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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CAREY DIVERSIFIED LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENT)
DELAWARE 6798 (PENDING)
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER IDENTIFICATION
ORGANIZATION OR INCORPORATION) CLASSIFICATION CODE NUMBER) NUMBER)
50 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
FRANCIS J. CAREY
CAREY DIVERSIFIED LLC
50 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10020
(NAME AND ADDRESS OF AGENT FOR SERVICE)
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COPY TO:
MICHAEL B. POLLACK, ESQUIRE
REED SMITH SHAW & MCCLAY LLP
2500 ONE LIBERTY PLACE
PHILADELPHIA, PENNSYLVANIA 19103
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of the Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING REGISTRATION
BEING REGISTERED REGISTERED(1) PER SHARE(2) PRICE FEE(3)
- ------------------- ------------------ ------------------- ------------------- ------------------
Listed Shares 23,654,898 $20.00 $473,097,960 $143,363
- ---------------
(1) Represents the maximum number of Shares issuable upon consummation of the
transactions described herein.
(2) $20 is an arbitrary amount chosen for the sole purpose of allocating Listed
Shares and is not intended to imply that the Listed Shares will trade at a
price of $20 per Share.
(3) The registration fee has been calculated using the maximum number of shares
that can be issued in this offering. Each Partnership Unit elected will
reduce the number of Listed Shares that can be issued allowing for a maximum
total issuance in this offering of 23,654,898 shares.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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CONSENT SOLICITATION STATEMENT/PROSPECTUS
CAREY DIVERSIFIED LLC
UP TO 23,654,898 LIMITED LIABILITY COMPANY LISTED SHARES
As described in this Consent Solicitation Statement/Prospectus ("Consent
Solicitation Statement" or "Prospectus"), William P. Carey, W.P. Carey & Co.,
Inc., Carey Corporate Property, Inc., Seventh Carey Corporate Property, Inc.,
Eighth Carey Corporate Property, Inc. and Ninth Carey Corporate Property, Inc.
(collectively, the "General Partners") are proposing a consolidation by merger
(the "Consolidation") of nine public limited partnerships in the Corporate
Property Associates series of limited partnerships (the "CPA(R) Partnerships")
with the subsidiary limited partnerships of Carey Diversified LLC, a newly
organized Delaware limited liability company (the "Company"). The CPA(R)
Partnerships are Delaware and California limited partnerships which own net
leased commercial and industrial real estate. The CPA(R) Partnerships currently
own 198 properties (the "Properties") located in 37 states and net leased to 76
tenants.
Limited Partners in the CPA(R) Partnerships (the "Unitholders") are being
asked to approve the Consolidation as described in this Prospectus. Upon
completion of the Consolidation, the CPA(R) Partnerships participating in the
Consolidation (the "Participating Partnerships") will each be merged with a
Subsidiary Partnership, and their Unitholders (the "Participating Investors") at
their election will receive a limited liability company interest in the Company
representing an interest in the income, loss and capital of the Company (a
"Listed Share") or will retain a limited partnership interest (a "Subsidiary
Partnership Unit") in the CPA(R)Partnership in which they are a Limited Partner.
Each CPA(R) Partnership will vote on whether to participate in the
Consolidation. If holders of a majority of the outstanding Units of a CPA(R)
Partnership vote in favor of the Consolidation, that Partnership's assets will
be combined with the assets of all other CPA(R) Partnerships which approve the
Consolidation. The Consolidation will not occur unless the CPA(R) Partnerships
approving the Consolidation represent at least $200 million in Total Exchange
Value. Additionally, if holders of a majority of the outstanding Units of a
Partnership vote against participation in the Consolidation, each Unitholder in
that Partnership will retain his interest currently held and that CPA(R)
Partnership will not participate in the Consolidation. The Company has applied
to list the Listed Shares on the New York Stock Exchange ("NYSE") under the
symbol "CDC". See "GLOSSARY OF TERMS" for definitions of certain key terms used
in this Prospectus.
The Listed Shares allow Unitholders to participate in the risks and rewards
of the Company's future plans for growth, while the Subsidiary Partnership Units
allow Unitholders to retain an investment that provides substantially the same
economic interests and legal rights as his investment in CPA(R) Partnership
interests (but will not be listed on a securities exchange). If the
Consolidation is consummated, the General Partners and their Affiliates will
contribute a portion of their General Partner interests in exchange for Listed
Shares. The General Partners or their Affiliates will retain the remainder of
their General Partner interests which will be converted into Limited Partner
interests in the Subsidiary Partnerships. See "DESCRIPTION OF SHARES AND
SUBSIDIARY PARTNERSHIP UNITS" for a description of Listed Shares and Subsidiary
Partnership Units.
THIS CONSOLIDATION INVOLVES CERTAIN RISKS, ADVERSE EFFECTS AND CONFLICTS OF
INTEREST THAT SHOULD BE CONSIDERED BY THE UNITHOLDERS. SEE "RISK FACTORS"
BEGINNING ON PAGE 20 OF THIS PROSPECTUS. IN PARTICULAR, THE UNITHOLDERS SHOULD
CONSIDER THE FOLLOWING:
- Fundamental changes in rights and in the nature of investment for holders
of Listed Shares, including reduction of relative voting power.
- Unitholders cannot be certain of the value of the Listed Shares they will
receive. Listed Shares may trade at prices substantially below Total
Exchange Value per Share or historic book value.
- Because the ultimate composition of the Company cannot be determined,
Unitholders must vote without knowing the exact composition of the
Company.
- The potential change in the nature and amount of leverage may increase
the risk of default and may reduce cash flow available for distribution.
- The Board of Directors can change investment, financing and certain other
policies without Shareholder approval.
- Unitholders are likely to be unable to resell or dispose of Subsidiary
Partnership Units except at a substantial discount from the Total
Exchange Value per Share.
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- Conflicts of interest of General Partners in structuring the
Consolidation.
- Lack of independent representation of Unitholders resulting in terms of
the Consolidation which may be more favorable to the General Partners.
- Because there are no appraisal or similar rights for nonconsenting
Unitholders, Unitholders must accept Listed Shares or Subsidiary
Partnership Units if the Consolidation is approved.
The General Partners believe that there are a number of reasons for and
benefits of the Consolidation, which are discussed at greater length in
"BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Expected Benefits of
Consolidation." These reasons include:
- Stock Exchange listing of Listed Shares and resulting liquidity.
- Growth potential of Listed Shares which may be realized.
- Increased diversification of tenants, location and building type.
- Shareholders' ability to borrow using Listed Shares as collateral.
- Increased Shareholder rights through annual election of Directors.
- Unitholders' choice of investment -- Listed Shares or Subsidiary
Partnership Units.
- Tax-free nature of Consolidation and preservation of pass-through tax
status.
- Unitholders who elect to receive Subsidiary Partnership Units will
receive an interest with substantially the same economic interests and
legal rights as the interest they currently hold.
Limited Partners who object to the Consolidation have the following rights:
- Limited Partners may vote against the Consolidation. If the holders of a
majority of the outstanding Units in the CPA(R) Partnerships representing
the Minimum Participation Amount do not approve the Consolidation, the
Consolidation will not be completed. Even if the Consolidation is
completed, a particular CPA(R) Partnership will not participate in the
Consolidation if the holders of at least a majority of the outstanding
Units in that Partnership do not approve the Consolidation. As a result,
these Unitholders will retain their current interest in their CPA(R)
Partnership.
- Limited Partners may elect to receive Subsidiary Partnership Units.
Subsidiary Partnership Units have been structured so that the economic
results and legal rights realized by holders thereof are substantially
the same as the results which would be realized by holders of limited
partner interests in a CPA(R) Partnership were the Consolidation not
effected. See "DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP
UNITS -- Subsidiary Partnership Units" for a more detailed description of
the Subsidiary Partnership Units.
This Prospectus and the related form of consent are first being sent to
Unitholders on or about October 22, 1997.
Each Unitholder may elect to receive all Listed Shares or all Subsidiary
Partnership Units as indicated on the enclosed Consent Card. IF A UNITHOLDER
VOTES FOR OR AGAINST OR ABSTAIN WITH RESPECT TO THE CONSOLIDATION AND FAILS TO
MAKE AN ELECTION BETWEEN LISTED SHARES AND SUBSIDIARY PARTNERSHIP UNITS ON THE
ENCLOSED CONSENT CARD, SUCH UNITHOLDER WILL RECEIVE LISTED SHARES IF THE
CONSOLIDATION IS CONSUMMATED. IF A UNITHOLDER FAILS TO RETURN THE ENCLOSED
CONSENT CARD, SUCH UNITHOLDER WILL RECEIVE LISTED SHARES IF THE CONSOLIDATION IS
CONSUMMATED. THE GENERAL PARTNERS MAY DECIDE NOT TO PURSUE THE CONSOLIDATION
WITH RESPECT TO ANY CPA(R) PARTNERSHIP FOR ANY REASON AND AT ANY TIME BEFORE IT
BECOMES EFFECTIVE, WHETHER BEFORE OR AFTER APPROVAL BY THE UNITHOLDERS.
THE GENERAL PARTNERS STRONGLY RECOMMEND THAT ALL UNITHOLDERS VOTE FOR THE
CONSOLIDATION AND ELECT TO RECEIVE LISTED SHARES. EACH UNITHOLDER SHOULD MAKE A
DETERMINATION AS TO WHICH TYPE OF SECURITIES TO RECEIVE BASED UPON SUCH
UNITHOLDER'S PERSONAL SITUATION, AND SUCH DECISION SHOULD BE BASED UPON A
CAREFUL EXAMINATION OF THE UNITHOLDER'S PERSONAL FINANCES, INVESTMENT
OBJECTIVES, LIQUIDITY NEEDS, TAX SITUATION AND EXPECTATIONS AS TO THE COMPANY'S
FUTURE GROWTH.
THIS SOLICITATION OF CONSENTS EXPIRES AT 5:00 P.M.,
NEW YORK TIME ON DECEMBER 16, 1997 UNLESS EXTENDED.
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NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED UPON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
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ALL QUESTIONS AND INQUIRIES SHOULD BE DIRECTED TO SHAREHOLDER COMMUNICATION
SERVICES, INC., INFORMATION AGENT, BY TELEPHONE AT (800) 773-8481, extension
CPA.
The date of this Prospectus is October 15, 1997.
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TABLE OF CONTENTS
AVAILABLE INFORMATION.................................................................. 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................ 2
PROSPECTUS SUMMARY..................................................................... 3
Overview............................................................................. 3
Organizational Chart................................................................. 4
Risks and Other Adverse Factors...................................................... 5
Benefits of the Consolidation and Listed Shares...................................... 6
Options Available and Duties Owed to Limited Partners who Object to the
Consolidation..................................................................... 7
Fairness............................................................................. 8
Independent Appraisals and Fairness Opinion.......................................... 8
The Consent Solicitation............................................................. 9
The Company.......................................................................... 10
Recommendation of the General Partners............................................... 10
Alternatives to the Consolidation.................................................... 11
Consequences if the Consolidation Is Not Approved.................................... 11
Tables Regarding Total Exchange Value................................................ 12
No Dissenters' Rights................................................................ 13
Comparison of the CPA(R) Partnerships and the Company................................ 14
Summary of Federal Tax Consequences.................................................. 15
Conflicts of Interest Related to the Consolidation................................... 15
Conditions to the Consolidation...................................................... 17
Delivery of the Certificates for Units............................................... 17
Voting Procedures.................................................................... 17
Summary Selected Combined Financial Information...................................... 18
RISK FACTORS........................................................................... 20
Change in Nature of Investment from Finite-Life to Perpetual Existence............... 20
Uncertainty Regarding Trading Price for the Listed Shares............................ 20
Risk Associated with Greater Diversity and Growth.................................... 20
Conflicts of Interest in Structuring the Consolidation............................... 21
Distributions Paid to Holders of Subsidiary Partnership Units Before Holders of
Listed Shares..................................................................... 21
No Market for the Subsidiary Partnership Units....................................... 22
Potential Differences Between Total Exchange Value and Realizable Value.............. 22
Board of Directors' Ability to Effect Changes in Investment, Financing and Certain
Other Policies.................................................................... 22
Loss of Relative Voting Power........................................................ 22
No Appraisal or Similar Rights for Nonconsenting Unitholders......................... 22
Opinions of Counsel.................................................................. 22
No IRS Ruling with Respect to Partnership Status..................................... 23
Other Potential Tax Risks............................................................ 23
Tax Risks of Trading of Listed Shares................................................ 24
Uncertain Composition of the Company................................................. 24
Consolidation Expenses Will Reduce the Cash of the Company........................... 24
Combination of Real Estate Assets; Change in Geographic, Industry, Building-Type and
Tenant Diversity.................................................................. 25
Risk of Lower Distributions.......................................................... 25
Potential Loss of Future Appreciation................................................ 25
Restrictions on Changes in Control................................................... 25
Limitation of Director Liability..................................................... 26
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Reduction in Value From Contingent or Undisclosed Liabilities........................ 26
General Risks Related to Investments in Real Estate.................................. 27
Risk of Leverage..................................................................... 27
Rent Income Dependent Upon Creditworthiness of Tenants............................... 27
Losses From Uninsured Liabilities or Casualty........................................ 28
Losses From Casualty and Condemnation Related Lease Terminations..................... 28
Risks of Joint Ventures.............................................................. 28
Competition with Affiliates May Reduce Available Properties, Tenants and Purchasers
of Properties..................................................................... 28
Growth of Company Dependent on Borrowing Capacity and Ability to Raise Capital....... 29
Possible Environmental Liabilities................................................... 29
Risk of Investment in Real Property Located Outside the United States................ 30
Potential Claims Against Title to Properties......................................... 30
Dependence on Key Personnel.......................................................... 31
Competition for Investments.......................................................... 31
Status of the Company under ERISA.................................................... 31
BACKGROUND AND REASONS FOR THE CONSOLIDATION........................................... 31
General.............................................................................. 31
Background of the CPA(R) Partnerships and the General Partners....................... 32
Efforts to Dispose of Properties..................................................... 32
Terms of the Consolidation........................................................... 34
Total Exchange Value and Allocation of Listed Shares and Subsidiary Partnership
Units............................................................................. 36
Determination of Total Exchange Value................................................ 37
Allocation of Listed Shares to Unitholders and General Partners...................... 39
Allocation of Listed Shares Among CPA(R) Partnerships................................ 41
Allocation of Listed Shares and Total of Cumulative Distributions and Assigned Total
Exchange Value Per $1,000 Original Investment..................................... 41
Expected Benefits of Consolidation................................................... 41
Alternatives to the Consolidation.................................................... 43
Comparison of Alternatives........................................................... 45
Conditions to the Consolidation...................................................... 51
Recommendation of the General Partners and Fairness Determination.................... 51
Material Factors Underlying Belief as to Fairness.................................... 52
Relative Weight Assigned to Material Factors......................................... 54
Fairness to Unitholders Receiving Listed Shares in the Consolidation................. 54
Fairness to Unitholders Receiving Subsidiary Partnership Units in the
Consolidation..................................................................... 54
Fairness in View of Conflicts of Interest............................................ 55
Consequences if the Consolidation is Not Approved.................................... 55
Unitholder Elections................................................................. 55
Accounting Treatment................................................................. 56
Costs and Expenses................................................................... 56
No Fractional Listed Shares.......................................................... 56
Effect of the Consolidation on Dissenting Investors.................................. 56
Effect of Consolidation on Nonparticipating Partnerships............................. 57
Effective Time....................................................................... 57
Title Insurance...................................................................... 57
Environmental Matters................................................................ 57
Legal Proceedings.................................................................... 58
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Amendment, Termination and Waiver.................................................... 58
Appraisals and Fairness Opinions..................................................... 58
DISTRIBUTION POLICY.................................................................... 58
Listed Shares........................................................................ 58
Subsidiary Partnership Units......................................................... 61
Minimum Participation................................................................ 62
COMPARISON OF UNITS, LISTED SHARES AND SUBSIDIARY PARTNERSHIP UNITS.................... 63
Issuance in Series................................................................... 63
General Business..................................................................... 63
Distributions and Dividends.......................................................... 63
Management and Fiduciary Duties...................................................... 64
Voting Rights........................................................................ 64
Special Meetings..................................................................... 65
Redemption........................................................................... 66
Liquidation Rights................................................................... 67
Right to Compel Dissolution.......................................................... 67
Expenses of the Consolidation........................................................ 67
Limited Liability.................................................................... 67
Liquidity and Marketability.......................................................... 67
Restrictions on Transfer............................................................. 67
Continuity of Existence.............................................................. 68
Financial Reports.................................................................... 68
Payments to the General Partners and their Affiliates................................ 68
Certain Legal Rights................................................................. 68
Inspection of Books and Records...................................................... 69
COMPARISONS OF CPA(R) PARTNERSHIPS AND COMPANY......................................... 70
Form of Organization................................................................. 70
Length of Investment................................................................. 70
Nature of Investment................................................................. 71
Properties and Diversification....................................................... 71
