the "Unit Exchange Offer"),
(collectively, with the Merger, the "Transactions"), the limited partners of
EWRLP should consider, in addition to the other information in this Consent
Solicitation/Prospectus/Information Statement, the matters discussed under
"Risk Factors" on page 15 herein. Such matters include:
. Possible conflicts of interest due to the fact that certain directors
and members of management of EWR, pursuant to existing agreements, have
certain interests that arise in connection with the Merger that are in
addition to the interests of limited partners of EWRLP and shareholders
of EWR generally, including, among other things, consulting and
employment agreements between EQR and certain executives of EWR;
payments in cash by EQR for the value of certain options to purchase EWR
stock and for certain bonuses and the issuance of options to purchase
EQR stock to certain officers of EWR.
. The inability of EQR/ERP to maintain the growth rate which it has
experienced since 1993.
. The risk that the distributions with respect to each ERP Unit will be
$2.50 per annum compared to $3.18 per annum with respect to two EWRLP
Units (based upon the distributions per unit of ERP Units and EWRLP
Units declared for the four quarters ending September 30, 1997).
. Adverse consequences associated with debt or preferred equity financing,
including the risk that ERP's cash flow will be insufficient to meet
required payments of principal and interest, the risk that existing
indebtedness may not
<PAGE>
be refinanced or that the terms of such refinancing will not be as
favorable as the terms of current indebtedness, and the risk that
necessary capital expenditures for such purposes as renovations and
other improvements may not be financed on favorable terms or at all.
. Possible change in share prices of common shares of beneficial interest,
par value $0.01 per share, of EQR ("EQR Common") and common stock, par
value $0.01 per share of EWR ("EWR Common") prior to the time the Merger
becomes effective.
. Certain differences between the rights of limited partners in EWRLP and
ERP under their respective partnership agreements and Delaware and
Illinois state law, which currently govern EWRLP and ERP, respectively.
. Lack of control by the limited partners of ERP over the management and
affairs of ERP. Under the terms of the ERP Partnership Agreement, all
decisions regarding the business and operations of ERP are made by EQR,
which serves as sole general partner of ERP. The ERP Partnership
Agreement provides that the limited partners may not remove EQR as
general partner, which may not necessarily be in the limited partners'
interest.
. Lack of liquidity of investment in ERP Units. There is and there will be
no public market for ERP Units. In addition, the ERP Partnership
Agreement provides for certain restrictions on a limited partner's
ability to transfer their ERP Units.
. Taxation of EQR as a regular corporation if it fails to qualify as a
REIT, and the resulting decrease in cash available for distribution.
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED BY THE LIMITED PARTNERS OF ERP AND EWRLP.
--------------
THE SECURITIES TO WHICH THIS CONSENT SOLICITATION/PROSPECTUS/INFORMATION
STATEMENT RELATE HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS CONSENT
SOLICITATION/PROSPECTUS/INFORMATION STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Consent Solicitation/Prospectus/Information Statement is
November 24, 1997.
<PAGE>
AVAILABLE INFORMATION
ERP has filed a registration statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended ("Securities Act"),
with the Securities and Exchange Commission (the "Commission") covering the
ERP Units described herein. As permitted by the rules and regulations of the
Commission, this Consent Solicitation/Prospectus/Information Statement omits
certain information, exhibits and undertakings contained in the Registration
Statement. For further information pertaining to the securities offered
hereby, reference is made to the Registration Statement, including the
exhibits filed as a part thereof.
ERP and EWRLP are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in
accordance therewith, file reports, proxy statements and other information
with the Commission. Reports, proxy statements and other information filed by
ERP and EWRLP can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and at its Regional Offices located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
Commission's Web site is: http://www.sec.gov. Neither the ERP Units nor the
EWRLP Units are currently listed or authorized for listing on any national or
regional securities exchange.
All information contained in this Consent Solicitation/Prospectus/
Information Statement with respect to EWR and its subsidiaries, including EWRLP,
has been supplied by EWR, and all information with respect to EQR and its
subsidiaries, including ERP, has been supplied by EQR.
No person is authorized to give any information or to make any
representation not contained in this Consent Solicitation/Prospectus/
Information Statement, or incorporated in it by reference, and, if given or
made, such information or representation should not be relied upon as having
been authorized. This Consent Solicitation/Prospectus/Information Statement does
not constitute an offer to sell, or a solicitation of an offer to purchase, the
securities offered by this Consent Solicitation/Prospectus/Information
Statement, or the solicitation of a proxy, in any jurisdiction where or from any
person to whom it is unlawful to make such offer, or solicitation of an offer,
or proxy solicitation. Neither the delivery of this Consent Solicitation/
Prospectus/Information Statement nor any distribution of the securities offered
pursuant to this Consent Solicitation/Prospectus/Information Statement shall,
under any circumstances, create an implication that there has been no change in
the affairs of ERP or EWRLP since the date of this Consent
Solicitation/Prospectus/Information Statement.
All documents incorporated by reference in this Consent Solicitation/
Prospectus/Information Statement but not delivered herewith are available
without charge (other than exhibits to such documents which are not specifically
incorporated by reference therein) upon request from, in the case of documents
relating to ERP, Two North Riverside Plaza, Suite 400, Chicago, Illinois 60606,
Attention: Cynthia McHugh, telephone (312) 474-1300, and, in the case of
documents relating to EWRLP, 6991 East Camelback Road, Suite A-200, Scottsdale,
Arizona 85251, Attention: Paul R. Fannin, telephone (602) 840-1040. In order to
insure timely delivery of the documents, any request should be made by December
7, 1997.
i
<PAGE>
INFORMATION INCORPORATED BY REFERENCE
IN THIS CONSENT SOLICITATION/PROSPECTUS/INFORMATION STATEMENT
The following documents filed with the Commission by ERP pursuant to the
Exchange Act are hereby incorporated in this Consent
Solicitation/Prospectus/Information Statement by reference:
1. ERP's current report on Form 8-K dated May 23, 1996.
2. ERP's current report on Form 8-K/A dated May 23, 1996.
3. ERP's current report on Form 8-K dated November 15, 1996.
4. ERP's annual report on Form 10-K for the year ended December 31, 1996.
5. ERP's quarterly report on Form 10-Q for the quarter ended March 31,
1997.
6. ERP's current report on Form 8-K dated May 20, 1997.
7. Description of ERP Units contained in Item 11 to ERP's Registration
Statement on Form 10 dated October 6, 1994, as amended by Amendment No.
3 dated December 12, 1994.
8. ERP's quarterly report on Form 10-Q for the quarter ended June 30, 1997.
9. ERP's current report on Form 8-K dated August 15, 1997.
10. ERP's current report on Form 8-K dated August 27, 1997.
11. ERP's current report on Form 8-K dated September 10, 1997.
12. ERP's current report on Form 8-K dated September 17, 1997.
13. ERP's current report on Form 8-K dated October 3, 1997.
14. ERP's current report on Form 8-K dated October 9, 1997.
15. ERP's quarterly report on Form 10-Q for the quarter ended September 30,
1997.
16. ERP's current report on Form 8-K dated September 30, 1997.
17. ERP's current report on Form 8-K/A dated October 9, 1997.
18. ERP's current report on Form 8-K dated May 30, 1997.
19. All documents subsequently filed by ERP pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the date of the
consummation of the Asset Contribution.
Any statement contained herein or in a document incorporated by reference or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Consent Solicitation/Prospectus/Information
Statement to the extent that a statement contained in this Consent
Solicitation/Prospectus/Information Statement or in any other subsequently
filed document that also is or is deemed to be incorporated by reference in
this Consent Solicitation/Prospectus/Information Statement 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 Consent Solicitation/Prospectus/Information Statement.
ii
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
AND
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSENT SOLICITATION/PROSPECTUS/INFORMATION STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
SECTION NO.
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<S> <C>
SUMMARY................................................................... 1
CONSENT SOLICITATION INFORMATION.......................................... 15
RISK FACTORS.............................................................. 15
Conflicts of Interest................................................... 15
Size and Rapid Growth of EQR............................................ 16
Decrease in Distributions Per Unit to EWRLP Unitholders................. 16
Potential Change in Relative Stock Prices............................... 16
Termination Payments if Merger Fails to Occur........................... 16
Potential Adverse Effects of Combining the Companies.................... 16
Adverse Consequences of Debt Financing and Preferred Shares............. 16
Control and Influence by Significant Shareholders....................... 17
Potential Environmental Liability....................................... 17
General Real Estate Investment Considerations; Changes in Laws.......... 18
Ownership Limit and Limits on Changes in Control........................ 18
Consequences of Failure to Qualify as a REIT............................ 19
Dependence on Key Personnel............................................. 20
Limited Control Over Business of ERP and EWRLP.......................... 20
Loss of Limited Liability............................................... 20
Reliance on General Partner to Declare Distributions.................... 20
Inability to Remove General Partner..................................... 20
Risks of Ownership of ERP Units......................................... 21
Issuance of Preferred Units............................................. 21
No Dissenters' Rights................................................... 21
Distribution Requirements Potentially Increasing Indebtedness of EQR.... 21
Exemptions for Mr. Zell and Others from Maryland Business Combination
Law which Tend to Inhibit Takeovers.................................... 21
THE TRANSACTIONS.......................................................... 22
Terms of the Transactions............................................... 22
Background of the Transactions.......................................... 22
Reasons for the Transactions; Recommendation of the EQR Board of
Trustees............................................................... 25
Reasons for the Transactions; Recommendation of the EWR Board of
Directors.............................................................. 27
Opinion of Financial Advisor--EQR....................................... 28
No Opinion of EWR Financial Advisor..................................... 31
Effective Time of the Transactions...................................... 31
Representations and Warranties; Conditions to the Transactions.......... 32
Dissolution of EWRLP.................................................... 33
No Appraisal Rights..................................................... 33
Regulatory Matters...................................................... 33
Termination Provisions.................................................. 33
Termination Fee and Expenses............................................ 34
No Solicitation of Other Transactions................................... 34
Conversion of Shares/Units.............................................. 35
Conduct of Business Pending the Transactions............................ 35
Anticipated Effects of the Merger on Results of Operations, Liquidity
and Capital Resources.................................................. 37
Loan to EWR and 1031 Exchange........................................... 37
Limitations on the Sale or Refinancing of Certain Properties............ 37
Waiver and Amendment.................................................... 37
Anticipated Accounting Treatment........................................ 38
Restrictions on Transfer of ERP Units; Shares Available for Resale...... 38
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
SECTION NO.
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<C> <S> <C>
THE AMENDMENTS............................................................ 38
ERP Amendment.......................................................... 38
EWRLP Amendment........................................................ 39
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS.......................... 40
ERP UNAUDITED PRO FORMA COMBINED FINANCIAL DATA........................... 43
CAPITALIZATION............................................................ 59
FEDERAL INCOME TAX CONSEQUENCES........................................... 59
POLICIES OF EQR WITH RESPECT TO CERTAIN ACTIVITIES........................ 77
Business Objectives and Operating Strategies........................... 77
Acquisition Strategies................................................. 77
Disposition Strategies................................................. 77
Investment Policies.................................................... 78
Financing Policies..................................................... 78
Lending Policies....................................................... 79
Development Policies................................................... 79
Policies with Respect to Other Activities.............................. 79
MANAGEMENT AND OPERATION OF EQR AFTER THE MERGER.......................... 79
ADDITIONAL INFORMATION REGARDING THE BUSINESS OF EWRLP.................... 79
FINANCIAL INFORMATION REGARDING EWRLP..................................... 83
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF EWRLP...................................................... 85
EWRLP PROPERTIES.......................................................... 93
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................... 95
COMPARISON OF RIGHTS OF UNITHOLDERS....................................... 95
Issuance of Units...................................................... 95
Unit Option Plan....................................................... 95
Indemnification........................................................ 96
Financial Statements and Reports....................................... 96
Mergers................................................................ 96
Transfer or Pledge of Units............................................ 96
Redemption/Exchange of Units........................................... 97
Amendments to Partnership Agreements................................... 97
Transactions and Related Dispositions.................................. 97
Meetings............................................................... 98
PRINCIPAL HOLDERS EWRLP................................................... 98
LEGAL MATTERS............................................................. 99
EXPERTS................................................................... 99
GLOSSARY.................................................................. G-1
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES............................... F-1
APPENDIX A ASSET CONTRIBUTION AGREEMENT.................................. A-1
APPENDIX B FORM OF EWRLP AMENDMENT....................................... B-1
APPENDIX C FORM OF ERP AMENDMENT......................................... C-1
APPENDIX D FORM OF UNIT CONTRIBUTION AGREEMENT........................... D-1
APPENDIX E OPINION OF J.P. MORGAN SECURITIES, INC........................ E-1
</TABLE>
iv
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Consent Solicitation/ Prospectus/Information Statement. Reference is made to,
and this summary is qualified in its entirety by, the more detailed information
and financial statements contained in this Consent Solicitation/Prospectus/
Information Statement, the Appendices hereto and the
documents incorporated by reference herein.
Certain capitalized terms used in this summary are defined elsewhere in this
Consent Solicitation/Prospectus/ Information Statement. As used in this Consent
Solicitation/Prospectus/Information Statement, except where the context
requires otherwise, "EQR" means Equity Residential Properties Trust, a Maryland
real estate investment trust and its subsidiaries, including ERP (as defined in
this paragraph) as the survivor of the merger between Wellsford Residential
Property Trust ("Wellsford") and Equity Residential Properties Trust and both
Equity Residential Properties Trust and Wellsford as predecessors to EQR; "ERP"
means ERP Operating Limited Partnership, an Illinois limited partnership of
which EQR is the sole general partner, and its subsidiaries; "EWR" means Evans
Withycombe Residential, Inc., a Maryland corporation, and its subsidiaries,
including EWRLP (as defined in this paragraph); "EWRLP" means Evans Withycombe
Residential, L.P., a Delaware limited partnership of which EWR is the sole
general partner, and its subsidiaries.
PARTIES TO THE TRANSACTIONS
EQR. EQR, one of the largest publicly traded REITs (based on the aggregate
market value of its outstanding equity capitalization), is a self-administered
and self-managed equity REIT. EQR was organized in March 1993 and commenced
operations as a publicly traded company on August 18, 1993 upon the completion
of its initial public offering (the "EQR IPO"). EQR was formed to continue the
multifamily property business objectives and acquisition strategies of certain
affiliated entities controlled by Mr. Samuel Zell, Chairman of the Board of
Trustees of EQR. These entities had been engaged in the acquisition, ownership
and operation of multifamily properties since 1969. EQR's senior executives
average over 23 years of experience in the multifamily property business.
EQR is the largest publicly traded REIT owner of multifamily properties
(based on the number of apartment units owned and total revenues earned). As of
September 30, 1997, EQR owned or had interests in a portfolio of 363
multifamily properties containing 103,270 apartment units and managed
approximately 9,067 additional units owned by affiliated entities. As of
September 30, 1997, the properties EQR owned or had interests in had an average
occupancy rate of approximately 95%. These properties are located in the
following 32 states: Arizona, Arkansas, California, Colorado, Florida, Georgia,
Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Michigan,
Minnesota, Missouri, New Hampshire, New Jersey, New Mexico, Nevada, North
Carolina, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Utah,
Virginia, Washington and Wisconsin.
All of EQR's interests in its properties are held directly or indirectly by,
and substantially all of its operations relating to the properties are
conducted through, ERP. EQR controls ERP as the sole general partner and, as of
September 30, 1997, owned approximately 91% of ERP's outstanding common
partnership interests ("ERP Units"), which may be exchanged by the holders
thereof for either EQR Common, on a one-for-one basis or, at EQR's option, the
cash equivalent thereof.
EQR's corporate headquarters and executive offices are located at Two North
Riverside Plaza, Suite 400, Chicago, Illinois 60606, and its telephone number
is (312) 474-1300. In addition, EQR has regional operations centers in Chicago,
Illinois; Dallas, Texas; Denver, Colorado; Seattle, Washington; Tampa, Florida;
and Bethesda, Maryland, and area offices in Atlanta, Georgia; Las Vegas,
Nevada; Phoenix, Arizona; Portland, Oregon; San Antonio and Houston, Texas;
Irvine and Stockton, California; Ypsilanti, Michigan; Raleigh, North Carolina;
Ft. Lauderdale, Florida; Nashville, Tennessee; and Kansas City, Kansas.
EWR. EWR is a publicly traded, self-administered and self-managed equity
REIT, which commenced operations as a publicly traded company in August 1994.
EWR owns and operates multifamily properties located in Arizona and Southern
California. EWR was formed to continue and expand the multifamily apartment
operations of Evans Withycombe, Inc. As of September 30, 1997, EWR owned or had
interests in a portfolio of 51 multifamily properties containing 15,700
apartment units (including stabilized communities and communities under
development) and managed 1,759 additional units owned by affiliated entities.
EWR's average occupancy rate on September 30, 1997 was approximately 92.2%.
All of EWR's interests in its properties are held directly or indirectly by,
and substantially all of its operations relating to the properties are
conducted through, EWRLP. EWR controls EWRLP as its sole general partner, is
also a limited partner
<PAGE>
of EWRLP and, as of September 30, 1997, owned approximately 81.9% of EWRLP's
outstanding partnership interests ("EWRLP Units"), which may be exchanged by
the holders thereof for either shares of common stock, $.01 par value per share
of EWR ("EWR Common"), on a one-for-one basis or, at EWR's option, the cash
equivalent thereof.
EWR's corporate headquarters and executive offices are located at 6991 East
Cambelback Road, Suite A200, Scottsdale, Arizona 85251, and its telephone
number is (602) 840-1040.
SUMMARY RISK FACTORS
In considering whether to approve the Transactions, the EWRLP Unitholders
should consider, in addition to the other information contained in this Consent
Solicitation/Prospectus/Information Statement, the matters discussed under
"Risk Factors." Such matters include:
. Possible conflicts of interest due to the fact that certain members of
management of EWR, pursuant to existing agreements, have certain
interests that arise in connection with the Transactions that are in
addition to the interests of shareholders of EWR generally including,
among other things, consulting and employment agreements between EQR and
certain executives of EWR; payments in cash by EQR for the value of
certain options to purchase EWR stock and for certain bonuses and the
issuance of options to purchase EQR stock to certain officers of EWR.
. The inability of EQR to maintain the growth rate which it has experienced
since 1993.
. Expectations that the distributions payable to former EWR Unitholders
with respect to each ERP Unit will be $2.50 per annum compared to $3.18
per annum with respect to two EWRLP Units (based upon the distributions
per of EQR Unit and ERP Unit declared for the four quarters ending
September 30, 1997).
. Adverse consequences associated with debt or preferred equity financing,
including the risk that EQR's cash flow will be insufficient to meet
required payments of principal and interest, the risk that existing
indebtedness may not be refinanced or that the terms of such refinancing
will not be as favorable as the terms of current indebtedness, and the
risk that necessary capital expenditures for such purposes as renovations
and other improvements may not be financed on favorable terms or at all.
. Share prices of EQR Common and EWR Common may change prior to the time
the Merger becomes effective.
. Possible payment of liquidated damages and expenses: the Agreement and
Plan of Merger dated August 27, 1997 (the "Merger Agreement") provides
for a "Break-Up Fee" of $14 million (the "Break-Up Fee") plus "Break-Up
Expenses" of up to $2.5 million (the "Break-Up Expenses") payable by EWR
to EQR if the Merger Agreement is terminated by either EQR or EWR under
certain circumstances and, if EWR, within one year thereafter, enters
into an agreement regarding an "Acquisition Proposal," as defined herein,
which is consummated. If the Merger Agreement is terminated by either EQR
or EWR under certain other circumstances, either EQR or EWR will be
required to pay the other party's Break-Up Expenses of up to $2.5
million. See "The Transactions--Termination Provisions."
. Certain differences between the rights of EWRLP Unitholders and ERP
Unitholders under their respective partnership agreements and Delaware
and Illinois state law, which currently govern EWRLP and ERP,
respectively.
. Lack of control by the limited partners over the management and affairs
of ERP. Under the terms of the ERP Partnership Agreement, all decisions
regarding the business and operations of ERP are made by EQR, the sole
general partner of ERP. The ERP Partnership Agreement provides that the
limited partners may not remove EQR as general partner, which may not
necessarily be in the limited partners' interest.
. Lack of liquidity of investment in ERP Units. There will be no public
market for ERP Units. In addition, the ERP Partnership Agreement provides
for certain restrictions on a limited partner's ability to transfer his
or her ERP Units.
. A number of federal income tax risks associated with an investment in
ERP, more fully described in "Federal Income Tax Consequences."
When considering the ERP Amendment, the limited partners of ERP should
consider, in addition to the risks set forth above, the other information
contained in this Consent Solicitation/Prospectus/Information Statement, and
that, as a result of the Transactions, EQR will serve as both the sole general
partner of ERP and co-general partner of EWRLP. Although EQR does not plan to
conduct any new business through EWRLP, and intends to continue to use ERP as
its sole investment and operations vehicle, and to combine EWRLP into ERP
through the consummation of the Asset Contribution Agreement, there can be no
assurance that such intentions will be realized, and limited partners of ERP
could suffer a loss in the value of their ERP Units as a result thereof.
2
<PAGE>
TERMS OF THE TRANSACTIONS
The Unit Exchange Offer. Holders of EWRLP Units are hereby offered (the "Unit
Exchange Offer") the opportunity to contribute, effective immediately following
the effectiveness of the Merger (as defined in the following paragraph), their
EWRLP Units to ERP in exchange for a number of ERP Units equal to the number of
EWRLP Units so exchanged multiplied by 0.5. See "The Transactions--The Unit
Exchange Offer."
The Merger. Pursuant to the Merger Agreement, and upon the terms and
conditions set forth therein, EWR will merge with and into EQR (the "Merger").
The Asset Contribution (as defined in the following paragraph) and Unit
Exchange Offer (together with the Merger, the "Transactions") will be
effectuated in connection with the Merger, resulting in the acquisition by EQR
of EWR. The EQR Board of Trustees and EWR Board of Directors have each approved
the Transactions as set forth in the Merger Agreement. The Merger is subject to
approval by the holders of EQR Common and EWR Common. Upon consummation of the
Merger, each outstanding share of EWR Common will be converted into 0.5 (the
"Exchange Ratio") of a share of EQR Common. See "The Transactions--Terms of the
Transactions." At the Effective Time, approximately 2.3% of EQR Common will be
beneficially owned by affiliates of the EQR (assuming that no outstanding
options are exercised and no ERP Units are exchanged for shares of EQR Common).
The Asset Contribution. Pursuant to, and subject to the terms and conditions
of the Asset Contribution Agreement, EWRLP has agreed, subsequent to the
effectiveness of the Merger and at the option of ERP, to contribute all of
EWRLP's assets (the "Asset Contribution") to ERP in exchange for a number of
ERP Units equal to the number of EWRLP Units then outstanding multiplied by the
Exchange Ratio. Following the Asset Contribution, EWRLP will distribute such
ERP Units to the holders of EWRLP Units (the "Distribution"). As a result of
the Distribution, the remaining holders of EWRLP Units (i.e., those holders who
have not previously contributed their EWRLP Units to ERP pursuant to the Unit
Exchange Offer) will receive a number of ERP Units equal to the number of EWRLP
Units held by such holder, multiplied by the Exchange Ratio. Unless certain
conditions described in "Effective Time of the Transactions--The Asset
Contribution" are met, the Asset Contribution will not be consummated for at
least one year following the effectiveness of the Merger. The principal reason
that the Asset Contribution will not be consummated earlier than the date such
conditions are met or one year following the effectiveness of the Merger is to
preserve the qualification of the Merger as a tax-free reorganization within
the meaning of Section 368 of the Internal Revenue Code of 1986, as amended
(the "Code"). During this period, EWRLP will remain in existence with ERP and
EQR acting as co-general partners of EWRLP. EWRLP Unitholders may retain their
EWRLP Units until (i) they exchange their EWRLP Units for ERP Units pursuant to
the Unit Exchange Offer or (ii) the consummation of the Asset Contribution. EQR
reserves the right to not consummate the Asset Contribution or to change the
terms thereof if, subsequent to the Unit Exchange Offer, EQR and ERP are the
only limited partners of EWRLP. If the Asset Contribution is not consummated,
the Unit Exchange Offer continues until all of the EWRLP Units are tendered.
The effect of such inability or unwillingness to consummate the Asset
Contribution is that EWRLP will remain in existence, those EWRLP Unitholders
which have not exchanged their EWRLP Units for ERP Units will retain their
EWRLP Units and the EWRLP Unitholders will continue to have an interest in
EWRLP which will become a subsidiary of ERP and EQR. See "The Transactions--
Terms of the Asset Contribution."
Although the Asset Contribution Agreement is subject to approval by the
holders of EWRLP Units, the Asset Contribution Agreement has already been
approved by EWR, which holds a majority of the outstanding EWRLP Units.
Therefore, holders of EWRLP Units can either (i) exchange their EWRLP Units for
ERP Units pursuant to the Unit Exchange Offer or (ii) retain their EWRLP Units
and receive ERP Units pursuant to the Distribution. Whether EWRLP Unitholders
receive ERP Units pursuant to the Unit Exchange Offer or the Distribution, each
such holder will receive an amount of ERP Units equal to the number of EWRLP
Units held by such holder multiplied by the Exchange Ratio.
TERMS OF THE AMENDMENT TO THE ERP PARTNERSHIP AGREEMENT
The ERP Amendment will amend Section 6.2 of the ERP Partnership Agreement to
allow EQR to serve as general partner of EWRLP upon the effectiveness of the
Merger.
TERMS OF THE AMENDMENT TO THE EWRLP PARTNERSHIP AGREEMENT
The proposed EWRLP Amendment will amend the EWRLP Partnership Agreement to
(i) allow EQR and ERP to serve as co-general partners of EWRLP upon the
effectiveness of the Merger, (ii) adjust each outstanding EWRLP Unit by one
half to give effect to the Exchange Ratio, (iii) eliminate certain restrictions
that the EWRLP Partnership Agreement would
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<PAGE>
place upon EQR and ERP as co-general partners of EWRLP, (iv) permit the Asset
Contribution pursuant to the Asset Contribution Agreement, (v) permit the
dissolution of EWRLP upon the terms contained in the Asset Contribution
Agreement and (vi) ratify the revocation of the 11.2 Amendment (as defined in
"The Amendments--EWRLP Amendment"). The text of the EWRLP Amendment is attached
as Appendix B hereto.
FIDUCIARY RESPONSIBILITY OF GENERAL PARTNERS
EQR, as the sole general partner of ERP, EWR, as the sole general partner of
EWRLP and EQR and ERP, as co-general partners of EWRLP after the effectiveness
of Merger and prior to the dissolution of EWRLP following the Asset
Contribution, will be accountable to limited partners of ERP and EWRLP as
fiduciaries. This is a rapidly developing and changing area of the law and
limited partners of ERP and EWRLP who have questions regarding these matters
should consult with their counsel.
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Pre-Merger Structure
--------------------
------------------------- -------------------------
Public Shareholders Public Shareholders
------------------------- -------------------------
------------------------- -------------------------
Equity Residential Evans Withycombe
Properties Trust Residential, Inc.
------------------------- -------------------------
General General Partner
Partner 91% and Limited
Partner 82%*
Limited Limited
Partners 9% Partners 18%
ERP Evans
Operating Withycombe
Limited Partnership Residential, L.P.
103,270 15,700
Apartment Units** Apartment Units**
* Owns 1% as General Partner and approximately 81% as a limited partner.
** As of September 30, 1997. Includes stabilized communities and communities
under development.
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Merger Transactions
-------------------
------------------------- -------------------------
Equity Residential Merger Evans Withycombe
Properties Trust Residential, Inc.
------------------------- -------------------------
Limited Limited
Partners Partners*
ERP Contribution** Evans
Operating ERP Units Withycombe
Limited Partnership Residential, L.P.
103,270 15,700
Apartment Units*** Apartment Units***
* Immediately following the effectiveness of the Merger, each Limited Partner
of EWRLP may contribute and certain limited partners of EWRLP have agreed
to contribute their limited partnership units in EWRLP to ERP in exchange
for ERP OP Units based on the Exchange Ratio.
** It is the intention of ERP that the Contribution will occur when permitted
under the Asset Contribution Agreement. Subsequent to the effectiveness of
the Merger and consummation of the Contribution, EQR and ERP will be co-
general partners of EWRLP.
*** As of September 30, 1997. Includes stabilized communities and communities
under development.
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<PAGE>
Post-Merger Transactions Structure
----------------------------------
Equity Residential Properties Trust Former Evans Withycombe
Public Shareholders (88%)** Residential, Inc. Public Shareholders
(12%)**
Equity Residential
Properties Trust
Former Evans
ERP Operating Withycombe
Limited Partnership General Partner (90%)** Residential, L.P.
Limited Partners Limited Partners
(8%)** (2%)**
ERP
Operating
Limited Partnership
118,970
Apartment Units*
* As of September 30, 1997.
** Assuming all contemplated transactions are consummated.
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<PAGE>
REASONS FOR THE TRANSACTIONS; RECOMMENDATIONS OF EQR AND EWR
The EQR Board of Trustees believes that the Transactions, including the
consideration to be paid by ERP, are fair and in the best interests of EQR, ERP
and their shareholders and Unitholders, respectively. The EQR Trustees who
voted on the Transactions unanimously approved the Transactions.
The EQR Board of Trustees considered certain potentially negative factors
which could arise from the Transactions. These negative factors included the
following: (i) the risk that the anticipated benefits of the Transactions might
not be fully realized, (ii) the substantial management time and effort required
to effectuate the Transactions and integrate the businesses of EQR and EWR,
(iii) the Transactions would increase the debt of EQR by the assumption of all
of EWR's outstanding debt of approximately $442,156,000 at September 30, 1997,
(iv) the increase in outstanding debt could adversely affect the ability of EQR
to obtain additional debt financing for additional growth and would subject EQR
to the risks of higher leverage, (v) the increase in the total debt of the EQR,
(vi) the possible adverse effects upon the market for shares of EQR Common and
upon EQR's ability to raise capital and issue equity in both the public and
private markets which might result if the Transactions were not consummated and
(vii) the significant costs involved in connection with consummating the
Transactions.
The favorable factors the EQR Board of Trustees considered in approving the
Transactions were the beliefs that (a) the Transactions would solidify EQR's
leadership position in the multifamily property industry through the
acquisition of a high quality portfolio of approximately 16,000 apartment
units, (b) the Transactions would increase operating efficiencies through
economies of scale, (c) the Transactions would provide greater access to the
public equity and debt markets, (d) as a result of the Transactions, EQR would
be a larger and financially stronger company, which would facilitate
combinations with other entities, (e) the combination of the EWR properties
with those of EQR would expand the geographic focus of EQR's operations in
Arizona and Southern California, (f) the Transactions would provide EQR with
the capability to supervise third-party development projects, (g) the Unaudited
Pro Forma Combined Financial Statements for the nine months ended September 30,
1997 on a pro forma basis illustrated the effects of the Transactions and
indicated that EQR's FFO (as such term is defined under "The Transactions--
Opinion of Financial Advisor--EQR" herein) available for distribution to
holders of ERP Units and EQR Common would most likely increase and (h) the
Transactions could be effectuated through the issuance of new equity rather
than through the use of cash or a public offering of equity or debt securities.
The EQR Board of Trustees also received the written opinion, dated August 27,
1997, of J.P. Morgan Securities Inc. ("J.P. Morgan") to the effect that, as of
such date and based upon and subject to certain matters stated therein, the
consideration to be paid by EQR in connection with the Transactions was fair,
from a financial point of view, to EQR. See "The Transactions--Reasons for the
Transactions; Recommendation of the EQR Board of Trustees" and "Opinion of
Financial Advisor--EQR."
The EWR Board of Directors believes that the Transactions are fair to, and in
the best interests of, EWR, EWRLP and their shareholders and Unitholders,
respectively. By unanimous vote, the EWR Board of Directors approved the
Transactions. The EWR Board of Directors reached its decision after careful
consideration of a wide variety of factors, including certain potentially
negative factors. These negative factors consisted of the following: (i) after
the Transactions, the distributions payable to former EWRLP Unitholders with
respect to each ERP Unit will be $2.50 per annum compared to $3.18 per annum
with respect to two EWRLP Units based upon the distributions per ERP Unit and
EWRLP Unit declared for the four quarters ending September 30, 1997, (ii) the
possibility that EWR may be required, if the Merger Agreement is terminated
under certain circumstances, to pay EQR a Break-Up Fee (as defined in
"Summary--Summary of Risk Factors") of $14 million and to reimburse EQR for
Break-Up Expenses (as defined in "Summary--Summary of Risk Factors") of up to
$2.5 million, and (iii) the substantial management time and effort required to
effectuate the Transactions.
In making its determination with respect to the Transactions the EWR Board of
Directors also considered, among other things, the following advantages: (a)
the Exchange Ratio was more favorable than the then-current market price of EWR
Common, (b) the Transactions would afford EWR shareholders and EWRLP
Unitholders a significant participation in a much larger and more
geographically diversified REIT with greater potential for long-term
appreciation and improved access to capital markets, (c) the Transactions were
the best alternatives reasonably available to EWRLP Unitholders and EWR
shareholders, providing the greatest feasibility and potential to maximize
shareholder value, (d) the market capitalization of EQR following the Merger is
expected to be approximately $6,639,000,000 greater than the then-current
market capitalization of EWR, (e) the Exchange Ratio fairly reflected the
relative contributions of both companies to the combined entity and (f) the
Merger would be tax-free. See "The Transactions--Reasons for the Transactions"
and "Opinion of Financial Advisor--EWR."
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<PAGE>
OPINION OF FINANCIAL ADVISORS
EQR. At the meeting of the Board of Trustees of EQR on August 27, 1997, J.P.
Morgan delivered its oral opinion to the Board of Trustees of EQR, dated August
27, 1997, that, as of such date, and subject to the assumptions made,
procedures followed, matters considered and limits of its review, as set forth
in such opinion the consideration to be paid by EQR in connection with the
proposed Merger was fair from a financial point of view to EQR, including ERP.
No limitations were imposed by EQR's Board of Trustees upon J.P. Morgan with
respect to the investigations made or procedures followed by it in rendering
its opinions. See "The Transactions--Opinion of Financial Advisor--EQR."
EWR. Morgan Stanley Realty Incorporated ("Morgan Stanley"), EWR's financial
advisor in connection with the Transactions, was not engaged to render an
opinion with respect to the Unit Exchange Offer or Asset Contribution Agreement
and did not render any such opinion.
INTERESTS OF CERTAIN PERSONS
In considering whether to approve the Transactions, limited partners should
be aware that certain members of the management of EWR and certain members of
the EWR Board of Directors have certain interests that arise in connection with
the Transactions that are in addition to the interests of shareholders of EWR
generally. The EWR Board of Directors considered these interests and
deliberated upon any resulting conflicts of interest, unanimously concluding
that the advantages of the Transactions and the benefits thereof to the limited
partners outweighed any conflicts of interest. These additional interests arise
under existing agreements with, and annual compensation awards from EWR and
agreements relating to, among other things, (i) the Consulting Agreement dated
August 27, 1997 between Equity Residential Properties Management Limited
Partnership, an Illinois limited partnership and an affiliate of EQR ("EQR
Properties Management LP"), and Stephen O. Evans which will become effective
upon completion of the Merger pursuant to which Mr. Evans will be elected as a
Trustee and Executive Vice President--Strategic Investments of EQR and will
provide consulting services to EQR Properties Management LP until December 31,
1999 for $225,000 per annum and certain additional benefits (see "Interests of
Certain Persons in the Transactions"), subject to certain early termination
provisions provided therein, (ii) the appointment of Richard G. Berry,
President, Chief Operating Officer and Director of EWR, to the office of
Executive Vice President--Development of EQR upon completion of the Merger,
pursuant to the terms of an employment agreement providing a salary of $250,000
per annum and certain additional benefits (see "Interest of Certain Persons in
the Transactions") which will expire on December 31, 2000, (iii) a deferred
compensation agreement between EQR and Mr. Berry which provides two semi-annual
payments, plus accrued interest at a rate of 9%, if Mr. Berry's employment
agreement with EQR Properties Management LP terminates prior to the expiration
of the term of such agreement with the cash payment to be equal to the fair
market value, as of the termination date, of any unvested restricted shares of
EQR Common exchanged for shares of EWR Common or granted in payment of Mr.
Berry's 1997 bonus under existing agreements with EWR (see "Interests of
Certain Persons to the Transactions"), (iv) the consulting agreement dated as
of November 14, 1997, between EQR and Mr. Paul Fannin which shall become
effective upon completion of the Merger and will expire on January 2, 2000
pursuant to which Mr. Fannin will provide consulting services to EQR Properties
Management LP and EQR for aggregate cash payments of $835,610 plus certain
additional benefits, subject to certain adjustments capping total fees at
$988,000 (see "Interests of Certain Persons in the Transactions"), (v)
termination of Change in Control Agreements between EWR and Messrs. Evans and
Berry, (vi) amendments to the Change in Control Agreements between EWR and five
officers of EWR which provide that (a) a payment obligation will arise as of
the Closing Date notwithstanding the fact that each officer may perform
services for a transitional period thereafter, (b) payment be made within five
days after termination of employment (or earlier if required by law) unless
such termination occurs during the last two months of a calendar year in which
case payment will be made on the January 2 of the immediately following
calendar year (or earlier if required by law), (c) payments of money will be
made in lieu of the vesting of employer contributions to such executives'
accounts in the EWR 401(k) plan and (d) the definition of "change in control"
in the Change in Control Agreements will be amended to refer only to the Merger
of EWR into EQR and not to any future transactions involving EQR, (vii) an
amendment to the Change in Control Agreement between EWR and a certain officer
which provides that, (a) a payment of money shall be made in lieu of the
vesting of employer contributions to such executive's account in the EWR 401(k)
plan, (b) the definition of "change in control" in the Change in Control
Agreement shall be amended to refer only to the Merger of EWR into EQR and not
to any future transactions involving EQR and (c) the officer's new position
with EQR will not trigger payments under his Change in Control Agreement and
(viii) EQR's agreement that all restricted share grants of EWR Common
previously made by EWR, with the exception of restricted shares of EWR Common
previously granted to Mr. Berry will become vested and will participate in the
Merger on the same basis as all other shares of EWR Common.
9
<PAGE>
Certain directors, executive officers and employees of EWR who hold options
to purchase shares of EWR Common will be allowed to exercise those options
which constitute vested incentive share options and will agree not to exercise
all other options in exchange for a cash payment equal to the difference
between (i) the Exchange Ratio multiplied by the closing price of a share of
EQR Common on the New York Stock Exchange ("NYSE") on the Closing Date (the
"Closing Price") and (ii) the applicable exercise price of the option,
multiplied by the number of shares of EWR Common subject to the option. After
the Effective Date, all employees of EWR who (i) become employees of EQR, and
(2) exercise vested incentive share options to purchase shares of EWR Common
and/or receive a cash payment in exchange for agreeing not to exercise
outstanding options to purchase EWR Common, will receive a nonqualified option
to purchase a number of shares of EQR Common equal to (a) the number of vested
incentive share options to purchase EWR Common received upon exercise of a
vested incentive share option, plus (b) the number of shares of EWR Common
subject to each employee's EWR options which agreed not to exercise for cash,
multiplied by the Exchange Ratio. Each such option to purchase shares of EQR
Common will vest in three equal annual installments, with an exercise price per
share equal to the Closing Price. See "Interests of Certain Persons."
In addition, pursuant to the terms of his consulting agreement, Mr. Fannin
will receive his 1997 bonus in cash and pursuant to the terms of the Merger
Agreement, EQR has agreed to pay the 1997 bonuses to certain employees of EWR
under the existing bonus plan of EWR on the date such bonus would have been
paid by EWR had the Merger not occurred; provided, however, that EQR shall have
no obligation to pay such bonus to (i) any person who voluntarily terminated
his or her employment with EWR prior to the effectiveness of the Merger or (ii)
any person who received payment of a pro rata bonus under the terms and
conditions set forth under any of the Change in Control Agreements described
above.
EQR will indemnify each director and officer of EWR for all actions taken by
such person on or prior to the Effective Time to the same extent such
individuals were indemnified by EWR prior to the Effective Time, and expects to
obtain "tail insurance" providing for the extension of the directors and
officers liability insurance currently maintained by EWR for a period of six
years after the Closing Date.
THE CONSENT SOLICITATION
The limited partners of EWRLP are being asked to consent to the following
proposals (the "Proposals"):
. Following the effectiveness of the Merger, the contribution of all the
assets of EWRLP to ERP in exchange for a number of ERP Units equal to the
number of EWRLP Units then outstanding multiplied by the Exchange Ratio,
pursuant to the Asset Contribution Agreement.
. The amendment to the EWRLP Partnership Agreement to (i) allow EQR and ERP
to serve as co-general partners of EWRLP upon the effectiveness of the
Merger, (ii) subsequent to the Asset Contribution, permit EQR and ERP, as
co-general partners of EWRLP, to dissolve EWRLP upon the terms set forth
in the Asset Contribution Agreement and (iii) make additional amendments
to permit the Transactions to be effected without the further approval of
the limited partners of EWRLP.
. Following the effectiveness of the Asset Contribution, the dissolution of
EWRLP on the terms and conditions set forth herein.
Only limited partners of record of EWRLP will be entitled to consent to the
Proposals. As of November 7, 1997, EWRLP had 47 limited partners holding an
aggregate of 24,947,481 EWRLP Units.
As of November 7, 1997, EWR, as a limited partner of EWRLP, owned 20,447,006
EWRLP Units. Under the EWRLP Partnership Agreement, EWR is permitted to consent
to the Proposals in the same manner as all other EWRLP Unitholders, and,
although EWR has not entered into any binding agreements in this regard, EWR
currently contemplates consenting to the Proposals. In addition, F. Keith
Withycombe and Stephen O. Evans, affiliates of EWR, and two affiliates of
Messrs. Withycombe and Evans, own a total of 3,309,762 EWRLP Units, and have
entered into a binding agreement with EQR to consent to the Proposals.
Therefore, withholding consent to the Proposals will have no effect.
Approval of each Proposal requires the consent of a majority in interest of
the EWRLP Unitholders. Therefore, withholding consent to the Proposals will
have no effect. EWRLP Unitholders who consent to the Proposals may waive their
right to challenge the Transactions in a court of law or equity.
For additional information with respect to the consent solicitations, see
"Consent Solicitation Information."
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<PAGE>
EFFECTIVE TIME OF THE TRANSACTIONS
The Unit Exchange Offer. The contribution of EWRLP Units of the EWRLP
Unitholders who accept the Unit Exchange Offer prior to the effectiveness of
the Merger will be consummated as soon as practicable after the effectiveness
of the Merger. The Unit Exchange Offer will remain open to EWRLP Unitholders
until the consummation of the Asset Contribution.
The Merger. The closing ("Closing") of the Merger will take place at 10:00
a.m. on the date to be specified by EQR and EWR, which will be no later than
the third business day after satisfaction or waiver of the conditions set forth
in the Merger Agreement (the "Closing Date"), at the offices of Rudnick &
Wolfe, 203 North LaSalle Street, Chicago, Illinois 60601, unless another date
or place is agreed to in writing by the parties. The Merger will become
effective at the time the State Department of Assessments and Taxation of
Maryland (the "Department") accepts for record the Articles of Merger (the
"Articles"), or at such time as EQR and EWR will agree should be specified in
the Articles (not to exceed 30 days after the Articles are accepted for record
by the Department). It is currently anticipated that the Merger will become
effective on or about December 19, 1997.
The Asset Contribution. The Asset Contribution will occur upon ERP giving
notice to EWRLP at any time following the first to occur of (i) the date twelve
months after the consummation of the Merger, (ii) the date on which EQR
receives an opinion of a nationally recognized tax counsel satisfactory to it
or a ruling from the Internal Revenue Service that the Asset Contribution may
be effected without adversely affecting the qualification of the Merger as a
tax-free reorganization within the meaning of Section 368 of the Code, or (iii)
the date on which regulations are promulgated by the Department of the Treasury
which, in the opinion of a nationally recognized tax counsel satisfactory to
EQR, would permit the Asset Contribution to occur without adversely affecting
the qualification of the Merger as a tax-free reorganization within the meaning
of Section 368 of the Code. If ERP fails to give such notice by December 31,
1999, the Asset Contribution Agreement shall terminate and EWRLP shall have no
further obligations thereunder.
CONDITIONS TO THE TRANSACTIONS
Unit Exchange Offer. As to each limited partner of EWRLP who chooses to
participate in the Unit Exchange Offer, such offer is conditioned upon (i) the
effectiveness of the Merger, (ii) ERP's receipt of a completed Unit
Contribution Agreement, in the form attached hereto as Appendix D, from each
such limited partner and (iii) the surrender of such limited partner's
certificates representing EWRLP Units to ERP in accordance with the Unit
Contribution Agreement. The Unit Exchange Offer shall remain open to limited
partners of EWRLP until the consummation of the Asset Contribution.
Merger. The obligations of EQR and EWR to consummate the Merger are subject
to the satisfaction or waiver of certain conditions, including, among others,
(i) obtaining the requisite approval of the holders of EQR Common and EWR
Common, (ii) the absence of any material adverse change in the financial
condition, business or operations of EWR or EQR, (iii) the receipt of certain
legal opinions, including opinions with respect to the tax consequences of the
Merger, (iv) the receipt of all material consents, authorizations, orders and
approvals of governmental agencies and third parties and (v) the execution of
certain agreements between each of EWR and EQR and their respective affiliates.
Each of EQR and EWR have the right to waive any conditions to its obligations
to consummate the Merger. See "The Transactions--Conditions of the Merger."
Asset Contribution. The consummation of the Asset Contribution is conditioned
on (i) receiving the requisite consent of the limited partners of EWRLP, (ii)
the effectiveness of the Merger and (iii) EWRLP's receipt of notice by December
31, 1999 from ERP that ERP desires to effectuate the Asset Contribution.
NO APPRAISAL RIGHTS
Limited partners of EWRLP are not entitled to dissenters' appraisal rights
under Delaware law or the EWRLP Partnership Agreement in connection with the
Asset Contribution or the EWRLP Amendment.
Limited partners of ERP are not entitled to dissenters' appraisal rights
under Illinois law or the ERP Partnership Agreement in connection with the ERP
Amendment.
FEDERAL INCOME TAX CONSEQUENCES
As described more fully in "Federal Income Tax Consequences" below, in
general, no gain or loss will be recognized by EWRLP or the EWRLP Unitholders
in connection with the Unit Exchange Offer, Asset Contribution or Distribution.
See
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<PAGE>
"Federal Income Tax Consequences--Tax Consequences of Asset Contribution and
Distribution" and "Unit Exchange Offer." However, because of the particular tax
attributes of partners of EWRLP, and the effect of the Transactions on the
amount of liabilities of ERP that will be allocated to the former EWRLP
Unitholders after the Transactions are consummated, the Unit Exchange Offer,
Asset Contribution and Distribution may have differing tax implications for
EWRLP Unitholders. Thus, EWRLP Unitholders should consult with their own tax
advisors to determine the tax consequences of the Unit Exchange Offer, the
Asset Contribution, the Distribution and the subsequent ownership of ERP Units
or EQR Common in light of their particular circumstances.
TERMINATION
The Merger Agreement provides that it may be terminated under a number of
circumstances at any time prior to the Effective Time, whether before or after
the approval of the Merger by the shareholders of EQR and shareholders of EWR.
See "The Transactions--Termination Provisions." If the Merger Agreement is
terminated for any reason, the Asset Contribution Agreement, Unit Contribution
Agreement and Unit Exchange Offer also terminate.
TERMINATION FEES
Depending on the reason for the termination of the Merger Agreement, EWR may
be required to pay EQR the Break-Up Fee and/or Break-Up Expenses, or EQR may be
required to pay EWR the Break-Up Expenses. Payment of such fees by EWR could
adversely effect EWR's ability to engage in other transactions should the
Transactions not take place. See "The Transactions--Termination Fees and
Expenses."
ANTICIPATED ACCOUNTING TREATMENT
The Transactions will be treated as a purchase in accordance with Accounting
Principles Board Opinion No. 16.
EXCHANGE OF UNITS
Pursuant to the Unit Exchange Offer, holders of EWRLP Units may contribute
such units to ERP in exchange for a number of ERP Units equal to the number of
EWRLP Units contributed multiplied by the Exchange Ratio. Each EWRLP Unitholder
who chooses to participate in the Unit Exchange Offer must execute a Unit
Contribution Agreement, in the form attached hereto as Appendix D. EWRLP
Unitholders who execute Unit Contribution Agreements prior to the effectiveness
of the Merger (i) will transfer their EWRLP Units to ERP in accordance with the
Unit Contribution Agreement and (ii) become ERP Unitholders and hold a number
of ERP Units equal to the number of EWRLP Units contributed multiplied by the
Exchange Ratio, immediately after the effectiveness of the Merger. EWRLP
Unitholders who execute Unit Contribution Agreements subsequent to the
effectiveness of the Merger shall transfer their EWRLP Units and become limited
partners of ERP effective as of the close of business on the date of ERP's
acceptance of such Unit Contribution Agreements. Limited partners of EWRLP who
choose not to contribute their EWRLP Units to ERP pursuant to the Unit Exchange
Offer will receive ERP Units upon the dissolution of EWRLP pursuant to the
Asset Contribution Agreement.
MANAGEMENT OF EQR
As general partner of ERP and, following the Merger, co-general partner (with
ERP) of EWRLP, management and control of ERP and EWRLP will be vested in EQR.
The EQR Board of Trustees will be made up of the current trustees of EQR and
Stephen O. Evans, Chairman of the Board of Directors and Chief Executive
Officer of EWR. The EQR Board of Trustees will be divided into three classes
serving staggered three-year terms.
Pursuant to the Merger, Richard G. Berry has entered into an employment
agreement, and Stephen O. Evans has entered into a consulting agreement, with
Equity Residential Properties Management Limited Partnership, an affiliate of
EQR. J. Donald Couvillion, a Vice President of EWR, will be employed as Vice
President-Development of ERP. In addition, other officers of EWR, including Mr.
Anthony V. Pusateri, a Senior Vice-President of EWR and Mr. G. Edward O'Clair,
a Senior Vice President of EWR, are expected to continue as employees of ERP,
but will not be subject to employment agreements. See "Management of EQR
Following the Transactions; Interests of Certain Persons in the Transactions."
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<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following tables set forth the summary unaudited pro forma combined
financial data for ERP, giving effect to the Merger as if it had occurred on
the dates indicated herein, after giving effect to the pro forma adjustments
described in the notes to the unaudited pro forma financial statements included
elsewhere in the Consent Solicitation/Prospectus/Information Statement.
The summary unaudited pro forma combined operating data are presented as if
the Merger had been consummated at the beginning of the period presented.
The summary unaudited pro forma combined balance sheet is presented as if the
Merger had occurred on September 30, 1997. The Merger has been accounted for
under the purchase method of accounting in accordance with Accounting
Principles Board Opinion No. 16. In the opinion of management, all significant
adjustments necessary to reflect the effects of the Merger have been made.
The summary pro forma financial information should be read in conjunction
with, and is qualified in its entirety by, the historical financial statements
and notes thereto of ERP incorporated by reference into the Consent
Solicitation/Prospectus/ Information Statement and the historical financial
statements and notes thereto of EWRLP and the ERP unaudited pro forma financial
statements and notes thereto included elsewhere in the Consent
Solicitation/Prospectus/Information Statement.
The summary unaudited pro forma operating and balance sheet data are
presented for comparative purposes only and are not necessarily indicative of
what the actual combined results of ERP and EWRLP would have been for the
period and dates presented. Nor does such data purport to represent the results
of future periods.
13
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
OPERATING DATA:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(AMOUNTS IN THOUSANDS
EXCEPT PER UNIT DATA)
<S> <C> <C>
REVENUES
Rental Income............................. $753,594 $ 966,942
Fee and asset management.................. 4,975 7,906
Interest income--investment in mortgage
notes.................................... 15,022 12,819
Interest and other income................. 13,508 14,345
-------- ---------
Total revenues........................ 787,099 1,002,012
-------- ---------
EXPENSES
Property and maintenance.................. 194,532 271,533
Real estate taxes and insurance........... 75,514 94,670
Property management....................... 26,467 31,539
Fee and asset management.................. 2,523 3,837
Depreciation.............................. 170,724 218,658
Interest:
Expense incurred........................ 147,365 179,870
Amortization of deferred financing
costs.................................. 1,859 4,308
General and administrative................ 12,279 11,363
-------- ---------
Total expenses........................ 631,263 815,778
-------- ---------
Income before gain on disposition of
properties, (loss) on joint venture
communities and extraordinary items...... 155,836 186,234
Gain on disposition of properties....... 11,454 22,336
(Loss) on joint venture communities..... (19) (58)
-------- ---------
Income before extraordinary items......... 167,271 208,512
Extraordinary item:
(Loss) on early extinguishment of debt.. (1,500) --
Write-off of unamortized costs on
refinanced debt........................ -- (3,512)
-------- ---------
Net income................................ $165,771 $ 205,000
======== =========
ALLOCATION OF NET INCOME:
Redeemable Preference Interests........... -- 263
9 3/8% Series A Cumulative Redeemable
Preference Units......................... 10,758 14,345
9 1/8% Series B Cumulative Redeemable
Preference Units......................... 8,555 11,406
9 1/8% Series C Cumulative Redeemable
Preference Units......................... 7,870 10,494
8.60% Series D Cumulative Redeemable
Preference Units......................... 11,288 15,050
Series E Cumulative Convertible Preference
Units.................................... 4,162 5,549
9.65% Series F Cumulative Redeemable
Preference Units......................... 5,250 6,999
7 1/4% Series G Convertible Cumulative
Redeemable Preference Units.............. 17,195 22,928
General Partner........................... 84,281 97,934
Limited Partners (Minority interest)...... 16,412 20,032
-------- ---------
$100,693 $ 117,966
======== =========
Net income per weighted average OP Unit
outstanding.............................. $ 1.03 $ 1.21
======== =========
Weighted average OP Units outstanding..... 97,418 97,418
======== =========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER
BALANCE SHEET DATA: 30, 1997
(at end of period) ----------
(AMOUNTS
IN
THOUSANDS)
<S> <C>
Real Estate, after accumulated depreciation.......................... $6,402,500
==========
Total assets......................................................... $6,764,224
==========
Total debt........................................................... $2,611,825
==========
Total partners' capital.............................................. $2,883,170
==========
</TABLE>
14
<PAGE>
CONSENT SOLICITATION INFORMATION
PURPOSE
The EWRLP Unitholders are being asked by EWR, in its capacity as sole
general partner of EWRLP, to consent to the Proposals. Consent to the
Proposals by the EWRLP Unitholders is required for consummation of the
Transactions.
RECORD DATE; CONSENTS REQUIRED
Neither the EWRLP Partnership Agreement nor Delaware law requires the
setting of a record date for limited partners entitled to consent to the
Proposals. However, only limited partners of record of EWRLP may consent to
the Proposals.
Approval of each Proposal requires the affirmative consent of the holders of
a majority of limited partnership interest in EWRLP. At November 7, 1997,
EWRLP had issued and outstanding 24,947,481 EWRLP Units. Accordingly, approval
of each Proposal requires the affirmative consent of EWRLP Unitholders holding
12,473,741 EWRLP Units.
As of November 7, 1997, EWR owned, as a EWRLP Unitholder 20,477,006 EWRLP
Units, and, although EWR has not entered into any binding agreements in this
regard, EWR currently intends to consent to the Proposals. In addition, F.
Keith Withycombe and Stephen O. Evans, both affiliates of EWR, and two
affiliates of Messrs. Withycombe and Evans, own a total of 3,309,762 EWRLP
Units, and have entered into a binding agreement with EQR to consent to the
Proposals. Therefore, withholding consent to the Proposals will have no
effect.
SOLICITATION OF CONSENTS
Consents will be solicited by mail, telephone and in person. Solicitations
may be made by certain employees of EWR, none of whom will receive additional
compensation for such solicitations. EWRLP will bear its own expenses in
connection with the consent solicitation. Consents must be received prior to
the execution and delivery of the Articles to the Department (the "Consent
Period").
REVOCATION OF CONSENTS
EWRLP Unitholders may revoke consents until the expiration of the Consent
Period by dating, signing and delivering a written notice, which clearly
expresses the revocation of consent, or by delivering a properly executed,
subsequently dated consent card withholding a previously granted consent to
EWRLP, 6991 East Camelback Road, Suite A-200, Scottsdale, Arizona 85251,
Attention: Paul R. Fannin.
RISK FACTORS
In considering whether to consent to the Proposals, the EWRLP Unitholders
should consider, in addition to the other information in this Consent
Solicitation/Prospectus/Information Statement, the matters described in this
section.
CONFLICTS OF INTEREST
EWRLP Unitholders should be aware that certain officers, directors and
members of the management of EWR have certain interests that arise in
connection with the Transactions that are in addition to the interests of
limited partners generally. These interests arise under existing agreements
with, and annual compensation awards from, EWR, and agreements relating to,
among other things, (i) a consulting agreement dated August 27, 1997 between
EQR Properties Management LP and Stephen O. Evans pursuant to which Stephen O.
Evans shall provide consulting services until December 31, 1999 in exchange
for $225,000 per annum and certain additional benefits (see "Interests of
Certain Persons in the Transactions"), (ii) the appointment of Stephen O.
Evans as a Trustee of EQR and Executive Vice President-Strategic Investments,
(iii) the appointment of Richard G. Berry, President, Chief Operating Officer
and Director of EWR, to the office of Executive Vice President-Development of
EQR upon completion of the Merger pursuant to the terms of an employment
agreement providing a salary of $250,000 per annum and certain additional
benefits (see "Interests of Certain Persons in the Transactions") which shall
expire on December 31, 2000, (iv) the deferred compensation agreement between
EQR and Mr. Berry which provides for two semi-annual cash payments, plus
accrued interest at a rate of 9% if Mr. Berry's employment agreement with EQR
Properties Management LP terminates prior to the expiration of the term of
such agreement with the cash payment to be equal to the fair market value, as
of the termination date, of any unvested restricted shares of EWR Common
exchanged for shares of EQR Common or granted in payment of Mr. Berry's 1997
bonus under existing agreements with EWR (see "Interests of Certain Persons in
the Transactions"), (v) the consulting agreement between EQR Properties
Management LP and Mr. Fannin which will be effective as of the Effective Date
and (a) provides for payment of $225,540 on January 1, 1998, $301,535 on
January 1, 1999 and $278,535 on January 1, 2000, (b) is subject to an
aggregate fee cap of $988,000 and (c) provides for certain additional benefits
(see "Interests of Certain Persons in the Transactions"), amendments to
certain Change in Control Agreements between EWR and certain of its officers,
(vi) the right to exercise options to purchase shares of EWR Common which
right (a) may be exercised with respect to previously vested incentive share
options or terminate upon the Effective Time, and (b) will either be forfeited
with respect to all other options, in exchange for a cash payment in lieu
thereof, (vii) the right to receive an equivalent number (subject to
adjustment to take in account the Exchange Ratio) of options to purchase EQR
Common based on the number of vested incentive share options
15
<PAGE>
exercised and the number of all other options to purchase EWR Common forfeited
in exchange for a cash payment, provided they become EQR employees, and (viii)
EQR's agreement, with the exception of restricted shares of EWR Common
previously granted to Mr. Berry that all restricted share grants of EWR Common
previously made by EWR shall become vested and will participate in the Merger
on the same basis as all other shares of EWR Common.
SIZE AND RAPID GROWTH OF EQR
EQR has experienced rapid growth since the completion of its IPO on August
18, 1993 at which time EQR held 69 multifamily properties containing 21,725
units. Upon completion of the Transactions, EQR will own and operate 398
properties, consisting of 116,079 units and EQR will be the largest publicly
traded multifamily REIT. There can be no assurances that EQR will continue to
be able to continue to maintain the growth rate which it has experienced since
1993.
DECREASE IN DISTRIBUTIONS PER UNIT TO EWRLP UNITHOLDERS
Upon the completion of the Merger, it is expected that the distributions
payable with respect to each ERP Unit will be $2.50 per annum compared to
$3.18 per annum with respect to two EWRLP Units, based upon the current
distributions per ERP Unit and EWRLP Unit declared for the four quarters
ending September 30, 1997.
POTENTIAL CHANGE IN RELATIVE STOCK PRICES
In considering whether to consent to the Proposals, EWRLP Unitholders should
consider the risks associated with (i) a potential change in the relative
prices of EQR Common and EWR Common, into which ERP Units and EWRLP Units are
redeemable, respectively, prior to the effectiveness of the Merger and (ii) a
possible reduction in the market price of EQR Common following the Merger, due
to future sales of shares of EQR Common or the availability of such shares for
future sales, government regulatory action, tax laws, interest rates, the
operating performance of EQR and market conditions in general.
Sales of a substantial number of shares of EQR Common or the perception that
such sales could occur, could adversely affect prevailing market prices for
shares of EQR Common.
Neither EQR nor EWR may terminate the Merger Agreement due to a change in
the prevailing market price of EQR Common or EWR Common.
TERMINATION PAYMENTS IF MERGER FAILS TO OCCUR
The Merger Agreement provides for a Break-Up Fee payable by EWR of $14
million plus Break-Up Expenses of up to $2.5 million if the Merger Agreement
is terminated by either EQR or EWR under certain circumstances and, within one
year after such termination, EWR enters into an agreement regarding an
"Acquisition Proposal" (as defined in "The Transactions -- Termination
Provisions"), which is consummated. In addition, if the Merger Agreement is
terminated for certain reasons, EQR or EWR will be required to pay the other
party's Break-Up Expenses of up to $2.5 million. See "The Transactions --
Termination Fee and Expenses." EWR will be required to pay the other party's
Break-Up Expenses of up to $2.5 million. See "The Transactions -- Termination
Fee and Expenses."
The obligation to pay the Break-Up Fee and/or Break-Up Expenses may
adversely affect the ability of EWR to engage in another transaction in the
event the Merger is not consummated.
POTENTIAL ADVERSE EFFECTS OF COMBINING THE COMPANIES
EQR and EWR are large enterprises with operations in a number of different
states. There can be no assurance that costs or other factors associated with
the integration of the two groups would not adversely affect future combined
results of operations or the benefits of expected costs savings.
ADVERSE CONSEQUENCES OF DEBT FINANCING AND PREFERRED SHARES
General Risks. As of June 30, 1997, the properties of EQR were subject to
approximately $961 million of mortgage indebtedness and EQR's total debt
equaled approximately $1.7 billion, $361.5 million of which was floating rate
debt. In addition, in June 1995, EQR issued 6,120,000 Series A Preferred
Shares pursuant to a preferred share offering; in November 1995, EQR issued
5,000,000 depository shares each representing a 1/10 fractional interest in a
Series B Preferred Share pursuant to a depository share offering; in September
1996, EQR issued 4,600,000 depository shares each representing a 1/10
fractional interest in a Series C Preferred Share pursuant to a depository
share offering; in May 1997, EQR issued 7,000,000 depository shares each
representing a 1/10 fractional interest in a Series D Preferred Share pursuant
to a depository share offering and also in May 1997, subsequent to the merger
of EQR with Wellsford Residential Property Trust ("Wellsford"), Wellsford's
3,999,800 Series A Cumulative Convertible Preferred Shares of Beneficial
Interest were redesignated as EQR's 3,999,800 Series E Preferred Shares,
Wellsford's 2,300,000 Series B Cumulative Redeemable Preferred Shares of
Beneficial Interest were redesignated as EQR's 2,300,000 Series F Preferred
Shares and in September 1997 EQR issued 1,265,000 7 1/4% Series G Convertible
Cumulative Preferred Shares of Beneficial Interest, par value $.01 per share
(collectively, the "Preferred Share Offerings"). EQR used the proceeds from
the Preferred Share Offerings to repay indebtedness and to
16
<PAGE>
acquire additional properties. EQR is subject to the risks associated with
debt or preferred equity financing, including the risk that EQR's cash flow
will be insufficient to meet required payments of principal and interest, the
risk that existing indebtedness may not be refinanced or that the terms of
such refinancing will not be as favorable as the terms of current indebtedness
and the risk that necessary capital expenditures for such purposes as
renovations and other improvements may not be financed on favorable terms or
at all. If EQR were unable to refinance its indebtedness on acceptable terms,
or at all, EQR might be forced to dispose of one or more of the properties on
disadvantageous terms, which might result in losses to EQR and might adversely
affect the cash available for distributions to shareholders. If interest rates
or other factors at the time of the refinancing result in higher interest
rates upon refinancing, EQR's interest expense would increase, which would
affect EQR's ability to make distributions to its shareholders. Furthermore,
if a property is mortgaged to secure payment of indebtedness and EQR is unable
to meet mortgage payments, the mortgagee could foreclose upon the property,
appoint a receiver and receive an assignment of rents and leases or pursue
other remedies, all with a consequent loss of income and asset value to EQR.
Foreclosures could also create taxable income without accompanying cash
proceeds, thereby hindering EQR's ability to meet the REIT distribution
requirements of the Code.
Restrictions on EQR's Activities. A substantial portion of EQR's debt was
issued pursuant to certain indentures (the "Indentures") which restrict the
amount of indebtedness (including acquisition financing) EQR may incur.
Accordingly, in the event that EQR is unable to raise additional equity or
borrow money because of the debt restrictions in the indentures, EQR's ability
to acquire additional properties may be limited. If EQR is unable to acquire
additional properties, its ability to increase the distributions with respect
to EQR Common, as it has done in the past, will be limited to management's
ability to increase funds from operations, and thereby cash available for
distributions, from the existing properties in EQR's portfolio at such time.
Bond Compliance Requirements. EQR owns several properties that are subject
to restrictive covenants or deed restrictions relating to current or previous
tax-exempt bond financing and owns the bonds collateralized by several
additional properties. EQR has retained an independent outside consultant to
monitor compliance with the restrictive covenants and deed restrictions that
affect these properties. The bond compliance requirements may have the effect
of limiting EQR's income from certain of these properties if EQR is required
to lower its rental rates to attract low or moderate income tenants, or
eligible/qualified tenants.
CONTROL AND INFLUENCE BY SIGNIFICANT SHAREHOLDERS
As of September 11, 1997, Mr. Zell, certain current holders (the "Zell
Holders") of ERP OP Units issued at the time of the initial public offering of
shares of EQR Common (the "EQR IPO") to certain affiliates of Mr. Zell which
contributed 33 of the properties at the time of the EQR IPO (the "Zell
Original Owners"), Equity Properties Management Corp. ("EPMC") and other
affiliates of Mr. Zell owned in the aggregate approximately 5.8% of the shares
of EQR Common (assuming that all of the partnership interests in ERP Units are
exchanged for EQR Common), and certain entities controlled by Starwood Capital
Partners L.P. ("Starwood") and its affiliates which contributed 23 of the
properties at the time of the EQR IPO (the "Starwood Original Owners") owned
in the aggregate approximately 2.3% of EQR Common (assuming that all of the
ERP Units are exchanged for EQR Common). The Starwood Original Owners,
together with the Zell Original Owners, shall be referred to collectively as
the "Original Owners." As of September 11, 1997, EQR had options outstanding
to purchase approximately 3.8 million shares of EQR Common which it has
granted to certain officers, employees and trustees of EQR and consultants to
EQR, some of whom are affiliated with Mr. Zell, representing in the aggregate
approximately 4.5% of the shares of EQR Common (assuming that all such options
are exercised for shares of EQR Common and all of the outstanding ERP Units
are exchanged for EQR Common). Further, the consent of affiliates of Mr. Zell
who are Zell Holders and of the Starwood Original Owners is required for
certain amendments to the ERP Fourth Amended and Restated ERP Operating
Limited Partnership Agreement of Limited Partnership (the "Partnership
Agreement"). Accordingly, Mr. Zell and the Starwood Original Owners may
continue to have substantial influence over EQR, which influence might not be
consistent with the interests of other shareholders, and on the outcome of any
matters submitted to EQR's shareholders for approval. In addition, although
there is no current agreement, understanding or arrangement for these
shareholders to act together on any matter, these shareholders would be in a
position to exercise significant influence over the affairs of EQR if they
were to act together in the future.
POTENTIAL ENVIRONMENTAL LIABILITY
Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real estate may be liable for the costs of removal or
remediation of certain hazardous or toxic substances on such property. These
laws often impose environmental liability without regard to whether the owner
knew of, or was responsible for, the presence of such hazardous or toxic
substances. The presence of such substances, or the failure properly to
remediate such substances, may adversely affect the owner's ability to sell or
rent the property or to borrow using the property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances may
also be liable for the costs of removal or remediation of such substances at a
disposal or treatment facility, whether or not such facility is owned or
operated by such
17
<PAGE>
person. Certain laws impose liability for release of asbestos-containing
materials ("ACMs") into the air and third parties may seek recovery from
owners or operators of real properties for personal injury associated with
ACMs. In connection with the ownership (direct or indirect), operation,
management and development of real properties, EQR or EWR may consider an
owner or operator of such properties or as having arranged for the disposal or
treatment of hazardous or toxic substances and, therefore, potentially liable
for removal or remediation costs, as well as for certain other related costs,
including governmental fines and injuries to persons and property.
All of the properties of EQR and EWR have been the subject of a Phase I and,
in certain cases, a supplemental environmental assessment completed by
qualified independent environmental consultant companies. The most recent
environmental assessments for each of such properties were conducted within
the last five years. Environmental assessments were obtained prior to the
acquisition by EQR and EWR of their respective properties. These environmental
assessments have not revealed, nor is EQR or EWR aware of, any environmental
liability that EQR's or EWR's management believes would have a material
adverse effect on EQR's or EWR's business, results of operations, financial
condition or liquidity.
No assurance can be given that existing environmental assessments with
respect to any of EQR's or EWR's properties reveal all environmental
liabilities, that any prior owner of a property did not create any material
environmental condition not known to EQR or EWR, or that a material
environmental condition does not otherwise exist as to any one or more
properties.
GENERAL REAL ESTATE INVESTMENT CONSIDERATIONS; CHANGES IN LAWS
General. Real property investments are subject to varying degrees of risk
and are relatively illiquid. Income from real property investments and EQR's
resulting ability to make expected distributions to shareholders may be
adversely affected by the general economic climate, local conditions such as
oversupply of apartment units or a reduction in demand for apartment units in
the area, the attractiveness of the properties to tenants, zoning or other
regulatory restrictions, the ability of EQR to provide adequate maintenance
and insurance, and increased operating costs (including insurance premiums and
real estate taxes). EQR's income would also be adversely affected if tenants
were unable to pay rent or EQR were unable to rent apartment units on
favorable terms. If EQR were unable to promptly relet units or renew the
leases for a significant number of apartment units, or if the rental rates
upon such renewal or reletting were significantly lower than expected rates,
then EQR's funds from operations and ability to make expected distributions to
shareholders may be adversely affected. In addition, certain expenditures
associated with each equity investment (such as real estate taxes and
maintenance costs) generally are not reduced when circumstances cause a
reduction in income from the investment. Furthermore, real estate investments
are relatively illiquid and, therefore, will tend to limit the ability of EQR
to vary its portfolio promptly in response to changes in economic or other
conditions.
Changes in Laws. Increases in real estate taxes, income taxes and service or
other taxes generally are not passed through to tenants under existing leases
and may adversely affect EQR's funds from operations and its ability to make
distributions to shareholders. Similarly, changes in laws increasing the
potential liability for environmental conditions existing on properties or
increasing the restrictions on discharges or other conditions may result in
significant unanticipated expenditures, which would adversely affect EQR's
funds from operations and its ability to make distributions to shareholders.
OWNERSHIP LIMIT AND LIMITS ON CHANGES IN CONTROL
5% Ownership Limit; Inapplicability to Mr. Zell and Others. In order to
maintain its qualification as a REIT under the Code, not more than 50% of the
value of the outstanding shares of beneficial interest of EQR may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code
to include certain entities). Certain beneficial owners of the Zell Holders
and EPMC (i.e., beneficiaries of trusts established for the benefit of Mr.
Zell and his family and trusts established for the benefit of the family of
Mr. Robert Lurie, a deceased partner of Mr. Zell (the "Lurie Family Trusts")),
of the Starwood Original Owners and Mr. Henry H. Goldberg, a trustee of EQR
(through their potential ownership of EQR Common) together constitute five
individuals for purposes of this test, and under the Code, will be deemed to
own approximately 6.2% of the value of the outstanding shares of beneficial
interest of EQR upon exchange of all of their ERP Units. Due to such potential
concentration of ownership of EQR, ownership of more than 5% of the lesser of
the number or value of the outstanding shares of beneficial interest of EQR by
any single shareholder has been restricted, with certain exceptions, for the
purpose of maintaining EQR's qualification as a REIT under the Code. Such
restrictions in EQR's Declaration of Trust do not apply to the ownership of
the 5,541,331 shares of EQR Common subject to acquisition by the holders of
ERP OP Units and EPMC through the exchange of Original ERP Units.
Additionally, EQR's Declaration of Trust allows certain transfers of such
shares of EQR Common without the transferees being subject to the 5% ownership
limit, provided such transfers do not result in an increased concentration in
the ownership of EQR. EQR's Board of Trustees, upon
18
<PAGE>
receipt of a ruling from the Service, an opinion of counsel or other evidence
satisfactory to the Board of Trustees and upon such other conditions as the
Board of Trustees may direct, may also exempt a proposed transferee from this
restriction.
The 5% ownership limit, as well as the ability of EQR to issue additional
shares of EQR Common or other shares of beneficial interest (which may have
rights and preferences senior to shares of EQR Common), may discourage a
change of control of EQR and may also (i) deter tender offers for shares of
EQR Common, which offers may be advantageous to shareholders, and (ii) limit
the opportunity for shareholders to receive a premium for their shares of EQR
Common that might otherwise exist if an investor were attempting to assemble a
block of shares of EQR Common in excess of 5% of the outstanding shares of
beneficial interest of EQR or otherwise effect a change of control of EQR.
Possible Adverse Consequences of Ownership Limit. To maintain its
qualification as a REIT for federal income tax purposes, not more than 50% in
value of the outstanding shares of beneficial interest of EQR may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code,
to include certain entities). See "Federal Income Tax Consequences--Share
Ownership Test." Certain beneficial owners of the Zell Holders (i.e.,
beneficiaries of trusts established for benefit of Mr. Zell and his family and
the family of Mr. Robert Lurie, a deceased partner of Mr. Zell) and EPMC,
together with the Starwood Original Owners and Mr. Goldberg (through their
potential ownership of EQR Common) together constitute five individuals for
purposes of this test, and under the Code, will be deemed to own approximately
6.2% of the value of the outstanding shares of beneficial interest of EQR upon
exchange of all of their ERP Units for EQR Common. To facilitate maintenance
of its qualification as a REIT for federal income tax purposes, EQR generally
will prohibit ownership, directly or by virtue of the attribution provisions
of the Code, by any single shareholder of more than 5% of the issued and
outstanding shares of EQR Common and generally will prohibit ownership,
directly or by virtue of the attribution provisions of the Code, by any single
shareholder of more than 5% of the issued and outstanding shares of any class
or series of EQR Preferred Shares (collectively, the "Ownership Limit"). The
Board of Trustees may, in its reasonable discretion, waive or modify the
Ownership Limit with respect to one or more persons who would not be treated
as "individuals" for purposes of the Code if it is satisfied, based upon
information required to be provided by the party seeking the waiver, that
ownership in excess of this limit will not cause a person who is an individual
to be treated as owning EQR Common or EQR Preferred in excess of the Ownership
Limit, applying the applicable constructive ownership rules, and will not
otherwise jeopardize EQR's status as a REIT for federal income tax purposes.