Permitted Investments................................................................ 71
Additional Equity.................................................................... 72
Borrowing Policies................................................................... 73
Restrictions Upon Related Party Transactions......................................... 73
Management Control and Responsibility................................................ 74
Management Liability and Indemnification............................................. 75
Antitakeover Provisions.............................................................. 76
Voting Rights........................................................................ 76
Limited Liability of Investors....................................................... 77
Liquidity............................................................................ 77
VOTING PROCEDURES...................................................................... 78
Time of Voting....................................................................... 78
Record Date and Outstanding Units.................................................... 78
Approval Date........................................................................ 78
Consent Card and Vote Required....................................................... 78
Revocability of Consent.............................................................. 79
Solicitation of Votes; Solicitation Expenses......................................... 80
Alternatives Available to Unitholders who Object to the Consolidation................ 80
Unitholder Names and Addresses....................................................... 81
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No Right of Appraisal................................................................ 81
Amendments to Partnership Agreements................................................. 81
Issuance of Certificates............................................................. 81
INTERESTS OF CERTAIN PERSONS IN THE CONSOLIDATION AND CONFLICTS OF INTEREST............ 82
Substantial Benefits to General Partners............................................. 82
Common General Partners.............................................................. 83
Lack of Independent Representation of Unitholders.................................... 83
Fiduciary Duties of General Partners................................................. 83
Features Discouraging Potential Takeovers............................................ 84
Allocation of Services and Expenses.................................................. 84
Non-Arm's-Length Agreements.......................................................... 84
Competition with the Company from Affiliates of the Manager in the Purchase, Sale,
Lease and Operation of Properties................................................. 84
Adjacent Properties.................................................................. 85
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION........................................... 85
Fiduciary Responsibility of the General Partners..................................... 85
Indemnification of Directors and Officers of the Company............................. 86
Directors and Officers Insurance..................................................... 86
BUSINESS AND PROPERTIES................................................................ 87
The Company's Business............................................................... 87
Management of the Company............................................................ 87
Acquisition Strategies............................................................... 87
Financing Strategies................................................................. 88
Transaction Origination.............................................................. 88
Acquisition and Underwriting Process................................................. 89
Asset Management..................................................................... 90
Properties........................................................................... 91
Description of Most Significant Tenants.............................................. 95
Mortgage Debt........................................................................ 98
Environmental Matters................................................................ 99
Competition.......................................................................... 99
Employees............................................................................ 100
Insurance............................................................................ 100
Legal Proceedings.................................................................... 100
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES............................................ 100
Investment Policies.................................................................. 100
Financing Policies................................................................... 101
Miscellaneous Policies............................................................... 101
Working Capital Reserves............................................................. 102
SELECTED COMBINED FINANCIAL INFORMATION................................................ 102
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................... 114
Overview............................................................................. 114
Results of Operations................................................................ 114
Comparison of the Six Months Ended June 30, 1997 and 1996......................... 114
Comparison of the Years Ended December 31, 1996 and 1995.......................... 115
Comparison of the Years Ended December 31, 1995 and 1994.......................... 116
Liquidity and Capital Resources...................................................... 116
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MANAGEMENT FOLLOWING THE CONSOLIDATION................................................. 118
Directors and Executive Officers of the Company...................................... 118
Directors and Principal Officers of the Manager...................................... 121
Terms of Directors of the Company.................................................... 122
Committees of the Board of Directors of the Company.................................. 122
Compensation of the Board of Directors............................................... 123
Executive Compensation............................................................... 123
1997 Listed Share Incentive Plan..................................................... 123
Incentive Compensation............................................................... 124
The Non-Employee Director Plan....................................................... 124
The Manager.......................................................................... 125
Shareholdings........................................................................ 125
Management Decisions................................................................. 126
Limitations on Liability of Directors and Officers of the Company.................... 126
Indemnification of Directors and Officers............................................ 126
Management Services Provided by Manager.............................................. 126
SECONDARY MARKET AND OWNERSHIP OF CPA(R) PARTNERSHIP UNITS............................. 128
Sale Prices of Units................................................................. 128
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................... 129
DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS................................. 130
Listed Shares........................................................................ 130
Subsidiary Partnership Units......................................................... 131
Restricting Changes in Control and Business Combination Provisions................... 132
Additional Classes and Series of Shares........................................... 132
Staggered Board of Directors...................................................... 132
Number of Directors; Removal; Filling Vacancies................................... 132
Business Combination Provisions................................................... 133
Amendments to Business Combination Provisions..................................... 136
Control Share Acquisition Provisions.............................................. 137
Voting Rights of Control Shares................................................... 137
Redemption of Control Shares...................................................... 137
Advantages and Disadvantages of Control Share Acquisition Provisions.............. 138
Amendments to Control Share Acquisition Provisions................................ 138
Shareholder Rights Plan........................................................... 138
Distribution Date................................................................. 138
Adjustments to Purchase Plan...................................................... 139
Exercise of Rights................................................................ 139
Redemption of Rights.............................................................. 139
Amendment of Rights Plan.......................................................... 139
Effect of the Rights Plan......................................................... 139
Resale of Shares.................................................................. 139
Transfer Agent and Registrar...................................................... 140
COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER...... 140
Compensation Payable by the CPA(R) Partnerships...................................... 140
Amounts Payable to the Manager after the Consolidation............................... 142
Fees Payable Over Past Three Years................................................... 143
General Partners' Preferred Return................................................... 144
Investment Banking Fee............................................................... 145
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APPRAISALS AND FAIRNESS OPINION........................................................ 146
General.............................................................................. 146
Experience of Independent Appraiser.................................................. 146
Independent Appraisal................................................................ 146
Fairness Opinion..................................................................... 149
INCOME TAX CONSEQUENCES................................................................ 152
New Tax Law Provisions............................................................... 153
Classification as "Partnerships"..................................................... 154
Tax Consequences of the Consolidation................................................ 155
Tax Consequences of Consolidation to Subsidiary Partnership Unitholders.............. 156
Shareholders or Subsidiary Partnership Unitholders, Not Partnership, Subject to
Tax............................................................................... 156
Allocations of Profits and Losses.................................................... 157
Passive Activity Loss Limitations.................................................... 158
Deductibility of Fees................................................................ 158
Organization and Consolidation Expenses.............................................. 159
Start-up Expenditures................................................................ 159
Tax and "At Risk" Basis of Shares.................................................... 160
Treatment of Cash Distributions From the Company..................................... 160
Treatment of Gain or Loss on Disposition of Units.................................... 161
Treatment of Gifts of Shares......................................................... 162
Issuance of Additional Shares........................................................ 162
Treatment of Gain or Loss on Sale of Property........................................ 162
Sale-Leaseback Transactions.......................................................... 163
Acquisition of Stock, Options and Warrants........................................... 164
Tax Elections........................................................................ 164
Depreciation......................................................................... 165
Depreciation Recapture............................................................... 165
Alternative Minimum Tax.............................................................. 166
Installment Sales-Imputed Interest................................................... 166
Accrual of Original Issue Discount................................................... 167
Construction Expenses................................................................ 168
Investment by Qualified Pension and Profit-Sharing Plans (Including Keoghs), Stock
Bonus Plans and Individual Retirement Accounts.................................... 168
Certain Federal Estate Tax Matters................................................... 169
Tax Penalties and Interest........................................................... 169
Termination of the Company for Tax Purposes.......................................... 169
State and Local Tax Consequences..................................................... 170
Necessity of Prospective Shareholders Obtaining Professional Advice.................. 170
LEGAL MATTERS.......................................................................... 171
EXPERTS................................................................................ 171
GLOSSARY OF TERMS...................................................................... 171
INDEX TO FINANCIAL STATEMENTS.......................................................... F-1
Fairness Opinion............................................................... Appendix A
Appraisal...................................................................... Appendix B
Consent Card and Election Form with Instructions............................... Appendix C
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No person is authorized to give any information or to make any
representation not contained in this Prospectus, and any information or
representation not contained herein must not be relied upon as having been
authorized by the CPA(R) Partnerships, the General Partners or the Company. This
Prospectus does not constitute an offer of any securities other than the
registered securities to which it relates or an offer to any person in any
jurisdiction where such offer would be unlawful. Neither the delivery of this
Prospectus nor any sales made thereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the CPA(R)
Partnerships or the Company since the date hereof; however, in the event of any
material change during the period when this Prospectus must be delivered, the
Prospectus will be supplemented accordingly.
AVAILABLE INFORMATION
The CPA(R) Partnerships subject to this Consolidation are Corporate
Property Associates (a California limited partnership) ("CPA(R):1"), Corporate
Property Associates 2 (a California limited partnership) ("CPA(R):2"), Corporate
Property Associates 3 (a California limited partnership) ("CPA(R):3"), Corporate
Property Associates 4, a California limited partnership ("CPA(R):4"), Corporate
Property Associates 5 (a California limited partnership) ("CPA(R):5"), Corporate
Property Associates 6 -- a California limited partnership ("CPA(R):6"),
Corporate Property Associates 7 -- a California limited partnership
("CPA(R):7"), Corporate Property Associates 8, L.P., a Delaware limited
partnership ("CPA(R):8") and Corporate Property Associates 9, L.P. (a Delaware
limited partnership) ("CPA(R):9").
The CPA(R) Partnerships are subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, must file reports and other information with the
Securities and Exchange Commission (the "Commission"), 450 Fifth Street N.W.,
Washington, D.C. 20549. In addition, the Company has filed a Registration
Statement on Form S-4 under the Securities Act of 1933, as amended (the
"Securities Act") and the rules and regulations promulgated thereunder, with
respect to the Listed Shares and the Subsidiary Partnership Units offered
pursuant to this Prospectus. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and financial schedules thereto. For further
information with respect to the CPA(R) Partnerships and the Company, reference
is made to the reports of the CPA(R) Partnerships filed under the Exchange Act
and the Company's Registration Statement and such exhibits and schedules, copies
of which may be examined without charge at, or obtained upon payment of
prescribed fees from, the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, which will also
be available for inspection and copying at the regional offices of the
Commission located at Seven World Trade Center, New York, New York 10048 and at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. In addition,
information may be obtained from the Commission's internet site at
http://www.sec.gov. This site contains reports, proxy and information
statements, and other information regarding registrants that file electronically
with the Commission.
Statements contained in this Prospectus as to the contents of any contract
or other document which is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document.
Upon consummation of the Consolidation, the Company will be required to
file reports and other information with the Commission pursuant to the Exchange
Act. In addition to applicable legal NYSE requirements, if any, holders of the
Listed Shares and the Subsidiary Partnership Units will receive annual reports
containing audited financial statements, with a report thereon by the Company's
independent public accountants, and quarterly reports containing unaudited
financial information for each of the first three quarters of each fiscal year.
If a CPA(R) Partnership does not participate in the Consolidation, such CPA(R)
Partnership will continue to file reports and other information with the
Commission as required by law.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Consent Solicitation Statement incorporates documents by reference
which are not presented herein or delivered herewith. These documents (without
exhibits, unless such exhibits are specifically incorporated by reference
herein) are available without charge to each person to whom a copy of this
Prospectus is delivered, upon written or oral request addressed to: W.P. Carey &
Co., Inc., 50 Rockefeller Plaza, New York, NY 10020, Attention: Investor
Relations, telephone number 1-800-733-8481 ext. CPA. In order to ensure timely
delivery of the documents, any request should be made by December 1, 1997.
The following documents of the CPA(R) Partnerships have been filed with the
Commission and are incorporated herein by reference:
Annual Report on Form 10-K of CPA(R):1 for the year ended December 31, 1996.
Annual Report on Form 10-K of CPA(R):2 for the year ended December 31, 1996.
Annual Report on Form 10-K of CPA(R):3 for the year ended December 31, 1996.
Annual Report on Form 10-K of CPA(R):4 for the year ended December 31, 1996.
Annual Report on Form 10-K of CPA(R):5 for the year ended December 31, 1996.
Annual Report on Form 10-K of CPA(R):6 for the year ended December 31, 1996.
Annual Report on Form 10-K of CPA(R):7 for the year ended December 31, 1996.
Annual Report on Form 10-K of CPA(R):8 for the year ended December 31, 1996.
Annual Report on Form 10-K of CPA(R):9 for the year ended December 31, 1996.
Quarterly Report on Form 10-Q of CPA(R):1 for the six months ended June 30,
1997.
Quarterly Report on Form 10-Q of CPA(R):2 for the six months ended June 30,
1997.
Quarterly Report on Form 10-Q of CPA(R):3 for the six months ended June 30,
1997.
Quarterly Report on Form 10-Q of CPA(R):4 for the six months ended June 30,
1997.
Quarterly Report on Form 10-Q of CPA(R):5 for the six months ended June 30,
1997.
Quarterly Report on Form 10-Q of CPA(R):6 for the six months ended June 30,
1997.
Quarterly Report on Form 10-Q of CPA(R):7 for the six months ended June 30,
1997.
Quarterly Report on Form 10-Q of CPA(R):8 for the six months ended June 30,
1997.
Quarterly Report on Form 10-Q of CPA(R):9 for the six months ended June 30,
1997.
All documents filed by the CPA(R) Partnerships pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Consent
Solicitation Statement and prior to the date on which the Consolidation is
consummated shall be deemed to be incorporated by reference into this Consent
Solicitation Statement and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated by reference
herein shall be deemed to be modified or superseded for purposes hereof to the
extent that a statement obtained herein (or in any other subsequently filed
document which also is incorporated herein) modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed to
constitute a part hereof except as so modified or superseded.
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PROSPECTUS SUMMARY
The following Summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus and
supplements thereto. Capitalized terms not otherwise defined in this Summary
shall have the meanings set forth in the "GLOSSARY OF TERMS."
OVERVIEW
As described in this Prospectus, William P. Carey, W.P. Carey & Co., Inc.
("W.P. Carey & Co."), Carey Corporate Property, Inc. ("CCP"), Seventh Carey
Corporate Property, Inc. ("Seventh Carey"), Eighth Carey Corporate Property,
Inc. ("Eighth Carey") and Ninth Carey Corporate Property, Inc. ("Ninth Carey"
and collectively, the "General Partners") are proposing a consolidation by
merger (the "Consolidation") of nine subsidiary limited partnerships (the
"Subsidiary Partnerships") of Carey Diversified LLC, a newly organized Delaware
limited liability company (the "Company" or "CD") with and into nine public
limited partnerships in the Corporate Property Associates series of limited
partnerships (the "CPA(R) Partnerships"). The CPA(R) Partnerships currently own,
in the aggregate, 198 properties in 37 states.
The Company's objective is to increase shareholder value and its Funds from
Operations through prudent management of its real estate assets and through
opportunistic investments. The Company intends to capitalize on its status as a
publicly-traded real estate investment company to take immediate advantage of
the significant opportunities to make net lease and other investments at
attractive returns. The sources of capital for additional investments may
include internally generated cash flow and the issuance of debt or equity
securities by the Company.
The General Partners are soliciting consents in connection with the
Consolidation because they believe it is in the best interests of the
Unitholders to restructure the CPA(R) Partnerships. They believe that the
Consolidation offers Unitholders the opportunity to control better the timing of
the liquidation of their investments (and the resulting taxation of such
liquidation) and to participate in the growth opportunities and additional
diversification provided by the Company while deferring the tax on approximately
$336 million of capital gain (assuming the Properties are all sold for their
appraised value). The General Partners believe that an aggregation of all the
CPA(R) Partnerships' Properties will likely result in higher values over the
long term for more Unitholders than if the real estate were sold and the CPA(R)
Partnerships were liquidated in accordance with the Partnership Agreements.
Participating Investors holding Listed Shares will be able to sell their Listed
Shares on the NYSE if they want to liquidate their interest or may borrow funds
using the Listed Shares as collateral.
At the same time, the General Partners recognize that some Unitholders may
wish to retain a security that reflects the rights and interests represented by
the Units. The Company is offering the Subsidiary Partnership Units to those
Unitholders who wish to retain a security that provides substantially the same
economic interests and legal rights as a Unit. Subsidiary Partnership Units will
entitle holders to share in the economic performance of the assets held by the
CPA(R) Partnership in which such holder held an interest. The Subsidiary
Partnership Units will also entitle holders to vote on certain matters relating
to those Subsidiary Partnerships and will entitle holders to have their
Subsidiary Partnership Units redeemed within the same time period that the
corresponding CPA(R) Partnerships were expected to liquidate (or within which
they could reasonably be liquidated as of the date hereof).
If the Consolidation is approved by the holders of a majority of the
outstanding Units in CPA(R) Partnerships owning assets with a Total Exchange
Value in excess of $200 million, and certain other conditions are satisfied, the
Consolidation will be completed. A CPA(R) Partnership will participate in the
Consolidation with the approval of Unitholders holding at least a majority of
the outstanding Units of such CPA(R) Partnership and the satisfaction of certain
other conditions. Each Unitholder may elect to receive all Listed Shares (which
represent an economic interest in all of the assets of the Company) or all
Subsidiary Partnership Units (which represent an interest in the particular
CPA(R) Subsidiary Partnership). See "DESCRIPTION OF SHARES AND SUBSIDIARY
PARTNERSHIP UNITS." If the Consolidation is consummated, the General Partners
and their Affiliates will contribute a portion of their General Partner interest
in exchange for Listed Shares and will retain the remainder of their General
Partner interests which
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will be converted into Limited Partner interests in the Subsidiary Partnerships.
See COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND
MANAGER.
If Unitholders of a CPA(R) Partnership do not approve the Consolidation,
the CPA(R) Partnership (a "Nonparticipating Partnership") will continue to
operate as a separate legal entity with its own assets and liabilities, and its
investment objectives, policies and restrictions will not change. As a result,
Unitholders will retain their current interest in the Nonparticipating
Partnership. A Nonparticipating Partnership will continue to be operated in
accordance with the terms of its Partnership Agreement. The management of the
Nonparticipating Partnerships will be substantially the same. See "BACKGROUND
AND REASONS FOR THE CONSOLIDATION -- Effect of Consolidation on Nonparticipating
Partnerships."
A vote in favor of the Consolidation also constitutes a vote in favor of
the related amendment of a Partnership Agreement (collectively, the "Partnership
Agreement Amendments"), the form of which is attached to this Prospectus as
Appendix C. The proposed Partnership Agreement Amendments expressly authorize
all actions necessary to successfully complete the Consolidation and the
distribution of the Listed Shares and Subsidiary Partnership Units to
Participating Investors. See "VOTING PROCEDURES -- Amendments to Partnership
Agreements."
ORGANIZATIONAL CHART
The following organizational chart illustrates the organizational structure
of the Company assuming the Consolidation is consummated.
[ORGANIZATIONAL CHART]
(1) Affiliates include CCP, Seventh Carey, Eighth Carey and Ninth Carey
(2) Carey Management LLC will own 661,718 Listed Shares and will be a Limited
Partner of each Subsidiary Partnership. See "COMPENSATION, REIMBURSEMENT AND
DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER" for the interest retained
by Carey Management LLC in each Subsidiary Partnership.
(3) Carey Diversified LLC will serve as the General Partner of all of the
Subsidiary Partnerships that participate in the Consolidation.
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RISKS AND OTHER ADVERSE FACTORS
The following is a summary of the potential disadvantages, adverse
consequences and risks of the Consolidation. This summary is qualified in its
entirety by the more detailed discussion in the section entitled "RISK FACTORS"
contained in this Prospectus beginning on page 20.
Fundamental Change in the Nature of Investment for Holders of Listed
Shares. If the Consolidation is completed, there will be a change in the nature
of the investment of each Participating Investor that elects to receive Listed
Shares from holding an interest in a specified portfolio of net leased
commercial and industrial properties to holding an interest in an ongoing
company, the investment portfolio of which may be changed from time to time
without approval of Shareholders. If the Consolidation is completed, holders of
Listed Shares will be able to liquidate their investments only by selling their
Listed Shares on the NYSE or in private transactions, and they will not receive
a return of their investment in the form of liquidation proceeds through
property sales. If the Consolidation is completed, former Unitholders who elect
to receive Listed Shares will have an investment in an entity that is larger
than each of the CPA(R) Partnerships and will thus lose relative voting power.
Potential Differences Between Total Exchange Value and Realizable
Value. Unitholders are subject to the risk that the Total Exchange Value of the
CPA(R)Partnerships, which is based primarily on independent appraisals of each
CPA(R) Partnership's portfolio of Properties, does not reflect the realizable
value of the CPA(R) Partnerships' assets in an actual transaction. Were this to
be the case as to a CPA(R) Partnership, the consideration received by a
Unitholder of that CPA(R) Partnership may be understated or overstated.
Unitholders should recognize that appraisals are opinions as of the date
specified and are subject to certain assumptions and may not represent the true
worth or realizable value of the Properties. There can be no assurance that
another appraiser would assign the same appraised values to the Properties, or,
that if the Properties were sold, they would actually be sold at appraised
values; the sale prices might be higher or lower than the appraised values.
Uncertainty Regarding Trading Price for the Listed Shares. Listed Shares
may trade at prices substantially below Total Exchange Value per Share or
historical book value of the Company's assets. The price of Listed Shares after
the Consolidation may decrease below the Total Exchange Value per Share of $20
due to the potentially large number of Listed Shares that may be sold
immediately after the Consolidation by Participating Investors.
Uncertainty as to Ultimate Composition of the Company. Due to uncertainty
at the time of voting as to which CPA(R) Partnerships will participate in the
Consolidation, Unitholders may not be able to fully evaluate the Company's
potential financial strength or asset base when making the decision to
participate in Consolidation.
Potential Change in the Nature and Amount of Leverage. All but one of the
CPA(R) Partnerships own properties subject to limited recourse debt. The Board
of Directors could authorize additional borrowing by the Company. The Company
could become more highly leveraged and, thereby, increase its debt service,
which may adversely affect the Company's ability to make distributions to
Shareholders. In addition, the Company may incur full recourse debt which
exposes all of the assets of the Company to repayment instead of the mostly
limited recourse debt incurred by the CPA(R) Partnerships, which debt generally
exposes specific properties for the repayment of debt.
Board of Directors' Ability Unilaterally to Effect Changes in Investment,
Financing and Certain Other Policies. Although the Board of Directors of the
Company intends to implement the business plan set forth herein, the Board will
have the ability to change investment, financing and other policies of the
Company without the consent of Shareholders. See "BUSINESS AND PROPERTIES." No
changes can be made which affect the fundamental rights, preferences and
privileges of the holders of Subsidiary Partnership Units. The Board of
Directors will also have the ability to change the Company's distribution policy
with respect to the Listed Shares without the consent of the holders of Listed
Shares.
No Market for the Subsidiary Partnership Units. Holders of Subsidiary
Partnership Units may not be able to sell their Subsidiary Partnership Units
because no organized market for the Subsidiary Partnership
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Units is expected to develop. If Subsidiary Partnership Units are sold, it is
likely that they will be sold at a substantial discount to the Total Exchange
Value per Subsidiary Partnership Unit.
Conflicts of Interest in Structuring the Consolidation. The General
Partners initiated and structured the Consolidation and will realize substantial
economic benefits, and, therefore, the General Partners are subject to conflicts
of interest with respect to the Consolidation. See "INTERESTS OF CERTAIN PERSONS
IN THE CONSOLIDATION AND CONFLICTS OF INTEREST -- Common General Partners."
Lack of Independent Representation of Unitholders. No independent party
was retained by the CPA(R) Partnerships to negotiate on behalf of the
Unitholders. Therefore, terms of the Consolidation may be less favorable to
Unitholders and more favorable to General Partners than if the Consolidation had
been subject to arm's-length negotiation. Had an independent party negotiated on
behalf of each CPA(R) Partnership, the terms of the Consolidation may have been
more favorable to certain or all CPA(R) Partnerships and fewer Listed Shares may
have been allocated to the General Partners.
Consolidation Expenses will Reduce the Cash of the Company. The
Consolidation Expenses are estimated to be approximately $2,997,000, or
approximately 0.6% of the Total Exchange Value (assuming 100 percent Partnership
Participation). Such expenses will reduce the cash available to the Company. See
"BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Fees and Expenses."
No Appraisal or Similar Rights for Nonconsenting Unitholders. Unitholders
will have no appraisal or similar rights in connection with the Consolidation.
Therefore, Unitholders will not be entitled to receive cash payment for the fair
value of their Units if they do not vote in favor of the Consolidation and the
Consolidation is approved and consummated.
Potential Reduction in Cash Distributions to Certain Investors. Aggregate
cash distributions to Participating Investors may be lower after the
Consolidation than the aggregate distributions to Unitholders before the
Consolidation.
Holders of Majority of Units Bind Partnership. Approval of the
Consolidation by Unitholders holding a majority of outstanding Units of a CPA(R)
Partnership will cause such CPA(R) Partnership to be merged with a Subsidiary
Partnership and such approval will bind all of that CPA(R) Partnership's
Unitholders, including Unitholders who vote against or abstain from voting with
respect to the Consolidation.
Additional and Unknown Liabilities. Combining assets and liabilities of
the Participating Partnerships in the Consolidation may subject holders of
Listed Shares to liabilities of Participating Partnerships in which they did not
previously own an interest. The Company also has potential liability for
unknown, undisclosed or contingent liabilities of Participating Partnerships,
including, but not limited to, claims for indemnification by General Partners,
environmental liabilities and title defects, which could adversely affect the
liquidity of the Company and its ability to make expected distributions to
holders of Listed Shares.
BENEFITS OF THE CONSOLIDATION AND LISTED SHARES
From 1979 through 1991, the CPA(R) Partnerships raised approximately $400
million through public offerings of Units, and each CPA(R) Partnership invested
in net leased industrial and commercial real estate. When the CPA(R)
Partnerships were formed, Unitholders anticipated a return of their investment
over the finite lives of the CPA(R) Partnerships, with a disposition strategy
that included the sale of assets and liquidation of the CPA(R) Partnerships. The
General Partners believe that the Consolidation is the best way for Limited
Partners to achieve the original investment goals for the following reasons:
- - LIQUIDITY THROUGH STOCK EXCHANGE LISTING.
The Company has applied for listing of the Listed Shares on the NYSE.
Accordingly, the Consolidation offers liquidity to those Limited Partners who
receive Listed Shares in the Consolidation. Holders of Listed Shares may also be
able to borrow by using the Listed Shares as collateral. The Subsidiary
Partnership Units will not be listed on any national securities exchange, and no
public market is expected to develop for the Subsidiary Partnership Units.
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- - INCREASED DIVERSIFICATION.
The Consolidation permits holders of Listed Shares to participate in a
company substantially larger and more diversified than any of the individual
CPA(R) Partnerships. The Company will have increased tenant, building type,
industry sector and geographic diversity. The size and diversity of the Company
spreads the risk of an investment in the Company over a broader group of assets
and reduces the dependence of the investment upon the performance of any
particular asset or group of assets.
- - GREATER CONTROL OF TIMING OF RECOGNITION OF TAXABLE INCOME.
As a perpetual life entity, the Company will be able to continue to manage
the Properties instead of being forced to sell them over the next several years.
Holders of Listed Shares will be able to control better the recognition of
taxable income by holding or selling the Listed Shares and recognizing taxable
income at the time of the sale of such Shares, instead of being forced to
recognize taxable income resulting from the sale of Properties by the CPA(R)
Partnerships as the CPA(R) Partnerships are liquidated. If the CPA(R)
Partnerships were to sell the Properties at their appraised value, the
Unitholders would recognize capital gains of approximately $336 million. In
addition, the sale of these Properties may result in the recognition of taxable
income in an amount in excess of the cash received by the CPA(R) Partnership
selling the Properties at the time Properties are sold. Holders of Listed Shares
will still recognize income if the Company sells these Properties for a gain,
but the Company expects to sell significantly fewer Properties than if the
CPA(R) Partnerships were being liquidated.
- - GREATER INVESTMENT OPPORTUNITY.
The General Partners believe that the Company will maximize economic value
for those Unitholders who receive Listed Shares in connection with the
Consolidation. Although there can be no assurances, the General Partners believe
that investment opportunities exist for investment in net leased real estate and
other assets which provide attractive investment yields relative to their risk.
- - UNITHOLDERS' CHOICE OF INVESTMENT -- LISTED SHARES OR SUBSIDIARY PARTNERSHIP
UNITS.
Those Unitholders who do not want the risks and opportunities afforded by
the Listed Shares can elect to receive Subsidiary Partnership Units in
connection with the Consolidation. The Subsidiary Partnership Units have been
structured so that their economic interests and legal rights are substantially
the same as the economic interests and legal rights of the Units. The
performance of, and distributions to the holders of, Subsidiary Partnership
Units will depend on the performance of the Properties of the corresponding
Subsidiary Partnerships.
OPTIONS AVAILABLE AND DUTIES OWED TO LIMITED PARTNERS WHO OBJECT TO THE
CONSOLIDATION
- - LIMITED PARTNERS MAY VOTE AGAINST THE CONSOLIDATION.
If the holders of a majority of the outstanding Units in the CPA(R)
Partnerships representing the Minimum Participation Amount do not approve the
Consolidation, the Consolidation will not be completed. Even if the
Consolidation is completed, a particular CPA(R) Partnership will not participate
in the Consolidation if the holders of at least a majority of the outstanding
Units in that CPA(R) Partnership do not approve the Consolidation. Rather, that
CPA(R) Partnership will continue to operate as a separate legal entity with its
own assets and liabilities, its investment objectives, policies and restrictions
will not change, and those Limited Partners will retain their interests
currently held.
- - LIMITED PARTNERS MAY ELECT TO RECEIVE SUBSIDIARY PARTNERSHIP UNITS.
The economic interests and legal rights of holders of Subsidiary
Partnership Units are substantially the same as those of holders of Limited
Partner interests in a CPA(R) Partnership.