EQR's Declaration of Trust also exempts from the Ownership Limit certain of
the beneficial owners of the Original Owners and EPMC, who would exceed the
Ownership Limit as a result of the exchange of the ERP OP Units for shares of
EQR Common, which ERP OP Units were received by them at the time of the
formation of EQR. Absent any such exemption or waiver, EQR Common or EQR
Preferred acquired or held in violation of the Ownership Limit will be
transferred to a trust for the benefit of a designated charitable beneficiary,
with the person who acquired such EQR Common and/or EQR Preferred in violation
of the Ownership Limit not entitled to receive any distributions thereon, to
vote such EQR Common or EQR Preferred, or to receive any proceeds from the
subsequent sale thereof in excess of the lesser of the price paid therefore or
the amount realized from such sale. A transfer of EQR Common and/or EQR
Preferred to a person who, as a result of the transfer, violates the Ownership
Limit may be void under certain circumstances. See "Description of Shares of
Beneficial Interest--Restrictions on Ownership and Transfer." The Ownership
Limit may have the effect of delaying, deferring or preventing a change in
control and, therefore, could adversely affect the shareholder's ability to
realize a premium over the then-prevailing market price for EQR Common in
connection with such transaction.
Staggered Board. The Board of Trustees of EQR has been divided into three
classes of trustees. As the term of each class expires, trustees for that
class will be elected for a three-year term and the trustees in the other two
classes will continue in office. The staggered terms for trustees may impede
the shareholders' ability to change control of EQR even if a change in control
were in the shareholders' interest.
Preferred Shares. EQR's Declaration of Trust authorizes the Board of
Trustees to issue up to 100,000,000 preferred shares of beneficial interest,
$.01 par value per share ("EQR Preferred"), and to establish the preferences
and rights (including the right to vote and the right to convert into EQR
Common) of any EQR Preferred issued. The power to issue EQR Preferred could
have the effect of delaying or preventing a change in control of EQR even if a
change in control were in the shareholders' interest. As of September 11,
1997, 14,079,800 shares of EQR Preferred were issued and outstanding.
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Taxation as a Corporation. EQR believes that it has qualified and will
continue to qualify as a REIT under the Code, commencing with its taxable year
ended December 31, 1993. However, no assurance can be given that EQR was
organized and has been operated and will be able to operate in a manner so as
to qualify or remain so qualified. 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 there
are only limited judicial or administrative interpretations, and involves the
determination of various factual matters and circumstances not entirely within
EQR's control.
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If EQR were to fail to qualify as a REIT in any taxable year, EQR 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, EQR 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 EQR
available for investment or distribution to shareholders because of the
additional tax liability to EQR for the years involved. In addition,
distributions to shareholders would no longer be required to be made. See
"Federal Income Tax Consequences."
Other Tax Liabilities. Even if EQR qualifies as a REIT, it will be subject
to certain federal, state and local taxes on its income and property. See
"Federal Income Tax Consequences--Other Tax Consequences--State and Local
Taxes." In addition, EQR's management operations, which are conducted through
EQR Properties Management LP and Equity Residential Properties Management
Limited Partnership II (collectively, the "EQR Properties Management
Partnerships") generally will be subject to federal income tax at regular
corporate rates. See "Federal Income Tax Consequences--Tax Aspects of
Investment in EQR--Other Tax Consequences."
Consequences of Failure to Qualify as Partnerships. EQR believes that the
ERP Operating Partnership, the EQR Properties Management Partnerships and each
of the other partnership and limited liability company subsidiaries have been
organized as partnerships and will qualify for treatment as such under the
Code. If any of such subsidiaries fails to qualify for such treatment under
the Code, EQR would cease to qualify as a REIT, and such subsidiary would be
subject to federal income tax (including any alternative minimum tax) on its
income at corporate rates. See "Federal Income Tax Consequences--Entity
Classification--Classification of ERP and Subsidiary Partnerships."
Each of EQR and EWR believes it has operated in a manner so as to qualify as
a REIT under the Code for all taxable years ended on or before December 31,
1996 and for the period beginning January 1, 1997 and ending on the date
hereof.
DEPENDENCE ON KEY PERSONNEL
EQR is dependent on the efforts of its executive officers. While EQR
believes that it could find replacements for these key personnel, the loss of
their services may have a temporary adverse effect on the operations of EQR.
Except for Stephen O. Evans and Richard G. Berry, who will be employed by EQR
upon the effectiveness of the Merger, none of these officers has entered or
will enter into employment or consulting agreements with EQR.
LIMITED CONTROL OVER BUSINESS OF ERP AND EWRLP
All decisions regarding the business and operations of EWRLP and ERP ("the
Partnerships") following the Merger will be made by EQR, which continue to
will serve as general partner of ERP and, until EWRLP's dissolution pursuant
to the Asset Contribution Agreement, will serve as co-general partner (with
ERP) of EWRLP.
The limited partners of the Partnerships will have little or no control over
actions of EQR as general partner, and may not take part in the operation,
management or control of the business of the Partnerships. The limited
partners of the Partnerships have no rights with respect to the election of
the Board of Trustees of EQR.
LOSS OF LIMITED LIABILITY
Any participation in the management of the Partnerships may subject a
limited partner to the loss of limited liability by the limited partner with
respect to the obligations of the Partnerships. The loss of such limited
liability may subject the limited partner to obligations that exceed the
investment of such limited partner in the Partnerships as represented by such
limited partner's partnership units.
RELIANCE ON GENERAL PARTNER TO DECLARE DISTRIBUTIONS
Under the partnership agreements of the Partnerships, amounts of the
distributions paid to the limited partners are and will be within the
discretion of EQR, as general partner of ERP, and EQR and ERP as co-general
partners of EWRLP. If EQR, as general partner of ERP, and EQR and ERP as co-
general partners of EWRLP, determine to reduce or otherwise limit the amount
of such distributions by the Partnerships, the limited partners may not
receive anticipated distributions, which may adversely affect the financial
planning of such limited partners.
INABILITY TO REMOVE GENERAL PARTNER
Under the ERP Partnership Agreement, the limited partners of ERP may not
remove EQR as general partner, and under the EWRLP Partnership Agreement, the
limited partners of EWRLP will be unable to remove EQR and ERP as co-general
partners. The inability to remove EQR and ERP from such positions may not
necessarily be in the limited partners' interest because the general
partner(s) may pursue policies or actions that the limited partners believe
are adverse to their interests.
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RISKS OF OWNERSHIP OF ERP UNITS
Restrictions on Transfer of Units. The ERP Partnership Agreement provides
for certain restrictions on a limited partner's ability to transfer his or her
ERP Units. Subject to certain exceptions, a limited partner may not transfer
all or any portion of his or her ERP Units without obtaining the prior written
consent of the general partner, which consent may be withheld in the sole and
absolute discretion of the general partner, and meeting certain other
requirements set forth in the ERP Partnership Agreement. Notwithstanding this
general prohibition, a limited partner of ERP may transfer his, her or its ERP
Units by (i) operation of law, testamentary disposition, gift (outright or in
trust) or by sale in each case to or for the benefit of his or her parent(s),
spouse or descendants, (ii) pledges or other collateral transfers effected by
a limited partner to secure the repayment of a loan or other obligation,
provided, however, that each such pledgee will agree in writing, concurrent
with such pledge or other collateral transfer, to (y) subordinate his, her or
its rights with respect to the pledged interest to any and all rights granted
by the pledging limited partner to ERP and (z) to defer the exercise of its
rights as a secured creditor to realize upon the collateral in the case of an
event of default until the expiration of any applicable "lock-up" period under
the terms of any agreement between ERP and the pledging limited partner, (iii)
the exchange of ERP Units for shares of EQR Common, and (iv) the distribution
of ERP Units or Preference Units to any of its direct or indirect constituent
partners or owners. A "transfer" does not include the conversion of a
preference unit of ERP ("Preference Unit") into one or more ERP Units nor the
conversion of a ERP Unit into a share of EQR Common. While these restrictions
may limit a limited partner's ability to liquidate his, her or its investment
in ERP Units quickly, the ERP Units are redeemable into shares of EQR Common,
for which there is an active market.
No Public Market. There is no public market for ERP Units. However, the ERP
Partnership Agreement provides that limited partners may, subject to certain
limitations, redeem their ERP Units for (i) shares of EQR Common on a one-for-
one basis or (ii) cash equal to the fair market value of the shares of EQR
Common into which such ERP Units would otherwise have been converted. The
determination of whether the redeeming party receives cash or shares of EQR
Common is within the sole discretion of the general partner.
ISSUANCE OF PREFERRED UNITS
The ERP Partnership Agreement provides that the general partner may, in its
sole discretion, issue additional units of partnership interest with rights
and preferences that may be senior to those of ERP Units. Such preferred units
are available for issuance without further action by the limited partners of
ERP. To the extent preferred units are issued, the holders of ERP Units may be
adversely affected because the holders of such additional units may have a
priority on distributions with respect to ERP Units or priority upon the
liquidation of the assets of ERP. The rights and preferences associated with
such additional units may also prevent distributions to the holders of ERP
Units until the obligations of ERP with respect to such additional units are
satisfied. As of August 15, 1997, ERP had 14,079,800 preferred units
outstanding.
NO DISSENTERS' RIGHTS
Limited partners of EWRLP are not entitled to dissenters' appraisal rights
under Delaware law or the EWRLP Partnership Agreement in connection with the
Transactions. Limited partners of ERP are not entitled to dissenters'
appraisal rights under Illinois law or the ERP Partnership Agreement in
connection with the ERP Amendment.
DISTRIBUTION REQUIREMENTS POTENTIALLY INCREASING INDEBTEDNESS OF EQR
EQR may be required from time to time, under certain circumstances, to
accrue as income for tax purposes interest and rent earned but not yet
received. In such event, or upon the repayment by EQR of principal on debt,
EQR could have taxable income without sufficient cash to enable EQR to meet
the distribution requirements of a REIT. Accordingly, EQR could be required to
borrow funds or liquidate investments on adverse terms in order to meet such
distribution requirements. See "Federal Income Tax Consequences--Distributions
from EQR."
EXEMPTIONS FOR MR. ZELL AND OTHERS FROM MARYLAND BUSINESS COMBINATION LAW
WHICH TEND TO INHIBIT TAKEOVERS
Under the Maryland General Corporation Law, as amended ("MGCL") as
applicable to real estate investment trusts, certain "business combinations"
(including a merger, consolidation, share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland real estate investment trust and any person who
beneficially owns 10% or more of the voting power of the trust's shares of
beneficial interest or an affiliate of the trust who, at any time within the
two-year period prior to the date in question, was the beneficial owner of 10%
or more of the voting power of the trust's then outstanding shares of
beneficial interest (an "Interested Shareholder"), or an affiliate of such
Interested Shareholder, are prohibited for five years after the most recent
date on which the Interested Shareholder
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becomes an Interested Shareholder. Thereafter, any such business combination
must be recommended by the board of trustees of such trust and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by
holders of outstanding voting shares of beneficial interest of the trust and
(b) two-thirds of the votes entitled to be cast by holders of voting shares of
beneficial interest of the trust other than shares held by the Interested
Shareholder with whom (or with whose affiliate) the business combination is to
be effected, (unless, among other conditions, the holders of the EQR Common of
the trust receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously
paid by the Interested Shareholder for its EQR Common. As permitted by the
MGCL, EQR has exempted any business combination involving Mr. Zell, the Zell
Original Owners, EPMC and their respective affiliates and associates, present
or future, or any other person acting in concert or as a group with any of the
foregoing persons and, consequently, the five-year prohibition and the super-
majority vote requirements will not apply to a business combination between
any of them and EQR. As a result, Mr. Zell, the Zell Original Owners, EPMC,
any present or future affiliate or associate of theirs or any other person
acting in concert or as a group with any of the foregoing persons may be able
to enter into business combinations with EQR, which may not be in the best
interest of the shareholders, without compliance by EQR with the super-
majority vote requirements and other provisions of the MGCL.
THE TRANSACTIONS
TERMS OF THE TRANSACTIONS
The Unit Exchange Offer. Holders of EWRLP Units are hereby offered the
opportunity to contribute, effective immediately following the Merger, their
EWRLP Units to ERP in exchange for a number of ERP Units equal to the number
of EWRLP Units so exchanged multiplied by the Exchange Ratio. The Unit
Exchange Offer will remain open to holders of EWRLP Units until the
effectiveness of the Asset Contribution.
The Merger. Pursuant to the Merger Agreement and upon the terms and
conditions set forth therein, EWR will merge into EQR. The Asset Contribution
and Unit Exchange Offer are proposed in connection with the Merger as a method
for EQR to complete the acquisition of EWR. The EQR Board of Trustees and EWR
Board of Directors have each approved the Transactions as set forth in the
Merger Agreement. Upon the consummation of the Merger, each outstanding share
of EWR Common will be converted into 0.5 share of EQR Common. Upon the
effectiveness of the Merger, approximately 2.3% of EQR Common will be
beneficially owned by affiliates of the EQR (assuming that no outstanding
options for shares of EQR Common are exercised and no ERP Units are exchanged
for shares of EQR Common). The percentage of EQR Common that will be
beneficially owned by affiliates will be 3.4%, assuming that all options for
shares of EQR Common are exercised and all ERP Units are exchanged for shares
of EQR.
The Asset Contribution. Pursuant to, and subject to the terms and conditions
of the Asset Contribution Agreement, EWRLP has agreed, subsequent to the
effectiveness of the Merger and at the option of ERP, to contribute all of
EWRLP's assets (the "Asset Contribution") to ERP in exchange for a number of
ERP Units equal to the number of EWRLP Units then outstanding multiplied by
the Exchange Ratio. Following the Asset Contribution, EWRLP will distribute
such ERP Units to the remaining EWRLP Unitholders (i.e., those holders who did
not previously exchange their EWRLP Units pursuant to the Unit Exchange Offer)
(the "Distribution"). As a result of the Distribution, holders of EWRLP Units
will receive a number of ERP Units equal to the number of EWRLP Units held by
such holder, multiplied by the Exchange Ratio. Unless certain conditions are
met, the Asset Contribution will not take place for at least one year
following the effectiveness of the Merger. EQR reserves the right to not
consummate the Asset Contribution or to change the terms thereof if,
subsequent to the Unit Exchange Offer EQR and ERP are the only limited
partners of EWRLP. See "The Transactions--Terms of the Asset Contribution."
Although the Asset Contribution Agreement is subject to approval by the
limited partners of EWRLP, the Asset Contribution Agreement has already been
approved by EWR, which holds a majority of outstanding EWRLP Units. Therefore,
Holders of EWRLP Units can either (i) exchange their EWRLP Units for ERP Units
pursuant to the Unit Exchange Offer or (ii) retain their EWRLP Units and
receive ERP Units pursuant to the Asset Contribution Agreement. Regardless of
whether holders of EWRLP Units receive ERP Units pursuant to the Unit Exchange
Offer or Asset Contribution Agreement, each such holder will receive an amount
of ERP Units equal to the number of EWRLP Units held by such holder multiplied
by the Exchange Ratio.
BACKGROUND OF THE TRANSACTIONS
Since 1993, Douglas Crocker, the President and Chief Executive Officer of
EQR and Stephen O. Evans, the Chief Executive Officer of EWR, have had a
personal relationship arising out of their participation in the multifamily
property business. Since 1994, Mr. Crocker and Mr. Evans have discussed the
general status of the multifamily property industry. Messrs. Crocker and Evans
each presumed that the multifamily property industry would be the subject of
combinations of existing companies in the future and separately considered
whether their respective companies should explore a combination with other
companies.
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On April 16, 1997, Mr. Evans met with Samuel Zell, Chairman of EQR, Mr.
Crocker and Gerald Spector, EQR's Chief Operating Officer, to discuss
preliminarily the possibility of a business combination.
On May 6, 1997, at a regular quarterly meeting of the EWR Board of
Directors, Mr. Evans reported to the directors of EWR on multifamily industry
consolidation trends and his meeting with Mr. Zell, Mr. Crocker and Mr.
Spector on April 16, 1997.
Pursuant to an engagement letter dated May 7, 1997, EWR retained Morgan
Stanley to assist it in a review of strategic alternatives.
On June 10, 1997, at a meeting of the EWR's Board of Directors, Morgan
Stanley presented a review of potential strategic alternatives available to
EWR. These alternatives included the continuation of EWR's existing strategy
of property operation and of pursuing acquisition and development
opportunities in its existing markets in Arizona and Southern California, as
well as the possibility of a so-called "merger of equals" or the merger of EWR
into a larger company. Strategic alternatives were analyzed in light of
various characteristics, including geographic fit and portfolio quality, as
well as the resulting effect on EWR's cost of capital. While EWR had, in the
first half of 1997, very preliminary discussions with a number of companies
regarding a possible business combination, none of such discussions resulted
in any specific proposals or offers. EWR's discussions with EQR as described
herein were the only discussions that resulted in an offer to consummate a
business combination. For the reasons discussed below under "Reasons for the
Transactions--Recommendation of the EWR Board of Directors," the EWR Board of
Directors ultimately determined that the merger with EQR was the best
strategic alternative for EWR and its shareholders.
Through early July 1997, Mr. Evans had conversations with members of the EWR
Board of Directors to review the possibility of approaching EQR to assess
EQR's preliminary interest in pursuing a business combination with EWR on
mutually acceptable terms.
On July 7, 1997, Messrs. Crocker and Spector and David J. Neithercut, Chief
Financial Officer of EQR, met with Mr. Evans specifically to discuss each
company's interest in pursuing merger discussions. During such meeting, Mr.
Crocker and Mr. Evans considered whether a merger would be in the best
interests of both companies and their respective shareholders. Among the
issues considered were whether a merger would combine the talents of their
respective companies, reduce corporate overhead by eliminating redundancies,
create a larger company which might be attractive to institutional investors
and increase access to public equity and debt markets and provide EQR with
access to proven development expertise. Concluding that a merger might be in
the best interests of both companies and their shareholders, Mr. Crocker and
Mr. Evans decided to pursue merger discussions.
Subsequent to the meeting on July 7, 1997, Mr. Evans updated the EWR Board
of Directors regarding his discussions with EQR. Members of the EWR Board of
Directors encouraged Mr. Evans to continue these discussions.
On July 24, 1997, Mr. Evans contacted Mr. Crocker and indicated a
willingness to commence substantive discussions of a business combination,
such discussions to occur pursuant to a confidentiality agreement with a 30-
day exclusivity provision. A Confidentiality and Exclusivity Agreement was
executed on July 25, 1997.
On July 31 and August 1, 1997, Mr. Crocker, Mr. Evans, Paul Fannin, Chief
Financial Officer of EWR, Bruce C. Strohm, Executive Vice President, Secretary
and General Counsel of EQR, Mr. Neithercut, David Lee, Senior Vice President--
Capital Markets of EQR and representatives of Morgan Stanley and legal
representatives of both EQR and EWR met at Morgan Stanley's offices in New
York to discuss the structure of a possible merger transaction, and the
possible pricing matrix for the EWR Common and EWR LP Units. General terms
were discussed. The tentative exchange ratio was determined by establishing
relative values for the EQR Common and EWR Common. The value for EQR Common
was based on its then market value of $51.25 per share. No one specific
valuation method was utilized in connection with the determination of the
value of the EWR Common. The value for EWR Common was negotiated based upon,
among other things, (a) its then market price of $21.125 per share and each
party's evaluation of the value of EWR's assets to be acquired in the merger,
which were estimated at approximately $1.1 million, (b) the budgeted net
operating income, earnings before interest, taxes, depreciation and
amortization and funds from operations for 1997 estimated to be generated from
the assets to be acquired by EQR in the merger which were approximately $80.1
million, $82.7 million and $53.9 million, respectively, and (c) the cost of
savings anticipated from the Merger which were estimated at $1.1 million per
year and the costs associated with the Merger, which, including employee
severance and retention costs, which were estimated at $17.2 million. It was
tentatively agreed, subject to satisfactory resolution of the material issues
and completion of due diligence, that the exchange ratio would be determined
based upon a value of $26.00 per share for the EWR Common and EWRLP Units and
$52.00 per share for the EQR Common, subject to adjustment in the event of a
decline in the market price of EQR Common. Although discussions were still
ongoing, EQR and EWR requested their legal counsel to prepare a draft of a
merger agreement and other related documents so that management of the
companies could focus on the issues that required resolution.
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Reciprocal due diligence commenced on August 4, 1997 and was completed the
week of August 25, 1997 to the satisfaction of both parties.
From August 4, 1997 through August 20, 1997, the management of EQR and EWR
and each company's respective counsel had numerous discussions regarding
various business and legal issues. At a regular meeting of the EWR Board of
Directors on August 6, 1997, the Merger was discussed and the directors of EWR
were advised of the status of the negotiations.
On August 21, 1997, Mr. Crocker, Mr. Neithercut, Mr. Strohm and Fred Tuomi,
Executive Vice President of EQR, met with Mr. Evans, Richard Berry, President
and Chief Operating Officer of EWR, and Tony Pusateri, Senior Vice President--
Operations of EWR, at EQR's corporate offices. The parties discussed the
structure of the transaction, the current operations of the companies,
potential synergies expected by management to result from the proposed
transaction, the structure of existing and future development transactions,
certain governance, tax and employee transition matters and the time table for
completion of the transaction.
On August 22, 1997, Messrs. Crocker and Evans discussed by telephone certain
open issues in connection with the Merger, including the employment
arrangements with certain key employees of EWR after the completion of the
proposed merger.
On August 22, 1997, a special EQR board meeting of the EQR Board of Trustees
was held at which members of management and representatives of EQR's financial
and legal advisors were present in person or by conference telephone call. At
such meeting, the EQR Board of Trustees were informed of the status of
discussions with EWR's management and the reasons that a combination with EWR
would be beneficial to EQR. In addition, the trustees discussed with management
and EQR's legal advisors the current operations of EQR and EWR, the form of
consideration payable in the proposed transaction, the valuation methodologies
to be utilized by J.P. Morgan for purposes of its opinion (see "The Merger--
Opinion of Financial Advisor--EQR"), potential synergies expected by management
to result from the proposed transaction, certain governance, tax and due
diligence matters and the time table for completion of the transaction. The EQR
Board of Trustees also reviewed the tentative terms of the proposed merger
between EQR and EWR.
Mr. Crocker provided the EQR Board of Trustees with a discussion of the
background and events leading up to the meeting with respect to the proposed
Merger with EWR and set forth in detail the reasons he believed a possible
business combination with EWR would be appropriate for EQR. The reasons
discussed included (i) the resulting size of the combined entity as compared to
other REITs, (ii) the combined market capitalization would increase to
approximately $7.6 billion and would not significantly alter EQR's existing
Debt to Total Market Capitalization Ratios, (iii) the merger would improve
access to the public debt and equity markets to support EQR's continued growth
and (iv) the merger would allow EQR access to proven development expertise.
EQR's legal counsel presented and explained the terms of the Merger Agreement
to the EQR Board of Trustees including closing conditions, termination rights
and liquidated damages and expense reimbursement provisions, and advised the
EQR Board of Trustees of its fiduciary obligations.
A discussion among the EQR Board of Trustees followed concerning the
advantages and disadvantages of the proposed Merger, including the factors
raised by Mr. Crocker. The principal negative factors considered by the EQR
Board of Trustees were the significant cost involved in connection with
consummating the merger and the substantial management time and effort required
to effectuate the merger and integrate the businesses of EQR and EWR. The EQR
Board of Trustees did not find the negative factors sufficient to outweigh
advantages of the merger, particularly in light of the expected lower payout
ratio that EQR would have following the merger based upon funds from operations
and the similar expected Debt to Total Market Capitalization Ratio that EQR
would have following the merger as compared with EQR's current ratios.
From August 23, 1997 through August 27, 1997, representatives of management
of EQR and EWR and their respective counsel discussed and resolved the
remaining open business and legal issues.
On August 27, 1997, a special meeting of the EQR Board of Trustees was held.
Representatives of J.P. Morgan made a detailed presentation regarding the
proposed Merger with EQR. J.P. Morgan's presentation included a discussion of
(i) the fairness from a financial point of view to EQR of the consideration to
be paid by EQR in the proposed Merger, (ii) a summary of the financial terms of
the proposed Merger, (iii) a valuation analysis and (iv) a discussion of the
impact of the proposed Merger on EQR. Also included in J.P. Morgan's oral
presentation of its fairness opinion were (a) an outline of J.P. Morgan's
fairness opinion process, (b) a pro forma merger analysis, (c) a fully loaded
share price analysis, (d) a public trading multiples analysis, (e) a selected
transactions analysis, (f) a share trading history analysis, (g) an historical
exchange ratio analysis and (h) a net asset value analysis.
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Following J.P. Morgan's presentation, and after extensive discussion, the
Board of Trustees of EQR concluded that the advantages of the merger
outweighed the potential risks and the EQR Trustees who voted on the merger
unanimously approved the Merger Agreement and the related agreements
contemplated thereby, and authorized EQR management to enter
into such agreements. J.P. Morgan rendered its oral opinion to the effect
that, as of the date and subject to the assumptions made, procedures followed,
matters considered and limits of its review, the consideration to be paid by
EQR in connection with the merger was fair, from a financial point of view to
EQR. J.P. Morgan's written opinion confirming its oral opinion was delivered
on August 27, 1997.
On August 27, 1997, the EWR Board of Directors held a special meeting at
which members of management, representatives of Morgan Stanley and legal
counsel were present. At the meeting, the EWR Board of Directors was updated
on the status of discussions with EQR regarding the potential merger
transaction between EWR and EQR. Mr. Evans and Morgan Stanley reviewed with
the EWR Board of Directors (i) the background of the proposed Merger, (ii) the
status of EWR's financial and business plans with and without the proposed
Merger, (iii) due diligence findings with respect to EQR and (iv) the
potential benefits as well as the risks of the proposed Merger transaction as
described below under "Reasons for the Transactions; Recommendation of the EWR
Board of Directors."
EWR's legal counsel made a presentation to the EWR Board of Directors in
which it explained the material terms of the proposed Merger, briefed the EWR
Board of Directors on certain legal issues raised by the proposed Merger
transaction and advised the EWR Board of Directors of its duties in connection
with such transaction.
Morgan Stanley presented its financial analysis of the merger transaction.
Morgan Stanley concluded its presentation by orally advising the EWR Board of
Directors that as of that date and subject to the assumptions made, factors
considered and limits on the review, the consideration to be received by the
holders of EWR Common, pursuant to the Merger, was fair, from a financial
point of view, to such shareholders.
Following such presentations, and after extensive discussion of the
advantages and disadvantages of the proposed Merger transaction as described
under "Reasons for the Transactions; Recommendations of the EWR Board of
Directors," the Board of Directors of EWR concluded that the advantages of the
Merger outweighed the potential risks, and unanimously approved the Merger,
the Merger Agreement and all transactions contemplated thereby.
EQR and EWR did not believe that the Merger would have a material adverse
effect on the results of operations, liquidity or capital resources of EQR and
believed that the advantages of such transactions outweighed the
disadvantages.
The Merger Agreement was executed on August 27, 1997.
REASONS FOR THE TRANSACTIONS; RECOMMENDATION OF THE EQR BOARD OF TRUSTEES
The Board of Trustees of EQR, the sole general partner of ERP, believes that
the Transactions, including the consideration, are fair to and in the best
interests of EQR, ERP and their respective Shareholders and Unitholders.
Accordingly, the EQR Trustees who voted on the Transactions unanimously
approved the Transactions. In reaching this determination, the EQR Board of
Trustees consulted with EQR management, as well as its financial advisors,
J.P. Morgan, legal counsel and accountants, and considered a number of
factors. The material factors that the EQR Board of Trustees considered in
approving the Transactions and unanimously recommending approval of the
Transactions are that:
(i) The EQR Board of Trustees believes that the Transactions would
solidify EQR's leadership position in the multifamily property industry.
The EQR Board of Trustees viewed this as favorable because, based upon the
number of properties owned by EQR and EWR as of June 30, 1997, EQR would
own or have interests in and operate approximately 398 multifamily
properties consisting of approximately 116,079 apartment units; would have
FFO (as such term is defined in "Opinion of Financial Advisor--EQR" herein)
on a pro forma basis for the six months ended June 30, 1997 of
approximately $134.9 million and would have a combined market
capitalization, as of the Effective Time, of approximately $7.6 billion
with an initial Debt to Total Market Capitalization Ratio of approximately
28%.
(ii) The EQR Board of Trustees believes that the Transactions would
increase operating efficiency through economies of scale, which the EQR
Board of Trustees viewed as favorable as the combined entity would realize
significant savings in overhead and expenses (such savings are initially
estimated to be approximately $1.1 million per annum).
(iii) The EQR Board of Trustees believed that the Transactions would
provide greater access to the public equity and debt markets. The EQR Board
of Trustees viewed this favorably because of management's belief, based in
part on discussions with advisors, investment banking firms and lenders,
that it would provide holders of EQR Common with enhanced liquidity and
make EQR Common a more attractive investment for institutional investors.
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(iv) The EQR Board of Trustees believes that as a result of the
Transactions, EQR will be a larger and financially stronger company, which
would facilitate combinations with other public or private entities. The
EQR Board of Trustees viewed this as favorable because it would provide
another efficient and attractive means of growth.
(v) The EQR Board of Trustees believes that the combination of the EWR
properties (15,700 units as of September 30, 1997) with those of EQR will
expand EQR's ownership and operation of properties and enhance EQR's
operations in the areas of Arizona and Southern California. The EQR Board
of Trustees viewed this as favorable particularly because the EQR Board of
Trustees believes that the properties located in these markets should
increase in value.
(vi) The EQR Board of Trustees believes that the Transactions will
enhance EQR's ability to supervise development projects undertaken by
third-party developers because the EWR executive officers joining EQR have
substantial experience in the area of property development.
(vii) The Transactions could be effectuated through the issuance of new
equity valued at $628 million (based upon a market price of $50.44 per
share of EQR Common on June 30, 1997), rather than through the use of cash
or a public offering of equity or debt securities, which the EQR Board of
Trustees viewed as favorable.
(viii) J.P. Morgan delivered a written opinion dated August 27, 1997 to
the effect that, as of such date and based upon and subject to certain
matters stated therein, the consideration to be paid by EQR in connection
with the Transactions was fair, from a financial point of view, to EQR. The
EQR Board of Trustees viewed such opinion as favorable not only because of
the conclusion reached by J.P. Morgan, but also because such conclusion was
consistent with the opinion of EQR's management.
(ix) The EQR Board of Trustees believes the terms of the Transactions to
be fair to EQR and its shareholders.
(x) Under generally accepted accounting principles, the Transactions will
be accounted for as purchases, and for federal income tax purposes the
Transactions will be a tax-free transaction, which the EQR Board of
Trustees viewed as favorable because, with certain possible exceptions, no
gain or loss will be recognized by EQR, EWR or a shareholder or unit holder
of EWR who receives EQR Common or ERP Units for EWR Common or EWRLP Units
exchanged therefor (except with respect to any cash received in lieu of a
fractional interest in a share of EQR Common).
The EQR Board of Trustees also considered certain potentially negative
factors which could arise from the Transactions. These included, among others,
the risk that the anticipated benefits of the Transactions might not be fully
realized. The EQR Board of Trustees considered that the Transactions would
increase the debt of the EQR. EQR will assume all of EWR's outstanding debt
which, at September 30, 1997, was approximately $442,156,000. The EQR Board of
Trustees recognized this increase could adversely affect the ability of EQR to
obtain debt financing for additional growth and would subject EQR to the risks
of higher leverage. Overall, however, the EQR Board of Trustees concluded that
the increase in debt and the increase in the ratio of Debt to Total Market
Capitalization for EQR as of September 30, 1997 from approximately 26% to
approximately 31% on a pro forma basis would be within EQR's policies with
respect to the incurrence of debt. In addition, the EQR Board of Trustees
considered the possible adverse effects upon the market for EQR Common and
upon EQR's ability to raise capital and issue equity in both the public and
private markets which might result if the Transactions were not consummated.
The EQR Board of Trustees also considered the significant costs involved in
connection with consummating the Transactions and the substantial management
time and effort required to effectuate the Transactions and integrate the
businesses of EQR and EWR. Finally, the EQR Board of Trustees considered the
ability of EQR to manage approximately 16,000 additional apartment units. The
EQR Board of Trustees did not believe that the negative factors were
sufficient, either individually or collectively, to outweigh the advantages of
the Transactions.
The EQR Board of Trustees viewed as adequate the conditions to the closing
in the Merger Agreement, including the condition that no change in the
financial condition, business or operations of EWR will have occurred that
would have a material adverse effect, other than a change which affects EQR
and EWR in a substantially similar manner.
In view of the wide variety of factors considered in connection with its
evaluation of the Transactions, the EQR Board of Trustees did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weight to the specific factors considered in reaching its determination.
The EQR Board of Trustees view the indemnification provisions relating to
EWR directors and officers as a continuing responsibility and approved of the
continuation of the indemnification of the EWR directors and officers as part
of the negotiated transaction.
The EQR Board of Trustees believes that the Transactions are fair to and in
the best interests of ERP, EQR and its Unitholders and shareholders,
respectively.
In the event the Transactions are not consummated for any reason, EQR will
continue to pursue its business objectives.
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REASONS FOR THE TRANSACTIONS; RECOMMENDATION OF THE EWR BOARD OF DIRECTORS
The Board of Directors of EWR, the sole general partner of EWRLP, believes
that the Transactions are fair to, and in the best interests, of EWR, EWRLP and
its shareholders and Unitholders, respectively. At a special meeting of the EWR
Board of Directors held on August 27, 1997, members of EWR management,
representatives of Morgan Stanley and legal counsel made presentations
concerning the Transactions and the business and prospects of EWR and EQR. As
part of its deliberations, the EWR Board of Directors considered, among other
factors, the age, condition and geographic diversification of EQR's assets, the
depth and experience of its management and its credit rating and analyzed its
capital structure, funds from operations and Debt to Total Market
Capitalization Ratio, as well as its future prospects and opportunities for
growth as a combined company with EWR. The EWR Board of Directors also reviewed
the terms of the Merger Agreement with EWR's management and EWR's financial and
legal advisors. By unanimous vote, the EWR Board of Directors determined that
the Transactions were fair to, and in the best interests of, EWR, EWRLP and its
shareholders and Unitholders, respectively, approved the Transactions
contemplated thereby and resolved to recommend, among other things, that
EWRLP's Unitholders approve the Asset Contribution, certain amendments to the
EWRLP Partnership Agreement and the transactions contemplated thereby.
The EWR Board of Directors believes that the Transactions offer EWRLP's
limited partners an opportunity to take advantage of the general trend in the
real estate industry towards consolidation, by affording limited partners a
significant participation in a much larger and more geographically diversified
REIT with greater potential for long-term appreciation and improved access to
capital markets.
In making its determination with respect to the Transactions, the EWR Board
of Directors also considered, among other things:
(i) that the Transactions offer the greatest potential to maximize value
to EWR's shareholders and EWRLP's limited partners (together, "EWR
Equityholders"). In this regard, the Board considered the discussions
management conducted with its advisor, Morgan Stanley, other investment
banking firms and other publicly traded REITs regarding industry
consolidation, as well as EQR's size, financial, resources, geographic
diversification and credit rating and the expertise and experience of EQR's
management;
(ii) that after reviewing EWR's strategic alternatives, the Transactions
were the best alternatives reasonably available to EWR Equityholders. The
Board believed that, after management's discussions with investment banking
firms and other publicly traded REITs, there were no other prospective
purchasers that had both the financial ability to complete the transaction
and would be willing to pay an aggregate consideration greater than that to
be paid by EQR in the Transactions;
(iii) the terms of the Merger Agreement, which the EWR Board of Directors
viewed as favorable because it believed them to be fair to EWR and its
shareholders and because the terms were reached through extensive arms-
length negotiations. In this regard, the EWR Board of Directors noted that
the Exchange Ratio represented an attractive opportunity for EWR
shareholders to continue their investment and maintain their receipt of
quarterly dividends (albeit at a reduced level), but with significantly
expanded geographic diversification;
(iv) the structure of the Merger, particularly the fact that the Merger,
as a "stock-for-stock" transaction, rather than a "cash-for-stock"
transaction, will provide an opportunity for EWR Equityholders to
participate in any future appreciation of EQR; and
(v) the opinion, analyses and presentations of Morgan Stanley, including
the opinion that, subject to certain considerations, the consideration to
be received by EWR Common shareholders pursuant to the Merger was fair,
from a financial point of view, to such shareholders.
The EWR Board of Directors also considered certain potentially negative
factors in its deliberations concerning the Merger, including, among others:
(i) the risk that the anticipated benefits of the Transactions might not
be fully realized;
(ii) the significant costs involved in connection with consummating the
Transactions;
(iii) the substantial management time and effort required to effectuate
the Transactions;
(iv) the possibility that EWR may be required, if the Merger Agreement is
terminated under certain circumstances, to pay EQR a Break-Up Fee of $14.0
million and to reimburse EQR Break-Up Expenses of up to $2.5 million; and
(v) that the dividend rate payable with respect to the EQR Common is less
than the dividend rate payable with respect to the EWR Common.
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In addition to the above factors, the Board of Directors was mindful of and
evaluated the actual and potential conflicts of interest. In view of the wide
variety of factors considered by the EWR Board of Directors, the Board of
Directors did not quantify or otherwise attempt to assign relative weights to
the specific factors considered in making its determination. However, after due
consideration of its obligations, in the unanimous view of the EWR Board of
Directors, the potential conflicts of interest and potentially negative factors
considered by it were not sufficient, either individually or collectively, to
outweigh the positive factors considered by it in its deliberations relating to
the Transactions.
OPINION OF FINANCIAL ADVISOR--EQR
At the meeting of the Board of Trustees of EQR on August 27, 1997, J.P.
Morgan rendered its oral opinion to the Board of Trustees of EQR that, as of
such date, the consideration to be paid by EQR in connection with the proposed
Merger was fair from a financial point of view to EQR (together with its
subsidiaries and affiliates, which includes ERP). J.P. Morgan confirmed its
August 27, 1997 oral opinion by delivering its written opinion to the Board of
Trustees of EQR, dated August 27, 1997, that, as of such date, the
consideration to be paid by EQR in connection with the proposed Merger was fair
from a financial point of view to EQR (together with its subsidiaries and
affiliates, which includes ERP). J.P. Morgan did not make a recommendation to
EQR with respect to the amount of consideration to be paid by EQR in connection
with the proposed merger. J.P. Morgan has not been requested to, and will not,
update its opinion prior to the Closing Date. No limitations were imposed by
EQR's Board of Trustees upon J.P. Morgan, and no instructions were given by
EQR's Board of Trustees to J.P. Morgan, with respect to the investigations made
or procedures followed by it in rendering its opinions.
The full text of the written opinion of J.P. Morgan, which sets forth the
assumptions made, matters considered and limits on the review undertaken, is
attached as Appendix E to this Consent Solicitation/Prospectus/Information
Statement and is incorporated herein by reference. Limited partners of ERP are
urged to read the opinion in its entirety. J.P. Morgan's written opinion is
addressed to the Board of Trustees of EQR, and is directed only to the
consideration to be paid in connection with the Merger. The summary of the
opinion of J.P. Morgan set forth in this Consent Solicitation/Prospectus/
Information Statement is qualified in its entirety by reference to the full text
of such opinion. The summary of the opinion of J.P. Morgan set forth in this
Consent Solicitation/Prospectus/Information Statement also constitutes a summary
of the material analyses presented by J.P. Morgan at the meeting of the Board of
Trustees of EQR on August 27, 1997. In the opinion of EQR, no events or
significant changes in information have occurred that would have altered the
opinion of J.P. Morgan.
In arriving at its opinion, J.P. Morgan reviewed, among other things, the
Merger Agreement, certain publicly available information concerning the
business of EWR and of certain other companies engaged in businesses comparable
to those of EWR, and the reported market prices for certain other companies'
securities deemed comparable; publicly available terms of certain transactions
involving companies comparable to EWR and the consideration received for such
companies; current and historical market prices of the EQR Common and EWR
Common; the audited financial statements contained in the Annual Report on Form
10-K of EQR and EWR for the fiscal year ended December 31, 1996, and the
unaudited financial statements contained in the Quarterly Report on Form 10-Q
of EQR and EWR for the six months ended June 30, 1997; certain agreements with
respect to outstanding indebtedness or obligations of EQR and EWR; certain
internal financial analyses and estimates of budgeted 1998 funds from
operations ("FFO") and net operating income ("NOI") prepared by EQR and EWR and
their respective managements; and the terms of other business combinations
deemed relevant by J.P. Morgan. J.P. Morgan also held discussions with certain
members of the managements of EQR and EWR with respect to certain aspects of
the Merger, and the past and current business operations of EQR and EWR, the
financial condition and future prospects and operations of EQR and EWR, and
certain other matters believed necessary or appropriate to J.P. Morgan's
inquiry. In addition, J.P. Morgan reviewed such other financial studies and
analyses and considered such other information as it deemed appropriate for the
purposes of its opinion.
J.P. Morgan relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was publicly available or
that was furnished to it by EQR and EWR or otherwise reviewed by J.P. Morgan,
and J.P. Morgan has not assumed any responsibility or liability therefor. J.P.
Morgan has not conducted any valuation or appraisal of any assets or
liabilities, nor have any valuations or appraisals been provided to J.P.
Morgan. In relying on financial analyses and forecasts provided to J.P. Morgan,
J.P. Morgan has assumed that they have been reasonably prepared based on
assumptions reflecting the best currently available estimates and judgments by
management as to the expected future results of operations and financial
condition of EQR and EWR to which such analyses or forecasts relate. J.P.
Morgan has also assumed that the Merger will have the tax consequences
described in discussions with, and materials furnished to J.P. Morgan by,
representatives of EQR, and that the other transactions contemplated by the
Merger Agreement will be consummated as described in the Merger Agreement.
The projections of (i) total rental revenues, (ii) NOI, (iii) earnings before
interest, taxes, depreciation and amortization ("EBITDA") and (iv) FFO utilized
by J.P. Morgan in connection with its opinion were, in the case of EQR, based
on
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estimates prepared by J.P. Morgan's equity research department, as augmented by
discussions with management of EQR, and, in the case of EWR, based on estimates
prepared by EQR. The projections of FFO per share for EQR were provided by
First Call, an online data service available to subscribers which compiles
earnings estimates by research analysts and, in the case of EWR, based on
estimates prepared by EQR. This resulted in projected 1998 total rental
revenues, NOI, EBITDA, FFO and FFO per share of approximately $1,089.5 million,
$648.9 million, $666.3 million, $379.2 million, and $4.10 per share,
respectively, for EQR, and approximately $117.5 million, $78.4 million, $80.0
million, $49.3 million and $1.98 per share, respectively, for EWR.
No representation or warranty was or is made by any party with respect to
these projections. Financial projections are subject to contingencies beyond
management's control, and realization of the projections depends on numerous
factors, including among other things, the cost of integrating the companies,
the completion of pending developments, the actual cost in relation to such
projects and decisions by management to modify business plans to address
changing needs and a changing operating environment. All material events and
circumstances cannot be predicted and unanticipated events and circumstances
are likely to occur. Accordingly, there may be differences between the
projected results of operations and the actual results of operations of the
respective companies, and such differences could be material. In the event that
the financial projections prove to be materially different, the conclusions
reached in the opinion of J.P. Morgan could be materially affected.
J.P. Morgan's opinions are based on economic, market and other conditions as
in effect on, and the information made available to J.P. Morgan as of, the date
of such opinions. Subsequent developments may affect the written opinion dated
August 27, 1997, and J.P. Morgan does not have any obligation to update,
revise, or reaffirm such opinion. J.P. Morgan expressed no opinion as to the
price at which the EQR Common or EWR Common will trade at any future time.
In accordance with customary investment banking practice, J.P. Morgan
employed generally accepted valuation methods in reaching its opinion. The
following is a summary of the material analyses utilized by J.P. Morgan in
connection with providing its opinion.
Pro Forma Merger Analysis. J.P. Morgan analyzed the effect of the Merger on,
among other things, the estimated First Call FFO per share of EQR Common for
the year ended December 31, 1998. In doing so, J.P. Morgan combined the
estimated 1998 operating results for EWR and EQR and assumed certain savings in
accounting and general and administrative expense per estimates provided by the
management of EQR. J.P. Morgan observed a total projected post-Merger
incremental accretion of 0.5% to EQR's First Call 1998 FFO estimates of $4.10
per share. The analysis assumed the August 25, 1997 closing price of $50.44 per
share for EQR Common in calculating the purchase price for EWR Common.
J.P. Morgan also analyzed the effect of the Merger on EQR's pro forma equity
market capitalization and total capitalization immediately following the
Merger. In this regard, J.P. Morgan noted that the pro forma equity market
capitalization for EQR would be approximately $4.72 billion, assuming a share
price of $50.44 (EQR's closing share price on August 25, 1997) and 93.6 million
shares of EQR Common outstanding after completion of the Merger, and a total
post-transaction pro forma capitalization of approximately $7.63 billion. J.P.
Morgan further analyzed EQR's 1998 pro forma leverage ratios and dividend
payout ratio and noted that (i) EQR's ratio of debt to total capitalization
would increase, upon completion of the Merger, from 26.3% prior to the Merger
to 28.6% after the assumption of EWR's outstanding debt plus the incremental
debt incurred from the payment of certain transaction costs and (ii) the ratio
of debt plus preferred stock to total capitalization would also increase from
37.4% to 38.1%.
Fully-Loaded Share Price. J.P. Morgan calculated the fully-loaded share price
being paid by EQR for EWR Common. The fully-loaded share price adjusts the
implied share price of $25.22 (calculated as the August 25, 1997 closing price
of $50.44 per share for EQR Common multiplied by the 0.50 exchange ratio) for
certain additional amounts being paid by EQR for share options. These
additional payments are more particularly described in the Merger Agreement.
J.P. Morgan calculated that these additional amounts create a fully-loaded
price of $25.43 per share of EWR Common. Based on the fully-loaded share price,
J.P. Morgan calculated a range of estimated FFO multiples being paid for EWR
from a high of 12.9x (excluding synergies and accounting) to a low of 11.9x
(including synergies and accounting).
Public Trading Multiples Analysis. Using publicly available information, J.P.
Morgan compared selected financial and stock market data of EWR with similar
data for selected publicly traded companies (each, a "Comparable Company" and,
collectively, the "Comparable Companies") engaged in businesses which J.P.
Morgan judged to be analogous to that of EWR's. The companies selected by J.P.
Morgan were Security Capital Pacific Trust, United Dominion Realty Trust, Inc.,
Post Properties, Inc., Avalon Properties, Inc., Merry Land & Investment
Company, Inc., Security Capital Atlantic Trust, Gables Residential Trust,
Camden Property Trust, Irvine Apartment Communities, Inc., Summit Properties,
Inc., and Oasis Residential, Inc. These companies were selected, among other
reasons, because of their specialization in the multifamily REIT sector.
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For each Comparable Company, publicly available financial performance data
through the six months ended June 30, 1997 was measured. J.P. Morgan calculated
the multiples of current stock price, as of August 25, 1997, to analysts'
estimates for 1998 consensus FFO as reported by First Call for each of the
Comparable Companies to determine the 1998 FFO trading multiples. J.P. Morgan's
calculations resulted in a range of 1998 FFO multiples from 9.3x to 13.0x.
These multiples were then applied to EWR's 1998 FFO per share estimate prepared
by EQR, yielding a range of implied trading values for EQR's common stock of
approximately $18.34 to $25.76 per share.
Selected Transaction Analysis. Using publicly available information, J.P.
Morgan examined selected multifamily REIT transactions with respect to purchase
price per share to calculate FFO transaction multiples. Specifically, J.P.
Morgan reviewed the following eight transactions (collectively, the
"Transaction Comparables") that it deemed relevant: Post Properties,
Inc./Columbus Realty Trust, Equity Residential Properties Trust/Wellsford
Residential Property Trust, Camden Property Trust/Paragon Group, Inc., United
Dominion Realty Trust, Inc./South West Property Trust, Inc., BRE Properties,
Inc./California Real Estate Investment Trust, Mid-America Apartment
Communities, Inc./America First REIT, Inc., Property Trust of America/Security
Capital Pacific Trust, and Wellsford Residential Property Trust/Holly
Residential Properties, Inc. J.P. Morgan observed a range of transaction
multiples from 8.3x to 12.4x based on consensus First Call FFO estimates for
the acquired companies. This range was then applied to EQR's estimate of EWR's
1998 FFO per share, resulting in a range of equity values for EWR's common
stock of between $16.41 and $24.53 per share. J.P. Morgan noted that this range
was below both the implied and fully-loaded prices for EWR Common.
J.P. Morgan also noted that when certain other transactions from REIT sectors
other than the multifamily REIT sector were included in the transaction
analysis, the range of FFO multiples became 8.2x to 13.4x, resulting in a range
of $16.32 to $26.47 per share for EWR's common stock. These additional
transactions were Highwoods Properties Inc./Crocker Realty Investors, Inc.,
Simon Property Group, Inc./DeBartolo Realty Corporation, Horizon Outlet
Centers, Inc./McArthur/Glen Realty Corp., and Omega Healthcare Investors,
Inc./Health Equity Properties, Inc.
Average Transaction Premia Analysis. J.P. Morgan reviewed mergers and
acquisitions of U.S. public companies in negotiated transactions with values
over $50 million to derive a range of premia paid over the public trading
prices per share five days prior to the announcement of such transactions for
the periods from 1988 to 1992 and from 1993 to 1996. J.P. Morgan noted that the
reasons for, and circumstances surrounding, each of the transactions analyzed
were diverse and that premia fluctuate among different industry sectors and
based on perceived growth, synergies, strategic value and the type of
consideration utilized in the transaction.
The analyses indicated that the medians of premia paid over the public
trading prices were 46.7% in the period from 1988-1992 and 29.2% in the period
from 1993 to 1996. J.P. Morgan applied these median premia to EWR's closing
price of $20.50 on August 25, 1997, to derive implied prices per EWR share of
$30.07 and $26.49, respectively.
Historical Exchange Ratio Analysis. J.P. Morgan reviewed the historical
exchange ratio of the daily closing price per share of EWR Common to the daily
closing price per share of EQR Common for the period from August 22, 1996 to
August 25, 1997. J.P. Morgan noted a one-year low to high range of between 0.40
and 0.61, and an average one-year exchange ratio of 0.49. In addition, such
analysis implied a one-year historical share price range for EWR of $20.18 to
$30.77, as calculated by multiplying EQR's Common August 25, 1997 closing price
of $50.44 by the 52-week low and high values for the exchange ratios,
respectively.
Net Asset Value Analysis. Using the publicly available unaudited results for
each company for the period ending June 30, 1997, J.P. Morgan calculated the
Net Asset Value ("NAV") per share for both EWR Common and EQR Common. In so
doing, J.P. Morgan applied a range of capitalization rates from 8.0% to 9.0% to
projections for the stabilized 1997 NOI of the properties, in order to
calculate a gross real estate value, to which was added the book value of other
assets, less each company's respective outstanding debt and liabilities, to
arrive at an equity NAV. The equity NAV per share was then calculated by
dividing the equity NAV by the number of common shares outstanding for each
company as of June 30, 1997. This analysis indicated an NAV exchange ratio
range for the two companies of between 0.43 to 0.53, and an implied range for
the price of EWR Common of $21.82 to $26.67 per share, assuming an August 25,
1997 closing price of $50.44 per share for EQR Common.
Discounted Cash Flow Analysis. J.P. Morgan performed discounted cash flow
analysis (i.e, an analysis of the present value of the projected levered cash
flows for the periods and using the discount rates indicated) of EWR based upon
projections provided by management of EQR of EWR's funds available for
distribution ("FAD") for the years 1998 through 2002, inclusive, using discount
rates reflecting an equity cost of capital ranging from 14.0% to 16.0% and
terminal value multiples of calendar year 2003 FAD ranging from 11.5x to 13.0x.
Based upon EQR's projection of EWR's FAD per share of $1.86 in 1998 increasing
gradually to $2.88 in 2003, the range of present values per EWR share was
$23.90 to $27.35.
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Contribution Analysis. J.P. Morgan reviewed certain estimated future
operating and financial information (including, among other things, total
rental revenues, NOI, EBITDA and FFO) for EQR and EWR for 1997 and 1998.
Financial statistics for 1997 were derived, for EQR, by annualizing EQR pro
forma results for the six months ended June 30, 1997 from EQR's Quarterly
Report on Form 10-Q, as supplemented by EQR, and, for EWR, from financial
results for the six months ended June 30, 1997, from EWR's Quarterly Report on
Form 10-Q, as supplemented by EWR's budget for the third and fourth quarters of
1997. J.P. Morgan analyzed the relative contributions of EWR and EQR to the
combined entity based upon these time periods. These analyses indicated that,
based upon EQR's and EWR's contribution in 1997, excluding synergies and
accounting adjustments, EWR would contribute 13.8% of total rental revenues,
14.2% of NOI, 14.6% of EBITDA, and 12.3% of FFO, while having a 13.3% equity
ownership in the combined entity. Based upon 1998 contribution, including
synergies and accounting adjustments, EWR would contribute 9.4% of total rental
revenues, 10.9% of NOI, 11.0% of EBITDA and 12.3% of FFO, while maintaining an
11.9% equity ownership in the combined entity.
The summary set forth above does not purport to be a complete description of
the analyses or data presented by J.P. Morgan. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. J.P. Morgan believes that the summary set
forth above and its analyses must be considered as a whole and that selecting
portions thereof, without considering all of its analyses, could create an
incomplete view of the processes underlying its analyses and opinion. J.P.
Morgan based its analyses on assumptions that it deemed reasonable, including
assumptions concerning general business and economic conditions and industry-
specific factors. The other principal assumptions upon which J.P. Morgan based
its analyses are set forth above under the description of each such analysis.
J.P. Morgan's analyses are not necessarily indicative of actual values or
actual future results that might be achieved, which values may be higher or
lower than those indicated. Moreover, J.P. Morgan's analyses are not and do not
purport to be appraisals or otherwise reflective of the prices at which
businesses actually could be bought or sold.
As a part of its investment banking business, J.P. Morgan and its affiliates
are continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, investments for passive and control
purposes, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes. J.P. Morgan was selected to deliver an opinion to EQR's
Board of Trustees with respect to the Merger on the basis of such experience
and its familiarity with EQR.
For the delivery of its opinion, J.P. Morgan received a fee of $500,000 from
EQR. In addition, EQR reimbursed J.P. Morgan for its reasonable expenses
incurred in connection with its services, including the fees and disbursements
of counsel, and agreed to indemnify J.P. Morgan against certain liabilities,
including liabilities arising under the Federal securities laws.
J.P. Morgan and its affiliates (including Morgan Guaranty Trust Company of
New York) maintain banking and other business relationships with EQR and its
affiliates pursuant to which J.P. Morgan has received an aggregate of
approximately $1,374,000 in fees over the past two years, and with EWR and its
affiliates pursuant to which J.P. Morgan has received an aggregate of
approximately $300,000 in fees over the past two years. In the ordinary course
of their businesses, affiliates of J.P. Morgan may actively trade the debt and
equity securities of EQR or EWR for their own accounts or for the accounts of
customers and, accordingly, they may at any time hold long or short positions
in such securities.
NO OPINION OF EWR FINANCIAL ADVISOR
Morgan Stanley was not retained to, and did not, render an opinion regarding
the Asset Contribution Agreement or Unit Exchange Offer.
EFFECTIVE TIME OF THE TRANSACTIONS
The Merger. The Closing of the Merger will take place at 10:00 a.m. on the
date to be specified by EQR and EWR, which will be no later than the third
business day after satisfaction or waiver of the conditions set forth in the
Merger Agreement (the "Closing Date"), at the offices of Rudnick & Wolfe, 203
North LaSalle Street, Chicago, Illinois 60601, unless another date or place is
agreed to in writing by the parties. The Merger will become effective at the
time the State Department of Assessments and Taxation of Maryland (the
"Department") accepts for record the Articles of Merger (the "Articles"), or at
such time as EQR and EWR will agree should be specified in the Articles (not to
exceed 30 days after the Articles are accepted for record by the Department).
It is currently anticipated that the Merger will become effective on or about
December 19, 1997.
The Unit Exchange Offer. The Unit Exchange Offer will remain open to limited
partners of EWRLP from the date hereof until the consummation of the Asset
Contribution.
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The Asset Contribution. The Asset Contribution shall occur upon ERP giving
notice to EWRLP at any time following the first to occur of (i) the date twelve
months after the consummation of the Merger, (ii) the date on which EQR
receives an opinion of a nationally recognized tax counsel satisfactory to it
or a ruling from the Internal Revenue Service that the Asset Contribution may
be effected without adversely affecting the qualification of the Merger as a
tax-free reorganization within the meaning of Section 368 of the Code or (iii)
the date on which regulations are promulgated by the Department of the Treasury
which, in the opinion of a nationally recognized tax counsel satisfactory to
EQR, would permit the Asset Contribution to occur without adversely affecting
the qualification of the Merger as a tax-free reorganization within the meaning
of Section 368 of the Code. If ERP fails to give such notice by December 31,
1999, the Asset Contribution Agreement shall terminate and EWRLP shall have no
further obligations thereunder. See "--Representations and Warranties;
Conditions to the Transactions."
REPRESENTATIONS AND WARRANTIES; CONDITIONS TO THE TRANSACTIONS
The Merger. The Merger Agreement contains representations and warranties by
EQR and EWR regarding, among other things, their organization and good
standing, capitalization, ownership and capitalization of their subsidiaries,
qualification to do business, authority to enter into the Merger Agreement and
related agreements, filings with the Commission, reliability of financial
statements, compliance with applicable laws and regulations, taxation and
qualification as a REIT, properties, environmental matters, contracts, debt
instruments, employee benefit plans (with respect to EWR only), undisclosed
liabilities and the absence of certain legal proceedings and other events,
including material adverse changes in the parties' businesses, financial
condition or results of operations. These representations and warranties will
not survive the Effective Time.
The respective obligations of EQR and EWR to effect the Merger are subject to
the following conditions: (i) approval of the Merger Agreement, and the
transactions contemplated therein, by the shareholders of EWR and EQR, (ii)
approval by the NYSE of the listing of the shares of EQR Common to be issued in
connection with the Merger, (iii) the Registration Statement shall not be the
subject of any stop order or proceeding by the Commission seeking a stop order,
(iv) no injunctions or restraints issued by any court of competent jurisdiction
or other legal restraints or prohibitions preventing the consummation of the
Merger shall be in effect on the Closing Date, (v) all necessary state
securities permits and authorizations shall have been received by EQR and (vi)
the delivery of the opinion of Ballard Spahr Andrews & Ingersoll to the effect
that the Merger Agreement and Articles are enforceable under Maryland law.
The obligations of EQR are subject to the following additional conditions:
(i) execution of the Asset Contribution Agreement and Unit Contribution
Agreement, (ii) the voting shares of Evans Withycombe Management, Inc., an
Arizona corporation ("EW Management") shall have been transferred in accordance
with the Stock Purchase Agreement dated as of August 27, 1997 among Stephen O.
Evans ("Evans") and F. Keith Withycombe ("Withycombe") and David Neithercut
("Neithercut") and Bruce C. Strohm ("Strohm") (collectively, the "Stock
Purchase Agreement"), (iii) the Consulting Agreement by and between Equity
Properties Management LP and Evans, currently an employee and owner of direct
and indirect equity interest in EWR shall remain in full force and effect and
Evans shall not have breached any obligations thereunder, (iv) the Employment
Agreement by and between Equity Properties Management LP and Richard G. Berry
("Berry"), currently an owner of direct and indirect equity interest in EWR and
EWRLP shall remain in full force and effect and Berry shall not have breached
any obligations thereunder, (v) the Voting Agreement between EQR and Evans,
Withycombe and their respective affiliates shall remain in full force and
effect and no default shall have occurred thereunder, (vi) the voting shares of
Evans Withycombe, Inc. have been transferred to EQR's designees in accordance
with the Evans Withycombe, Inc. Stock Purchase Agreement, (vii) the Change in
Control Agreements shall have been amended in accordance with the Merger
Agreement and (viii) each of the Affiliates (as defined in the Merger
Agreement) shall have delivered to EQR the written agreement contemplated by
Section 4.4 of the Merger Agreement.
The obligations of EWR and EQR to effect the Merger are subject to the
following additional conditions: (i) all representations and warranties made by
the parties shall be true and correct in all material respects as of the
Closing Date, (ii) each party shall have performed in all material respects its
obligations under the Merger Agreement, (iii) as of the Closing Date, neither
party will have suffered a material adverse change in its business, financial
condition or results of operations taken as a whole (a "Material Adverse
Change"), (iv) EWR shall have received an opinion of counsel from EQR's counsel
stating that commencing with its taxable year ended December 31, 1993, EQR was
organized and has operated in conformity with the requirements for
qualification as a REIT under the Code, (v) EQR shall have received an opinion
of EWR's counsel stating that commencing with its taxable year ended December
31, 1994, EWR was organized and has operated in conformity with the
requirements for a REIT under the Code, (vi) each party shall have received an
opinion of counsel dated as of the Closing Date, to the effect that the Merger
will qualify as a reorganization under the provisions of Section 368(a) of the
Code, (vii) each party shall have received an opinion from counsel to the other
party addressing certain issues set forth in the Merger Agreement and (viii)
the receipt of all consents and waivers from third parties necessary to
consummate the transactions contemplated by the Merger Agreement.
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The Asset Contribution. The Asset Contribution Agreement does not contain any
representation or warranty whatsoever, including as to title or legal
sufficiency, except that title to all real estate included in the assets
contributed to ERP is warranted and will be conveyed by warranty deed. The
effectiveness of the Asset Contribution and the obligations of ERP under the
Asset Contribution Agreement are conditioned on (i) receipt of the requisite
consent of the limited partners of EWRLP and (ii) EWRLP's receipt of notice by
December 31, 1999 from ERP that ERP desires to consummate the Asset
Contribution.
DISSOLUTION OF EWRLP
The Asset Contribution Agreement provides that EWRLP shall dissolve pursuant
to the terms of the EWRLP Partnership Agreement and distribute the ERP Units to
the holders of EWRLP Units. Each holder of EWRLP Units who did not already
contribute his, her or its EWRLP Units in exchange for ERP Units pursuant to
the Unit Exchange Offer shall become a holder of ERP Units in accordance with a
Registration Rights Agreement entered into by EQR and certain former holders of
EWRLP Units (the "Registration Rights Agreement") upon the effectiveness of the
Merger to the extent the holders of EWRLP Units will receive Registrable
Securities (as defined in the Registration Rights Agreement) upon the
distribution of ERP Units to the holders of EWRLP Units. In the event that
EWRLP is required to continue to hold any asset pursuant to the Asset
Contribution Agreement, EWRLP shall distribute to the holders of EWRLP Units,
other than EQR and ERP, their pro rata share of the ERP Units received by EWRLP
in the partial dissolution of EWRLP and the partners receiving such ERP Units
shall have no further interest in EWRLP as a partner, including any interest in
its assets, profits and losses.
NO APPRAISAL RIGHTS
The Merger. Shareholders of EWR and shareholders of EQR are not entitled to
dissenting shareholders' appraisal rights under Maryland law. Maryland law does
not provide appraisal rights to shareholders of a real estate investment trust
or corporation in connection with a merger if their respective shares are
listed on a national securities exchange, such as the NYSE, on the record date
for determining shareholders entitled to vote on such merger. The Merger
Agreement specifically provides that the holders of EWR Common are not entitled
to appraisal rights as a result of the Merger.
The Asset Contribution. EWRLP was organized under the Delaware Revised
Uniform Limited Partnership Act ("DRULPA"). Under DRULPA a limited partnership
agreement or a merger agreement may contractually provide for appraisal rights
with respect to limited partnership interests. The EWRLP Partnership Agreement
does not contain a provision granting appraisal rights to holders of EWRLP
Units. ERP was organized under the Illinois Revised Uniform Limited Partnership
Act ("IRULPA"). Neither IRULPA nor the ERP Partnership Agreement grant to the
holders of ERP Units rights of appraisal with respect to their ERP Units.
REGULATORY MATTERS
EQR and EWR believe that the Transactions may be consummated without
notification being given or certain information being furnished to the Federal
Trade Commission (the "FTC") or the Antitrust Division of the Department of
Justice (the "Antitrust Division") pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended ("HSR Act"), and that no waiting period
requirements under the HSR Act are applicable to the Transactions. However, at
any time before or after the Effective Time, either the Antitrust Division or
the FTC could take such action under the antitrust laws as it deems necessary
or desirable in the public interest, or certain other persons could take action
under the antitrust laws, including seeking to enjoin the Transactions. The ERP
Group and EWR believe that consummation of the Transactions would not violate
any antitrust laws. However, there can be no assurance that a challenge to the
Transactions on antitrust grounds will not be made or, if a challenge is made,
what the result will be.
TERMINATION PROVISIONS
The Merger. The Merger Agreement provides that it may be terminated at any
time prior to the filing of the Articles with the Department, whether before or
after approval of the Merger by the shareholders of EWR and EQR, by mutual
written consent, duly authorized by the Board of Trustees of EQR and the Board
of Directors of EWR. In addition, the Merger Agreement may be terminated by EQR
or EWR (i) if the Merger has not been consummated by February 15, 1998
(provided the terminating party will not have breached in any material respect
its obligations under the Merger Agreement in any manner that will have
proximately contributed to the occurrence of such failure), (ii) upon a breach
of any representation, warranty, covenant, obligation or agreement on the part
of the non-terminating party set forth in the Merger Agreement, such that
certain conditions set forth in the Merger Agreement would be incapable of
being satisfied by February 15, 1998, (iii) if the requisite vote of the
shareholders of EQR or EWR will not have been obtained at the meeting of such
shareholders or (iv) if a judgment, injunction, order, decree, ruling or other
action by a governmental entity of competent jurisdiction preventing the
consummation of the Merger will have become final and non-appealable.
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The Merger Agreement may be terminated by EWR, if prior to a special meeting
of shareholders of EWR to be held at , Scottsdale, Arizona, on
December 17, 1997, at 9:00 a.m., Arizona time (the "EWR Special Meeting"), the
EWR Board of Directors withdraws or modifies its approval or recommendation of
the Merger or Merger Agreement in connection with, or approves or recommends,
a Superior Acquisition Proposal (as defined hereinafter). The Merger Agreement
may be terminated by EQR if (i) prior to the EWR Special Meeting, the EWR
Board of Directors withdraws or modifies in any manner adverse to EQR its
approval or recommendation of the Merger or the Merger Agreement in connection
with, or approves or recommends, a Superior Acquisition Proposal, (ii) EWR
enters into a definitive agreement with respect to any Acquisition Proposal or
(iii) if Evans terminates his Consulting Agreement (other than by reason of
his death) or Berry terminates his Employment Agreement (other than by reason
of his death) of if any of Evans, Withycombe or their respective affiliates
defaults in the performance of his or its obligations under the Voting
Agreement.
The Merger Agreement defines an "Acquisition Proposal" as a merger,
acquisition, tender offer, exchange offer, consolidation, sale of assets or
similar transaction involving all or any significant portion of the assets or
any equity securities of EWR or any of its subsidiaries, other than the
transactions contemplated by the Merger Agreement. The Merger Agreement
defines a "Superior Acquisition Proposal" as a bona fide acquisition proposal
by a third party which a majority of the members of the EWR Board of Directors
determines in good faith to be more favorable to EWR's shareholders from a
financial point of view than the Merger and which the Board of Directors of
EWR determines is reasonably capable of being consummated.
The Asset Contribution. The Asset Contribution Agreement terminates if the
Merger Agreement is terminated prior to the consummation of the Merger.
The Unit Exchange Offer. The Unit Exchange Offer terminates upon termination
of the Merger Agreement.
TERMINATION FEE AND EXPENSES
The Merger Agreement provides for certain payments by EWR or EQR in
connection with the termination of the Merger Agreement. These payments
include (i) a Break-Up Fee of up to $14 million, plus Break-Up Expenses (as
defined in the following clause) and/or (ii) Break-Up Expenses equal to the
recipient's out-of-pocket expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereunder, up to a maximum of
$2.5 million. If the Merger Agreement is terminated because, prior to the EWR
Special Meeting, the EWR Board of Directors withdraws or modifies its approval
or recommendation of the Merger or the Merger Agreement in connection with, or
approves or recommends a Superior Acquisition Proposal, or if EWR enters into
a definitive agreement with respect to any Acquisition Proposal, EWR is
obligated to pay EQR the Break-Up Fee and Break-Up Expenses. Additionally, if
the Merger Agreement is terminated due to a breach of any representation,
warranty, covenant, obligation or agreement by EWR or EQR set forth in the
Merger Agreement, or failure by either EWR or EQR to obtain the required
shareholder approval of the Merger, then the breaching party, or the party
which failed to obtain such shareholder approval, shall pay to the other party
an amount equal to the Break-Up Expenses. If the Merger is not consummated
(other than due to the termination of the Merger Agreement by (i) the mutual
written consent duly authorized by the Board of Trustees of EQR and Board of
Directors of EWR, (ii) either party, upon the failure by EQR to obtain the
required shareholder approval of the Merger, or (iii) EWR, upon a material
breach of the representations, warranties, covenants, obligations or
agreements of EQR) as set forth in the Merger Agreement and at the time of
termination of the Merger Agreement, an Acquisition Proposal has been received
by EWR and either prior to the termination of the Merger Agreement or within
12 months thereafter, EWR or any of its subsidiaries enters into any written
Acquisition Proposal which is subsequently consummated, EWR is required to pay
the Break-Up Fee and Break-Up Expenses to EQR. The payment of the Break-Up Fee
shall be compensation and liquidated damages for the loss suffered by EQR as a
result of the failure of the Merger to be consummated and to avoid the
difficulty of determining damages under the circumstances. Neither party shall
have any liability to the other after payment of the Break-Up Fee and Break-Up
Expenses.
Except as described above, each party shall assume its own costs and
expenses incurred in connection with the Merger Agreement and the transactions
contemplated thereby.
NO SOLICITATION OF OTHER TRANSACTIONS
EWR has agreed that (i) it and its subsidiaries will not, and it will not
permit its officers, trustees, employees, agents or financial advisors to
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its shareholders) with respect to an
Acquisition Proposal and (ii) it will notify EQR immediately if it receives
any such inquiries or proposals, or any requests for such
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information, or if any negotiations or discussions are sought to be initiated
or continued with it with respect to any of the foregoing. The Merger Agreement
does not, however, prohibit EWR from furnishing information to or entering into
discussions or negotiations with any person or entity that makes an unsolicited
proposal if the Board of Directors of EWR determines that such action is
required by its fiduciary duties to its shareholders imposed by law.
CONVERSION OF SHARES/UNITS
The Merger. Under the Merger Agreement, each share of EWR Common outstanding
immediately prior to the Effective Time will be converted into 0.5 of a share
of EQR Common. All such shares of EWR Common, when so converted, will cease to
be outstanding and will automatically be cancelled and retired and each holder
of a certificate representing any such shares will cease to have any rights
with respect thereto, except the right to receive certificates representing the
shares of EQR Common and any cash, without interest, in lieu of fractional
shares to be issued or paid in consideration therefor upon the surrender of
such certificate in accordance with the Merger Agreement, as well as dividends
and distributions declared with a record date after the Effective Time.
The Asset Contribution. The Asset Contribution Agreement provides that solely
in exchange for the contribution of the Contributed Assets, EWRLP will receive
such number of common units of ERP as shall equal the number of EWRLP units of
partnership interest issued and outstanding immediately prior to the effective
time of the Contribution multiplied by the Exchange Ratio (as defined in the
Merger Agreement). No fractional ERP Units will be issued in connection with
the contribution by any Contributor. Instead, at the time of the effectiveness
of the Contribution, EWRLP will be paid an amount in cash equal to the Closing
Price (as hereinafter defined) multiplied by the fraction of an ERP Unit to
which EWRLP would otherwise be entitled. For purposes of this and the following
paragraph, "Closing Price" means the unweighted average closing price of a
share of EQR Common as reported on the NYSE (Composite Tape) for the five (5)
trading days preceding the Effective Time (as defined in the Merger Agreement),
and "Trading Days" means any day on which the EQR common shares of beneficial
interest is traded on the NYSE and reported on its Composite Tape.
The Unit Contribution. Pursuant to the Unit Contribution Agreement, certain
individuals and entities (collectively "Contributors" and each a "Contributor")
have agreed to contribute each EWRLP Unit they own to ERP free and clear of all
liens and encumbrances in exchange for a number of ERP Units equal to one (1)
multiplied by the Exchange Ratio. No fractional ERP Units shall be issued in
connection with the contribution by any Contributor. Instead, each Contributor
of EWRLP Units shall be paid an amount in cash equal to the Closing Price
multiplied by the fraction of an ERP Unit to which the Contributor would
otherwise be entitled.
The issuance, terms and conditions of the EQR Common and ERP Units will be
governed by EQR's Declaration and the ERP Partnership Agreement, respectively.
For a detailed description of the provisions of the ERP's Partnership
Agreement, see "Comparison of Rights of Holders of ERP Units and EWRLP Units."
CONDUCT OF BUSINESS PENDING THE TRANSACTIONS
EWR. Prior to the Effective time, except as (i) contemplated by the Merger
Agreement or (ii) consented to in writing by EQR, EWR will, and will cause each
of its subsidiaries to: (a) conduct its business only in the usual, regular and
ordinary course and in substantially the same manner as before the date of the
Merger Agreement and take all actions necessary to continue to qualify as a
REIT, (b) preserve intact its business organizations and goodwill and use its
reasonable efforts to keep available the services of its officers and
employees, (c) confer on a regular basis with one or more representatives of
EQR to report operational matters of materiality and, subject to certain
qualifications, any proposals to engage in material transactions, (d) promptly
notify EQR of any material emergency or other material change in the condition
(financial or otherwise), business, properties, assets, liabilities, or the
normal course of its businesses or in the operation of its properties, or of
any material governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), (e) promptly
deliver to EQR true and correct copies of any report, statement or schedule
filed with the Commission subsequent to the date of the Merger Agreement, (f)
maintain its books and records in accordance with generally accepted accounting
principles ("GAAP") consistently applied and not change in any material manner
any of its methods, principles or practices of accounting in effect at the
"Financial Statement Date" (as defined in the Merger Agreement), except as may
be required by the Commission, applicable law or GAAP, (g) duly and timely file
all reports, tax returns and other documents required to be filed with Federal,
state, local and other authorities, subject to extensions permitted by law,
provided EWR notifies EQR that it is availing itself of such extensions and
provided such extensions do not adversely affect EWR's status as a qualified
REIT under the Code, (h) not make or rescind any express or deemed election
relative to taxes (unless required by law or necessary to preserve EWR's status
as a REIT or the status of any EWR subsidiaries as a partnership for Federal
income tax purposes), (i) not acquire, enter into any option to acquire, or
exercise an option or contract to acquire, additional real property, incur
additional indebtedness except for working capital under its revolving
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line(s) of credit, encumber assets or commence construction of, or enter into
any agreement or commitment to develop or construct, other real estate
projects, except in the ordinary course of business, which shall include all
activities necessary to proceed with the acquisition, ownership and
construction of the multi-family residential projects described in the EWR SEC
Documents (as defined in the Merger Agreement) as being under development as
well as projects which have been budgeted and previously described in the EWR
Capital Budget (as defined in the Merger Agreement) in accordance with the
agreements in existence on the date of the Merger Agreement and previously
furnished to EQR, (j) not amend its Charter, Bylaws, or the articles of
incorporation, bylaws, partnership agreement, joint venture agreement or
comparable charter or organization document of any subsidiary, (k) make no
change in the number of shares of capital stock, membership interests of units
of limited partnership interest issued and outstanding other than pursuant to
(A) the exercise of outstanding options to purchase shares of EWR Common, (B)
the conversion of EWRLP Units pursuant to the terms of the EWRLP Partnership
Agreement for shares of EWR Common, and (C) the issuance of shares of EWR
Common to Paul Fannin in lieu of the cash bonus to which he is entitled as
approved by the Compensation Committee of the EWR Board of Directors on July
11, 1997, (l) grant no options or other right or commitment relating to its
shares of beneficial interest or capital stock, membership interests or units
of limited partnership interest or any security convertible into its shares of
beneficial interest or capital stock, membership interests or units of limited
partnership interest, or any security the value of which is measured by shares
of capital stock, or any security subordinated to the claim of its general
creditors and not waive or amend any rights under any of the EWR Options (as
defined in the Merger Agreement), (m) except as provided in the Merger
Agreement and in connection with the use of shares of beneficial interest to
pay the exercise price or tax withholding in connection with equity-based
employee benefit plans, not (A) authorize, declare, set aside or pay any
dividend or make any other distribution or payment with respect to any shares
of EWR Common or EWRLP Units, or (B) directly or indirectly redeem, purchase or
otherwise acquire any shares of capital stock, membership interests or units of
limited partnership interest or any option, warrant or right to acquire, or
security convertible into, shares of capital stock, membership interests, or
units of limited partnership interest, except for redemptions of shares of EWR
Common in order to preserve the status of EWR as REIT under the Code, (n) not
sell, lease, mortgage, subject to lien or otherwise dispose of any of its
properties except the sale of properties which are the subject of binding
contracts to sell in existence on the date of the Merger Agreement and
disclosed to EQR, (o) not make any loans, advances or capital contributions to,
or investments in, any other person or entity, other than loans, advances and
capital contributions to subsidiaries in existence on the date of the Merger
Agreement, (p) not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the ordinary
course of business consistent with past practice or in accordance with their
terms, of liabilities reflected or reserved against in, or contemplated by, the
most recent consolidated financial statements (or the notes thereto) furnished
to EQR or incurred in the ordinary course of business consistent with past
practice, (q) not enter into any commitment, contractual obligation, capital
expenditure or transaction (each, a "Commitment") which may result in total
payments or liability by or to it in excess of $500,000 or aggregate
Commitments in excess of $1 million, except (A) purchases of real estate
necessary to complete a like kind exchange, provided such purchase has been
approved by EQR, and (B) capital expenditures disclosed in the EWR Capital
Budget, (r) not guarantee the indebtedness of another person or entity, enter
into any "keep well" or other agreement to maintain any financial statement
condition of another person or entity or enter into any arrangement having the
economic effect of any of the foregoing, (s) not enter into any Commitment with
any officer, trustee, consultant or affiliate of EWR or any of EWR's
subsidiaries, except as contemplated by the Merger Agreement, (t) not increase
any compensation or enter into or amend any employment agreement with any of
its officers, directors or employees earning more than $50,000 per annum, other
than waivers by employees of benefits under such agreements, (u) not adopt any
new employee benefit plan or amend any existing plans or rights, except for
changes which are required by law and changes which are not more favorable to
participants than provisions presently in effect, (v) not settle any
shareholder derivative or class action claims arising out of or in connection
with any of the transactions contemplated by the Merger Agreement, (w) not
change the ownership of any of its subsidiaries, except pursuant to the Asset
Contribution Agreement and Unit Contribution Agreement and (x) not accept a
promissory note in payment of the exercise price payable under any option to
purchase shares of EWR Common.
The Merger Agreement provides that any contract, transaction or other event
will be deemed to be material if it would result or is expected to result in a
net impact on EWR's consolidated income statement in excess of $500,000, or on
EWR's consolidated balance sheet in excess of $1 million.
EQR. Prior to the Effective Time, except as (i) contemplated by the Merger
Agreement or (ii) consented to in writing by EWR, EQR will, and will cause each
of its subsidiaries to: (a) use its reasonable efforts to preserve intact its
business organizations and goodwill and keep available the services of its
officers and employees, (b) confer on a regular basis with one or more
representatives of EQR to report operational matters of materiality which could
have an EQR Material Adverse Effect (as defined in the Merger Agreement), (c)
promptly notify EWR of any material emergency or other material change in the
condition (financial or otherwise), business, properties, assets, liabilities,
prospects or the normal course of its businesses or in the operation of its
properties, or of any material governmental complaints, investigations or
hearings (or
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communications indicating that the same may be contemplated), (d) promptly
deliver to EWR true and correct copies of any report, statement or schedule
filed with the Commission subsequent to the date of the Merger Agreement, (e)
maintain its books and records in accordance with GAAP consistently applied
and (f) duly and timely file all reports, tax returns and other documents
required to be filed with Federal, state, local and other authorities.
ANTICIPATED EFFECTS OF THE MERGER ON RESULTS OF OPERATIONS, LIQUIDITY AND
CAPITAL RESOURCES
As a result of the Merger EQR expects to experience a significant increase
in net income available to EQR Common as well as an increase in total
revenues, property and maintenance expenses, real estate taxes and insurance,
property management expenses depreciation expense interest expense and general
and administrative expenses.
Also in connection with the Merger EQR expects to assume for financial
statement purposes liabilities of approximately $418 million and issue
approximately 10.2 million EQR Common as well as 2.3 million ERP Units to
consummate the Merger. EQR also anticipates to fund approximately $77 million
to pay for related merger costs and the repayment of amounts outstanding on
EWR's line of credit. After the close of the Merger EQR will terminate EWR's
line of credit facility but will continue to maintain EQR's line of credit
facility which was recently increased to $500 million. EQR and ERP may also
guarantee or assume debt obligations of EWR and EWRLP. After the effectiveness
of the Merger, ERP believes that EWRLP will be permitted, and EQR intends to
cause EWRLP, to suspend its obligations to file reports under the Exchange Act
for fiscal years ending after 1997.
EQR expects to meet its short-term liquidity requirements including capital
expenditures relating to maintaining its existing properties and EWR's
stabilized communities generally through its working capital, net cash
provided by operating activities and borrowings under its line of credit. EQR
considers its cash provided by operating activities to be adequate to meet
operating requirements and payments of distributions. EQR also expects to meet
its long-term liquidity requirements, such as scheduled mortgage debt
maturities, reduction of outstanding amounts under its line of credit,
property acquisition, financing of construction and development activities
related to EWR and capital improvements through the issuance of unsecured
notes and equity securities including additional ERP Units as well as from
undistributed FFO and proceeds received from the disposition of certain
Properties.
LOAN TO EWR AND 1031 EXCHANGE
On November 4, 1997 EQR made a demand loan to EWR in the aggregate principal
amount of $70,000,000 bearing interest at the rate of LIBOR plus 1.15% per
annum. EWR used the proceeds from the loan to pay off its revolving credit
line of the same amount bearing interest at LIBOR plus 1.5%. In the event that
the Merger is not consummated and EQR demands payment under the terms of the
loan, EWR intends to re-borrow the necessary funds for such payment under its
revolving credit facility.
In addition, EQR assigned its rights under a contract to purchase a
multifamily property to EWR to allow EWR to consummate an exchange pursuant to
Section 1031 of the Code. In the event that the Merger is not consummated, EWR
has agreed to sell said property to EQR at cost.
LIMITATIONS ON THE SALE OR REFINANCING OF CERTAIN PROPERTIES
The Merger Agreement provides that EQR will not sell, transfer or otherwise
dispose of any of 42 EWR properties (or any property acquired in a like-kind
exchange under Section 1031 or 1033 of the Code in replacement of any such
properties) in a transaction resulting in the recognition of gain for federal
income tax purposes on or before January 1, 2003, unless and until the first
to occur of (a) the date on which an aggregate of at least 50% of the ERP
Units issued to EWRLP Unitholders have been transferred in taxable
transactions or (b) the date on which an amendment to the Code is enacted
which eliminates tax-free transfers, exchanges, conveyances or other
dispositions of real property under Section 1031 or 1033 of the Code. EQR has
also agreed that it will not voluntarily prepay the securitized debt of EWR
Finance Partnership L.P. or the fixed rate loan from Northwestern Mutual Life
Insurance Company to EWR Partnership (each an "EWR Debt") until the date the
EWR Debt in question can be prepaid without penalty or premium.
WAIVER AND AMENDMENT
The Merger. The Merger Agreement provides that, at any time prior to the
Effective Time, either party may, to the extent legally allowed and set forth
in a written instrument signed on behalf of such party, (i) extend the time
for the performance of any of the obligations or other acts of the other
party, (ii) waive any inaccuracies in the representations and warranties
contained in the Merger Agreement or in any document delivered pursuant
thereto or (iii) waive compliance with any of the agreements or conditions for
the benefit of such party contained in the Merger Agreement.
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The Merger Agreement provides that it may be amended by the parties by action
taken by the Board of Trustees of EQR and the Board of Directors of EWR, at any
time before or after approval of the Merger Agreement by the shareholders of
EQR or EWR and prior to the filing of the Articles with the Department. After
any such approval by the shareholders of EQR or EWR, no amendment may be made
which by law requires the further approval of shareholders or partners without
obtaining such further approval.
The Asset Contribution. The Asset Contribution Agreement may be amended or
modified by written agreement of the parties.
ANTICIPATED ACCOUNTING TREATMENT
The Transactions will be treated as a purchase in accordance with Accounting
Principles Board Opinion No. 16. Purchase accounting for a merger is the same
as the accounting treatment used for the acquisition of any group of assets.
The fair market value of the consideration given by EQR and ERP in the
Transactions will be used as the valuation basis of the combination. The assets
acquired and liabilities assumed of EWRLP will be recorded at their relative
fair market values as of the Effective Date. The financial statements of ERP
will reflect the combined operations of ERP and EWRLP from the date of the
Transactions.
RESTRICTIONS ON TRANSFER OF ERP UNITS; SHARES AVAILABLE FOR RESALE
Notwithstanding the registration of ERP units, ERP units are not transferable
under the ERP Partnership Agreement without the consent of EQR in its capacity
as general partner except an ERP limited partner may do the following: (i)
transfer all or any portion of its ERP Units to ERP, (ii) transfer all or any
portion of its ERP Units to an affiliate, another limited partner or to an
immediate family member, (iii) if such limited partner is a natural person,
transfer all or any portion of his or her ERP Units upon his or her death to
such limited partner's estate, executor, administrator or personal
representative or to such limited partner's beneficiaries pursuant to a devise
or bequest or by the laws of descent and distribution or to a trust of which
such limited partner is a settlor or co-settlor with a member or his or her
immediate family and the beneficiaries of which include no person or entity
other than such limited partner and/or such limited partner's immediate family,
(iv) transfer all or any portion of its ERP Units pursuant to the exercise of a
redemption right under the ERP Partnership Agreement, (v) transfer all or any
portion of its ERP Units to a lending institution, which is not an affiliate of
such limited partner, as collateral or security for a bona fide loan or other
extension of credit, and transfer such pledged ERP Units to such lending
institution in connection with the exercise of remedies under such loan
extension or credit, and (vi) if such limited partner is an entity, transfer
all or any portion of its ERP Units to one or more entities that are wholly-
owned and controlled by such limited partner or by distributing ERP Units in a
liquidation, winding up or otherwise without consideration to the equity owners
of such entity. In order to effect such transfer, the limited partner must
deliver to EQR as general partner a duly executed copy of the instrument making
such transfer and such instrument must evidence the written acceptance by the
assignee of all of the terms and conditions of the ERP Partnership Agreement
and represent that such assignment was made in accordance with all applicable
laws and regulations.
The issuance of shares of EQR Common upon consummation of the Transactions
will be registered under the Securities Act. Such shares may be traded freely
and without restriction by those shareholders not deemed to be "affiliates" of
EWR as that term is defined in the rules and regulations promulgated pursuant
to the Securities Act. "Affiliates" are generally defined as persons who
control, are controlled by or are under common control with an issuer. This
Consent Solicitation/Prospectus/Information Statement does not cover any
resales of shares of EQR Common received by affiliates of EWR.
THE AMENDMENTS
ERP AMENDMENT
The Chairman of the Board of Trustees of EQR as general partner of ERP, will
amend, immediately prior to the effectiveness of the Merger, the ERP
Partnership Agreement to permit EQR to engage in activities as the co-general
partner of EWRLP and to acquire an ownership interest in the Financing
Partnership (as defined in "Federal Income Tax Consequences--Entity
Classification"), as contemplated under the terms of the Merger Agreement, in
addition to performing its duties as general partner of ERP. The ERP
Partnership Agreement currently provides that in addition to fulfilling its
duties as a general partner of ERP, EQR is permitted to (a) own any wholly-
owned subsidiary or other entity of EQR which is a general partner of a
partnership having ERP as a partner, (b) borrow (including the issuance of debt
securities) where the net proceeds thereof are loaned or contributed to ERP and
(c) engage in activities incidental to EQR's status and existence as a
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<PAGE>
REIT. The ERP Amendment will provide that, in addition to performing its duties
as general partner of ERP, EQR may (i) have an ownership interest in a
partnership or a limited liability company of which ERP is a partner or a
member, respectively, (ii) own any qualified REIT subsidiary (within the
meaning of the Code) or any other entity which is a partner of a partnership or
a member of a limited liability company having ERP as a partner or member,
respectively, (iii) own any entity that owns no more than an one percent (1%)
interest in any partnership, limited liability company or other entity, (iv)
borrow (including the issuance of debt securities) where the net proceeds
thereof are loaned or contributed to ERP, (v) engage in any activity which the
EQR Board of Trustees, in its sole discretion, has determined will have a
material benefit to EQR and will not have a material adverse effect on ERP, and
(vi) engage in activities incidental to EQR's status and existence as a REIT.
EWRLP AMENDMENT
The holders of EWRLP Units are being asked to consent to an amendment to the
EWRLP Partnership Agreement, which will, among other things, (i) allow EQR and
ERP to serve as co-general partners of EWRLP upon the effectiveness of the
Merger, (ii) adjust each outstanding EWRLP Unit by one-half to give effect to
the Exchange Ratio, (iii) eliminate certain restrictions that the EWRLP
Partnership Agreement would place upon EQR and ERP as co-general partners of
EWRLP, (iv) permit the Asset Contribution pursuant to the Asset Contribution
Agreement, (v) permit the dissolution of EWRLP upon the terms contained in the
Asset Contribution Agreement and (vi) ratify the revocation of the 11.2
Amendment (as defined below). The text of the EWRLP Amendment is attached as
Appendix B hereto.
The Merger Agreement provides that EQR and ERP shall become co-general
partners of EWRLP upon the effectiveness of the Merger, thereby succeeding EWR
as general partner of EWRLP. The EWRLP Partnership Agreement requires the
consent of the limited partners to a new general partner. Accordingly, the
EWRLP Amendment will permit EQR and ERP to act as the co-general partners of
EWRLP.
The EWRLP Partnership Agreement provides for adjustments in the number of
outstanding EWRLP Units to maintain the economic relationship between an EWRLP
Unit and the shares of the general partner. The proposed amendment will specify
the amount of such adjustment is 50% to reflect the Exchange Ratio.
EWRLP Partnership Agreement currently limits the activities of the general
partner to the management of EWRLP Partnership with specific exceptions. The
proposed EWRLP Amendment would eliminate such limitations. EQR and ERP as co-
general partners of EWRLP may engage in any and all activities without such
limitations.
The EWRLP Partnership Agreement prohibits EWRLP from selling property to the
general partner except on terms that are fair and reasonable and no less
favorable to EWRLP than would be obtained from unaffiliated third parties.
While ERP and EWRLP believe the Asset Contribution satisfies such criteria, the
EWRLP Amendment will specifically permit the contribution of EWRLP's assets,
subject to its liabilities to ERP pursuant to the Asset Contribution Agreement
to ERP in exchange for the number of ERP Units equal to the number of EWRLP
Units then outstanding.
The EWRLP Partnership Agreement contemplates that the assets of EWRLP would
be sold before dissolution so that cash would be distributed to the holders of
EWRLP Units. The EWRLP Amendment will permit, following the Asset Contribution,
the dissolution of EWRLP and the distribution to the partners of EWRLP a number
of ERP Units equal to the number of EWRLP Units held by such holder. The EWRLP
Amendment also specifically authorizes the dissolution of EWRLP in the manner
set forth in the Asset Contribution Agreement.
The EWRLP Partnership Agreement prohibits the general partner from
transferring its general partnership interest except in certain limited
instances. The EWRLP Amendment prohibits the general partners from transferring
their general partnership interests except by operation of law.
Section 11.2(c) of the EWRLP Partnership Agreement provides, among other
things, that EWR in its capacity as general partner of EWRLP may not engage in
a merger, consolidation or other combination with or into another entity or a
sale of all or substantially all of its assets or similar transaction unless
(i) under the terms of such a transaction the limited partners of EWRLP will
not engage in a sale or exchange under the Code of their EWRLP Units, or (ii)
such a transaction includes a merger of EWRLP or sale of substantially all of
its assets and as a result of which all limited partners of EWRLP will receive
for each EWRLP Unit an amount equal to the amount of consideration paid to a
holder of one share of EWR Common in consideration of one share of EWR Common
in connection with such a transaction; provided that in connection with such a
transaction, a purchase, tender or exchange offer shall have been made to and
is accepted by the holders of more than 50% of the outstanding shares of EWR
Common, the holders of EWRLP Units will receive the greatest amount of
consideration which a limited partner of EWRLP would have received had it
exercised its right of redemption and received shares of EWR Common in exchange
for its EWRLP Units immediately prior to such a transaction. Since the Unit
Exchange Offer and
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<PAGE>
Asset Contribution Agreement do not comply with such requirements, the EWRLP
Amendment will delete Section 11.2(c) in its entirety.
On June 18, 1997, the EWR Board of Directors, in its capacity as general
partner of EWRLP, adopted an amendment to Section 11.2 of the EWRLP Partnership
Agreement (the "11.2 Amendment") with the intent to propose the 11.2 Amendment
to the EWRLP limited partners for their approval pursuant to the terms of the
EWRLP Partnership Agreement. Prior to the proposal of the 11.2 Amendment to the
EWRLP limited partners for approval, EWR commenced active negotiations of a
transaction with EQR. In light of the proposed Merger, the EWR Board of
Directors concluded that the 11.2 Amendment was not in the best interests of
EWRLP and decided not to propose said amendment to the EWRLP limited partners
for approval. The 11.2 Amendment is no longer being proposed by the EWR Board
of Directors to the EWRLP limited partners for approval.
The 11.2 Amendment provided that in the event EWR was the subject of a
business combination, (i) the redemption right of the holders of EWRLP Units
would be protected by specifying the securities into which EWRLP Units would be
exchangeable, (ii) the business combination be structured in such a manner so
that the limited partners of EWRLP will not engage in a sale or exchange for
Federal income tax purposes of their EWRLP Units and as a transaction which
includes the merger of EWRLP or the sale of substantially all its assets as a
result of which the holders of EWRLP Units would receive the same or greater
consideration as EWR shareholders pursuant to such business combination, (iii)
substantially all the assets of the surviving entity, other than EWRLP Units
held by the general partner must be owned directly or indirectly by EWRLP or
its successor, (iv) required the successor to EWR to guaranty the obligations
of general partner of EWRLP under the 11.2 Amendment, (v) that the rights and
privileges of the holders of EWRLP Units must be at least as favorable as the
rights granted to other limited partners of the surviving partnership, (vi) the
general partner shall use its best reasonable efforts to structure such
business combination to avoid causing the limited partners of EWRLP to
recognize gain for Federal income tax purposes by virtue of the occurrence of
or their participation in such combination, and (vii) EWRLP to use its best
reasonable efforts to cooperate with the limited partners of EWRLP to minimize
any taxes payable in connection with any repayment, refinancings, replacement
or restructuring of indebtedness or any sale, exchange or other disposition of
the assets of EWRLP. The 11.2 Amendment would apply to a subsequent business
combination of any successor to EWRLP.
The Transactions described herein could not be effected in compliance with
the 11.2 Amendment.
The EWRLP Amendment includes a provision which ratifies, approves and
confirms the decision of the EWR Board of Directors not to propose the 11.2
Amendment to the limited partners of EWRLP for approval, with the same force
and effect as if the 11.2 Amendment had been proposed to the limited partners
of EWRLP and rejected.
INTERESTS OF CERTAIN PERSONS
IN THE TRANSACTIONS
Certain executive officers, directors and key employees of EWR have been
granted stock options and/or, restricted shares and/or have entered agreements
providing them with certain rights upon a change in control of EWR. The
following sets forth the cash payments and other benefits which will be
provided to key executives, directors and key employees of EWR in connection
with the Merger.
EVANS CONSULTING AGREEMENT
EQR Properties Management LP, an affiliate of EQR, has entered into a
consulting agreement to be effective as of the Effective Time which will expire
on December 31, 1999, cash compensation to be paid to him of $225,000 per
annum. Mr. Evans will also receive an option (an "EQR Option") to purchase
115,500 shares of EQR Common. The EQR Option will vest in three equal annual
installments and will have an exercise price equal to the Closing Price for a
share of EQR Common on the Closing Date. Mr. Evans will receive the following
additional benefits under his consulting agreement: (1) consideration for an
option award under EQR's Second Amended and Restated Share Option and Share
Award Plan, (2) payment in shares of EQR Common valued at the time of payment
equal to the value of the bonus he would have received for the 1997 calendar
year under his existing employment agreement with EWR, (3) eligibility for a
performance bonus under EQR's Incentive Compensation Plan and (4) eligibility
to participate in other EQR employee benefit plans in which persons in
comparable positions participate.
FANNIN CONSULTING AGREEMENT
EQR Properties Management LP has entered into a consulting agreement with Mr.
Fannin to be effective as of the Effective Time which will expire on January 2,
2000. The agreement provides for Mr. Fannin to provide certain financial
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<PAGE>
consulting services in exchange for payments of cash compensation in the
following amounts: $225,540 on January 1, 1998, $301,535 on January 1, 1999
and $278,535 on January 1, 2000. The agreement provides for certain payments
to Mr. Fannin in the event that he incurs excise taxes as a result of the
Merger. The maximum fees payable to Mr. Fannin under the agreement are
$988,000. The agreement also provides that Mr. Fannin will receive health
insurance coverage.
BERRY EMPLOYMENT AGREEMENT
EQR Properties Management LP has entered into an employment agreement to be
effective as of the Effective Time with Mr. Berry which will expire on
December 31, 2000 and will provide for cash compensation to be paid to him of
$250,000 per annum. Mr. Berry will also receive an EQR Option to purchase
77,500 shares of EQR Common. The EQR Option will vest in three equal annual
installments and will have an exercise price equal to the Closing Price of a
share of EQR Common on the Closing Date. The agreement provides that Mr. Berry
will exchange all unvested restricted shares of EWR Common at the time of the
Merger for restricted shares of EQR Common, which will be issued under EQR's
Second Amended and Restated Share Option and Share Award Plan (the "EQR Share
Plan"), and will vest on December 31, 2000 and will receive his 1997 bonus in
restricted shares of EQR Common. Mr. Berry will also receive the following
benefits under his employment agreement: (1) consideration for an option award
under the EQR Share Plan, (2) payment in shares of EQR Common valued at the
time of payment equal to the value of the bonus he would have received for the
1997 calendar year under his existing employment agreement with EWR, (3)
eligibility for a performance bonus under EQR's Incentive Compensation Plan
(4) eligibility to participate in other EQR employee benefit plans in which
persons in comparable positions participate and five (5) payments to cover any
excise taxes incurred by Mr. Berry as a result of the Merger.
BERRY DEFERRED COMPENSATION AGREEMENT
Mr. Berry has entered into a deferred compensation agreement with EQR which
will become effective as of the Effective Time and will only pay benefits in
the event Mr. Berry terminates his employment with EQR prior to January 1,
2000. The amount payable under this agreement will equal the value of any
restricted shares of EQR Common received in exchange for EWR Common or in
payment of Mr. Berry's 1997 bonus which are forfeited upon his termination of
employment. The payment will be made in two semi-annual installments over the
one year period following termination of employment and interest of 9% per
annum will accrue on the balance over the one year payment period.
SENIOR OFFICERS
Mr. J. Donald Couvillion, a Vice President of EWR, will be the Vice
President--Development of ERP. Other officers of EWR, including Mr. Anthony V.
Pusateri, a Senior Vice-President of EWR, and Mr. G. Edward O'Clair, a Senior
Vice President of EWR, are expected to continue as employees of ERP, but will
not be subject to employment agreements.
CHANGE IN CONTROL AGREEMENTS
Messrs. Evans, Berry, Fannin, O'Clair, Couvillion, Mr. Kevin M. Burnett, a
Vice President and Controller of EWR, Mr. Gail B. Peterson, a Vice President
of EWR, and Mr. G. Grant Lyon, a Vice President of EWR, have entered into
agreements, dated June 18, 1997 and Mr. Pusateri has entered into an agreement
dated July 21, 1997 ("Change in Control Agreements") with EWR which provide
that change in control payments and pro rata bonus payments shall be paid to
and the vesting of certain options and restricted stock held by such
individuals shall occur upon a termination of employment following a change in
control (as defined in the Change in Control Agreements) of EWR. Messrs.
Evans, Berry and Fannin will terminate their respective Change in Control
Agreements as of the Effective Date. Mr. Couvillion will amend his Change in
Control Agreement to (1) eliminate vesting of employer contributions under the
EWR 401(k) plan in exchange for a cash payment increased to cover income taxes
on the cash payment, (2) acknowledge that his new position with EQR will not
trigger the payments provision under his Change in Control Agreement and (3)
acknowledge that the term "change in control" applies only to the Merger of
EWR into EQR and not to any future transactions involving EQR. Messrs.
Burnett, Peterson, Pusateri, O'Clair and Lyon will amend their Change in
Control Agreements to (1) eliminate vesting of employer contributions under
the EWR 401(k) Plan in exchange for a cash payment increased to cover income
taxes on the cash payment, (2) impose the payment obligation as of the Closing
Date notwithstanding the fact that each officer may perform services for a
transitional period thereafter, (3) acknowledge that the term "change in
control" applies only to the Merger of EWR into EQR and not to any future
transactions involving EQR and (4) require payment be made within five days of
termination of employment (or earlier if required by law) unless such
termination occurs during the last two months of a calender year in which case
payment will be made on January 2 of the immediately following calendar year
(or earlier if required by law). Messrs. Burnett, Peterson, Pusateri, O'Clair
and Lyon will receive cash payments under their Change in Control Agreements
of $546,000, $197,000, $206,300, $392,000, $246,990 and $190,000,
respectively. Messrs. Evans, Berry and Fannin will not receive a payment of
cash or property under their respective Change in Control Agreements. Mr.
Couvillion will receive a payment only if his employment is terminated within
two years of the Effective Date.
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RESTRICTED SHARE GRANTS
Outstanding restricted share grants were previously made to Messrs. Evans,
Berry, Pusateri, O'Clair, Fannin and other employees of EWR. In connection
with the Merger, except with respect to Mr. Berry, as of the Effective Time
all restricted shares of EWR Common will become vested and will participate in
the Merger on the same basis as all other shares of EWR Common. As described
in "Interests of Certain Persons in the Transactions--Berry Employment
Agreement," Mr. Berry will exchange unvested restricted shares of EWR Common
for restricted shares of EQR Common as of the Effective Time.
In the second quarter of 1997, Messrs. Evans and Berry elected to receive
restricted shares of EWR Common in lieu of salary and bonuses for 1997. In
July, 1997, approximately 13,000 and 12,000 restricted shares of EWR Common
were issued to Messrs. Evans and Berry in lieu of their 1997 salary. The
restricted shares of EWR Common issued to Mr. Evans will vest in connection
with the Merger and any unvested restricted shares held by Mr. Berry will be
exchanged for restricted shares of EQR Common at the time of the Merger. In
accordance with his employment agreement, the restricted shares of EQR Common
received by Mr. Berry will vest on December 31, 2000 if Mr. Berry is an
employee of EQR at that time. No restricted shares of EWR Common have been
issued to either Mr. Evans or Mr. Berry for their 1997 bonuses since the
amount of their respective bonuses has not yet been determined.
EWR OPTIONS
As of the Effective Time, all rights under all existing vested and nonvested
options to purchase shares of EWR Common will terminate unless each holder of
options to purchase shares of EWR Common shall have entered into an agreement
(an "Option Cash Out Agreement") with EWR not to exercise such option in
consideration for a cash payment equal to the difference between (i) the
Exchange Ratio multiplied by the Closing Price of a share of EQR Common on the
NYSE on the Closing Date and (ii) the applicable exercise price of such
option, multiplied by the number of shares of EWR Common subject to such
option.
Assuming a share price of $51.0625 for EQR Common on the Closing Date, the
cash payments which will be made to key executives, directors and key
employees of EWR who enter into an Option Cash Out Agreement are as follows:
$1,158,469 for Mr. Evans, $717,844 for Mr. Berry, $100,781 for Mr. Pusateri,
$317,734 for Mr. O'Clair, $417,813 for Mr. Fannin, $182,484 for Mr.
Couvillion, $47,531 for Mr. Lyon, $127,375 for Mr. Burnett, $109,531 for Mr.
Peterson, $989,922 for Mr. Withycombe, $49,038 for Mr. Bidstrup, $49,038 for
Mr. Theobald, $49,038 for Mr. O'Connor and $526,662 for all other employees.
EQR OPTIONS
After the Effective Time, all employees including key employees of EWR who
(1) become employees of EQR, and (2) exercise vested incentive share options
to purchase shares of EWR Common and/or receive a cash payment in
consideration for their agreement not to exercise their other outstanding
options to purchase shares of EWR Common will receive a nonqualified option to
purchase a number of shares of EQR Common equal to (a) the number of shares of
EWR Common received upon exercise of vested incentive share options to
purchase shares of EWR Common, plus (b) the number of shares of EWR Common
subject to their EWR Option Cash Out Agreement multiplied by the Exchange
Ratio. The new EQR option shall vest in three equal annual installments and
have an exercise price per share to equal the Closing Price of a share of EQR
Common on the Closing Date. Assuming all holders of options to purchase shares
of EWR Common elect to receive a cash payment in consideration for their
agreement not to exercise such options respective options, the number of
shares of EQR Common subject to option which will be issued is as follows:
115,500 for Mr. Evans pursuant to his consulting agreement, 77,500 for Mr.
Berry pursuant to his employment agreement, 12,500 for Mr. Pusateri, 33,750
for Mr. O'Clair, 21,750 for Mr. Couvillion, and 283,188 for all other
employees.
UNIT CONTRIBUTION AGREEMENT
Mr. Evans and Mr. Withycombe and certain of their respective affiliates hold
an aggregate of 3,309,762 units of limited partnership interests in EWRLP
which will be contributed to ERP in exchange for 1,654,881 units of limited
partnership interest in ERP pursuant to a Unit Contribution Agreement.
SALE OF STOCK
Messrs. Evans and Withycombe shall sell all of their respective shares of
Evans Withycombe Management Inc. to Messrs. Neithercut and Strohm for an
aggregate consideration of $10,000.
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ERP OPERATING LIMITED PARTNERSHIP
BASIS OF PRESENTATION TO UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
The Unaudited Pro Forma Combined Balance Sheet has been prepared as if the
proposed Merger of ERP Operating Limited Partnership ("ERP") and Evans
Withycombe Residential, LP ("EWRLP") had occurred on September 30, 1997. The
Company has also included (i) the sale of 1,650,000 depositary shares (the
"Series G Depositary Shares") on October 3, 1997 and the net proceeds
therefrom of $39.6 million, (ii) the issuance of $150,000,000 million of 7
1/8% unsecured fixed rate notes (the "2017 Notes") in a public debt offering
(the "Fourth Public Debt Offering") which occurred on October 8, 1997 and the
net proceeds therefrom of $147.4 million, (iii) the acquisition in October
1997 of 17 properties containing 5,015 units for a total purchase price of
$292.4 million which included the assumption of $136 million of mortgage
indebtedness and the issuance of 3,315,500 Common Shares and (iv) the
acquisition in October 1997 of 21 properties and the probable acquisition of
an additional 24 properties for a total purchase price of $607.5 million,
including the assumption of $218.5 million of mortgage indebtedness. All of
these events have been presented as if they had occurred on September 30,
1997. The Unaudited Pro Forma Combined Balance Sheet gives effect to the
Merger under the purchase method of accounting in accordance with Accounting
Principles Board Opinion No. 16. In the opinion of management, all significant
adjustments necessary to reflect the effects of the Merger have been made.
The Unaudited Pro Forma Combined Balance Sheet is presented for comparative
purposes only and is not necessarily indicative of what the actual combined
financial position of EQR and EWRLP would have been at September 30, 1997, nor
does it purport to represent the future combined financial position of EQR and
EWRLP. This Unaudited Pro Forma Combined Balance Sheet should be read in
conjunction with, and is qualified in its entirety by, the respective
historical financial statements and notes thereto of EQR, EWRLP and the
financial statements and notes thereto included in the Form 8-K, as amended by
Form 8-K/A, dated October 9, 1997 incorporated by reference into the Consent
Solicitation/Prospectus/Information Statement.
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<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
1997 MOST
RECENT
ACQUIRED AND ERP PRO FORMA ERP
ERP PROBABLE PRE-MERGER EWRLP MERGER PRO FORMA
HISTORICAL PROPERTIES (A) PRO FORMA HISTORICAL (B) ADJUSTMENTS (C) COMBINED
---------- -------------- ---------- -------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Rental property, cost... $4,822,779 $ 905,502 $5,728,281 $806,472 $322,706 (D) $6,857,459
Less: Accumulated
Depreciation........... (400,550) -- (400,550) (54,409) -- (454,959)
Rental property, net.... 4,422,229 905,502 5,327,731 752,063 322,706 6,402,500
Real Estate held for
disposition............ 3,948 -- 3,948 -- -- 3,948
Construction in
progress............... -- -- -- 36 -- 36
Investment in mortgage
notes, net............. 176,051 -- 176,051 7,188 -- 183,239
Cash and cash
equivalents............ 277,997 (207,541) 70,456 2,488 (73,834)(E) (890)
Rents receivable........ 2,614 -- 2,614 -- -- 2,614
Deposits-restricted..... 7,761 -- 7,761 15,305 -- 23,066
Escrow deposits-
mortgage............... 31,702 -- 31,702 -- -- 31,702
Deferred financing
costs, net............. 14,168 1,313 15,481 4,503 (4,503)(F) 15,481
Other assets............ 97,544 -- 97,544 4,984 -- 102,528
---------- --------- ---------- -------- -------- ----------
Total assets........ $5,034,014 $ 699,274 $5,733,288 $786,567 $244,369 $6,764,224
========== ========= ========== ======== ======== ==========
LIABILITIES AND
PARTNERS' CAPITAL
Liabilities:
Mortgage notes
payable.............. $ 963,819 $ 354,496 $1,318,315 $261,922 $ -- $1,580,237
Line of credit........ -- -- -- 56,000 (56,000)(G) --
Notes, net............ 754,292 148,703 902,995 124,234 4,359 (H) 1,031,588
Accounts payable and
accrued expenses..... 56,864 -- 56,864 14,251 -- 71,115
Accrued interest
payable.............. 20,493 -- 20,493 5,327 -- 25,820
Due to affiliates..... 783 -- 783 -- -- 783
Rents received in
advance and other
liabilities.......... 28,928 -- 28,928 838 -- 29,766
Security deposits..... 21,196 -- 21,196 2,617 -- 23,813
Distributions payable. 66,707 -- 66,707 9,480 -- 76,187
---------- --------- ---------- -------- -------- ----------
Total liabilities... 1,913,082 503,199 2,416,281 474,669 (51,641) 2,839,309
---------- --------- ---------- -------- -------- ----------
Commitments and
contingencies
9 3/8% Series A
Cumulative Redeemable
Preference Units..... 153,000 -- 153,000 -- -- 153,000
9 1/8% Series B
Cumulative Redeemable
Preference Units..... 125,000 -- 125,000 -- -- 125,000
9 1/8% Series C
Cumulative Redeemable
Preference Units..... 115,000 -- 115,000 -- -- 115,000
8.60% Series D
Cumulative Redeemable
Preference Units..... 175,000 -- 175,000 -- -- 175,000
Series E Cumulative
Convertible
Preference Units..... 99,995 -- 99,995 -- -- 99,995
9.65% Series F
Cumulative Redeemable
Preference Units..... 57,500 -- 57,500 -- -- 57,500
Series G Cumulative
Convertible
Preference Units..... 275,000 41,250 316,250 -- -- 316,250
Partners' capital:
General Partner....... 1,938,553 154,825 2,093,378 311,099 193,259 (I) 2,597,736
Limited Partners
(Minority interest).. 181,884 -- 181,884 799 102,751 (J) 285,434
---------- --------- ---------- -------- -------- ----------
Total partners'
capital............ 2,120,437 154,825 2,275,262 311,898 296,010 2,883,170
---------- --------- ---------- -------- -------- ----------
Total liabilities
and partners'
capital............ $5,034,014 $ 699,274 $5,733,288 $786,567 $244,369 $6,764,224
========== ========= ========== ======== ======== ==========
</TABLE>
44
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
BASIS OF PRESENTATION TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
The Unaudited Pro Forma Combined Statement of Operations for the nine months
ended September 30, 1997 is presented as if the Merger, the Wellsford Merger,
the March 1997 Common Share Offerings, the Series D Preferred Share Offering,
the June 1997 Common Share Offerings, the September 1997 Common Share
Offering, the issuance of the Series G Depositary Shares, the Fourth Public
Debt Offering, the acquisition of an additional 47 properties, which occurred
between January 1997 and October 1997, including the assumption of $193.5
million of mortgage indebtedness and the probable acquisition of an additional
24 properties, including the assumption of $218.5 million of mortgage
indebtedness had occurred on January 1, 1997. The Unaudited Pro Forma Combined
Statement of Operations gives effect to the Merger under the purchase method
of accounting in accordance with Accounting Principles Board Opinion No. 16.
In the opinion of management, all significant adjustments necessary to reflect
the effects of these transactions have been made.
The Unaudited Pro Forma Combined Statement of Operations is presented for
comparative purposes only and is not necessarily indicative of what the actual
combined results of ERP and EWRLP would have been for the nine months ended
September 30, 1997, nor does it purport to be indicative of the results of
operations in future periods. The Unaudited Pro Forma Combined Statement of
Operations should be read in conjunction with, and are qualified in their
entirety by, the respective historical financial statements and notes thereto
of ERP, EWRLP and the financial statements included in Forms 8-K, as amended
by Forms 8-K/A, as applicable, dated March 17, 1997, May 20, 1997, August 15,
1997, September 17, 1997 and October 9, 1997 incorporated by reference into
this Consent Solicitation/Prospectus/Information Statement.
45
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(AMOUNTS IN THOUSANDS EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
ADDITIONAL ERP ERP
ERP 1997 ACQUIRED PRE-MERGER EWRLP MERGER PRO FORMA
HISTORICAL PROPERTIES(K) PRO FORMA HISTORICAL(W) ADJUSTMENTS COMBINED
---------- ------------- ---------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Rental Income.......... $482,980 $187,332 (L) $670,312 $83,282 $ -- $753,594
Fee and asset
management............ 4,364 -- 4,364 611 -- 4,975
Interest income-
investment in
mortgage notes........ 14,821 -- 14,821 201 -- 15,022
Interest and other
income................ 7,513 248 (M) 7,761 5,747 -- 13,508
-------- -------- -------- ------- ------- --------
Total revenues..... 509,678 187,580 697,258 89,841 -- 787,099
-------- -------- -------- ------- ------- --------
EXPENSES
Property and
maintenance........... 117,681 54,708 (N) 172,389 22,143 -- 194,532
Real estate taxes and
insurance............. 48,560 19,667 (O) 68,227 7,287 -- 75,514
Property management.... 18,765 5,174 (P) 23,939 2,328 200 (X) 26,467
Fee and asset
management............ 2,523 -- 2,523 -- -- 2,523
Depreciation........... 106,114 40,428 (Q) 146,542 19,338 4,844 (Y) 170,724
Interest:
Expense incurred..... 82,775 42,461 (R) 125,236 22,534 (405)(Z) 147,365
Amortization of
deferred financing
costs............... 1,810 49 (S) 1,859 741 (741)(AA) 1,859
General and
administrative........ 10,037 1,485 (T) 11,522 978 (221)(BB) 12,279
-------- -------- -------- ------- ------- --------
Total expenses..... 388,265 163,972 552,237 75,349 3,677 631,263
-------- -------- -------- ------- ------- --------
Income before gain on
disposition of
properties, (loss) on
joint venture
communities and
extraordinary item..... 121,413 23,608 145,021 14,492 (3,677) 155,836
Gain on disposition of
properties............ 3,923 -- 3,923 7,531 -- 11,454
(Loss) on joint
venture communities... -- (19) (19) -- -- (19)
-------- -------- -------- ------- ------- --------
Income before
extraordinary item..... 125,336 23,589 148,925 22,023 (3,677) 167,771
EXTRAORDINARY ITEM:
(Loss) on early
extinguishment of
debt.................. -- -- -- (1,500) -- (1,500)
-------- -------- -------- ------- ------- --------
Net income.............. $125,336 $ 23,589 $148,925 $20,523 $(3,677) $165,701
======== ======== ======== ======= ======= ========
ALLOCATION OF NET
INCOME:
9 3/8% Series A
Cumulative Redeemable
Preference Units...... 10,758 -- 10,758 -- -- 10,758
9 1/8% Series B
Cumulative Redeemable
Preference Units...... 8,555 -- 8,555 -- -- 8,555
9 1/8% Series C
Cumulative Redeemable
Preference Units...... 7,870 -- 7,870 -- -- 7,870
8.60% Series D
Cumulative Redeemable
Preference Units...... 5,477 5,811 (U) 11,288 -- -- 11,288
Series E Cumulative
Convertible
Preference Units...... 2,365 1,797 (U) 4,162 -- -- 4,162
9.65% Series F
Cumulative Redeemable
Preference Units...... 1,875 3,375 (U) 5,250 -- -- 5,250
Series G Cumulative
Convertible
Preference Units...... 387 16,808 (U) 17,195 -- -- 17,195
General Partner........ 78,618 (4,202) 74,416 20,478 (10,613) 84,281
Limited Partners
(Minority interest)... 9,431 -- 9,431 45 6,936 (CC) 16,412
-------- -------- -------- ------- ------- --------
$ 88,049 $ (4,202) $ 83,847 $20,523 $(3,677) $100,693
======== ======== ======== ======= ======= ========
Net income per weighted
average OP Unit
outstanding............ $ 1.28 $ (0.26) $ 0.99 $ 0.83 $ 0.30 $ 1.03
======== ======== ======== ======= ======= ========
Weighted average OP
Units outstanding...... 68,970 15,974 (V) 84,944 24,586 (12,112)(DD) 97,418
======== ======== ======== ======= ======= ========
</TABLE>
46
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
BASIS OF PRESENTATION TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
The Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1996 is presented as if the Merger, the Wellsford Merger, the
March 1997 Common Share Offerings, the Series D Preferred Share Offering, the
June 1997 Common Share Offerings, the September 1997 Common Share Offering,
the issuance of the Series G Depositary Shares, the Fourth Public Debt
Offering, the acquisition of an additional 47 properties, which occurred
between January 1997 and October 1997, including the related assumption of
$193.5 million of mortgage indebtedness and the probable acquisition of an
additional 24 properties, including the related assumption of $218.5 million
of mortgage indebtedness had occurred on January 1, 1996. The Unaudited Pro
Forma Combined Statement of Operations gives effect to the Merger under the
purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16. In the opinion of management, all significant adjustments
necessary to reflect the effects of these transactions have been made.
The Unaudited Pro Forma Combined Statement of Operations is presented for
comparative purposes only and is not necessarily indicative of what the actual
combined results of ERP and EWRLP would have been for the year ended December
31, 1996, nor does it purport to be indicative of the results of operations in
future periods. The Unaudited Pro Forma Combined Statement of Operations
should be read in conjunction with, and are qualified in their entirety by,
the respective historical financial statements and notes thereto of ERP, EWRLP
and the financial statements included in Forms 8-K, as amended by Forms 8-K/A,
as appropriate, dated March 17, 1997, May 20, 1997, August 15, 1997, September
17, 1997 and October 9, 1997 incorporated by reference into this Consent
Solicitation/Prospectus/Information Statement.
47
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
ADDITIONAL 1997
ACQUIRED AND ERP ERP
ERP 1996 ACQUIRED PROBABLE PRE-MERGER EWRLP MERGER PRO FORMA
HISTORICAL PROPERTIES (EE) PROPERTIES (OO) PRO FORMA HISTORICAL (YY) ADJUSTMENTS COMBINED
---------- --------------- --------------- ---------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Rental Income........... $454,412 $ 71,359 (FF) $346,821 (PP) $872,592 $ 94,350 $ -- $ 966,942
Fee and asset
management............. 6,749 -- -- 6,749 1,157 -- 7,906
Interest income-
investment in mortgage
notes.................. 12,819 -- -- 12,819 -- -- 12,819
Interest and other
income................. 4,405 (2,942)(GG) 6,763 (QQ) 8,226 6,119 -- 14,345
-------- -------- -------- -------- -------- -------- ----------
Total revenues....... 478,385 68,417 353,584 900,386 101,626 -- 1,002,012
-------- -------- -------- -------- -------- -------- ----------
EXPENSES
Property and
maintenance............ 127,172 17,292 (HH) 101,908 (RR) 246,372 25,161 -- 271,533
Real estate taxes and
insurance.............. 44,128 7,614 (II) 34,807 (SS) 86,549 8,121 -- 94,670
Property management..... 17,512 1,099 (JJ) 9,557 (TT) 28,168 3,225 146 (ZZ) 31,539
Fee and asset
management............. 3,837 -- -- 3,837 -- -- 3,837
Depreciation............ 93,253 13,217 (KK) 79,772 (UU) 186,242 20,885 11,531 (AAA) 218,658
Interest:
Expense incurred....... 81,351 4,376 (LL) 71,222 (VV) 156,949 23,460 (539)(BBB) 179,870
Amortization of
deferred financing
costs................. 4,242 -- 66 (WW) 4,308 765 (765)(CCC) 4,308
General and
administrative......... 9,857 -- 496 (XX) 10,353 1,204 (194)(DDD) 11,363
-------- -------- -------- -------- -------- -------- ----------
Total expenses....... 381,352 43,598 297,828 722,778 82,821 10,179 815,778
-------- -------- -------- -------- -------- -------- ----------
Income before gain on
disposition of
properties, (loss) on
joint venture
communities and
extraordinary item..... 97,033 24,819 55,756 177,608 18,805 (10,179) 186,234
Gain on disposition of
properties............ 22,402 -- (66) 22,336 -- -- 22,336
(Loss) on joint venture
communities........... -- -- (58) (58) -- -- (58)
-------- -------- -------- -------- -------- -------- ----------
Income before
extraordinary item..... 119,435 24,819 55,632 199,886 18,805 (10,179) 208,512
Extraordinary item:
Write-off of
unamortized costs on
refinanced debt....... (3,512) -- -- (3,512) -- -- (3,512)
-------- -------- -------- -------- -------- -------- ----------
Net income.............. $115,923 $ 24,819 $ 55,632 $196,374 $ 18,805 $(10,179) $ 205,000
======== ======== ======== ======== ======== ======== ==========
ALLOCATION OF NET
INCOME:
Redeemable Preference
Interests.............. 263 -- -- 263 -- -- 263
9 3/8% Series A
Cumulative Redeemable
Preference Units....... 14,345 -- -- 14,345 -- -- 14,345
9 1/8% Series B
Cumulative Redeemable
Preference Units....... 11,406 -- -- 11,406 -- -- 11,406
9 1/8% Series C
Cumulative Redeemable
Preference Units....... 3,264 7,230 (MM) -- 10,494 -- -- 10,494
8.60% Series D
Cumulative Redeemable
Preference Units....... -- 15,050 (MM) -- 15,050 -- -- 15,050
Series E Cumulative
Convertible Preference
Units.................. -- -- 5,549 5,549 -- -- 5,549
9.65% Series F
Cumulative Redeemable
Preference Units....... -- -- 6,999 6,999 -- -- 6,999
Series G Cumulative
Convertible Preference
Units.................. -- 22,928 (MM) -- 22,928 -- -- 22,928
General Partner......... 72,609 (20,389) 41,677 93,897 18,730 (14,693) 97,934
Limited Partners
(Minority interest).... 14,036 -- 1,407 15,443 75 4,514 (EEE) 20,032
-------- -------- -------- -------- -------- -------- ----------
$ 86,645 $(20,389) $ 43,084 $109,340 $ 18,805 $(10,179) $ 117,966
======== ======== ======== ======== ======== ======== ==========
Net income per weighted
average OP Unit
outstanding............ $ 1.70 $ (0.88) $ 4.01 $ 1.29 $ 0.84 $ 1.05 $ 1.21
======== ======== ======== ======== ======== ======== ==========
Weighted average OP
Units outstanding...... 51,108 23,105 (NN) 10,731 84,944 22,184 (9,710)(FFF) 97,418
======== ======== ======== ======== ======== ======== ==========
</TABLE>
48
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER UNIT DATA)
(A) Includes the most recent multifamily properties acquired in October 1997
and probable properties anticipated to be acquired in December 1997.
Atrium, Burwick Farms, Carolina Crossing, Chimneys, Clarion, Concorde Bridge,
Creekwood, Eastland on the Lake, Garden Lake, Glen Eagle, Grey Eagle,
Hickory Ridge, Hidden Oaks, Highland Grove, Mariners Wharf, Northlake,
Silver Springs, Tamarind at Stoneridge, Tivoli Lakes Club, Village of
Sycamore Ridge, Woodland Meadows, which were acquired in October 1997, as
reported on Form 8-K, as amended by Form 8-K/A dated October 9, 1997;
Hidden Palms, Idlewood, Riverside Park, Sycamore Creek, Blue Swan, Autumn
Creek, Governor's Point, Northwoods Village, Preakness, Trinity Lakes,
Larkspur Woods, Brookridge, Chantecleer Lakes, Orchard of Landen, Crescent
at Cherry Creek, Jefferson at Walnut Creek, Kirby Place, which were
acquired in October 1997, as reported on Form 8-K dated September 17, 1997,
(collectively the "1997 Most Recent Acquired Properties"); and
Arbor Glen, Breckinridge Court, Ethans Glen III, Ethans Ridge I, Ethans Ridge
II, Farmington Gates, Fountain Place I, Fountain Place II, Geary Courtyard,
James Street Crossing, Ocean Walk, Regency Woods, Ridgeway Commons, River
Oaks, Royal Oaks, The Cedars, Trailway Pond I, Trailway Pond II, Valley Creek
I, Valley Creek II, Westwood Pines, White Bear Woods, Woodcrest Villa, and
Woodlane Place, (collectively the "Probable Properties") as reported on Form
8-K, as amended by Form 8-K/A dated October 9, 1997.
In connection with these transactions the amounts presented include the
initial purchase price of $905.5 million, the assumption of $354.5 million
of mortgage indebtedness the issuance of 3,315 Common Shares with a value
of approximately $154.8 million, the issuance of Preferred Shares with a
value of $41.3 as well as the cash portion of these transactions which were
or will be financed primarily through proceeds raised from the issuance of
the Series G Depositary Shares and the Fourth Public Debt Offering.
(B) Certain reclassifications have been made to EWRLP's historical balance
sheet to conform to ERP's balance sheet presentation.
(C) Represents adjustments to record the Merger in accordance with the
purchase method of accounting, based upon the assumed purchase price of
$1,104,770 detailed as follows:
<TABLE>
<S> <C>
Issuance of 2,257 ERP OP Units based on the .50 Exchange
Ratio, in exchange for 4,514 EWRLP OP Units*................. $ 110,029
Contribution of EWRLP OP Units qcquired by EQR to ERP, at fair
value........................................................ 498,079
Assumption of EWRLP's liabilities............................. 474,669
Adjustment to increase the assumed EWRLP debt to its fair
value (see Note H)........................................... 4,359
Merger costs (see calculation below).......................... 17,634
----------
$1,104,770
==========
</TABLE>
*The number of ERP OP Units to be received by each EWR Unit Holder, other
than EWR, who elects to exchange will be equal to the number of EWR OP
Units contributed by such EWR Unit Holder multiplied by the .50 Exchange
Ratio.
The following is a calculation of the estimated fees and other expenses
related to the Merger:
<TABLE>
<S> <C>
Employee termination costs........................................ $ 2,220
Buyout of stock options........................................... 4,843
Investment Banking Fee............................................ 5,650
Legal and accounting fees......................................... 2,120
Other, including printing, filing, title and transfer costs....... 2,801
-------
Total estimated merger costs.................................... $17,634
=======
</TABLE>
49
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER UNIT DATA)
(D) Represents the estimated increase in EWRLP's rental property, net based
upon ERP's purchase price and the adjustment to eliminate the basis of
EWRLP's net assets acquired:
<TABLE>
<S> <C>
Purchase Price (see Note C).................................... $1,104,770
Less: Historical basis of EWRLP's net assets acquired
Rental property, net......................................... 752,063
Construction in progress..................................... 36
Investment in mortgage notes, net............................ 7,188
Cash and cash equivalents.................................... 2,488
Restricted deposits.......................................... 15,305
Other assets................................................. 4,984
----------
Step-up to record fair value of EWRLP's rental property........ $ 322,706
==========
</TABLE>
(E) Decrease to Cash and cash equivalents reflects the following:
<TABLE>
<S> <C>
The expected payment for Merger costs (see Note C) and
registration costs (see Note I)................................. $17,834
Repayment of EWRLP's line of credit.............................. 56,000
-------
$73,834
=======
</TABLE>
(F) Decrease due to elimination of EWRLP's deferred loan costs in connection
with the Merger.
(G) Reflects the repayment of EWRLP's line of credit from ERP's cash balances.
(H) Increase to Notes, net reflects the premium required to adjust EWRLP's
notes to their estimated fair value.
(I) Increase to General Partner's capital reflects the following:
<TABLE>
<S> <C>
Issuance of ERP OP Units and fair value of EWRLP OP Units
contributed by EQR pursuant to the Asset Contribution
Agreement (see Note C)........................................ $ 608,108
Registration costs incurred in connection with the Merger...... (200)
EWRLP's historical Partner's capital........................... (311,898)
Adjustment to Limited Partners' ownership in ERP (see Note J).. (102,751)
---------
$ 193,259
=========
</TABLE>
The 9.9% Limited Partners' ownership in ERP, is calculated as follows:
<TABLE>
<CAPTION>
SHARES UNITS
------ ------
<S> <C> <C>
EWR's historical Shares/Units outstanding.................. 20,434 24,948
====== ======
EQR's Shares/Units to be issued based on the .50 Merger
exchange ratio............................................ 10,217 12,474
EQR's historical Shares/Units outstanding as adjusted (see
Note A)................................................... 77,520 84,944
------ ------
EQR's pro forma Shares/Units outstanding................... 87,737 97,418
====== ======
EQR ownership percentage of ERP............................ 90.1%
======
Limited Partners' ownership percentage of ERP.............. 9.9%
======
</TABLE>
(J) The pro forma allocation to the Limited Partners is based upon the
percentage owned by such Limited Partners as follows:
<TABLE>
<S> <C>
Total partners' capital........................................ $2,883,170
Limited Partners' percentage ownership in ERP (see Note I)..... 9.9%
----------
Pro Forma Combined Limited Partners' ownership in ERP.......... 285,434
ERP pre-merger pro forma Limited Partners' ownership in ERP.... (181,884)
Historical Limited Partners' ownership in EWRLP................ (799)
----------
Adjustment to Limited Partners' ownership in ERP............... $ 102,751
==========
</TABLE>
50
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT DATA)
(K) Reflects the historical results of operations for the properties acquired
in the merger between EQR and Wellsford on May 30, 1997, the 1997 Most
Recent Acquired and Probable Properties (see Note A) as well as the
following groups of properties acquired from January through October, 1997
(collectively, the "Additional 1997 Acquired and Probable Properties"):
Town Center, Harborview, The Cardinal, Trails at Dominion, Dartmouth Woods,
Rincon, Waterford at the Lakes, Junipers at Yarmouth, Lincoln Harbor,
Sedona Ridge, Club at the Green and Knight's Castle, which were acquired
during the first quarter of 1997, as reported on Form 8-K dated May 20,
1997; and
Country Gables, Indigo Springs, Watermark Square, The Willows, Summit
Chase, Willow Brook, Highline Oaks, Mountain Brook, Ridgemont, Preston
Bend, Spinnaker Cove, Windemere and Wyndridge II and III, which were
acquired during the second quarter of 1997, as reported on Form 8-K dated
May 20, 1997; and
Foxchase, La Mirage, Bay Ridge, Boynton Place, Gates of Redmond, Cambridge
Village, Crosswinds, Gates of Redmond II, Cascade at Landmark, Sabal Palm
Club, Tamarlane, Banyan Lake, Hunters Ridge, South Pointe, Club at
Tanasbourne and Wood Creek, which were acquired during the third quarter of
1997, as reported on Form 8-K dated August 15, 1997; and
Paces on the Green and Paces Station, which were acquired during the third
quarter of 1997, as reported on Form 8-K dated September 17, 1997; and
Hidden Palms, Idlewood, Riverside Park, Sycamore Creek, Blue Swan, Autumn
Creek, Governor's Point, Northwoods Village, Preakness, Trinity Lakes,
Larkspur Woods, Brookridge, Chantecleer Lakes, Orchard of Landen, Crescent
at Cherry Creek, Jefferson at Walnut Creek, Kirby Place, which were
acquired in October 1997, as reported on Form
8-K dated September 17, 1997.
(L) Reflects rental income for the Additional 1997 Acquired and Probable
Properties for the periods indicated as follows:
<TABLE>
<S> <C>
Properties acquired during the first quarter of 1997, as
reported on Form 8-K dated May 20, 1997, for the period from
January 1, 1997 through the respective acquisition dates for
each property................................................. $ 4,645
Properties acquired during the second quarter of 1997, as
reported on Form 8-K dated May 20, 1997, for the three months
ended March 31, 1997.......................................... 6,586
Properties acquired during the second quarter of 1997, as
reported on Form 8-K dated May 20, 1997, for the period from
April 1, 1997 through the respective acquisition dates for
each property................................................. 2,982
Properties acquired during the third quarter of 1997, as
reported on Form 8-K dated August 15, 1997, for the six months
ended June 30, 1997........................................... 19,662
Properties acquired during the third quarter of 1997, as
reported on Form 8-K dated August 15, 1997, for the period
from July 1, 1997 through the respective acquisition dates for
each property................................................. 1,767
Properties acquired during the third and fourth quarters of
1997, as reported on Form 8-K dated September 17, 1997, for
the six months ended June 30, 1997............................ 22,438
Properties acquired during the third quarter of 1997, as
reported on Form 8-K dated September 17, 1997, for the period
from July 1, 1997 through the respective acquisition dates for
each property................................................. 762
Properties acquired during the fourth quarter of 1997, as
reported on Form 8-K dated September 17, 1997, for the period
from July 1, 1997 through September 30, 1997.................. 10,118
Properties acquired during the fourth quarter of 1997 and
probable acquisitions, as reported on Form 8-K dated October
9, 1997, for the nine months ended September 30, 1997......... 63,654
Properties acquired in merger between EQR and Wellsford on May
30, 1997 for the period from January 1, 1997 through May 30,
1997.......................................................... 54,718
--------
$187,332
========
</TABLE>
51
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT DATA)
(M) Reflects the following for the periods indicated:
<TABLE>
<S> <C>
Reduction of interest income due to the use of working capital
for property acquisitions as reported on Form 8-K dated
October 9, 1997 for the nine months ended September 30, 1997. $ (3,332)
Interest and other income in connection with the Wellsford
merger for the nine months ended September 30, 1997.......... 3,580
--------
$ 248
========
</TABLE>
(N) Reflects property and maintenance expense, which includes the elimination
of third party management fees where ERP is providing onsite property
management services, for the Additional 1997 Acquired and Probable
Properties for the periods indicated as follows:
<TABLE>
<S> <C>
Properties acquired during the first quarter of 1997 as reported
on Form 8-K dated May 20, 1997 for the period from January 1,
1997 through the respective acquisition dates for each property. $ 948
Properties acquired during the second quarter of 1997 as reported
on Form 8-K dated May 20, 1997 for the three months ended March
31, 1997........................................................ 1,804
Properties acquired during the second quarter of 1997 as reported
on Form 8-K dated May 20, 1997 for the period from April 1, 1997
through the respective acquisition dates for each property...... 773
Properties acquired during the third quarter of 1997 as reported
on Form 8-K dated August 15, 1997 for the six months ended June
30, 1997........................................................ 5,158
Properties acquired during the third quarter of 1997 as reported
on Form 8-K dated August 15, 1997 for the period from July 1,
1997 through the respective acquisition dates for each property. 468
Properties acquired during the third and fourth quarters of 1997
as reported on Form 8-K dated September 17, 1997 for the six
months ended June 30, 1997...................................... 6,437
Properties acquired during the third quarter of 1997 as reported
on Form 8-K dated September 17, 1997 for the period from July 1,
1997 through the respective acquisition dates for each property. 318
Properties acquired during the fourth quarter of 1997 as reported
on Form 8-K dated September 17, 1997 for the period from July 1,
1997 through September 30, 1997................................. 2,838
Properties acquired during the fourth quarter of 1997 and
probable acquisitions, as reported on Form 8-K dated October 9,
1997 for the nine months ended September 30, 1997............... 18,707
Properties acquired in merger between EQR and Wellsford on May
30, 1997 for the period from January 1, 1997 through May 30,
1997............................................................ 17,257
-------
$54,708
=======
</TABLE>
52
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT DATA)
(O) Reflects real estate tax and insurance expense for the Additional 1997
Acquired and Probable Properties for the periods indicated as follows:
<TABLE>
<S> <C>
Properties acquired during the first quarter of 1997, as reported
on Form 8-K dated May 20, 1997, for the period from January 1,
1997 through the respective acquisition dates for each property. $ 517
Properties acquired during the second quarter of 1997, as
reported on Form 8-K dated May 20, 1997, for the three months
ended March 31, 1997............................................ 557
Properties acquired during the second quarter of 1997, as
reported on Form 8-K dated May 20, 1997, for the period from
April 1, 1997 through the respective acquisition dates for each
property........................................................ 177
Properties acquired during the third quarter of 1997, as reported
on Form 8-K dated August 15, 1997, for the six months ended June
30, 1997........................................................ 1,865
Properties acquired during the third and fourth quarters of 1997,
as reported on Form 8-K dated September 17, 1997, for the six
months ended June 30, 1997...................................... 2,642
Properties acquired during the third quarter of 1997, as reported
on Form 8-K dated September 17, 1997, for the period from July
1, 1997 through the respective acquisition dates for each
property........................................................ 87
Properties acquired during the fourth quarter of 1997, as
reported Form 8-K dated September 17, 1997, for the period from
July 1, 1997 through September 30, 1997......................... 1,214
Properties acquired during the fourth quarter of 1997 and
probable acquisitions, as reported on Form 8-K dated October 9,
1997, for the nine months ended September 30, 1997.............. 7,764
Properties acquired in the merger between EQR and Wellsford on
May 30, 1997, for the period from January 1, 1997 through May
30, 1997........................................................ 4,844
-------
$19,667
=======
</TABLE>
(P) Reflects incremental cost associated with self management of the
Additional 1997 Acquired and Probable Properties for the periods indicated
as follows:
<TABLE>
<S> <C>
Properties acquired during the first quarter of 1997, as reported
on Form 8-K dated May 20, 1997, for the period from January 1,
1997 through the respective acquisition dates for each property. $ 89
Properties acquired during the second quarter of 1997, as
reported on Form 8-K dated May 20, 1997, for the three months
ended March 31, 1997............................................ 159
Properties acquired during the second quarter of 1997, as
reported on Form 8-K dated May 20, 1997, for the period from
April 1, 1997 through the respective acquisition dates for each
property........................................................ 75
Properties acquired during the third quarter of 1997, as reported
on Form 8-K dated August 15, 1997, for the six months ended June
30, 1997........................................................ 492
Properties acquired during the third quarter of 1997, as reported
on Form 8-K dated August 15, 1997, for the period from July 1,
1997 through the respective acquisition dates for each property. 44
Properties acquired during the third and fourth quarters of 1997,
as reported on Form
8-K dated September 17, 1997, for the six months ended June 30,
1997............................................................ 561
Properties acquired during the third quarter of 1997, as reported
on Form 8-K dated September 17, 1997, for the period from July
1, 1997 through the respective acquisition dates for each
property........................................................ 19
Properties acquired during the fourth quarter of 1997, as
reported on Form 8-K dated September 17, 1997, for the period
from July 1, 1997 through September 30, 1997.................... 253
Properties acquired during the fourth quarter of 1997 and
probable acquisitions, as reported on Form 8-K dated October 9,
1997, for the nine months ended September 30, 1997.............. 1,591
Properties acquired in the merger between EQR and Wellsford on
May 30, 1997, for the period from January 1, 1997 through May
30, 1997........................................................ 1,891
-------
$ 5,174
=======
</TABLE>
53
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT DATA)
(Q) Reflects depreciation based on the total investment of $2.7 billion for
the Additional 1997 Acquired and Probable Properties less amounts
allocated to land, generally 10%, and depreciated over a 30-year life for
real property for the periods indicated as follows:
<TABLE>
<S> <C>
Properties acquired during the first quarter of 1997 as reported
on Form 8-K dated May 20, 1997 for the period from January 1,
1997 through the respective acquisition dates for each property.. $ 972
Properties acquired during the second quarter of 1997 as reported
on Form 8-K dated May 20, 1997 for the three months ended March
31, 1997......................................................... 1,774
Properties acquired during the third quarter of 1997, as reported
on Form 8-K dated August 15, 1997 for the six months ended June
30, 1997......................................................... 4,706
Properties acquired during the third quarter of 1997, as reported
on Form 8-K dated August 15, 1997 for the period from July 1,
1997 through the respective acquisition dates for each property.. 197
Properties acquired during the third and fourth quarters of 1997,
as reported on Form 8-K dated September 17, 1997 for the six
months ended June 30, 1997....................................... 5,032
Properties acquired during the third quarter of 1997, as reported
on Form 8-K dated September 17, 1997 for the period from July 1,
1997 through the respective acquisition dates for each property.. 156
Properties acquired during the fourth quarter of 1997, as reported
on Form 8-K dated September 17, 1997 for the period from July 1,
1997 through September 30, 1997.................................. 2,145
Properties acquired during the fourth quarter of 1997 and probable
acquisitions, as reported on Form 8-K dated October 9, 1997 for
the nine months ended September 30, 1997......................... 13,680
Properties acquired in the merger between EQR and Wellsford on May
30, 1997 for the period from January 1, 1997 through May 30,
1997............................................................. 11,766
-------
$40,428
=======
(R) Reflects interest expense on mortgage indebtedness totaling $618.5 million
assumed in connection with the Additional 1997 Acquired and Probable
Properties, $250 million in unsecured notes assumed in connection with the
Wellsford merger at various interest rates and $150 million associated with
the Fourth Public Debt Offering at a rate of 7.125% per annum for the
periods indicated as follows:
Properties acquired during the first quarter of 1997 as reported
on Form 8-K dated
May 20, 1997 for the period from January 1, 1997 through the
respective acquisition dates for each property................... $ 528
Properties acquired during the second quarter of 1997 as reported
on Form 8-K dated May 20, 1997 for the three months ended March
31, 1997......................................................... 1,704
Properties acquired during the second quarter of 1997 as reported
on Form 8-K dated May 20, 1997 for the period from April 1, 1997
through the respective acquisition dates for each property....... 822
Properties acquired during the third quarter of 1997, as reported
on Form 8-K dated August 15, 1997 for the six months ended June
30, 1997......................................................... 801
Properties acquired during the third quarter of 1997, as reported
on Form 8-K dated August 15, 1997 for the period from July 1,
1997 through the respective acquisition dates for each property.. 87
Properties acquired during the third and fourth quarters of 1997,
as reported on Form 8-K dated September 17, 1997 for the six
months ended June 30, 1997....................................... 4,420
Properties acquired during the fourth quarter of 1997, as reported
on Form 8-K dated September 17, 1997 for the period from July 1,
1997 through September 30, 1997.................................. 2,210
Properties acquired during the fourth quarter of 1997 and porbable
acquisitions, as reported on Form 8-K dated October 9, 1997 for
the nine months ended September 30, 1997......................... 11,950
Properties acquired in merger between EQR and Wellsford on May 30,
1997 for the period from January 1, 1997 through May 30, 1997.... 11,923
Fourth Public Debt Offering....................................... 8,016
-------
$42,461
=======
</TABLE>
54
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT DATA)
(S) Reflects amortization of financing costs associated with the Fourth Public
Debt Offering in the amount of $1.3 million over 20 years.
(T) Reflects historical G & A costs for Wellsford for the period from January
1 through May 30, 1997.
(U) Reflects the allocation of net income based on the distributions payable
to Series D Cumulative Redeemable Preference Units, Series E Cumulative
Convertible Preference Units, Series F Cumulative Redeemable Preference
Units at the rates of 8.60%, 7.00%, 9.65%, respectively for the period
from January 1, 1997 through their respective dates of issuance and Series
G Cumulative Convertible Preferred Shares at the rate of 7.25% for the
nine months ended September 30, 1997.
(V) Reflects the increase in pro forma OP Units outstanding resulting from the
March 1997 Common Share Offerings, the June 1997 Common Share Offerings,
the September 1997 Common Share Offering and Common Shares issued in
connection with properties acquired in October 1997 as if these events had
occurred on January 1, 1997.
(W) Certain reclassifications have been made to EWRLP's Historical Statement
of Operations to conform to ERP's Statement of Operations presentation.
(X) Increase results from additional costs expected to be incurred as a result
of the Merger.
(Y) Represents the net increase in depreciation of real estate owned as a
result of recording EWRLP's real estate assets at fair value versus
historical cost. Depreciation is computed on a straight-line basis over
the estimated useful lives of the related assets which have a useful life
of approximately 30 years.
The calculation of the fair value of depreciable real estate assets at
September 30, 1997 is as follows:
<TABLE>
<S> <C>
Historical basis of EWRLP's rental property................... $ 752,063
Plus: Step up to EWRLP's rental property, net (see Note D).... 322,706
----------
Pro forma basis of EWRLP's rental property at fair value...... 1,074,769
Less: Fair value allocated to land............................ (107,477)
----------
Pro forma basis of EWRLP's depreciable rental property at fair
value........................................................ $ 967,292
==========
</TABLE>
Calculation of depreciation of rental property for the six months ended
September 30, 1997 is as follows:
<TABLE>
<S> <C>
Depreciation expense based upon an estimated useful life of
approximately 30 years........................................ $ 24,182
Less: EWRLP's historic depreciation of rental property......... (19,338)
--------
Pro forma adjustment........................................... $ 4,844
========
</TABLE>
(Z) Decrease results from the amortization of the premium required to record
EWRLP's debt at its estimated fair value.
(AA) Decrease results from the elimination of amortization of EWRLP's deferred
financing costs, which costs would be eliminated in connection with the
Merger.
(BB) Decrease results from identified historic costs of certain items which
are anticipated to be eliminated or reduced as a result of the Merger as
follows:
<TABLE>
<S> <C>
Duplication of public company expenses............................... $ 87
Net reduction in salary, benefits and occupancy...................... 134
----
Total................................................................ $221
====
</TABLE>
55
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT DATA)
(CC) A portion of income was allocated to the Limited Partners representing
interests in ERP not owned by EQR and interests in EWRLP not owned by
EWR. The pro forma allocation to the Limited Partners (represented by OP
Units) is based upon the percentage estimated to be owned by such Limited
Partners as a result of the pro forma transactions.
(DD) Decrease of Weighted Average OP Units Outstanding is based on the
conversion of 4,514 EWRLP OP Units to ERP OP Units at a conversion ratio
of .50 EWRLP OP Unit per ERP OP Unit and the contribution of EWRLP OP
Units held by EQR to ERP.
(EE)Reflects the results of operations for Desert Park, 7979 Westheimer, Sabal
Pointe (fka: Vinings at Coral Springs), Woodbridge (fka: The Plantations),
Heron Landing (fka: Oxford & Sussex), The Pines of Cloverlane, Regency
Palms, Port Royale II, 2900 on First, Woodland Hills, Ivy Place (fka: Post
Place), Ridgetree, Country Ridge, Rosehill Pointe, Forest Ridge, Canyon
Sands Village, Desert Sands Village, Chandler Court, Lands End, Mallard
Cove, Sunny Oak Village, Pine Meadow, Summer Ridge, Promenade Terrace,
South Creek, Pueblo Villas, Brixworth, Brierwood, Woodscape, Park Place,
Canterchase, Eagle Canyon, Summerset Village, Songbird, Willowglen,
Merrimac Woods, Casa Capricorn, Hunter's Glen, Marbrisa, Cedar Crest,
Lakeville Resort, Rock Creek, Village Oaks, Creekside Oaks, Gatehouse on
the Green, Gatehouse at Pine Lake, Wilde Lake, Spice Run and Mountain
Terrace (collectively the "1996 Acquired Properties"). The amounts
presented represent the historical amounts for certain revenues and
expenses for the periods from January 1, 1996 through the respective
acquisition dates for each property.
(FF)Reflects rental income for the 1996 Acquired Properties for the period
from January 1, 1996 through the respective acquisition dates for each
property.
(GG)Reflects the reduction of interest income due to the use of working
capital for property acquisitions.