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- - LIMITED PARTNERS OWED A FIDUCIARY DUTY.
The common law of both Delaware and California imposes fiduciary duties of
care, loyalty, good faith and fair dealing on the General Partners in connection
with effecting or attempting to effect the Consolidation.
FAIRNESS
The General Partners believe the terms of the Consolidation are fair as a
whole and to the Unitholders in each of the CPA(R) Partnerships, regardless of
which combination of CPA(R) Partnerships is included in the Consolidation. The
General Partners have based their determination on a variety of factors,
including, but not limited to (i) the form, allocation and amount of
consideration offered to Unitholders, including Unitholders who vote against the
Consolidation ("Dissenting Investors") and to the General Partners, (ii) the
tax-free nature of the transaction, (iii) the lack of material differences among
the CPA(R) Partnerships, (iv) the opportunity for each Unitholder to vote in
favor of, or against, the Consolidation, and to elect to receive either Listed
Shares or Subsidiary Partnership Units that are valued based on the same
methodology, (v) the appraisals rendered by the Independent Appraiser with
respect to the value of the CPA(R) Partnerships and (vi) the Fairness Opinion
rendered by the Independent Appraiser. See "BACKGROUND AND REASONS FOR THE
CONSOLIDATION."
The General Partners reviewed the allocation and estimated value of the
consideration to be received by Unitholders in connection with the Consolidation
and compared this estimated consideration to the estimated consideration that
may have been received by Unitholders if any of the alternatives to the
Consolidation had been recommended by the General Partners. The General Partners
concluded that the likely market value of the Listed Shares of the Company,
based upon the trading range of real estate securities, would be higher in the
long run than the estimated value of the consideration Unitholders would have
received if the General Partners had recommended any of the alternatives to the
Consolidation. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Comparison
of Alternative Considerations." Based upon this review and comparison, the
General Partners concluded that the Consolidation is fair and that the terms of
the Subsidiary Partnership Units are fair to Unitholders from a financial point
of view.
INDEPENDENT APPRAISALS AND FAIRNESS OPINION
Each CPA(R) Partnership has obtained from the Independent Appraiser an
appraisal of the fair market value of its real estate portfolio as of March 31,
1997 based solely on the income approach to valuation (the "Independent
Appraisal"). Due to the type of real estate assets held by the CPA(R)
Partnerships and the nature of lease terms, the General Partners concluded after
consultation with the Independent Appraiser that the use of the income approach
to valuation was the most appropriate way of assessing the value of the CPA(R)
Partnerships' real estate portfolios. The Independent Appraiser concluded that
use of the income approach was reasonable and appropriate. The same method was
used for each CPA(R) Partnership. In performing such appraisals, the Independent
Appraiser conducted such investigations and inquiries as it deemed necessary in
establishing the valuations and made such assumptions and identified such
qualifications and limitations as it deemed necessary in its findings. See
"APPRAISALS AND FAIRNESS OPINION -- Independent Appraisal."
The Independent Appraiser has rendered its opinion (the "Fairness
Opinion"), subject to the assumptions, limitations and qualifications contained
therein, that the allocation of Listed Shares among the CPA(R) Partnerships is
fair to the Unitholders from a financial point of view. The Independent
Appraiser, in arriving at its opinion, performed the Independent Appraisal of
each CPA(R) Partnership's portfolio of properties reviewed, among other things,
a draft of this Prospectus in substantially the form filed with the SEC and
provided to Unitholders, financial and other information regarding the CPA(R)
Partnerships provided to it by the General Partners and conducted such other
inquiries as it deemed appropriate and discussed the allocation methodology,
analysis and conclusions with the General Partners.
The Fairness Opinion does not address (i) the fairness of any terms of the
Consolidation (other than the fairness of the allocations of the Listed Shares
for the maximum and minimum participation levels as defined herein) or the
amounts or allocations of Consolidation Expenses or the amounts of Consolidation
Expenses
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borne by Limited Partners at various levels of participation in the
Consolidation, (ii) the relative value of the Listed Shares and the Subsidiary
Partnership Units to be issued in the Consolidation, (iii) the prices at which
the Listed Shares or Subsidiary Partnership Units may trade following the
Consolidation or the trading value of the Listed Shares or Subsidiary
Partnership Units to be received compared with the current fair market value of
the CPA(R) Partnership's portfolio or other assets if liquidated in real estate
markets or (iv) alternatives to the Consolidation.
The Fairness Opinion and the Independent Appraisal, each of which contains
a description of the assumptions and qualifications made, matters considered and
limitations on the review and analysis, are set forth as Appendices A and B,
respectively, and should be read in their entirety.
THE CONSENT SOLICITATION
The Consent Solicitation... Consent Cards must be received by December 16, 1997
(unless extended by the General Partners) to be
counted in the vote on the Consolidation.
Voting..................... Each Unit entitles the holder thereof on the record
date to one vote. Only Unitholders on the record
date are entitled to vote on the Consolidation.
October 7, 1997 is the record date for
determination of Unitholders entitled to vote on
the Consolidation.
Units Outstanding.......... On the record date, the following number of Units
were outstanding for each CPA(R) Partnership:
UNITS
CPA(R): OUTSTANDING
------------------------------------- -----------
1................................... 40,000
2................................... 54,900
3................................... 66,000
4................................... 85,528
5................................... 113,200
6................................... 47,930
7................................... 45,209
8................................... 67,582
9................................... 59,918
Vote Required.............. Participation in the Consolidation by a CPA(R)
Partnership will require the approval of the
holders of a majority of the outstanding Units of
that CPA(R) Partnership.
Each Unitholder votes FOR or AGAINST or ABSTAIN on
the Consolidation and may elect to receive all
Listed Shares or all Subsidiary Partnership Units.
If a Unitholder fails to return a Consent Card or
returns a Consent Card and fails to elect to
receive Listed Shares or Subsidiary Partnership
Units in connection with the Consolidation and the
Consolidation is consummated, such Unitholder will
receive all Listed Shares. Failure to submit a
written Consent Card is the functional equivalent
of a vote AGAINST the Consolidation for purposes of
tallying the vote. Abstentions and broker non-votes
(if any) will not count toward the number of
consents required for approval and have the effect
of a vote AGAINST the Consolidation for purposes of
tallying the vote.
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THE COMPANY
General
The Company was formed as a Delaware limited liability company under the
laws of the State of Delaware on October 15, 1996 for the initial purpose of
participating in the Consolidation. The current Shareholders of the Company are
Carey Management LLC (the "Manager") and Carey Property Advisors LP (the
"Initial Member"). The Company is expected to be treated as a partnership for
tax purposes. See "INCOME TAX CONSEQUENCES -- Classification as 'Partnerships'."
The Company currently has no significant assets or liabilities. The Company's
principal executive offices are located at 50 Rockefeller Plaza, New York, New
York 10020.
Business Plan of the Company
The Company's objective is to increase shareholder value and its Funds from
Operations through prudent management of its real estate assets and
opportunistic investments. The Company intends to capitalize on its status as a
publicly-traded real estate investment company to take immediate advantage of
the significant opportunities to make net lease and other real estate
investments at attractive returns. The Company expects to evaluate a number of
different opportunities and to pursue the most attractive based upon its
analysis of the risk/return tradeoffs.
The Company's business plan is a significant expansion of the business
plans of the CPA(R) Partnerships. The Company intends to be a dynamic,
growth-oriented organization rather than a closed-end portfolio of real estate
investments. In addition to acquiring additional net leased properties, the
Company intends to seek additional opportunistic investments utilizing the core
competencies of Company's management (which include in-depth credit analysis,
asset valuation and creative structuring), optimizing the Company's existing
portfolio through the expansion of existing properties and strategic property
sales and increasing the Company's access to capital at a lower cost. As a
perpetual life, growth-oriented company, the Company will continue to own
Properties as long as it believes ownership helps attain the Company's
objectives. The Board of Directors of the Company will have the ability to
change investment, financing, distribution and other policies of the Company
without the consent of the Shareholders. See "BUSINESS AND PROPERTIES."
Management of the Company
The Manager will provide both strategic and day-to-day management for the
Company, including research, investment analysis, acquisition and development
services, asset management, capital funding services, disposition of assets and
administrative services. The Manager has dedicated senior executives in each
area of its organization so that the Company will function as a fully integrated
operating company.
The Board of Directors will monitor the performance of the Manager.
Initially the Board will consist of ten members, including five directors who
are not employees of the Company or the Manager. Initially, the Directors will
be appointed by the Manager and thereafter will be elected by holders of Listed
Shares.
For the background of the individuals responsible for the management of the
Company and a more detailed description of the responsibilities of the Manager,
please see the "MANAGEMENT FOLLOWING THE CONSOLIDATION" section of this
Prospectus. For more information on fees payable to the Manager or its
Affiliates, please see the "COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE
GENERAL PARTNERS AND MANAGER" section of this Prospectus.
RECOMMENDATION OF THE GENERAL PARTNERS
The General Partners, including all of the Directors of the corporate
General Partners, have unanimously approved the Consolidation and believe the
Consolidation is fair as to each CPA(R) Partnership and any combination of
CPA(R) Partnerships. THE GENERAL PARTNERS STRONGLY RECOMMEND THAT THE
UNITHOLDERS IN EACH CPA(R) PARTNERSHIP VOTE FOR THE CONSOLIDATION AND ELECT TO
RECEIVE LISTED SHARES. See "BACKGROUND AND REASONS FOR THE
CONSOLIDATION -- Recommendations of the General Partners and Fairness
Determination."
10
22
The General Partners believe the Consolidation has the greatest potential
to maximize investment returns, while offering significantly enhanced liquidity.
This belief is based, in part, upon a comparison of the after-tax consideration
to be received in the Consolidation to the after-tax consideration which may
have been received if any of the alternatives to the Consolidation had been
approved. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Recommendations
of the General Partner and Fairness Opinion" and "-- Alternatives to the
Consolidation."
ALTERNATIVES TO THE CONSOLIDATION
The General Partners are proposing the Consolidation because they believe
that it is the best available alternative to maximize Unitholder value over the
long-term. The alternatives to the Consolidation which were considered by the
General Partners include continuing the existence of each CPA(R) Partnership as
a limited partnership, listing of the Units on a national securities exchange or
the Nasdaq National Market System and liquidating each CPA(R) Partnership. The
General Partners do not believe that any of these alternatives would be more
beneficial to the Unitholders than the Consolidation. See "BACKGROUND AND
REASONS FOR THE CONSOLIDATION -- Alternatives to the Consolidation."
CONSEQUENCES IF THE CONSOLIDATION IS NOT APPROVED
If the Consolidation is not consummated for any reason with respect to a
particular CPA(R) Partnership, the General Partners presently intend to continue
to operate such CPA(R) Partnership in its current form and the limited partners
will retain their Units. In managing the business of the CPA(R) Partnership, the
General Partners will take whatever actions they deem are appropriate in
satisfying their fiduciary obligations to the Limited Partners and the CPA(R)
Partnership. The General Partners will consider various options relating to the
termination of the CPA(R) Partnership. No other transaction is currently being
considered by the CPA(R) Partnerships as an alternative to the Consolidation,
although the CPA(R) Partnerships may from time to time explore other
alternatives. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Consequences
if the Consolidation is Not Approved."
11
23
TABLES REGARDING TOTAL EXCHANGE VALUE
Total Exchange Value Allocated to Unitholders. The following table sets
forth the allocation of Listed Shares among the CPA(R) Partnerships in
connection with the Consolidation. This table also sets forth the Total Exchange
Value and number of Listed Shares allocated to Unitholders per $1,000 originally
invested.
TOTAL EXCHANGE VALUES ALLOCATED
TO UNITHOLDERS(1)
PER $1,000
ORIGINAL INVESTMENT
TOTAL --------------------
EXCHANGE VALUE TOTAL NUMBER PERCENT OF TOTAL NUMBER OF
ALLOCATED TO OF LISTED TOTAL EXCHANGE LISTED
UNITHOLDERS(2) SHARES(3) LISTED SHARES VALUE(4) SHARES(5)
-------------- ------------ ------------- -------- ---------
CPA(R):1............................. $ 21,036,720 1,051,836 4.45% $1,052 52.59
CPA(R):2............................. 30,693,620 1,534,681 6.49% 1,118 55.91
CPA(R):3............................. 50,062,060 2,503,103 10.58% 1,517 75.85
CPA(R):4............................. 56,388,180 2,819,409 11.92% 1,319 65.93
CPA(R):5............................. 41,586,398 2,079,320 8.79% 735 36.74
CPA(R):6............................. 66,168,400 3,308,420 13.99% 1,381 69.03
CPA(R):7............................. 50,079,940 2,503,997 10.58% 1,108 55.39
CPA(R):8............................. 94,010,240 4,700,512 19.87% 1,391 69.55
CPA(R):9............................. 63,072,402 3,153,620 13.33% 1,053 52.63
------------ ---------- ------
TOTAL................................ $ 473,097,960 23,654,898 100.00%
============ ========== ======
- ---------------
(1) This table presents the Total Exchange Value allocated to the Unitholders
and assumes 100 percent Partnership Participation in the Consolidation and
that no Subsidiary Partnership Units are issued.
(2) See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Determination of Total
Exchange Value" for a determination of the Total Exchange Value for the
Unitholders and the General Partners.
(3) The total number of Listed Shares was calculated by dividing the Total
Exchange Value Allocated to Unitholders by $20, an arbitrary figure.
(4) A capital contribution of $500 was required for each Unit in CPA(R):5. The
capital contribution for each Unit of the remaining CPA(R) Partnerships was
$1,000. This column was calculated based on an original investment of $1,000
to facilitate a comparison among the CPA(R) Partnerships.
(5) The number of Listed Shares to be issued per $1,000 original investment was
calculated by dividing the Total Exchange Value allocated to Unitholders per
$1,000 original investment by $20. No fractional Listed Shares will be
issued in connection with the Consolidation. See "BACKGROUND AND REASONS FOR
THE CONSOLIDATION -- No Fractional Shares."
Historical Cash Distributions and Total Exchange Value Allocated to
Unitholders. The following table sets forth selected information per $1,000
original investment in a CPA(R) Partnership. The Total Exchange Value of the
CPA(R) Partnerships as of June 30, 1997 is based on the appraised market value
of their properties, net of adjustments for Net Other Assets and Liabilities,
mortgage debt and certain other adjustments and does not necessarily reflect the
aggregate price at which Listed Shares or Subsidiary Partnership Units may be
sold. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Total Exchange Value
and Allocation of Listed Shares and Subsidiary Partnership Units."
12
24
HISTORICAL CASH DISTRIBUTIONS AND
TOTAL EXCHANGE VALUE ALLOCATED TO UNITHOLDERS
PER $1,000 ORIGINAL INVESTMENT
TOTAL OF CUMULATIVE
TOTAL DISTRIBUTIONS AND PERCENT OF
CUMULATIVE DISTRIBUTIONS EXCHANGE VALUE(2) ASSIGNED ORIGINAL
PARTNERSHIP TO UNITHOLDERS(1) ALLOCATED TO UNITHOLDERS EXCHANGE VALUE INVESTMENT
- ---------------------------- ------------------------ ------------------------ ------------------- ----------
CPA(R):1.................... $1,208 $1,052 $ 2,260 226%
CPA(R):2.................... 2,456 1,118 3,574 357%
CPA(R):3.................... 2,423 1,517 3,940 394%
CPA(R):4.................... 1,630 1,319 2,949 295%
CPA(R):5.................... 1,292 735 2,027 203%
CPA(R):6.................... 1,110 1,381 2,491 249%
CPA(R):7.................... 954 1,108 2,062 206%
CPA(R):8.................... 778 1,391 2,169 217%
CPA(R):9.................... 688 1,053 1,741 174%
- ---------------
(1) Represents cash distributions from operations and return of capital from
inception through October 1997.