(HH)Reflects property and maintenance expense, which includes the elimination
of third party management fees where ERP is providing onsite property
management services, for the 1996 Acquired Properties for the period from
January 1, 1996 through the respective acquisition dates for each property.
(II)Reflects real estate tax and insurance expense for the 1996 Acquired
Properties for the period from January 1, 1996 through the respective
acquisition dates for each property.
(JJ)Reflects incremental cost associated with self management of the 1996
Acquired Properties for the period from January 1, 1996 through the
respective acquisition dates for each property.
(KK)Reflects depreciation based on the total investment of $789.4 million for
the 1996 Acquired Properties less amounts allocated to land, generally 10%,
and depreciated over a 30-year life for real property for the period from
January 1, 1996 through the respective acquisition dates for each property.
(LL)Reflects interest expense on mortgage indebtedness totaling $134.1 million
assumed in connection with the 1996 Acquired Properties at various interest
rates for the period from January 1, 1996 through the respective
acquisition dates for each property.
(MM)Reflects an allocation of net income based on distributions payable to
Series C Cumulative Redeemable Preference Units at the rate of 9.125% for
the period from January 1, 1996 through the date of issuance; and Series D
Cumulative Redeemable Preference Units, Series E Cumulative Convertible
Preference Units, Series F Cumulative Redeemable Preference Units and
Series G Cumulative Convertible Preference Units at the rates of 8.60%,
7.00%, 9.65% and 7.25%, respectively for the year ended December 31, 1996
as if they had occurred on January 1, 1996.
(NN)Reflects the increase in pro forma OP Units outstanding resulting from the
January 1996 Common Share Offering, the February 1996 Common Share
Offering, the May 1996 Common Share Offerings, the September 1996 Common
Share Offering, the December 1996 Common Share Offering, the March 1997
Common Share Offerings, the June 1997 Common Share Offerings, the September
1997 Common Share Offering and Common Shares issued in connection with
properties acquired in October 1997 as if these events had occurred on
January 1, 1996.
(OO)Reflects the historical results of operations for the properties acquired
in the merger between ERP and Wellsford on May 30, 1997, the Most Recent
Acquired and Probable Properties (see Note A) as well as the following
groups of properties acquired from January through October, 1997
(collectively, the "Additional 1997 Acquired and Probable Properties"):
Town Center, Harborview, The Cardinal, Trails at Dominion, Dartmouth Woods,
Rincon, Waterford at the Lakes, Junipers at Yarmouth, Lincoln Harbor,
Sedona Ridge, Club at the Green, Knight's Castle, Country Gables, Indigo
Springs, Watermark Square, The Willows, Summit Chase, Willow Brook,
Highline Oaks, Mountain Brook, Ridgemont, Preston Bend, Spinnaker Cove,
Windemere, Wyndridge II and III (collectively, the properties reported on
in Form 8-K dated May 20, 1997);
56
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT DATA)
Foxchase, La Mirage, Bay Ridge, Boynton Place, Gates of Redmond, Cambridge
Village, Crosswinds, Gates of Redmond II, Cascade at Landmark, Sabal Palm
Club, Tamarlane, Banyan Lake, Hunters Ridge, South Pointe, Club at
Tanasbourne, Wood Creek (collectively, the properties reported on in Form
8-K dated August 15, 1997) and;
Hidden Palms, Idlewood, Riverside Park, Sycamore Creek, Blue Swan, Autumn
Creek, Governor's Point, Northwoods Village, Preakness, Trinity Lakes,
Larkspur Woods, Brookridge, Chantecleer Lakes, Orchard of Landen, Crescent
at Cherry Creek, Jefferson at Walnut Creek, Kirby Place, Paces on the
Green and Paces Station (collectively, the properties reported on in Form
8-K dated September 17, 1997).
(PP) Reflects rental income for the Additional 1997 Acquired and Probable
Properties for the year ended December 31, 1996 as follows:
<TABLE>
<S> <C>
Acquired properties reported on Form 8-K dated May 20, 1997..... $ 54,659
Acquired properties reported on Form 8-K dated August 15, 1997.. 40,694
Acquired properties reported on Form 8-K dated September 17,
1997........................................................... 44,619
Acquired and probable properties reported on Form 8-K dated
October 9, 1997................................................ 82,441
Properties acquired in merger between ERP and Wellsford on May
30, 1997....................................................... 124,408
--------
$346,821
========
</TABLE>
(QQ) Reflects the following for the year ended December 31, 1996:
<TABLE>
<S> <C>
Interest and other income in connection with the Wellsford
merger.......................................................... $6,763
======
</TABLE>
(RR) Reflects property and maintenance expense, which includes the elimination
of third party management fees where the Company is providing onsite
property management services, for the Additional 1997 Acquired and
Probable Properties for the year ended December 31, 1996 as follows:
<TABLE>
<S> <C>
Acquired properties reported on Form 8-K dated May 20, 1997..... $ 14,310
Acquired properties reported on Form 8-K dated August 15, 1997.. 10,814
Acquired properties reported on Form 8-K dated September 17,
1997........................................................... 12,408
Acquired and probable properties reported on Form 8-K dated
October 9, 1997................................................ 24,022
Properties acquired in merger between ERP and Wellsford on May
30, 1997....................................................... 40,354
--------
$101,908
========
</TABLE>
(SS) Reflects real estate tax and insurance expense for the Additional 1997
Acquired and Probable Properties for the year ended December 31, 1996 as
follows:
<TABLE>
<S> <C>
Acquired properties reported on Form 8-K dated May 20, 1997...... $ 5,953
Acquired properties reported on Form 8-K dated August 15, 1997... 4,111
Acquired properties reported on Form 8-K dated September 17,
1997............................................................ 5,013
Acquired and probable properties reported on Form 8-K dated
October 9, 1997................................................. 9,848
Properties acquired in merger between ERP and Wellsford on May
30, 1997........................................................ 9,882
-------
$34,807
=======
</TABLE>
(TT) Reflects incremental cost associated with self management of the
Additional 1997 Acquired and Probable Properties for the year ended
December 31, 1996 as follows:
<TABLE>
<S> <C>
Acquired properties reported on Form 8-K dated May 20, 1997...... $ 1,367
Acquired properties reported on Form 8-K dated August 15, 1997... 1,017
Acquired properties reported on Form 8-K dated September 17,
1997............................................................ 1,115
Acquired and probable properties reported on Form 8-K dated
October 9, 1997................................................. 2,064
Properties acquired in merger between ERP and Wellsford on May
30, 1997........................................................ 3,994
--------
$ 9,557
========
</TABLE>
(UU) Reflects depreciation based on the total investment of $2.7 billion for
the Additional 1997 Acquired and Probable Properties less amounts
allocated to land, generally 10%, and depreciated over a 30-year life for
real property for the year ended December 31, 1996 as follows:
<TABLE>
<S> <C>
Acquired properties reported on Form 8-K dated May 20, 1997....... $10,569
Acquired properties reported on Form 8-K dated August 15, 1997.... 9,942
Acquired properties reported on Form 8-K dated September 17, 1997. 10,063
Acquired and probable properties reported on Form 8-K dated
October 9, 1997.................................................. 18,240
Properties acquired in merger between ERP and Wellsford on May 30,
1997............................................................. 30,958
-------
$79,772
=======
</TABLE>
57
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT DATA)
(WW) Reflects interest expense on mortgage indebtedness totaling $618.5 million
assumed in connection with the Additional 1997 Acquired and Probable
Properties and $250 million in unsecured notes assumed in connection with
the Wellsford merger at various interest rates and $150 million associated
with the Fourth Public Debt Offering at a rate of 7.125% per annum for the
year ended December 31, 1996 as follows:
<TABLE>
<S> <C>
Acquired properties reported on Form 8-K dated May 20, 1997....... $11,873
Acquired properties reported on Form 8-K dated August 15, 1997.... 1,701
Acquired properties reported on Form 8-K dated September 17, 1997. 8,840
Acquired and probable properties reported on Form 8-K dated
October 9, 1997.................................................. 15,933
Properties acquired in merger between ERP and Wellsford on May 30,
1997............................................................. 22,187
Fourth Public Debt Offering....................................... 10,688
-------
$71,222
=======
</TABLE>
(XX) Reflects incremental G & A costs as a result of the Wellsford merger.
(YY) Certain reclassifications have been made to EWRLP's Historical Statement
of Operations to conform to ERP's Statement of Operations presentation.
(ZZ)Increase results from additional costs expected to be incurred as a result
of the Merger.
(AAA) Represents the net increase in depreciation of real estate owned as a
result of recording EWRLP's real estate assets at fair value versus
historical cost. Depreciation is computed on a straight-line basis over
the estimated useful lives of the related assets which have a useful life
of approximately 30 years.
The calculation of the fair value of depreciable real estate assets at
September 30, 1997 is as follows:
<TABLE>
<S> <C>
Historical basis of EWRLP's rental property................... $ 752,063
Plus: Step up to EWRLP's rental property, net (see Note D).... 322,706
----------
Pro forma basis of EWRLP's rental property at fair value...... 1,074,769
Less: Fair value allocated to land............................ (107,477)
----------
Pro forma basis of EWRLP's depreciable rental property at fair
value........................................................ $ 967,292
==========
</TABLE>
Calculation of depreciation of rental property for the year ended December
31, 1996 is as follows:
<TABLE>
<S> <C>
Depreciation expense based upon an estimated useful life of
approximately 30 years........................................ $ 32,243
Less: EWRLP's historic depreciation of rental property......... (20,712)
--------
Pro forma adjustment........................................... $ 11,531
========
</TABLE>
(BBB) Decrease results from the amortization of the premium required to record
EWRLP's debt at its estimated fair value.
(CCC) Decrease results from the elimination of amortization of EWRLP's deferred
financing costs, which costs would be eliminated in connection with the
Merger.
(DDD) Decrease results from identified historic costs of certain items which
are anticipated to be eliminated or reduced as a result of the Merger as
follows:
<TABLE>
<S> <C>
Duplication of public company expenses............................... $ 30
Net reduction in salary, benefits and occupancy...................... 164
----
Total................................................................ $194
====
</TABLE>
(EEE) A portion of income was allocated to Limited Partners representing
interests in ERP not owned by EQR and interests in EWRLP not owned by
EWR. The pro forma allocation to Limited Partners (represented by OP
Units) is based upon the percentage estimated to be owned by such Limited
Partners as a result of the pro forma transactions.
(FFF) Decrease of Weighted Average OP Units Outstanding is based on the
conversion of 4,515 EWRLP OP Units to ERP OP Units at a conversion ratio
of .50 EWRLP OP Units per ERP OP Unit and the contribution of EWRLP OP
Units held by EQR to ERP.
58
<PAGE>
CAPITALIZATION
The following table sets forth the pro forma capitalization of ERP, as
adjusted to reflect the Transactions. The information set forth in the
following table should be read in conjunction with the unaudited combined pro
forma financial statements and notes thereto included elsewhere in this Consent
Solicitation/Prospectus/Information Statement.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
PRO FORMA (IN THOUSANDS)
------------------------
<S> <C>
Mortgage notes payable......................... $1,580,237
Notes, net..................................... 1,031,588
Partners' Capital.............................. 2,883,170
----------
Total capitalization....................... $5,494,995
==========
</TABLE>
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the federal income tax consequences
material to (i) the Unit Exchange Offer, whereby holders of EWRLP Units
("Exchanging Partners") will contribute their EWRLP Units to ERP in exchange
for a number of ERP Units equal to the number of EWRLP Units so exchanged
multiplied by the Exchange Ratio, (ii) the Asset Contribution and Distribution,
whereby EWRLP will contribute its assets, subject to its liabilities, to ERP,
with EWRLP receiving 0.5 ERP Units for each EWRLP Unit outstanding at the
Effective Time, (iii) the ownership of ERP Units by an EWRLP Unitholder, and
(iv) the ownership of EQR Shares. The following discussions were prepared based
on consultation with Gibson, Dunn & Crutcher LLP, special counsel to EWRLP, and
Rudnick & Wolfe, special counsel to ERP, in connection with the Unit Exchange
Offer, the Asset Contribution and Distribution. In the opinion of Rudnick &
Wolfe and Gibson, Dunn & Crutcher, the following discussion, to the extent it
constitutes matters of law or legal conclusions, is accurate in all material
respects. Opinions of counsel are not binding on the Internal Revenue Service
("IRS" or "Service"). Thus, there can be no assurance that the IRS will agree
with the following discussion and positions described therein, or that the IRS
will not seek to challenge such positions, which challenge may be sustained by
the courts.
The information set forth below is based on the Code, final, temporary and
proposed Treasury Department regulations promulgated thereunder (such existing
regulations are hereafter referred to as the "Regulations"), and current
administrative interpretations, and court decisions. No assurance can be given
that future legislation, Regulations, administrative interpretations, and court
decisions will not significantly change the law, and thereby affect the
accuracy of this discussion. Any such change in law could apply retroactively.
Neither ERP, EQR, EWRLP nor EWR intend to obtain a ruling from the IRS
concerning the tax consequences of the Unit Exchange Offer, the Asset
Contribution, the Distribution or any of the other matters set forth herein
(except with regard to their impact on the Merger qualifying for tax-free
treatment under Code Section 368(a) of the Code). The discussions in this
section do not constitute tax advice to any person.
The following summary is not intended to be comprehensive. It does not
address the state, local or foreign tax consequences of the Unit Exchange
Offer, the Asset Contribution, or the Distribution, nor does it discuss all
aspects of federal income taxation that may be relevant to EWRLP Unitholders in
light of their particular circumstances. Except where indicated, the discussion
below describes general federal income tax considerations applicable to
individuals who are citizens or residents of the United States, and therefore
has limited application to domestic corporations and persons subject to special
federal income tax treatment, such as foreign persons, tax-exempt entities,
regulated investment companies and insurance companies.
BECAUSE OF THE PARTICULAR TAX ATTRIBUTES OF PARTNERS OF EWRLP, THE UNIT
EXCHANGE OFFER AND THE ASSET CONTRIBUTION MAY HAVE DIFFERING TAX IMPLICATIONS
FOR SUCH PARTNERS. THUS, PARTNERS ARE STRONGLY URGED TO CONSULT WITH THEIR OWN
TAX ADVISORS TO DETERMINE THE TAX CONSEQUENCES OF THE UNIT EXCHANGE OFFER, THE
ASSET CONTRIBUTION, THE DISTRIBUTION AND THE SUBSEQUENT OWNERSHIP OF ERP UNITS
OR EQR COMMON IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES. THE FOLLOWING
DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING.
TAX CONSEQUENCES OF ASSET CONTRIBUTION AND DISTRIBUTION
General. Pursuant to, and subject to the terms and conditions of the Asset
Contribution Agreement, EWRLP has agreed, subsequent to the effectiveness of
the Merger, and at the option of ERP, to contribute all of its assets to ERP in
exchange for a number of ERP Units equal to the number of EWRLP Units then
outstanding multiplied by the Exchange Ratio. Following
59
<PAGE>
the Asset Contribution and pursuant to the Distribution, EWRLP will distribute
such ERP Units to the partners of EWRLP in liquidation. See "The Transactions--
Terms of the Transactions--The Asset Contribution."
Contribution of Assets to ERP/Termination of EWRLP. The Service regards
transactions whereby the businesses of two or more partnerships are combined in
a single partnership, regardless of the form of the transaction and regardless
of whether the transaction constitutes a merger or consolidation under state
law, as mergers or consolidations for purposes of Code Section 708. In Revenue
Ruling 77-458, the Service concluded that where a partnership transferred all
of its assets, subject to all of its liabilities, to another partnership in
exchange for interests in the other partnership, and such interests were
distributed to the partners of the partnership transferring its assets and
liabilities, such transaction constituted a merger of the two partnerships for
purposes of Code Section 708. Therefore, the Asset Contribution and subsequent
liquidation of EWRLP will constitute a merger of ERP and EWRLP for purposes of
Code Section 708. Under Code Section 708(b)(2)(A), in the case of a merger of
two or more partnerships, the resulting partnership shall be considered the
continuation of the merging partnership whose members own an interest of more
than 50% in the capital and profits of the resulting partnership. Following the
Asset Contribution and Distribution, the pre-Asset Contribution partners of ERP
will own more than 50% in the capital and profits of the resulting partnership.
Therefore, ERP will be considered the surviving partnership under Code Section
708. In Revenue Ruling 68-289, the Service concluded that regardless of the
actual form of the transaction, a partnership that terminates as a result of a
merger is treated as contributing its assets to the resulting partnership and
then liquidating, distributing interests in the resulting partnership to its
partners. Thus, as a result of the Asset Contribution and Distribution, EWRLP
will be treated for federal income tax purposes as if it had directly
contributed all of its assets, (subject to all of its liabilities) to ERP in
exchange for ERP Units and subsequently liquidated, distributing all of such
ERP Units to its partners. Subject to the exceptions discussed below, under
Code Section 721(a) no gain or loss will be recognized by EWRLP upon the
contribution of its assets (subject to its liabilities) to ERP in consideration
for ERP Units.
Basis in ERP Units Received by EWRLP Unitholders. Code Section 732(b)
provides that the basis of property (other than money) distributed to a partner
in liquidation of the partner's interest in the partnership shall be an amount
equal to the adjusted basis of such partner's interest in the partnership
reduced by any cash distributed in the same transaction. Therefore, each EWRLP
Unitholder will have an adjusted basis in his ERP Units received in the
Distribution equal to such partner's basis in the EWRLP Units held by such
partner, subject to adjustment by operation of Code Section 752. Code Section
752 provides that an increase in a partner's share of partnership liabilities
is treated as a contribution of cash to the partner, and reduction in a
partner's share of partnership liabilities is treated as a distribution of cash
by the partner to the partnership. Under Code Section 722, a contribution of
cash by a partner increases a partner's adjusted basis in his partnership
interest, and under Code Section 733, a distribution of cash to a partner
reduces a partner's adjusted basis in his partnership interest. The Asset
Contribution and liquidation of EWRLP, may cause each EWRLP Unitholder to
receive an allocation of liabilities from ERP that is greater or less than the
amount of liabilities that was previously allocated to such partner by EWRLP.
See "--Allocation of ERP Liabilities." Accordingly, a partner who receives ERP
Units in connection with the liquidation of EWRLP will have an adjusted basis
in his ERP Units equal to such partner's adjusted basis in his EWRLP Units
immediately prior to the liquidation of EWRLP, increased or decreased by any
actual or deemed contribution or distribution, respectively, of cash in
connection with the Asset Contribution and Distribution.
Consequences of Deemed Distribution of Cash. Under Code Section 731, a
distribution of money by a partnership to a partner results in gain recognition
only to the extent the amount of money exceeds the partner's adjusted basis in
his partnership interest. As discussed above, the EWRLP Unitholders will be
deemed to be relieved of the liabilities of EWRLP assumed by ERP as a result of
the Asset Contribution, and will receive an allocation of liabilities by ERP
pursuant to Code Section 752 and the ERP Partnership Agreement as new partners
in ERP. See "--Allocation of ERP Liabilities" and "--Basis in ERP Units
Received by EWRLP Unitholders." Accordingly, an EWRLP Unitholder who receives
ERP Units in connection with the Distribution will recognize gain to the extent
that any deemed distribution of cash arising from a reduction in the
Unitholder's share of partnership liabilities exceeds such partner's adjusted
basis in his partnership interest. EWRLP Unitholders are strongly urged to
consult with their own tax advisor to determine the adjusted bases in their
EWRLP Units and the extent (if any) of any deemed cash distribution to such
partner as a result of the Asset Contribution and Distribution.
Subsequent Adjustments to Adjusted Tax Basis of ERP Units. An ERP
Unitholder's adjusted basis in his ERP Units generally will be increased by (a)
his share of ERP taxable income, (b) his contributions to the capital of ERP
and (c) increases in his allocable share of the liabilities of ERP. Generally,
such Exchanging Partner's adjusted basis in his ERP Units will be decreased
(but not below zero) by (1) his share of ERP's taxable losses and ERP
nondeductible expenditures which are not chargeable to capital, (2) cash
distributions made to such partner by ERP and (3) decreases in his allocable
share of the liabilities of ERP.
Distributions of Cash/Marketable Securities. Under Code Section 731, a
distribution of money by a partnership to a partner results in gain recognition
only to the extent the amount of money exceeds the partner's adjusted basis in
his partnership interest. A distribution of property, other than money, by a
partnership to a partner does not result in taxable
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gain to the partner. The term "money" for purposes of Code Section 731 includes
marketable securities. The term "marketable securities" includes financial
instruments, such as stock and other equity interests, that are actively traded
as of the date of the distribution, and financial instruments that are readily
convertible into or exchangeable for money or marketable securities. ERP Units
received by partners of EWRLP pursuant to the Distribution and liquidation of
EWRLP may be considered "marketable securities" subject to the gain recognition
requirements of Code Section 731. Under Code Section 731(c), marketable
securities include "financial instruments" which, in turn, include "other
equity interests" which are "actively traded." In cases where the value of a
financial instrument is determined substantially by reference to marketable
securities, such financial instrument is deemed to be actively traded. Because
each ERP Unit can be redeemed for one share of EQR common or the cash
equivalent, the value of the ERP Units are determined by reference to the value
of EQR Common. Therefore, such ERP Units may be considered marketable
securities for purposes of Code Section 731(c). However, an exception to the
foregoing rule provides that a distribution of property that would otherwise
constitute a "marketable security" will not constitute a marketable security
for purposes of Code Section 731 if such property was acquired by the
partnership in a non-recognition transaction, the value of any marketable
securities and money exchanged by the partnership in the nonrecognition
transaction is less than 20 percent of the value of all assets exchanged by the
partnership in the nonrecognition transaction, and the partnership distributes
the marketable securities received within 5 years of receipt. EWRLP will
receive the ERP Units in a non-recognition transaction governed by Code Section
721(a), and the value of any marketable securities and money contributed to ERP
by EWRLP in the Asset Contribution will be less than 20 percent of the value of
all assets contributed by EWRLP to ERP. Accordingly, a distribution of ERP
Units to a partner of EWRLP in connection with the Asset Contribution and
Distribution will not constitute a distribution of money to the EWRLP
Unitholders under Code Section 731.
UNIT EXCHANGE OFFER
Contribution of EWRLP Units to ERP. EWR Unitholders who elect to participate
in the Unit Exchange Offer will be treated as contributing assets to a
partnership in exchange for an interest in a partnership in a transaction
governed by Code Section 721. Subject to the exceptions discussed below, under
Code Section 721 no gain or loss will be recognized by a EWRLP Unitholder upon
the contribution of EWRLP Units to ERP.
Exchanging Partners' Adjusted Tax Basis in ERP Units. In general, an
Exchanging Partner of EWRLP will have an initial tax basis ("Initial Basis") in
his ERP Units equal to his basis in his EWRLP Units, increased or decreased by
any deemed contribution or distribution, respectively, of cash arising under
Code Section 752. Code Section 752 provides that an increase in a partner's
share of partnership liabilities is treated as a contribution of cash to the
partner, and a reduction in a partner's share of partnership liabilities is
treated as a distribution of cash by the partner to the partnership. Under Code
Section 722, a contribution of cash by a partner increases a partner's adjusted
basis in his partnership interest, and under Code Section 733, a distribution
of cash to a partner reduces such partner's adjusted basis in his partnership
interest. As a result of the contribution of EWRLP Units to ERP, an Exchanging
Partner will be deemed to have been relieved of the liabilities previously
allocated to him by EWRLP and to have assumed liabilities of ERP allocated to
such partner by ERP. Accordingly, an Exchanging Partner's basis in his ERP
Units will be reduced to the extent the amount of liabilities allocated to him
by ERP are less than the amount of liabilities previously allocated to such
partner by EWRLP, and will be increased to the extent the amount of liabilities
allocated to him by ERP are greater than the amount of liabilities previously
allocated to such partner by EWRLP. For a discussion of the allocation of
liabilities of ERP, see "--Allocation of ERP Liabilities."
Consequences of Deemed Distribution of Cash. Under Code Section 731, a
distribution of money by a partnership to a partner results in gain recognition
only to the extent the amount of cash exceeds the partner's adjusted basis in
his partnership interest. Upon the contribution of EWRLP Units to ERP, the
Exchanging Partner will be deemed to be relieved of the liabilities previously
allocated to him by EWRLP and will receive an allocation of liabilities of ERP,
resulting in a net increase or decrease in the amount of liabilities allocated
to such EWRLP Unitholder. An Exchanging Partner will recognize gain to the
extent that any deemed distribution arising from a reduction in the partner's
share of partnership liabilities exceeds such partner's adjusted basis in his
partnership interest. Exchanging Partners of EWRLP are strongly urged to
consult with their own tax advisor to determine the adjusted bases in their
EWRLP Units and the extent (if any) of any deemed cash distribution to such
partner as a result of the exchange of their EWRLP Units for ERP Units and the
corresponding increase or reduction in the amount of liabilities allocated to
such partner.
Subsequent Adjustments to Adjusted Tax Basis of ERP Units. An Exchanging
Partner's adjusted basis in his ERP Units generally will be increased by (a)
his share of ERP taxable income, (b) his contributions to the capital of ERP
and (c) increases in his allocable share of the liabilities of ERP. Generally,
such Exchanging Partner's adjusted basis in his ERP Units will be decreased
(but not below zero) by (1) his share of ERP's taxable losses and ERP
nondeductible expenditures which are not chargeable to capital, (2) cash
distributions made to such partner by ERP and (3) decreases in his allocable
share of the liabilities of ERP.
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ALLOCATION OF ERP LIABILITIES
ERP's recourse and nonrecourse liabilities will be allocated among ERP
Unitholders in accordance with Code Section 752 and the Regulations thereunder
in the manner set forth below.
Recourse Liabilities. A partnership liability is a recourse liability to the
extent that any partner or a related person bears the economic risk of loss for
that liability. A partner's share of recourse liabilities equals the portion of
that liability, if any, for which that partner or a related person bears such
economic risk of loss. EWRLP Unitholders are not expected to bear the economic
risk of loss for any liabilities of ERP. However, EQR, as the sole general
partner of ERP, currently does and will bear the economic risk of loss for
certain liabilities of ERP. Accordingly, under Code Section 752, such
liabilities will constitute recourse liabilities which are allocable to EQR.
Nonrecourse Liabilities. A partnership liability is a nonrecourse liability
to the extent that no partner or related person bears the economic risk of loss
for that liability. A partner's share of nonrecourse liabilities equals the sum
of: (1) the partner's share of partnership "minimum gain" determined in
accordance with the rules of Code Section 704(b) and Regulations thereunder;
(2) the amount of any taxable gain that would be allocated to the partner under
Code Section 704(c) if the partnership (in a taxable transaction) disposed of
all partnership property subject to one or more partnership nonrecourse
liabilities in full satisfaction of those liabilities and for no other
consideration ("Code Section 704(c) Minimum Gain"); and (3) the partner's share
of excess nonrecourse liabilities of the partnership (i.e., those liabilities
not allocated under (1) and (2) above) as determined in accordance with the
partner's share of profits. ERP believes that it allocates its nonrecourse
liabilities in accordance with the foregoing Regulations. The allocation of
excess nonrecourse liabilities by ERP is determined by taking into account
facts and circumstances relating to the partner's interest in the profits of
ERP. EQR, as general partner of ERP, will have discretion in any fiscal year to
allocate excess nonrecourse liabilities among the partners in any manner
permitted under Code Section 752 and the Regulations thereunder.
EWRLP Unitholders are strongly urged to consult with their own tax advisor to
determine the extent (if any) of any increase or reduction in the amount of
nonrecourse liabilities allocated to such partner as a result of the exchange
of their EWRLP Units for ERP Units (either through the Unit Exchange Offer or
the Distribution) and the implications of any corresponding deemed cash
distributions to such partner. See "--Unit Exchange Offer--Consequences of
Deemed Distributions of Cash" and "--Tax Consequences of Asset Contribution and
Distribution--Consequences of Deemed Distribution of Cash."
ENTITY CLASSIFICATION
Substantially all of EQR's investments are held indirectly through ERP and
the Subsidiary Partnerships (as defined in the following paragraph). 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. EQR includes in its income its
proportionate share of the foregoing partnership items for purposes of the
various REIT income tests and in the computation of its REIT taxable income.
Moreover, for purposes of the REIT asset tests, EQR includes its proportionate
share of assets held by ERP and the partnerships.
Classification of ERP and Subsidiary Partnerships. EQR's interests in ERP,
EWRLP, and certain partnerships and limited liability companies that own the
beneficial interest of certain properties encumbered by mortgage financing
(collectively, the "EQR Financing Partnerships"), EQR Properties Management LP,
Equity Residential Properties Management, L.P. II ("EQR Properties Management
LP II"), and Evans Withycombe Finance, L.P. ("EW Finance LP") (collectively,
the "Subsidiary Partnerships") involve special tax considerations, including
the possibility of a challenge by the IRS of the status of such entities as
partnerships (as opposed to an association taxable as a corporation) for
federal income tax purposes. If ERP, EWRLP or any of the Subsidiary
Partnerships were treated as an association, such partnership would be taxable
as a corporation and therefore be subject to an entity-level tax on its income.
In such a situation, the character of EQR's assets and items of gross income
would change and preclude EQR from satisfying the asset tests and possibly the
income tests (See "--Tax Aspects of Investment in EQR--Qualification of EQR as
a REIT"), and in turn would prevent EQR from qualifying as a REIT. In addition,
a change in ERP, EWRLP or a Subsidiary Partnership's status for tax purposes
might be treated as a taxable event in which case EQR might incur a tax
liability without any related cash distributions.
The IRS recently finalized and published certain Regulations (the "Entity
Classification Regulations") which provide that a domestic business entity not
otherwise classified as a corporation and which has at least two members (an
"Eligible Entity") may elect to be taxed as a partnership for federal income
tax purposes. The Entity Classification Regulations apply for tax periods
beginning on or after January 1, 1997 (the "Regulations Effective Date").
Unless it elects otherwise, an
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Eligible Entity in existence prior to the Regulations Effective Date will have
the same classification for federal income tax purposes that it claimed under
the Regulations in effect prior to the Regulations Effective Date. In addition,
an Eligible Entity with two or more members and which did not exist, or did not
claim a classification, prior to the Regulations Effective Date, will be
classified as a partnership for federal income tax purposes unless it elects
otherwise. Each of ERP, EWRLP and the Subsidiary Partnerships in existence
prior to the Regulations Effective Date claimed classification as a partnership
for federal tax purposes.
Publicly Traded Partnerships. Code Section 7704 provides that publicly traded
partnerships will be taxed as corporations, unless a certain percentage of
their income consists of "qualifying income." A partnership is "a publicly
traded partnership" if interests in such partnership are either traded on an
established securities market or are "readily tradable on a secondary market
(or the substantial equivalent thereof)." Under the Regulations promulgated
under Code Section 7704, interests in a partnership are readily tradable on a
secondary market or substantial equivalent thereof if, "taking into account all
of the facts and circumstances, the partners are readily able to buy, sell, or
exchange their partnership interests in a manner that is comparable,
economically, to trading on an established securities market." Furthermore,
interests in a partnership are tradeable as such if (i) interests in the
partnership are regularly quoted by any person, such as a broker or dealer,
making a market in the interests; (ii) any person regularly makes available to
the public (including customers or subscribers) bid or offer quotes with
respect to interests in the partnership and stands ready to effect buy or sell
transactions at the quoted prices for itself or on behalf of others; (iii) the
holder of an interest in the partnership has a readily available, regular, and
ongoing opportunity to sell or exchange the interest through a public means of
obtaining or providing information of offers to buy, sell, or exchange
interests in the partnership; or (iv) prospective buyers and sellers otherwise
have the opportunity to buy, sell, or exchange interests in the partnership in
a time frame and with the regularity and continuity that is comparable to that
described in (i), (ii) or (iii). ERP believes that it will not be a publicly
traded partnership at the Effective Time nor upon consummation of the Asset
Contribution.
Even if ERP were deemed to be a publicly traded partnership, depending on
circumstances at the time, it still might avoid taxation as a corporation under
Code Section 7704, based on the nature of its income. A publicly traded
partnership is not taxed as a corporation if at least 90% of its gross income
for each taxable year consists of certain passive income, including interest,
dividends, real property rents, and gains from the sale or other disposition of
real property. These are predominantly the types of income that ERP expects to
earn. If ERP satisfied the 90% gross income test but was classified as a
publicly traded partnership, it would not be taxed as a corporation but would
be subject to certain special rules under Code Section 469(k). In such event, a
ERP Unitholder would be unable to use losses from other passive activities
against his allocable share of ERP passive activity losses allocable to a ERP
Unitholder could be offset only against his allocable share of ERP passive
activity income or gains, and not against income or gains from other passive
activities.
If ERP at any time were considered a publicly traded partnership and did not
satisfy the qualifying income test, then it will be considered as having
transferred its assets at that time to a corporation, and would be taxed as a
corporation for federal income tax purposes, which would result in adverse
consequences to the ERP Unitholders and would jeopardize EQR's status as a REIT
for federal income tax purposes. This deemed transfer of assets to a
corporation may also result in the recognition of taxable income to ERP and its
partners, to the extent that its liabilities at that time have exceeded the
adjusted tax bases of its assets, without the receipt of any cash with which to
pay the income tax liability resulting from such income.
ALLOCATIONS OF PARTNERSHIP ITEMS
Requirements Under Code Section 704(b). Under Code Section 704(b), a
partnership's allocation of any item of income, gain, loss or deduction to a
partner will be respected for federal income tax purposes so long as it has
"substantial economic effect," or is otherwise deemed to be allocated in
accordance with the partner's "interest in the partnership." If the allocation
does not satisfy this standard, the item will be reallocated among the partners
on the basis of their respective interests in the partnership, determined by
taking into account all the facts and circumstances. Taxable income and losses
of ERP are generally allocated among the partners of ERP in proportion to their
partnership interests (based on the number of ERP Units held by such partner).
The allocations of partnership items under the ERP Partnership Agreement are
intended to have substantial economic effect, based on the applicable
Regulations. Notwithstanding such intention, however, there can be no assurance
that the allocations under the ERP Partnership Agreement will not be challenged
by the IRS or that partnership items will not be required to be reallocated as
a result of such challenge.
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Tax Allocations with Respect to the Properties. Pursuant to Code Section
704(c), 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 (such as certain of the properties contributed to
ERP and EWRLP in connection with their initial public offering, the interests
in EWRLP contributed to ERP in connection with the Unit Exchange Offer, and the
properties contributed to ERP pursuant to the Asset Contribution) (the
"Contributed Properties") 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 and the
adjusted tax basis of contributed property at the time of initial contribution
("Built-in Gain" or "Built-in Loss," respectively). 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 ERP Partnership
Agreement requires such allocations to be made in a manner consistent with Code
Section 704(c). As a result, certain limited partners of ERP will be allocated
lower amounts of depreciation deductions for tax purposes and increased taxable
income and gain on sale by ERP of certain of the Contributed Properties. These
allocations will tend to eliminate the Built-in Gain or Built-in Loss
associated with such assets over their useful lives. However, the special
allocation rules of Code Section 704(c), as applied by EQR, will not always
entirely rectify the Built-in Gain or Built-in Loss 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 ERP may cause EQR 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.
Sale of the Properties. Gain or loss recognized by ERP upon disposition of an
item of Contributed Property which has Built-in Gain or Built-in Loss,
respectively, remaining after prior adjustments for depreciation and other
items will be allocated to the Contributing Partners, as required under Code
Section 704(c). Any additional gain or loss with respect to the Contributed
Property will be allocated among all of the ERP Unitholders in the manner
provided under the ERP Partnership Agreement for allocations of profits and
losses, as described above. Thus, if an asset of ERP is sold after the Asset
Contribution, the partners who contributed or are deemed to have contributed
such asset to ERP will be allocated all of the remaining Built-in Gain or
Built-in Loss with respect to such asset under Code Section 704(c). Under the
ERP Partnership Agreement, to the extent the Regulations under Code Section
704(c) permit ERP to elect alternative methods to eliminate Built-in Gain or
Built-in Loss with respect to Contributed Property or any item thereof, EQR, as
general partner of ERP, will have the authority to elect the method to be used,
and such election will be binding on all partners. Pursuant to the Merger
Agreement, EQR has agreed to cause ERP to use the "traditional method" under
Code Section 704(c) with respect to the properties of or interests in EWRLP
contributed to ERP.
ERP DISTRIBUTIONS
Under Code Section 731, distributions of money (and marketable securities) by
ERP to a ERP Unitholder generally will not be taxable to such ERP Unitholder to
the extent such distributions do not exceed the ERP Unit holder's adjusted
basis in its ERP Units immediately before the distribution. Distributions in
excess of an ERP Unit holder's basis in his ERP Units (arising from either an
actual distribution of cash or a deemed distribution of cash resulting from a
shifting of partnership liabilities) will be considered gain recognized from
the sale or disposition of the partner's ERP Units.
DISPOSITIONS AND EXCHANGES/REDEMPTIONS OF ERP UNITS
Disposition of ERP Units. If an ERP Unit is sold or otherwise disposed of,
the determination of gain or loss will be based on the difference between the
amount realized and the adjusted tax basis for such ERP Unit. Upon the sale of
an ERP Unit, an ERP Unitholder's "amount realized" will be the sum of the cash
and fair market value of other property received, plus the portion of ERP's
liabilities allocated to the ERP Unit sold. Upon a gift of an ERP Unit, the
amount realized will be the portion of ERP's liabilities allocable to such ERP
Unit. To the extent that the amount realized exceeds the adjusted basis of the
ERP Unit disposed of, the ERP Unitholder will recognize gain. The tax liability
resulting from such gain could exceed the amount of cash received upon such
disposition.
Exchange/Redemption of ERP Units. Under the ERP Partnership Agreement, each
ERP Unit may be exchanged for one share of EQR Common or the cash equivalent.
Such right may be exercised by an ERP Unitholder at any time and from time to
time upon not less than ten (10) days notice to EQR. Upon receipt of such
request, EQR, as general partner of ERP, may, in its discretion, issue one
share of EQR Common for each ERP Unit redeemed or cause ERP to pay to such ERP
Unitholder the cash equivalent of the value of the ERP Units requested to be
exchanged. An exchange of ERP Units will constitute a sale of ERP Units by such
ERP Unitholder to EQR. Such sale will be fully taxable to the ERP Unitholder,
and such ERP Unitholder will be treated as realizing for tax purposes an amount
equal to the sum of the cash or the value of the EQR Common received in the
exchange plus the amount of any ERP liabilities allocable to the redeemed ERP
Units at the time of the exchange.
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TAX RETURNS AND OTHER TAX MATTERS AFFECTING ERP UNITHOLDERS
ERP must file with the IRS an annual information return for federal income
tax purposes. Within 90 days after the close of each ERP taxable year, ERP
intends to furnish to each ERP Unitholder a Schedule K-1 which sets forth the
allocable share of ERP's income, gains, losses, deductions and credits, if any,
as well as certain other information to be used in the ERP Unitholder's tax
return. The information return filed by ERP may be audited by the IRS.
Adjustments (if any) resulting from such an audit may result in adjustments to
the ERP Unitholder's tax return, and possibly may result in an audit of that
return, which would not necessarily be limited to ERP items.
The Code contains special procedures that specify the manner in which IRS
audit adjustments of partnership items are resolved. Partnerships generally are
treated as separate entities for purposes of federal tax audits, judicial
review of IRS adjustments and tax settlement proceedings. The tax treatment of
partnership items is determined at the partnership level in a unified
partnership proceeding rather than in separate proceedings with each partner.
The Code provides for one partner to be designated as the "Tax Matters Partner"
("TMP") for these purposes. The ERP Partnership Agreement appoints EQR as its
TMP. As the TMP, EQR has all the rights and obligations of the TMP under the
Code. The ERP Unitholders generally will be required to treat ERP items on
their federal income tax returns in a manner consistent with the treatment of
the items on the ERP information return. In general, that consistency
requirement will be waived if the ERP Unitholder files a statement with the IRS
identifying the inconsistency. Failure to satisfy the consistency requirement,
if not waived, will result in an adjustment to conform the treatment of the
item by the ERP Unitholder to the treatment on the ERP return. Even if the
consistency requirement is waived, adjustments to the ERP Unitholder's tax
liability with respect to partnership items may result from an audit of ERP's
or the ERP Unitholder's tax return. Intentional or negligent disregard of the
consistency requirement may subject an ERP Unitholder to substantial penalties.
LIMITATIONS ON DEDUCTIBILITY OF LOSSES
Passive Activity Rules. The passive activity rules of Code Section 469
generally provide that individuals, estates, trusts and certain closely held
corporations and personal service corporations can deduct losses from passive
activities (including rental activities, as well as trade or business
activities in which the taxpayer does not materially participate) only to the
extent of the taxpayer's income from passive activities. Most of ERP's income
or loss is likely to be treated as passive activity income or loss (although
ERP also may have a substantial amount of portfolio income from earnings on
reserves). However, if ERP or any Subsidiary Partnership was to be classified
as a publicly traded partnership under Code Section 469(k), any passive
activity losses arising from the publicly traded partnership that are allocable
to an ERP Unitholder could be used solely to offset passive activity gains or
income from ERP, and could not be offset with losses from other passive
activities. See "--Entity Classification."
Other Loss Limitations. An ERP Unitholder may not deduct his share of ERP
losses to the extent that such losses exceed the lesser of (1) the adjusted tax
basis of his ERP Units at the end of ERP's taxable year in which the loss
occurs, and (2) the amount for which the ERP Unitholder is considered "at risk"
at the end of that year under Code Section 465. In general, a partner will
initially be "at risk" to the extent of the cash investment in his respective
partnership interest (unless he borrowed an amount on a nonrecourse basis to
acquire such interest) plus such partner's share (as determined under Code
Section 752) of such partnership's "qualified nonrecourse financing" (within
the meaning of Code Section 465(b)(6)). Losses disallowed to an ERP Unitholder
as a result of these rules can be carried forward and may be allowable to the
extent that such partner's adjusted basis or "at risk" amount (whichever was
the limiting factor) is increased in a subsequent year. The "at risk" rules
apply to (a) an individual, (b) a shareholder of a corporation that is an S
corporation, and (c) a corporation if more than 50% of the value of stock of
such corporation is owned directly or indirectly by five or fewer individuals
during the last half of the taxable year.
STATE AND LOCAL TAXES
ERP will own properties and conduct business operations in a number of
states, and, thus, ERP and its partners may be subject to income tax,
withholding and tax reporting requirements in a number of jurisdictions. ERP
intends to provide its partners with sufficient and timely state and local
income tax information upon which they may rely in reporting and otherwise
complying with their state and local income tax obligations.
ALTERNATIVE MINIMUM TAX
The Code contains different sets of minimum tax rules applicable to corporate
and noncorporate taxpayers. The discussion below relates only to the
alternative minimum tax applicable to noncorporate taxpayers. CORPORATE
INVESTORS SHOULD CONSULT WITH THEIR TAX ADVISORS WITH RESPECT TO THE EFFECT OF
THE CORPORATE MINIMUM TAX PROVISIONS FOLLOWING CONSUMMATION OF THE ASSET
CONTRIBUTION.
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Noncorporate taxpayers are subject to an alternative minimum tax ("AMT") to
the extent the tentative minimum tax ("TMT") exceeds the regular income tax
otherwise payable. The highest rate of tax imposed on alternative minimum
taxable income ("AMTI") in computing TMT is 28%. AMTI consists of the
taxpayer's taxable income, as adjusted under Code Sections 56 and 58, plus his
items of tax preference, reduced by an exemption amount.
In computing AMTI, for all depreciable property placed in service after
December 31, 1986, an alternative cost recovery (i.e., depreciation) system is
substituted for the cost recovery system used in calculating the regular tax.
Cost recovery for most real property of the type to be owned by ERP (including
shopping center structures) is computed under the straight-line method over a
40-year life for purposes of computing AMTI rather than the 31.5-year life used
for most nonresidential real property under the regular tax system. (For
regular tax and AMT purposes, different recovery periods will apply to personal
property and parking lot improvements owned by ERP.)
The limitation on the deduction of passive activity losses applies to the
calculation of AMTI as well as the regular tax, although the amount of passive
activity deductions disallowed for AMTI purposes will be less than the amount
disallowed for regular tax purposes to the extent that the lower depreciation
rates used in computing AMTI depreciation produce smaller passive activity
losses.
ERP itself will not be subject to the alternative minimum tax, but each ERP
Unitholder will be required to take into account his share of ERP's tax
preference items and adjustments in order to compute AMTI. Since the impact of
this tax depends on each ERP unit-holder's particular situation, partners of
EWRLP and ERP are urged to consult their own tax advisors as to the
applicability of the alternative minimum tax following consummation of the
Asset Contribution.
TAX ASPECTS OF INVESTMENT IN EQR
Qualification of EQR as a REIT
General. EQR elected REIT status commencing with its taxable year ending
December 31, 1993. In the opinion of Rudnick & Wolfe, special counsel to EQR,
EQR was organized and has operated in conformity with the requirements for
qualification and taxation as a REIT under the Code, and its method of
operation has enabled it and will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Code. Rudnick &
Wolfe has opined that, subsequent to the Merger, EQR's proposed method of
operation described in this Consent Solicitation/Prospectus/ Information
Statement and as represented by EQR will enable it to meet the requirements for
qualification and taxation as a REIT.
EWR elected REIT status commencing with its taxable year ending December 31,
1994. In the opinion of Gibson, Dunn & Crutcher LLP which has acted as special
counsel to EWR, commencing with its taxable year ended December 31, 1994, EWR
was organized in conformity with the requirements for qualification and
taxation as a REIT under the Code, and its method of operation has enabled it
(and will enable it up to the Effective Time of the Merger) to continue to meet
the requirements for qualification and taxation as a REIT under the Code.
It must be emphasized that these opinions are based on various assumptions
relating to the organization and operation of various entities. In general,
Rudnick & Wolfe's opinion is based on various assumptions relating to the
organization and operation of various entities, including EQR, ERP, EQR
Properties Management LP, and EQR Properties Management LP II (collectively,
the "EQR Properties Management Partnerships"), Equity Residential Properties
Management, Inc. ("EQR Management Corp.") and Equity Residential Properties
Management, Inc. II ("EQR Management Corp. II") (collectively, the "EQR
Management Corps."), the limited partnerships and limited liability companies
that own the beneficial interest of certain properties encumbered by mortgage
financing (the "EQR Financing Partnerships") and various qualified REIT
subsidiaries wholly owned by EQR (each a "QRS Corporation") (collectively, the
EQR Properties Management Partnerships, the EQR Management Corps., the EQR
Financing Partnerships and the QRS Corporations may be referred to as the
"Subsidiary Entities"), and is conditioned upon certain representations made by
EQR and ERP as to factual matters relating to the organization, operation,
income, assets, distributions and share ownership of EQR and ERP. EQR's
qualification as a REIT depends on its having met and continuing to meet,
through actual operating results, distribution levels and diversity of share
ownership, the various qualifications tests imposed under the Code that are
discussed below, the results of which have not been and will not be reviewed by
Rudnick & Wolfe. Accordingly, no assurance can be given that the actual results
of EQR's operations for any particular taxable year have satisfied or will
satisfy such requirements.
Gibson, Dunn & Crutcher's opinion is based on various assumptions relating to
the organization and operation of various entities, including EWR, EWRLP, Evans
Withycombe Management, Inc. ("EW Management, Inc."), Evans Withycombe Finance,
Inc. ("EW Finance, Inc."), and Evans Withycombe Finance Partnership, L.P. ("EW
Finance LP"), and is conditioned upon the accuracy of certain representations
made by EWR and EWRLP as to factual matters relating to
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the organization, operation, income, assets, distributions and stock ownership
of EWR and EWRLP. EWR's qualification as a REIT depends on its having met and
continuing to meet, through actual operating results, distribution levels and
diversity of stock ownership, the various qualifications tests imposed under
the Code that are discussed below, the results of which have not been and will
not be reviewed by Gibson, Dunn & Crutcher LLP. Accordingly, no assurance can
be given that the actual results of EWR's operations for any particular taxable
year have satisfied or will satisfy such requirements.
An opinion of counsel is not binding on the IRS or the courts, and no
assurance can be given that the IRS will not challenge EQR's or EWR's
eligibility for taxation as a REIT. Further, the federal income tax treatment
described herein may be changed, perhaps retroactively, by legislative,
administrative or judicial action at any time.
In any year in which EQR qualifies as a REIT, generally it will not be
subject to federal income tax on that portion of its REIT taxable income or
capital gain which is distributed to shareholders. This treatment substantially
eliminates the "double taxation" that generally results from the use of
corporate investment vehicles. EQR may, however, be subject to tax at normal
corporate rates upon any taxable income or capital gain not distributed.
If EQR should fail to satisfy either the 75% or the 95% gross income test (as
discussed below), and nonetheless maintains its qualification as a REIT because
certain other requirements are met, it will be subject to a 100% tax on the
greater of the amount by which it fails the 75% or the 95% test, multiplied by
a fraction intended to reflect its profitability. EQR will also be subject to a
100% tax on net income derived from any "prohibited transaction," as described
below. In addition, if EQR should fail to distribute during each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95%
of its REIT capital gain net income for such year, and (iii) any undistributed
taxable income from prior years, EQR would be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed. EQR
may also be subject to the corporate "alternative minimum tax," as well as tax
in certain situations and on certain transactions not presently contemplated.
EQR will use the calendar year both for federal income tax purposes and for
financial reporting purposes.
In order to qualify as a REIT, EQR must meet, among others, the following
requirements:
Share Ownership Test. Shares of beneficial interest of EQR must be held by a
minimum of 100 persons for at least 335 days of a taxable year that is 12
months, or during a proportionate part of a taxable year of less than 12
months. In addition, no more than 50% in value of the shares of beneficial
interest of EQR may be owned, directly or indirectly and by applying certain
constructive ownership rules, by five or fewer individuals during the last half
of each taxable year. EQR and EWR believe that they have each satisfied both of
these tests, and EQR believes EQR will continue to do so. In order to comply
with the second of these tests, EQR has placed certain restrictions on the
transfer of the EQR Common and EQR Preferred that are intended to prevent
further concentration of share ownership.
Asset Tests. At the close of each quarter of EQR's taxable year, EQR must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of EQR's total assets must be represented by any combination of
interests in real property, interests in mortgages on real property, shares in
other REITs, cash, cash items and certain government securities. Second,
although the remaining 25% of EQR's assets generally may be invested without
restriction, securities in this class may not exceed either (i) 5% of the value
of EQR's total assets as to any one issuer, or (ii) 10% of the outstanding
voting securities of any one issuer. Where EQR invests in a partnership, it
will be deemed to own a proportionate share of the partnership's assets. EQR
believes that its investment in the properties of EWR through its interest in
EWRLP and ERP will constitute qualified assets for purposes of the 75% asset
test.
ERP will own 1% of the voting stock of the EW Management, Inc. ERP will also
own 100% of the non-voting stock of EW Management, Inc., the EQR Management
Corps. and Wellsford Real Properties, Inc. By virtue of its partnership
interest in ERP, EQR will be deemed to own its pro rata share of the assets of
ERP, including the stock of the EQR Management Corps., EW Management, Inc. and
Wellsford Real Properties, Inc., as described above. ERP has not and does not
intend to own more than 10% of the voting securities of any of the above
mentioned corporations.
In addition, based upon its analysis of the estimated value of the stock of
the EW Management, Inc., the EQR Management Corps. and Wellsford Real
Properties, Inc. owned by ERP relative to the estimated value of the other
assets owned by ERP, EQR believes that its pro rata share of the stock of, EW
Management, Inc., the EQR Management Corps. and Wellsford Real Properties,
Inc., held by ERP will not exceed 5% of the total value of EQR's assets. No
independent appraisals, however, have been obtained to support this conclusion.
This 5% limitation must be satisfied not only on the date that EQR first
acquires stock of EW Management, Inc., but also at the end of each quarter in
which EQR increases its interest in EW Management, Inc. or any other interest
in an issuer of securities (including as a result of increasing its interest in
ERP
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as the holders of ERP Units exercise their exchange rights). Although EQR
plans to take steps to ensure that it satisfies the 5% value test for any
quarter with respect to which retesting is to occur, there can be no assurance
that such steps will always be successful or will not require a reduction in
ERP's overall interest in EW Management, Inc., the EQR Management Corps. or
Wellsford Real Properties, Inc.
EQR's indirect interest in EW Finance LP will be held through EWRLP and EW
Finance, Inc., which is organized and operated as a "qualified REIT
subsidiary" ("QRS") within the meaning of the Code. Qualified REIT
subsidiaries are not treated as separate entities from their parent REIT.
Instead, all assets, liabilities and items of income, deduction and credit of
each QRS Corporation will be treated as assets, liabilities and items of EQR.
The QRS Corporation, therefore, will not be subject to Federal corporate
income taxation, although it may be subject to state or local taxation. In
addition, EQR's ownership of the voting stock of the QRS Corporation will not
violate the general restriction against ownership of more than 10% of the
voting securities of any issuer.
Gross Income Tests. There are three separate percentage tests relating to
the sources of EQR's gross income which must be satisfied for each taxable
year. For purposes of these tests, where EQR invests in a partnership, EQR
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 EQR as it has in the hands of the partnership.
1. The 75% Test. At least 75% of EQR's gross income for each taxable year
must be "qualifying income." Qualifying income generally includes (i) rents
from real property (except as modified below); (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 EQR's trade or business ("dealer
property"); (iv) 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 a mortgage collateralized by such property
("foreclosure property"); (vii) commitment fees received for agreeing to make
loans collateralized by mortgages on real property or to purchase or lease
real property; and (viii) certain qualified temporary investment income
attributable to the investment of new capital received by EQR in exchange for
its shares (including the Securities offered hereby) during the one-year
period following the receipt of such new capital.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% test (or the 95% gross income test described
below) if EQR, or an owner of 10% or more of EQR, directly or constructively
owns 10% or more of such 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 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. Finally, for rents received to qualify as rents from real
property, EQR generally must not operate or manage the property or furnish or
render services to tenants, other than through an "independent contractor"
from whom EQR derives no revenue. The "independent contractor" requirement,
however, does not apply to the extent that the services provided by EQR are
"usually or customarily rendered" in connection with the rental of space for
occupancy only, and are not otherwise considered "rendered to the occupant."
EQR, through its Management Partnerships, the EQR Management Corps. and EW
Management, Inc. will provide certain services with respect to the properties
of EQR and any newly acquired multifamily residential properties. EQR believes
that the services provided by the EQR Properties Management Partnerships, the
EQR Management Corps. and EW Management, Inc. are usually or customarily
rendered in connection with the rental of space for occupancy only, and
therefore the provision of such services has not caused, and will not in the
future cause the rents received with respect to the properties to fail to
qualify as rents from real property for purposes of the 75% and 95% gross
income tests.
2. The 95% Test. At least 95% of EQR'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 (including EQR's share of dividends
paid by the EQR Management Corps. and EW Management, Inc.) and interest on any
obligations not collateralized by an interest in real property and any
payments made on behalf of EQR by a financial institution pursuant to a rate
protection agreement will be included as qualifying income for purposes of the
95% gross income test, but not for purposes of the 75% test. For purposes of
determining whether EQR complies with the 75% and 95% income tests, qualifying
income does not include income from prohibited transactions. A "prohibited
transaction" is a sale of dealer property, excluding certain dealer property
held by EQR for at least four years and excluding foreclosure property.
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EQR's investment in its properties, through ERP, in major part will give rise
to rental income qualifying under the 75% and 95% gross income tests. Gains on
sales of the properties or of EQR's interest in ERP and EWRLP will generally
qualify under the 75% and 95% gross income tests. EQR believes that the income
on its other investments, including its indirect investment in the EQR
Management Corps. and EW Management, Inc., will not cause EQR to fail the 75%
or 95% gross income test for any year, and EQR anticipates that this will
continue to be the case.
Even if EQR fails to satisfy one or both of the 75% or 95% gross income 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) EQR's failure to comply was due
to reasonable cause and not to willful neglect; (ii) EQR reports the nature and
amount of each item of its income included in the 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. If these relief provisions apply, EQR,
however, will still be subject to a 100% tax based upon the greater of the
amount by which it fails either the 75% or 95% gross income test for that year,
less certain adjustments.
3. The 30% Test. EQR must derive 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. EQR does not anticipate that it will have
any substantial difficulty in complying with this test.
Annual Distribution Requirements. EQR, in order to qualify as a REIT, is
required to make dividend distributions (other than capital gain dividends) to
its shareholders each year in an amount at least equal to (A) the sum of (i)
95% of EQR's REIT taxable income (computed without regard to the dividends paid
deduction and EQR'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 EQR timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. To the extent that EQR 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.
EQR has made and intends to continue to make timely distributions sufficient
to satisfy the annual distribution requirements. In this regard, the
partnership agreements of ERP and EWRLP authorize EQR, as general partner, to
take such steps as may be necessary to cause ERP and EWRLP, respectively, to
distribute to its partners an amount sufficient to permit EQR to meet these
distribution requirements. It is possible that EQR may not have sufficient cash
or other liquid assets to meet the 95% dividend requirement, due to the payment
of principal on debt or 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 EQR's REIT taxable
income on the other hand. To avoid any problem with the 95% distribution
requirement, EQR will closely monitor the relationship between its REIT taxable
income and cash flow and, if necessary, will borrow funds (or cause ERP or
other affiliates to borrow funds) in order to satisfy the distribution
requirement.
Failure to Qualify. If EQR fails to qualify for taxation as a REIT in any
taxable year and the relief provisions do not apply, EQR will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which EQR
fails to qualify will not be required and, if made, will not be deductible by
EQR. In such event, to the extent of current and accumulated earnings and
profits, all distributions to shareholders 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, EQR also will be ineligible for qualification as
a REIT for the four taxable years following the year during which qualification
was lost.
Taxation of Taxable U.S. Shareholders
As long as EQR qualifies as a REIT, distributions made to EQR's taxable "U.S.
Shareholders" (as defined in the following paragraph), with respect to their
shares out of current or accumulated earnings and profits (and not designated
as capital gain dividends) will be taken into account by them as ordinary
income and will not be eligible for the dividends received deduction for
shareholders that are corporations. For purposes of determining whether
distributions on the Securities are out of current or accumulated earnings and
profits, the earnings and profits of EQR will be allocated first to the holders
of EQR Preferred and second to the holders of EQR Common. There can be no
assurance, however, that EQR will have sufficient earnings and profits to cover
distributions on the EQR Preferred. Dividends that are designated as capital
gain dividends will be taxed as capital gains without regard to the period for
which the shareholder has held its securities. However, corporate shareholders
may be required to treat up to 20% of certain capital gain dividends as
ordinary income.
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To the extent that EQR makes distributions in excess of current and accumulated
earnings and profits, these distributions are treated first as a tax-free
return of capital to the shareholder, reducing the tax basis of a shareholder's
securities by the amount of such distribution (but not below zero), with
distributions in excess of the shareholder's tax basis taxable as capital gains
(if the Securities are held as a capital asset). In addition, any dividend
declared by EQR in October, November or December of any year and payable to a
shareholder of record on a specific date in any such month will be treated as
both paid by EQR and received by the shareholder on December 31 of such year,
provided that the dividend is actually paid by EQR during January of the
following calendar year. Shareholders may not include in their individual
income tax returns any net operating losses or capital losses of EQR.
As used herein, the term "U.S. Shareholder" means a holder of EQR Common or
EQR Preferred who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (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, if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. Pursuant to the Taxpayer Relief Act of 1997 (the "Act"), for taxable
years of EQR that begin on or after January 1, 1998, EQR may elect to retain
and pay income tax on its net long-term capital gain attributable to such
taxable year. If EQR makes this election, its U.S. Shareholders will be
required to include in their income as long-term capital gain their
proportionate share of such amount so designated by EQR. A U.S. Shareholder
will be treated as having paid his or her share of the tax paid by EQR in
respect of such amount so designated by EQR, for which such U.S. Shareholder
will be entitled to a credit or refund. Additionally, each U.S. Shareholder's
adjusted basis in EQR Common will be increased by the excess of the amount so
includible in income over the tax deemed paid on such amount. EQR must pay tax
on its designated long-term capital gain within 30 days of the close of any
taxable year in which it designates long-term capital gain pursuant to this
rule, and it must mail a written notice of its designation to its shareholders
within 60 days of the close of the taxable year.
Distributions made by EQR and gain arising from the sale or exchange by a
U.S. Shareholder of EQR Common will not be treated as passive activity income,
and, as a result, U.S. Shareholders will not be able to apply any "passive
losses" against such income or gain. Distributions made by EQR (to the extent
that they do not constitute a return of capital) generally will be treated as
investment income for purposes of computing the investment income limitation.
Gain arising from the sale or other disposition of EQR Common (and
distributions treated as such), however, will not be treated as investment
income unless a U.S. Shareholder so elects, in which case such capital gains
will be taxed at ordinary income rates.
Upon any sale or other disposition of shares of EQR Common, a U.S.
Shareholder will recognize gain or loss for Federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and
(ii) the holder's adjusted basis in such shares of EQR Common for tax purposes.
Such gain or loss will be capital gain or loss if the shares have been held by
the U.S. Shareholder as a capital asset, and will be mid-term or long-term gain
or loss if such shares have been held for more than one year or eighteen
months, respectively. In general, any loss recognized by a U.S. Shareholder
upon the sale or other disposition of shares of EQR Common 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. Shareholders from EQR which were required to be treated
as long-term capital gains.
As a result of other changes made by the Act to the Code, capital gains of
non-corporate taxpayers derived in respect of capital assets held for at least
one year are eligible for reduced rates of taxation. Although the Act did not
make conforming changes to other provisions of the Code, the Act authorizes the
issuance of regulations coordinating these capital gains provisions with other
rules involving the treatment of sales and exchanges by "pass-through"
entities, such as REITs and partnerships, and of sales and exchanges of
interests therein. Due to the complexity of these provisions and in the absence
of the coordinating regulations, each prospective investor should consult his
or her own tax advisor concerning the tax consequences to him or her of the
changes made by the Act.
Backup Withholding
EQR reports to its U.S. Shareholders and the IRS the amount of dividends paid
during each calendar year, and the amount of tax withheld, if any. Under the
backup withholding rules, a shareholder may be subject to backup withholding at
the rate of 31% with respect to dividends paid unless such shareholder (a) is a
corporation or comes within one of the 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
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rules. A U.S. shareholder that does not provide EQR with its correct taxpayer
identification number may also be subject to penalties imposed by the IRS.
Backup withholding is not an additional tax. Any amount paid as backup
withholding will be creditable against the shareholder's income tax liability.
In addition, EQR may be required to withhold a portion of capital gain
distributions to any shareholders who fail to certify their non-foreign status
to EQR. See "--Taxation of Shareholders--Taxation of Foreign Shareholders".
Taxation of Tax-Exempt Shareholders
Most tax-exempt employees' pension trusts are not subject to Federal income
tax except to the extent of their receipt of "unrelated business taxable
income" as defined in Section 512(a) of the Code ("UBTI"). Distributions by EQR
to a shareholder that is a tax-exempt entity will not constitute UBTI, provided
that the tax-exempt entity has not financed the acquisition of its securities
with "acquisition indebtedness" within the meaning of the Code and the
securities are not otherwise used in an unrelated trade or business of the tax-
exempt entity. In addition, for taxable years beginning on or after January 1,
1994, certain pension trusts that own more than 10% of a "pension-held REIT"
must report a portion of the distribution that they receive from such a REIT as
UBTI. EQR has not been and does not expect to be treated as a pension-held REIT
for purposes of this rule.
Taxation of Foreign Shareholders
The following is a discussion of certain anticipated U.S. Federal income tax
consequences of the ownership and disposition of securities applicable to Non-
U.S. Holders of such securities. A "Non-U.S. Holder" is any person other than
(i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in the United States or under the laws of the
United States or of any state thereof, or (iii) an estate or trust whose income
is includible in gross income for U.S. Federal income tax purposes regardless
of its source. The discussion is based on current law and is for general
information only.
1. Ordinary Dividends. The portion of dividends received by Non-U.S. Holders
payable out of EQR's earnings and profits which are not attributable to capital
gains of EQR or of ERP and which are not effectively connected with a U.S.
trade or business of the Non-U.S. Holder will be subject to U.S. withholding
tax at the rate of 30% (unless reduced by an applicable treaty). In general,
Non-U.S. Holders will not be considered engaged in a U.S. trade or business
solely as a result of their ownership of securities. In cases where the
dividend income from a Non-U.S. Holder's investment in securities is (or is
treated as) effectively connected with the Non-U.S. Holder's conduct of a U.S.
trade or business, the Non-U.S. Holder generally will be subject to U.S. tax at
graduated rates, in the same manner as U.S. shareholders are taxed with respect
to such dividends (and may also be subject to the 30% branch profits tax in the
case of a Non-U.S. Holder that is a foreign corporation).
2. Non-Dividend Distributions. Distributions by EQR which are not dividends
out of the earnings and profits of EQR will not be subject to U.S. income or
withholding tax. If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of EQR's current and
accumulated earnings and profits, the entire distribution will be subject to
withholding at the rate applicable to dividends. However, the Non-U.S. Holder
may seek a refund of such amounts from the IRS if it is subsequently determined
that such distribution was, in fact, in excess of current and accumulated
earnings and profits of EQR.
3. Capital Gain Dividends. Under the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"), a distribution made by EQR to a Non-U.S. Holder, to the
extent attributable to gains from dispositions of United States Real Property
Interests ("USRPIs") such as the properties beneficially owned by EQR will be
considered effectively connected with a U.S. trade or business of the Non-U.S.
Holder and subject to U.S. income tax at the rate applicable to U.S.
individuals or corporations, without regard to whether such distribution is
designated as a capital gain dividend. In addition, EQR will be required to
withhold tax equal to 35% of the amount of dividends to the extent such
dividends constitute gains from any USRPI. Distributions subject to FIRPTA may
also be subject to a 30% branch profits tax in the hands of a foreign corporate
shareholder that is not entitled to treaty exemption.
4. Dispositions of Securities. Unless securities constitute a USRPI, a sale
of securities by a Non-U.S. Holder generally will not be subject to U.S.
taxation under FIRPTA. The securities will not constitute a USRPI if EQR is a
"domestically controlled REIT." A domestically controlled REIT is a REIT in
which, at all times during a specified testing period, less than 50% in value
of its securities is held directly or indirectly by Non-U.S. Holders. EQR
believes that it has been and anticipates that it will continue to be a
domestically controlled REIT, and therefore that the sale of securities will
not be subject to taxation under FIRPTA. Because the securities will be
publicly traded, however, no assurance can be given EQR
71
<PAGE>
will continue to be a domestically controlled REIT. If EQR does not constitute
a domestically controlled REIT, a Non-U.S. Holder's sale of securities
generally will still not be subject to tax under FIRPTA as a sale of a USRPI
provided that (i) the securities are "regularly traded" (as defined by
applicable Regulations) on an established securities market and (ii) the
selling Non-U.S. Holder held 5% or less of EQR's outstanding securities at all
times during a specified testing period. If gain on the sale of securities were
subject to taxation under FIRPTA, the Non-U.S. Holder would be subject to the
same treatment as a U.S. Shareholder 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 securities could be
required to withhold 10% of the purchase price and remit such amount to the
IRS. Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder's
investment in securities is effectively connected with a U.S. trade or business
conducted by such Non-U.S. Holder, the Non-U.S. Holder will be subject to the
same treatment as a U.S. Shareholder with respect to such gain, or (ii) if the
Non-U.S. Holder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and has a "tax home" in the
United States, the nonresident alien individual will be subject to a 30% tax on
the individual's capital gain.
Tax Legislation
The Taxpayer Relief Act of 1997 (H.R. 2014), signed by President Clinton on
August 5, 1997, will modify certain REIT-related Code provisions for tax years
beginning on or after January 1, 1998.
Some of the potentially significant changes contained in the legislation
relating to REITs include: (i) the rule disqualifying a REIT for any year in
which it fails to comply with certain regulations requiring the REIT to monitor
its stock ownership is replaced with an intermediate financial penalty; (ii)
the rule disqualifying a REIT in any year that it is "closely-held" will not
apply if during such year the REIT complied with certain regulations which
require the REIT to monitor its stock ownership, and the REIT did not know or
have reason to know that it was closely-held; (iii) a REIT is permitted to
render a de minimus amount of impermissible services to tenants in connection
with the management of property and still treat amounts received with respect
to such property (other than certain amounts relating to such services) as
qualified rent; (iv) the 30% gross income test is repealed; (v) any corporation
wholly-owned by a REIT is permitted to be treated as a qualified REIT
subsidiary regardless of whether such subsidiary has always been owned by the
REIT; and (vi) certain other Code provisions relating to REIT's are amended.
Some or all of the provisions could affect both EQR's operations and its
ability to maintain its REIT status for its taxable years beginning in 1998.
Other Tax Consequences
EW Management, Inc. and the EQR Management Corps. A portion of the cash to be
used by ERP to fund distributions to its partners, including EQR, is expected
to come from EW Management, Inc. and the EQR Management Corps. through payments
of dividends on the stock of the EW Management, Inc. and the EQR Management
Corps. held by ERP. The EW Management, Inc. and the EQR Management Corps. will
pay Federal and state income tax at the full applicable corporate rates on
their taxable income. To the extent that such companies are required to pay
Federal, state or local taxes, the cash available for distribution by EQR,
among its shareholders will be reduced accordingly.
State and Local Taxes. EQR and its shareholders may be subject to state or
local taxation in various jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of EQR and its
shareholders may not conform to the Federal income tax consequences discussed
above. Consequently, prospective shareholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
EQR Common or EQR Preferred.
72
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following tables set forth the selected unaudited pro forma combined
financial data for ERP, giving effect to the Merger as if it had occurred on
the dates indicated herein, after giving effect to the pro forma adjustments
described in the notes to the unaudited pro forma financial statements
included elsewhere in the Consent Solicitation/Prospectus/Information
Statement.
The selected unaudited pro forma combined operating data are presented as if
the Merger had been consummated at the beginning of the period presented.
The selected unaudited pro forma combined balance sheet is presented as if
the Merger had occurred on September 30, 1997. The Merger has been accounted
for under the purchase method of accounting in accordance with Accounting
Principles Board Opinion No. 16. In the opinion of management, all significant
adjustments necessary to reflect the effects of the Merger have been made.
The selected pro forma financial information should be read in conjunction
with, and is qualified in its entirety by, the historical financial statements
and notes thereto of ERP incorporated by reference into the Consent
Solicitation/Prospectus/ Information Statement and the historical financial
statements and notes thereto of EWRLP and the ERP unaudited pro forma
financial statements and notes thereto included elsewhere in the Consent
Solicitation/Prospectus/Information Statement.
The selected unaudited pro forma operating and balance sheet data are
presented for comparative purposes only and are not necessarily indicative of
what the actual combined results of ERP and EWRLP would have been for the
period and dates presented. Nor does such data purport to represent the
results of future periods.
73
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
OPERATING DATA:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
---------------------- -----------------
(AMOUNTS IN THOUSANDS
EXCEPT PER UNIT DATA)
<S> <C> <C>
REVENUES
Rental Income......................... $ 753,594 $ 966,942
Fee and asset management.............. 4,975 7,906
Interest income--investment in
mortgage notes....................... 15,022 12,819
Interest and other income............. 13,508 14,345
---------- ----------
Total revenues.................... 787,099 1,002,012
---------- ----------
EXPENSES
Property and maintenance.............. 194,532 271,533
Real estate taxes and insurance....... 75,514 94,670
Property management................... 26,467 31,539
Fee and asset management.............. 2,523 3,837
Depreciation.......................... 170,724 218,658
Interest:
Expense incurred.................... 147,365 179,870
Amortization of deferred financing
costs.............................. 1,859 4,308
General and administrative............ 12,279 11,363
---------- ----------
Total expenses.................... 631,263 815,778
---------- ----------
Income before gain on disposition of
properties, (loss) on joint venture
communities and extraordinary items.. 155,836 186,234
Gain on disposition of properties... 11,454 22,336
(Loss) on joint venture communities. (19) (58)
---------- ----------
Income before extraordinary item...... 167,271 208,512
---------- ----------
Extraordinary item:
(Loss) on early extinguishment of
debt............................... (1,500) --
Write-off of unamortized costs...... -- (3,512)
---------- ----------
Net income............................ $ 165,771 $ 205,000
========== ==========
ALLOCATION OF NET INCOME:
Redeemable Preference Interests....... -- 263
9 3/8% Series A Cumulative Redeemable
Preference Units..................... 10,758 14,345
9 1/8% Series B Cumulative Redeemable
Preference Units..................... 8,555 11,406
9 1/8% Series C Cumulative Redeemable
Preference Units..................... 7,870 10,494
8.60% Series D Cumulative Redeemable
Preference Units..................... 11,288 15,050
Series E Cumulative Convertible
Preference Units..................... 4,162 5,549
9.65% Series F Cumulative Redeemable
Preference Units..................... 5,250 6,999
7 1/4% Series G Convertible Cumulative
Preference Units..................... 17,195 22,928
General Partner....................... 84,281 97,934
Limited Partners (Minority interest).. 16,412 20,032
---------- ----------
$ 100,693 $ 117,966
========== ==========
Net income per weighted average OP
Unit outstanding..................... $ 1.03 $ 1.21
========== ==========
Weighted average OP Units outstanding. 97,418 97,418
========== ==========
<CAPTION>
PRO FORMA
SEPTEMBER 30, 1997
----------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
(at end of period)
Real Estate, after accumulated
depreciation......................... $6,402,500
==========
Total assets.......................... $6,764,224
==========
Total debt............................ $2,611,825
==========
Total partners' capital............... $2,883,170
==========
</TABLE>
74
<PAGE>
COMPARATIVE SHARE PRICES
There is no market for either ERP Units or EWRLP Units, and such units are
subject to restrictions on transfer. However, ERP Units and EWRLP Units are
redeemable for shares of EQR Common and EWR Common, respectively. The
following tables set forth certain information regarding the high and low
prices, as well as the distributions declared, on EQR Common and EWR Common.
COMPARATIVE PER SHARE DATA
The following summary presents selected comparative unaudited per share
information for EQR on an historical basis adjusted for additional properties
acquired in 1997 and EQR and EWR on a pro forma combined basis assuming the
combination had been effective throughout the periods presented. EWR pro forma
equivalent per share amounts are presented with respect to pro forma
information. Such per share amounts allow comparison of historical
information, as adjusted, with respect to the value of one share of EWR Common
to the corresponding information with respect to the projected value of one
share of EQR Common as a result of the Merger by multiplying the pro forma
amounts by the Exchange Ratio of .50 to 1.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Net Income Per Common
Share
EQR................... $ 1.28 $ 1.70
EWR................... .88 .84
EQR pro forma combined
(A).................... 1.12 1.48
EWR pro forma
equivalent (B)......... .56 .74
Cash Distributions
Declared Per Common
Share
EQR................... $ 1.88 $ 2.40
EWR................... 1.19 1.58
EQR pro forma combined
(A).................... 1.88 2.40
EWR pro forma
equivalent (B)......... .94 1.20
Shareholders' Equity Per
Common Share
EQR................... $39.61 $28.52
EWR................... 12.77 12.46
EQR pro forma combined
(A).................... 43.16 N/A
EWR pro forma
equivalent (B)......... 21.58 N/A
</TABLE>
- -------
(A) The pro forma combined Net Income Per Common Share and Shareholders'
Equity Per Common Share data for EQR has been prepared assuming that in
the Merger each share of EWR Common is converted into .50 of a share of
EQR Common resulting in total weighted average outstanding shares of EQR
Common of 87,938,000 for the year ended December 31, 1996 and
for the nine months ended September 30, 1997.
(B) The EWR pro forma equivalent is determined by multiplying the Exchange
Ratio (.50) by the EQR pro forma combined per share amounts so that the
per share amounts are equated to the comparative values for each share of
EWR Common.
EQR. The EQR Common has been traded on the NYSE under the symbol "EQR" since
August 11, 1993. The following table sets forth the quarterly high and low
sales prices per share of EQR Common reported on the NYSE, as well as the
quarterly distributions declared per ERP Unit, from January 1, 1995 through
November 12, 1997.
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTIONS
--------- ------- -------------
<S> <C> <C> <C>
1995
First Quarter.......................... $29 1/8 $25 5/8 $.53
Second Quarter......................... 29 3/4 27 7/8 .53
Third Quarter.......................... 31 3/4 27 3/4 .53
Fourth Quarter......................... 31 7/8 28 .59
1996
First Quarter.......................... 33 3/4 28 1/4 .59
Second Quarter......................... 33 1/2 30 7/8 .59
Third Quarter.......................... 36 1/8 32 7/8 .59
Fourth Quarter......................... 43 3/8 35 5/8 .625
1997
First Quarter.......................... 48 7/8 39 3/4 .625
Second Quarter......................... 47 1/2 41 1/4 .625
Third Quarter.......................... 54 9/16 47 1/8 .625
Fourth Quarter (through November 12,
1997)................................. 54 13/16 49 5/8 --
</TABLE>
75
<PAGE>
On November 12, 1997, the last reported sale price of a share of EQR Common
on the NYSE was $49 5/8 share. On August 27, 1997, the last full trading day
prior to the public announcement of the Transactions, the last reported sale
price of a share of EQR Common on the NYSE was $50 3/8. As of November 12,
1997, EQR's transfer agent reported 1,051 record holders of EQR Common and, as
of July, 1997, certain depository entities held shares of EQR Common on behalf
of approximately 24,000 beneficial owners at such date.
EWR. The EWR Common has been traded on the NYSE under the symbol "EWR" since
August 11, 1994. The following table sets forth the quarterly high and low
sales prices per share of EWR Common reported on the NYSE, as well as the
quarterly distributions declared per EWRLP Unit from January 1, 1995 through
September 12, 1997.
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTIONS
------- ------- -------------
<S> <C> <C> <C>
1995
First Quarter............................ $20 7/8 $19 1/2 $.37
Second Quarter........................... 20 7/8 18 3/8 .37
Third Quarter............................ 20 3/8 18 1/2 .38
Fourth Quarter........................... 21 5/8 18 7/8 .38
1996
First Quarter............................ 23 1/4 20 3/4 .39
Second Quarter........................... 23 1/4 20 1/4 .39
Third Quarter............................ 21 7/8 19 3/4 .40
Fourth Quarter........................... 22 1/4 20 1/8 .40
1997
First Quarter............................ 20 1/4 20 3/8 .405
Second Quarter........................... 21 1/8 19 1/2 .405
Third Quarter............................ 27 20 1/2 .38 *
Fourth Quarter (through October 30,
1997)................................... 27 3/8 24 1/4 --
</TABLE>
- -------
* In connection with the Transactions, EWRLP reduced its distribution for
the third quarter of 1997 to $0.38 per unit and is required to limit its
dividend per unit for the fourth quarter of 1997 and thereafter to 50% of
the distribution per ERP unit declared for the same quarter.
On November 12, 1997, the last reported sale price of a share of EWR Common
on the NYSE was $24 11/16 share. On August 27, 1997, the last full trading day
prior to the public announcement of the Transactions, the last reported sale
price of a share of EWR Common on the NYSE was $22 1/16. As of September 15,
1997, EWR's transfer agent reported 276 record holders of EWR Common and, as
of September 15, 1997, The Depository Trust Company held shares of EWR Common
on behalf of approximately 9,100 beneficial owners at such date.
BECAUSE THE EXCHANGE RATIO IS FIXED AND THE MARKET PRICE OF EQR COMMON IS
SUBJECT TO FLUCTUATION, THE MARKET VALUE OF THE EQR COMMON TO WHICH HOLDERS OF
ERP UNITS ARE ENTITLED UPON REDEMPTION OF SUCH ERP UNITS MAY INCREASE OR
DECREASE PRIOR TO AND FOLLOWING THE TRANSACTIONS. UNITHOLDERS ARE URGED TO
OBTAIN CURRENT MARKET QUOTATIONS FOR EQR COMMON AND EWR COMMON.
76
<PAGE>
POLICIES OF EQR WITH RESPECT TO CERTAIN ACTIVITIES
Upon effectiveness of the Merger, management and control of EWRLP will vest
in EQR and ERP, as co-general partners of EWRLP. The following section sets
forth the policies expected to be implemented by EQR upon the effectiveness of
the Transactions. These policies may be amended or revised from time to time at
the discretion of the EQR Board of Trustees without a vote of either the ERP
Unitholders or the shareholders of EQR.
BUSINESS OBJECTIVES AND OPERATING STRATEGIES
EQR will seek to maximize both current income and long-term growth in income.
EQR will focus on acquiring multifamily properties that have strong cash flow
potential with the intent to hold such properties for long-term investment and
capital appreciation.
EQR's primary business objectives are to increase distributions on a per
share of EQR Common basis, to increase the value of its properties and to
increase shareholders' value.
EQR's strategies for accomplishing these objectives will be:
. maintaining and increasing property occupancy while increasing rental
rates;
. controlling expenses, providing regular preventive maintenance, making
periodic renovations and enhancing amenities;
. maintaining a Debt to Total Market Capitalization Ratio of less than 50%;
. pursuing acquisitions that: (i) are available at prices below estimated
replacement costs; (ii) have potential for rental rate and/or occupancy
increases; (iii) have attractive locations in their respective markets;
and (iv) provide anticipated total returns that will increase EQR's
distributions per share of EQR Common and EQR's overall market value; and
. expanding EQR's relationships with third-party developers who will build
multifamily properties for EQR to purchase upon completion.
EQR will be committed to tenant satisfaction by striving to anticipate
industry trends and implementing strategies and policies consistent with
providing quality tenant services. In addition, EQR will continuously survey
rental rates of competing properties and conduct satisfaction surveys of
residents to determine the factors they consider most important in choosing a
particular apartment unit.
ACQUISITION STRATEGIES
EQR anticipates that future property acquisitions will be located in the
continental United States. Management will use market information to evaluate
acquisition opportunities. EQR's market data base will allow it to review the
primary economic indicators of the markets where EQR currently manages
properties and where it expects to expand its operations. Acquisitions may be
financed from various sources of capital, which may include undistributed funds
from operations, issuance of additional equity securities, sales of properties
and collateralized and uncollateralized borrowings. In addition, EQR may
acquire additional multifamily properties in transactions that include the
issuance of ERP Units as consideration for the acquired properties. Such
transactions may, in certain circumstances, partially defer the sellers' tax
consequences.
When evaluating potential acquisitions, EQR will consider: (i) the geographic
area and type of community; (ii) the location, construction quality, condition
and design of the property; (iii) the current and projected cash flow of the
property and the ability to increase cash flow (iv) the potential for capital
appreciation of the property; (v) the terms of resident leases, including the
potential for rent increases; (vi) the potential for economic growth and the
tax and regulatory environment of the community in which the property is
located; (vii) the occupancy and demand by residents for properties of a
similar type in the vicinity (the overall market and submarket); (viii) the
prospects for liquidity through sale, financing or refinancing of the property;
and (ix) competition from existing multifamily properties and the potential for
the construction of new multifamily properties in the area. EQR expects to
purchase multifamily properties with physical and market characteristics
similar to the properties.
DISPOSITION STRATEGIES
Management will use market information to evaluate dispositions. EQR intends
to dispose of its properties in cities or markets where the level of new
construction is increasing or the economy is expected to decline substantially.
EQR will also dispose of properties in markets where it does not intend to
establish long-term concentrations. EQR will reinvest the proceeds received
from property dispositions to fund property acquisitions. In addition, when
feasible EQR will structure these transactions as tax deferred exchanges.
77
<PAGE>
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate. EQR's investment
objectives will be to increase cash flow and the value of its properties, and
to acquire established income-producing multifamily properties with cash flow
growth potential. Additionally, where prudent and possible, EQR will seek to
upgrade its existing properties and any newly acquired multifamily properties.
EQR's business is focused on multifamily properties, although such properties
may include retail and recreational facilities. EQR's policy will be to acquire
assets primarily for current income generation and long-term value
appreciation; however, where appropriate, EQR will sell certain of its
properties.
EQR expects to pursue its investment objectives through the direct and
indirect ownership of properties and the ownership of interests in other
entities. EQR will focus on properties in those markets where EQR currently has
operations and in new markets targeted by management. Future investments,
including the activities described below, will not be limited to any geographic
area or to a specified percentage of EQR's assets. EQR also may participate
with other entities in property ownership through joint ventures or other types
of co-ownership. Equity investments may be subject to existing mortgage
financing and other indebtedness or such financing or indebtedness may be
incurred in connection with acquiring investments. Any such financing or
indebtedness will have priority over EQR's equity interest in such property.
Investments in Real Estate Mortgages. While EQR will emphasize equity real
estate investments in multifamily properties, it may, in its discretion, invest
in mortgages and other interests related to multifamily properties. EQR does
not intend to invest to a significant extent in mortgages or deeds of trust,
but may acquire mortgages as a strategy for acquiring a property, subject to
the investment restrictions applicable to REITs. The mortgages in which EQR may
invest may be either first mortgages or junior mortgages, and may or may not be
insured by a governmental agency. EQR may also invest in mortgage-related
securities. Furthermore, EQR may seek to issue securities representing interest
in such mortgage-related securities as a method of raising additional funds.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. Subject to the gross income and asset tests for
REIT qualification, EQR also may invest in securities of entities engaged in
real estate activities or securities of other issuers, including for the
purpose of exercising control over such entities. EQR may acquire all or
substantially all of the securities or assets of other REITs or similar
entities where such investments would be consistent with EQR's investment
policies. In any event, EQR does not intend that its investments in securities
will require it to register as an "investment company" under the Investment
Company Act of 1940, and EQR would intend to divest securities before any such
registration would be required.
FINANCING POLICIES
EQR intends to maintain a Debt to Total Market Capitalization Ratio of 50% or
less. EQR, however, may from time to time re-evaluate this policy and decrease
or increase such ratio in light of then current economic conditions, relative
costs to EQR of debt and equity capital, market values of the properties,
growth and acquisition opportunities and other factors. There is no limit on
the EQR's Debt to Total Market Capitalization Ratio imposed by EQR's
Declaration of Trust or Bylaws. To the extent that the Board of Trustees of EQR
determines to obtain additional capital, EQR may issue debt or equity
securities, or cause ERP to issue additional ERP Units, or retain earnings
(subject to provisions in the Code requiring distributions of income to
maintain REIT status), or a combination of these methods. As long as ERP is in
existence, the proceeds of all equity capital raised by EQR will be contributed
to ERP in exchange for additional interests in ERP, which will dilute the
ownership interest of holders of ERP Units. It is EQR's policy that it shall
not incur indebtedness other than short-term trade, employee compensation,
dividends payable or similar indebtedness that will be paid in the ordinary
course of business, and that indebtedness shall instead be incurred by the ERP
to the extent necessary to fund the business activities conducted by the ERP.
EQR owns several properties that are subject to restrictive covenants or deed
restrictions relating to current or previous tax-exempt bond financings and
owns the bonds collateralized by several additional properties. EQR has
retained an independent outside consultant to monitor compliance with the
restrictive covenants and deed restrictions that affect these properties. The
bond compliance requirements may have the effect of limiting EQR's income from
these properties if EQR is required to lower its rental rates to attract low or
moderate income tenants, or eligible qualified tenants.
To the extent that the EQR Board of Trustees determines to obtain debt
financing EQR intends to do so generally through mortgages on its properties
and through lines of credit; however, EQR may also issue additional debt
securities in the future. Such indebtedness may be recourse, non-recourse or
cross-collateralized and may contain cross-default provisions. EQR will not
have a policy limiting the number or amount of mortgages that may be placed on
any particular property, but mortgage financing instruments usually limit
additional indebtedness on such properties. In the future, EQR may seek to
extend, expand, reduce or renew its lines of credit, or obtain new credit
facilities or lines of credit, subject to its general policy on debt
capitalization, for the purpose of making acquisitions or capital improvements
or providing working capital to EQR or meeting the taxable income distribution
requirements for REITs under the Code if EQR has taxable income without receipt
of cash sufficient to enable EQR to meet such distribution requirements.
78
<PAGE>
LENDING POLICIES
Although it is not presently contemplated, EQR may consider offering
purchase money financing in connection with the sale of multifamily properties
where the provision of such financing will increase the value received by EQR
for the property sold.
DEVELOPMENT POLICIES
EQR intends to expand its relationships with third-party developers who will
build multifamily properties for EQR to purchase upon completion through the
utilization of the skills and experience in the area of development project
supervision of executives joining EQR.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
Although it is not presently contemplated, the EQR may make investments
other than as previously described. All investments will be related to the
multifamily residential business. EQR will have authority to offer EQR Common
or other equity or debt securities in exchange for property or other REITs and
to repurchase or otherwise reacquire EQR Common or any other securities and
may engage in such activities in the future. Similarly, EQR may offer
additional ERP Units or other equity interests in ERP that are exchangeable
into shares of EQR Common in exchange for property. EQR may also make loans to
joint ventures in which it may participate in the future. EQR will not engage
in trading, underwriting or the agency distribution or sale of securities of
other issuers. At all times, EQR intends to make investments in such a manner
as to be consistent with the requirements of the Code to qualify as a REIT
unless, because of circumstances or changes in the Code (or the regulations
promulgated thereunder), the EQR Board of Trustees determines that it is no
longer in the best interests of EQR to continue to have EQR qualify as a REIT.
EQR's policies with respect to such activities may be reviewed and modified
from time to time by EQR's trustees without notice to or the vote of the
shareholders.
MANAGEMENT AND OPERATION OF EQR AFTER THE MERGER
Upon the consummation of the Transactions the executive officers and
trustees of EQR shall continue to serve for the balance of their unexpired
terms or their earlier death, resignation or removal. In addition, Stephen O.
Evans shall become a trustee on the EQR Board of Trustees for a term expiring
at the annual meeting of shareholders of EQR held in the year 2000 and shall
be appointed as Executive Vice President-Strategic Investments and Richard G.
Berry shall be appointed as Executive Vice President-Development.
Stephen O. Evans, age 52 as of September 11, 1997, served as the Chairman of
the Board and Chief Executive Officer of EWR since its formation in May 1994.
Mr. Evans founded the predecessor of EWR in 1977 and served as Chairman of the
Board and Chief Executive Officer. From 1973 to 1977, Mr. Evans was Investment
Vice President of W.R. Schulz & Associates, at that time Arizona's largest
apartment development company. He earned his Bachelor of Science in Business
Administration and Masters of Business Administration degrees from Arizona
State University. He also served as an officer in the United States Air Force
for four years. Mr. Evans' affiliations include National Multi-Housing
Council; National Association for Real Estate Investment Trusts ("NAREIT");
Lambda Alpha, a National Land Economic Fraternity; and the Urban Land
Institute.
Richard G. Berry, age 53 as of September 11, 1997, served as a director on
the Board of Directors of EWR since EWR's formation in May 1994 and was
appointed President and Chief Operating Officer of EWR on January 21, 1997.
Prior to that time, Mr. Berry served as the Executive Vice President of EWR
since May 1994 and served as the Executive Vice President of Evans Withycombe,
Inc. since 1992. From 1983 to 1992, Mr. Berry served as Chairman of the Board
of Berry and Boyle, a real estate investment and development management
company. Prior to 1983, Mr. Berry served as Executive Vice President of Hutton
Real Estate Services and was responsible for that firm's real estate
investment and management activities. Mr. Berry earned a Bachelor of
Architecture degree and a Masters of Business Administration degree from the
University of Michigan. He served as an officer of a United States Navy mobile
construction battalion for three years.
ADDITIONAL INFORMATION REGARDING THE BUSINESS OF EWRLP
FINANCIAL
In August 1994, EWR completed an initial public offering of 8,685,000 shares
of its common stock (the "Initial Public Offering"), and subsequently
completed the sale of an additional 1,302,750 shares of common stock upon
exercise of the underwriters' over-allotment option that resulted in net
proceeds to EWR of approximately $181.3 million. Concurrent with completing
the Initial Public Offering, EWR engaged in various formation transactions
designed to transfer the ownership of its properties ("Communities") and
certain development rights and the business of EWR's predecessor, Evans
Withycombe, Inc., and its affiliates, predecessors and partners (collectively,
"Evans Withycombe") and other assets to EWRLP. In May 1996 EWR completed a
second public offering of 2,000,000 shares of its common stock (an additional
2,500,000 shares
79
<PAGE>
were sold by two institutional stockholders) and an additional 88,889 shares
pursuant to the partial exercise of the underwriters' over-allotment option
(111,111 additional shares were sold by the institutional stockholders pursuant
to such exercise). The net proceeds to EWR from the second public offering of
approximately $41 million were used to pay down EWR's revolving credit
facility.
On February 14, 1997, EWR completed a public offering of 1,800,000 shares of
its common stock. Net proceeds to EWR were approximately $35,820,000 and were
contributed to EWRLP in exchange for 1,800,000 Units. EWRLP used the net
proceeds to pay down its revolving credit facility.
OPERATIONS
EWRLP has focused on becoming a major presence in each of its markets,
allowing it to capitalize on its superior customer service, product design and
property locations while establishing and maintaining a strong brand identity.
EWRLP owns and manages 44 stabilized multifamily apartment communities located
in Arizona and seven stabilized multifamily communities in Southern California,
containing a total of 14,523 apartments, of which 12,125 are in Arizona and
2,398 are in Southern California. The 51 stabilized communities in Arizona and
California are referred to herein as the "Stabilized Communities." The
Communities are located in growing sub-markets in Phoenix and Tucson, Arizona
and in Riverside/San Bernardino, California. The Communities are in submarkets
close to areas of employment, transportation and shopping, and in master
planned communities.
Arizona. EWRLP's size and prominence in its primary Arizona markets provide
it with a number of competitive advantages, including superior market knowledge
resulting in choice site selection, product differentiation, economies of scale
in operations and the ability to utilize specialized marketing techniques.
California. After conducting an extensive study of a number of potential
markets within its region, EWRLP has determined that certain selected sub-
markets in Riverside/San Bernardino and San Diego, California present
significant opportunities for growth and attractive investment opportunities.
EWRLP has acquired 2,398 units in these markets and believes that properties
continue to be available for purchase in such markets at prices below
replacement costs which could result in attractive yields and growth for EWRLP.
RISKS RELATED TO AN INVESTMENT IN EWRLP
EWRLP's results of operations are subject to certain risks and uncertainties,
including, for example, population and employment growth rates and household
formations, the availability of properties for purchase, the actual timing of
EWRLP's planned acquisitions and developments, the strength of the local
economies in the sub-markets in which EWRLP operates and EWRLP's ability to
successfully manage its planned expansion into Southern California. No
assurance can be given that actual results will meet EWRLP's expectations and
projections with respect to such uncertainties.
GENERAL REAL ESTATE INVESTMENT RISKS
Real property investments are subject to varying degrees of risk. The yields
available from equity investments in real estate depend on the amount of income
generated and expenses incurred. If EWRLP's Communities do not generate
revenues sufficient to meet operating expenses, including debt service and
capital expenditures, EWRLP's cash flow and ability to make distributions will
be adversely affected.
A multifamily apartment community's revenues and value may be adversely
affected by a number of factors including: the national economic climate; the
local economic climate (which may be adversely impacted by plant closings,
industry slowdowns, changing demographics and military base closings); local
real estate conditions (such as oversupply of or reduced demand for
apartments); the perceptions by prospective residents of the safety,
convenience and attractiveness of the communities or neighborhoods in which
they are located and the quality of local schools and other amenities; the
ability of the owner to provide adequate management, maintenance and insurance;
and increased operating costs (including real estate taxes and utilities).
Certain significant expenditures associated with each equity investment (such
as mortgage payments, if any, real estate taxes, insurance and maintenance
costs) are generally not reduced when circumstances cause a reduction in income
from the investment. If a property is mortgaged to secure payment of
indebtedness, and if EWRLP is unable to meet its mortgage payments, a loss
could be sustained as a result of foreclosure on the property or the exercise
of other remedies by the mortgagee. In addition, real estate values and income
from properties are also affected by such factors as applicable laws, including
tax laws, interest rate levels and the availability of financing.
DEPENDENCE ON PRIMARY MARKETS
The Communities are located in Arizona and selected sub-markets in Southern
California, and EWRLP's performance could be adversely affected by economic
conditions in these geographic areas, including supply and demand for
apartments in these areas, zoning or other regulatory conditions and
competition from other available apartments and alternative forms of housing.
These factors or a decline in the economy or real estate values in the Arizona
markets and selected sub-markets of Southern California may adversely affect
the ability of EWRLP to make distributions to holders of Units.
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<PAGE>
OPERATING RISKS
The Communities are subject to all operating risks common to multifamily
apartment communities in general, any and all of which might adversely affect
apartment occupancy or rental rates. Increases in unemployment in the areas in
which the communities owned or managed by EWRLP are located might adversely
affect multifamily apartment occupancy or rental rates. Increases in operating
costs due to inflation may not necessarily be offset by increased rents.
Residents may be unable or unwilling to pay rent increases. If operating
expenses increase, the local rental market may limit the extent to which rents
may be increased to meet increased expenses without decreasing occupancy rates.
If any of the above occurs, EWRLP's ability to make distributions to holders of
Units could be adversely affected.
RISKS OF DEVELOPMENT ACTIVITIES
EWRLP intends to continue to actively pursue development projects, including
the expansion of existing apartment communities. Such projects generally
require the expenditure of capital as well as various forms of government and
other approvals, the receipt of which cannot be assured. Consequently, there
can be no assurance that any such projects will be completed or that such
projects will prove to be profitable. The failure of EWRLP to complete or to
profitably operate planned development projects may have a material adverse
effect on EWRLP's financial position and results of operations.
RISKS RELATED TO COMPETITION
There are numerous housing alternatives that compete with the Communities in
attracting residents. The Communities compete directly with other multifamily
rental apartments and single family homes that are available for rent in the
markets in which the Communities are located. The Communities also compete for
residents with new and existing homes and condominiums. In addition, other
competitors for development and acquisitions of properties may have greater
resources than EWRLP. If such competition results in a reduced demand for
EWRLP's Communities or if EWRLP's competitors develop and/or acquire competing
communities on a more cost-effective basis than EWRLP, EWRLP may experience a
drop in rental rates, which may have a material adverse effect on EWRLP's
financial position and results of operations.
ENVIRONMENTAL RISKS
Under various federal, state and local laws, ordinances and regulations,
EWRLP may be considered an owner or operator of real property or may have
arranged for the disposal or treatment of hazardous or toxic substances and,
therefore, may become liable for the costs of removal or remediation of certain
hazardous substances released on or in its property or disposed of by it, as
well as certain other potential costs which could relate to hazardous or toxic
substances (including governmental fines and injuries to persons and property).
Such liability may be imposed whether or not EWRLP knew of, or was responsible
for, the presence of such hazardous or toxic substances. Any such liability
could materially adversely affect EWRLP and its ability to make distributions.
RISK OF UNINSURED LOSS
EWRLP carries comprehensive liability, fire, extended coverage and rental
loss insurance with respect to all of the Communities, with policy
specifications, insured limits and deductibles customarily carried for similar
properties. There are, however, certain types of losses (such as losses arising
from acts of war or from earthquakes) that are not generally insured because
they are either uninsurable or not economically insurable. Should an uninsured
loss or a loss in excess of insured limits occur, EWRLP could lose its capital
invested in a property, as well as the anticipated future revenues from such
property and would continue to be obligated on any mortgage indebtedness or
other obligations related to the property. Any such loss would adversely affect
EWRLP and its ability to make distributions.
NO LIMITATION ON INCURRENCE OF DEBT
EWR currently has a policy of incurring debt only if upon such incurrence the
ratio of debt to total market capitalization (i.e., the total consolidated debt
of EWR as a percentage of the market value of issued and outstanding Common
Stock and Units plus total consolidated debt) would be 50% or less, but the
organizational documents of neither EWR nor EWRLP contain any limitation on the
amount of indebtedness EWR and EWRLP may incur. Accordingly, the Board of
Directors of EWR could alter or eliminate this policy. If this policy were
changed, EWRLP could become more highly leveraged, resulting in an increase in
debt service that could adversely affect EWRLP's cash available for
distribution to shareholders and could increase the risk of default on EWRLP's
indebtedness.
81
<PAGE>
OVERVIEW
EWRLP's portfolio consists of Stabilized Communities and Communities Under
Construction and in Lease Up:
Stabilized Communities. EWRLP owns and manages 44 Stabilized Communities
located in the Phoenix and Tucson, Arizona areas, containing a total of
12,349 apartments. In addition, EWRLP owns and manages seven Stabilized
Communities in Southern California, which contain a total of 2,398
apartments.
Communities Under Construction and in Lease-up. EWRLP owns four apartment
Communities Under Construction and in Lease-Up in Arizona with a total of
953 apartments. Three of these Communities were new developments and one is
an expansion of an existing Community owned by EWRLP.
COMPETITION
The Communities are located in areas that include other apartment
communities and that may include new apartment communities that are under
construction. The number of competitive communities in a particular area could
have an effect on EWRLP's ability to lease apartments at the Communities or at
any newly developed or acquired properties and on the rents charged by EWRLP.
Also, other forms of housing provide alternatives to potential residents of
high quality apartment complexes like the Communities.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or
petroleum product releases at such property, and may be held liable to a
governmental entity or to third parties for property damage and for
investigation and clean-up costs incurred by such parties in connection with
the contamination.
EWRLP believes that the Communities are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances or petroleum products. EWRLP has not
been notified by any governmental authority, and is not otherwise aware, of
any material noncompliance, liability or claim relating to hazardous or toxic
substances or petroleum products in connection with any of its present
properties.
EMPLOYEES
As of September 30, 1997, EWRLP, primarily through the Management Company,
employed, in the aggregate, a total of 600 persons. The Management Company
and/or EWRLP employ substantially all of the professional employees that are
currently engaged in the residential property management, development and
construction businesses of EWR. EWRLP believes that its relations with its
employees are good.
REGULATION
Apartment communities are subject to various laws, ordinances and
regulations, including laws, ordinances and regulations related to fair
housing, Americans with disabilities and building safety. EWRLP believes that
each Community has the necessary permits and approvals to operate its business
and that each Community is in material compliance with present laws,
ordinances and regulations.
SEASONALITY
The fall and winter months in EWRLP's primary markets generally experience
somewhat higher seasonal occupancies.
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<PAGE>
FINANCIAL INFORMATION REGARDING EWRLP
The following table sets forth certain financial and operating data on a
consolidated basis for EWRLP and on a combined historical basis for Evans
Withycombe. The following information should be read in conjunction with all of
the consolidated financial statements and notes thereto included elsewhere in
this Consent Solicitation/Prospectus/Information Statement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AND
PROPERTY INFORMATION)
<S> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
REVENUES:
Rental.................... $ 94,350 $ 68,864 $ 51,097 $ 38,613 $ 26,876
Third party management
fees..................... 1,157 1,268 1,668 2,213 2,204
Interest and other........ 6,119 4,399 4,194 3,112 2,373
--------- --------- --------- -------- --------
Total revenues......... 101,626 74,531 56,959 43,938 31,453
EXPENSES:
Repairs and maintenance... 11,607 8,293 6,288 4,730 3,272
Other property operating.. 12,713 8,699 7,834 6,593 4,684
Advertising............... 1,864 1,244 966 1,022 783
Real estate taxes......... 6,915 4,723 3,204 2,869 2,307
Property management....... 3,225 2,825 2,505 2,605 2,417
General and
administrative........... 1,387 1,321 1,175 1,466 1,360
Interest.................. 24,225 12,650 7,836 6,361 5,909
Depreciation and
amortization............. 20,885 13,762 10,333 10,319 7,146
Write-down of real estate
assets(1)................ -- -- -- 1,361 10,284
Other(2).................. -- -- 5,233 -- --
--------- --------- --------- -------- --------
Total expenses......... 82,821 53,517 45,374 37,326 38,162
--------- --------- --------- -------- --------
Income (loss) before
minority interest and
extraordinary item....... 18,805 21,014 11,585 6,612 (6,709)
Minority interest (3)..... (75) (89) (42) -- --
Extraordinary item-gain on
extinguishment of debt
(1)...................... -- -- -- 6,061 12,569
--------- --------- --------- -------- --------
Net income................ $ 18,730 $ 20,925 $ 11,543 $ 12,673 $ 5,860
========= ========= ========= ======== ========
Earnings per unit (4)..... $ 0.84 $ 1.02
========= =========
Earnings per unit for the
period August 17 to
December 31, 1994(4)..... $ 0.38
=========
OTHER INFORMATION:
Cash flows from:
Operating activities..... $ 38,721 $ 36,983 $ 21,998 $ 20,897 $ 13,271
Investing activities..... (129,461) (118,061) (211,651) (79,511) (61,829)
Financing activities..... 89,674 82,273 189,614 57,417 50,792
Total rental communities
(end of period).......... 49 41 32 31 27
Total number of apartments
(end of period).......... 13,905 11,053 7,924 7,695 6,502
Physical occupancy (end of
period) (5).............. 93% 96% 97% 97% 97%
Weighted average number of
apartments (6)........... 12,887 9,798 7,740 6,641 4,998
Weighted average monthly
revenue per unit (7)..... $ 715 $ 641 $ 586 $ 532 $ 498
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Real estate, before
accumulated depreciation. $ 761,550 $ 587,183 $ 399,987 $292,513 $215,549
Total assets.............. 735,467 579,564 402,486 271,055 204,836
Total debt................ 436,172 297,456 127,787 106,545 64,792
Minority interest......... 827 889 1,247 -- --
Equity.................... $ 283,954 $ 259,055 $ 253,867 $142,886 $122,135
</TABLE>
- -------
(1) During 1993, EWRLP negotiated a discounted payoff of a mortgage loan
secured by The Meadows and Promontory Pointe (1992). The excess of the
amounts owed for principal and interest over the amount paid to pay off the
loan is recorded as an extraordinary item-gain on extinguishment of debt.
EWRLP determined that the carrying values of the communities were in excess
of net realizable value. The excess of $1,361 and $10,284 was charged to
write down of real estate assets.
(2) In connection with the repayment of existing indebtedness at the time of
the Initial Public Offering, prepayment penalties and lender participation
(additional interest) totaling $2,594 were paid. Prior to the Initial
Public Offering, an Executive Incentive Deferred Compensation Plan was
canceled and the $2,639 that was funded by EWRLP was expensed during 1994.
83
<PAGE>
(3) Net income includes an adjustment for Evans Withycombe Finance, Inc.'s one
percent interest in the Financing Partnership for the years ended December
31, 1996 and 1995 and the period from August 17 to December 31, 1994,
respectively.
(4) Net income per Unit is based on 22,184,395, 20,590,873 and 20,086,884
weighted average number of Units outstanding for the years ended December
31, 1996 and 1995 and the period from August 17 to December 31, 1994,
respectively.
(5) Physical Occupancy is defined as the number of apartments occupied or
leased (including models and employee apartments) divided by the total
number of leasable apartments within the community, expressed as a
percentage. Physical occupancy has been calculated using the average of the
occupancy that existed on the last day of each month over each period.
(6) Weighted average number of apartments is the average of all apartments
during the period. For stabilized properties, all apartments are included
in the calculation of the weighted average. For communities in the lease-up
phase, only apartments that are completed and occupied are included in the
weighted average calculation.
(7) Weighted average monthly revenue per apartment is derived by dividing
rental income by the weighted average number of apartments.
84
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF EWRLP
(DOLLARS IN THOUSANDS, EXCEPT APARTMENT DATA)
OVERVIEW
The following discussion, which is based primarily on the consolidated
financial statements of Evans Withycombe Residential, L.P. and the combined
financial statements of its predecessor, should be read in conjunction with the
"Selected Financial Data" and all financial statements contained herein is a
part. The consolidated financial statements of EWRLP consist of the Stabilized
Communities, Communities Under Construction and in Lease-up and the Management
Company.
When used in the following discussion, the words "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected,
including, but not limited to, the actual timing of EWRLP's planned
acquisitions and developments, the strength of the local economies in the sub-
markets in which EWRLP operates, and EWRLP's ability to successfully manage its
planned expansion into Southern California. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. EWRLP undertakes no obligation to publicly release any revisions
to these forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS--CONSOLIDATED FINANCIAL STATEMENTS
The results of operations for the years ended December 31, 1996 and 1995,
respectively, were significantly affected by acquisitions, developments and
expansions.
Comparison of Results of Operations for the Year Ended December 31, 1996 to
the Year Ended December 31, 1995
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------- PERCENTAGE
1996 1995 CHANGE
-------- ------- ----------
<S> <C> <C> <C>
Rental income............................ $ 94,350 $68,864 37.0%
Third party management fees.............. 1,157 1,268 (8.8)
Interest and other....................... 6,119 4,399 39.1
-------- ------- -----
Total revenues....................... 101,626 74,531 36.4
Property operating and maintenance (1)... 26,184 18,236 43.6
Real estate taxes........................ 6,915 4,723 46.4
Property management...................... 3,225 2,825 14.2
General and administrative............... 1,387 1,321 5.0
Interest................................. 24,225 12,650 91.5
Depreciation and amortization............ 20,885 13,762 51.8
-------- ------- -----
Total expenses....................... 82,821 53,517 54.8
-------- ------- -----
Income before minority interest.......... $ 18,805 $21,014 (10.5)%
======== ======= =====
Weighted average monthly rental revenue
per unit................................ $ 715 $ 641
======== =======
Weighted average number of apartments.... 12,887 9,798
======== =======
Economic occupancy (2)................... 90.0% 91.6%
======== =======
</TABLE>
- -------
(1) EWRLP defines property operating and maintenance expense as repairs and
maintenance, other property operating and advertising expense.
(2) Stabilized properties only.
Rental revenues increased by $25,486 or 37.0 percent for the year ended
December 31, 1996 as compared to the similar period in 1995, respectively as a
result of increases in the weighted average number of apartments and weighted
average monthly revenue per occupied apartment. EWRLP believes that the
increase in rental income was largely attributable to the acquisitions and
stabilization of properties developed by EWRLP in its rental markets.
Third party management fees decreased $111 or 8.7 percent due to the sale of
several properties from the management portfolio. Included in third party
management fees is a non recurring $500 fee received in exchange for
terminating the management contract on nine apartment communities containing
1298 apartment units in the second quarter 1996.
85
<PAGE>
Interest and other income increased $1,720 for the year ended December 31,
1996 compared to the year ended December 31, 1995 as a result of the sale of
telephone servicing rights on certain properties and an increase in ancillary
income such as redecoration and application fees as a result of the increase in
the weighted average number of apartments.
Property operating and maintenance expense increased due to the increase in
the weighted average number of apartments for the year ended December 31, 1996
as compared to the same period in 1995, respectively. Real estate taxes
increased primarily due to the increase in the number of properties for the
year ended December 31, 1996.
Interest expense increased due to an increase in debt resulting from
acquisitions and the increase in weighted average number of units in the
portfolio. EWRLP capitalized $2,714 of interest for the year ended December
31,1996 compared to $5,048 for the year ended December 31, 1995 due to a
decrease in construction activity. Interest costs incurred during construction
of a new property are capitalized until completion of construction on a
building-by-building basis.
"SAME STORE" PORTFOLIO
EWRLP defines same store portfolio as those communities that reached
stabilized occupancy prior to January 1, 1995. Same store portfolio consists of
32 stabilized properties containing 7,924 apartment units that were owned by
EWRLP for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------- PERCENTAGE
1996 1995 CHANGE
------- ------- ----------
<S> <C> <C> <C>
Rental income............................. $55,074 $55,202 (.2)%
Other income.............................. 3,296 2,581 27.7
------- ------- ----
58,370 57,783 1.0
------- ------- ----
Property operating and maintenance........ 16,134 14,619 10.4
Real estate taxes......................... 3,995 3,906 2.3
------- ------- ----
20,129 18,525 8.7
------- ------- ----
Property net operating income............. $38,241 $39,258 (2.6)%
======= ======= ====
Weighted average monthly rental revenue
per unit................................. $ 654 $ 638
======= =======
Economic occupancy........................ 89.7% 91.1%
======= =======
</TABLE>
Rental income for the year ended December 31, 1996 was comparable with the
same period in 1995 as a result of the increase in the weighted average monthly
rental revenue per unit being offset by a decline in the average economic
occupancy during the year ended December 31, 1996 as compared to the year ended
December 31, 1995. Other income for the year ended December 31, 1996 increased
as a result of gains from the sale of telephone servicing rights at various
communities.
Property operating and maintenance expense increased $1,515 or 10.4 percent
over 1995 due to higher apartment turnover and utility costs associated with an
increased number of vacant apartments and higher advertising costs incurred by
EWRLP in its "same store" portfolio.
COMMUNITIES STABILIZED LESS THAN TWO YEARS
Communities stabilized less than two years consist of the development of five
new apartment communities and the expansion of two existing apartment
communities by EWRLP, containing 1,521 apartment units that reached stabilized
occupancy during the year ended December 31, 1995. Increases in the year ended
December 31, 1996 as compared to the year ended December 31, 1995 are the
result of the increase in the weighted average number of apartments.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1996 1995
------- ------
<S> <C> <C>
Rental income........................................... $12,606 $7,113
Other income............................................ 680 541
------- ------
13,286 7,654
------- ------
Property operating and maintenance...................... 2,532 1,734
Real estate taxes....................................... 1,011 407
------- ------
3,543 2,141
------- ------
Property net operating income........................... $ 9,743 $5,513
======= ======
Weighted average number of apartments................... 1,521 888
======= ======
</TABLE>
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<PAGE>
DEVELOPMENT AND LEASE UP PROPERTIES
Development and lease up properties consist of the development of 13 new
apartment communities or the expansion of existing apartment communities
containing 2,522 apartment units that were in the "construction," "development"
or "lease up" stage during 1996 and therefore, not considered to have achieved
stabilized occupancy for all of the periods presented. Increases in the year
ended December 31, 1996 as compared to the year ended December 31, 1995 are the
result of an increase in the weighted average number of apartments.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1996 1995
------- ------
<S> <C> <C>
Rental income........................................... $11,276 $1,281
Other income............................................ 720 128
------- ------
11,996 1,409
------- ------
Property operating and maintenance...................... 3,203 700
Real estate taxes....................................... 790 30
------- ------
3,993 730
------- ------
Property net operating income........................... $ 8,003 $ 679
======= ======
Weighted average number of apartments in lease up....... 1,398 174
======= ======
</TABLE>
ACQUISITIONS
Acquisitions consist of eight properties containing 3,016 apartment units,
which have been acquired by EWRLP since January 1, 1995. Increase in the year
ended December 31, 1996, as compared to the year ended December 31, 1995, are
the result of the increase in the weighted average number of apartments.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1996 1995
------- ------
<S> <C> <C>
Rental income........................................... $15,394 $5,268
Other income............................................ 727 193
------- ------
16,121 5,461
------- ------
Property operating and maintenance...................... 4,315 1,183
Real estate taxes....................................... 1,119 380
------- ------
5,434 1,563
------- ------
Property net operating income........................... $10,687 $3,898
======= ======
Weighted average number of apartments................... 2,044 769
======= ======
</TABLE>
Comparison of Results of Operations for the Year Ended December 31, 1995 to
the Year Ended December 31, 1994
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- PERCENTAGE
1995 1994 CHANGE
------- ------- ----------
<S> <C> <C> <C>
TOTAL PORTFOLIO
Rental income.............................. $68,864 $51,097 34.8%
Third party management fees................ 1,268 1,668 (24.0)%
Interest and other......................... 4,399 4,194 4.9%
------- ------- -----
74,531 56,959 30.9%
------- ------- -----
Property operating and maintenance......... 18,236 15,088 20.9%
Real estate taxes.......................... 4,723 3,204 47.4%
Property management........................ 2,825 2,505 12.8%
General and administrative................. 1,321 1,175 12.4%
Interest................................... 12,650 7,836 61.4%
Depreciation and amortization.............. 13,762 10,333 33.2%
Other...................................... -- 5,233 --
------- ------- -----
53,517 45,374 17.9%
------- ------- -----
Income before minority interest............ $21,014 $11,585 81.4%
======= ======= =====
Weighted average number of apartments 9,798 7,740
Economic occupancy......................... 91.6% 92.3%
======= =======
</TABLE>
87
<PAGE>
Rental revenues increased by $17,767 or 34.8 percent as a result of increases
in the weighted average number of apartments and weighted average monthly
revenue per occupied apartment. EWRLP believes that the increase in rental
income, other than that attributable to the acquisitions and developments, was
achieved as a result of EWRLP's ability to capitalize on continuing improvement
in EWRLP's rental markets.
The decrease in third party management fees of $400, a 24.0 percent decrease
from the 1994 period, is due to the sale of several properties from the
management portfolio, including 508 units which EWRLP purchased.
Property operating and maintenance expense increased $3,148 or 20.9 percent
(versus a 26.6 percent increase in the weighted average number of units) due to
the increase in the number of properties. Real estate taxes increased $1,519 or
47.4 percent (versus a 26.6 percent increase in the weighted average number of
units) primarily due to the increase in the number of properties and higher
values placed on properties due to improved market conditions.
Property management expense increased $320 or 12.8 percent due to the
increase in the number of properties under management.
Interest expense increased $4,814 or 61.4 percent due to an increase in debt
resulting from acquisitions and more units under construction. EWRLP
capitalized $5,048 of interest in 1995 compared to $2,724 in 1994 due to an
increase in construction activity. Interest costs incurred during construction
of a new property are capitalized until completion of construction on a
building-by-building basis.
"SAME STORE" PORTFOLIO
In 1995, EWRLP defined the same store portfolio as those communities that
reached stabilization prior to January 1, 1994.
Same store portfolio consists of 30 stabilized operating properties
containing 7,559 apartment units that were owned by EWRLP for the years ended
December 31, 1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- PERCENTAGE
1995 1994 CHANGE
------- ------- ----------
<S> <C> <C> <C>
Rental income............................. $52,940 $49,712 6.5 %
Other income.............................. 2,568 3,180 (19.2)%
------- ------- -----
55,508 52,892 4.9 %
------- ------- -----
Property operating and maintenance........ 14,213 14,589 (2.6)%
Real estate taxes......................... 3,671 3,180 15.4 %
------- ------- -----
17,884 17,769 .6 %
------- ------- -----
Property net operating income............. $37,624 $35,123 7.1 %
======= ======= =====
Weighted average monthly rental revenue
per unit................................. $638 $586
======= =======
Economic occupancy........................ 91.5% 92.5%
======= =======
</TABLE>
Rental income for the year ended December 31, 1995 increased $3,228 or 6.5
percent as a result of an increase in the weighted average monthly revenue per
occupied unit which increased $52 or 8.9 which was partially offset by a
decline in the average economic occupancy from 92.5 percent during the year
ended December 31, 1994 and 91.5 percent during the year ended December 31,
1995.
Property operating and maintenance expense decreased $376 or 2.6 percent due
to EWRLP beginning to realize economies of scale from consolidated operations
of the integrated property portfolio.
Real estate taxes increased $491 or 15.4 percent due to higher values placed
on properties due to improved market conditions and property values.
88
<PAGE>
DEVELOPMENT AND LEASE UP PROPERTIES
Development properties consist of 15 developments or expansion of existing
properties containing 2,878 apartment units that have been developed by EWRLP
since the Initial Public Offering in August 1994. Increases in 1995 as compared
to 1994 are the result of development units stabilized or in lease-up
increasing to 15 properties and 2,878 apartment units in 1995 as compared to
three properties and 661 apartment units in 1994.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1994
------ ------
<S> <C> <C>
Rental income............................................ $9,766 $1,248
Other income............................................. 636 84
------ ------
10,402 1,332
------ ------
Property operating and maintenance....................... 2,604 459
Real estate taxes........................................ 560 18
------ ------
3,164 477
------ ------
Property net operating income............................ $7,238 $ 855
====== ======
</TABLE>
ACQUISITIONS
Acquisitions consist of five properties containing 1,756 apartment units
which have been acquired by EWRLP since the Initial Public Offering in August
1994. Increases in 1995 as compared to 1994 are the result of acquiring four
properties in 1995 consisting of 1,608 apartment units compared to one property
consisting of 148 apartment units in 1994.
<TABLE>
<CAPTION>
DECEMBER
31,
-----------
1995 1994
------ ----
<S> <C> <C>
Rental income.............................................. $6,158 $137
Other income............................................... 239 5
------ ----
6,397 142
------ ----
Property operating and maintenance......................... 1,419 40
Real estate taxes.......................................... 492 6
------ ----
1,911 46
------ ----
Property net operating income.............................. $4,486 $ 96
====== ====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
EWRLP's net cash provided by operating activities increased from $37.0
million for the year ended December 31, 1995 to $38.7 million for the year
ended December 31, 1996 principally due to increased rental operations from
additional properties acquired and developed subsequent to December 31, 1995.
Net cash used in investing activities increased from $118.1 million for the
year ended December 31, 1995 to $129.5 million for the year ended December 31,
1996. Cash used in investing activities largely relates to EWRLP's development
and construction of new apartment communities in Phoenix and Tucson, Arizona
and acquisitions of apartment communities in its markets. Net cash provided by
financing activities increased from $82.3 million for the year ended December
31, 1995 to $89.7 million for the year ended December 31, 1996 due to the
proceeds from the sale of 2,088,889 shares of common stock of EWR and
borrowings under EWRLP's Revolving Credit Facility ("Revolving Credit
Facility") which were used to fund the development and acquisition of apartment
communities.
EWRLP expects to meet its short-term liquidity requirements, including
capital expenditures relating to maintaining Stabilized Communities, generally
through its net cash provided by operations and borrowings under its credit
arrangements and anticipates meeting long-term liquidity requirements, such as
scheduled debt maturities, financing of construction and development activities
and possible acquisitions through long-term unsecured borrowings, issuance of
additional equity securities of EWR or debt securities of EWRLP, or, possibly
in connection with acquisitions of land or existing properties, Units of EWRLP.
EWRLP believes that its net cash provided by operations will be adequate and
anticipates that it will continue to be adequate to meet both operating
requirements and payment of dividends by EWRLP in accordance with REIT
requirements in both the short and the long-term.
89
<PAGE>
The information in the immediately preceding paragraph is forward looking and
involves risks and uncertainties that could significantly impact EWRLP's
expected liquidity requirements in the short and long term. While it is
impossible to itemize the many factors and specific events that could affect
EWRLP's outlook for its liquidity requirements, such factors would include the
actual timing of EWRLP's planned development of new, and expansion of existing,
communities; acquisitions of existing apartment communities; the actual costs
associated with such developments and acquisitions; and the strength of the
local economies in the sub-markets in which EWRLP operates. EWRLP is further
subject to risks relating to the limited geographic area in which it operates
and its ability to successfully manage its planned expansion into Southern
California, a market in which it did not have any operating history prior to
1995. Higher than expected costs, delays in development of communities, a
downturn in the local economies and/or the lack of growth of such economies
could reduce EWRLP's revenues and increase its expenses, resulting in a greater
burden on EWRLP's liquidity than that which EWRLP has described above.
Capital Resources
At December 31, 1996, EWRLP's total debt was approximately $436.2 million and
EWRLP's debt to total market capitalization (market equity plus debt) was
approximately 47.4 percent. EWRLP received an investment grade rating of "BBB-"
from Standard & Poor's Corporation, "Baa3" from Moody's Investor Service Inc.
and "BBB-" from Fitch Investors Service, Inc. in December 1996.
A security rating is not a recommendation to buy, sell, or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization, and each rating should be evaluated independently of any
other rating. A rating of (a) BBB- from Standard & Poor's Corporation indicates
that the obligations of EWRLP are in the lower range of those obligations that
exhibit adequate protection parameters, (b) Baa3 from Moody's Investor Service
Inc. indicates that the obligations of EWRLP are considered to be in the lower
range of medium-grade obligations, which are not considered to be highly
protected or poorly secured and (c) BBB- from Fitch Investors Service, Inc.
indicates that the obligations of EWRLP are considered to be in the lower range
of obligations considered to be of investment grade and of satisfactory credit
quality and that its ability to pay interest and to repay principal is
considered to be adequate.
Conventional Mortgage Loans
Conventional mortgage loans were comprised of six fixed rate loans at
December 31, 1996, each of which is collateralized by a first mortgage lien on
an apartment community included in real estate assets. The mortgages are
payable in monthly installments of principal and interest and mature at various
dates through 1997. The conventional mortgage loans aggregated $40.1 million at
December 31, 1996 with interest rates ranging from 8.0 percent to 9.95 percent.
On January 9, 1997, EWRLP extinguished the debt on three mortgages with unpaid
principal balances of approximately $18.7 million with proceeds from the
Revolving Credit Facility. As a result, EWRLP incurred a loss from the early
extinguishment of debt of approximately $1.2 million. EWRLP prepaid a $6.2
million mortgage note on January 31, 1997 which resulted in an additional loss
from the early extinguishment of debt of approximately $300. The loss from the
early extinguishment of debt was recorded by EWRLP in the first quarter of
1997.
In December 1995, EWRLP entered into a ten year $50 million fixed rate loan
from an insurance company that bears interest at 7.17 percent, with principal
and interest due monthly based on a 25-year amortization schedule beginning
January 1, 1996 through January 1, 2006, and the remaining unpaid principal
balance due January 1, 2006. The loan is secured by a first deed of trust on
five apartment communities. Proceeds from the loan were used to pay down
outstanding balances on the Revolving Credit Facility. The outstanding debt was
$49.5 million at December 31, 1996. The loan is convertible to unsecured upon
EWRLP achieving an investment grade rating of "BBB" or better.
Mortgage Loan Certificates
EWRLP, through the Financing Partnership, borrowed $102.0 million under a
securitized loan in August 1994. During January 1995, EWRLP borrowed the
balance of $29.0 million (increasing the total to $131.0 million). The loan is
secured by the first mortgage liens on 22 of the Communities. The $102.0
million was issued at 99.97 percent of its face amount and the $29.0 million
was issued at 97.9375 percent of its face amount and will mature on August 1,
2001. Although both amounts bear interest at 7.98 percent, the $29.0 million
has an effective interest rate of 8.40 percent due to the discount. The
weighted average effective interest rate of the total $131 million loan is 8.05
percent. The bonds have been rated "AA" by Standard and Poor's Corporation.
90
<PAGE>
Tax Exempt Bonds
Tax exempt bonds were comprised of three floating rate bonds based on the tax
exempt note rate set by the respective remarketing agents (or at the option of
EWRLP at a fixed rate determined by the remarketing agents). The bonds are
secured by letters of credit which are secured by first mortgage liens on four
apartment communities. The tax exempt bonds have monthly interest only payments
and mature at various dates through 2016. The tax exempt bonds aggregated $64
million at December 31, 1996 with interest rates ranging from 5.16 percent to
6.14 percent.
Revolving Credit Facility
On September 25, 1996, EWRLP expanded its existing $125 million unsecured
Revolving Credit Facility to $225 million with a bank group. The Revolving
Credit Facility bears interest at a floating rate of the London Interbank
Offered Rate ("LIBOR") plus 150 basis points (100 basis points equals one
percent) (or, at the option of EWRLP, at the prime rate announced by the
banks). The interest rate was reduced 25 basis points upon EWRLP achieving an
investment grade rating of "Baa3" or "BBB-." The Revolving Credit Facility has
a term of three years, with an option to extend for one year, subject to
certain conditions, and provides for monthly payments of interest only. It will
be used to finance acquisitions, to fund construction and development and
renovation costs, and for working capital purposes. At December 31, 1996, there
was $152 million outstanding on the Revolving Credit Facility, with an
effective interest rate of 7.20 percent. The Revolving Credit Facility contains
customary representations, covenants and events of default, including a
limitation which restricts distributions to 95 percent of Funds From
Operations, as defined under "Funds From Operations" below. EWRLP does not
expect that the covenants will affect its ability to pay distributions in
accordance with its current distribution policy.
The table below outlines EWRLP's debt structure as of December 31, 1996
(amounts in thousands).
<TABLE>
<CAPTION>
OUTSTANDING WEIGHTED AVERAGE
BALANCE INTEREST RATE
----------- ----------------
<S> <C> <C>
FIXED RATE DEBT:
Mortgage Debt
Conventional............................. $ 89,652 7.87%
Mortgage Loan Certificates............... 130,520 8.05
-------- ----
Total Fixed Rate Debt.................. 220,172 7.98
VARIABLE RATE DEBT:
Tax Exempt Bonds......................... 64,000 5.70
Revolving Credit Facility................ 152,000 7.20
-------- ----
Total Variable Rate Debt............... 216,000 6.76
-------- ----
Total Debt............................. $436,172 7.37%
======== ====
</TABLE>
EWRLP had 4,806 unencumbered apartment units related to the Stabilized
Communities (including properties with debt that was repaid in January 1997)
and 1,198 unencumbered apartment units related to the Communities Under
Construction and in Lease Up at December 31, 1996.
SUBSEQUENT OFFERINGS AND REGISTRATION STATEMENTS
In September 1995, EWR filed a shelf registration statement with the
Securities and Exchange Commission ("SEC") for up to $200 million of debt
securities, common stock and warrants. The registration statement was declared
effective by the SEC in December 1995.
In January 1997, EWR and EWRLP filed a shelf registration statement with the
SEC for up to $125 million of common stock, preferred stock and warrants
issuable by EWR and $200 million of debt securities issuable by EWRLP. This
registration statement, which has not been declared effective by the SEC,
subsumed $125 million of available securities under the September 1995
registration statement. These registration statements will provide EWR and
EWRLP with the ability to issue and sell a portion of such securities from time
to time.
On May 28, 1996, EWR completed a public offering of 4,500,000 shares of
common stock of which 2,000,000 shares were sold by EWR and an aggregate of
2,500,000 shares were sold by two institutional stockholders. On June 25, 1996,
EWR issued an additional 88,889 shares of its common stock and the
institutional stockholders sold an additional 111,111 shares pursuant to a
partial exercise of an over-allotment option granted to the underwriters. Net
proceeds to EWR from the second offering were approximately $40,891,000. EWR
used the proceeds from the sale of common stock offering to pay down the
Revolving Credit Facility.
91
<PAGE>
In February 1997, EWR completed a public offering of 1,800,000 shares of
common stock. Net proceeds to EWR of approximately $35,820,000 were
contributed to EWRLP in exchange for 1,800,000 Units. EWRLP used the proceeds
to pay down the Revolving Credit Facility.
INFLATION
Most of the leases at the Communities are for a term of one year or less,
which may enable EWRLP to seek increased rents upon renewal of existing leases
or commencement of new leases. The short-term nature of the leases generally
serves to reduce the risk to EWRLP of the adverse effects of inflation.
FUNDS FROM OPERATIONS
EWRLP and industry analysts consider Funds from Operations ("FFO") to be an
appropriate measure of the performance of an equity REIT because it is
predicated on cash flow analyses. EWRLP computes FFO in accordance with
standards established by the National Association of Real Estate Investment
Trusts ("NAREIT"). FFO is defined as net income (loss) determined in
accordance with GAAP, excluding gains (or losses) from debt restructuring and
sales of property plus depreciation and amortization, excluding depreciation
on non-real estate assets and amortization of deferred financing costs. FFO
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indicator of EWRLP's financial performance or to
cash flow from operating activities (determined in accordance with GAAP) as a
measure of EWRLP's needs. EWRLP believes that in order to facilitate a clear
understanding of the consolidated historical operating results of EWRLP, FFO
should be examined in conjunction with net income, as presented in the
consolidated financial statements contained herein incorporated by reference
into the Registration Statement of which this Consent Solicitation/Prospectus/
Information Statement is a part.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994 (A) 1993 1992
------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income (loss) before
extraordinary items and
minority interest.......... $18,805 $21,014 $16,818 $ 6,612 $(6,709)
Depreciation and
amortization............... 20,712 13,624 10,333 10,319 7,146
Amortization of executive
deferred compensation
expense.................... 390 693 267 -- --
------- ------- ------- ------- -------
Funds from operations....... $39,907 $35,331 $27,418 $16,931 $ 437
======= ======= ======= ======= =======
</TABLE>
- -------
(a) 1994 FFO has been adjusted to include other expenses ($5,233) that were
incurred relating to the repayment of existing indebtedness at the time of
the Initial Public Offering, prepayment penalties and lender participation
(additional interest) totaling $2,594. Prior to the Initial Public
Offering, an Executive Incentive Deferred Compensation Plan was canceled
and the $2,639 that was funded by EWRLP was expensed in 1994. EWRLP
believes it is appropriate to add back other expenses to net income for
the FFO calculation in 1994 as these expenses represent nonrecurring costs
directly related to the Initial Public Offering rather than recurring
expenses from operations.
NUMBER OF UNITS
EWRLP had 22,184,395 and 20,590,873 weighted average number of units for the
years ended December 31, 1996 and 1995, respectively.
CAPITALIZATION OF FIXED ASSETS AND COMMUNITY IMPROVEMENTS
EWRLP has established a policy of capitalizing those expenditures relating
to acquiring new assets, materially enhancing the value of an existing asset,
or substantially extending the useful life of an existing asset. All
expenditures necessary to maintain a Community in ordinary operating condition
are expensed as incurred.
Acquisition of assets and community expenditures for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
New community development............................ $ 82,177 $107,223
Acquisitions......................................... 88,648 77,895
Nonrecurring capital expenditures:
Vehicle access control gates....................... 551 --
Computer upgrade................................... 413 202
Recurring capital expenditures:
Community additions and improvements............... 2,374 1,547
Corporate additions and improvements............... 348 549
-------- --------
$174,511 $187,416
======== ========
</TABLE>
92
<PAGE>
EWRLP PROPERTIES
STABILIZED PROPERTIES
The following sets forth certain information regarding the current Stabilized
Communities. All of the Communities are owned 100 percent in fee by EWR
(indirectly through EWRLP or the Financing Partnership). For a description of
liens on certain of the Communities listed below, see Schedule III--Real Estate
Investments and Accumulated Depreciation on page F-17.
<TABLE>
<CAPTION>
AVERAGE AVERAGE PHYSICAL
UNIT PHYSICAL OCCUPANCY AS
SIZE OCCUPANCY OF
NUMBER OF YEAR DEVELOPED (SQUARE DURING DECEMBER 31,
STABILIZED COMMUNITIES CITY APARTMENTS DEVELOPED/ACQUIRED OR ACQUIRED FEET) 1996(1) 1996(1)
---------------------- ------------ ---------- ------------------ -------------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARIZONA:
PHOENIX:
Acacia Creek............ Scottsdale 508 Acquired 1995 910 97% 98%
Bayside at the Islands.. Gilbert 272 Developed 1988 870 93% 94%
Country Brook (4)....... Chandler 396 Acq/Dev 1991/1993/1996 961 93% 92%
Deer Creek Village...... Phoenix 308 Acquired 1991 819 97% 92%
Gateway Villas.......... Scottsdale 180 Developed 1995 998 96% 97%
Greenwood Village....... Tempe 270 Acquired 1993 884 96% 93%
Heritage Point.......... Mesa 148 Acquired 1994 773 95% 91%
La Mariposa............. Mesa 222 Acquired 1990 928 95% 93%
La Valencia............. Mesa 361 Acquired 1990 950 92% 87%
Ladera.................. Phoenix 248 Developed 1996 1,012 95% 98%
Little Cottonwoods...... Tempe 379 Acq/Acq/Dev 1989/89/90 1,023 91% 85%
Los Arboles (2)......... Chandler 232 Developed 1985 851 95% 92%
Mirador................. Phoenix 316 Developed 1996 987 85% 94%
Miramonte............... Scottsdale 151 Developed 1983 782 98% 99%
Morningside............. Scottsdale 160 Acquired 1992 1,019 95% 99%
Mountain Park Ranch..... Phoenix 240 Developed 1995 961 93% 93%
Park Meadow (4)......... Gilbert 224 Acq/Dev 1992/1996 880 96% 93%
Preserve at Squaw Peak.. Phoenix 108 Acquired 1991 952 96% 90%
Promontory Pointe (3)... Phoenix 304 Acquired 1988 986 91% 83%
Rancho Murietta......... Tempe 292 Acquired 1995 866 97% 87%
Scottsdale Courtyards... Scottsdale 274 Developed 1993 1,044 97% 100%
Scottsdale Meadows...... Scottsdale 168 Developed 1984 888 95% 99%
Shadow Brook............ Phoenix 224 Acquired 1993 1,010 97% 98%
Shores at Andersen
Springs................ Chandler 299 Developed 1989/1993 889 97% 97%
Silver Creek............ Phoenix 174 Acquired 1991 775 98% 97%
Sonoran................. Phoenix 429 Developed 1995 965 93% 89%
Sun Creek............... Glendale 175 Acquired 1993 762 98% 98%
Superstition Vista...... Mesa 316 Acquired 1995 950 97% 96%
The Enclave............. Tempe 204 Developed 1995 952 97% 100%
The Heritage............ Phoenix 204 Developed 1995 973 93% 92%
The Ingleside........... Phoenix 120 Developed 1995 987 96% 94%
The Meadows............. Mesa 306 Acquired 1987 809 94% 92%
The Palms............... Phoenix 132 Developed 1990 1,026 93% 96%
The Pines............... Mesa 194 Acquired 1992 887 96% 94%
Towne Square (4)........ Chandler 584 Acq/Dev 1992/1995/1996 960 92% 90%
Villa Encanto........... Phoenix 382 Developed 1983 810 99% 99%
Village at Lakewood..... Phoenix 240 Developed 1988 857 94% 98%
------
9,744
------
TUCSON:
Harrison Park (3)....... Tucson 172 Acquired 1991/1996 809 87% 85%
La Reserve.............. Oro Valley 240 Developed 1988 900 91% 92%
Orange Grove Village
(4).................... Tucson 400 Acq/Dev 1991/1996 714 93% 87%
Suntree Village......... Oro Valley 424 Acquired 1992 831 91% 93%
The Arboretum........... Tucson 496 Acq/Dev 1992/1995 886 93% 89%
The Legends............. Tucson 312 Developed 1995 1,041 94% 94%
Village at Tanque Verde. Tucson 217 Acq/Dev 1990/1995 694 90% 83%
------
2,261
------
Total Arizona.......... 12,005
CALIFORNIA:
The Ashton.............. Corona Hills 492 Acquired 1995 850 94% 92%
Canyon Crest Views (5).. Riverside 178 Acquired 1996 1,193 97% 96%
Portofino (6)........... Chino Hills 176 Acquired 1996 873 99% 98%
Parkview Terrace (6).... Redlands 558 Acquired 1996 801 96% 95%
Redlands Lawn & Tennis
(7).................... Redlands 496 Acquired 1996 795 89% 89%
------ ------
Total California........ 1,900
======
Total.................. 13,905 44,343
====== ======
Weighted Average....... 283 905
====== ======
</TABLE>
93
<PAGE>
- -------
(1) Physical occupancy is defined as apartments occupied or leased (including
models and employee apartments) divided by the total number of leasable
apartments within the Community, expressed as a percentage.
(2) EWR owns approximately a 10 percent interest in the joint venture that
owns Los Arboles II, as well as two promissory notes with an outstanding
balance of approximately $760,000, secured by subordinated liens on such
property. Los Arboles II contains 200 apartments, was developed in 1987,
has an average unit size of 843 square feet and had average physical
occupancy during 1996 of 95 percent and physical occupancy as of December
31, 1996 of 92 percent.
(3) Another phase of this community is currently under development. See
"Development and Construction Activity" below.
(4) A new phase of this community was completed and reached stabilized
occupancy in 1996.
(5) Property was acquired June 1996.
(6) Property was acquired July 1996.
(7) Property was acquired December 1996.
Of the current Stabilized Communities included in the table, 37 are located
in the greater Phoenix area, seven are located in the Tucson area and five are
located in California. All of the Stabilized Communities are managed and
operated by EWR and have an average size of 283 units. The Stabilized
Communities are primarily oriented to upscale residents seeking high levels of
amenities, such as clubhouses, exercise rooms, tennis courts, swimming pools,
therapy pools and covered parking. The average unit size of the Stabilized and
Communities under Construction combined is 905 square feet. All have fully-
equipped kitchens with upgraded cabinets, individual utility metering,
dishwashers, microwave ovens, separate dining areas, individual storage,
spacious patios and balconies, and ceramic tile entries. Most have
washers/dryers; and many offer high ceilings, fireplaces, and alarm system
prewiring.
DEVELOPMENT AND CONSTRUCTION ACTIVITY
The apartment Communities under Construction and in Lease Up are listed
below:
<TABLE>
<CAPTION>
QUARTER
------------------------------------
ESTIMATED ACTUAL ACTUAL OR ESTIMATED
AVERAGE CONSTRUCTION DATE OF ESTIMATED DATE OF
TOTAL UNIT SIZE COST CONSTRUCTION COMMENCEMENT STABILIZED
NAME CITY UNITS (SQ. FT.) (MILLIONS) COMMENCEMENT OF LEASE-UP OCCUPANCY
---- -------- ----- --------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PHOENIX
The Hawthorne........... Phoenix 276 904 $17 4:95 3:96 3:97
The Isle at Arrowhead
Ranch.................. Glendale 256 940 17 2:96 4:96 4:97
Promontory Pointe II
Expansion.............. Phoenix 120 1,013 8 4:95 3:96 2:97
----- ---
652 42
TUCSON
Bear Canyon............. Tucson 238 973 15 3:95 2:96 2:97
Harrison Park II
Expansion.............. Tucson 188 974 10 3:95 2:96 2:97
----- ---
426 25
----- ---
Total............... 1,078 $67
===== ===
</TABLE>
EWR owns sites in the Phoenix area intended for the development of four
additional multifamily apartment communities, which, if completed, are
expected to contain approximately 1115 apartment units. In February 1997, EWR
began the construction at one of the sites of the first phase of the Retreat
which will contain 240 apartment units. EWR currently anticipates that the
first phase of the Retreat will achieve stabilized occupancy in the third
quarter of 1998. EWR currently anticipates that it will develop three
additional communities in the Phoenix area (with approximately an aggregate of
635 units) and the second phase of the Retreat (with an additional 240 units)
over the course of the next two years. EWR currently estimates that such
developments, if completed, would reach stabilized occupancy during the latter
part of 1998 through the end of 1999. There can be no assurance that EWR will
succeed in obtaining any necessary governmental approvals or any financing
required to develop the remaining sites or the completion of phase II of the
Retreat, or that EWR will decide to develop any particular project.
The forward-looking information set forth in the table and paragraph above
is based upon a number of estimates and assumptions that are inherently
subject to business, economic and competitive uncertainties and contingencies,
many of which are beyond EWR's control. The actual development cost,
completion date and stabilization date of any project will be dependent upon a
variety of factors beyond the control of EWR including, for example, labor and
other personnel costs, material costs, weather conditions, government fees and
leasing rates.
94
<PAGE>
LEGAL PROCEEDINGS
Neither EWR, EWRLP, the Management Company, the Financing Partnership, or any
of the Communities is presently subject to material litigation nor, to EWR's
knowledge, is any litigation threatened against EWR or any of the Communities,
other than routine actions for negligence or other claims and administrative
proceedings arising in the ordinary course of business, some of which are
expected to be covered by liability insurance and all of which collectively are
not expected to have a material adverse effect on the business or financial
condition of EWR.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on page F-1.
COMPARISON OF RIGHTS OF THE UNITHOLDERS
At the Effective Time, holders of EWRLP Units will become holders of ERP
Units. The rights of EWRLP's limited partners are presently governed by DRULPA
and the EWRLP Partnership Agreement. The rights of ERP's limited partners are
presently governed by IRULPA and the ERP Partnership Agreement. Upon approval
of the Transactions by the holders of EWRLP Units and at the Effective Time,
the EWRLP Partnership Agreement will remain in full force and effect. Upon
exchange of EWRLP Units pursuant to the Unit Exchange Agreements to be entered
into by certain holders of EWRLP Units, the rights of the former holders of
EWRLP Units approving the Transactions will be governed by IRULPA and the ERP
Partnership Agreement. Upon dissolution of EWRLP following consummation of the
Asset Contribution and the dissolution of ERP Units in liquidation of all then
outstanding EWRLP Units, the rights of the former holders of EWRLP Units will
be governed by IRULPA and ERP Partnership Agreement.
The following discussion summarizes the significant differences between the
rights of holders of limited partnership interests of ERP and EWRLP as a result
of certain of these transactions. This summary does not purport to be complete
and is subject to and qualified in its entirety by reference to the ERP
Partnership Agreement and the EWRLP Partnership Agreement. Rights of the
holders of ERP Units which are and will remain the same after the Asset
Contribution are not discussed.
ISSUANCE OF OTHER UNITS
The EWRLP Partnership Agreement authorizes EWR as general partner to cause
EWRLP to issue additional EWRLP Units for any EWRLP purpose, from time to time.
EWR is authorized to cause EWRLP to issue to EWR EWRLP Units which are
convertible or exchangeable into shares of EWR Common. EWRLP may issue to EWR
one or more classes, or one or more series of such classes, and to fix the
designations, preferences, special rights, powers and duties, including rights,
powers and duties senior to the EWRLP Units held by limited partners as
determined by EWR as general partner.
Under the ERP Partnership Agreement, EQR as general partner may cause ERP to
issue additional units as follows: (i) ERP Units to EQR upon the issuance by
EQR of additional EQR Common (other than in exchange for ERP Units) and the
contribution of the net proceeds from such additional issuance as a capital
contribution to ERP, however, EQR may issue shares of EQR Common in connection
with share option plans, dividend reinvestment plans without receiving any
proceeds and that the issuance of such EQR Common will nonetheless entitle EQR
to additional ERP Units under this section, (ii) ERP Units to the partners that
hold Preference Units that are convertible into ERP Units, upon the exercise of
such conversion in accordance with the terms and conditions of the Preference
Unit term sheet or other securities, (iii) ERP Units to partners holding ERP
Units if and to the extent of each such partner's participation in any
reinvestment program, (iv) Preference Units to EQR upon the issuance by EQR of
securities other than EQR Common and the contribution of the net proceeds
thereof as a capital contribution to ERP and (v) in all other cases, ERP Units
and/or Preference Units, as determined by EQR as general partner, in its
discretion, to existing or newly-admitted partners, in exchange for the
contribution by a partner of additional capital contributions to ERP.
UNIT OPTION PLAN
Under the EWRLP Partnership Agreement, EWR as general partner may cause EWRLP
to adopt option plans pursuant to which employees of EWRLP or EW Management
(including any successors) may acquire EWR Common or EWRLP Units to employees
of EWRLP or any of EWR's subsidiaries.
The ERP Partnership Agreement provides that EQR as general partner may cause
ERP to issue ERP Units to EQR upon the issuance by EQR of additional EQR Common
(other than in exchange for ERP Units) and the contribution of the net proceeds
from such additional issuance as a capital contribution to ERP, however, EQR
may issue EQR Common in connection with share option plans, dividend
reinvestment plans without receiving any proceeds and that the issuance of such
EQR Common will nonetheless entitle EQR to additional ERP Units.
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INDEMNIFICATION
The EWRLP Partnership Agreement provides that EWRLP will indemnify EWR as
general partner, or any officer of EWRLP or EWR and certain other persons or
entities (collectively, "Indemnitees") from and against any and all losses,
claims, damages, liabilities, joint or several, expenses (including legal fees
and expenses), judgments, fines, settlements and other amounts arising from
proceedings, whether they are civil, criminal, administrative, or
investigative, that relate to the operations of EWRLP in which any Indemnitees
may be involved, or is threatened to be involved, as a party or otherwise,
unless it is established that: (i) the act or omission of the Indemnitees was
material to the matter giving rise to the proceeding and either was committed
in bad faith or was the result of active and deliberate dishonesty; (ii) the
Indemnitees actually received an improper personal benefit in money, property
or services; or (iii) in the case of a criminal proceeding, the Indemnitees
have reasonable cause to believe that the act or omission was unlawful. Under
the EWRLP Partnership Agreement, any indemnification is to be made only out of
the assets of EWRLP. Limited partners are not subject to personal liability by
reason of the indemnification provisions. The ERP Partnership Agreement
contains similar indemnification provisions.
FINANCIAL STATEMENTS AND REPORTS
EWR as general partner is required to deliver to the limited partners (i) no
later than 120 days after the close of each EWRLP fiscal year, an annual
report containing financial statements of EWRLP, or of EWR if such statements
are prepared solely on a consolidated basis with EWR, for such EWRLP fiscal
year and (ii) no later than 60 days after the close of each calendar quarter,
a report containing unaudited financial statements of EWRLP, or of EWR, if
such statements are prepared solely on a consolidated basis with EWR, and such
other information as may be required by applicable law or regulation, or as
EWR as general partner deems appropriate. Under the ERP Partnership Agreement,
EQR as general partner is required to cause ERP to prepare and distribute to
the partners of ERP annual financial data sufficient to reflect the status and
operations of ERP and its assets and to enable each partner to file its
federal income tax return. The ERP Partnership Agreement does not require or
provide for the distribution of quarterly financial information to the
partners.
MERGERS
DRULPA provides that limited partnerships may enter into mergers,
consolidations or similar transactions with other limited partnerships or
business entities. IRULPA does not contain a similar provision.