(2) The assigned Total Exchange Value is based on the appraised value of the
Properties, net of certain adjustments, and does not necessarily reflect the
aggregate price at which Listed Shares or Subsidiary Partnership Units may
be sold.
Distribution Comparison. The following table sets forth the distributions
currently paid by the CPA(R) Partnerships per $1,000 original investment in a
CPA(R) Partnership and the distributions expected to be paid by the Company if
distributions are paid at an annual rate of $1.65 per Listed Share.
DISTRIBUTIONS FROM DIVIDENDS FROM LISTED SHARES
CPA(R) PARTNERSHIP ISSUED IN THE CONSOLIDATION
PARTNERSHIP PER $1,000 INVESTMENT(1) PER $1,000 INVESTMENT(2)
------------------------------- ------------------------ ----------------------------
CPA(R):1....................... $70.56 $ 86.78
CPA(R):2....................... 51.12 92.25
CPA(R):3....................... 99.36 125.15
CPA(R):4....................... 98.40 108.78
CPA(R):5....................... 66.72 60.62
CPA(R):6....................... 97.16 113.89
CPA(R):7....................... 73.28 91.39
CPA(R):8....................... 88.16 114.76
CPA(R):9....................... 84.96 86.84
- ---------------
(1) Annualized rate based on distributions paid in October 1997.
(2) Assuming an annual distribution rate of $1.65 per Listed Share.
NO DISSENTERS' RIGHTS
If a Unitholder in a Participating Partnership votes AGAINST the
Consolidation, he will not be entitled to dissenters' or appraisal rights under
the Partnership Agreements or Delaware or California Partnership Law, nor will
such rights be provided by the CPA(R) Partnerships or the Company. See "VOTING
PROCEDURES -- No Right of Appraisal."
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25
COMPARISON OF THE CPA(R) PARTNERSHIPS AND THE COMPANY
The summary information below highlights a number of significant
differences between the CPA(R) Partnerships and the Company. See "COMPARISONS OF
CPA(R) PARTNERSHIPS AND COMPANY."
Form of Organization. The CPA(R) Partnerships and the Company are each
vehicles appropriate for holding real estate investments and afford passive
investors, such as Unitholders and Shareholders, certain benefits, including
limited liability, a professionally managed portfolio and the avoidance of
double-level taxation. The CPA(R) Partnerships are under the control of their
General Partners, while the Company is under the control of the Directors.
Length of Investment. Unitholders in each of the CPA(R) Partnerships
expect liquidation of their investments when the assets of the CPA(R)
Partnership are liquidated. In contrast, the Company does not expect to dispose
of its assets within any prescribed period and, in any event, plans to retain
the net sales proceeds for future investments. Holders of Listed Shares are
expected to achieve liquidity for their investments by trading Listed Shares in
the public market and not through the liquidation of the Company's assets.
Properties and Diversification. The real estate portfolio of each CPA(R)
Partnership was limited to the assets raised in its initial equity offering and
debt financing. The Company will be larger, have a more diversified portfolio
than any of the CPA(R) Partnerships and has the potential for future growth. An
investment in the Company should not be viewed as an investment in a specific
pool of assets, but instead as an investment in an ongoing Company, subject to
the risks normally related to its business.
Additional Equity. As the CPA(R) Partnerships are not authorized to issue
additional Units or other equity interests, the Units generally are not subject
to dilution. In contrast, the Company has substantial flexibility to raise
equity capital to finance its business through the sale of equity securities,
market conditions permitting. The Company, through the issuance of new equity
securities, may substantially expand its capital base to make new investments.
The issuance of additional equity securities by the Company may dilute the
interests of holders of Listed Shares. The Company may issue limited liability
company interests with priorities or preferences over Listed Shares with respect
to dividends and liquidation proceeds ("Preferred Shares").
Borrowing Policies. In conducting its business, the Company, like the
CPA(R) Partnerships, may borrow funds. Borrowing funds may allow the Company to
substantially expand its asset base, but may also increase the Company's risk
from leveraged investments. The Partnership Agreements include limitations on
borrowing, while the Company's Organization Documents include no such
limitations.
Restrictions on Related Party Transactions. Except for transactions
specifically approved in the Partnership Agreements (and which were disclosed in
the disclosure documents prepared for the offering and sale of the Units), the
CPA(R) Partnerships are not authorized to enter into transactions with the
General Partners or their Affiliates unless the transactions are approved in
advance by a vote of the Unitholders. The Limited Liability Company agreement of
the Company (the "Operating Agreement") contains similar restrictions, but the
Company may enter into a transaction with its Directors, officers and
significant Shareholders if the transaction is approved by a majority of the
Directors not interested in the matter following a determination that the
transaction is fair, competitive and commercially reasonable. Transactions with
interested parties do not require the approval of Shareholders.
Compensation, Fees and Distributions. Under the Partnership Agreements and
certain management agreements, each of the CPA(R) Partnerships pays compensation
to its General Partner. After the Consolidation, the Manager will own Listed
Shares and receive fees for certain services. The General Partners will continue
to receive certain distributions after the Consolidation as limited partners of
the Subsidiary Partnerships and leasing fees which will be credited against fees
payable to the Manager. Additionally, if the Consolidation is completed, W.P.
Carey & Co. will receive compensation for investment banking services in the
form of warrants to purchase Listed Shares. If all the CPA(R) Partnerships
participate in the Consolidation, W.P. Carey & Co. will receive warrants to
purchase 2,284,800 Listed Shares at $21 per Share and 725,930
14
26
Listed Shares at $23 per Share. The warrants will generally be exercisable for
ten years beginning one year after the date the Consolidation is completed.
Management Control and Responsibilities. Holders of Listed Shares have
greater control over management of the Company than the Unitholders have over
the CPA(R) Partnerships because the members of the Company's Board of Directors
are elected for three-year terms, with a portion of the Board of Directors
elected at each annual meeting of holders of Listed Shares. The General Partners
do not need to seek re-election, but instead serve unless removed by an
affirmative vote of Unitholders owning a majority of the Units entitled to vote,
which is generally an extraordinary event. As passive investors, Unitholders and
holders of Listed Shares must rely upon management of the CPA(R) Partnerships
and Company, respectively, for the prudent administration of their investments.
Management Liability and Indemnification. The General Partner of each of
the CPA(R) Partnerships has, under most circumstances, no liability to its
CPA(R) Partnership for acts or omissions it undertakes when performed in good
faith, in a manner reasonably believed to be within the scope of its authority
and in the best interests of the CPA(R) Partnership. Each General Partner also
has, under specified circumstances, a right to be reimbursed by its CPA(R)
Partnership for liability, loss, damage, costs and expenses it incurs by virtue
of serving as General Partner. Although the standards are expressed somewhat
differently, there are similar protections from liability available to the
Manager, Directors and officers for exculpation from liability and to seek
indemnification from the Company. In the Consolidation, the Company will be
assuming all of the existing and contingent liabilities of the Participating
Partnerships, including their obligations to indemnify the General Partners.
Voting Rights. Holders of Listed Shares have the right to elect Directors
and vote on other matters on a periodic basis, while Unitholders may vote only
on matters related to their CPA(R) Partnership.
Liquidity. The Units constitute illiquid investments and Unitholders may
find it difficult to dispose of their Units, if they wish to do so, or may be
forced to sell the Units at substantial discounts to facilitate the sale. The
Subsidiary Partnership Units are expected to have similar liquidity
characteristics to the Units, while the Listed Shares are expected to be listed
on the NYSE and freely tradable.
Taxation of Taxable Investors. The CPA(R) Partnerships allow full
pass-through of tax benefits resulting in taxable income or loss at the partner
level only. Unitholders are taxed on their allocable share of partnership income
regardless of the amount of cash distributions. The Company is expected to be
treated as a partnership for tax purposes and will have similar tax
characteristics.
SUMMARY OF FEDERAL TAX CONSEQUENCES
Unitholders and the Company will not recognize any gain or loss in
connection with the Consolidation, subject to the assumptions and other matters
discussed in this Prospectus under "INCOME TAX CONSEQUENCES."
CONFLICTS OF INTEREST RELATED TO THE CONSOLIDATION
The following is a summary of the potential conflicts of interest relating
to the Consolidation. This summary is qualified in its entirety by the more
detailed discussion in the Section entitled "INTERESTS OF CERTAIN PERSONS IN THE
CONSOLIDATION AND CONFLICTS OF INTEREST" contained in this prospectus beginning
on page 82.
General. A number of conflicts of interest are inherent in the
relationships among the CPA(R)Partnerships, the General Partners and the
Unitholders. As a result, the General Partners engaged the Independent Appraiser
to render the Fairness Opinion and to independently determine the fair value of
the Properties. Certain conflicts of interest are summarized below.
General Partners. The General Partners have participated in the initiation
and structuring of the Consolidation and, in exchange for transferring certain
interests to the Company, will realize substantial
15
27
economic benefits if the Company is able to proceed with and consummate the
Consolidation as to some or all of the CPA(R) Partnerships.
A transaction involving the purchase, financing, lease and sale of any
Property by the Company may result in the immediate realization by the Manager
and its Affiliates of substantial commissions, fees, compensation and other
income. Potential conflicts may arise in connection with the determination by
the Manager (on behalf of the Company) whether to hold or to sell a Property, as
such determination could impact the timing and amount of fees payable to the
Manager.
Common General Partners. W.P. Carey & Co. serves as the corporate general
partner of CPA(R):1, CPA(R):2 and CPA(R):3; CCP serves as the corporate general
partner of CPA(R):4, CPA(R):5 and CPA(R):6; Seventh Carey serves as the
corporate general partner of CPA(R):7; Eighth Carey serves as the corporate
general partner of CPA(R):8; and Ninth Carey serves as the corporate general
partner of CPA(R):9. William P. Carey serves as a general partner of all of the
CPA(R) Partnerships. The Boards of Directors of W.P. Carey & Co., CCP, Seventh
Carey, Eighth Carey and Ninth Carey are comprised of the same persons, except
that Stephen H. Hamrick serves as a Director of only Seventh Carey, Eighth Carey
and Ninth Carey.
The General Partners of each CPA(R) Partnership have an independent
obligation to ensure that such CPA(R) Partnership's participation in the
Consolidation is fair and equitable. The General Partners have sought to
discharge faithfully this obligation to each of the CPA(R) Partnerships, but it
should be borne in mind that each of the General Partners or their Affiliates
serves in a similar capacity with respect to the other CPA(R) Partnerships.
Lack of Independent Representation. While the Independent Appraiser has
provided the Fairness Opinion, the CPA(R) Partnerships have not retained any
outside representatives to act on behalf of or represent the interests of the
Unitholders in negotiating the terms and conditions of the Consolidation.
Additionally, no group of Unitholders was empowered to negotiate the terms and
conditions of the Consolidation or to determine what procedures should be in
place to safeguard the rights and interests of the Unitholders.
Fiduciary Duties of General Partners. The General Partners have fiduciary
duties to the CPA(R) Partnerships and the Unitholders. Under these fiduciary
duties, the General Partners are obligated to ensure that the CPA(R)
Partnerships are treated fairly and equitably in transactions with third
parties, especially where consummation of such transactions may result in the
interests of General Partners being opposed to, or not totally consistent with,
the interests of the Limited Partners.
Allocation of Services. If the Consolidation is consummated, employees of
the Manager will provide services related to the operation of the Company, any
Nonparticipating Partnerships and the other entities described above. As a
result, possible conflicts of interest may arise regarding allocation of these
services between the Company, any Nonparticipating Partnerships and these other
entities.
Non-Arm's-Length Agreements. All agreements and arrangements, including
those relating to compensation, between the Company and the Manager or any of
its Affiliates will not be the result of arm's-length negotiations.
Competition with the Company from Affiliates of the Manager. W.P. Carey &
Co. and its Affiliates specialize in providing lease financing services to major
corporations and, therefore, may be in competition with the Company with respect
to properties, potential purchasers, sellers and lessees of properties and
mortgage financing for the Properties. W.P. Carey & Co., its subsidiaries and
Affiliates and William P. Carey currently manage or advise public and private
real estate investment entities, including the CPA(R) Partnerships and CPA(R)
REITs, whose investment and rate of return objectives are similar to those of
the Company. In addition, they expect to manage or advise, directly or through
Affiliates, additional REITs, public and private investment partnerships and
other investment entities.
Investment Banking Fees Paid to W.P. Carey & Co. in the form of
Warrants. If the Consolidation is completed, W.P. Carey & Co. will receive
compensation for investment banking services in the form of warrants to purchase
Listed Shares. If all the CPA Partnerships participate in the Consolidation,
W.P. Carey & Co. will receive warrants to purchase 2,284,800 Listed Shares at
$21 per Share and 725,930 Listed Shares
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at $23 per Share. The warrants generally will be exercisable for 10 years
beginning one year after the date the Consolidation is completed. See
"COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND
MANAGER -- Investment Banking Fee."
CONDITIONS TO THE CONSOLIDATION
The principal conditions to the Consolidation are: (i) approval of the
Consolidation by CPA(R) Partnerships representing the Minimum Participation
Amount and (ii) approval of the Listed Shares for listing on the NYSE (which
requires that certain minimum share distribution requirements be met, including
(A) 1.1 million Listed Shares and (B) 2,000 public holders thereof, each holding
at least 100 Shares). No federal or state regulatory requirements must be
complied with or approval must be obtained in connection with the Consolidation.
The General Partners may decide not to pursue the Consolidation at any time
before it becomes effective, whether before or after approval by the
Unitholders.
DELIVERY OF THE CERTIFICATES FOR UNITS
Promptly after the effective time of the Consolidation, the Company will
cause to be mailed to all Unitholders in CPA(R) Partnerships participating in
the Consolidation certificates representing the Listed Shares. UNITHOLDERS
SHOULD NOT SEND ANY CERTIFICATES WITH THE ENCLOSED CONSENT CARD AND ELECTION
FORM.
VOTING PROCEDURES
This Consent Solicitation Statement contains detailed procedures to be
followed by Unitholders in voting on the Consolidation. These procedures must be
strictly followed in order for the vote of the Unitholders to be effective. The
following is a summary of certain of these procedures:
A Unitholder may make his or her election on the Consent Card only during
the Solicitation Period commencing upon the date of delivery of this Consent
Solicitation Statement and continuing until the later of (i) December 16, 1997
or (ii) such later date as may be selected by the General Partners.
A Unitholder must return a properly completed and executed Consent Card to
ChaseMellon Shareholder Services ("ChaseMellon") (which has been engaged to
tabulate the votes of the Unitholders) on or prior to the expiration of the
Solicitation Period. Certain CPA(R) Partnerships may, at their option, solicit
votes by telephone.
A Consent Card delivered by a Unitholder may be withdrawn or changed prior
to the expiration of the Solicitation Period by delivering to ChaseMellon a
substitute Consent Card, properly completed and executed, together with a
writing signed by the Unitholder indicating that such Unitholder's prior consent
has been revoked.
A Unitholder submitting a signed but unmarked Consent Card will be deemed
to have voted FOR a CPA(R) Partnership's participation in the Consolidation.
A Unitholder submitting an unsigned Consent Card, whether marked or
unmarked, will be deemed to have voted ABSTAIN.
Approval of the Consolidation requires the affirmative vote of a majority
in interest of the Unitholders in each CPA(R) Partnership. Consent Cards marked
ABSTAIN and Consent Cards that are not submitted (including broker non-votes)
will be deemed to have voted AGAINST their CPA(R) Partnership's participation in
the Consolidation.