TRANSFER OR PLEDGE OF UNITS
Limited partners of EWRLP may, without the prior written consent of EWR as
general partner, subject to any applicable securities laws and certain other
restrictions: (i) transfer all or any portion of its EWRLP Units to EWR, (ii)
transfer all or any portion of its EWRLP Units to an affiliate, another
limited partner or to an immediate family member, (iii) if such limited
partner is a natural person, transfer all or any portion of his or her EWRLP
Units upon his or her death to such limited partner's estate, executor,
administrator or personal representative or to such limited partner's
beneficiaries pursuant to a devise or bequest or by the laws of descent and
distribution or to a trust of which such limited partner is a settlor or co-
settlor with a member or his or her immediate family and the beneficiaries of
which include no person or entity other than such limited partner and/or such
limited partner's immediate family, (iv) transfer all or any portion of its
EWRLP Units pursuant to the exercise of a redemption right under the EWRLP
Partnership Agreement, (v) transfer all or any portion of its EWRLP Units to a
lending institution, which is not an affiliate of such limited partner, as
collateral or security for a bona fide loan or other extension of credit, and
transfer such pledged EWRLP Units to such lending institution in connection
with the exercise of remedies under such loan extension or credit, and (vi) if
such limited partner is an entity, transfer all or any portion of its EWRLP
Units to one or more entities that are wholly-owned and controlled by such
limited partner or by distributing EWRLP Units in a liquidation, winding up or
otherwise without consideration to the equity owners of such entity. In order
to effect such transfer, the limited partner must deliver to EWR as general
partner a duly executed copy of the instrument making such transfer and such
instrument must evidence the written acceptance by the assignee of all of the
terms and conditions of the EWRLP Partnership Agreement and represent that
such assignment was made in accordance with all applicable laws and
regulations.
Under the ERP Partnership Agreement, no limited partner (including
substituted limited partners) may, without the prior written consent of EQR
(which consent may be given or withheld in the sole discretion of ERP), sell,
assign, distribute or otherwise transfer (a "Transfer") all or any part of
his, her or its interest in ERP, except (i) by operation of law, testamentary
disposition, gift (outright or in trust), or by sale, in each case to or for
the benefit of his parent(s), spouse or descendants, (ii) pledges or other
collateral transfers effected by a limited partner to secure the repayment of
a loan or other obligation,
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provided, however, that each such pledgee will agree in writing, concurrent
with such pledge or other collateral transfer, to (y) subordinate his, her or
its rights with respect to the pledged interest to any and all rights granted
by the pledging limited partner to ERP and (z) to defer the exercise of its
rights as a secured creditor to realize upon the collateral in the case of an
event of default until the expiration of any applicable "lock-up" period under
the terms of any agreement between ERP and the pledging limited partner, (iii)
the exchange of ERP Units for shares of in EQR Common, and (iv) the
distribution of ERP Units or Preference Units by a limited partner to any of
its direct or indirect constituent partners or owners. A Transfer does not
include the conversion of a Preference Unit into one or more ERP Units nor the
conversion of a ERP Unit into an EQR Common.
The ERP Partnership Agreement also provides that EQR as general partner
reserves the right to require an opinion of counsel regarding such matters in
form and substances reasonably acceptable to EQR as a condition to any
Transfer. Limited partners of ERP must notify ERP of any Transfer of beneficial
interest or other interest which occurs without a transfer of record ownership,
as well as any pledge or other collateral transfer. No part of the interest of
a limited partner may be subject to the claims of any creditor, any spouse for
alimony or support, or to legal process, and may not be voluntarily alienated
or encumbered except as may be specifically provided for in the ERP Partnership
Agreement.
REDEMPTION/EXCHANGE OF UNITS
Under the EWRLP Partnership Agreement each limited partner has the right to
cause the EWRLP to redeem ("EWRLP Right of Redemption") all or any portion of
such limited partner's EWRLP Units for cash equal to the average daily market
price of share of EWR Common for ten consecutive trading days immediately
preceding the date EWR receives from the limited partner a notice of redemption
("Redemption Amount"). EWR may satisfy the EWRLP's Right of Redemption by
exchanging EWRLP Units and shares of EWR Common at a ratio of one for one
("Unit Adjustment Factor"), or cash equal to the Redemption EWR Amount, at
EWR's option. If a change is necessary to adjust the Unit Adjustment Factor,
the adjustment must have the effect to cause each EWRLP Unit to be exchangeable
for one share of EWR Common, without dilution.
AMENDMENTS TO PARTNERSHIP AGREEMENTS
Except for certain circumstances described below and certain amendments
permitted to be made without the consent of the limited partners, amendments to
the EWRLP Partnership Agreement require the consent EWR as general partner and
a majority of the limited partners interests (including those held by EWR as
general partner). Consent of the limited partners is required to amend the
EWRLP Partnership Agreement if such amendment would (i) convert a limited
partner's EWRLP Units into a general partner's interest, (ii) modify the
limited liability of a limited partner, (iii) alter the rights of a partner to
receive distributions, or allocations, (iv) alter or modify the EWRLP Right of
Redemption or Redemption Amount, (v) cause the termination of EWRLP, prior to
the end of the term of EWRLP, or (vi) amend the section in the EWRLP
Partnership Agreement entitled "Amendments of Partnership Agreement; Meetings."
Under the ERP Partnership Agreement, except for certain restrictions, the
Chairman of the Board of EQR is empowered to amend the ERP Partnership
Agreement, without the consent of the limited partners, in any respect other
than: (i) to enlarge the obligation of any partner to make contributions to the
capital of ERP; (ii) except as otherwise provided in the ERP Partnership
Agreement or as required by law, to modify the allocation of profits or losses
or distributions among the partners. (iii) to amend the sections of the ERP
Partnership Agreement entitled "Partnership," "Issuance and Conversion of
Units," "Limitations on Powers and Authorities of Partners," or "Transfer of
Partnership Units;" and (iv) to amend the section of the ERP Partnership
Agreement entitled "Amendment of Agreement." However, with respect to
subparagraphs (ii) and (iii) of this paragraph, the ERP Partnership Agreement
may be amended with the written consent of EQR and certain affiliates of Mr.
Zell and certain of other specified partners or their respective successors in
interest, as applicable, so long as they remain partners of ERP and those
limited partners holding not less that 67% of the aggregate partnership
interests held by all limited partners. With respect to subparagraphs (i) and
(iv) of this paragraph, the ERP Partnership Agreement may be amended only with
the written consent of all partners.
TRANSACTIONS AND RELATED DISPOSITIONS
Under the EWRLP Partnership Agreement, EWR as general partner may not engage
in any merger, consolidation or other combination with or into another entity
or sale of all or substantially all of its assets, or any reclassification, or
recapitalization or change of outstanding shares of EWR Common ("Partnership
Transaction") unless (i) under the terms of the Partnership Transaction, the
limited partners will not engage in a sale or exchange for federal income tax
purposes of their EWRLP Units or (ii) the Partnership Transaction also includes
a merger of EWRLP or sale of substantially all of the assets of EWRLP and as a
result of which all of the limited partners will receive for each EWRLP Unit
(after application of
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the Unit Adjustment Factor) an amount of cash, securities or other property
equal to, without taking into account any tax considerations, the greatest
amount of cash, securities or other property paid to a holder of one share of
EWR Common in consideration of one share of EWR Common in connection with the
Partnership Transaction. The ERP Partnership Agreement does not include a
similar provision. However, EQR as the general partner is authorized to acquire
any assets, and encumber, sell, ground lease or otherwise dispose of any or all
of the assets of ERP.
MEETINGS
Meetings of the partners of EWRLP may be called by EWR as general partner and
shall be called upon the receipt by EWR of a written request by the limited
partners holding 25% or more of the EWRLP Units, which request states the
nature of the business to be transacted. Notice of any such meeting must be
given to all partners not less than seven (7) nor more than 30 days prior to
the date of such meeting. Any action required or permitted to be taken at a
meeting of the partners may be taken without a meeting if a written consent
setting forth the action so taken is signed by a majority of the percentage
interests of the partners. The ERP Partnership Agreement does not contain a
provision relating to meetings of the partners.
PRINCIPAL HOLDERS OF EWRLP
The following table sets forth the beneficial ownership of EWRLP Units as of
September 8, 1997 for (i) the Chief Executive Officer and each of the four
other most highly compensated executive officers of EWR, (ii) directors of the
EWR, (iii) each person who is a holder of EWRLP Units holding more than a 5%
interest in EWRLP and (iv) the directors and executive officers of EWR, as a
group. Unless otherwise indicated in the footnotes, all of such units are owned
directly, and the indicated person or entity has sole voting and disposition
power. EWRLP has no directors.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF ALL UNITS
NAME AND ADDRESS OF BENEFICIAL OWNER (1) UNITS OUTSTANDING
- ---------------------------------------- ---------- --------------------
<S> <C> <C>
Stephen O. Evans (2)........................... 2,859,450 11.5%
F. Keith Withycombe (3)........................ 2,726,200 10.9%
Richard G. Berry (4)........................... 110,000 *
G. Edward O'Clair.............................. 4,724 *
Paul Fannin.................................... -- --
Gadi Kaufmann.................................. -- --
Joseph W. O'Connor............................. -- --
G. Peter Bidstrup.............................. -- --
John O. Theobald............................... -- --
Evans Withycombe Residential, Inc.............. 20,372,163 81.7%
EW Investments Limited Partnership............. 1,632,114 6.5%
All Executive Officers and Directors as a Group
(12 persons).................................. 3,746,373 15.0%
</TABLE>
- -------
* Less than 1%
(1) The address for each of the persons or entities listed above, except Mr.
O'Connor, is 6991 East Camelback Road, Suite A-200, Scottsdale, Arizona
85251. The address for Mr. O'Connor is 225 Franklin Street, Boston,
Massachusetts 02110.
(2) Stephen O. Evans directly owns 769,899 EWRLP Units, representing 3.1% of
the outstanding EWRLP Units. Mr. Evans, as the Chairman of the general
partner of EW Investments Limited Partnership ("EWILP"), may be deemed the
beneficial owner with shared voting and dispositive power of 1,632,114
Units held by EWILP. Additionally, Mr. Evans, as a manager of The Evans
Family Limited Liability Company ("Evans LLC"), may be deemed the
beneficial owner with shared voting and dispositive power of 135,550 EWRLP
Units held by Evans LLC. Mr. Evans may also be deemed the beneficial owner
with shared voting and dispositive power of an aggregate of 321,887 EWRLP
Units held by EW Cottonwood/Tempe Limited Partnership, EW Lakewood Limited
Partnership, EW/SWS Investors Limited Partnership and EW Kachina Limited
Partnership (collectively, the "EW LPs"). Mr. Evans is the Chairman of
Evans Withycombe Communities, Inc., an Arizona corporation ("Communities"),
which is the general partner of each of the EW LPs. In the aggregate, Mr.
Evans may be deemed to beneficially own 2,859,450 EWRLP Units, which
represents 11.5% of the outstanding EWRLP Units.
(3) F. Keith Withycombe directly owns 772,199 Units, representing 3.1% of the
outstanding EWRLP Units. Mr. Withycombe, as the President and Treasurer of
the general partner of EWILP, may be deemed the beneficial owner with
shared voting and dispositive power of 1,632,114 EWRLP Units held by EWILP.
Mr. Withycombe may also be deemed the beneficial owner with shared voting
and dispositive power of an aggregate of 321,887 EWRLP Units held by the EW
LPs. Mr. Withycombe is the President and Treasurer of Communities. In the
aggregate, Mr. Withycombe may be deemed to beneficially own 2,726,200 EWRLP
Units, which represents 10.9% of the outstanding EWRLP Units.
(4) Richard G. Berry, a limited partner of EWILP, may be deemed the beneficial
owner of 110,000 Units held by EWILP.
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LEGAL MATTERS
Certain legal matters in connection with the Transactions will be passed
upon for EQR by Rudnick & Wolfe in Chicago, Illinois and Rosenberg &
Liebentritt, P.C. in Chicago, Illinois. Errol R. Halperin, a partner of
Rudnick & Wolfe, is a trustee of EQR. Attorneys of Rudnick & Wolfe
beneficially own less than 1% of the outstanding EQR Common, either directly
or upon the exercise of options. Sheli Z. Rosenberg, a principal of Rosenberg
& Liebentritt, P.C., is a trustee of EQR. Attorneys of Rosenberg &
Liebentritt, P.C. beneficially own less than 1% of the outstanding EQR Common,
either directly or upon the exercise of options. Certain legal matters in
connection with the Transactions will be passed upon for EWR by Gibson, Dunn &
Crutcher LLP, Los Angeles, California. Ballard Spahr Andrews & Ingersoll in
Baltimore, Maryland, will pass upon certain matters of Maryland law relating
to the Merger Agreement and Articles of Merger under Maryland law.
EXPERTS
The consolidated financial statements of EWRLP appearing in the Current
Report of ERP on Form 8-K, dated September 10, 1997 and appearing in this
Consent Solicitation/Prospectus/Information Statement; the consolidated
financial statements of Wellsford Residential Property Trust and its
subsidiaries included in ERP's Current Report on Form 8-K, dated May 30, 1997;
the consolidated financial statements of ERP appearing in ERP's 1996 Annual
Report (Form 10-K) for the year ended December 31, 1996; and the Statements of
Revenue and Certain Expenses of certain properties either acquired or expected
to be acquired in 1996 or 1997, appearing in the Current Reports of ERP on
Forms 8-K or 8-K/A dated May 23, 1996, November 15, 1996, May 20, 1997, August
15, 1997, September 17, 1997 and October 9, 1997; have all been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein or incorporated herein by reference, and are
incorporated herein by reference in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of ERP and its subsidiaries appearing
in ERP's Annual Report (Form 10-K) at December 31, 1995 and for the years
ended December 31, 1995 and 1994 incorporated herein by reference have been
audited by Grant Thornton LLP, independent public accountants, as indicated in
their report with respect thereto, and are incorporated in this Consent
Solicitation/Prospectus/Information Statement in reliance upon the authority
of said firm as experts in accounting and auditing.
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GLOSSARY
The following list of capitalized terms used in this Consent Solicitation/
Prospectus/Information Statement are defined as follows. See "Summary" at page
1 for definitions of the principals involved in the Transactions.
"ACMs" means asbestos-containing materials.
"Acquisition Proposal" means a merger, acquisition, tender offer, exchange
offer, consolidation, sale of assets or similar transaction involving all or
any significant portion of the assets or any equity securities of, EWR or any
of its subsidiaries, other than the transactions contemplated by the Merger
Agreement.
"Act" means the Taxpayer Relief Act of 1997.
"Affiliates" means persons who control, are controlled by or are under the
common control with an issuer.
"Agreed Value" means the fair market value of partnership assets contributed
or revalued by ERP at the time of the Asset Contribution.
"AMT" means alternate minimum tax.
"AMTI" means alternative minimum taxable income.
"Antitrust Division" means the Antitrust Division of the Department of
Justice.
"Articles" means the Articles of Merger with respect to the Merger
Agreement.
"Asset Contribution" means the contribution of all of the assets (subject to
its liabilities) of EWRLP to ERP in exchange for ERP Units.
"Asset Contribution Agreement" means the Asset Contribution Agreement dated
August 27, 1997 by and between ERP and EWRLP.
"Berry" means Richard G. Berry, an individual.
"Break-up Expenses" means the out-of-pocket expenses incurred in connection
with the Merger Agreement and the transactions contemplated thereunder, up to
a maximum of $2.5 million.
"Break-up Fee" means an amount equal to the lesser of (i) $14 million plus
Break-up Expenses (the "Base Amount") and (ii) the sum of (A) the maximum
amount that can be paid to EQR without causing it to fail to meet the
requirements of Section 856(c)(2) and (3) of the Code determined as if the
payment of such amount did not constitute income described in Sections
856(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code ("Qualifying Income"), as
determined by independent accountants of EQR, and (B) in the event EQR
receives a letter from outside counsel indicating that EQR has received a
ruling from the IRS holding that EQR's base receipt of the Base Amount would
either constitute Qualifying Income or would be excluded from gross income
within the meaning of Sections 856(c)(2) and (3) of the Code or that the
receipt by EQR of the remaining balance of the Base Amount following the
receipt of and pursuant to such ruling would not be deemed constructively
received prior thereto, the Base Amount less the amount payable under clause
(A) above.
"Built-in Gain" or "Built-in Loss" means the difference between the fair
market value of property contributed to ERP and its tax basis at the time of
contribution.
"Change in Control Agreements" means agreements entered to by certain
officers of EWR which provide severance payments, pro rata bonus, payments,
vesting of stock options and restricted shares, vesting of employer
contributions to the EWR 401(k) Plan, and tax payments to offset the impact of
any excise tax resulting from the above payments upon a termination of
employment following a change in control.
"Closing" means the closing of the Merger as set forth in the Merger
Agreement.
"Closing Date" means the third business day after the satisfaction or waiver
of the conditions set forth in the Merger Agreement.
"Closing Price" means the closing price of a share of EQR Common as reported
on the NYSE on the Closing Date.
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"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Commitment" means any commitment, contractual obligation, capital
expenditure or transaction.
"Communities" means certain community properties owned and operated by EWR.
"Comparable Companies" means companies engaged in businesses which J. P.
Morgan judged to be analogous to that of EWR's.
"Consent Period" means the period of time during which consents will be
solicited prior to the execution and delivery of the Articles regarding the
Merger to the Department.
"Contemplated Transactions" means a merger, consolidation, sale or transfer
of all or substantially all of the assets or earning power of EWRLP and EWR in
connection with the EWRLP Transfer Amendment.
"Contributed Properties" means the properties contributed to ERP pursuant to
the Asset Contribution.
"Contributors" means certain persons and entities which have agreed to
contribute their EWRLP Units in accordance with the Unit Contribution
Agreement.
"Department" means the State Department of Assessments and Taxation of
Maryland.
"Distribution" means following the Asset Contribution, EWRLP will distribute
ERP Units to the holders of EWRLP Units.
"DRULPA" means the Delaware Revised Uniform Limited Partnership Act, as
amended.
"11.2 Amendment" means the Amendment to the EWRLP Partnership Agreement
dated June 18, 1997 which relates to Section 11.2.
"EBITDA" means earnings before interest, taxes, depreciation and
amortization.
"Effective Time" means the time when the Department accepts the Articles of
Merger for record, or as such time as EQR and EWR shall agree should be
specified in the Articles of Merger (not to exceed thirty (30) days after the
Articles of Merger are accepted for record by the Department).
"Eligible Entity" means a domestic business not otherwise classified as a
corporation and which has at least two members.
"Eligible Entity Regulations" means certain regulations published by the IRS
regarding Eligible Entities.
"EPMC" means Equity Properties Management Corp.
"EQR Common" means common shares of beneficial interest, par value $0.01 per
share, of EQR.
"EQR Financing Partnerships" means the limited partnerships and limited
liability companies that own the beneficial interest of certain properties
encumbered by mortgage financing.
"EQR IPO" means the initial public offering of EQR Common by EQR.
"EQR Management Corps." means Equity Residential Properties Management,
Inc., a Delaware corporation, and Equity Residential Properties Management,
Inc. II, a Delaware corporation, collectively.
"EQR Option" means Mr. Evans will receive an option to purchase 115,500
shares of EQR Common.
"EQR Preferred" means preferred shares of beneficial interest $0.01 par
value, of EQR.
"EQR Properties Management, LP" means Equity Residential Properties
Management, Limited Partnership, an Illinois limited partnership.
"EQR Properties Management, LP II" means Equity Residential Properties
Management, L.P. II, an Illinois limited partnership.
"EQR Properties Management Partnerships" means EQR Properties Management,
LP, and EQR Properties Management, LP II, collectively.
"EQR Share Plan" means EQR's Second Amended and Restated Share Option and
Share Award Plan.
G-2
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"ERP Amendment" means the amendment to the ERP Partnership Agreement to
expand the ability of EQR to conduct business other than as the general partner
of ERP.
"ERP Partnership Agreement" means the Fourth Amended and Restated Limited
Partnership Agreement dated September 30, 1995 by and among EQR and certain
limited partners.
"ERP Unitholder" means a holder of units of limited partnership interest in
ERP.
"ERP Units" means units of limited partnership interest in ERP.
"Evans" means Stephen O. Evans, an individual.
"EW Finance, Inc." means Evans Withycombe Finance, Inc., a Delaware
corporation.
"EW Finance LP" means Evans Withycombe Finance Partnership, LP, a Delaware
limited partnership.
"EW Management, Inc." means Evans Withycombe Management, Inc., an Arizona
corporation.
"EWR Board of Directors" means the board of directors of EWR.
"EWR Common" means common stock, par value $0.01 per share, of EWR.
"EWR Debt" means that EQR has agreed that it will not voluntarily prepay the
securitized debt of EWR Finance LP or the fixed rate loan from Northwestern
Mutual Insurance Company to EWRLP.
"EWR Equityholders" means EWR shareholders and EWRLP's limited partners.
"EWR Special Meeting" means a special meeting of shareholders of EWR to be
held at , Scottsdale, Arizona, on December 23, 1997, at 9:00
a.m., Arizona time.
"EWRLP Amendment" means the amendment to the EWRLP Partnership Agreement to
allow (i) EQR and ERP to serve as co-general partners of EWRLP upon the
effectiveness of the Merger, (ii) subsequent to the Asset Contribution, to
permit EQR and ERP, as co-general partners of EWRLP, to dissolve EWRLP upon the
terms stated in the Asset Contribution Agreement and (iii) certain additional
amendments to permit the Transactions to be effected without further approval
of the limited partners of EWRLP.
"EWRLP Partnership Agreement" means the Amended and Restated Agreement of
Limited Partnership of EWRLP dated as of August 17, 1994 by and among EWR and
certain limited partners.
"EWRLP Right of Redemption" means the right of each limited partner of EWRLP
to cause EWRLP to redeem all of any portion of such limited partners EWRLP
Units for the Redemption Amount.
"EWRLP Unitholder" means holders of limited partnership units in EWRLP.
"EWRLP Units" means units of limited partnership interest in EWRLP.
"EWRLP Units" means units of limited partnership of EWRLP.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchanging Partners" means holders of EWRLP Units who contribute their EWRLP
Units to ERP in exchange for a number of ERP Units equal to the number of EWRLP
Units so exchanged multiplied by the Exchange Ratio.
"Exchange Ratio" means the ratio of 0.5 at which outstanding shares of EWR
Common will be converted into shares of EQR Common pursuant to the Merger.
"FAD" means funds available for distribution.
"FFO" or "funds from operations" means net income (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization, and after adjustments from
unconsolidated partnerships and joint ventures.
G-3
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"Financing Partnership" means Evans Withycombe Finance Partnership, L.P., a
Delaware limited partnership.
"FIRPTA" means the Foreign Investment in Real Property Tax Act, as amended.
"FTC" means the Federal Trade Commission.
"GAAP" means generally accepted accounting principles.
"HSR Act" means the Hart-Scott Rodino Antitrust Improvements Act of 1976, as
amended.
"Indemnities means EWR as general partner, or any officer or director of
EWRLP or EWR and certain other persons or entities who EWRLP will indemnify
under the EWRLP Partnership Agreement.
"Initial Basis" means a partner's initial basis in ERP Units, which generally
will be equal to his partnership interest in ERP, as the case may be, such
partnership interest reduced by any cash received and any reduction of his
share of ERP liabilities and increased by the increase in his share of
partnership liabilities.
"Inside Basis" means a partner's share of the basis of ERP in its assets,
plus any basis adjustment pursuant to Section 743(b) of the Code.
"Interested Shareholder" means any person who beneficially owns 10% or more
of the voting power of a Maryland REIT's or corporation's shares of beneficial
interest or an affiliate of the trust who, at any time within the two-year
period prior to the date in question, was the beneficial owner of 10% or more
of the voting power of the REIT's or corporation's shares of beneficial
interest.
"IRS" means the Internal Revenue Service.
"IRULPA" means the Illinois Revised Uniform Limited Partnership Act, as
amended.
"J.P. Morgan" means J. P. Morgan Securities, Inc., EQR's financial advisor.
"LIBOR" means the London Interbank Offered Rate.
"Lurie Family Trusts" means trusts established for the benefit of the family
of Mr. Robert Lurie, as deceased partner of Mr. Sam Zell.
"Material Adverse Change" means a material adverse change in business,
financial condition or results of operations taken as a whole.
"MGCL" means the Maryland General Corporation Law, as amended.
"Merger" means the merger of EWR into EQR as set forth in the Merger
Agreement.
"Merger Agreement" means the Agreement and Plan of Merger dated August 27,
1997 by and between EQR and EWR.
"Morgan Stanley" means Morgan Stanley Realty Incorporated.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"NAV" means net asset value.
"Neithercut" means David Neithercut, an individual.
"NOI" means net operating income equal to total revenues less certain
operating expenses.
"NYSE" means the New York Stock Exchange.
"Option Cash Out Agreement" means an agreement entered into by the holders of
options to purchase shares of EWR Common not to exercise such option in
consideration for a cash payment equal to the difference between (i) the
Exchange Ratio multiplied by the closing price of a share of EQR Common on the
NYSE on the Closing Date and (ii) the applicable exercise price of such option,
multiplied by the number of shares of EWR Common subject to such option.
G-4
<PAGE>
"Original ERP Units" means certain ERP Units held by the Zell Holders issued
at the time of the IPO.
"Original Owners" means the Starwood Original Owners and the Zell Original
Owners.
"Other Securities" means securities of EQR other than EQR Common.
"Ownership Limit" means to facilitate maintenance of its qualification as a
REIT for federal income tax purposes, EQR generally will prohibit ownership,
directly or by virtue of the attribution provisions of the Code, by any single
shareholder of more than 5% of the issued and outstanding shares of EQR Common
and generally will prohibit ownership, directly or by virtue of the attribution
provisions of the Code, by any single shareholder of more than 5% of the issued
and outstanding shares of any class or series of EQR Preferred Shares.
"Partnership Agreement" means the Fourth Amended and Restated Agreement of
Limited Partnership Agreement dated September 30, 1995 by and among EQR and
certain limited partners.
"Partnership Transaction" means any merger, consolidation or other
combination with or into another entity or sale of all or substantially all of
its assets, or any reclassification, or recapitalization or change of
outstanding EWR Common as contemplated by the EWRLP Partnership Agreement.
"Partnerships" means EWRLP and ERP.
"Preference Units" means ERP Units with those designated preferences as set
forth in the ERP Partnership Agreement.
"Preferred Share Offerings" means in June, 1995, EQR issued 6,120,000 Series
A Preferred Shares pursuant to a preferred share offering; in November 1995,
EQR issued 5,000,000 depository shares each representing a 1/10 fractional
interest in a Series B Preferred Share pursuant to a depository share offering;
in September 1996, EQR issued 4,600,000 depository shares each representing a
1/10 fractional interest in a Series C Preferred Share pursuant to a depository
share offering, in May 1996, EQR issued 7,000,000 depository shares each
representing a 1/10 fractional interest in a Series D Preferred Share pursuant
to a depository share offering and also in May 1997 subsequent to the merger of
EQR with Wellsford, Wellsford's 3,999,800 Series A Cumulative Convertible
Preferred Shares of Beneficial Interest were redesignated as EQR's 3,999,800
Series E Preferred Shares and Wellsford's 2,300,000 Series B Cumulative
Redeemable Preferred Shares of Beneficial Interest were redesignated as EQR's
2,300,000 Series F Preferred Shares.
"Proposals" means the proposals submitted to the limited partners of EWRLP
for their consent with respect to the Asset Contribution and the EWRLP
Amendment.
"QRS" means qualified REIT subsidiaries.
"QRS Corporation" means qualified REIT subsidiary.
"Redemption Amount" means the amount equal to the average daily market price
of EWR Common for ten consecutive trading days immediately preceding the date
EWR receives from the limited partners a notice of redemption.
"Redemption Right" means the right of a holder of ERP Units to require
redemption of ERP Units.
"Registration Rights Agreement" means the Registration Rights Agreement
entered into by EQR and certain former holders of EWRLP Units where each holder
of EWRLP Units who did not already contribute his, her or its EWRLP Units in
exchange for ERP Units pursuant to the Unit Exchange Offer will become a holder
of ERP Units.
"Registration Statement" means the registration statement on Form S-4 filed
by ERP.
"Regulations" means existing and proposed United States Treasury Department
regulations promulgated under the Code.
"Regulations Effective Date" means January 1, 1997, the date which the Entity
Classification Regulations apply.
"REIT" means a real estate investment trust, as such term is defined in the
Code.
"Revolving Credit Facility" means the $225,000,000 credit facility under a
certain Credit Agreement dated September 24, 1996 by and among EWRLP, Bank One,
Arizona, NA and certain other banks.
G-5
<PAGE>
"RIC" means regulated investment company.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the Internal Revenue Service.
"Starwood" means Starwood Capital Partners, L.P.
"Starwood Original Owners" means Starwood and its affiliates which
contributed 23 of the properties at the time of the EQR IPO.
"Starwood Original Partners" means certain entities controlled by Starwood
Capital Partners L.P., an Illinois limited partnership, and its affiliates
which contributed 23 of the properties to EQR at the time of the IPO.
"Stock Purchase Agreement" means the Stock Purchase Agreement dated August
27, 1997 by and among Messers, Evans, Withycombe, Neithercut and Strohm.
"Strohm" means Bruce C. Strohm, an individual.
"Subsidiary Entities" means the EQR Properties Management Partnerships, the
EQR Management Corps., the EQR Financing Partnerships and the QRS
Corporations.
"Subsidiary Partnerships" means ERP, EWRLP, the EQR Financing Partnerships,
EQR Properties Management, LP, EQR Properties Management, LP II, EW Finance
LP, collectively.
"Superior Proposal" means a bona fide acquisition proposal by a third party
in which a majority of the members of the EWR Board of Directors determines in
good faith to be more favorable to EWR's shareholders from a financial point
of view than the Merger and the EWR Board of Directors determines is
reasonably capable of being consummated.
"TMP" means the Tax Matters Partner, the partner who represents the
partnership in tax matters.
"TMT" means tentative minimum tax.
"Trading Day(s)" means any day on which shares of EWR Common and EQR Common
are traded on the NYSE and reported on its Composite Tape.
"Transfer" means the sale, assignment, distribution or other transfer of ERP
Units by ERP Unitholders pursuant to the ERP Partnership Agreement.
"Transaction Comparables" means transactions selected by J. P. Morgan with
respect to purchase price per share to calculate FFO transaction multiples.
"Transactions" means the Merger, Asset Contribution and Unit Exchange Offer.
"UBTI" means unrelated business taxable income, as defined in Section 512(a)
of the Code.
"Unit Adjustment Factor" means the ratio of 1.0 at which EWRLP Units are
converted into shares of EWR Common in accordance with the EWRLP Partnership
Agreement.
"Unit Exchange Offer" means that holders of EWRLP Units are offered the
opportunity to contribute their EWRLP Units to ERP in exchange for a number of
ERP Units equal to the number of EWRLP Units so exchanged multiplied by the
Exchange Ratio.
"USRPIs" means United States Real Property Interests.
"Wellsford" means Wellsford Residential Property Trust.
"Withycombe" means F. Keith Withycombe, an individual.
"Zell Holders" means certain beneficial holders affiliated with Mr. Sam
Zell.
"Zell Original Owners" means certain affiliates of Mr. Sam Zell which
contributed 33 of the properties to EQR at the time of the EQR IPO.
G-6
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EVANS WITHYCOMBE RESIDENTIAL, L. P.
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-3
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994........................................................... F-4
Consolidated Statements of Partners' Capital for the years ended December
31, 1996, 1995 and 1994................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Schedule III--Real Estate Investments and Accumulated Depreciation as of
December 31, 1996. All other schedules for which provision is made in
the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and therefore have been omitted............................ F-17
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Partners
Evans Withycombe Residential, L.P.
We have audited the accompanying consolidated balance sheets of Evans
Withycombe Residential, L.P. ("EWRLP") as of December 31, 1996 and 1995 and
the related consolidated statements of income, partners' capital and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedule listed in the Index on
page F-1. These financial statements and the schedule are the responsibility
of EWRLP's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of EWRLP at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects the information set forth therein.
Ernst & Young LLP
Phoenix, Arizona
January 31, 1997
F-2
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Real Estate:
Land............................................... $121,915 $ 95,908
Buildings and improvements......................... 543,839 389,846
Furniture and fixtures............................. 29,567 23,736
Construction-in-progress........................... 66,229 77,693
-------- --------
761,550 587,183
Less accumulated depreciation...................... (38,331) (17,511)
-------- --------
723,219 569,672
Cash and cash equivalents............................ 2,568 3,634
Restricted cash...................................... 1,622 522
Accounts and notes receivable........................ 2,702 1,346
Deferred costs, net of accumulated amortization of
$1,265 and $507 at December 31, 1996 and 1995,
respectively........................................ 3,838 2,946
Other assets......................................... 1,518 1,444
-------- --------
Total assets..................................... $735,467 $579,564
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage and notes payable........................... $436,172 $297,456
Accounts payable and other liabilities............... 7,782 9,365
Distributions payable................................ -- 7,901
Accrued interest..................................... 1,417 605
Accrued property taxes............................... 2,912 2,358
Resident security deposits........................... 1,818 1,497
Prepaid rent......................................... 585 438
-------- --------
Total liabilities.................................... 450,686 319,620
Minority interest.................................... 827 889
Partners' capital.................................... 283,954 259,055
-------- --------
Total liabilities and partners' capital.......... $735,467 $579,564
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT FOR NUMBER OF UNITS AND PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
EVANS WITHYCOMBE EVANS WITHYCOMBE EVANS WITHYCOMBE
RESIDENTIAL, RESIDENTIAL, RESIDENTIAL, L.P.
L.P. L.P. AND GROUP
---------------- ---------------- -----------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
---------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues:
Rental................... $ 94,350 $ 68,864 $ 51,097
Third party management
fees.................... 1,157 1,268 1,668
Interest and other....... 6,119 4,399 4,194
---------- ---------- ----------
Total revenues......... 101,626 74,531 56,959
---------- ---------- ----------
Expenses:
Repairs and maintenance.. 11,607 8,293 6,288
Property operating....... 12,713 8,699 7,834
Advertising.............. 1,864 1,244 966
Real estate taxes........ 6,915 4,723 3,204
Property management...... 3,225 2,825 2,505
General and
administrative.......... 1,387 1,321 1,175
Interest................. 24,225 12,650 7,836
Depreciation and
amortization............ 20,885 13,762 10,333
Other.................... -- -- 5,233
---------- ---------- ----------
Total expenses......... 82,821 53,517 45,374
---------- ---------- ----------
Income before minority
interest.................. 18,805 21,014 11,585
Minority interest.......... (75) (89) (42)
---------- ---------- ----------
Net income................. $ 18,730 $ 20,925 $ 11,543
========== ========== ==========
Earnings per unit.......... $ 0.84 $ 1.02
========== ==========
Earnings per unit, period
from August 17 to
December 31, 1994......... $ 0.38
==========
Weighted average units
outstanding .............. 22,184,395 20,590,873 20,086,884
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(AMOUNTS IN THOUSANDS, EXCEPT FOR NUMBER OF UNITS AND PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
UNAMORTIZED
EVANS OTHER RESTRICTED
WITHYCOMBE LIMITED UNITS
NUMBER OF RESIDENTIAL, PARTNERS EMPLOYEE
UNITS INC. CAPITAL COMPENSATION TOTAL
---------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Partners' capital,
December 31, 1993...... -- $ -- $142,886 $ -- $142,886
Capital contributions. -- -- 9,660 -- 9,660
Distributions......... -- -- (15,204) -- (15,204)
Net income, January 1
to August 16, 1994... -- -- 4,012 -- 4,012
---------- -------- -------- ------- --------
-- -- 141,354 -- 141,354
The Offering and
formation of EWRLP... 20,140,530 205,664 (88,011) -- 117,653
Minority interest in
Financing Partnership
at date of offering.. -- (1,594) -- -- (1,594)
Net Income, August 17
to December 31, 1994. -- 5,983 1,548 -- 7,531
Distributions ($.55
per unit)............ -- (8,812) (2,265) -- (11,077)
---------- -------- -------- ------- --------
Partners' capital,
December 31, 1994...... 20,140,530 201,241 52,626 -- 253,867
Net income............ -- 16,331 4,594 -- 20,925
Distributions ($1.50
per unit)............ -- (24,102) (6,801) -- (30,903)
Issuance of units for
acquisition of
apartment
communities.......... 710,550 -- 14,207 -- 14,207
Conversion of limited
partners' units into
common stock......... -- 390 (390) -- --
Issuance of restricted
units for executive
deferred
compensation......... 82,802 1,657 -- (1,657) --
Amortization of
deferred
compensation......... -- -- -- 959 959
---------- -------- -------- ------- --------
Partners' capital,
December 31, 1995...... 20,933,882 195,517 64,236 (698) 259,055
Net income............ -- 14,720 4,010 -- 18,730
Distributions on units
($1.58 per unit)..... -- (28,040) (7,545) -- (35,585)
Purchase of units by
Evans Withycombe
Residential, Inc.
from proceeds of
second offering, net
of underwriting
discount and offering
costs of $3,237...... 2,088,889 40,891 -- -- 40,891
Conversion of limited
partners' units into
common stock......... -- 2,583 (2,583) -- --
Purchase of units from
proceeds from the
exercise of stock
options.............. 19,500 390 -- -- 390
Issuance of restricted
units................ 10,895 240 -- (240) --
Forfeiture of
restricted units..... (8,729) -- -- -- --
Amortization of
deferred
compensation......... -- -- -- 473 473
---------- -------- -------- ------- --------
Partners' capital,
December 31, 1996...... 23,044,712 $226,301 $ 58,118 $ (465) $283,954
========== ======== ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
EVANS
EVANS EVANS WITHYCOMBE
WITHYCOMBE WITHYCOMBE RESIDENTIAL,
RESIDENTIAL, RESIDENTIAL, L.P. AND
L.P. L.P GROUP
------------ ------------ ------------
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................. $ 18,730 $ 20,925 $ 11,543
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 21,578 14,420 10,703
Minority Interest.................... 75 89 42
Amortization of executive deferred
comp................................ 390 693 267
Write-off of real estate assets...... 227 -- --
Write-off of deferred loan costs..... -- 172 --
Decrease (increase) in assets
Restricted cash...................... (1,100) 561 (129)
Accounts and notes receivable........ (1,356) (934) (468)
Other assets......................... (74) (1,051) 3,279
(Decrease) increase in liabilities
Accounts payable and other
liabilities......................... (1,583) 540 4,043
Due to related parties and owners.... -- -- (6,482)
Accrued interest..................... 812 505 (818)
Accrued property taxes............... 554 825 62
Resident security deposits........... 321 500 54
Prepaid rent......................... 147 (262) (98)
--------- --------- ---------
Net cash provided by operating
activities........................ 38,721 36,983 21,998
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of real estate assets......... (127,811) (116,716) (207,978)
Payment for organization and loan
costs................................. (1,650) (1,345) (3,673)
--------- --------- ---------
Net cash (used) in investing
activities........................ (129,461) (118,061) (211,651)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Public Offering, net of
expenses.............................. 40,891 -- 181,262
Proceeds from exercise of options...... 390 -- --
Proceeds from mortgage notes and credit
facility.............................. 269,778 315,653 122,522
Principal payments on mortgage notes... (177,762) (202,477) (101,280)
Minority interest distributions........ (137) (447) (389)
Distributions paid..................... (43,486) (30,456) (5,149)
Distributions to owners................ -- -- (17,012)
Capital contributions.................. -- -- 9,660
--------- --------- ---------
Net cash provided by financing
activities........................ 89,674 82,273 189,614
Net increase (decrease) in cash and
cash equivalents...................... (1,066) 1,195 (39)
--------- --------- ---------
Cash and cash equivalents, beginning of
year.................................. 3,634 2,439 2,478
--------- --------- ---------
Cash and cash equivalents, end of year. $ 2,568 $ 3,634 $ 2,439
========= ========= =========
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest. $ 22,648 $ 11,487 $ 8,284
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
ACTIVITY
Assumption of debt related to the
acquisition of apartment communities.. $ 46,700 $ 56,493 $ --
Acquisition of apartment communities
through issuance of units in EWRLP.... $ -- $ 14,207 $ --
Issuance of stock under restricted
stock incentive plan.................. $ 83 $ 959 $ --
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT FOR NUMBER OF UNITS OR SHARES AND PER UNIT
AMOUNTS)
1. ORGANIZATION AND FORMATION OF EWRLP
Evans Withycombe Residential, L.P. (the "Operating Partnership") is one of
the largest developers and managers of upscale apartment communities in
Arizona and is expanding its operation into selected sub-markets in Southern
California. EWRLP owns and manages 49 stabilized multifamily apartment
communities containing 13,905 units, of which 44 stabilized multifamily
apartment communities are located in Phoenix and Tucson, Arizona, containing a
total of 12,005 units and five stabilized multifamily apartment communities
are located in the Riverside/San Bernardino, California market containing a
total of 1,900 units. EWRLP considers an apartment community stabilized when
it reaches 93 percent physical occupancy. EWRLP is also in the process of
developing or expanding five multifamily apartment communities comprising
1,078 units in its Arizona markets. EWRLP is fully integrated with expertise
in development, acquisitions, construction and management of apartment
communities. EWRLP had approximately 580 employees at December 31, 1996.
EWRLP was formed in June 1994 to develop, acquire, own and manage upscale
multifamily apartment communities for Evans Withycombe Residential, Inc. On
August 17, 1994, Evans Withycombe Residential, Inc. completed an Initial
Public Offering and engaged in various formation transactions designed to
transfer ownership of the communities and other assets of the predecessor
company to EWRLP or Evans Withycombe Finance Partnership, L.P. (the "Financing
Partnership"). EWRLP owns 99.0 percent of Evans Withycombe Finance Partnership
L.P. and has a 99.0 percent economic interest in Evans Withycombe Management,
Inc. (the "Management Company"). Evans Withycombe Residential, Inc. is the
sole general partner of and owned a 79.7 percent, 77.02 percent and 79.50
percent interest in EWRLP at December 31, 1996, 1995 and 1994, respectively.
In the second quarter of 1996 Evans Withycombe Residential, Inc. completed
the Second Offering. The net proceeds from the Second Offering were used to
repay a portion of the Revolving Credit Facility.
EWRLP elected to be taxed as a partnership for Federal income tax purposes.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Evans Withycombe
Residential, L.P. include the consolidated accounts of EWRLP, the Financing
Partnership and the Management Company from the date of the Initial Public
Offering, August 17, 1994. The accompanying financial statements of Evans
Withycombe Residential Group (the "Predecessor") prior to August 17, 1994,
include the accounts of various partnerships sponsored by Evans Withycombe.
The Predecessor was a combination of affiliated entities that had ownership in
multifamily communities in the Phoenix and Tucson, Arizona area; it was not a
separate legal entity. The predecessor accounts are presented on a combined
basis because all of the communities were managed by Evans Withycombe which
had a significant ownership interest in each of the communities and because
these communities were the subject of business combination in connection with
the formation of EWRLP.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Real Estate Assets and Depreciation
EWRLP records its real estate assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long Lived Assets to be Disposed of",
which was issued by the Financial Accounting Standards Board in March 1995 and
EWRLP adopted in 1996. SFAS No. 121 requires that long-lived assets such as
real estate assets, be reviewed whenever events or changes in circumstances
indicate that the book value of the asset may not be recoverable. If the sum
of the expected future net cash flows (undiscounted and without interest
charges) from an asset to be held and used is less than the book value of the
asset, an impairment loss must be recognized in the amount of the difference
between book value and fair value as opposed to the difference between book
value and net realizable value under the previous accounting standard. For
long-term assets like apartment communities, the determination of whether
there is an impairment loss is dependent primarily on EWRLP's estimates on
occupancy, rent and expense increases, which involves numerous assumptions and
judgments as to future events over a period of many years. At December 31,
1996 EWRLP does not hold any assets that meet the impairment criteria of SFAS
No. 121.
F-7
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Costs related directly to the acquisition and improvement of real estate are
capitalized. Interest costs incurred during construction of a new property are
capitalized until completion of construction on a building-by-building basis.
Interest capitalized was $2,714, $5,048 and $2,724, for the years ended
December 31, 1996, 1995 and 1994, respectively.
Ordinary repairs, maintenance and costs incurred in connection with resident
turnover such as unit cleaning, painting, and carpet cleaning are expensed as
incurred; major replacements and betterment's are capitalized and depreciated
over their estimated useful lives. Depreciation is computed on a straight-line
basis over the expected useful lives of depreciable property, which ranges
from 10 to 40 years for buildings and improvements and five to eight years for
furnishings and equipment.
EWRLP reports developments and lease-up properties as construction-in-
progress until construction on the apartment community has been completed and
the apartment community has reached stabilized occupancy.
EWRLP also reports land relating to construction-in-progress as land on its
balance sheet. Land associated with construction-in-progress was $16,542 and
$16,414 at December 31, 1996 and 1995, respectively.
Revenue Recognition
Rental income attributable to residential leases is recorded when due from
residents. Leases are for periods of up to one year, with rental payments due
monthly.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and cash equivalent investments
with original maturities of three months or less, primarily consisting of
demand deposits in banks.
Restricted Cash
Restricted cash includes restricted deposits for sinking fund accounts
related to tax exempt bonds, property taxes and escrow accounts.
Deferred Costs
Costs incurred in obtaining long-term financing are deferred. These costs
are amortized on the effective interest method over the terms of the related
debt agreements.
Income Taxes
EWRLP has made an election to be taxed as a partnership and accordingly, no
federal or state income taxes have been provided in the accompanying
consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Earnings Per Unit
Earnings per unit has been computed by dividing net income for the years
ended December 31, 1996 and 1995 and the period ended December 31, 1994,
respectively, by the weighted average number of units outstanding. Historical
earnings per unit data for the periods ended prior to the Offering on August
17, 1994 are not relevant since the financial information prior to such date
is comprised of combined operations of partnerships and corporations.
4. OTHER
Prior to the Initial Public Offering, Evans Withycombe, Inc. had in place an
Executive Incentive Deferred Compensation Plan (the "Executive Plan").
Pursuant to the Executive Plan, certain executives of Evans Withycombe, Inc.
(the "Participants") were granted unfunded, unsecured rights to receive cash
payments based on the distributions from certain partnerships in which Evans
Withycombe owned an interest. The awards would have vested over a six-year
period from the date of grant. In connection with the Initial Public Offering,
all rights of Participants under the Executive Plan were canceled, and the
participants received (a) an aggregate of approximately $2,600 in cash which
was funded by Evans Withycombe, Inc. prior to the Initial Public Offering and
(b) the right to receive an aggregate of 98,500 shares of restricted stock
from Evans Withycombe Residential, Inc. one year following the Offering if
they remain as employees of EWRLP during such
F-8
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
period. One third of the shares vest on each of the second, third and fourth
anniversaries of the Initial Public Offering based on an offering price per
share of $20 (See Stock Incentive Plan footnote). The $2,600 cash payment,
which represents an estimate of the executives' vested share of the gain, was
expensed by Evans Withycombe, Inc. during the third quarter of 1994 prior to
the Offering.
In connection with the repayment of existing indebtedness at the time of the
offering, prepayment penalties and lender participation (additional interest)
totaling $2,600 were paid.
5. MORTGAGE AND NOTES PAYABLE
EWRLP's mortgage notes and notes payable consists of the following at
December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Mortgage note payable at fixed interest rate of 7.2
percent, monthly principal and interest payments through
August 18, 1996. The unpaid principal balance was repaid
on August 18, 1996...................................... $ -- $ 5,457
Mortgage note payable at fixed interest rate of 8.0
percent, monthly principal and interest payments. The
unpaid principal balance was repaid on January 9, 1997.. 5,380 5,463
Mortgage note payable at fixed interest rate of 8.0
percent, monthly principal and interest payments. The
unpaid principal balance was repaid on January 9, 1997.. 4,340 4,406
Mortgage note payable at fixed interest rate of 8.0
percent, monthly principal and interest payments. The
unpaid principal balance was repaid on January 9, 1997.. 8,951 9,063
Mortgage note payable at fixed interest rate of 8.28
percent, monthly principal and interest payments. The
unpaid principal balance was repaid on January 31,
1997.................................................... 6,225 6,339
Mortgage note payable at fixed interest rate of 9.95
percent, monthly principal and interest payments through
September 15, 1997, remaining balance due September 15,
1997.................................................... 12,065 12,184
Mortgage note payable at fixed interest rate of 9.3
percent, monthly principal and interest payments through
September 15, 1997, remaining balance due September 15,
1997.................................................... 3,182 3,212
$50 million securitized debt at a fixed interest rate of
7.17 percent, monthly principal and interest payments
through January 1, 2006, remaining balance due January
1, 2006. Secured by first mortgage liens on 5
communities............................................. 49,509 50,000
Securitized debt at a fixed stated interest rate of 7.98
percent, with an effective interest rate of 8.05
percent, monthly interest only payments through August
1, 2001. The face amount of $131 million is due August
1, 2001. Secured by first mortgage liens on 22
communities, the balance is net of unamortized discount
of $480 and $561 at December 31, 1996 and 1995,
respectively............................................ 130,520 130,439
$13 million short term note payable at a fixed interest
rate of 6.0 percent. Interest only payments, matured on
January 5, 1996. The unpaid principal balance was repaid
on January 5, 1996...................................... -- 13,000
$17.3 million tax exempt bonds with a floating interest
rate based on the tax exempt note rate set by the
remarketing agent, or at the option of EWRLP can convert
to a fixed rate as determined by the remarketing agent.
Secured by a $17.5 million direct pay letter of credit
agreement, interest payments only, matures December 1,
2007 (Effective interest rate of 5.16 percent at
December 31, 1996)...................................... 17,300 17,300
$22.6 million tax exempt bonds with a floating interest
rate based on the tax exempt note rate set by the
remarketing agent, interest payments only. Secured by a
$22.8 million direct pay letter of credit, matures
February 1, 2016. (Effective interest rate of 5.65
percent at December 31, 1996)........................... 22,650 --
$24.05 million tax exempt bonds with a floating interest
rate based on the tax exempt note rate set by the
remarketing agent. Interest payments only. Secured by a
$24.4 million direct pay letter of credit agreement,
matures August 1, 2005. (Effective interest rate of 6.14
percent at December 31, 1996)........................... 24,050 --
$225 million unsecured Revolving Credit Facility with
floating interest rate based on LIBOR plus 1.50 percent
or at the option of EWR at prime, interest payments
only. Matures September 24, 1999 (Effective interest
rate of 7.2 percent at December 31, 1996)............... 152,000 40,593
-------- --------
$436,172 $297,456
======== ========
</TABLE>
Each of the mortgage loans is secured by a first mortgage on separate
communities.
F-9
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Principal maturities as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997..................................... $ 40,625
1998..................................... 563
1999..................................... 152,605
2000..................................... 650
2001..................................... 131,218
Thereafter............................... 110,511
--------
$436,172
========
</TABLE>
The $225 million Revolving Credit Facility provides funding for working
capital, construction activities and acquisitions.
EWRLP has three direct pay letters of credit of $17,500, $22,800 and $24,400
which serve as a credit enhancement for the tax exempt bonds. The letters of
credit are secured by a first mortgage on four apartment communities.
On January 9, 1997, EWRLP extinguished the debt on three mortgages with
unpaid principal balances of approximately $18,700 with proceeds from the
Revolving Credit Facility. As a result, EWRLP incurred a loss from the early
extinguishment of debt of approximately $1,200. EWRLP prepaid the $6,225
mortgage note on January 31, 1997 with proceeds from the Revolving Credit
Facility which resulted in an additional loss from the early extinguishment of
debt of approximately $300. The loss from the early extinguishment of debt was
recorded by EWRLP in the first quarter of 1997.
6. DISTRIBUTIONS
On December 31, 1996, EWRLP paid a distribution of $.40 per share ($9,217)
to Unitholders of record as of December 24, 1996. Approximately 36 percent and
30 percent of the distributions paid during 1996 and 1995 represented return
of capital to the Unitholders.
7. MANAGEMENT AND DEVELOPMENT FEES
EWRLP, through Evans Withycombe Management, Inc. performs management
services for certain unaffiliated communities. Management fees received from
managed communities were $1,157, $1,268, and $1,668 for the years ended
December 31, 1996, 1995 and 1994, respectively. Included in 1996 third party
management fees is a non recurring $500 fee received in exchange for
terminating the management contract on nine apartment communities containing
1,298 apartment units in the second quarter 1996.
Prior to the Offering, in conjunction with development of projects, the
communities paid development fees to affiliates of $4,554 for the period ended
August 16, 1994.
8. RETIREMENT PLAN
EWRLP has a defined contribution wealth accumulation plan and trust (the
"Plan") covering all employees who have elected to participate in the Plan.
Each participant may make pretax contributions to the Plan up to the maximum
allowed by the IRS. EWRLP makes a matching contribution of 25 percent of the
participant's contribution up to 1 percent of a participant's salary, which
totaled $113, $53, and $91 for 1996, 1995, and 1994, respectively.
9. COMMITMENTS AND CONTINGENCIES
EWRLP leases office space in buildings and certain equipment under
noncancelable operating leases. Future minimum payments under these leases
with initial terms of one year or more consist of the following at December
31, 1996:
<TABLE>
<S> <C>
1997......................................... $358
1998......................................... 364
1999......................................... 224
2000......................................... 4
----
$950
====
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994 was $360,
$300, and $288, respectively.
F-10
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. STOCK INCENTIVE PLAN
Stock Option Plan
Evans Withycombe Residential, Inc. (the "Company") has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for Stock-
Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of EWR's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if EWR had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions
for 1995 and 1996, respectively: risk-free interest rates of 6.5% and 6.5%;
dividend yields of 7.5% and 7.4%; volatility factors of the expected market
price of EWR's common stock of 0.18 and 0.18; and a weighted-average expected
life of the option of 5 years. Because Statement 123 is applicable only to
options granted subsequent to December 31, 1994, its pro forma effect will not
be fully reflected until 1997.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because EWR's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. EWR's pro
forma information follows (amounts in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Pro forma net income..................................... $18,727 $20,925
Pro forma primary earnings per share..................... $ 0.83 $ 1.02
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$18.25 to $22.25. The weighted-average remaining contractual life of those
options is 7.6 years.
Initially 1,830,000 shares of EWR's common stock were reserved for issuance
under the plan. Information with respect to stock options granted during 1996,
1995 and 1994 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE
SHARES PER SHARE
-------- --------------
<S> <C> <C>
Options granted on August 17, 1994............. 685,200 $20.00
Exercised.................................... -- --
Granted...................................... 16,000 19.65
Forfeited.................................... (4,840) 20.00
-------- ------
Options outstanding at December 31, 1994....... 696,360 19.99
Exercised.................................... -- --
Granted...................................... 21,000 19.74
Forfeited.................................... (18,185) 20.00
-------- ------
Options outstanding at December 31, 1995....... 699,175 19.98
Exercised.................................... (19,500) 20.00
Granted...................................... 345,000 21.96
Forfeited.................................... (115,825) 20.00
-------- ------
Options outstanding at December 31, 1996....... 908,850 $20.63
======== ======
Options exercisable:
December 31, 1994............................ -- --
December 31, 1995............................ 175,300 $20.00
December 31, 1996............................ 357,700 $19.98
</TABLE>
F-11
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options to purchase 901,650, 1,130,825 and 1,133,640 shares of common stock
were available for grant under the plan at December 31, 1996, 1995 and 1994,
respectively.
Executive Stock Incentive Plan
Prior to the Initial Public Offering, EWR's predecessor Evans Withycombe,
Inc. had in place an Executive Incentive Deferred Compensation Plan (the
"Executive Plan"). Pursuant to the Executive Plan, certain executives of Evans
Withycombe, Inc. (the "Participants") were granted the right to receive an
aggregate of 98,500 shares of restricted stock from EWR one year following the
Initial Public Offering if they remain employees of EWR during such period.
One-third of the shares will vest on each of the second, third and fourth
anniversaries of the Initial Public Offering based on an offering price per
share of $20. The expense will be amortized ratably over the periods in which
the shares vest and an expense of $390 and $698 and $267 for the years ended
December 31, 1996, 1995 and 1994 is included in general and administrative
expense. Information with respect to the executive restricted stock incentive
plan is as follows:
<TABLE>
<CAPTION>
SHARES
-------
<S> <C>
Restricted stock at December 31, 1994.......................... 98,500
Forfeited.................................................... (15,698)
-------
Restricted stock at December 31, 1995.......................... 82,802
Forfeited.................................................... (8,454)
-------
Restricted stock at December 31, 1996.......................... 74,348
=======
Number of shares vested........................................ 27,600
=======
</TABLE>
Restricted Stock Program
In 1996, EWR awarded 10,895 shares of restricted stock to certain employees
of EWRLP under its 1994 Stock Incentive Plan. The restricted stock vests
ratably over periods ranging from one to four years from the date of the award
and are based on the price of the stock at the award date which ranges from
$20.75 to $22.25. The expense will be amortized ratably over the periods in
which the shares vest and an expense of $83 is included in general and
administrative expense for the year ended December 31, 1996.
EWR uses the proceeds from exercise of stock options and the issuance of
restricted stock to acquire a similar number of units in EWRLP.
11. MINORITY INTEREST
Evans Withycombe Finance, Inc. owns a one percent interest in the Financing
Partnership at December 31, 1996, 1995 and 1994, respectively, as follows:
<TABLE>
<CAPTION>
DOLLARS
-------
<S> <C>
Minority interest in the Financing
Partnership at date of offering............................... $1,594
Allocation of net income...................................... 42
Distributions................................................. (389)
------
Balance at December 31, 1994.................................. 1,247
Allocation of net income...................................... 89
Distributions................................................. (447)
------
Balance at December 31, 1995.................................. 889
Allocation of net income...................................... 75
Distributions................................................. (137)
------
Balance at December 31, 1996.................................. $ 827
======
</TABLE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by
management using available market information and appropriate valuation
methodologies. Judgment is necessary to interpret market data and develop
estimated fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts EWRLP could realize on disposition of
the financial instruments. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
F-12
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash equivalents, accounts receivable, accounts payable and other accruals
are carried at amounts that reasonably approximate their fair values as of
December 31, 1996 and 1995. EWRLP's debt has an estimated aggregate fair value
of approximately $437,800 at December 31, 1996 compared to the carrying value
of $436,172. At December 31, 1995, EWRLP's debt had an estimated fair value of
approximately $298,800 compared to the carrying value of $297,456. Fair values
were estimated using discounted cash flow analyses, based on interest rates
currently available to EWRLP for issuance of debt with similar terms and
remaining maturities.
13. 1994 RESULTS OF OPERATIONS
The 1994 results of operations of EWRLP and its Predecessor are as follows:
<TABLE>
<CAPTION>
EVANS WITHYCOMBE EVANS WITHYCOMBE
RESIDENTIAL, L.P. RESIDENTIAL GROUP
AUGUST 17 TO JANUARY 1 TO
DECEMBER 31, 1994 AUGUST 16, 1994
----------------- -----------------
<S> <C> <C>
Revenues:
Rental.................................... $20,185 $30,912
Third party management fees............... 560 1,108
Interest and other........................ 1,028 3,166
------- -------
Total revenues.......................... 21,773 35,186
Expenses:
Repairs and maintenance................... 2,642 3,646
Property operating........................ 2,392 5,442
Advertising............................... 345 621
Real estate taxes......................... 1,251 1,953
Property management....................... 1,104 1,401
General and administrative................ 410 765
Interest.................................. 2,302 5,534
Depreciation and amortization............. 3,754 6,579
Other..................................... -- 5,233
------- -------
Total expenses.......................... 14,200 31,174
Net income before minority interest......... 7,573 4,012
Minority interest........................... (42) --
------- -------
Net income.................................. $ 7,531 $ 4,012
======= =======
</TABLE>
14. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED, AMOUNTS IN THOUSANDS,
EXCEPT PER UNIT AMOUNTS).
<TABLE>
<CAPTION>
QUARTER
----------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
1996
Revenue........................... $24,161 $24,085 $25,938 $27,442
Net operating income.............. 16,840 16,287 16,724 18,676
Income before minority interest... 5,341 4,748 3,986 4,730
Minority interest................. (23) (16) (15) (21)
Net income........................ 5,318 4,732 3,971 4,709
Earnings per unit................. $ .25 $ .22 $ .17 $ .20
1995
Revenue........................... $16,276 $17,531 $19,061 $21,663
Net operating income.............. 11,413 11,999 12,296 15,864
Income before minority interest... 5,692 4,975 4,723 5,624
Minority interest................. (26) (19) (16) (28)
Net income........................ 5,666 4,956 4,707 5,596
Earnings per unit................. $ .28 $ .23 $ .23 $ .28
</TABLE>
EWRLP defines net operating income as earnings before property management,
general and administrative expense, interest and depreciation.
F-13
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS
CAPITALIZED
SUBSEQUENT TO GROSS AMOUNTS AT
ACQUISITION/ WHICH CARRIED AT
INITIAL COST CONSTRUCTION CLOSE OF PERIOD
---------------- ----------------- ----------------
BUILDINGS BUILDINGS BUILDINGS ACCUMU-
AND AND AND LATED DEPRECIABLE
ENCUM- IMPROVE- IMPROVE- IMPROVE- DEPRE- YEAR YEAR LIVES
DESCRIPTION BRANCES LAND MENTS LAND MENTS LAND MENTS TOTAL CIATION DEVELOPED ACQUIRED IN YEARS
----------- ------- ------ --------- ------ --------- ------ --------- ------- ------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SAME STORE
Phoenix
Bayside at the
Islands
Gilbert, AZ.... $ 6,589 $1,877 $6,623 $1,429 $3,491 $3,306 $10,114 $13,420 $ 815 1988-1989 5 to 40 years
Country Brook
Chandler, AZ... 7,792 937 3,886 25 6,578 962 10,464 11,426 954 1991 5 to 40 years
Deer Creek
Village
Phoenix, AZ.... 5,116 919 5,454 506 3,465 1,425 8,919 10,344 912 1991 5 to 40 years
Greenwood
Village
Tempe, AZ...... 6,553 1,770 7,119 349 2,322 2,119 9,441 11,560 961 1993 5 to 40 years
Heritage Point
Mesa, AZ....... -- 666 5,125 -- 397 666 5,522 6,188 424 1994 5 to 40 years
La Mariposa
Mesa, AZ....... 4,750 1,440 3,962 608 2,620 2,048 6,582 8,630 528 1990 5 to 40 years
La Valencia
Mesa, AZ....... 7,792 2,485 6,569 1,068 4,283 3,553 10,852 14,405 829 1990 5 to 40 years
Little
Cottonwoods
Tempe, AZ...... 9,424 2,834 6,655 216 7,161 3,050 13,816 16,866 939 1989 5 to 40 years
Los Arboles
Chandler, AZ... -- 1,160 7,836 -- 237 1,160 8,073 9,233 895 1993 5 to 40 years
Miramonte
Scottsdale, AZ. 4,340 1,133 3,711 -- 123 1,133 3,834 4,967 481 1993 5 to 40 years
Morningside
Scottsdale, AZ. 4,542 533 6,316 137 2,115 670 8,431 9,101 731 1992 5 to 40 years
Park Meadow
Gilbert, AZ.... 2,936 607 2,828 225 1,275 832 4,103 4,935 450 1992 5 to 40 years
Preserve at
Squaw Peak
Phoenix, AZ.... 3,172 377 4,252 141 1,939 518 6,191 6,709 500 1991 5 to 40 years
Promontory
Pointe
Phoenix, AZ.... 7,610 2,038 6,987 (379) 7,861 1,659 4,943 6,602 392 1988 5 to 40 years
(9,905)*
Scottsdale
Courtyards
Scottsdale, AZ. 10,442 2,946 8,385 33 3,087 2,979 11,472 14,451 1,035 1993 5 to 40 years
Scottsdale
Meadows
Scottsdale, AZ. 5,381 1,512 4,203 -- 113 1,512 4,316 5,828 539 1993 5 to 40 years
Shadow Brook
Phoenix, AZ.... 7,922 2,440 9,320 625 3,388 3,065 12,708 15,773 1,157 1993 5 to 40 years
Shores at
Andersen
Springs
Chandler, AZ... 8,196 2,095 9,682 649 3,949 2,744 13,631 16,375 1,078 1993 5 to 40 years
Silver Creek
Phoenix, AZ.... 3,211 484 3,157 228 2,429 712 5,586 6,298 546 1991 5 to 40 years
Sun Creek
Glendale, AZ... 3,811 715 3,950 182 1,648 897 5,598 6,495 624 1993 5 to 40 years
The Meadows
Mesa, AZ....... -- 650 4,797 -- 2,795 650 6,231 6,881 532 1987 5 to 40 years
(1,361)*
The Palms
Phoenix, AZ.... 4,895 2,152 4,455 1,133 2,764 3,285 7,219 10,504 512 1990 5 to 40 years
The Pines
Mesa, AZ....... 3,707 577 3,725 351 2,559 928 6,284 7,212 679 1992 5 to 40 years
Towne Square
Chandler, AZ... -- 1,042 8,413 277 3,614 1,319 12,027 13,346 1,607 1992 5 to 40 years
Villa Encanto
Phoenix, AZ.... 8,951 2,884 8,558 -- 844 2,884 9,402 12,286 983 1991 5 to 40 years
Village at
Lakewood
Phoenix, AZ.... 8,317 1,652 5,776 1,514 5,897 3,166 11,673 14,839 915 1991 5 to 40 years
Tucson
Harrison Park
Tucson, AZ..... 3,315 516 3,511 -- 743 516 4,254 4,770 393 1991 5 to 40 years
La Reserve
Oro, Valley.... 6,409 2,309 6,356 956 3,656 3,265 10,012 13,277 732 1988 5 to 40 years
</TABLE>
F-14
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO GROSS AMOUNTS AT
ACQUISITION/ WHICH CARRIED AT
INITIAL COST CONSTRUCTION CLOSE OF PERIOD
----------------- ----------------- -----------------
BUILDINGS BUILDINGS BUILDINGS ACCUMU-
AND AND AND LATED DEPRECIABLE
ENCUM- IMPROVE- IMPROVE- IMPROVE- DEPRE- YEAR YEAR LIVES
DESCRIPTION BRANCES LAND MENTS LAND MENTS LAND MENTS TOTAL CIATION DEVELOPED ACQUIRED IN YEARS
----------- -------- ------- --------- ------- --------- ------- --------- -------- ------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Orange Grove
Village
Tucson, AZ..... $ 3,786 $ 814 $ 3,233 $ 906 $ 2,575 $ 1,720 $ 5,808 $ 7,528 $ 605 1991 5 to 40 years
Suntree Village
Oro, Valley.... 8,550 1,246 8,862 326 3,713 1,572 12,575 14,147 1,348 1992 5 to 40 years
The Arboretum
Tucson, AZ..... 16,684 1,014 8,323 1,526 3,349 2,540 11,672 14,212 1,584 1992 5 to 40 years
Village at
Tanque Verde
Tucson, AZ..... 6,436 690 1,280 745 4,895 1,435 6,175 7,610 589 1990 5 to 40 years
-------- ------- -------- ------- ------- ------- -------- -------- -------
Subtotal Same
Store.......... 180,629 44,514 183,309 13,776 84,619 58,290 267,928 326,218 25,269
COMMUNITIES STABILIZED
LESS THAN TWO YEARS
Phoenix
Gateway Villas
Phoenix, AZ.... -- 1,431 11,238 -- (50) 1,431 11,188 12,619 561 1994-1995 5 to 40 years
Mountain Park
Ranch
Phoenix, AZ.... 9,704 1,662 12,540 -- 28 1,662 12,568 14,230 1,032 1994-1995 5 to 40 years
Sonoran
Phoenix, AZ.... -- 2,362 20,802 -- 17 2,362 20,819 23,181 1,142 1994-1995 5 to 40 years
The Enclave
Tempe, AZ...... 8,367 1,500 10,527 -- 26 1,500 10,553 12,053 860 1994-1995 5 to 40 years
The Heritage
Phoenix, AZ.... -- 1,211 12,370 -- (13) 1,211 12,357 13,568 769 1994-1995 5 to 40 years
Towne Square
Expansion
Phase II
Chandler, AZ... -- -- 6,061 -- -- -- 6,061 6,061 -- 1994-1995 5 to 40 years
Tucson
Arboretum
Expansion
Phase II
Tucson, AZ..... -- 914 8,383 -- -- 914 8,383 9,297 -- 1994-1995 5 to 40 years
-------- ------- -------- ------- ------- ------- -------- -------- -------
Subtotal
Communities
Stabilized Less
than Two Years. 18,071 9,080 81,921 -- 8 9,080 81,929 91,009 4,364
DEVELOPMENTS AND
LEASE-UP PROPERTIES
Phoenix
Country Brook
Expansion
Phase III
Chandler, AZ... -- 543 6,779 -- -- 543 6,779 7,322 136 1995 5 to 40 years
The Hawthorne
Phoenix, AZ.... -- 2,695 14,087 -- -- 2,695 14,087 16,782 122 1995 5 to 40 years
Ingleside
Phoenix, AZ.... -- 1,204 6,242 -- -- 1,204 6,242 7,446 386 1995 5 to 40 years
The Isle at
Arrowhead Ranch
Glendale, AZ... -- 1,652 9,806 -- -- 1,652 9,806 11,458 3 1996 5 to 40 years
Ladera
Phoenix, AZ.... -- 2,979 14,884 -- -- 2,979 14,884 17,863 727 1994-1995 5 to 40 years
Mirador
Phoenix, AZ.... -- 2,597 20,885 -- -- 2,597 20,885 23,482 921 1994-1995 5 to 40 years
Park Meadow
Expansion Phase
II
Gilbert, AZ.... -- 4 3,998 -- -- 4 3,998 4,002 100 1995 5 to 40 years
Promontory
Pointe
Expansion
Phoenix, AZ.... -- 665 8,141 -- -- 665 8,141 8,806 68 1995 5 to 40 years
Towne Square
Expansion Phase
III
Chandler, AZ... -- 605 6,092 -- -- 605 6,092 6,697 177 1995 5 to 40 years
</TABLE>
F-15
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO GROSS AMOUNTS AT
ACQUISITION/ WHICH CARRIED AT
INITIAL COST CONSTRUCTION CLOSE OF PERIOD
------------------ ----------------- ------------------
BUILDINGS BUILDINGS BUILDINGS ACCUMU-
AND AND AND LATED
ENCUM- IMPROVE- IMPROVE- IMPROVE- DEPRE- YEAR YEAR
DESCRIPTION BRANCES LAND MENTS LAND MENTS LAND MENTS TOTAL CIATION DEVELOPED ACQUIRED
----------- -------- -------- --------- ------- --------- -------- --------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Retreat (1)
Phoenix, AZ..... $ -- $ 3,477 $ 2,578 $ -- $ -- $ 3,477 $ 2,578 $ 6,055 $ -- 1997
Scottsdale &
Mountain View
(1)
Scottsdale, AZ.. -- 3,456 508 -- -- 3,456 508 3,964 -- 1997
Vista Grove (1)
Mesa, AZ........ -- 1,343 1,897 -- -- 1,343 1,897 3,240 -- 1997
The Gates Project
(2)
Various
Locations....... -- -- 551 -- -- -- 551 551 -- Various
Laguna at
Arrowhead (1)
Glendale, AZ.... -- 879 592 -- -- 879 592 1,471 -- 1997
Tucson
Bear Canyon
Tucson, AZ...... -- 1,645 12,926 -- -- 1,645 12,926 14,571 237 1995
Harrison Park
Expansion Phase
II
Tucson, AZ...... -- 749 8,912 -- -- 749 8,912 9,661 235 1995
The Legends
Tucson, AZ...... -- 2,728 17,893 -- -- 2,728 17,893 20,621 1,235 1994-1995
Orange Grove
Expansion Phase
II
Tucson, AZ...... -- 93 7,213 -- -- 93 7,213 7,306 312 1995
-------- -------- -------- ------- ------- -------- -------- -------- -------
Subtotal
Developments
and Lease-Up
Properties...... -- 27,314 143,984 -- -- 27,314 143,984 171,298 4,644
ACQUISITIONS
Phoenix
Acacia Creek
Scottsdale, AZ.. 15,247 6,122 24,382 -- 599 6,122 24,981 31,103 1,486 1995
Rancho Murietta
Tempe, AZ....... 6,225 1,766 10,208 -- 993 1,766 11,201 12,967 698 1995
Superstition
Vista
<CAPTION>Mesa, AZ........ -- 1,641 12,272 -- 1,512 1,641 13,784 15,425 480 1995
DEPRECIABLE
LIVES
DESCRIPTION IN YEARS
----------- -------------
<S> <C>
The Retreat (1)
Phoenix, AZ..... 5 to 40 years
Scottsdale &
Mountain View
(1)
Scottsdale, AZ.. 5 to 40 years
Vista Grove (1)
Mesa, AZ........ 5 to 40 years
The Gates Project
(2)
Various
Locations....... 5 to 40 years
Laguna at
Arrowhead (1)
Glendale, AZ.... 5 to 40 years
Tucson
Bear Canyon
Tucson, AZ...... 5 to 40 years
Harrison Park
Expansion Phase
II
Tucson, AZ...... 5 to 40 years
The Legends
Tucson, AZ...... 5 to 40 years
Orange Grove
Expansion Phase
II
Tucson, AZ...... 5 to 40 years
Subtotal
Developments
and Lease-Up
Properties......
ACQUISITIONS
Phoenix
Acacia Creek
Scottsdale, AZ.. 5 to 40 years
Rancho Murietta
Tempe, AZ....... 5 to 40 years
Superstition
Vista
Mesa, AZ........ 5 to 40 years
California
Canyon Crest
Views
Riverside, CA... -- 1,745 12,163 -- -- 1,745 12,163 13,908 141 1996
The Ashton
Corona Hills,
CA.............. 17,300 2,594 18,679 -- 2,185 2,594 20,864 23,458 510 1995
Portofino
Chino Hills, CA. -- 3,572 9,031 -- -- 3,572 9,031 12,603 91 1996
Parkview
Terrace Club
Redlands, CA.... 22,650 4,969 28,301 -- -- 4,969 28,301 33,270 286 1996
Redlands Lawn and
Tennis Club
Redlands, CA.... 24,050 4,822 24,045 -- -- 4,822 24,045 28,867 50 1996
-------- -------- -------- ------- ------- -------- -------- -------- -------
Subtotal
Acquisitions.... 85,472 27,231 139,081 -- 5,289 27,231 144,370 171,601 3,742
Canyon Crest
Views
Riverside, CA... 5 to 40 years
The Ashton
Corona Hills,
CA.............. 5 to 40 years
Portofino
Chino Hills, CA. 5 to 40 years
Parkview
Terrace Club
Redlands, CA.... 5 to 40 years
Redlands Lawn and
Tennis Club
Redlands, CA.... 5 to 40 years
Subtotal
Acquisitions....
CORPORATE OFFICE
Scottsdale, AZ.. -- -- 325 -- 1,099 -- 1,424 1,424 312 1994
-------- -------- -------- ------- ------- -------- -------- -------- -------
Total........... $284,172 $108,139 $548,620 $13,776 $91,015 $121,915 $639,635 $761,550 $38,331
======== ======== ======== ======= ======= ======== ======== ======== =======
Scottsdale, AZ.. 5 to 8 years
Total...........
</TABLE>
- -------
(1) Projects are currently in the early planning stage.
(2) The Gates Project represents the costs associated with EWR's investment in
constructing security gate systems at all its apartment communities.
*Write-down of real estate assets.