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SUMMARY SELECTED COMBINED FINANCIAL INFORMATION
The following table sets forth summary selected combined operating and
balance sheet information on a consolidated pro forma basis for the Company and
on a combined historical basis, assuming 100 percent participation and Minimum
Participation for the CPA(R) Partnerships. The following information should be
read in conjunction with the financial statements and notes thereto for the
Company and the CPA(R) Partnerships included elsewhere in this Consent
Solicitation Statement. The combined historical operating and balance sheet
information of the CPA(R) Partnerships as of December 31, 1995 and 1996 and for
the years ended December 31, 1994, 1995 and 1996 has been derived from the
historical Combined Financial Statements audited by Coopers & Lybrand L.L.P.,
independent accountants, whose report with respect thereto is included elsewhere
in this Consent Solicitation Statement. The combined historical operating
information for the six months ended June 30, 1996 and 1997 and the years ended
December 31, 1992 and 1993 and the historical balance sheet information as of
June 30, 1997 and December 31, 1992, 1993 and 1994 have been derived from the
unaudited combined financial statements of the CPA(R) Partnerships. In the
opinion of management, the combined historical operating information for the six
months ended June 30, 1996 and 1997 and the historical balance sheet information
as of June 30, 1997 include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein.
The unaudited pro forma consolidated operating and balance sheet
information is presented as if the Consolidation and the related issuance of
Listed Shares occurred on June 30, 1997 for the consolidated balance sheet and
January 1, 1996 for the consolidated statements of income. The pro forma
financial information is not necessarily indicative of what the actual financial
position and results of operations of the Company would have been as of and for
the periods indicated, nor does it purport to represent the Company's future
financial position and results of operations.
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30
CPA(R) PARTNERSHIPS
SELECTED COMBINED FINANCIAL INFORMATION
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1996 (PRO FORMA(2))
------------------------
100% PARTICIPATION(3)
------------------------
NO 5%
HISTORICAL(1) SUBSIDIARY SUBSIDIARY
------------------------------------------------- PARTNERSHIP PARTNERSHIP
1992 1993 1994 1995 1996 UNITS(5) UNITS(6)
-------- -------- -------- --------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Revenues.................................... $102,936 $109,027 $109,137 $ 107,946 $102,731 $ 102,731 $ 102,731
Income before extraordinary items,
attributable to Listed Shares(7)........... 32,245 33,790 38,456 49,363 45,547 44,220 41,933
Pro forma income before extraordinary items
per Listed Share(8)........................ 1.81 1.80
Distributions............................... $ 41,363 $ 50,638 $ 35,589 $ 57,216 $ 34,173
OTHER DATA:
Cash provided by operating activities....... 43,706 45,673 45,131 63,276 50,983
Cash provided by (used in) investing
activities................................. 6,098 21,051 37,136 24,327 19,545
Cash used in financing activities........... (46,444) (66,071) (70,045) (105,578) (69,686)
BALANCE SHEET DATA:
Real estate, net(9)......................... $342,641 $345,199 $330,671 $ 301,505 $271,660
Investment in direct financing leases....... 302,181 260,663 244,746 218,922 215,310
Total assets................................ 706,767 679,284 659,047 582,324 544,728
Mortgages and notes payable................. 373,549 358,768 325,886 274,737 227,548
AS OF AND FOR THE
YEAR ENDED DECEMBER 31, AS OF AND FOR THE SIX MONTHS ENDED JUNE 30,
----------------------- --------------------------------------------------------
1997 (PRO FORMA(2))
-------------------------------------
MINIMUM
MINIMUM PARTICIPATION(4) 100% PARTICIPATION(3) PARTICIPATION(4)
-------------------------- --------------------- ----------------
NO NO 5% NO
SUBSIDIARY 5% SUBSIDIARY HISTORICAL SUBSIDIARY SUBSIDIARY SUBSIDIARY
PARTNERSHIP PARTNERSHIP ------------------ PARTNERSHIP PARTNERSHIP PARTNERSHIP
UNITS(5) UNITS(6) 1996 1997 UNITS(5) UNITS(6) UNITS(5)
----------- ------------- -------- -------- ----------- ----------- -----------
OPERATING DATA:
Revenues.................................... $40,717 $40,717 $ 51,446 $ 50,985 $ 50,985 $ 50,985 $ 21,083
Income before extraordinary items,
attributable to Listed Shares(7)........... 18,858 17,927 22,545 21,022 20,327 19,271 8,876
Pro forma income before extraordinary items
per Listed Share(8)........................ 1.85 1.84 .83 .82 .86
Distributions............................... $ 17,666 $ 17,336
OTHER DATA:
Cash provided by operating activities....... 23,360 25,406
Cash provided by (used in) investing
activities................................. 15,309 (1,354)
Cash used in financing activities........... (32,660) (25,526)
BALANCE SHEET DATA:
Real estate, net(9)......................... $249,030 $ 377,707 $ 377,707 $ 118,657
Investment in direct financing leases....... 216,403 268,142 268,142 117,843
Total assets................................ 540,508 752,046 752,046 273,333
Mortgages and notes payable................. 219,356 219,356 219,356 55,401
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------
1997
PRO FORMA(2)
------------
MINIMUM
PARTICIPATION(4)
----------------
5%
SUBSIDIARY
PARTNERSHIP
UNITS(6)
-----------
OPERATING DATA:
Revenues.................................... $ 21,083
Income before extraordinary items,
attributable to Listed Shares(7)........... 8,439
Pro forma income before extraordinary items
per Listed Share(8)........................ .86
Distributions...............................
OTHER DATA:
Cash provided by operating activities.......
Cash provided by (used in) investing
activities.................................
BALANCE SHEET DATA:
Real estate, net(9)......................... $ 118,657
Investment in direct financing leases....... 117,843
Total assets................................ 273,333
Mortgages and notes payable................. 55,401
- ---------------
Notes:
(1) See the Combined Financial Statements of the CPA(R) Partnerships included
elsewhere herein.
(2) See pro forma Condensed Consolidated Financial Statements of the Company
included elsewhere herein.
(3) Reflects pro forma results if all the CPA(R) Partnerships participate in the
Consolidation.
(4) Reflects pro forma results if only CPA(R): 1, CPA(R): 2, CPA(R): 3, CPA(R):
5 and CPA(R): 7 participate in the Consolidation. This combination of CPA(R)
Partnerships has the lowest combined Total Exchange Value in excess of the
$200 million and lowest cash flow necessary for the Consolidation to be
completed.
(5) Reflects pro forma results if the Company issues only Listed Shares and no
Subsidiary Partnership Units.
(6) Reflects pro forma results if the Company issues 95 percent Listed Shares
and five percent Subsidiary Partnership Units.
(7) See Note 13 to the Combined Financial Statements of the CPA(R) Partnerships
included elsewhere herein.
(8) Computed based on a weighted average number of shares outstanding of:
24,484,170 Listed Shares assuming 100 percent participation without the
issuance of Subsidiary Partnership Units; 23,301,425 Listed Shares assuming
100 percent participation with the issuance of Subsidiary Partnership Units;
10,210,682 Listed Shares assuming minimum participation without the issuance
of Subsidiary Partnership Units; 9,727,035 Listed Shares assuming minimum
participation with the issuance of Subsidiary Partnership Units by the
Company as if the Consolidation transaction had been consummated as of
January 1, 1996.
(9) Real estate includes assets leased under operating leases and operating real
estate.
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31
RISK FACTORS
The Consolidation involves certain risks. Listed below are the material
risks associated with the Consolidation and operation of the Company.
Unitholders should read this entire Prospectus, including all appendices and
supplements hereto, and consider carefully the following factors in evaluating
the Consolidation, the Company and its business before completing the
accompanying Consent Card and Election Form. The risks described below are
materially the same for the Unitholders of each of the CPA(R) Partnerships.
Except for the historical information contained in this Prospectus, matters
discussed herein may constitute "forward-looking statements" (within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act). Such
forward-looking information reflects the Company's current best estimates
regarding its future operations. The Company's actual results could differ
materially from those estimated in the forward-looking statements as a result of
several factors, including those discussed below and elsewhere in this
Prospectus. A variety of factors may materially impact estimates of future
operations. Many of such factors are outside the Company's control and cannot be
accurately predicted. Important factors include, but are not limited to, general
economic conditions, interest rate levels, financial market performance,
financial performance of tenants, competition impacting availability and price
of investments and changes in tax and other legislation.
Change in Nature of Investment from Finite-Life to Perpetual
Existence. The CPA(R) Partnerships have a finite life. Upon liquidation of a
CPA(R) Partnership, the Unitholders of the CPA(R) Partnership would realize the
market value of the CPA(R) Partnership's investments, less expenses of
liquidation and liquidation fees, if any, payable to the General Partners. By
contrast, the Company has no specific intention to liquidate or to sell its
assets at a given point in time, and it plans to continue operations
indefinitely. Therefore, holders of Listed Shares will have to rely on their
being able to sell their Listed Shares in order to realize the value of their
investment instead of waiting for the Company to be liquidated. The market value
of the Listed Shares may or may not reflect the full fair market value of the
Company's assets, and, consequently, Shareholders may or may not realize the
full fair market value of such assets by selling their Listed Shares at prices
obtained on the NYSE or in a private transaction.
Uncertainty Regarding Trading Price for the Listed Shares. There has been
no prior market for the Listed Shares, and it is possible that the Listed Shares
will trade at prices substantially below the Total Exchange Value per Listed
Shares or the historical book value of the assets of the Company. The Listed
Shares have been approved for listing on the NYSE, subject to official notice of
issuance. The market price of the Listed Shares may be subject to significant
volatility after the Consolidation and could substantially decrease as a result
of increased selling activity following issuance of the Listed Shares, the
interest level of investors in purchasing the Listed Shares after the
Consolidation, the amount of distributions to be paid by the Company and the
acceptance by the securities markets of a limited liability company as an
investment vehicle.
Risk Associated with Greater Diversity and Growth. The real estate
portfolio of each CPA(R) Partnership is limited to the assets acquired with its
initial equity offering and debt financing. By contrast, the holders of the
Listed Shares will be investors in an entity which has a more diverse investment
strategy with greater opportunity for growth than do the CPA(R) Partnerships.
This opportunity for diversity and growth is accompanied by greater risks than
those posed by an investment in the CPA(R) Partnerships, such as:
- While the Company will initially emphasize equity real estate investments
in properties, it may, in its discretion, invest in: (i) mortgages
(including first mortgages and junior mortgages, regardless of whether
such mortgages are insured by a governmental agency), (ii) securities of
entities engaged in real estate activities, (iii) securities of other
issuers, including investments in securities for the purpose of
exercising control and (iv) other assets. See "POLICIES WITH RESPECT TO
CERTAIN ACTIVITIES -- Investment Policies."
- Consistent with its investment policies, the Company intends to incur
debt to acquire additional properties when such transactions can be
entered into on favorable terms. While borrowing funds may allow the
Company to expand its asset base, it may also increase the Company's risk
from leverage. See "RISK FACTORS -- Risk of Leverage."
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32
Conflicts of Interest in Structuring the Consolidation. The General
Partners are proposing the Consolidation because they believe that it is in the
best interests of the CPA(R) Partnerships and the Unitholders. The General
Partners may, however, be viewed as having a potential conflict of interest with
the Unitholders with respect to the determination of the number of Listed Shares
Affiliates of the General Partners will receive in the Consolidation in exchange
for a portion of their general partner interests in the CPA(R) Partnerships,
with respect to their retained interest in the Subsidiary Partnerships and with
respect to the compensation of the Manager. Compensation payable to the Manager
under the terms of the Consolidation is likely to increase when compared to
compensation payable to the General Partners under the existing Partnership
Agreements. After completion of the Consolidation, the Manager may receive fees
on the refinancing of Company debt and an increase in management fees.
Additionally, if the Consolidation is completed, W.P. Carey & Co. will receive
compensation for investment banking services in the form of warrants to purchase
Listed Shares. If all the CPA(R) Partnerships participate in the Consolidation,
W.P. Carey & Co. will receive warrants to purchase 2,284,800 Listed Shares at
$21 per Share and 725,930 Listed Shares at $23 per Share. The warrants generally
will be exercisable for ten years beginning one year after the date the
Consolidation is completed. Historical compensation paid to the General
Partners, consisting of partnership leasing fees and distributions of cash from
operations, for the years ended December 31, 1994, 1995 and 1996 amount to
$3,734,923, $4,338,947 and $2,951,441, respectively. If the Consolidation had
been completed as of January 1, 1994, the Manager would have received additional
management fees in cash of $415,077 and $743,559 for the years ended December
31, 1994 and 1996 respectively. The Manager would also have received performance
fees in the form of restricted Listed Shares of the Company. The Manager's
interest in Listed Shares vested in each of the years ended December 31, 1994,
1995 and 1996 would have been $830,000, $1,618,000 and $2,357,000, respectively,
assuming the Company's Total Capitalization had been equal to the asset base of
the CPA(R) Partnerships at the time the restricted Listed Shares were issued.
Under the terms of the Consolidation, such management and performance fees are
based on the Company's Total Capitalization which may increase or decrease
depending on the Company's operating performance and market conditions affecting
the market value per share of Listed Shares; management and performance fees
actually paid would increase or decrease accordingly. Assuming the Company had
utilized leverage of 67 percent, additional cash management fees of $613,000,
$686,000 and $748,000 and the vested portion of performance fees, paid in
restricted Listed Shares, of $340,000, $1,192,000 and $2,018,000 for the years
ended December 31, 1994, 1995 and 1996 respectively would have been paid.
Achievement of this level of leverage would have resulted in an increase in
average outstanding debt, and corresponding assets, of $132,000,000 in 1994,
$142,000,000 in 1995 and $168,000,000 in 1996.
Furthermore, the General Partners will not have any personal liability for
Company obligations and liabilities which occur after the Consolidation and
certain pre-Consolidation liabilities. Unitholders were not separately
represented in establishing the terms of the Consolidation. Such representation
might have caused the terms of the Consolidation to be different, and perhaps
more favorable to the Unitholders, in some respects from those described herein.
The General Partners did, however, obtain a Fairness Opinion that the allocation
of the Listed Shares among the CPA(R) Partnerships is fair to the Unitholder
from a financial point of view. The General Partners do not believe that this
lack of independent representation for the Unitholders affects their conclusion
that the Consolidation is fair to the Unitholders. For additional information
concerning the potential conflicts of interest between the General Partners and
the Unitholders in the Consolidation and the procedures adopted by the General
Partners to prevent these conflicts from having an impact on the terms of the
Consolidation (including the receipt of a fairness opinion), see "BACKGROUND AND
REASONS FOR THE CONSOLIDATION -- Recommendation of the General Partners and
Fairness Determination" and "-- Terms of the Consolidation."
Distributions Paid to Holders of Subsidiary Partnership Units Before
Holders of Listed Shares. In the CPA(R) Partnerships, all Unitholders in a
particular CPA(R) Partnership are treated equally. By contrast, the holders of
Subsidiary Partnership Units will be paid any distributions paid by the
Subsidiary Partnerships at the same time the Company receives its pro rata share
of such distribution. Holders of Listed Shares will receive their share of such
distributions if and only after the Company pays a distribution which includes
the funds distributed by the Subsidiary Partnerships.