F-16
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
SCHEDULE III--REAL ESTATE INVESTMENTS AND
ACCUMULATED DEPRECIATION
A summary of activity for real estate investments and accumulated
depreciation is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period......... $587,183 $399,987 $292,513
Acquisitions........................... 88,648 77,895 5,849
Improvements, including construction
costs................................. 85,719 109,301 66,604
Elimination of accumulated depreciation
at date of acquisition................ -- -- (38,360)(1)
Fair value adjustment.................. -- -- 73,381
-------- -------- --------
Balance at close of period............. $761,550 $587,183 $399,987
======== ======== ========
Accumulated depreciation
Balance at beginning of period........ $ 17,511 $ 3,749 $ 32,065
Depreciation......................... 20,885 13,762 10,333
Accumulated depreciation on
disposals........................... (65) -- (289)
Elimination of accumulated
depreciation
at date of acquisition.............. -- -- (38,360)
-------- -------- --------
Balance at close of period............. $ 38,331 $ 17,511 $ 3,749
======== ======== ========
</TABLE>
Amount represents decrease in basis due to acquiring real estate at net book
value at the time of the Offering.
F-17
<PAGE>
APPENDIX A
ASSET CONTRIBUTION AGREEMENT
THIS AGREEMENT is made as of August 27, 1997 by and between EVANS WITHYCOMBE
RESIDENTIAL, L.P., a Delaware limited partnership ("EWOP"), and ERP OPERATING
LIMITED PARTNERSHIP, an Illinois limited partnership ("ERP").
RECITALS:
A. To induce the general partner of ERP to enter into an agreement of merger
with the general partner of EWOP pursuant to the Agreement and Plan of Merger
dated August 27, 1997 between the general partners of ERP and EWOP (the
"Merger Agreement"), EWOP desires to contribute to ERP, at the option of ERP,
all of its assets pursuant to the terms and conditions of this Agreement.
Section 5.18 of the Merger Agreement provides certain assurances given to
induce EWOP to enter into this Agreement.
B. EWOP intends to dissolve after the contribution of its assets to ERP.
AGREEMENTS:
In consideration of the foregoing premises and the respective agreements,
covenants and obligations herein contained and other good and valuable
consideration, the parties agree as follows:
1. CONTRIBUTION. Subject to Section 6 of this Agreement, EWOP hereby agrees
to contribute all of its assets (the "Contributed Assets"), subject to its
liabilities (including liabilities which are non-recourse in nature), to ERP
in exchange for units of partnership interest in ERP of the type and in the
amount set forth in Sections 3 hereof.
The aforesaid contribution is made without any representation or warranty,
express or implied, all of which are expressly disclaimed.
2. ASSUMPTION OF LIABILITIES. Subject to Section 6 of this Agreement, ERP
shall assume the liabilities of EWOP (other than liabilities which are non-
recourse in nature) and agrees to pay and perform such liabilities when due
and when required to be performed. Such liabilities include, without
limitation, all obligations under the Indenture dated as of April 2, 1997
between EWOP and Bank One, Columbus, N.A., as trustee. The liabilities assumed
pursuant to this Section are referred to collectively as the "Assumed
Liabilities."
3. CONSIDERATION FOR CONTRIBUTION TO ERP. Solely in exchange for the
contribution of the Contributed Assets, EWOP shall receive such number of
common units of ERP as shall equal the number of EWOP units of partnership
interest issued and outstanding immediately prior to the effective time of the
Contribution multiplied by the Exchange Ratio (as defined in the Merger
Agreement). No fractional ERP Units shall be issued in connection with the
contribution by any Contributor. Instead, at the time of the effectiveness of
the Contribution, EWOP shall be paid an amount in cash equal to the Closing
Price (as hereinafter defined) multiplied by the fraction of a ERP Unit to
which EWOP would otherwise be entitled. For purposes of this Paragraph 2,
"Closing Price" shall mean the unweighted average closing price of a share of
Equity Residential Properties Trust ("EQR") common stock as reported on the
New York Stock Exchange (Composite Tape) for the five (5) trading days
preceding the Effective Time (as defined in the Merger Agreement), and
"Trading Days" shall mean any day on which the EQR common shares of beneficial
interest is traded on the New York Stock Exchange and reported on its
Composite Tape.
4. TRANSFER DOCUMENTS. At the Closing (as defined herein), EWOP shall
execute a Warranty Deed for each of the EWR Properties (as defined in the
Merger Agreement) owned by it and a general assignment and assumption
agreement, in form and substance satisfactory to ERP, as assignor, for EWR
Properties owned by it and ERP shall sign such general assignment and
assumption agreement as assignee.
5. ADDITIONAL AGREEMENTS. EWOP and ERP shall execute, deliver (or cause to
be executed or delivered) and record, all agreements, documents and
instruments necessary or appropriate to effect the contribution and assumption
contemplated hereby, including any assignments, assumptions, supplemental
indentures, deeds, agreements or instruments.
6. LIMITATION ON CONTRIBUTION. To the extent any assignment, transfer,
conveyance or delivery of a Contributed Asset or the assumption of an Assumed
Liability shall violate or cause an event of default under any agreement
between EWOP or ERP on one hand, and any other person on the other hand, such
asset shall not be contributed or such
A-1
<PAGE>
liability shall not be assumed pursuant to the terms of this Agreement and the
parties shall cooperate to effect the contributions promptly following the
Effective Time hereof as practicable. Nothing herein shall be deemed to
require the contribution of any asset or the assumption of any liability which
by its term or operation cannot be assigned, transferred, conveyed or
delivered, provided the parties shall use their reasonable efforts to seek or
obtain any such approvals as soon as practicable after the date hereof. In the
event any contribution of an asset has not been consummated on the date
hereof, EWOP shall continue in existence and hold such asset in trust for the
use and benefit of ERP and shall take any other action as reasonably requested
by ERP, as applicable, in order to place ERP, as applicable, as reasonably
possible, in the same position that would have existed had such Contributed
Asset been contributed immediately following the Effective Time as
contemplated by this Agreement. If any assumption of a liability has not been
consummated on the date hereof, then ERP which was to assume such liability
shall reimburse the Contributor for all amounts paid by the Contributor with
respect to such liability until such liability has been assigned to ERP, as
the case may be. As and when any such Contributed Asset or Assumed Liability
is able to be assigned, transferred, conveyed or delivered, as the case may
be, such contribution and assumption shall be effective forthwith. The parties
agree that, as of the Closing, ERP shall be deemed to have acquired complete
and sole beneficial ownership of all Contributed Assets to be contributed to
it hereunder, together with all rights, powers and privileges incident thereto
and all duties and obligations and responsibilities incident thereto
including, without limitation, the liabilities assumed by ERP hereunder. The
failure to contribute any Contributed Asset hereunder shall not reduce the
consideration to be received by EWOP.
7. LACK OF REPRESENTATION. Each of the parties hereto understands and agrees
that no party hereto is, in this Agreement or any other agreement or document
contemplated by this Agreement or otherwise, making any representation or
warranty whatsoever including, without limitation, as to title, value or legal
sufficiency, except that title to all real estate included in the Contributed
Assets is warranted and shall be conveyed by warranty deeds.
8. FURTHER ASSURANCES. Each of the parties hereto shall use its reasonable
best efforts, on and after the date hereof, to take or cause to be taken, all
actions, and to do, or cause to be done all things, necessary, proper or
desirable under applicable laws and regulations to carry out the purposes of
this Agreement and to vest ERP, with full title to all Contributed Assets as
of the Closing. Without limiting the foregoing, ERP shall use its best efforts
to obtain all consents and approvals, to enter into all amendatory agreements
and to make all filings and applications and take all other actions which may
be required for the consummation of the transactions contemplated by this
Agreement, including, without limitation, all applicable regulatory filings.
9. CLOSING. The Closing of the transaction shall occur at such date after
the Transfer Date (as hereinafter defined), as ERP may give notice to EWOP
that it desires to consummate the transaction contemplated by this Agreement.
As used in this Agreement, "Transfer Date" shall mean the first to occur of
(i) the date twelve months after the Effective Time, (ii) the date on which
EQR receives an opinion of Rudnick & Wolfe or other nationally recognized tax
counsel satisfactory to it or a ruling from the Internal Revenue Service that
the transaction to be undertaken pursuant to this Agreement may be effected
without adversely affecting the qualification of the Merger as a tax-free
reorganization within the meaning of Section 368 of the Code or (iii) the date
on which regulations are promulgated by the Department of the Treasury which,
in the opinion of Rudnick & Wolfe or other nationally recognized tax counsel
to EQR, would permit the transaction contemplated by this Agreement without
adversely affecting the qualification of the Merger as a tax-free
reorganization within the meaning of Section 368 of the Code. Notwithstanding
the provisions of this Paragraph 9, in no event shall ERP be required to give
any notice with respect to the Contribution and if ERP fails to give such
notice by December 31, 1999, this Agreement shall terminate and EWOP shall
have no further obligations pursuant to this Agreement.
10. APPROVAL BY LIMITED PARTNERS OF EWOP. The parties acknowledge and agree
that the obligations of ERP pursuant to this Agreement shall be subject to the
approval of this Agreement and the transaction contemplated hereby by the
limited partners of EWOP pursuant to the terms of the partnership agreement of
EWOP. EWOP agrees to present this Agreement, the transaction contemplated
hereby and any other matter specified in Section 1.8(e) of the Merger
Agreement for approval by the partners of EWOP pursuant to the terms of the
partnership agreement of EWOP as soon as practicable after the date hereof in
the manner contemplated by the Merger Agreement. In the event that the Merger
Agreement is terminated for any reason prior to the consummation of the Merger
(as defined in the Merger Agreement), this Agreement shall terminate.
11. DISTRIBUTION OF UNITS RECEIVED FROM ERP. The parties acknowledge and
agree that the consummation of the Contribution contemplated by this
Agreement, subject to the provisions of Section 6 hereof, EWOP shall dissolve
pursuant to the terms of its Partnership Agreement and distribute the ERP
units to the partners of EWOP pursuant to the terms of the Amended and
Restated Partnership Agreement of EWOP. Each holder of units shall become a
holder under that certain Registration Rights Agreement entered into by EQR
and certain former holders of units of EWOP upon the effectiveness of the
merger of EQR and Evans Withycombe Residential, Inc. to the extent the holders
of units of EWOP will
A-2
<PAGE>
receive Registrable Securities (as defined in the Registration Rights
Agreement) upon the distribution of ERP Units to the partners of EWOP. In the
event that EWOP is required to continue to hold any asset pursuant to Section
6 hereof after the Closing for the benefit of ERP, EWOP shall distribute to
the partners of EWOP, other than EQR and ERP, their pro rata share of the ERP
Units received by EWOP in partial dissolution of the EWOP and the partners
receiving such ERP Unit shall have no further interest in EWOP as a partner,
including any interest in its assets, profits and losses.
12. COMPLETE AGREEMENT; CONSTRUCTION. This Agreement, including the
exhibits, constitutes the entire agreement between the parties with respect to
the subject matter hereof, and supersedes all previous negotiations,
commitments and writings with respect to such subject matter.
13. SURVIVAL OF AGREEMENTS. Except as otherwise contemplated by this
Agreement, all covenants and agreements of the parties contained in this
Agreement will survive the consummation of the transactions contemplated
hereby.
14. GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Illinois, without regard to the
principles of conflicts of laws thereof.
15. NOTICES. All notices and other communications hereunder must be in
writing and must be delivered by hand, mailed by registered or certified mail
(return receipt requested) or sent by facsimile transmission to the party for
whom it is intended at the following address (or at such other address for a
party as may be specified by like notice) and will be deemed given on the date
on which such notice is received:
(a) If to ERP:
Two North Riverside Plaza
Suite 400
Chicago, IL 60606
Attention: General Counsel
Fax: (312) 454-0039
With a copy to:
Rudnick & Wolfe
203 North LaSalle Street
Chicago, Illinois 60601
Attention: Errol R. Halperin
Fax: (312) 236-7516
(b) If to EWOP:
Evans Withycombe Residential, L.P.
6991 East Camelback Road
Suite A-200
Scottsdale, Arizona 85251
Attention: General Partner
Fax: (602) 423-8843
With a copy to:
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, CA 90071
Attention: Kenneth M. Doran
Fax: (213/229-6537)
16. AMENDMENTS. This Agreement may not be modified or amended except by an
agreement in writing signed by the parties.
17. SUCCESSORS AND ASSIGNS. This Agreement shall not be assignable, in whole
or in part, directly or indirectly, by any party hereto without the prior
written consent of the other, and any attempt to assign any rights or
obligations arising under this Agreement without such consent shall be void;
provided, however, that the provisions of this Agreement shall be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors and permitted assigns.
A-3
<PAGE>
18. NO THIRD-PARTY BENEFICIARIES. The provisions of this Agreement are
solely for the benefit of the parties hereto and their respective successors
and permitted assigns and should not be deemed to confer upon third parties
any remedy, claim, liability, reimbursement, claim of action or other right in
excess of those existing without reference to this Agreement.
19. TITLE AND HEADINGS. Titles and headings to sections herein are inserted
for the convenience of reference only and are not intended to be a part of or
to affect the meaning or interpretation of this Agreement.
20. LEGAL ENFORCEABILITY. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof. Any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction. Without
prejudice to any rights or remedies otherwise available to any party hereto,
each party hereto acknowledges that damages would be an inadequate remedy for
any breach of the provisions of this Agreement and agrees that the obligations
of the parties hereunder are specifically enforceable.
21. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which when executed shall be deemed an original, but all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
ERP OPERATING LIMITED PARTNERSHIP
By: Equity Residential Properties Trust,
its general partner
/s/ Bruce C. Strohm
By: __________________________________
Executive Vice President
EVANS WITHYCOMBE RESIDENTIAL, L.P.
By: Evans Withycombe Residential, Inc.,
its general partner
/s/ Stephen O. Evans
By: _____________________________________
Its: Chairman & Chief Executive Officer
A-4
<PAGE>
APPENDIX B
FORM OF EWRLP AMENDMENT
AMENDMENT NO. 1 TO AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
EVANS WITHYCOMBE RESIDENTIAL, L.P.
THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF EVANS WITHYCOMBE RESIDENTIAL, L.P. (this "Amendment"),
effective as of the Effective Time (as defined in the Agreement and Plan of
Merger dated as of August 27, 1997 ("Merger Agreement") between Equity
Residential Properties Trust and Evans Withycombe Residential, Inc.).
RECITALS:
A. Evans Withycombe Residential, L.P., a Delaware limited partnership (the
"Partnership"), is governed by that certain Amended and Restated Agreement of
Limited Partnership of Evans Withycombe Residential, L.P. dated as of August
17, 1994 (the "Agreement").
B. Evans Withycombe Residential, Inc., a Maryland corporation ("EWR") and
the general partner of the Partnership, and Equity Residential Properties
Trust, a Maryland real estate investment ("EQR"), have merged pursuant to the
Merger Agreement (the "Merger").
C. Pursuant to the Merger Agreement, the limited partners of the Partnership
have approved the contribution of all the assets of the Partnership, subject
to its liabilities, to ERP Operating Partnership, an Illinois limited
partnership, on the terms and conditions provided for in the Merger Agreement
(the "Asset Contribution").
D. In connection with the Merger and the Asset Contribution, the limited
partners of the Partnership desire to amend the Agreement as hereinafter set
forth.
E. The limited partners of the Partnership further desire to ratify and
confirm the decision of the Board of Directors of Evans Withycombe
Residential, Inc., in its capacity as general partner of the Partnership, not
to present for consideration by the limited partners of the Partnership that
certain proposed Amendment to the Agreement dated as of June 18, 1997 (the
"11.2 Amendment").
AGREEMENTS:
1. AMENDMENTS TO ARTICLE 1: PROVISIONS RELATING TO DEFINED TERMS.
(a) Article 1 of the Partnership Agreement is hereby amended by adding
thereto the following definitions:
"ASSET CONTRIBUTION AGREEMENT" means the Asset Contribution Agreement
dated August 27, 1997 between the Partnership and ERP.
"EFFECTIVE TIME" means the time the State Department of Assessments and
Taxation of Maryland accepts for record the Articles of Merger between EQR
and Evans Withycombe Residential, Inc.
"EQR" means Equity Residential Properties Trust, a Maryland real estate
investment trust, as successor by merger to Evans Withycombe Residential,
Inc., a Maryland corporation.
"ERP" means ERP Operating Limited Partnership, an Illinois limited
partnership of which EQR is the general partner.
"ERP COMMON UNITS" mean units of common partnership interest in ERP.
"ERP UNITS" mean units of partnership interest in ERP.
(b) The definitions of "Option Plans", "Partnership Record Date" and "Value"
are hereby amended to change the references therein to "General Partner" to
"EQR."
(c) The definition of "Common Shares" is hereby amended to read as follows:
"COMMON SHARES" mean common shares of beneficial interest, $.01 par value
per share, of EQR.
B-1
<PAGE>
(d) The definition of "General Partner" is hereby amended to read as
follows:
"GENERAL PARTNER" means EQR and ERP, as co-general partners, and their
respective successors as co-general partners of the Partnership.
(e) The definition of "Transaction" in Article I is hereby deleted.
(f) The definition of "Unit Adjustment Factor" is hereby amended to read as
follows:
"UNIT ADJUSTMENT FACTOR" means 1.00 until the Effective Time and from and
after the Effective Time 0.50; provided that in the event that EQR (a)
declares or pays a dividend on its outstanding Common Shares in Common
Shares or makes a distribution to all holders of its outstanding Common
Shares in Common Shares, (b) subdivides its outstanding Common Shares or
(c) combines its outstanding Common Shares into a smaller number of Common
Shares, the Unit Adjustment Factor shall be adjusted by multiplying the
Unit Adjustment Factor by a fraction, the numerator of which shall be the
number of Common Shares issued and outstanding on the record date (assuming
for such purpose that such dividend, distribution, subdivision or
combination has occurred as of such time), and the denominator of which
shall be the actual number of Common Shares (determined without the above
assumption) issued and outstanding on the record date for such dividend,
contribution, subdivision or combination. In addition, while Section 7.5
hereof provides that EQR shall not directly or indirectly enter into or
conduct any business except as permitted in said Section, if an event were
to occur that would significantly affect the economic relationship between
a Partnership Unit and a Common Share, the Unit Adjustment Factor shall
also be appropriately adjusted. Any such adjustment to the Unit Adjustment
Factor shall be determined by the Board of Trustees of EQR, whose
determination as to whether an adjustment is necessary and the amount of
such adjustment shall be conclusive absent manifest error. Any adjustment
to the Unit Adjustment Factor shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for
such event.
2. CHANGE OF PRINCIPAL OFFICE. The second sentence of Section 2.3 of the
Agreement is hereby amended to read as follows:
"The principal office of the Partnership is located at Two North
Riverside Plaza, Suite 400, Chicago, Illinois 60606, or such other place as
the General Partner may from time to time designate by notice to the
Limited Partners."
3. AMENDMENTS TO CHANGE REFERENCES FROM GENERAL PARTNER TO EQR. The
following Sections of the Agreement are hereby amended to change references
therein to "General Partner" to references to "EQR."
(a) Section 3.1;
(b) Section 3.2;
(c) Section 4.2(e) (renumbered pursuant to this Amendment as Section
4.2(b));
(d) the last sentence of Section 4.5;
(e) Section 7.1(a)(1);
(f) the penultimate sentence of Section 7.7(a);
(g) Section 8.3(a);
(h) Section 9.3;
(i) Section 10.3; and
(j) Section 14.1(b)(6).
4. GENERAL PARTNERSHIP INTERESTS. The last sentence of Section 4.1(a) is
hereby amended to read as follows:
"A number of Partnership Units held by EQR equal to one percent (1%) of all
outstanding Partnership Units shall be deemed to be a General Partnership
Interest and a number of Partnership Units held by ERP equal to one percent
(1%) of all outstanding Partnership Units shall be deemed to be a General
Partnership Interest."
5. DELETION OF REQUIREMENT TO CONTRIBUTE FUNDS. Section 4.1(b)(2) of the
Agreement is hereby deleted in its entirety.
6. EQR'S SHARES NOT EQUATED TO PARTNERSHIP UNITS. Sections 4.2(b), 4.2(c)
and 4.2(d) of the Agreement are hereby deleted in their entirety and paragraph
(e) of Section 4.2 is hereby redesignated as paragraph (b) of Section 4.2.
7. DISTRIBUTION OF ERP COMMON UNITS IN LIQUIDATION. The Agreement is hereby
amended by adding thereto a new Section 5.5, which shall read as follows:
"5.5 DISTRIBUTION OF ERP COMMON UNITS. Notwithstanding anything to the
contrary in this Agreement, the ERP Common Units which may be received by
the Partnership pursuant to the Asset Contribution Agreement may
B-2
<PAGE>
be distributed to the Partners in liquidation of the Partnership on the
basis of one ERP Common Unit for each Partnership Unit then outstanding."
8. CONFORMING AMENDMENT. The proviso at the end of Section 7.1(a)(3) is
hereby amended to read as follows:
"provided, further, that the sale of all or substantially all of the assets
of the Partnership shall require the Consent of a majority of the
Percentage Interests of the Limited Partnership Interests (including
Limited Partnership Interests held by the General Partner)."
9. SALE OF ALL ASSETS PERMITTED. Section 7.2(a) of the Agreement is hereby
amended to read as follows:
"(a) take any action which would make it impossible to carry on the
ordinary business of the Partnership, except as otherwise provided in this
Agreement (it being understood and agreed that, subject to Section
7.1(a)(3), a sale of any or all of the assets of the Partnership, for
example, would be an ordinary part of the Partnership's business and
affairs and is specifically permitted hereby);"
10. OUTSIDE ACTIVITIES OF EQR. Section 7.5 of the Agreement is hereby
deleted in its entirety and the following is substituted in lieu thereof:
"Section 7.5 INTENTIONALLY OMITTED."
11. ASSET CONTRIBUTION AGREEMENT PERMITTED. Section 7.6(c) of the Agreement
is hereby amended to read as follows:
"(c) CONTRACT WITH GENERAL PARTNER. Except as expressly permitted by this
Agreement and except as contemplated by the Asset Contribution Agreement,
neither the General Partner nor any of its Affiliates shall sell, transfer
or convey any property to, or purchase any property from, the Partnership,
directly or indirectly, except pursuant to transactions that are on terms
that are fair and reasonable and no less favorable to the Partnership than
would be obtained from an unaffiliated third party in connection
therewith."
12. ACTION TO MAINTAIN REIT STATUS OF EQR. Section 7.9(d) of the Agreement
is hereby amended to read as follows:
"(d) ACTIONS TO MAINTAIN REIT STATUS OR AVOID TAXATION OF
EQR. Notwithstanding any other provisions of this Agreement or the Act, any
action of the General Partner on behalf of the Partnership or any decision
of the General Partner to refrain from acting on behalf of the Partnership,
undertaken in the good faith belief that such action or omission is
necessary or advisable in order (i) to protect the ability of EQR to
continue to qualify as a REIT or (ii) to avoid the incurrence of any taxes
by EQR under Section 857 or Section 4981 of the Code, is expressly
authorized under this Agreement and is deemed approved by all of the
Limited Partners."
13. TITLE TO PARTNERSHIP ASSETS TRANSFERRED TO ERP PURSUANT TO ASSET
CONTRIBUTION AGREEMENT. The third sentence of Section 7.10 of the Agreement is
hereby amended to read as follows:
"The General Partner hereby declares and warrants that, except for
Partnership assets contributed to ERP pursuant to the Asset Contribution
Agreement, any Partnership assets for which legal title is held in the name
of the General Partner or any nominee or Affiliate of the General Partner
shall be held by the General Partner for the use and benefit of the
Partnership in accordance with the provisions of this Agreement; provided,
however, that the General Partner shall use its best efforts to cause
beneficial and record title to such assets to be vested in the Partnership
as soon as reasonably practicable."
14. ADJUSTMENT TO OUTSTANDING UNITS. Section 8.5(b) of the Agreement is
hereby amended to read as follows:
"(b) ADJUSTMENTS TO OUTSTANDING PARTNERSHIP UNITS AND NOTIFICATION OF
CHANGES IN UNIT ADJUSTMENT FACTOR. The number of outstanding Partnership
Units shall be subject to adjustment from time to time by the Unit
Adjustment Factor. The Partnership shall notify each Limited Partner in
writing of any change made to the Unit Adjustment Factor within ten (10)
Business Days of the date such change becomes effective."
15. TRANSFER OF GENERAL PARTNER'S PARTNERSHIP INTEREST.
(a) Section 11.2(a) of the Agreement is hereby amended to read as follows:
"(a) GENERAL. In no event may the General Partner at any time assign,
sell, transfer, pledge, hypothecate or otherwise dispose of all or any
portion of its General Partnership Interest except by operation of law."
(b) Section 11.2(c) of the Agreement is hereby deleted in its entirety.
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<PAGE>
16. NO REQUIREMENT TO SELL ERP UNITS RECEIVED UPON LIQUIDATION. Section 13.2
of the Agreement is hereby amended by adding at the end thereof a new sentence
which reads as follows:
"Notwithstanding anything to the contrary contained herein (including,
without limiting the generality of the foregoing, Section 13.2(a)(4)), the
General Partner shall cause the Partnership to distribute the ERP Common
Units received by the Partnership pursuant to the Asset Contribution
Agreement in liquidation of the Partnership Units on the basis of one ERP
Unit for each outstanding Partnership Unit. The General Partner shall be
under no obligation to sell such ERP Common Units. The Partnership may
remain in existence and undertake the activities as contemplated by Section
6 of the Asset Contribution Agreement as part of its winding up."
17. NO PRIOR AMENDMENT. The Limited Partners of the Partnership hereby
ratify, approve and confirm in all respects the decision of the Board of
Directors of Evans Withycombe Residential, Inc. not to present the 11.2
Amendment to the Limited Partners of the Partnership, with the same force and
effect as if the Limited Partners of the Partnership had voted against the
adoption of the 11.2 Amendment.
18. ELIMINATION OF CERTIFICATES FOR UNIT.
(a) The definition of Partnership Unit is hereby amended by deleting the
second sentence thereof.
(b) The Agreement is hereby amended by deleting Exhibit D thereof in its
entirety.
19. REFERENCE TO AND EFFECT ON THE PARTNERSHIP AGREEMENT.
(a) At and after the Effective Time, each reference in the Partnership
Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of
like import referring to the Partnership Agreement shall mean and be a
reference to the Partnership Agreement as amended by this Amendment.
(b) The Partnership Agreement as amended and restated as of August 17, 1994
and as amended by this Amendment shall remain in full force and effect and is
hereby ratified and confirmed.
20. HEADINGS. Section and subsection headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose or be given any substantive effect.
21. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO
CONFLICTS OF LAWS PRINCIPLES.
22. COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and
attached to a single counterpart so that all signature pages are physically
attached to the same document.
B-4
<PAGE>
IN WITNESS WHEREOF, the Partners have executed this Amendment as of the
Effective Time.
GENERAL PARTNERS:
EQUITY RESIDENTIAL PROPERTIES TRUST, a
Maryland real estate investment trust,
General Partner
By:______________________________________
Title:_________________________________
ERP OPERATING LIMITED PARTNERSHIP, an
Illinois limited partnership
By: EQUITY RESIDENTIAL PROPERTIES TRUST,
a Maryland real estate investment
trust, its general partner
By:___________________________________
Title:______________________________
LIMITED PARTNERS:
EQUITY RESIDENTIAL PROPERTIES TRUST, a
Maryland real estate investment trust,
Limited Partner, as attorney-in-fact for
the Limited Partners
By:______________________________________
Title:_________________________________
ERP OPERATING LIMITED PARTNERSHIP, an
Illinois limited partnership, Limited
Partner, as attorney-in-fact for the
Limited Partners
By: EQUITY RESIDENTIAL PROPERTIES TRUST,
a Maryland real estate investment
trust, its general partner
By:___________________________________
Title:______________________________
B-5
<PAGE>
APPENDIX C
FORM OF ERP AMENDMENT
AMENDMENT TO FOURTH AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP FOR
ERP OPERATING LIMITED PARTNERSHIP
THIS AMENDMENT TO FOURTH AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP FOR ERP OPERATING LIMITED PARTNERSHIP (this "Amendment"),
effective as of the Effective Time (as defined in the Agreement and Plan of
Merger dated as of August 27, 1997 between Equity Residential Properties Trust
and Evans Withycombe Residential, Inc.).
RECITALS:
A. ERP Operating Limited Partnership, an Illinois limited partnership (the
"Partnership"), is governed by that certain Fourth Amended and Restated
Agreement of Limited Partnership for ERP Operating Limited Partnership dated
as of September 30, 1995 (the "Partnership Agreement").
B. The limited partners of the Partnership desire to amend the Agreement as
hereinafter set forth.
AGREEMENTS:
1. AMENDMENT TO SECTION 9.6.
Section 9.6 of the Partnership Agreement is hereby amended and restated to
read as follows:
9.6 OTHER ACTIVITIES OF PARTNERS AND AGREEMENTS WITH RELATED PARTIES. The
General Partner shall devote its full-time efforts in furtherance of the
Partnership business, it being expressly understood that, except for (i)
EQR's ownership interest in a partnership or a limited liability company of
which the Partnership is a partner or a member, respectively; (ii) EQR's
ownership of any qualified REIT subsidiary (within the meaning of the Code)
or any other entity which is a partner of a partnership or a member of a
limited liability company having the Partnership as a partner or member,
respectively; (iii) EQR's ownership of any entity that owns no more than a
one percent (1%) interest in any partnership, limited liability company or
other entity; (iv) borrowing (including the issuance of debt securities)
where the net proceeds thereof are loaned or contributed to the
Partnership; (v) any activity which the Board of Trustees of the General
Partner, in its sole discretion, has determined will have a material
benefit to the General Partner and will not have a material adverse effect
on the Partnership; and (vi) activities incidental to EQR's status and
existence as a real estate investment trust, the General Partner shall
conduct all of its activities with respect to the multifamily residential
property business exclusively through the Partnership and shall not conduct
or engage in any way in any other business.
2. REFERENCE TO AND EFFECT ON THE PARTNERSHIP AGREEMENT.
(a) At and after the Effective Time, each reference in the Partnership
Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of
like import referring to the Partnership Agreement shall mean and be a
reference to the Partnership Agreement as amended by this Amendment.
(b) The Partnership Agreement as amended and restated as of September 30,
1995 and as amended by this Amendment shall remain in full force and effect
and is hereby ratified and confirmed.
3. HEADINGS. Section and subsection headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose or be given any substantive effect.
4. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO
CONFLICTS OF LAWS PRINCIPLES.
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<PAGE>
IN WITNESS WHEREOF, the Partners have executed this Amendment as of the
Effective Time.
GENERAL PARTNERS:
EQUITY RESIDENTIAL PROPERTIES TRUST, a
Maryland real estate investment trust,
General Partner
By:______________________________________
Title:_________________________________
LIMITED PARTNERS:
EQUITY RESIDENTIAL PROPERTIES TRUST, a
Maryland real estate investment trust,
Limited Partner, as attorney-in-fact for
the Limited Partners
By:______________________________________
Title:_________________________________
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<PAGE>
APPENDIX D
FORM OF UNIT CONTRIBUTION AGREEMENT
The undersigned ("Contributor") is the legal and beneficial owner of the
aggregate units of limited partnership interest (the "EWRLP Units") in Evans
Withycombe Residential, L.P., a Delaware limited partnership ("EWRLP") set
forth on the signature page hereof.
1. Contribution of the Units. Pursuant to the terms hereof, Contributor
hereby agrees to contribute all of the EWRLP Units owned by Contributor to ERP
(the "Contribution"), ERP hereby agrees to accept such EWRLP Units from
Contributor, in exchange for common units of limited partnership interest in
ERP ("ERP Units") in an amount as calculated pursuant to Paragraph 2 hereof.
Upon the issuance of ERP Units to each Contributor, such Contributor shall be
admitted as a limited partner of ERP.
2. Exchange Ratio. In exchange for each EWRLP Unit contributed to ERP,
Contributor shall receive 0.5 ERP Units. No fractional ERP Units shall be
issued in connection with the Contribution. For any fractional interest,
Contributor shall receive an amount in cash equal to the Closing Price (as
defined in the Consent Solicitation/Prospectus/Information Statement, dated
, 1997, as amended to date, including the latest supplement thereto (if
any) ("Consent Solicitation") multiplied by the fraction of a ERP Unit to
which the Contributor would otherwise be entitled.
3. Closing. This Agreement shall be consummated ("Closing") as soon as
practicable after the effectiveness of the merger between Equity Residential
Properties Trust ("EQR") and Evans Withycombe Residential, Inc. ("EWR")
pursuant to that certain Agreement and Plan of Merger between EQR and EWR
dated as of August 27, 1997, as such agreement may be hereafter amended, and
if the Merger has been consummated prior to the date of acceptance of this
Agreement, the Closing Date shall be the date of acceptance of this Agreement
by ERP. Contributor shall deliver the certificate(s) representing the
contributor's EWRLP units, an assignment in form and substance satisfactory to
EQR and an executed counterpart to the Fourth Amended and Restated Agreement
of Limited Partnership for ERP Operating Limited Partnership, as amended ("ERP
Partnership Agreement") agreeing to be bound by the terms of the ERP
Partnership Agreement, including the power of attorney set forth in Section 16
of the ERP Partnership Agreement.
4. Contributor's Representations and Warranties. Contributor hereby
represents and warrants to ERP, as of the date hereof and as of the date of
the Closing, as follows:
(a) Contributor is the sole legal and beneficial owner of the EWRLP Units
and has the full power and authority to sell the EWRLP Units to ERP
hereunder;
(b) The EWRLP Units are owned by Contributor free and clear of any and
all liens claims, equities, security interests or encumbrances whatsoever;
(c) Upon the contribution of the EWRLP Units to ERP, such EWRLP Units
will be owned by ERP free and clear of any and all liens, claims, equities,
security interests or encumbrances whatsoever;
(d) There are no judgments of record or inchoate tax liens against or
relating to Contributor or the EWRLP Units, nor any litigation or other
proceedings pending or, to Contributor's knowledge, threatened against or
relating to Contributor or the EWRLP Units;
(e) Contributor is not subject to any restriction, agreement, law,
judgment or decree which would prohibit or be violated by the execution and
delivery hereof or by the consummation of the transaction contemplated
hereby; and
(f) Contributor has received the Consent
Solicitation/Prospectus/Information Statement, dated , 1997,
as amended to date, including the latest supplement thereto (if any)
("Consent Solicitation").
5. Indemnification. The warranties and representations set forth in
Paragraph 4 shall survive the Closing. Contributor hereby agrees to indemnify,
defend and hold ERP harmless from and against any and all loss, cost, damage,
liability or expense (including, without limitation, reasonable attorneys
fees, court costs and reasonable litigation expenses) which the other party
may suffer, sustain or incur as a result of, arising under or in connection
with any breach of warranty or agreement contained herein or any failure of
performance hereunder.
6. Entire Agreement. This Agreement contains the entire agreement between
the parties hereto with respect to the subject matter hereof. This Agreement
may not be modified or rescinded except pursuant to a written instrument
signed by the party against whom enforcement is sought.
7. Governing Law. This Agreement and the rights and obligations of the
parties hereto shall be governed by and construed in accordance with the laws
of the State of Illinois, without regard to its conflicts of laws provisions.
D-1
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Unit Contribution
Agreement as of the day of September, 1997.
CONTRIBUTOR:
--------------------------------------
Name
--------------------------------------
Number of EWRLP Units
ACCEPTED:
ERP OPERATING LIMITED
PARTNERSHIP
By: Equity Residential Properties
Trust, its General Partner
By: ______________________________
Its: _____________________________
D-2
<PAGE>
APPENDIX E
JPMORGAN
J.P. Morgan Securities Inc.
August 27, 1997
60 Wall Street The Board of Trustees
New York NY Equity Residential Properties Trust
10260-0060 Two North Riverside Plaza
Chicago, Illinois 60606
Attention: Mr. Douglas Crocker II
President, Chief Executive Officer
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a
financial point of view, to Equity Residential Properties
Trust (together with its subsidiaries and affiliates, the
"Company") of the consideration proposed to be paid by the
Company in connection with the proposed merger (the "Merger")
of the Company with Evans Withycombe Residential, Inc. (the
"Seller"). Pursuant to the Agreement and Plan of Merger,
dated as of August 27, 1997 (the "Agreement"), between the
Company and the Seller, each common share of the Seller,
$0.01 par value per share, will be converted into 0.50 common
shares of beneficial interest of the Company, and each unit
of limited partnership interest in Evans Withycombe
Residential L.P. will be exchangeable for 0.50 common units
of ERP Operating Limited Partnership.
In arriving at our opinion set forth below, we have reviewed,
among other things: (i) the Agreement; (ii) certain publicly
available information concerning the business of the Seller
and of certain other companies engaged in businesses
comparable to those of the Seller, and the reported market
prices for certain other companies' securities deemed
comparable; (iii) publicly available terms of certain
transactions involving companies comparable to the Seller and
the consideration received for such companies; (iv) current
and historical market prices of the common shares of
beneficial interest of the Company and the common shares of
the Seller; (v) audited financial statements of the Company
and the Seller for the fiscal year ended December 31, 1996,
and unaudited financial statements of the Company and the
Seller for the six months ended June 30, 1997; (vi) certain
agreements with respect to outstanding indebtedness or
obligations of the Company and the Seller; (vii) certain
internal financial analyses and estimates of budgeted 1998
funds from operations and net operating income prepared by
the Company and the Seller and their respective managements;
and (viii) the terms of other business combinations that we
deemed relevant.
In addition, we have held discussions with certain members of
the management of the Company and the Seller with respect to
certain aspects of the Merger, and the past and current
business operations of the Company and the Seller, the
financial condition and future prospects and operations of
the Company and the Seller, the effects of the Merger on the
financial condition and future prospects of the Company and
the Seller, and certain other matters we believed necessary
or appropriate to our inquiry. We have reviewed such other
financial studies and analyses and considered such other
information as we deemed appropriate for the purposes of this
opinion.
In giving our opinion, we have relied upon and assumed,
without independent verification, the accuracy and
completeness of all information that was publicly available
or was furnished to us by the Company and the Seller or
otherwise reviewed by us, and we have not assumed any
responsibility or liability therefor. We have not conducted
any valuation or appraisal of any assets or liabilities, nor
have any such valuations or appraisals been provided to us.
In relying on
E-1
<PAGE>
JPMORGAN
financial analyses and forecasts provided to us, we have
assumed that they have been reasonably prepared based on
assumptions reflecting the best currently available estimates
and judgments by management as to the expected future results
of operations and financial condition of the Company and the
Seller to which such analyses or forecasts relate. We have
also assumed that the Merger will have the tax consequences
described in discussions with, and materials furnished to us
by, representatives of the Company, and that the other
transactions contemplated by the Agreement will be
consummated as described in the Agreement. We have relied as
to all legal matters relevant to rendering our opinion upon
the advice of counsel.
Our opinion is necessarily based on economic, market and
other conditions as in effect on, and the information made
available to us as of, the date hereof. It should be
understood that subsequent developments may affect this
opinion and that we do not have any obligation to update,
revise, or reaffirm this opinion. We are expressing no
opinion herein as to the price at which the Company's or the
Seller's shares will trade at any future time.
In addition, we were not requested to and did not provide
advice concerning the structure, the specific amount of the
consideration, or any other aspects of the Merger, or to
provide services other than the delivery of this opinion. We
did not participate in negotiations with respect to the terms
of the Merger and related transactions. Consequently, we have
assumed that such terms are the most beneficial terms from
the Company's perspective that could under the circumstances
be negotiated among the parties to such transactions.
We will receive a fee from the Company for the delivery of
this opinion. Our affiliate, Morgan Guaranty Trust Company of
New York ("MGT"), is a co-arranger on the Company's revolving
credit facility. We have also provided other financial
advisory services to the Company and its affiliates in the
past and have received fees for such services. In addition,
in the past we have assisted the Seller in raising debt
capital and MGT has entered into derivatives transactions
with the Seller. In the ordinary course of their businesses,
our affiliates may actively trade the debt and equity
securities of the Company or the Seller for their own account
or for the accounts of customers and, accordingly, they may
at any time hold long or short positions in such securities.
On the basis of and subject to the foregoing, it is our
opinion as of the date hereof that the consideration to be
paid by the Company in connection with the proposed Merger is
fair, from a financial point of view, to the Company.
This letter is provided to the Board of Trustees of the
Company in connection with and for the purposes of its
evaluation of the Merger. This opinion does not constitute a
recommendation to any stockholder of the Company as to how
such stockholder should vote with respect to the Merger. This
opinion may not be disclosed, referred to, or communicated
(in whole or in part) to any third party for any purpose
whatsoever except with our prior written consent in each
instance. This opinion may be reproduced in full in any proxy
or information statement mailed to stockholders of the
Company but may not otherwise be disclosed publicly in any
manner without our prior written approval and must otherwise
be treated as confidential.
Very truly yours,
J.P. MORGAN SECURITIES INC.
/s/ Peter E. Baccile
By:
Name: Peter E. Baccile
Title: Managing Director
E-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF TRUSTEES AND OFFICERS
Under Maryland law, a REIT organized in Maryland is permitted to eliminate,
by provision in its Declaration of Trust, the liability of its trustees and
officers to the trust and its shareholders for money damages except for
liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) active and deliberate dishonesty
established by final judgment as being material to the cause of action. The
Declaration of Trust of EQR includes such a provision eliminating such
liability to the maximum extent permitted by Maryland REIT law.
The Maryland REIT law permits a Maryland REIT to indemnify and advance
expenses to its trustees, officers, employees and agents to the same extent as
permitted by the MGCL for directors and officers of Maryland corporations. The
MGCL permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any
proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the act or
omission of the director or officer was material to the matter giving rise to
the proceeding and (i) was committed in bad faith or (ii) was the result of
active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, under the
MGCL, a Maryland corporation may not indemnify for an adverse judgment in a
suit by or in the right of the corporation or for a judgment of liability on
the basis that personal benefit was improperly received, unless in either case
a court orders indemnification and then only for expenses. In addition, the
MGCL permits a corporation to advance reasonable expenses to a director or
officer upon the corporation's receipt of (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the corporation and (b) a written
undertaking by or on his behalf to repay the amount paid or reimbursed by the
corporation if it shall ultimately be determined that the standard of conduct
was not met. The Declaration of Trust of EQR authorizes it, to the maximum
extent permitted by Maryland REIT law, to obligate itself to indemnify, and to
pay or reimburse reasonable expenses in advance of a final disposition of a
proceeding to, (a) any individual who is a present or former shareholder,
trustee or officer or (b) any individual who, while a shareholder, trustee or
officer of EQR and at the express request of EQR, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a director, officer, shareholder, partner or trustee of
such corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, from and against all claims and liabilities to which such
person may become subject by reason of his being or having been a shareholder,
trustee, or officer. In addition, the Declaration of Trust of EQR provides
that, with the approval of its board of trustees, EQR shall have the power to
provide such indemnification and advancement of expenses to a person who
served a predecessor of EQR in any of the capacities described in (a) or (b)
above and to any employee or agent of EQR or a predecessor of EQR. The MGCL
and Bylaws of EQR require it to indemnify (a) any trustee, officer or
shareholder or any former trustee, officer or shareholder (including among the
foregoing, for all purposes of the indemnification provisions of the Bylaws
and without limitation, any individual who, while a trustee, officer or
shareholder and at the express request of EQR, serves or has served another
real estate investment trust, corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer,
shareholder, partner or trustee of such real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise) who has been successful, on the merits or otherwise, in the
defense of a proceeding to which he was made a party by reason of service in
such capacity, against reasonable expenses incurred by him in connection with
the proceeding, (b) any trustee or officer or any former trustee or officer
against any claim or liability to which he may become subject by reason of
such status unless it is established that (i) his act or omission was material
to the matter giving rise to the proceeding and was committed in bad faith or
was the result of active and deliberate dishonesty, (ii) he actually received
an improper personal benefit in money, property or services or (iii) in the
case of a criminal proceeding, he had reasonable cause to believe that his act
or omission was unlawful and (c) each shareholder or former shareholder
against any claim or liability to which he may become subject by reason of
such status. In addition, EQR's Bylaws require it to pay or reimburse without
requiring a preliminary determination of the ultimate entitlement to
indemnification, in advance of final disposition of a proceeding, reasonable
expenses incurred by a trustee, officer or shareholder or former trustee,
officer or shareholder made a party to a proceeding by reason of such status,
provided that, in the case of a trustee or officer, EQR shall have received
(1) a written affirmation by such person of his good faith belief that he has
met the standard of conduct necessary for indemnification by EQR as authorized
by its Bylaws and (2) a written undertaking by or on his behalf to repay the
amount paid or reimbursed by EQR if it shall ultimately be determined that the
applicable standard of conduct was not met. EQR's Bylaws also (x) permit EQR
to provide indemnification and payment or reimbursement of expenses to a
present or former trustee, officer or shareholder who served as a predecessor
of EQR or to any employee or agent of EQR or a predecessor of EQR, (y) provide
that any indemnification and payment or reimbursement of the expenses
permitted in the
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<PAGE>
Bylaws shall be furnished in accordance with the procedures providing for
indemnification and payment or reimbursement of expenses under Section 2-418
of the MGCL for directors of Maryland corporations and (z) permit EQR to
provide to trustees, officers and shareholders such other and further
indemnification or payment or reimbursement of expenses to the fullest extent
permitted by the MGCL for directors of Maryland corporations.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to trustees and officers of EQR pursuant to the foregoing
provisions or otherwise, EQR has been advised that, although the validity and
scope of the governing statute have not been challenged in a court of law, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In addition, indemnification may be limited by state securities
laws.
The partnership agreements of ERP and the Management Partnerships also
provide for indemnification of EQR and its officers and trustees to the same
extent that indemnification is provided to officers and trustees of EQR in its
Declaration of Trust, and limit the liability of EQR and its officers and
trustees to ERP and the Management Partnerships and their respective partners
to the same extent that the liability of the officers and trustees of EQR to
EQR and its shareholders is limited under EQR's Declaration of Trust.
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
<C> <S> <C>
2.1 Asset Contribution Agreement between ERP Operating Limited
Partnership and Evans Withycombe Residential, L.P. dated as of
August 27, 1997 (Included as Appendix A to the Prospectus con-
tained in the Registration Statement)
2.2 Agreement and Plan of Merger made and entered into on August
27, 1997 by and between Equity Residential Properties Trust
and Evans Withycombe Residential, Inc. [incorporated by refer-
ence to Exhibit 10 to EQR's current report on Form 8-K dated
August 29, 1997 (SEC File No. 1-2252)]
5.1 Opinion of Rudnick & Wolfe regarding legality of securities
being registered
8.1* Opinion of Rudnick & Wolfe regarding REIT qualifications of
EQR
8.2* Opinion of Gibson, Dunn & Crutcher LLP regarding certain tax
aspects of the Merger and REIT qualifications of EWR
10.1 Unit Contribution Agreement, dated as of August 27, 1997, by
and among ERP Operating Limited Partnership, Stephen O. Evans,
F. Keith Withycombe, The Evans Limited Liability Company and
EW Investments Limited Partnership [incorporated by reference
to Exhibit 10(b) to ERP's current report on 8-K dated August
29, 1997 (SEC File No. 0-24920)]
10.2 Form of Unit Contribution Agreement to be entered into by lim-
ited partners of EWRLP (included as Appendix E to the Prospec-
tus contained in the Registration Statement)
23.1* Consent of Rudnick & Wolfe (included in Exhibit 5.1 hereof)
23.2 Consent of J.P. Morgan Securities Inc.
23.3* Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit
8.2 hereof)
23.4* Consent of Grant Thornton, LLP
23.5* Consent of Ernst & Young LLP (Chicago)
23.6* Consent of Ernst & Young LLP (Phoenix)
99.1 Amendment to the Amended and Restated Agreement of Limited
Partnership (included as Appendix B to the Prospectus con-
tained in the Registration Statement of Evans Withycombe Resi-
dential, L.P.)
99.2 Amendment to the Fourth Amended and Restated Limited Partner-
ship Agreement of ERP Operating Limited Partnership (included
as Appendix C to the Prospectus contained in the Registration
Statement)
99.3 Form of Consent Card for Consent Solicitation of Holders of
Units of Limited Partnership Interest in Evans Withycombe Res-
idential, L.P.
99.6 Opinion of J.P. Morgan Securities (included as Appendix D to
the Prospectus contained in the Registration Statement)
</TABLE>
- -------
* Filed with this amendment. All other exhibits previously filed.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
. To file, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement;
II-2
<PAGE>
. To include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
. To reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement;
. To include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration statement;
. That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
. To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
. The undersigned registrant hereby undertakes as follows: that prior to any
public re-offering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such re-offering prospectus will contain the
information called for by the applicable registration form with respect to
re-offerings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
. The registrant undertakes that every prospectus (A) that is filed pursuant
to paragraph (a) immediately preceding, or (B) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1993, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt
of such request, and to send the incorporation documents by first class mail
or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
. The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
. The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report, to security holders that is incorporated
by reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act
of 1934; and, where interim financial information required to be presented
by Article 3 of Regulation S-X is not set forth in the prospectus, to
deliver, or cause to be delivered to each person to whom the prospectus is
sent or given, the latest quarterly report that is specifically incorporated
by reference in the prospectus to provide such interim financial
information.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THIS 14TH DAY OF
NOVEMBER 1997.
ERP OPERATING LIMITED PARTNERSHIP
By: Equity Residential Properties
Trust, General Partner
/s/ Douglas Crocker II
By: __________________________________
Douglas Crocker II
President, Chief Executive Officer
and Trustee
S-1
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Samuel Zell* Chairman of the Board of Trustees of )
the general partner of the Registrant )
)
/s/ Douglas Crocker II President, Chief Executive Officer and )
____________________________________ Trustee of the general partner of the )
Douglas Crocker II Registrant )
)
David J. Neithercut* Executive Vice President and Chief )
Financial Officer of the general )
partner of the Registrant )
)
Michael J. McHugh* Senior Vice President, Chief )
Accounting Officer and Treasurer of )
the general partner of the Registrant )
)
Henry H. Goldberg* Trustee of the general partner of the } November 14, 1997
Registrant )
)
Errol R. Halperin* Trustee of the general partner of the )
Registrant )
)
James D. Harper, Jr.* Trustee of the general partner of the )
Registrant )
)
Jeffrey H. Lynford* Trustee of the general partner of the )
Registrant )
Sheli Z. Rosenberg* Trustee of the general partner of the )
Registrant )
Gerald A. Spector* Trustee of the general partner of the )
Registrant )
Barry S. Sternlicht* Trustee of the general partner of the )
Registrant )
B. Joseph White* Trustee of the general partner of the )
Registrant )
</TABLE>
Individual and as Attorney-in-Fact
/s/ Douglas Crocker II
*By____________________________
Douglas Crocker II
S-2
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF RUDNICK & WOLFE]
October 31, 1997
(312) 368-4000
Evans Withycombe Residential, Inc.
6991 East Camelback Road, Suite A200
Scottsdale, AZ 85251
Re: Tax Opinion - REIT Status/Partnership Classification
----------------------------------------------------
Ladies and Gentlemen:
In connection with (A) the Joint Proxy Statement and Prospectus, included
in the Registration Statement on Form S-4 (File No. 333-35873) (the "Merger
Registration Statement"), relating to the proposed merger (the "Merger") of
Evans Withycombe Residential, Inc., a Maryland corporation ("EWR"), with and
into Equity Residential Properties Trust, a Maryland real estate investment
trust ("EQR"), and (B) the Consent Solicitation/Prospectus/Information
Statement, contained in the Registration Statement on Form S-4 (File No. 333-
36053) (the "Partnership Registration Statement"), relating to (1) the proposed
contribution of the assets, subject to liabilities, of Evans Withycombe
Residential, L.P., a Delaware limited partnership ("EWRLP") to ERP Operating
Limited Partnership, an Illinois limited partnership ("ERP Operating
Partnership") and (2) the offer by ERP Operating Partnership to holders of units
in EWRLP to exchange such units for units of partnership interest in ERP
Operating Partnership, (the Merger Registration Statement and the Partnership
Registration Statement are referred to herein collectively as the "Registration
Statements"), you have requested our opinion, as special counsel to EQR,
concerning: (i) the qualification and taxation of EQR as a real estate
investment trust (a "REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"), for the taxable years ended December 31, 1993 through December 31,
1996; (ii) the qualification and taxation of EQR as a REIT under the Code for
all taxable years ending after the Effective Time; and (iii) the classification
of ERP Operating Partnership as a partnership for federal income tax purposes;
and (iv) the classification of EWRLP as a partnership for federal income tax
purposes from and after the Effective Time. Unless otherwise specifically
defined herein, all capitalized terms have the meaning assigned to them in the
Registration Statements.
In connection with rendering the opinions expressed below, we have examined
originals (or copies identified to our satisfaction as true copies of the
originals) of the following documents (collectively, the "Reviewed Documents"):
<PAGE>
Rudnick & Wolfe
Evans Withycombe Residential, Inc.
October 31, 1997
Page 2
(a) The Fourth Amended and Restated Limited Partnership Agreement of ERP
Operating Partnership, dated as of September 30, 1995, as amended (the
"ERP Operating Partnership Agreement");
(b) The Registration Statements;
(c) The Amended and Restated Agreement of Limited Partnership of EWRLP,
dated as of August 17, 1994, as amended (the "EWRLP Partnership
Agreement"); and
(d) Such other documents as may have been presented to us by EQR from time
to time.
In addition, we have relied upon (i) EQR's certificate, dated October 31,
1997 (the "EQR Officer's Certificate"), executed by a duly appointed officer of
EQR, which is attached hereto as Exhibit A, setting forth certain
representations relating to the organization and operation of EQR and ERP
Operating Partnership before the Merger and EQR, ERP Operating Partnership, and
EWRLP subsequent to the Merger, and (ii) EWR's certificates, dated October 31,
1997 (the "EWR Officer's Certificate"), executed by a duly appointed officer of
EWR, which are attached hereto as Exhibit B, setting forth certain
representations relating to the organization and operation of EWR and EWRLP
before the Merger (collectively, the EQR Officer's Certificate and the EWR
Officer's Certificate are referred to herein as the "Officer's Certificates").
For the purposes of our opinion, we have not made an independent investigation
of the facts set forth in the documents we reviewed. We consequently have
assumed that the information presented in such documents or otherwise furnished
to us accurately and completely describes all material facts relevant to our
opinion. In the course of our representation of EQR, no information has come to
our attention that would cause us to question the accuracy or completeness of
the representations contained in the Officer's Certificates or of the Reviewed
Documents in a material way.
In our review, we have assumed, with your consent, that all of the
representations and statements set forth in the documents we reviewed are true
and correct, and all of the obligations imposed by any such documents on the
parties thereto have been and will be performed or satisfied in accordance with
their terms. We have also assumed the genuineness of all signatures, the proper
execution of all documents, the authenticity of all documents submitted to us as
originals, the conformity to originals of documents submitted to us as copies,
and the authenticity of the originals from which any copies were made.
<PAGE>
Rudnick & Wolfe
Evans Withycombe Residential, Inc.
October 31, 1997
Page 3
In rendering these opinions, we have assumed that the transactions
contemplated by the Reviewed Documents will be consummated in accordance with
the terms and provisions of such documents, and that such documents accurately
reflect the material facts of such transactions. In addition, the opinions are
based on the correctness of the following specific assumptions: (i) prior to
the Merger, EQR, ERP Operating Partnership, EWR, and EWRLP each have been
operated in the manner described in the partnership agreements of ERP Operating
Partnership and EWRLP, respectively (hereinafter, the "Partnership Agreements")
or other organizational documents of each such entity, in the Joint Proxy
Statement/Prospectus and the Consent Solicitation/Prospectus/Information
Statement, and all terms and provisions of such agreements and documents have
been complied with by all parties thereto; (ii) following the Merger, EQR, the
ERP Operating Partnership, and EWRLP will each be operated in the manner
described in the Partnership Agreement or other organizational documents of each
such entity, in the Joint Proxy Statement/Prospectus and the Consent
Solicitation/Prospectus/Information Statement, and all terms and provisions of
such agreements and documents will be complied with by all parties thereto;
(iii) EQR is a duly formed real estate investment trust under the laws of the
State of Maryland; and (iv) there has been no change in the applicable laws of
the State of Maryland, or in the Code, the regulations promulgated thereunder by
the Treasury Department, and the interpretations of the Code and such
regulations by the courts and the Internal Revenue Service, all as they are in
effect and exist at the date of this letter. With respect to the last
assumption, it should be noted that statutes, regulations, judicial decisions,
and administrative interpretations are subject to change at any time and, in
some circumstances, with retroactive effect. A material change that is made
after the date hereof in any of the foregoing bases for our opinions could
affect our conclusions. Moreover, the qualification and taxation of EQR as a
REIT depends upon its ability to meet, through actual annual operating results,
distribution levels and diversity of share ownership and the various
qualification tests imposed under the Code, the results of which will not be
reviewed by the undersigned. Accordingly, no assurance can be given that the
actual results of the operations of EQR for any one taxable year will satisfy
such requirements.
Based upon and subject to the foregoing, it is our opinion that:
(i) EQR was organized and has operated in conformity with the requirements
for qualification as a REIT under the Code for its taxable years ended
December 31, 1993 through December 31, 1996; and
(ii) Assuming the Merger and all other events occur as contemplated in the
Agreements and the Registration Statements: (a) EQR's proposed method
of operation, as described in the Joint Proxy Statement/Prospectus and
the Consent Solicitation/Prospectus/Information Statement, and as
represented in the Officer's
<PAGE>
Rudnick & Wolfe
Evans Withycombe Residential, Inc.
October 31, 1997
Page 4
Certificates, will enable it to satisfy the requirements for
qualification and taxation as a REIT under the Code for its taxable
years ending after the Effective Time; (b) the ERP Operating
Partnership will be classified as a partnership, and not as an
association taxable as a corporation, for federal income tax purposes
under Code Section 7701 and the Treasury Regulations promulgated
thereunder; and (c) from and after the Effective Date, EWRLP will be
classified as a partnership, and not as an association taxable as a
corporation, for federal income tax purposes under Code Section 7701
and the Treasury Regulations promulgated thereunder.
Other than as expressly stated above, we express no opinion on any issue
relating to EQR, the ERP Operating Partnership and EWRLP, or to any investment
therein.
For a discussion relating the law to the facts and the legal analysis
underlying the opinion set forth in this letter, we incorporate by reference the
discussion of federal income tax issues, which we assisted in preparing, in the
respective sections of the Joint Proxy Statement/Prospectus and the Consent
Solicitation/Prospectus/Information Statement under the heading "Federal Income
Tax Consequences." We assume no obligation to advise you of any changes in the
foregoing subsequent to the date of this opinion letter, and we are not
undertaking to update the opinion letter from time to time.
This opinion letter has been prepared in connection with Section 6.3 of the
Merger Agreement. We hereby consent to the use of our name and our opinion under
the caption "Federal Income Tax Consequences" in the Joint Proxy
Statement/Prospectus.
Very truly yours,
RUDNICK & WOLFE
/s/ Rudnick & Wolfe
<PAGE>
Rudnick & Wolfe
EXHIBIT A
---------
<PAGE>
Equity Residential Properties Trust
Two North Riverside Plaza
Chicago, Illinois 60606
October 31, 1997
Rudnick & Wolfe
203 North LaSalle Street
Suite 1800
Chicago, Illinois 60601
Re: Tax Opinion for Status as a Real Estate Investment Trust/Partnership
Classification - Officer's Certificate
---------------------------------------
Ladies and Gentlemen:
In connection with (A) the Joint Proxy Statement and Prospectus, included
in the Registration Statement on Form S-4 (File No. 333-35873) (the "Merger
Registration Statement"), relating to the proposed merger (the "Merger") of
Evans Withycombe Residential, Inc., a Maryland corporation ("EWR"), with and
into Equity Residential Properties Trust, a Maryland real estate investment
trust ("EQR"), and (B) the Consent Solicitation/Prospectus/Information
Statement, contained in the Registration Statement on Form S-4 (File No. 333-
36053) (the "Partnership Registration Statement"), relating to (1) the proposed
contribution of the assets, subject to liabilities, of Evans Withycombe
Residential, L.P., a Delaware limited partnership ("EWRLP") to ERP Operating
Limited Partnership, an Illinois limited partnership ("ERP Operating
Partnership") and (2) the offer by ERP Operating Partnership to holders of units
in EWRLP to exchange such units for units of partnership interest in ERP
Operating Partnership, (the Merger Registration Statement and the Partnership
Registration Statement are referred to herein collectively as the "Registration
Statements"), we have requested your opinion concerning: (i) the qualification
and taxation of EQR as a real estate investment trust (a "REIT") under the
Internal Revenue Code of 1986, as amended (the "Code"), for its taxable year
ended December 31, 1993 through December 31, 1996; (ii) the qualification and
taxation of EQR as a REIT under the Code for all taxable years ending after the
Effective Time; and (iii) the classification of ERP Operating Partnership as a
partnership for federal income tax purposes. Unless otherwise specifically
defined herein or in Exhibit A attached hereto, all capitalized terms have the
meaning assigned to them in the Registration Statements.
In connection with the issuance of your legal opinion as described above,
EQR and/or ERP Operating Partnership hereby make the following representations
(intending that Rudnick & Wolfe will rely on such representations in rendering
its opinion); all representations made by EQR and ERP Operating Partnership are
made for all periods of their existence (or such other periods of time as may be
specifically set forth below):
<PAGE>
October 31, 1997
Page 2
1. No interests in ERP Operating Partnership held by a general partner or
limited partner have ever been or will be traded on an established
securities market or exchange (including an over-the-counter market)
or the substantial equivalent thereof.
2. No interests in EWRLP held by a general partner or limited partner
will be traded on an established securities market or exchange
(including an over-the-counter market) or the substantial equivalent
thereof.
3. Commencing with its taxable year ending December 31, 1993, EQR timely
and properly filed an election to be taxed as a "Real Estate
Investment Trust." EQR has not revoked such election and has no
present intention to revoke such election.
4. EQR has and will be managed by one or more of its trustees.
5. Beneficial ownership in EQR has been and will be evidenced by
transferable shares.
6. At no time during the last half of any taxable year of EQR have more
than 50% in value of EQR's outstanding beneficial interests been
owned, directly or indirectly, by or for five or fewer individuals as
determined by applying the Attribution Rules.
7. EQR will take all measures within its control to ensure that at no
time during the last half of any taxable year ending after the
Effective Time, are more than 50% in value of EQR's outstanding
beneficial interests owned, directly or indirectly, by or for five or
fewer individuals as determined by applying the Attribution Rules.
8. Beneficial ownership in EQR was held by 100 or more persons during at
least 335 days for the taxable year ending December 31, 1993 (or
during a proportionate part of such taxable year if such taxable year
was less than twelve months) and for all periods thereafter. EQR will
take all measures within its control to ensure that beneficial
ownership in EQR is held by 100 or more persons at all times from and
after the Effective Time.
9. Commencing with EQR's taxable year ending December 31, 1993, and for
all taxable years ending after the Effective Time, at least ninety-
five percent (95%) of the gross income of EQR (excluding gross income
from Prohibited Transactions) has been and is expected to be derived
from (i) dividends, (ii) interest, (iii) rents from real property,
(iv) gain from the sale or other disposition
of stock, securities
<PAGE>
October 31, 1997
Page 3
and real property (including Interests in Real Property and interests
on mortgages on real property), but excluding gain on real property
which is Code Section 1221(1) Property, (v) abatements and refunds of
taxes on real property, (vi) income and gain derived from Foreclosure
Property, (vii) amounts (other than amounts, the determination of
which depends in whole or in part on income or profits of any person)
received or accrued as consideration for entering into agreements (A)
to make loans secured by mortgages on real property or on Interests in
Real Property, or (B) to purchase or lease real property (including
Interests in Real Property and interests in mortgages on real
property), and (viii) gain from the sale or other disposition of Real
Estate Assets that is not a Prohibited Transaction.
10. Commencing with EQR's taxable year ending December 31, 1993, and for
all taxable years ending after the Effective Time, at least seventy-
five (75%) of the gross income of EQR (excluding gross income from
Prohibited Transactions) has been and is expected to be derived from
(i) rents from real property, (ii) interest on obligations secured by
mortgages on real property or on Interests in Real Property, (iii)
gain from the sale or disposition of real property (including
Interests in Real Property and interests in mortgages on real
property), but excluding gain from real property which is Code Section
1221(1) Property, (iv) dividends or other distributions on, and gain
(other than gain from Prohibited Transactions) from the sale or other
disposition of, transferable shares or beneficial certificates in
other Real Estate Investment Trusts, (v) abatements and refunds of
taxes on real property, (vi) income and gain derived from Foreclosure
Property, (vii) amounts (other than amounts, the determination of
which depends in whole or in part on the income or profits of any
person) received or accrued as consideration for entering into
agreements (A) to make loans secured by mortgages on real property or
on Interests in Real Property or (B) to purchase or lease real
property (including Interests in Real Property and interests in
mortgages on real property), (viii) gain from the sale or other
disposition of a Real Estate Asset which is not a Prohibited
Transaction, and (ix) Qualified Temporary Investment Income.
11. Less than 30% of the gross income of EQR in its taxable years ending
December 31, 1993, 1994, 1995 and 1996 was derived from the sale or
other disposition of (i) stock or securities held for less than one
year; (ii) property in a Prohibited Transaction; and (iii) real
property (including Interests in Real Property and interests in
mortgages on real property) held for less than four years other than
property compulsorily or involuntarily converted (by means of
destruction, theft, seizure, requisition, condemnation or threat of
imminence thereof) and Foreclosure Property.
<PAGE>
October 31, 1997
Page 4
12. EQR will take all measures within its control to ensure that, for the
taxable year ending December 31, 1997, less than 30% of its gross
income will be derived from the sale or other disposition of (i) stock
or securities held for less than one year; (ii) property in a
Prohibited Transaction; and (iii) real property (including Interests
in Real Property and interests in mortgages on real property) held for
less than four years other than property compulsorily or involuntarily
converted (by means of destruction, theft, seizure, requisition,
condemnation or threat of imminence thereof) and Foreclosure Property.
13. Neither EQR nor the ERP Operating Partnership has entered into any
agreement or arrangement (and each has taken all measures within its
control to ensure that no subsidiary of EQR classified as a Qualified
REIT Subsidiary ("QRS") and no Related Partnership, has entered into
any agreement or arrangement) in connection with the rental of real
property under which amounts payable to EQR, the ERP Operating
Partnership, any Related Partnership or QRS are dependent in whole or
in part on the income or profits derived from any tenant (or
subtenant) of such properties (except that such amounts may be based
on a fixed percentage or percentages of gross receipts or sales).
14. From and after the Effective Time, neither EQR, the ERP Operating
Partnership nor EWRLP will enter into any agreement or arrangement
(and each will take all measures within its control to ensure that no
Related Partnership or QRS will enter into any agreement or
arrangement) in connection with the rental of real property under
which amounts payable to EQR, the ERP Operating Partnership, EWRLP,
any Related Partnership or QRS will depend in whole or in part on the
income or profits derived from any tenant (or subtenant) of such
properties (except that such amounts may be based on a fixed
percentage or percentages of gross receipts or sales).
15. Neither EQR nor the ERP Operating Partnership has rendered services
themselves or through the ERP Operating Partnership, a Related
Partnership, or any other affiliate in regard to a real property in
which EQR, directly or through the ERP Operating Partnership or a
Related Partnership, had an interest that is less than or equal to 50%
unless EQR (i) obtained either a ruling from the Internal Revenue
Service or an opinion of counsel that the provision of such services
would not disqualify the income from such real property as rents from
real property or (ii) determined that, if the income from such real
property did not qualify as rents from real property, such income
(along with other nonqualifying income) would
<PAGE>
October 31, 1997
Page 5
not cause EQR to fail to meet the tests described in representations
(9) and (10) above.
16. Neither EQR, the ERP Operating Partnership nor EWRLP will render
services themselves or through the ERP Operating Partnership, EWRLP, a
Related Partnership, or any other affiliate, in regard to any real
property or any real property acquired in the future in which EQR,
directly or through the ERP Operating Partnership or a Related
Partnership, has an interest that is less than or equal to 50% unless
EQR (i) obtains either a ruling from the Internal Revenue Service or
an opinion of counsel that the provision of such services will not
disqualify the income from such real property as rents from real
property or (ii) determines that, if the income from such real
property did not qualify as rents from real property, such income
(along with other nonqualifying income) would not cause EQR to fail to
meet the tests described in representations (9) and (10) above.
17. For the taxable years ending December 31, 1993, 1994, 1995 and 1996,
(i) less than 15% of the rent received by EQR, the ERP Operating
Partnership, any Related Partnership or QRS in regard to each of the
real properties owned directly or indirectly and/or leased by any of
them (the "Properties") was attributable to personal property; and
(ii) all personal property contained in the Properties was leased
under or in connection with a lease of the real property contained in
the Properties.
18. EQR, the ERP Operating Partnership and EWRLP expect that, and each
will take all measures within its control to ensure that, for any
taxable year ending after the Effective Time, (i) less than 15% of the
rent received by EQR, the ERP Operating Partnership, EWRLP, any
Related Partnership or QRS in regard to each of the Properties will be
attributable to personal property; and (ii) all personal property
contained in the Properties will be leased under or in connection with
a lease of real property contained in the Properties.
19. For its taxable years ending December 31, 1993, 1994, 1995 and 1996,
no more than a de minimis amount of rent received by EQR, the ERP
Operating Partnership or any Related Partnership for the Properties
was received or accrued directly or indirectly from any person in
which EQR owns (i) in the case of a corporation, 10% or more of the
total combined voting power of all classes of stock entitled to vote,
or 10% or more of the total number shares of all classes of stock; or
(ii) in the case of an entity other than a corporation, an interest of
10% or more in the
<PAGE>
October 31, 1997
Page 6
assets or net profits of such entity. For purposes of this
representation, ownership will be determined by taking into account
the Modified Attribution Rules.
20. EQR will take all measures within its control to ensure that, for any
of its taxable years ending after the Effective Time, no more than a
de minimis amount of rent received by EQR, EWRLP, the ERP Operating
Partnership, any Related Partnership or QRS for the Properties will be
received or accrued directly or indirectly from any person in which
EQR owns (i) in the case of a corporation, 10% or more of the total
combined voting power of all classes of stock entitled to vote, or 10%
or more of the total number of shares of all classes of stock; or (ii)
in the case of an entity other than a corporation, an interest of 10%
or more in the assets or net profits of such entity. For purposes of
this representation, ownership will be determined by taking into
account the Modified Attribution Rules.
21. Neither EQR, the ERP Operating Partnership, nor any Related
Partnership or QRS or affiliate of any of them has entered into or (in
the case of the aforementioned entities and EWRLP) will enter into any
agreement or arrangement for the performance of services to tenants of
the Properties, other than an agreement or arrangement for services
not rendered primarily for the convenience of the tenants of the
Properties and customarily furnished or rendered in connection with
the rental of real property, pursuant to which (i) an entity that
fails to qualify as an Independent Contractor will furnish any
services to tenants of the Properties or (ii) EQR, the ERP Operating
Partnership or a Related Partnership, QRS or affiliate of any of them
derives any income from an entity providing services to Property
tenants that is required to qualify as an Independent Contractor.
22. At the close of each quarter during its existence, at least 75% of the
value of the Total Assets of EQR consisted of Real Estate Assets, cash
and cash items (including receivables which arise in the ordinary
course of EQR's operation but not receivables purchased from another
person) and government securities, and not more than 25% of the value
of its assets was represented by securities (other than government
securities).
23. EQR will take all measures within its control to ensure that, at the
close of each quarter during each taxable year ending after the
Effective Time, at least 75% of the value of its Total Assets of EQR
will consist of Real Estate Assets, cash and cash items (including
receivables which arise in the ordinary course of EQR's
operation but not receivables purchased from another person) and
government
<PAGE>
October 31, 1997
Page 7
securities, and not more than 25% of the value of its assets was
represented by securities (other than government securities).
24. At the close of each quarter during its existence, EQR has not owned
(either directly or indirectly through ERP Operating Partnership, or
any Related Partnership or other affiliate) securities in any one
issuer having an aggregate value in excess of 5% of the value of the
Total Assets of EQR.
25. EQR will take all measures within its control to ensure that, at the
close of each quarter of each taxable year ending after the Effective
Time, it does not own (either directly or indirectly through ERP
Operating Partnership, EWRLP, or any Related Partnership or other
affiliate) securities in any one issuer having an aggregate value in
excess of 5% of the value of the Total Assets of EQR.
26. At no time has EQR owned (either directly or indirectly through the
ERP Operating Partnership or any Related Partnership or other
affiliate) any securities in any issuer representing in excess of 10%
of the outstanding voting securities of such issuer, unless such
issuer is a Qualified REIT Subsidiary.
27. EQR will take all measures within its control to ensure that, at the
close of each quarter of each taxable year ending after the Effective
Time, it will not own (either directly, or indirectly, through ERP
Operating Partnership, EWRLP, or any Related Partnership or other
affiliate) any securities in any issuer representing in excess of 10%
of the outstanding voting securities of such issuer, unless such
issuer is a Qualified REIT Subsidiary.
28. EQR, the ERP Operating Partnership and any Related Partnerships have
at all times during their existence held the Properties (and all other
assets) for investment purposes and not as (i) stock in trade or other
property of a kind which would properly be included in inventory if on
hand at the close of the taxable year, or (ii) property held primarily
for sale to customers in the ordinary course of its trade or business.
29. EQR, the ERP Operating Partnership, EWRLP and any Related Partnerships
will at all times after the Effective Time hold the Properties (and
all other assets) for investment purposes and not as (i) stock in
trade or other property of a kind which would properly be included in
inventory if on hand at the close of the taxable year, or (ii)
property held primarily for sale to customers in the ordinary course
of its trade or business.
<PAGE>
October 31, 1997
Page 8
30. Commencing with EQR's taxable year ending December 31, 1993, EQR has
paid and expects to pay dividends (without regard to capital gains
dividends) equal to or in excess of the sum of (i) ninety-five percent
(95%) of EQR's REIT Taxable Income for the year (determined without
regard to the deduction for dividends paid and by excluding any net
capital gain), and (ii) ninety-five percent (95%) of the net income
from Foreclosure Property (after the tax imposed thereon by Section
857(b)(4)(A) of the Code), minus (iii) any Excess Noncash Income.
31. As required by Regulation Section 1.857-8, for each year commencing
with EQR's taxable year ending December 31, 1993, EQR (i) has
maintained and will maintain the necessary records relating to the
actual ownership of its stock, (ii) has made and will make the
requisite information requests of its shareholders regarding stock
ownership, and (iii) has maintained and will maintain a list of the
persons failing or refusing to comply in whole or in part with EQR's
demand for statements regarding stock ownership.
32. EQR has adopted a calendar year accounting period and has not changed
nor sought the consent of the Secretary of the Treasury or his
delegate to change EQR's accounting period, and from and after the
Effective Time, will continue to use a calendar year accounting period
and will take all measures within its control to retain a calendar
year accounting period.
33. Any representations herein as to the Properties will also be true with
respect to properties acquired by ERP Operating Partnership or any
Related Partnership or other affiliate after the date hereof.
34. None of the liabilities incurred by EQR, ERP Operating Partnership or
any Related Partnership during the two-year period immediately
preceding the date hereof were incurred in anticipation of any of the
transactions described in the Registration Statement.
35. The undersigned is familiar with the requirements for qualification as
a REIT under the Code and believes that (i) EQR has satisfied such
requirements for all periods of its existence and (ii) EQR will
satisfy such requirements for all periods after the Effective Time.
36. Neither EQR, ERP Operating Partnership, nor any Related Partnership or
other affiliate was notified by the IRS in writing on or before May 8,
1996, that the entity's classification was under examination.
<PAGE>
October 31, 1997
Page 9
37. The undersigned is a duly elected officer of EQR, and will be a duly
elected officer of EQR as of the Effective Time. In such capacity,
the undersigned has access to relevant information regarding each of
the factual matters set forth above and has consulted with other
employees and officers of EQR and the ERP Operating Partnership
regarding such factual matters, none of whom have disagreed in any
respect with any of the representations set forth above.
38. EQR has advised you of any matter of which it has been advised by
independent legal counsel or accounting advisors or of which EQR or
its employees is aware that could, if adversely decided, adversely
affect EQR's ability to satisfy the requirement for continued taxation
as a REIT under the Code.
The foregoing is provided in connection with the preparation of your
opinion. We understand that your opinion will be premised on the basis that all
of the facts, representations and assumptions on which you are relying, whether
contained herein or elsewhere, are accurate and complete and will be accurate
and complete on the date the Registration Statement is filed.
Very truly yours,
EQUITY RESIDENTIAL PROPERTIES TRUST
By:
Name: Bruce C. Strohm
------------------
Its: Executive Vice President
----------------------------
<PAGE>
EXHIBIT A
Definitions
-----------
"Attribution Rules": the rules of ownership described in Section 856(h) of
the Code.
"Constructive" or "Constructively": the constructive stock ownership rules
of Section 318 of the Code, as modified by Section 856(d)(5) of the Code.
"Excess Noncash Income": the excess of (i) the sum of (A) all interest,
original issue discount and other income includible in income with respect to
debt instruments received upon the sale of property over the money and fair
market value of property received with respect to such instruments and (B)
income recognized upon the disposition of real estate if there is a
determination that Section 1031 of the Code (like-kind exchanges) does not apply
to the disposition and the failure to satisfy the requirements of Section 1031
of the Code was due to reasonable cause and not willful neglect, over (ii) five
percent (5%) of REIT Taxable Income (without regard for the deduction for
dividends paid and excluding any net capital gain).
"Foreclosure Property": any real property (including Interests in Real
Property), and personal property incident to such real property, acquired by EQR
and/or its affiliates as a result of EQR and/or its affiliates having bid in
such property at foreclosure, or having otherwise reduced such property to
ownership or possession by agreement or process of law, after there was default
(or default was imminent) on a lease of such property or on an indebtedness
which such property secured; provided that an election for foreclosure property
status under Section 856(e)(5) of the Code is in effect with respect to such
property and such election has not been terminated under Section 856(e)(4) of
the Code. Such term does not include property acquired by EQR and/or its
affiliates as a result of indebtedness arising from the sale or other
disposition of property of EQR and/or its affiliates which is Section 1221(1)
Property which was not originally acquired as foreclosure property.
"Independent Contractor": means any person other than (i) any person
owning (actually or Constructively) more than 35% of the shares of EQR; (ii) any
corporation in which persons owning 35% or more of the shares of EQR own
(actually or Constructively) more than 35% of the voting power with respect to
the stock of such corporation; or (iii) any entity other than a corporation in
which persons owning 35% or more of the shares of EQR own actually or
Constructively) more than a 35% interest in the assets or net profits of such
entity.
"Interests in Real Property": includes fee ownership and co-ownership of
land or improvements thereon, leaseholders of land or improvements thereon,
options to acquire land or improvements thereon, and options to acquire
leaseholds of land or improvements thereon, but does not include mineral, oil or
gas royalty interests.
A-1
<PAGE>
"Modified Attribution Rules": the rules of ownership described in Code
Section 318 as modified by Code Section 856(d)(5).
"Prohibited Transaction": the sale or other disposition of Section 1221(1)
Property, other than Foreclosure Property, unless (i) the property sold was a
Real Estate Asset; (ii) EQR and/or its affiliates held the Real Estate Asset for
at least four years; (iii) the aggregate expenditures made by EQR and/or its
affiliates during the four (4) year period preceding the date of the sale which
are includible in the basis of the Real Estate Asset does not exceed thirty
percent (30%) of the net selling price of such asset; (iv) (A) during the
taxable year EQR and/or its affiliates did not make more than seven sales of
property (other than Foreclosure Property) or (B) the aggregate adjusted bases
(as determined for purposes of computing earnings and profits) of the REIT's
property (other than Foreclosure Property) sold during the taxable year does not
exceed ten percent (10%) of the aggregate adjusted bases (as so determined) of
all the assets of the REIT as of the beginning of the taxable year; (v) in the
case of property, which consists of land or improvements, not acquired through
foreclosure (or deed in lieu of foreclosure), or lease termination, EQR and/or
its affiliates has held the property for not less than four (4) years for
production of rental income; and (vi) if the requirement of clause (iv)(A) is
not satisfied, substantially all of the marketing and development expenditures
with respect to the property were made through an Independent Contractor from
whom EQR and/or its affiliates does not directly or indirectly derive gross
income (including but not limited to dividends). For purposes of clause (iv)(B)
of the preceding sentence, the REIT will be treated as owning its proportionate
share of the adjusted bases of assets owned by its affiliates.
"Qualified REIT Subsidiary": any corporation if 100 percent of the stock
of such corporation is held by EQR.
"Qualified Temporary Investment Income": any income which (i) is
attributable to stock, or a bond, debenture, note, certificate or other evidence
of indebtedness (excluding any annuity contract which depends (in whole or in
substantial part) on the life expectancy of one or more individuals, or is
issued by an insurance company subject to tax under subchapter L of the Code (1)
in a transaction in which there is no consideration other than cash or another
annuity contract meeting the requirements of this definition, (2) pursuant to
the exercise of an election under an insurance contract by a beneficiary owner
thereof on the death of the insured party under such contract, or (3) in a
transaction involving a qualified pension or employee benefit plan), (ii) is
attributable to the temporary investment of new capital (amounts received upon
the issuance of stock of EQR or upon a public offering of debt obligations of
EQR having maturities of at least five years) received by EQR and (iii) is
received or accrued during the one year period beginning on the date EQR
received such capital.
"Real Estate Asset": real property (including Interests in Real Property
and interests in mortgages on real property) and shares (or transferable
certificates of beneficial interest) in other Real Estate Investment Trusts.
Such term also includes any property (not otherwise a Real Estate Asset)
attributable to the temporary investment of new capital (amounts received upon
the issuance
A-2
<PAGE>
of stock of EQR or upon a public offering of debt obligations of EQR having
maturities of at least five years), but only if such property is stock or a debt
instrument, and only for the one-year period beginning on the date EQR receives
such capital.
"Real Estate Investment Trust": a real estate investment trust which meets
the requirements of Sections 856 through 860 of the Code.
"REIT Taxable Income": "Real estate investment trust taxable income" as
defined in Section 857(b) of the Code, which generally equals the taxable income
of EQR, computed with the dividends-paid deduction as defined in Section 561 of
the Code (except that the portion of such deduction attributable to net income
from Foreclosure Property is excluded), excluding any net income from
Foreclosure Property, and computed with a deduction for any tax imposed under
Section 857(b)(5) of the Code (i.e., tax on the failure to meet the seventy-five
percent (75%) or ninety-five percent (95%) income tests).
"Related Partnership": any entity classified as a partnership for federal
tax purposes in which EQR or the ERP Operating Partnership, directly or
indirectly owns an interest.
"Section 1221(1) Property": stock in trade of EQR and/or its affiliates or
other property of a kind which would properly be included in inventory of EQR
and/or its affiliates if on hand at the close of the taxable year, or property
held by EQR and/or its affiliates primarily for sale to customers in the
ordinary course of its trade or business.
"Total Assets": the gross assets of EQR determined in accordance with
generally accepted accounting principles.
A-3
<PAGE>
RUDNICK & WOLFE
EXHIBIT B
---------
<PAGE>
OFFICER'S CERTIFICATE FOR
EVANS WITHYCOMBE RESIDENTIAL, INC.
REGARDING EVANS WITHYCOMBE RESIDENTIAL, L.P.
AND EVANS WITHYCOMBE FINANCE PARTNERSHIP, L.P.
This Officer's Certificate is given in connection with (i) the Joint Proxy
Statement and Prospectus, included in the Registration Statement on Form S-4
(File No. 333-35873) (the "Merger Registration Statement"), relating to the
proposed merger (the "Merger") of Evans Withycombe Residential, Inc., a Maryland
corporation (the "REIT") with and into Equity Residential Properties Trust, a
Maryland real estate investment trust ("EQR"), and (ii) the Prospectus and
Information Statement, contained in the Registration Statement on Form S-4 (File
No.333-36053) (the "Partnership Registration Statement"), relating to (A) the
proposed contribution of the assets, subject to liabilities, of Evans Withycombe
Residential, L.P., a Delaware limited partnership (the "Operating Partnership")
to ERP Operating Limited Partnership, an Illinois limited partnership ("ERP")
and (B) the the offer by ERP to holders of units in the Operating Partnership to
exchange such units for units of partnership interest in ERP.
Paul R. Fannin, Senior Vice President and Chief Financial Officer of the
REIT, hereby certifies that to the best of his knowledge and belief that each of
the following statements is true and correct and will be true and correct at the
effective time of the Merger. The undersigned understands that the following
representations form the basis of the opinions of Rudnick & Wolfe and Gibson,
Dunn & Crutcher LLP described in the Merger Registration Statement and the
Partnership Registration Statement ( collectively the "Registration
Statements"), and any change or inaccuracy in the facts described herein could
adversely alter such opinions.
References herein to the "Partnerships" or "Partnership" include the
Operating Partnership, Evans Withycombe Finance Partnership, L.P., a Delaware
limited partnership (the "Finance Partnership), McKinley Hills Partners-85, and
EW Chandler Limited Partnership.
Terms not otherwise defined herein have the meanings set forth in Exhibit A
hereto. Unless specifically provided otherwise, all the statements below with
respect to any entity relate to such entity from the date of its organization
until the effective date of the Merger.
1. Except as provided in the Operating Partnership Agreement, the REIT has
not acted and will not be acting as the agent of the limited partners of the
Operating Partnership.
2. The current net worth of the Finance Partnership exceeds $190 million.
For purposes of this paragraph 2, "net worth" means the gross fair market value
of all assets minus liabilities.
3. The REIT has contributed to Finance Sub a promissory note (the "Demand
Note"), in the aggregate principal amount of $10 million payable to Finance Sub
on demand, proceeds from which may be used to satisfy any of Finance Sub's
obligations as general partner of the Finance Partnership.
4. Interests in the Partnerships have not been and will not be listed or
traded on an established securities market or exchange (including an over-the-
counter market).
1
<PAGE>
5. No interests in the Partnerships have been or will be issued in a
transaction that is registered under the Securities Act of 1933.
6. None of the Partnerships have had more than 500 partners, and the
general partners of the Partnerships will not take any action that could permit
the Partnerships to have more than 500 partners (including as partners those
persons indirectly owning an interest in the Partnerships through a partnership,
S corporation, or grantor trust).
7. Neither the REIT, Finance Sub nor the Partnerships will participate in
or tacitly allow the facilitation of public trading of interests in the
Partnerships.
8. Beginning with the taxable year ending December 31, 1994, ninety
percent (90%) or more of the gross income of each of the Partnerships have
consisted and will consist of "qualifying income" within the meaning of Section
7704(d) of the Code. "Qualifying income" for this purpose refers to interest,
dividends, real property rents, gain from the sale or other disposition of real
property, and gain from the sale or other disposition of assets (other than
inventory assets) that produce interest or dividends. "Interest" for this
purpose excludes any amounts received or accrued, directly or indirectly, if the
determination of such amount depends in whole or in part on the income or
profits of any person, other than interest based on a fixed percentage of
receipts or sales. In addition, gross income from the sale of real property
held primarily for sale to customers in the ordinary course of business is not
reduced by the cost of such property.
9. Beginning with the taxable year ending December 31, 1994, with respect
to each and every Lease, the amount of rent received or accrued by the
Partnerships has not been and will not be based in whole or in part on the
income or profits of any person.
10. With respect to each and every Tenant, neither the Partnerships nor
any owner (actual or Constructive) of 10% or more of the outstanding interests
in profits or capital of the Partnerships, has been or is expected to be the
owner (actual or Constructive) of: (i) in the case of a Tenant that is a
corporation, stock of such Tenant possessing 10% or more of the total combined
voting power of all classes of stock entitled to vote, or 10% or more of the
total number of shares of all classes of stock of such Tenant; or (ii) in the
case of a Tenant that is not a corporation, an interest of 10% or more in the
assets or net profits of such Tenant.
11. With respect to every Lease: (i) all personal property leased by the
Partnerships has been and will be leased in connection with a lease of real
property, and (ii) the rent attributable to any personal property leased in
connection with a Lease has been and will be less than 15% of the total rent
received or accrued under the Lease. I understand that the amount of rent
attributable to personal property is determined under Section 856(d)(1) of the
Code, which provides that with respect to each lease of real property, the
amount of rent attributable to personal property for a taxable year is the
amount that bears the same ratio to the rent for the taxable year as the average
of the adjusted basis of personal property at the beginning and at the end of
the taxable year bears to the average of the aggregate adjusted basis of both
the real property and the personal property at the beginning and at the end of
the taxable year. This representation applies only to personal property that is
owned (as opposed to leased) by the Partnerships.
2
<PAGE>
12. The Partnerships have not acted and will not act as lessee of any
property for the purpose of subleasing such property to a Tenant.
13. No Partnership would be or would have been a "regulated investment
company" within the meaning of Section 851(a) of the Code if it were a domestic
corporation. A "regulated investment company" is a domestic corporation which,
at all times during the taxable year, is registered under the Investment Company
Act of 1940, as amended (15 U.S.C. 80a-1 to 80b-2), as a management company or a
unit investment trust, or has in effect an election under such Act to be treated
as a business development company, or which is a common trust fund or similar
fund excluded by Section 3(c)(3) of such Act from the definition of "investment
company" and is not included in the definition of "common trust fund" by Section
584(a) of the Code.
14. The REIT, the Finance Sub and the Partnerships have no knowledge of
facts that are contrary to the following: (i) the Partnerships have been and
will be operated in accordance with the terms of the Partnership Agreements and
the provisions of the Delaware Revised Uniform Limited Partnership Act (the
"Act"), (ii) the Partnership Agreements and the Demand Note are valid and
enforceable in accordance with their terms, (iii) no person has made or will to
make a market in interests in the Partnerships, (iv) interests in the
Partnerships have not been and will not be regularly quoted by persons such as
brokers or dealers and (v) holders of interests in the Partnerships have not had
and will not have a readily available, regular or ongoing opportunity to buy,
sell or exchange such interests (other than with respect to the Redemption
Rights) in a time frame and with the regularity and continuity that a secondary
market for interests in the Partnerships would provide.
15. The Partnerships have been and will be operated in accordance with the
terms of the Partnership Agreements and the provisions of the Act.
16. The information set forth in the Registration Statement is true,
correct and complete.
17. As Senior Vice President and Chief Financial Officer, of the REIT,
which is (i) the sole general partner of the Operating Partnership, and (ii) the
sole shareholder of the Finance Sub, which is the sole general partner of the
Finance Partnership, it is my responsibility to have knowledge of the matters
described in the above representations.
IN WITNESS WHEREOF, I have executed this Certificate on this 31st day of
October, 1997.
/s/ Paul R. Fannin
-----------------------------
Paul R. Fannin
Senior Vice President
and Chief Financial Officer
3
<PAGE>
EXHIBIT A
Definitions
-----------
"Code": the Internal Revenue Code of 1986, as amended.
"Constructive" or "Constructively": constructive stock ownership rules of
Section 318 of the Code, as modified by Section 856(d)(5) of the Code.
"Finance Sub": Evans Withycombe Finance, Inc., a Delaware corporation and
wholly owned subsidiary of the REIT.
"Lease": any lease from which any Partnership derives revenue.
"Operating Partnership Agreement": the Amended and Restated Agreement of
Limited Partnership of Evans Withycombe Residential, L.P., dated as of August
17, 1994.
"Ownership Interest": in the case of a corporation, stock in such
corporation, and in the case of any other entity, an interest in the capital or
profits of such entity.
"Partnership Agreements": the partnership agreements of the Partnerships.
"Redemption Rights": the right of limited partners of the Operating
Partnership to have their partnership interests redeemed by the Operating
Partnership in accordance with Section 8.6 of the Operating Partnership
Agreement.
1
<PAGE>
OFFICER'S CERTIFICATE
FOR EVANS WITHYCOMBE RESIDENTIAL, INC.
REGARDING CERTAIN INCOME TAX MATTERS
This Officer's Certificate is given in connection with (i) the Joint Proxy
Statement and Prospectus, included in the Registration Statement on Form S-4
(File No. 333-35873) (the "Merger Registration Statement"), relating to the
proposed merger (the "Merger") of Evans Withycombe Residential, Inc., a Maryland
corporation (the "REIT") with and into Equity Residential Properties Trust, a
Maryland real estate investment trust ("EQR"), and (ii) the Prospectus and
Information Statement, contained in the Registration Statement on Form S-4 (File
No.333-36053) (the "Partnership Registration Statement"), relating to (A) the
proposed contribution of the assets, subject to liabilities, of Evans Withycombe
Residential, L.P., a Delaware limited partnership (the "Operating Partnership")
to ERP Operating Limited Partnership, an Illinois limited partnership ("ERP")
and (B) the offer by ERP to holders of units in the Operating Partnership to
exchange such units for units of partnership interest in ERP.
Paul R. Fannin, Senior Vice President and Chief Financial Officer of the
REIT, hereby certifies that to the best of his knowledge and belief that each of
the following statements is true and correct and will be true and correct at the
effective time of the Merger. The undersigned understands that the following
representations form the basis of the opinions of Rudnick & Wolfe and Gibson,
Dunn & Crutcher LLP described in the Merger Registration Statement and the
Partnership Registration Statement (collectively the "Registration Statements"),
and any change or inaccuracy in the facts described herein could adversely alter
such opinions.
References herein to the "Company" include the REIT, Evans Withycombe
Finance, Inc. (the "Finance Sub") as well as the Partnerships. References to the
Partnerships include Operating Partnership, Evans Withycombe Finance
Partnership, L.P., a Delaware limited partnership (the "Finance Partnership"),
McKinley Hills Partners-85, and EW Chandler Limited Partnership.
Terms not otherwise defined herein have the meanings set forth in Exhibit A
hereto. Unless specifically provided otherwise, all the statements below with
respect to any entity relate to such entity from the date of its organization
until the effective date of the Merger.
1. The information set forth in the Registration Statements is true,
correct and complete.
2. One hundred (100) or more persons have held, and, until the effective
date of the Merger will hold, the beneficial ownership of the outstanding stock
of the REIT.
3. Since the date of incorporation, five or fewer Persons have not owned,
and until the effective date of the Merger will not own, after applying the
Attribution Rules, more than fifty percent (50%) of the REIT's outstanding
stock.
4. Commencing with its taxable year ending December 31, 1994, the REIT
timely and properly filed an election to be a taxed as "Real Estate Investment
Trust." The REIT has not revoked such election and has no present intention to
revoke such election.
5. The REIT has not owned and does not anticipate to own an actual or
Constructive interest in any corporation, partnership, association, trust, joint
venture, limited
<PAGE>
liability company or other entity other than its actual or Constructive
interests in the Partnerships, the Finance Sub, the Management Company, and the
trusts established by the Finance Partnership to facilitate the borrowing by the
Finance Partnership.
6. With respect to each and every Lease, the amount of rent received or
accrued by the Company has not been, and will not be based in whole or in part
on the income or profits of any person.
7. With respect to each and every Tenant, neither the Company, nor any
owner (actual or Constructive) of 10% or more of the outstanding Common Stock of
the REIT, has been, or is expected to be the owner (actual or Constructive) of:
(i) in the case of a Tenant that is a corporation, stock of such Tenant
possessing 10% or more of the total combined voting power of all classes of
stock entitled to vote, or 10% or more of the total number of shares of all
classes of stock of such Tenant; or (ii) in the case of a Tenant that is not a
corporation, an interest of 10% or more in the assets or net profits of such
Tenant.
8. With respect to every Lease: (i) all personal property leased by the
Company has been and will be leased in connection with a lease of real property,
and (ii) the rent attributable to any personal property leased in connection
with a Lease has been and will be less than 15% of the total rent received or
accrued under the Lease. I understand that the amount of rent attributable to
personal property is determined under Section 856(d)(1) of the Code, which
provides that with respect to each lease of real property, the amount of rent
attributable to personal property for a taxable year is the amount that bears
the same ratio to the rent for the taxable year as the average of the adjusted
basis of personal property at the beginning and at the end of the taxable year
bears to the average of the aggregate adjusted basis of both the real property
and the personal property at the beginning and at the end of the taxable year.
This representation applies only to personal property that is owned (as opposed
to property leased) by the Company.
9. The Company has not acted and will not act as lessee of any property
for the purpose of subleasing such property to a Tenant.
10. No Partnership has leased or will lease or sublease personal property
that is not owned by it. All personal property provided or made available to a
Tenant by the Management Company has been and will be leased by the Management
Company acting on its own behalf and not as agent for the Partnerships, and the
Management Company has separately charged and will separately charge the Tenant
therefor.
11. The Company will not receive "excess rentals" from a Tenant. "Excess
rentals" means rent payable pursuant to a Lease in an amount that is greater
than the rent that would be payable under the Lease but for the existence of a
provision obligating the Tenant to pay over all or a portion of any rent
received by that Tenant from a subtenant or assignee of that Tenant.
12. One hundred percent (100%) of the stock of the Finance Sub has been
and will be held by the REIT at all times during the existence of the Finance
Sub.
13. For purposes of the following representations, income, deductions,
credits and other tax items of the REIT shall be deemed to include the REIT's
share of such items of the Partnerships, based on the REIT's proportionate
direct or indirect capital interest in such entities. Furthermore, for this
purpose the REIT will be treated as owning directly the assets owned by the
Finance Sub:
(a) Commencing with the REIT's taxable year ending December 31, 1994,
at least ninety-five percent (95%) of the gross income of the REIT
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(excluding gross income from Prohibited Transactions) has been and is
expected to be derived from (i) dividends, (ii) interest, (iii) rents from
real property, (iv) gain from the sale or other disposition of stock,
securities and real property (including Interests in Real Property and
interests in mortgages on real property), but excluding gain on real
property which is Section 1221(1) Property, (v) abatements and refunds of
taxes on real property, (vi) income and gain derived from Foreclosure
Property, (vii) amounts (other than amounts, the determination of which
depends in whole or in part on income or profits of any person) received or
accrued as consideration for entering into agreements (A) to make loans
secured by mortgages on real property or on Interests in Real Property, or
(B) to purchase or lease real property (including Interests in Real
Property and interests in mortgages on real property), and (viii) gain from
the sale or other disposition of Real Estate Assets that is not a
Prohibited Transaction;
(b) Commencing with the REIT's taxable year ending December 31, 1994,
at least seventy-five percent (75%) of the gross income of the REIT
(excluding gross income from Prohibited Transactions) has been and is
expected to be derived from (i) rents from real property, (ii) interest on
obligations secured by mortgages on real property or on Interests in Real
Property, (iii) gain from the sale or disposition of real property
(including Interests in Real Property and interests in mortgages on real
property), but excluding gain from real property which is Section 1221(1)
Property, (iv) dividends or other distributions on, and gain (other than
gain from Prohibited Transactions) from the sale or other disposition of,
transferable shares or beneficial certificates in other Real Estate
Investment Trusts, (v) abatements and refunds of taxes on real property,
(vi) income and gain derived from Foreclosure Property, (vii) amounts
(other than amounts, the determination of which depends in whole or in part
on the income or profits of any person) received or accrued as
consideration for entering into agreements (A) to make loans secured by
mortgages on real property or on Interests in Real Property and interests
in mortgages on real property, (viii) gain from the sale or other
disposition of a Real Estate Asset which is not a Prohibited Transaction,
and (ix) Qualified Temporary Investment Income. Dividends received by the
Operating Partnership from the Management Company are not included in
clauses (i) through (ix) of this paragraph (b);
(c) Commencing with the REIT's taxable year ending December 31, 1994,
the REIT has derived and expects to derive less than thirty percent (30%)
of its aggregate gross income from the sale or other disposition of (i)
stock or securities held for less than one year, (ii) property in a
Prohibited Transaction, and (iii) real property (including Interests in
Real Property and interests in mortgages on real property) held for less
than four years other than such property that is compulsorily or
involuntarily converted (by means of destruction, theft, seizure,
requisition, condemnation or threat of imminence thereof) and Foreclosure
Property;
(d) Commencing with the REIT's taxable year ending December 31, 1994,
the REIT has paid and expects to pay dividends (without regard to capital
gains dividends) equal to or in excess of the sum of (i) ninety-five
percent (95%) of the REIT's REIT Taxable Income for the year (determined
without regard to the deduction for dividends paid and by excluding any net
capital gain), and (ii) ninety-five percent (95%) of the net income from
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Foreclosure Property (after the tax imposed thereon by Section 857(b)(4)(A)
of the Code), minus (iii) any Excess Noncash Income; and
(e) Commencing with the REIT's taxable year ending December 31, 1994,
the dividends paid and to be paid by the REIT on the Common Stock were and
will be made pro rata, with no preference to any share of the Common Stock
as compared with other such shares.
14. For purposes of the following representations, assets of the REIT
shall be deemed to include the REIT's share of assets owned by the Partnerships,
based on the REIT's proportionate direct or indirect capital interest in such
entities. Furthermore, for this purpose the REIT will be treated as owning
directly the assets owned by the Finance Sub:
At the close of each quarter of each taxable year commencing with the
REIT's taxable year ending December 31, 1994 (i) at least seventy-five
percent (75%) of the value of the combined total assets of the REIT has
been and will be represented by Real Estate Assets, cash and cash items,
(including receivables), and U.S. Government securities, (ii) not more than
twenty-five percent (25%) of the value of the REIT's total assets has been
or will be represented by securities (other than those described in clause
(i) above), and (iii) with respect to those assets described in clause (ii)
above, the value of any one issuer's securities owned by the REIT
(including but not limited to the Management Company) has not exceeded and
will not exceed five percent (5%) of the value of the REIT's total assets
and the REIT has not owned and will not own more than ten percent (10%) of
any one issuer's outstanding voting securities.
15. The REIT, the Finance Sub, and the Partnerships have not earned and
will not earn fees for services performed, or other income (whether or not
through a manager) not described in clauses (i) through (viii) of paragraph
13(a) above, other than with respect to (i) Foreclosure Property and (ii)
income, if any attributable to reimbursements paid by the Operating Partnership
and Finance Partnership to the REIT pursuant to the terms of the Partnership
Agreements.
16. The Company has not provided and will not provide, and has not engaged
and will not engage any entity that fails to qualify as an "independent
contractor" to furnish, any services to any Tenant that are other than services
of the type that are "usually or customarily rendered" in connection with the
rental of space for occupancy only and not otherwise considered "rendered to the
occupant" within the meaning of Section 1.512(b)-1(c)(5) of the Treasury
Regulations. The Company has not received and will not receive any income,
directly or indirectly, from such contractor, including but not limited to
administrative or other fees, interest and dividends. For this purpose, an
"independent contractor" is a person other than (i) any person owning (actually
or Constructively) more than 35% of the stock of the REIT; (ii) any corporation
in which persons owning 35% or more of the stock of the REIT own (actually or
Constructively) more than 35% of the voting power with respect to the stock of
such corporation; or (iii) any entity other than a corporation in which persons
owning persons owning 35% or more of the stock of the REIT own (actually or
Constructively) more than 35% interest in the assets or net profits of such
entity.
17. No independent contractor providing services to Tenants has had or
will have any operating employees in common with the Company.
18. The services described in the draft private letter ruling request
dated August 16, 1994 prepared by the REIT sets forth in complete detail the
services that have been provided
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and are expected to be provided to by the Partnerships and the Management
Company to Tenants.
19. As required by Treasury Regulation Section 1.857-8, for each year
commencing with the REIT's taxable year ending December 31, 1994, the REIT (i)
has maintained and will maintain the necessary records relating to the actual
ownership of its stock, (ii) has made and will make the requisite information
requests of its shareholders regarding stock ownership, and (iii) has maintained
and will maintain a list of the persons failing or refusing to comply in whole
or in party with the Company's demand for statements regarding stock ownership.
20. The Company has operated and will operate in a manner such that the
above representations will continue to be true in the future; provided, however,
the Company may operate in a manner different from such representations if it
obtains the advice of nationally recognized counsel that such differences will
not impair its status as a Real Estate Investment Trust.
21. The REIT will use its best efforts to monitor ownership of Common
Stock in order to ensure compliance with, and will use its best efforts to
enforce, the Transfer Restrictions. Specifically, the REIT, as soon as
practicable after the date it discovers that a transaction in violation of the
Transfer Restrictions has occurred, will inform the Purported Record Owner and,
to the extent it is aware of its identity, the Purported Beneficial Owner, of
their obligations pursuant to the Charter, including the obligation to surrender
to the Trustee of the Trust any Trust Shares and any and all dividends or other
distributions received with respect to Trust Shares. The REIT will also take
additional action as is reasonably necessary to refuse to give effect to or to
prevent such transaction, which may include: (1) refusing to give effect to such
transaction on its books; (2) instituting legal proceedings to enjoin the
transaction and to recover any Trust Shares and any dividends erroneously paid
or distributed; and (3) declaring any votes erroneously cast by the Purported
Record Owner to be retroactively invalid. For purposes of this paragraph 21, the
terms "Purported Record Owner," "Purported Beneficial Owner," "Trustee," "Trust"
and "Trust Shares" shall have the meanings ascribed to such terms in the
Charter.
22. The representations herein take into account the expected income,
assets and operations of the Development Properties.
23. All shares of stock issued by the REIT are freely transferable.
24. As Senior Vice President and Chief Financial Officer, of the REIT,
which is (i) the sole general partner of the Operating Partnership, and (ii) the
sole stockholder of the Finance Sub, which is the sole general partner of the
Finance Partnership, it is my responsibility to have knowledge of the matters
described in the above representations.
IN WITNESS WHEREOF, I have executed this Certificate on the 31st day of
October, 1997.
/s/ Paul R. Fannin
-----------------------------
Paul R. Fannin
Senior Vice President
and Chief Financial Officer
5
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EXHIBIT A
Definitions
-----------
"Attribution Rules": the rules of ownership described in Section 856(h) of
the Code.
"Charter": The Charter of the REIT.
"Code": the Internal Revenue Code of 1986, as amended.
"Common Stock": Common Stock, $.01 par value per share of Evans Withycombe
Residential, Inc.
"Constructive" or "Constructively": constructive stock ownership rules of
Section 318 of the Code, as modified by Section 856(d)(5) of the Code.
"Development Properties": the "Development Communities" and the
"Development Rights" as those terms are defined in the Registration Statement.
"Excess Noncash Income": the excess of (i) the sum of (A) all interest,
original issue discount and other income includible in income with respect to
debt instruments received upon the sale of property over the money and fair
market value of property received with respect to such instruments and (B)
income recognized upon the disposition of real estate if there is a
determination that Section 1031 of the Code (like-kind exchanges) does not apply
to the disposition and the failure to satisfy the requirements of Section 1031
of the Code was due to reasonable cause and not willful neglect, over (ii) five
percent (5%) of REIT Taxable Income (without regard for the deduction for
dividends paid and excluding any net capital gain).
"Foreclosure Property": any real property (including Interests in Real
Property), and personal property incident to such real property, acquired by the
Company as a result of the Company having bid in such property at foreclosure,
or having otherwise reduced such property to ownership or possession by
agreement or process of law, after there was default (or default was imminent)
on a lease of such property or on an indebtedness which such property secured;
provided that an election for foreclosure property status under Section
856(e)(5) of the Code is in effect with respect to such property and such
election has not been terminated under Section 856(e)(4) of the Code. Such term
does not include property acquired by the Company as a result of indebtedness
arising from the sale or other disposition of property of the Company which is
Section 1221(1) Property which was not originally acquired as foreclosure
property.
"Interests in Real Property": includes fee ownership and co-ownership of
land or improvements thereon, leaseholders of land or improvements thereon,
options to acquire land or improvements thereon, and options to acquire
leaseholds of land or improvements thereon, but does not include mineral, oil or
gas royalty interests.
"Lease": any lease from which the Company derives revenue.
"Management Company": Evans Withycombe Management, Inc., an Arizona
corporation.
"Ownership Interest": in the case of a corporation, stock in such
corporation, and in the case of any other entity, any interest in the assets or
net income of such entity.
A-1
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"Partnership Agreements": the partnership agreements of the Partnerships.
"Person": an individual, private foundation, charitable trust, and
employee pension, profit sharing, stock bonus or supplemental unemployment
benefit trust.
"Prohibited Transaction": the sale or other disposition of Section 1221(1)
Property, other than Foreclosure Property, unless (i) the property sold was a
Real Estate Asset; (ii) the Company held the Real Estate Asset for at least four
years; (iii) the aggregate expenditures made by the Company during the four (4)
year period preceding the date of the sale which are includible in the basis of
the Real Estate Asset does not exceed thirty percent (30%) of the net selling
price of such asset; (iv) (A) during the taxable year the Company did not make
more than seven sales of property (other than Foreclosure Property) or (B) the
aggregate adjusted bases (as determined for purposes of computing earnings and
profits) of the REIT's property (other than Foreclosure Property) sold during
the taxable year does not exceed ten percent (10%) of the aggregate adjusted
bases (as so determined) of all the assets of the REIT as of the beginning of
the taxable year; (v) in the case of property, which consists of land or
improvements, not acquired through foreclosure (or deed in lieu of foreclosure),
or lease termination, the Company has held the property for not less than four
(4) years for production of rental income; and (vi) if the requirement of clause
(iv)(A) is not satisfied, substantially all of the marketing and development
expenditures with respect to the property were made through an independent
contractor (as defined in paragraph 16 hereof) from whom the Company does not
directly or indirectly derive gross income (including but not limited to
dividends). For purposes of clause (iv)(B) of the preceding sentence, the REIT
will be treated as owning its proportionate share of the adjusted bases of
assets owned by other entities in a manner consistent with that described in
paragraph 14 hereof.
"Qualified Temporary Investment Income": any income which (i) is
attributable to stock, or a bond, debenture, note, certificate or other evidence
of indebtedness (excluding any annuity contract which depends (in whole or in
substantial part) on the life expectancy of one or more individuals, or is
issued by an insurance company subject to tax under subchapter L of the Code (1)
in a transaction in which there is no consideration other than cash or another
annuity contract meeting the requirements of this definition, (2) pursuant to
the exercise of an election under an insurance contract by a beneficiary thereof
on the death of the insured party under such contract, or (3) in a transaction
involving a qualified pension or employee benefit plan), (ii) is attributable to
the temporary investment of new capital (amounts received upon the issuance of
stock of the REIT or upon a public offering of debt obligations of the REIT
having maturities of at least five years) received by the REIT and (iii) is
received or accrued during the one year period beginning on the date the REIT
received such capital.
"Real Estate Asset": real property (including Interests in Real Property
and interests in mortgages on real property) and shares (or transferable
certificates of beneficial interest) in other Real Estate Investment Trusts.
Such term also includes any property (not otherwise a Real Estate Asset)
attributable to the temporary investment of new capital (amounts received upon
the issuance of stock of the REIT or upon a public offering of debt obligations
of the REIT having maturities of at least five years), but only if such property
is stock or a debt instrument, and only for the one-year period beginning on the
date the REIT receives such capital.
"Real Estate Investment Trust": a real estate investment trust which meets
the requirements of Sections 856 through 860 of the Code.
"REIT Taxable Income": "Real estate investment trust taxable income" as
defined in Section 857(b) of the Code, which generally equals the taxable income
of the REIT, computed with the dividends-paid deduction as defined in Section
561 of the Code (except that the
A-2
<PAGE>
portion of such deduction attributable to net income from Foreclosure Property
is excluded), excluding any net income from Foreclosure Property, and computed
with a deduction for any tax imposed under Section 857(b)(5) of the Code (i.e.,
tax on the failure to meet the seventy-five percent (75%) or ninety-five percent
(95%) income tests).
"Section 1221(1) Property": stock in trade of the Company or other
property of a kind which would properly be included in inventory of the Company
if on hand at the close of the taxable year, or property held by the Company
primarily for sale to customers in the ordinary course of its trade or business.
"Tenant": any person from whom the Company derives gross income.
"Transfer Restrictions": The restrictions on transfer of capital stock of
the REIT as set forth in Article V of the Charter.
A-3
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EXHIBIT 8.2
October 31, 1997
(213) 229-7000 C 26181-00031
Evans Withycombe Residential, Inc.
6991 East Camelback Road
Suite A-200
Scottsdale, AZ 85251
Re: Tax Opinion For The Partnership Registration Statement
Ladies and Gentlemen:
We are acting as special counsel to Evans Withycombe Residential, Inc. a
Maryland corporation ("EWR"), in connection with (i) the Joint Proxy Statement
and Prospectus, included in the Registration Statement on Form S-4 (File No.
333-35873) (the "Merger Registration Statement"), relating to the proposed
merger (the "Merger") of EWR with and into Equity Residential Properties Trust,
a Maryland real estate investment trust ("EQR"), and (ii) the Prospectus and
Information Statement, contained in the Registration Statement on Form S-4 (File
No. 333-36053) (the "Partnership Registration Statement"), relating to (A) the
proposed contribution of the assets, subject to liabilities, of Evans Withycombe
Residential, L.P., a Delaware limited partnership ("EWRLP") to ERP Operating
Limited Partnership, an Illinois limited partnership ("ERP") and (B) the offer
by ERP to holders of units in EWRLP to exchange such units for units of
partnership interest in ERP. You have requested our opinion as to certain
federal income tax matters described below.
The Merger will be effected pursuant to the terms and conditions of the
Agreement and Plan of Merger (the "Merger Agreement") dated as of August 27,
1997, by and among EWR and EQR. This opinion is being rendered pursuant to
Section 6.3(d) of the Merger Agreement.
In rendering our opinion, we have, with your permission, relied upon and
assumed as correct now and as of the effective time of the Merger, (i) the
factual information contained in
<PAGE>
October 31, 1997
Page 2
the Merger Registration Statement and the Partnership Registration Statement,
(ii) certain factual representations made by EWR, EWRLP and EQR, which are
attached as Exhibits hereto and made a part hereof, and (iii) such other
materials as we have deemed necessary or appropriate as a basis for our opinion.
On the basis of the information and representations contained in the
foregoing materials, we are of the opinion that:
(i) EWRLP will be classified as a partnership for federal income tax
purposes;
(ii) commencing with its taxable year ended December 31, 1994, EWR was
organized in conformity with the requirements for qualification and taxation as
a real estate investment trust ("REIT") under Section 856 of the Code, and its
method of operation has enabled it and will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Code; and
(iii) the discussion under the caption "Federal Income Tax Consequences"
in the Partnership Registration Statement, to the extent it constitutes matters
of law or legal conclusions, is accurate in all material respects.
This opinion expresses our views as to federal income tax laws in effect as
of the date hereof, including the Code, applicable Treasury Regulations,
published rulings and administrative practices of the Internal Revenue Service
(the "Service") and court decisions. This opinion represents our best legal
judgment as to the matters addressed herein, but is not binding on the Service
or the courts. Furthermore, the legal authorities upon which we rely are
subject to change either prospectively or retroactively. Any change in such
authorities or any change in the facts or representations, or any past or future
actions by EWR, EQR, or EWRLP contrary to such representations might adversely
affect the conclusions stated herein.
Furthermore, our opinion as to the status of EWR as a REIT under the Code
is based upon the accuracy of the representations made by EWR and EWRLP as to
factual matters relating to the organization, operation, income, assets,
distributions and stock ownership of EWR and EWRLP. EWR's qualification as a
REIT depends on its having met and continuing to meet, through actual operating
results, distribution levels and diversity of stock ownership, the various
qualifications tests imposed under the Code and described in the Partnership
Registration Statement and the Exhibits attached hereto, the results of which
have not been and will not be reviewed by Gibson, Dunn & Crutcher LLP.
Accordingly, we give no assurance that the actual results of EWR's operations
for any taxable year have satisfied or will satisfy such requirements.
<PAGE>
October 31, 1997
Page 3
for any other purpose. We hereby consent to the use of our name and our opinion
under the caption "Federal Income Tax Consequences" in the Partnership
Registration Statement.
Very truly yours,
GIBSON, DUNN & CRUTCHER LLP
/s/ Gibson, Dunn & Crutcher LLP
HB/SMK/slc
<PAGE>
OFFICER'S CERTIFICATE FOR
EVANS WITHYCOMBE RESIDENTIAL, INC.
REGARDING EVANS WITHYCOMBE RESIDENTIAL, L.P.
AND EVANS WITHYCOMBE FINANCE PARTNERSHIP, L.P.
This Officer's Certificate is given in connection with (i) the Joint Proxy
Statement and Prospectus, included in the Registration Statement on Form S-4
(File No. 333-35873) (the "Merger Registration Statement"), relating to the
proposed merger (the "Merger") of Evans Withycombe Residential, Inc., a Maryland
corporation (the "REIT") with and into Equity Residential Properties Trust, a
Maryland real estate investment trust ("EQR"), and (ii) the Prospectus and
Information Statement, contained in the Registration Statement on Form S-4 (File
No.333-36053) (the "Partnership Registration Statement"), relating to (A) the
proposed contribution of the assets, subject to liabilities, of Evans Withycombe
Residential, L.P., a Delaware limited partnership (the "Operating Partnership")
to ERP Operating Limited Partnership, an Illinois limited partnership ("ERP")
and (B) the the offer by ERP to holders of units in the Operating Partnership to
exchange such units for units of partnership interest in ERP.
Paul R. Fannin, Senior Vice President and Chief Financial Officer of the
REIT, hereby certifies that to the best of his knowledge and belief that each of
the following statements is true and correct and will be true and correct at the
effective time of the Merger. The undersigned understands that the following
representations form the basis of the opinions of Rudnick & Wolfe and Gibson,
Dunn & Crutcher LLP described in the Merger Registration Statement and the
Partnership Registration Statement (collectively the "Registration Statements"),
and any change or inaccuracy in the facts described herein could adversely alter
such opinions.
References herein to the "Partnerships" or "Partnership" include the
Operating Partnership, Evans Withycombe Finance Partnership, L.P., a Delaware
limited partnership (the "Finance Partnership), McKinley Hills Partners-85, and
EW Chandler Limited Partnership.
Terms not otherwise defined herein have the meanings set forth in Exhibit A
hereto. Unless specifically provided otherwise, all the statements below with
respect to any entity relate to such entity from the date of its organization
until the effective date of the Merger.
1. Except as provided in the Operating Partnership Agreement, the REIT has
not acted and will not be acting as the agent of the limited partners of the
Operating Partnership.
2. The current net worth of the Finance Partnership exceeds $190 million.
For purposes of this paragraph 2, "net worth" means the gross fair market value
of all assets minus liabilities.
3. The REIT has contributed to Finance Sub a promissory note (the "Demand
Note"), in the aggregate principal amount of $10 million payable to Finance Sub
on demand, proceeds from which may be used to satisfy any of Finance Sub's
obligations as general partner of the Finance Partnership.
4. Interests in the Partnerships have not been and will not be listed or
traded on an established securities market or exchange (including an over-the-
counter market).
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5. No interests in the Partnerships have been or will be issued in a
transaction that is registered under the Securities Act of 1933.
6. None of the Partnerships have had more than 500 partners, and the
general partners of the Partnerships will not take any action that could permit
the Partnerships to have more than 500 partners (including as partners those
persons indirectly owning an interest in the Partnerships through a partnership,
S corporation, or grantor trust).
7. Neither the REIT, Finance Sub nor the Partnerships will participate in
or tacitly allow the facilitation of public trading of interests in the
Partnerships.
8. Beginning with the taxable year ending December 31, 1994, ninety
percent (90%) or more of the gross income of each of the Partnerships have
consisted and will consist of "qualifying income" within the meaning of Section
7704(d) of the Code. "Qualifying income" for this purpose refers to interest,
dividends, real property rents, gain from the sale or other disposition of real
property, and gain from the sale or other disposition of assets (other than
inventory assets) that produce interest or dividends. "Interest" for this
purpose excludes any amounts received or accrued, directly or indirectly, if the
determination of such amount depends in whole or in part on the income or
profits of any person, other than interest based on a fixed percentage of
receipts or sales. In addition, gross income from the sale of real property
held primarily for sale to customers in the ordinary course of business is not
reduced by the cost of such property.
9. Beginning with the taxable year ending December 31, 1994, with respect
to each and every Lease, the amount of rent received or accrued by the
Partnerships has not been and will not be based in whole or in part on the
income or profits of any person.
10. With respect to each and every Tenant, neither the Partnerships nor
any owner (actual or Constructive) of 10% or more of the outstanding interests
in profits or capital of the Partnerships, has been or is expected to be the
owner (actual or Constructive) of: (i) in the case of a Tenant that is a
corporation, stock of such Tenant possessing 10% or more of the total combined
voting power of all classes of stock entitled to vote, or 10% or more of the
total number of shares of all classes of stock of such Tenant; or (ii) in the
case of a Tenant that is not a corporation, an interest of 10% or more in the
assets or net profits of such Tenant.
11. With respect to every Lease: (i) all personal property leased by the
Partnerships has been and will be leased in connection with a lease of real
property, and (ii) the rent attributable to any personal property leased in
connection with a Lease has been and will be less than 15% of the total rent
received or accrued under the Lease. I understand that the amount of rent
attributable to personal property is determined under Section 856(d)(1) of the
Code, which provides that with respect to each lease of real property, the
amount of rent attributable to personal property for a taxable year is the
amount that bears the same ratio to the rent for the taxable year as the average
of the adjusted basis of personal property at the beginning and at the end of
the taxable year bears to the average of the aggregate adjusted basis of both
the real property and the personal property at the beginning and at the end of
the taxable year. This representation applies only to personal property that is
owned (as opposed to leased) by the Partnerships.
2
<PAGE>
12. The Partnerships have not acted and will not act as lessee of any
property for the purpose of subleasing such property to a Tenant.
13. No Partnership would be or would have been a "regulated investment
company" within the meaning of Section 851(a) of the Code if it were a domestic
corporation. A "regulated investment company" is a domestic corporation which,
at all times during the taxable year, is registered under the Investment Company
Act of 1940, as amended (15 U.S.C. 80a-1 to 80b-2), as a management company or a
unit investment trust, or has in effect an election under such Act to be treated
as a business development company, or which is a common trust fund or similar
fund excluded by Section 3(c)(3) of such Act from the definition of "investment
company" and is not included in the definition of "common trust fund" by Section
584(a) of the Code.
14. The REIT, the Finance Sub and the Partnerships have no knowledge of
facts that are contrary to the following: (i) the Partnerships have been and
will be operated in accordance with the terms of the Partnership Agreements and
the provisions of the Delaware Revised Uniform Limited Partnership Act (the
"Act"), (ii) the Partnership Agreements and the Demand Note are valid and
enforceable in accordance with their terms, (iii) no person has made or will to
make a market in interests in the Partnerships, (iv) interests in the
Partnerships have not been and will not be regularly quoted by persons such as
brokers or dealers and (v) holders of interests in the Partnerships have not had
and will not have a readily available, regular or ongoing opportunity to buy,
sell or exchange such interests (other than with respect to the Redemption
Rights) in a time frame and with the regularity and continuity that a secondary
market for interests in the Partnerships would provide.
15. The Partnerships have been and will be operated in accordance with the
terms of the Partnership Agreements and the provisions of the Act.
16. The information set forth in the Registration Statement is true,
correct and complete.
17. As Senior Vice President and Chief Financial Officer, of the REIT,
which is (i) the sole general partner of the Operating Partnership, and (ii) the
sole shareholder of the Finance Sub, which is the sole general partner of the
Finance Partnership, it is my responsibility to have knowledge of the matters
described in the above representations.
IN WITNESS WHEREOF, I have executed this Certificate on this 31st day of
October, 1997.
/s/ Paul R. Fannin
-----------------------------
Paul R. Fannin
Senior Vice President
and Chief Financial Officer
3
<PAGE>
EXHIBIT A
Definitions
-----------
"Code": the Internal Revenue Code of 1986, as amended.
"Constructive" or "Constructively": constructive stock ownership rules of
Section 318 of the Code, as modified by Section 856(d)(5) of the Code.
"Finance Sub": Evans Withycombe Finance, Inc., a Delaware corporation and
wholly owned subsidiary of the REIT.
"Lease": any lease from which any Partnership derives revenue.
"Operating Partnership Agreement": the Amended and Restated Agreement of
Limited Partnership of Evans Withycombe Residential, L.P., dated as of August
17, 1994.
"Ownership Interest": in the case of a corporation, stock in such
corporation, and in the case of any other entity, an interest in the capital or
profits of such entity.
"Partnership Agreements": the partnership agreements of the Partnerships.
"Redemption Rights": the right of limited partners of the Operating
Partnership to have their partnership interests redeemed by the Operating
Partnership in accordance with Section 8.6 of the Operating Partnership
Agreement.
1
<PAGE>
OFFICER'S CERTIFICATE
FOR EVANS WITHYCOMBE RESIDENTIAL, INC.
REGARDING CERTAIN INCOME TAX MATTERS
This Officer's Certificate is given in connection with (i) the Joint Proxy
Statement and Prospectus, included in the Registration Statement on Form S-4
(File No. 333-35873) (the "Merger Registration Statement"), relating to the
proposed merger (the "Merger") of Evans Withycombe Residential, Inc., a Maryland
corporation (the "REIT") with and into Equity Residential Properties Trust, a
Maryland real estate investment trust ("EQR"), and (ii) the Prospectus and
Information Statement, contained in the Registration Statement on Form S-4 (File
No.333-36053) (the "Partnership Registration Statement"), relating to (A) the
proposed contribution of the assets, subject to liabilities, of Evans Withycombe
Residential, L.P., a Delaware limited partnership (the "Operating Partnership")
to ERP Operating Limited Partnership, an Illinois limited partnership ("ERP")
and (B) the offer by ERP to holders of units in the Operating Partnership to
exchange such units for units of partnership interest in ERP.
Paul R. Fannin, Senior Vice President and Chief Financial Officer of the
REIT, hereby certifies that to the best of his knowledge and belief that each of
the following statements is true and correct and will be true and correct at the
effective time of the Merger. The undersigned understands that the following
representations form the basis of the opinions of Rudnick & Wolfe and Gibson,
Dunn & Crutcher LLP described in the Merger Registration Statement and the
Partnership Registration Statement (collectively the "Registration Statements"),
and any change or inaccuracy in the facts described herein could adversely alter
such opinions.
References herein to the "Company" include the REIT, Evans Withycombe
Finance, Inc. (the "Finance Sub") as well as the Partnerships. References to the
Partnerships include Operating Partnership, Evans Withycombe Finance
Partnership, L.P., a Delaware limited partnership (the "Finance Partnership"),
McKinley Hills Partners-85, and EW Chandler Limited Partnership.
Terms not otherwise defined herein have the meanings set forth in Exhibit A
hereto. Unless specifically provided otherwise, all the statements below with
respect to any entity relate to such entity from the date of its organization
until the effective date of the Merger.
1. The information set forth in the Registration Statements is true,
correct and complete.
2. One hundred (100) or more persons have held, and, until the effective
date of the Merger will hold, the beneficial ownership of the outstanding stock
of the REIT.
3. Since the date of incorporation, five or fewer Persons have not owned,
and until the effective date of the Merger will not own, after applying the
Attribution Rules, more than fifty percent (50%) of the REIT's outstanding
stock.
4. Commencing with its taxable year ending December 31, 1994, the REIT
timely and properly filed an election to be a taxed as "Real Estate Investment
Trust." The REIT has not revoked such election and has no present intention to
revoke such election.
5. The REIT has not owned and does not anticipate to own an actual or
Constructive interest in any corporation, partnership, association, trust, joint
venture, limited
<PAGE>
liability company or other entity other than its actual or Constructive
interests in the Partnerships, the Finance Sub, the Management Company, and the
trusts established by the Finance Partnership to facilitate the borrowing by the
Finance Partnership.
6. With respect to each and every Lease, the amount of rent received or
accrued by the Company has not been, and will not be based in whole or in part
on the income or profits of any person.
7. With respect to each and every Tenant, neither the Company, nor any
owner (actual or Constructive) of 10% or more of the outstanding Common Stock of
the REIT, has been, or is expected to be the owner (actual or Constructive) of:
(i) in the case of a Tenant that is a corporation, stock of such Tenant
possessing 10% or more of the total combined voting power of all classes of
stock entitled to vote, or 10% or more of the total number of shares of all
classes of stock of such Tenant; or (ii) in the case of a Tenant that is not a
corporation, an interest of 10% or more in the assets or net profits of such
Tenant.
8. With respect to every Lease: (i) all personal property leased by the
Company has been and will be leased in connection with a lease of real property,
and (ii) the rent attributable to any personal property leased in connection
with a Lease has been and will be less than 15% of the total rent received or
accrued under the Lease. I understand that the amount of rent attributable to
personal property is determined under Section 856(d)(1) of the Code, which
provides that with respect to each lease of real property, the amount of rent
attributable to personal property for a taxable year is the amount that bears
the same ratio to the rent for the taxable year as the average of the adjusted
basis of personal property at the beginning and at the end of the taxable year
bears to the average of the aggregate adjusted basis of both the real property
and the personal property at the beginning and at the end of the taxable year.
This representation applies only to personal property that is owned (as opposed
to property leased) by the Company.
9. The Company has not acted and will not act as lessee of any property
for the purpose of subleasing such property to a Tenant.
10. No Partnership has leased or will lease or sublease personal property
that is not owned by it. All personal property provided or made available to a
Tenant by the Management Company has been and will be leased by the Management
Company acting on its own behalf and not as agent for the Partnerships, and the
Management Company has separately charged and will separately charge the Tenant
therefor.
11. The Company will not receive "excess rentals" from a Tenant. "Excess
rentals" means rent payable pursuant to a Lease in an amount that is greater
than the rent that would be payable under the Lease but for the existence of a
provision obligating the Tenant to pay over all or a portion of any rent
received by that Tenant from a subtenant or assignee of that Tenant.
12. One hundred percent (100%) of the stock of the Finance Sub has been
and will be held by the REIT at all times during the existence of the Finance
Sub.
13. For purposes of the following representations, income, deductions,
credits and other tax items of the REIT shall be deemed to include the REIT's
share of such items of the Partnerships, based on the REIT's proportionate
direct or indirect capital interest in such entities. Furthermore, for this
purpose the REIT will be treated as owning directly the assets owned by the
Finance Sub:
(a) Commencing with the REIT's taxable year ending December 31, 1994,
at least ninety-five percent (95%) of the gross income of the REIT
2
<PAGE>
(excluding gross income from Prohibited Transactions) has been and is
expected to be derived from (i) dividends, (ii) interest, (iii) rents from
real property, (iv) gain from the sale or other disposition of stock,
securities and real property (including Interests in Real Property and
interests in mortgages on real property), but excluding gain on real
property which is Section 1221(1) Property, (v) abatements and refunds of
taxes on real property, (vi) income and gain derived from Foreclosure
Property, (vii) amounts (other than amounts, the determination of which
depends in whole or in part on income or profits of any person) received or
accrued as consideration for entering into agreements (A) to make loans
secured by mortgages on real property or on Interests in Real Property, or
(B) to purchase or lease real property (including Interests in Real
Property and interests in mortgages on real property), and (viii) gain from
the sale or other disposition of Real Estate Assets that is not a
Prohibited Transaction;
(b) Commencing with the REIT's taxable year ending December 31, 1994,
at least seventy-five percent (75%) of the gross income of the REIT
(excluding gross income from Prohibited Transactions) has been and is
expected to be derived from (i) rents from real property, (ii) interest on
obligations secured by mortgages on real property or on Interests in Real
Property, (iii) gain from the sale or disposition of real property
(including Interests in Real Property and interests in mortgages on real
property), but excluding gain from real property which is Section 1221(1)
Property, (iv) dividends or other distributions on, and gain (other than
gain from Prohibited Transactions) from the sale or other disposition of,
transferable shares or beneficial certificates in other Real Estate
Investment Trusts, (v) abatements and refunds of taxes on real property,
(vi) income and gain derived from Foreclosure Property, (vii) amounts
(other than amounts, the determination of which depends in whole or in part
on the income or profits of any person) received or accrued as
consideration for entering into agreements (A) to make loans secured by
mortgages on real property or on Interests in Real Property and interests
in mortgages on real property, (viii) gain from the sale or other
disposition of a Real Estate Asset which is not a Prohibited Transaction,
and (ix) Qualified Temporary Investment Income. Dividends received by the
Operating Partnership from the Management Company are not included in
clauses (i) through (ix) of this paragraph (b);
(c) Commencing with the REIT's taxable year ending December 31, 1994,
the REIT has derived and expects to derive less than thirty percent (30%)
of its aggregate gross income from the sale or other disposition of (i)
stock or securities held for less than one year, (ii) property in a
Prohibited Transaction, and (iii) real property (including Interests in
Real Property and interests in mortgages on real property) held for less
than four years other than such property that is compulsorily or
involuntarily converted (by means of destruction, theft, seizure,
requisition, condemnation or threat of imminence thereof) and Foreclosure
Property;
(d) Commencing with the REIT's taxable year ending December 31, 1994,
the REIT has paid and expects to pay dividends (without regard to capital
gains dividends) equal to or in excess of the sum of (i) ninety-five
percent (95%) of the REIT's REIT Taxable Income for the year (determined
without regard to the deduction for dividends paid and by excluding any net
capital gain), and (ii) ninety-five percent (95%) of the net income from
3
<PAGE>
Foreclosure Property (after the tax imposed thereon by Section 857(b)(4)(A)
of the Code), minus (iii) any Excess Noncash Income; and
(e) Commencing with the REIT's taxable year ending December 31, 1994,
the dividends paid and to be paid by the REIT on the Common Stock were and
will be made pro rata, with no preference to any share of the Common Stock
as compared with other such shares.
14. For purposes of the following representations, assets of the REIT
shall be deemed to include the REIT's share of assets owned by the Partnerships,
based on the REIT's proportionate direct or indirect capital interest in such
entities. Furthermore, for this purpose the REIT will be treated as owning
directly the assets owned by the Finance Sub:
At the close of each quarter of each taxable year commencing with the
REIT's taxable year ending December 31, 1994 (i) at least seventy-five
percent (75%) of the value of the combined total assets of the REIT has
been and will be represented by Real Estate Assets, cash and cash items,
(including receivables), and U.S. Government securities, (ii) not more than
twenty-five percent (25%) of the value of the REIT's total assets has been
or will be represented by securities (other than those described in clause
(i) above), and (iii) with respect to those assets described in clause (ii)
above, the value of any one issuer's securities owned by the REIT
(including but not limited to the Management Company) has not exceeded and
will not exceed five percent (5%) of the value of the REIT's total assets
and the REIT has not owned and will not own more than ten percent (10%) of
any one issuer's outstanding voting securities.
15. The REIT, the Finance Sub, and the Partnerships have not earned and
will not earn fees for services performed, or other income (whether or not
through a manager) not described in clauses (i) through (viii) of paragraph
13(a) above, other than with respect to (i) Foreclosure Property and (ii)
income, if any attributable to reimbursements paid by the Operating Partnership
and Finance Partnership to the REIT pursuant to the terms of the Partnership
Agreements.
16. The Company has not provided and will not provide, and has not engaged
and will not engage any entity that fails to qualify as an "independent
contractor" to furnish, any services to any Tenant that are other than services
of the type that are "usually or customarily rendered" in connection with the
rental of space for occupancy only and not otherwise considered "rendered to the
occupant" within the meaning of Section 1.512(b)-1(c)(5) of the Treasury
Regulations. The Company has not received and will not receive any income,
directly or indirectly, from such contractor, including but not limited to
administrative or other fees, interest and dividends. For this purpose, an
"independent contractor" is a person other than (i) any person owning (actually
or Constructively) more than 35% of the stock of the REIT; (ii) any corporation
in which persons owning 35% or more of the stock of the REIT own (actually or
Constructively) more than 35% of the voting power with respect to the stock of
such corporation; or (iii) any entity other than a corporation in which persons
owning persons owning 35% or more of the stock of the REIT own (actually or
Constructively) more than 35% interest in the assets or net profits of such
entity.
17. No independent contractor providing services to Tenants has had or
will have any operating employees in common with the Company.
18. The services described in the draft private letter ruling request
dated August 16, 1994 prepared by the REIT sets forth in complete detail the
services that have been provided
4
<PAGE>
and are expected to be provided to by the Partnerships and the Management
Company to Tenants.
19. As required by Treasury Regulation Section 1.857-8, for each year
commencing with the REIT's taxable year ending December 31, 1994, the REIT (i)
has maintained and will maintain the necessary records relating to the actual
ownership of its stock, (ii) has made and will make the requisite information
requests of its shareholders regarding stock ownership, and (iii) has maintained
and will maintain a list of the persons failing or refusing to comply in whole
or in party with the Company's demand for statements regarding stock ownership.
20. The Company has operated and will operate in a manner such that the
above representations will continue to be true in the future; provided, however,
the Company may operate in a manner different from such representations if it
obtains the advice of nationally recognized counsel that such differences will
not impair its status as a Real Estate Investment Trust.
21. The REIT will use its best efforts to monitor ownership of Common
Stock in order to ensure compliance with, and will use its best efforts to
enforce, the Transfer Restrictions. Specifically, the REIT, as soon as
practicable after the date it discovers that a transaction in violation of the
Transfer Restrictions has occurred, will inform the Purported Record Owner and,
to the extent it is aware of its identity, the Purported Beneficial Owner, of
their obligations pursuant to the Charter, including the obligation to surrender
to the Trustee of the Trust any Trust Shares and any and all dividends or other
distributions received with respect to Trust Shares. The REIT will also take
additional action as is reasonably necessary to refuse to give effect to or to
prevent such transaction, which may include: (1) refusing to give effect to such
transaction on its books; (2) instituting legal proceedings to enjoin the
transaction and to recover any Trust Shares and any dividends erroneously paid
or distributed; and (3) declaring any votes erroneously cast by the Purported
Record Owner to be retroactively invalid. For purposes of this paragraph 21, the
terms "Purported Record Owner," "Purported Beneficial Owner," "Trustee," "Trust"
and "Trust Shares" shall have the meanings ascribed to such terms in the
Charter.
22. The representations herein take into account the expected income,
assets and operations of the Development Properties.
23. All shares of stock issued by the REIT are freely transferable.
24. As Senior Vice President and Chief Financial Officer, of the REIT,
which is (i) the sole general partner of the Operating Partnership, and (ii) the
sole stockholder of the Finance Sub, which is the sole general partner of the
Finance Partnership, it is my responsibility to have knowledge of the matters
described in the above representations.
IN WITNESS WHEREOF, I have executed this Certificate on the 31st day of
October, 1997.
/s/ Paul R. Fannin
-----------------------------
Paul R. Fannin
Senior Vice President
and Chief Financial Officer
5
<PAGE>
EXHIBIT A
Definitions
-----------
"Attribution Rules": the rules of ownership described in Section 856(h) of
the Code.
"Charter": The Charter of the REIT.
"Code": the Internal Revenue Code of 1986, as amended.
"Common Stock": Common Stock, $.01 par value per share of Evans Withycombe
Residential, Inc.
"Constructive" or "Constructively": constructive stock ownership rules of
Section 318 of the Code, as modified by Section 856(d)(5) of the Code.
"Development Properties": the "Development Communities" and the
"Development Rights" as those terms are defined in the Registration Statement.
"Excess Noncash Income": the excess of (i) the sum of (A) all interest,
original issue discount and other income includible in income with respect to
debt instruments received upon the sale of property over the money and fair
market value of property received with respect to such instruments and (B)
income recognized upon the disposition of real estate if there is a
determination that Section 1031 of the Code (like-kind exchanges) does not apply
to the disposition and the failure to satisfy the requirements of Section 1031
of the Code was due to reasonable cause and not willful neglect, over (ii) five
percent (5%) of REIT Taxable Income (without regard for the deduction for
dividends paid and excluding any net capital gain).
"Foreclosure Property": any real property (including Interests in Real
Property), and personal property incident to such real property, acquired by the
Company as a result of the Company having bid in such property at foreclosure,
or having otherwise reduced such property to ownership or possession by
agreement or process of law, after there was default (or default was imminent)
on a lease of such property or on an indebtedness which such property secured;
provided that an election for foreclosure property status under Section
856(e)(5) of the Code is in effect with respect to such property and such
election has not been terminated under Section 856(e)(4) of the Code. Such term
does not include property acquired by the Company as a result of indebtedness
arising from the sale or other disposition of property of the Company which is
Section 1221(1) Property which was not originally acquired as foreclosure
property.
"Interests in Real Property": includes fee ownership and co-ownership of
land or improvements thereon, leaseholders of land or improvements thereon,
options to acquire land or improvements thereon, and options to acquire
leaseholds of land or improvements thereon, but does not include mineral, oil or
gas royalty interests.
"Lease": any lease from which the Company derives revenue.
"Management Company": Evans Withycombe Management, Inc., an Arizona
corporation.
"Ownership Interest": in the case of a corporation, stock in such
corporation, and in the case of any other entity, any interest in the assets or
net income of such entity.
A-1
<PAGE>
"Partnership Agreements": the partnership agreements of the Partnerships.
"Person": an individual, private foundation, charitable trust, and
employee pension, profit sharing, stock bonus or supplemental unemployment
benefit trust.
"Prohibited Transaction": the sale or other disposition of Section 1221(1)
Property, other than Foreclosure Property, unless (i) the property sold was a
Real Estate Asset; (ii) the Company held the Real Estate Asset for at least four
years; (iii) the aggregate expenditures made by the Company during the four (4)
year period preceding the date of the sale which are includible in the basis of
the Real Estate Asset does not exceed thirty percent (30%) of the net selling
price of such asset; (iv) (A) during the taxable year the Company did not make
more than seven sales of property (other than Foreclosure Property) or (B) the
aggregate adjusted bases (as determined for purposes of computing earnings and
profits) of the REIT's property (other than Foreclosure Property) sold during
the taxable year does not exceed ten percent (10%) of the aggregate adjusted
bases (as so determined) of all the assets of the REIT as of the beginning of
the taxable year; (v) in the case of property, which consists of land or
improvements, not acquired through foreclosure (or deed in lieu of foreclosure),
or lease termination, the Company has held the property for not less than four
(4) years for production of rental income; and (vi) if the requirement of clause
(iv)(A) is not satisfied, substantially all of the marketing and development
expenditures with respect to the property were made through an independent
contractor (as defined in paragraph 16 hereof) from whom the Company does not
directly or indirectly derive gross income (including but not limited to
dividends). For purposes of clause (iv)(B) of the preceding sentence, the REIT
will be treated as owning its proportionate share of the adjusted bases of
assets owned by other entities in a manner consistent with that described in
paragraph 14 hereof.
"Qualified Temporary Investment Income": any income which (i) is
attributable to stock, or a bond, debenture, note, certificate or other evidence
of indebtedness (excluding any annuity contract which depends (in whole or in
substantial part) on the life expectancy of one or more individuals, or is
issued by an insurance company subject to tax under subchapter L of the Code (1)
in a transaction in which there is no consideration other than cash or another
annuity contract meeting the requirements of this definition, (2) pursuant to
the exercise of an election under an insurance contract by a beneficiary thereof
on the death of the insured party under such contract, or (3) in a transaction
involving a qualified pension or employee benefit plan), (ii) is attributable to
the temporary investment of new capital (amounts received upon the issuance of
stock of the REIT or upon a public offering of debt obligations of the REIT
having maturities of at least five years) received by the REIT and (iii) is
received or accrued during the one year period beginning on the date the REIT
received such capital.
"Real Estate Asset": real property (including Interests in Real Property
and interests in mortgages on real property) and shares (or transferable
certificates of beneficial interest) in other Real Estate Investment Trusts.
Such term also includes any property (not otherwise a Real Estate Asset)
attributable to the temporary investment of new capital (amounts received upon
the issuance of stock of the REIT or upon a public offering of debt obligations
of the REIT having maturities of at least five years), but only if such property
is stock or a debt instrument, and only for the one-year period beginning on the
date the REIT receives such capital.
"Real Estate Investment Trust": a real estate investment trust which meets
the requirements of Sections 856 through 860 of the Code.
"REIT Taxable Income": "Real estate investment trust taxable income" as
defined in Section 857(b) of the Code, which generally equals the taxable income
of the REIT, computed with the dividends-paid deduction as defined in Section
561 of the Code (except that the
A-2
<PAGE>
portion of such deduction attributable to net income from Foreclosure Property
is excluded), excluding any net income from Foreclosure Property, and computed
with a deduction for any tax imposed under Section 857(b)(5) of the Code (i.e.,
tax on the failure to meet the seventy-five percent (75%) or ninety-five percent
(95%) income tests).
"Section 1221(1) Property": stock in trade of the Company or other
property of a kind which would properly be included in inventory of the Company
if on hand at the close of the taxable year, or property held by the Company
primarily for sale to customers in the ordinary course of its trade or business.
"Tenant": any person from whom the Company derives gross income.
"Transfer Restrictions": The restrictions on transfer of capital stock of
the REIT as set forth in Article V of the Charter.
A-3
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have issued our report dated February 14, 1996 accompanying the consolidated
financial statements of ERP Operating Limited Partnership as of December 31,
1995 and for each of the two years in the period then ended. We consent to the
incorporation by reference of the above report in Amendment No. 2 to the
Registration Statement of ERP Operating Limited Partnership on Form S-4, and to
the use of our name as it appears under the caption "Experts".
/s/ GRANT THORNTON LLP
----------------------
GRANT THORNTON LLP
Chicago, Illinois
November 14, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of ERP Operating
Limited Partnership for the registration of 620,831 units of limited
partnership interest and to the incorporation by reference therein of our
reports indicated below with respect to the financial statements indicated below
included or incorporated by reference in ERP Operating Limited Partnership's
filings as indicated below, filed with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Date of
-------
Financial Statements Auditor's Report Filing
-------------------- ---------------- ------
<S> <C> <C>
Consolidated financial statements February 12, 1997 except Annual Report on
and schedule of ERP Operating Limited for Note 19, as to which Form 10-K
Partnership at December 31, the date is March 20, 1997
1996 and for the year then ended
Combined Statement of Revenue and November 12, 1997 Current Report on
Certain Expenses of the CAPREIT Form 8-K, as amended
Acquired and Probable Properties for by Form 8-K/A, dated
the year ended December 31, 1996 October 9, 1997
Combined Statement of Revenue and August 15, 1997 Current Report on
Certain Expenses of the Ameritech Form 8-K dated
Pension Trust Probable Properties September 17, 1997
for the year ended December 31,
1996
Combined Statement of Revenue September 5, 1997 Current Report on
and Certain Expenses of Paces on Form 8-K dated
the Green and Paces Station for September 17, 1997
the year ended December 31, 1996
Statement of Revenue and Certain July 17, 1997 Current Report
Expenses of Cascade at Landmark on Form 8-K
for the year ended December 31, dated August 15,
1996 1997
Statement of Revenue and Certain July 2, 1997 Current Report
Expenses of Sabal Palm Club on Form 8-K
(formerly known as Post Crossing dated August 15,
(Pompano)) for the year ended 1997
December 31, 1996
Statement of Revenue and Certain July 23, 1997 Current Report
Expenses of Wood Creek (Pleasant on Form 8-K
Hill) for the year ended December dated August 15,
31, 1996 1997
Statement of Revenue and Certain July 25, 1997 Current Report
Expenses of LaMirage for the year on Form 8-K
ended December 31, 1996 dated August 15,
1997
Statement of Revenue and Certain May 16, 1997 Current Report
Expenses of Harborview for the on Form 8-K dated
year ended December 31, 1996 May 20, 1997
Statement of Revenue and Certain May 6, 1997 Current Report
Expenses of Trails at Dominion for on Form 8-K dated
the year ended December 31, 1996 May 20, 1997
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Date of
-------
Financial Statements Auditor's Report Filing
-------------------- ---------------- ------
<S> <C> <C>
Statement of Revenue and Certain May 7, 1997 Current Report
Expenses of Rincon for the year on Form 8-K dated
ended December 31, 1996 May 20, 1997
Statement of Revenue and Certain May 12, 1997 Current Report on
Expenses of Waterford at the Lakes Form 8-K dated
for the year ended December 31, May 20, 1997
1996
Statement of Revenue and Certain May 16, 1997 Current Report on
Expenses of Lincoln Harbour for Form 8-K dated
the year ended December 31, 1996 May 20, 1997
Combined Statement of Revenue and May 9, 1997 Current Report on
Certain Expenses of Knights Castle Form 8-K dated
and Club at the Green for the year May 20, 1997
ended December 31, 1996
Combined Statements of Revenue and March 25, 1997 Current Report on
Certain Expenses of the Form 8-K dated
Zell/Merrill Properties for each May 20, 1997
of the three years in the period
ended December 31, 1996
Combined Statement of Revenue and May 17, 1996 Current Report on
Certain Expenses of the 1996 Form 8-K, as amended
Acquired Properties and Probable by Form 8-K/A, dated
Properties for the year ended May 23, 1996
December 31, 1995
Combined Statement of Revenue and November 7, 1996 Current Report on
Certain Expenses for the 1996 Form 8-K, dated
Acquired Properties for the year November 15, 1996
ended December 31, 1995
Consolidated financial statements February 10, 1997 Current Report on
and schedule of Wellsford Residential except for Note 13, as Form 8-K, dated
Property Trust at December 31, 1996 to which the date is May 30, 1997
and 1995 and for each of the three February 28, 1997
years in the period ended December
31, 1996
</TABLE>
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Chicago, Illinois
November 14, 1997
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of ERP Operating
Limited Partnership for the registration of 620,831 units of limited partnership
interest and to the use of our report dated January 31, 1997, with respect to
the consolidated financial statements and schedule of Evans Withycombe
Residential, L.P. and Subsidiaries for the three years in the period ended
December 31, 1996, included in this Consent Solicitation/Prospectus/Information
Statement and included in the Current Report on Form 8-K, dated September 10,
1997, of ERP Operating Limited Partnership, filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
--------------------------
Ernst & Young LLP
Phoenix, Arizona
November 14, 1997