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33
No Market for the Subsidiary Partnership Units. The Subsidiary Partnership
Units will not be listed on any national securities exchange or the Nasdaq
National Market System, and no public market is expected to develop for the
Subsidiary Partnership Units. Holders of Subsidiary Partnership Units may not be
able to liquidate their investment promptly at a reasonable price. In order to
give holders of the Subsidiary Partnership Units some level of liquidity, they
will be redeemed for cash in accordance with a schedule that approximates the
scheduled liquidation date of each CPA(R)Partnership. See "DESCRIPTION OF SHARES
AND SUBSIDIARY PARTNERSHIP UNITS -- Subsidiary Partnership Units." The value of
the Subsidiary Partnership Units for purposes of the redemption will be
determined based on the then appraised value of the Properties and any other net
assets remaining in the Subsidiary Partnership in which the Unitholders own an
interest.
Potential Differences Between Total Exchange Value and Realizable
Value. Unitholders are subject to the risk that the Total Exchange Value
allocated to each CPA(R)Partnership, which is based primarily on independent
appraisals of each CPA(R)Partnership's portfolio of Properties, do not reflect
the realizable value of the CPA(R) Partnership's assets in an actual
transaction. Were this to be the case as to a CPA(R) Partnership, the
consideration received by a Unitholder of that CPA(R) Partnership may be
understated or overstated and the number of Listed Shares received by the
Manager may also be overstated or understated. The Independent Appraiser was
engaged to evaluate each CPA(R) Partnership's portfolio of real estate on a
limited scope basis utilizing the income approach to valuation. The cost
approach and the sales comparison approach, other approaches typically used by
appraisers in valuing real property, were not utilized by the Independent
Appraiser. To the extent that the cost approach or the sales comparison approach
would have produced different values for the portfolios, the Appraised Values
may have varied. The General Partners and the Independent Appraiser considered
the cost approach and the sales comparison approach to be less reliable than the
income approach, given that the income generated by a net leased property is the
primary criterion used by buyers of the type of property appraised in the
appraisals. The Independent Appraisal reflects the Independent Appraiser's
valuation of the real estate portfolios of the CPA(R) Partnerships as of March
31, 1997, in the context of the information available on such date. Events
occurring after March 31, 1997, and before the Closing Date could affect the
properties or assumptions used in preparing the Independent Appraisal. The
Independent Appraiser has no obligation to update the Independent Appraisal on
the basis of such subsequent events.
Board of Directors' Ability to Effect Changes in Investment, Financing and
Certain Other Policies. The major policies of the Company, including its
policies with respect to acquisitions, financing, growth, debt, capitalization
and distributions will be determined by the Company's Board of Directors.
Although the Board of Directors of the Company intends to implement the business
plan set forth herein and has no present intention to change such business plan,
the Board may amend or revise these and other policies from time to time without
a vote of the Shareholders. Accordingly, the Shareholders will have no direct
control over changes in the policies of the Company, and changes in the
Company's policies may not fully serve the interests of all of the Shareholders.
See "BUSINESS AND PROPERTIES" and "POLICIES WITH RESPECT TO CERTAIN ACTIVITIES."
Loss of Relative Voting Power. Unitholders may currently vote on certain
partnership matters in proportion to their interests in their CPA(R)
Partnership. If the Consolidation is completed, holders of Listed Shares will
have an investment in an entity larger than each of the CPA(R) Partnerships and
will thus lose relative voting power. See "COMPARISON OF UNITS, LISTED SHARES
AND SUBSIDIARY PARTNERSHIP UNITS."
No Appraisal or Similar Rights for Nonconsenting Unitholders. Unitholders
will have no appraisal or similar rights in connection with the Consolidation.
Therefore, Dissenting Investors will not be entitled to receive cash payment for
the fair value of their Units if the Consolidation is consummated. See "VOTING
PROCEDURES -- No Right of Appraisal."
Opinions of Counsel. The Company has received an opinion from its counsel
Reed Smith Shaw & McClay LLP (i) that the Company and each Participating
Partnership will be classified as partnerships for federal tax purposes,
provided, (a) that each Participating Partnership is not a publicly traded
partnership for
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34
federal income tax purposes or 90 percent or more of its gross income consists
of qualifying income as defined in Code Section 7704(d) and 90 percent or more
of the Company's gross income consists of qualifying income as described in Code
Section 7704(d), and (b) the Company and each Participating Partnership is
organized as described in and operates in compliance with its governing
agreements and, (ii) that the Consolidation will be a non-taxable transaction
with respect to Unitholders who become holders of Listed Shares except for any
amount by which (a) the excess of (1) a Unitholder's share of his Participating
Partnership's liabilities immediately before the Consolidation over (2) that
Unitholder's share of the liabilities of the Company immediately after the
Consolidation exceeds (b) the Unitholder's basis in his CPA(R) Partnership
interest immediately before the Consolidation, (iii) that the Consolidation will
be a non-taxable transaction with respect to Subsidiary Partnership Unitholders
except for any amount by which (a) the excess of (1) a Subsidiary Partnership
Unitholder's share of his Participating Partnership's liabilities immediately
before the Consolidation over (2) that Subsidiary Partnership Unitholder's share
of the liabilities of his Participating Partnership immediately after the
Consolidation exceeds (b) the Subsidiary Partnership Unitholder's basis in his
CPA(R) Partnership interest immediately before the Consolidation, (iv) which
confirms the opinions attributed to it in this Prospectus, and (v) which
concludes that, in the aggregate, the remaining federal income tax consequences
of owning Listed Shares referred to in this Prospectus will occur or be realized
by the holders of Listed Shares. No rulings have been sought from the IRS with
respect to any of the tax matters described in this Prospectus. The opinions of
counsel are dependent upon the present provisions of the Code, regulations and
existing administrative and judicial interpretations thereof, all of which are
subject to change. An opinion of counsel is not, however, binding upon the IRS
or the courts. In addition, such opinion is subject to certain assumptions. See
"INCOME TAX CONSEQUENCES."
No IRS Ruling with Respect to Partnership Status. Neither the Company nor
any of the Subsidiary Partnerships will apply for an IRS ruling that they will
be classified as partnerships rather than associations taxable as corporations
for federal income tax purposes. The Company and each Subsidiary Partnership
have received the opinion of Reed Smith Shaw & McClay LLP that they will be
classified as partnerships for federal income tax purposes. An opinion of
counsel is not, however, binding upon the IRS or the courts. In addition, such
opinion is subject to certain conditions. See "INCOME TAX CONSEQUENCES --
Classification as 'Partnerships'." The treatment of the Company as a partnership
is also dependent upon the present provisions of the Code, the regulations
thereunder and existing administrative and judicial interpretations thereof, all
of which are subject to change. The Manager intends to operate the Company and
the Subsidiary Partnerships so that they will be taxed as partnerships. If the
Company were treated as a corporation: (i) the income, deductions and losses of
the Company would not pass through to the holders of Listed Shares; (ii) the
Company would be required to pay federal income taxes on its taxable income,
thereby substantially reducing the amount of cash available to be distributed to
holders of Listed Shares; (iii) state and local taxes could be imposed on the
Company; and (iv) any distributions to holders of Listed Shares would be taxable
to them as dividends to the extent of current and accumulated earnings and
profits of the Company. Finally, the change from treatment as a partnership to
treatment as a corporation for federal income tax purposes could be treated as a
taxable event in which case holders of Listed Shares could have a tax liability
without receiving a distribution from the Company. Similar tax consequences
would result with respect to any Subsidiary Partnership found to be an
association taxable as a corporation.
Other Potential Tax Risks. In evaluating the Consolidation, a Unitholder
should consider the tax consequences of owning Listed Shares which include,
among others, the following (some or all of which may presently exist for some
or all of the CPA(R) Partnerships): (i) the possibility that taxable income or
gain allocable to a holder of Listed Shares will exceed the cash distributed by
the Company to the holder of Listed Shares, resulting in tax payments being
required from individual assets of a holder of Listed Shares; (ii) the
possibility that the IRS will not give effect to the allocation of profits and
losses provided by the Operating Agreement or the Subsidiary Partnerships'
Partnership Agreements and reallocate profits and losses so as to cause a holder
of Listed Shares or Subsidiary Partnership Units' taxable income or loss to be
different from that reported by the Company or the Subsidiary Partnership; (iii)
the possibility that the IRS will disallow as current deductions certain
payments made for management and other services in connection with the Company's
or Subsidiary Partnerships' Properties, especially where such payments are made
to the Manager, the General Partners or their Affiliates, and, thereby, increase
the Company's taxable income or decrease the
23
35
Company's tax loss; (iv) the possibility that the IRS will challenge the
allocations of acquisition costs of real property between land and depreciable
improvements, the characterization and purpose of various payments made to
sellers of properties or Affiliates of the Manager or the General Partners or
the legal characterization of the Company's or Subsidiary Partnerships' interest
in a Property and, thereby, increase the Company's taxable income or decrease
the Company's tax loss; (v) the fact that all of the Company's loss will be
classified as passive activity loss and the Company's net income will probably
be classified as portfolio income thereby limiting the ability of a holder of
Listed Shares to offset tax losses allocated to him from the Company against
taxable income allocated to him; (vi) the possibility that the "at risk" rules
could limit the deductibility of Company losses, if any; (vii) the possibility
that an audit of the Company's or a Subsidiary Partnership's information return
may result in an audit of an individual tax return; (viii) the possibility of
adverse changes in the tax law; and (ix) the possibility that an IRA or a
qualified pension or profit-sharing plan (including a Keogh) or stock bonus plan
which invests in Shares may receive "unrelated business taxable income" and
could become subject to federal income tax. See "INCOME TAX CONSEQUENCES" for
further details with respect to the above and other possible tax consequences of
the ownership of Shares.
Holders of Listed Shares and Subsidiary Partnership Units should be aware
that federal income taxation rules are constantly under review by the IRS,
resulting in revised interpretations of established concepts. The IRS pays close
attention to the proper application of tax laws to partnerships. The present
federal income tax treatment of an investment in the Company may be modified by
legislative or judicial action at any time, and any such action may affect
investments and commitments previously made.
The Operating Agreement and the Subsidiary Partnerships' Partnership
Agreements permit the Manager or the General Partner, as the case may be, to
modify the Operating Agreement from time to time, without the consent of the
holders of Listed Shares or the Subsidiary Partnership Units, in order to
achieve compliance with certain changes in federal income tax regulations and
legislation. In some circumstances, such revisions could have an adverse impact
on some or all of the holders of Listed Shares or Subsidiary Partnership Units.
Tax Risks of Trading of Listed Shares. Since the Listed Shares will be
traded on an established securities market, the Company will be a publicly
traded partnership as defined in the Code. See "INCOME TAX
CONSEQUENCES -- Classification as 'Partnerships'." As a publicly traded
partnership, passive activity losses from the Company, if any, allocable to the
holders of Listed Shares will be deductible only against passive income from the
Company, if any, allocable to the holders of Listed Shares. Net passive income
from the Company allocable to the holders of Listed Shares will probably be
treated as portfolio income, except that passive activity losses from the
Company may offset such income. See "INCOME TAX CONSEQUENCES -- Passive Activity
Loss Limitations." Additionally, if less than 90 percent of its gross income
consists of, among other things, interest, dividends, real property rents and
gain from the sale or exchange of real property, the Company will be treated as
a corporation for federal income tax purposes. It is anticipated that the
Company will not be treated as a corporation for federal income tax purposes.
Uncertain Composition of the Company. Because participation in the
Consolidation by each CPA(R) Partnership requires the approval of Unitholders
holding a majority of the outstanding Units of the CPA(R) Partnership, which
approval is outside the Company's control, no assurance can be given as to which
or how many of the CPA(R) Partnerships will participate in the Consolidation,
nor can any assurance be given as to the actual composition and capitalization
of the Company upon consummation of the Consolidation. If fewer than all of the
CPA(R) Partnerships participate in the Consolidation, the Company's ability to
provide diversification in its asset base will decrease, thereby reducing the
benefits realized from the Company's greater size and limiting the investment
flexibility that would be realized if all CPA(R) Partnerships participate. The
Consolidation may occur if CPA(R) Partnerships participating in the
Consolidation represent at least $200 million in Total Exchange Value, which
constitutes approximately 41 percent of the Total Exchange Value of the CPA(R)
Partnerships. Therefore, the Consolidation may occur if approved by as few as
three CPA(R) Partnerships.
Consolidation Expenses Will Reduce the Cash of the Company. The Company
will bear certain costs of the Consolidation if it is completed, thereby
reducing the cash of the Company following the Consolidation. The Consolidation
Expenses and Solicitation/Communications Costs related to the Consolidation are
estimated to be approximately $2,872,000 and $125,000, respectively, or
approximately 0.6 percent of the
24
36
Total Exchange Value, assuming 100 percent Partnership Participation. If the
Consolidation is consummated with 100 percent Partnership Participation, all of
the Consolidation Expenses and Solicitation/Communications Expenses will be paid
by the Company. If the Consolidation is not consummated, the Consolidation
Expenses will be allocated among all of the CPA(R) Partnerships in proportion to
their respective Total Exchange Values. Certain of the expenses are payable to
W.P. Carey & Co. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Fees and
Expenses."
Combination of Real Estate Assets; Change in Geographic, Industry,
Building-Type and Tenant Diversity. As a result of the Consolidation, the
diversity of the properties in which the Unitholders will own an interest will
change. The change will increase geographic, tenant, building-type and industry
sector diversification. However, because the market for real estate may vary
widely from one region of the country to another and the financial success of
tenants in different industries may change from time to time, the change in
diversity may expose Unitholders to different and greater risks than those to
which they are presently exposed. For geographic and industry information
regarding the CPA(R) Partnership Properties, see "BUSINESS AND
PROPERTIES -- Properties."
Risk of Lower Distributions. After the Consolidation, holders of Listed
Shares may receive distributions at a rate lower than that received as
Unitholders. Because CPA(R):5 has been paying a higher rate of distributions
relative to the value of its assets, the initial distribution rate for
Unitholders of CPA(R):5 will be lower by approximately nine percent immediately
after the Consolidation. In addition, the Board of Directors may lower the
distribution rate in the future to account for changes in economic conditions or
the performance of the Company, to allow the Company to accumulate cash for
acquisitions or other uses or for other reasons. The performance of, and
distributions to holders with respect to, each series of Subsidiary Partnership
Units will be measured by reference to the performance of the CPA(R) Partnership
relating to that series as they existed prior to the Consolidation. The Board of
Directors of the Company, as General Partner of the Subsidiary Partnership, will
determine the distribution payable to holders of Subsidiary Partnership Units.
Potential Loss of Future Appreciation. The Properties may appreciate in
value and might be able to be liquidated at a later date by a CPA(R) Partnership
for a price which would yield Unitholders more consideration than they would
receive in the Consolidation.
Restrictions on Changes in Control. Certain provisions of the
Organizational Documents and the Shareholder Rights Plan may restrict changes in
control of the Company's management. These provisions include:
- Additional Classes and Series of Shares. The Organizational Documents
authorize the Board of Directors (subject to certain restrictions) to
issue shares in other classes or series, to establish the number of
shares in each class or series and to fix the rights, powers and
limitations associated with such shares. Although the Board of Directors
has no present intention of doing so, it could issue a class or series
that could, depending on its terms, impede a merger, tender offer or
other transaction that holders of Listed Shares might believe is in their
best interest or in which the holders of Listed Shares might receive a
premium for their Listed Shares over the then current market price. See
"DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS -- Restricting
Changes in Control and Business Combination Provisions -- Additional
Classes and Series of Shares."
- Staggered Board of Directors. Pursuant to the Organizational Documents,
the Board of Directors is divided into three classes serving staggered
three-year terms. This arrangement may affect the ability of the holders
of Listed Shares to change control of the Company, even if such holders
of Listed Shares believe such a change to be in their interests. See
"DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS -- Restricting
Changes in Control and Business Combination Provisions -- Staggered Board
of Directors."
- Restrictions on Certain Business Combinations. The Organizational
Documents provide that certain transactions that involve an Interested
Party are permitted no earlier than five years following the most recent
date on which an Interested Party became an Interested Party (the
"Determination Date") unless the Interested Party obtains the approval of
(i) the Board of Directors before the Determination
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Date or (ii) two-thirds of the Board of Directors and two-thirds in
interest of the holders of Listed Shares (excluding the vote of the
Interested Party). Moreover, after this five-year period expires, such
transactions are subject to Fair Price and Procedural Requirements unless
the holders of Listed Shares recommend the transaction to the Board of
Directors and the Interested Party can obtain affirmative votes of at
least (i) 80% in interest of all Shareholders and (ii) and two-thirds in
interest of the holders of Listed Shares (excluding the vote of the
Interested Party). These restrictions on certain business combinations
may deter potential purchasers who seek control of the Company. See
"DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS -- Restricting
Changes in Control and Business Combination Provisions -- Business
Combination Provisions."
- Control Share Acquisition Provision. The Organizational Documents
provide that any person or entity that acquires one-fifth or more of the
outstanding Shares of any class or series acquires voting rights with
respect to the acquired Shares only to the extent approved by the
affirmative vote of two-thirds in interest of the Shareholders, but
excluding any votes cast with respect to Shares for which the acquirer is
entitled to exercise or direct the exercise of the voting power. These
provisions may make it more difficult or costly for another party to
acquire and exercise control of the Company or to remove the existing
management of the Company, even if such removal would be beneficial to
the Shareholders. See "DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP
UNITS -- Restricting Changes in Control and Business Combination
Provisions -- Control Share Acquisition Provisions."
- Shareholder Rights Plan. The Company intends to enter into a Shareholder
Rights Plan that will provide for the issuance of one Right for each
outstanding Listed Share to the Company's Shareholders of record as of a
date to be determined. Each Right will entitle the holder thereof to buy
one Listed Share at a specified price, subject to adjustment. Although
the Rights will not prevent a takeover of the Company, the Rights may
have certain anti-takeover effects, such as causing substantial dilution
to a person or group that attempts to acquire the Company in a manner or
on terms not approved by the Board of Directors. See "DESCRIPTION OF
SHARES AND SUBSIDIARY PARTNERSHIP UNITS -- Restricting Changes in Control
and Business Combination Provisions -- Shareholder Rights Plan."
- Termination Fee Payable to Manager. The Company will be required to pay
a termination fee to the Manager in the event the Manager is terminated
in connection with a Change of Control. This termination fee will make it
more costly to acquire control of the Company and may discourage third
parties from seeking control of the Company. See "COMPENSATION,
REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND
MANAGER -- Amounts Payable to the Manager after the Consolidation."
Limitation of Director Liability. The Delaware Limited Liability Company
Act (the "LLCA"), as well as the Organizational Documents, limit the liability
of Directors and officers to Shareholders. In addition, the Organizational
Documents generally provide for (i) greater indemnification of Directors and
officers than is available to the General Partners under the Partnership
Agreements and (ii) the ability to relieve Directors and officers of certain
monetary liabilities not available to the General Partners under the Partnership
Agreements. See "FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION -- Limitation on
Liability of Directors and Officers of the Company."
Reduction in Value From Contingent or Undisclosed Liabilities. Under the
Agreement of Merger executed by the Subsidiary Partnerships and the
Participating Partnerships in connection with the Consolidation (the
"Partnership Merger Agreement" or "Merger Agreement"), the Company, through the
Subsidiary Partnerships, will, as of the Closing Date, acquire all assets and
liabilities of the Participating Partnerships. Each of the Participating
Partnerships will deliver to the Company financial statements for such entity
disclosing all known material liabilities and reserves, if any, set aside for
contingent liabilities as of the Closing Date. The General Partners will
represent and warrant that, to the best of their knowledge, the financial
statements fairly present the financial position of each Participating
Partnership based upon generally accepted accounting principles. The accuracy
and completeness of these representations are conditions to the closing of
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the Consolidation and if, on or prior to the Closing Date, these representations
and warranties are shown to be inaccurate, there may be adjustments to the
consideration paid by the Company or the Company may elect not to proceed to
close the acquisition with the CPA(R) Partnership that failed to fully and
accurately disclose its financial position. See "-- Possible Environmental
Liabilities" below as to the possibility of undisclosed environmental conditions
potentially affecting the value of the CPA(R) Partnerships' properties. If the
Company is subject to liabilities of the CPA(R) Partnerships after the merger
that were not disclosed, the value of the Listed Shares would be reduced.
General Risks Related to Investments in Real Estate. Real property
investments are subject to varying degrees of risk. Values of commercial and
industrial properties are affected by changes in the general economic climate,
local conditions such as an oversupply of space or reduction in demand for real
estate in the area and competition from other available commercial and
industrial space. Real estate values are also affected by such factors as
government regulations and changes in zoning or tax laws, interest rate levels,
the availability of financing and potential liability under environmental and
other laws. The yields available on equity investments in commercial and
industrial real estate of the kind that will be owned by the Company depend in
part upon the amount of net income generated from the property. Upon the
termination of a tenant lease, the Company may not be able to re-lease the
property at comparable rents. If the property is leased at a lower rent, the
income of the Company will be reduced.
Risk of Leverage. All but one of the CPA(R)Partnerships own properties
subject to limited recourse debt, and certain CPA(R) Partnerships have recourse
debt outstanding. The Board of Directors may authorize additional borrowing by
the Company. The Company may become more highly leveraged and, thereby, increase
its debt service, which may adversely affect the Company's ability to make
distributions to holders of Listed Shares and increase the Company's risk of
default on its obligations.
If the Company incurs substantial debt, it will be subject to the following
risks: (i) the Company could lose its interests in Properties given as
collateral for secured borrowing if the required principal and interest payments
are not made when due; (ii) depending upon the number of Subsidiary Partnership
Units issued, the Company's cash flow from operations may not be sufficient to
retire these obligations upon their maturity, making it necessary for the
Company to raise additional debt and/or equity for the Company or dispose of
some of the Company's assets to retire the obligations; (iii) the Company's
ability to borrow additional funds (except for the purpose of refinancing
existing indebtedness) may be restricted; and (iv) no assurance can be given as
to the availability, or the terms and conditions, of any financing needed by the
Company to redeem the Subsidiary Partnership Units or other borrowings.
Rent Income Dependent Upon Creditworthiness of Tenants. Substantially all
of the Properties are single tenant properties. The financial failure of a
tenant could result in the termination of its lease with the Company which, in
turn, might cause a reduction of the cash flow of the Company and/or decrease
the value of the Property leased to such tenant. If a tenant defaults on its
lease payments to the Company, the Company would lose not only the net cash flow
from such tenant, but also might use cash generated from other Properties to
meet expenses, including the mortgage payments, if any, on such Property in
order to maintain ownership and prevent a foreclosure. If a lease is terminated,
there can be no assurance that the Company will be able to re-lease the Property
for the same amount of rent previously received or will be able to sell the
Property without incurring a loss. The Company could also experience delays in
enforcing its rights against tenants.
In addition, the Company may enter into or acquire net leases with tenants
for properties that are specially suited to the particular needs of a tenant as
is the case with certain of the Properties. Such a property may require
renovations or lease payment concessions in order to re-lease it to another
tenant upon the expiration or termination of the current lease. The Company may
also have difficulty selling a special purpose property to a party other than
the tenant for which the property was designed.
The financial failure of a tenant could cause the tenant to become the
subject of bankruptcy proceedings. Under bankruptcy law, a tenant has the option
of continuing or terminating an unexpired lease. If the tenant continues its
lease with the Company, the tenant must cure all defaults under the lease and
provide the Company with adequate assurance of its future performance under the
lease. If the tenant terminates the
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lease, the Company's claim for breach of the lease would (absent collateral
securing the claim) be treated as a general unsecured claim. The amount of the
claim would be capped at the amount owed for unpaid pre-petition lease payments
unrelated to the termination plus the greater of one year's lease payments or 15
percent of the remaining lease payments payable under the lease (but not to
exceed three years' lease payments).
Although the Company believes that each of its net lease transactions is a
"true lease" for purposes of bankruptcy law, depending on the terms of the lease
transaction, including the length of the lease and terms providing for the
repurchase of a property by the tenant, it is possible that a bankruptcy court
could recharacterize a net lease transaction as a secured lending transaction.
If a transaction were recharacterized as a secured lending transaction, the
Company would not be treated as the owner of the property and could lose certain
rights as the owner in the bankruptcy proceeding.
Losses From Uninsured Liabilities or Casualty. The Company requires
tenants to maintain liability and casualty insurance of the kind that is
customarily obtained for similar properties. However, certain disaster-type
insurance (covering events of a catastrophic nature, such as earthquakes) may
not be available or may only be available at rates that, in the opinion of the
Company, are prohibitive. In the event that an uninsured disaster occurs or a
tenant does not maintain the required insurance and a loss occurs, the Company
could suffer a loss of the capital invested in, as well as anticipated profits
from, the damaged or destroyed Property. If the loss involves a liability claim,
the loss may extend to the other assets of the Company.
Losses From Casualty and Condemnation related Lease Terminations. The
Company's leases may permit the tenant to terminate its lease in the event of a
substantial casualty or a taking by eminent domain of a substantial portion of a
Property. Should these events occur, the Company generally will be compensated
by insurance proceeds in the case of insured casualties or a condemnation award
in the case of a taking by eminent domain. There can be no assurance that any
such insurance proceeds or condemnation award will equal the value of the
Property or the Company's investment in the Property. Any such lease termination
could adversely affect the Company's income and cash flow.
Risks of Joint Ventures. The Company may participate in joint ventures.
See "BUSINESS AND PROPERTIES." An investment by the Company in a joint venture
which owns properties, rather than the Company investing directly in such
properties, may involve certain risks, including the possibility that the
Company's joint venture partner may become bankrupt, may have economic or
business interests or goals which are inconsistent with the business interests
or goals of the Company or may be in a position to take action contrary to the
instructions or the requests of the Company or contrary to the Company's
policies or objectives. Actions by the Company's joint venture partner might,
among other things, result in subjecting property owned by the joint venture to
liabilities in excess of those contemplated by the terms of the joint venture
agreement, exposing the Company to liabilities of the joint venture in excess of
its proportionate share of such liabilities or having other adverse consequences
for the Company. In a case where the joint venturers each own a 50 percent
interest in a venture, they may not be able to agree on matters relating to the
properties owned by the venture. Although each joint venturer may have a right
of first refusal to purchase the other venturer's interest in a property if a
sale thereof is desired, the joint venturer may not have sufficient resources to
exercise its right of first refusal.
The Company may from time to time participate jointly with
publicly-registered investment programs or other entities sponsored by the
Manager or one of its Affiliates in investments as tenants-in-common or in some
other joint venture arrangement. The risks of such joint ownership may be
similar to those mentioned above for joint ventures and, in the case of a
tenancy-in-common, each co-tenant normally has the right, if an unresolvable
dispute arises, to seek partition of the property, which partition might
decrease the value of each portion of the divided property. The Company or the
Manager may also experience difficulty in enforcing the rights of the Company in
a joint venture with an Affiliate due to the fiduciary obligation the Manager or
the Board may owe to the other partner in such joint venture.
Competition with Affiliates May Reduce Available Properties, Tenants and
Purchasers of Properties. The CPA(R) REITS have investment policies similar to
those of the Company. The CPA(R) REITs, therefore, may be in competition with
the Company for properties, purchasers and sellers of properties, tenants and
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financing. Affiliates of the General Partners and the Manager may sponsor
additional REITs or other investment entities, public and/or private or may
provide acquisition or management services to third parties, some of which may
have the same investment objectives and may be in a position to acquire
properties in competition with the Company.
In the event that a potential investment might be suitable for the Company
and an Affiliate, the decision as to which entity will make the investment will
be made by the Investment Committee. The Investment Committee also serves as the
investment committee of the CPA(R) REITs. The Investment Committee of the
Manager will review the investment portfolios of each entity and other factors
such as cash flow, the effect of the acquisition on the diversification of each
entity's portfolio, the length of the term of the lease, renewal options, the
estimated income tax effects of the purchase on each entity, the policies of
each entity relating to leverage, the funds of each entity available for
investment, the length of time such funds have been available for investment and
the various ways in which the potential investment can be structured.
Consideration will be given to joint ownership (e.g., tenancy-in-common or joint
venture arrangement) of a particular property determined to be suitable for the
Company and an Affiliate in order to achieve diversification of each entity's
portfolio and efficient completion of an entity's portfolio. In any joint
ownership, the investment of the investment entities will be on substantially
the same economic terms and conditions, and each investment entity may have a
right of first refusal to purchase the interest of the other, if a sale of that
interest is contemplated. To the extent that a particular property might be
determined to be suitable for more than one investment entity, the investment
will be made by the most appropriate investment entity after consideration of
the factors identified above.
Growth of Company Dependent on Borrowing Capacity and Ability to Raise
Capital. The Company's ability to acquire additional properties and make other
investments will be subject to the availability of suitable investments and the
Company's ability to obtain debt and/or equity capital to make such investments.
The Company could be delayed or prevented from structuring transactions and
acquiring desirable properties by an inability to obtain debt or equity
financing, either because the financial or other terms of the available
financing are unacceptable or because debt or equity financing is unavailable on
any terms.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or former owner of
real estate may be required to investigate and clean up hazardous or toxic
substances or petroleum product releases at such property or may be held liable
to governmental entities or to third parties for property or natural resource
damage and for investigation, clean up and other costs incurred by such parties
in connection with the contamination. Such laws typically impose clean-up
responsibility and liability without regard to whether the owner knew of or
caused the presence of the contamination, and the liability under such laws has
been interpreted to be joint and several, unless the harm is capable of
apportionment and there is a reasonable basis for allocation of responsibility.
The CPA(R) Partnerships' leases generally provide that the tenant is responsible
for compliance with applicable laws and regulations. This contractual
arrangement does not eliminate the CPA(R) Partnerships' or Company's statutory
liability or preclude claims against the Company by governmental authorities or
persons who are not parties to such arrangement. Contractual arrangements in the
Company's leases may provide a basis for the Company to recover from the tenant
damages or costs for which the Company has been found liable. The cost of an
investigation and clean-up of site contamination can be substantial, and the
fact that the property is or has been contaminated, even if remediated, may
adversely affect the value of the property and the owner's ability to sell or
lease the property or to borrow using the property as collateral. In addition,
some environmental laws create a lien on the contaminated site in favor of the
government for damages and costs that it incurs in connection with the
contamination, and certain state laws provide that such lien has priority over
all other encumbrances on the property or that a lien can be imposed on any
other property owned by the liable party. Finally, the owner of a site may be
subject to common law claims by third parties based on damages and costs
resulting from the environmental contamination emanating from the site.
Other federal, state and local laws, regulations and ordinances govern the
removal or encapsulation of asbestos-containing material when such material is
either in poor condition or in the event of building remodeling, renovation or
demolition. Still other federal, state and local laws, regulations and
ordinances may require the removal or upgrade of underground storage tanks that
are out of service or are out of compliance.
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In addition, federal, state and local laws, regulations and ordinances may
impose prohibitions, limitations and operational standards on, or require
permits, licenses or approvals in connection with, the discharge of wastewater
and other water pollutants, the emission of air pollutants, the operation of air
or water pollution equipment, the generation, storage, transportation, disposal
and management of materials classified as hazardous or nonhazardous waste, the
use of electrical equipment containing polychlorinated biphenyls, the storage or
release of toxic or hazardous chemicals and workplace health and safety.
Noncompliance with environmental or health and safety requirements may also
result in the need to cease or alter operations at a Property which could affect
the financial health of a tenant and its ability to make lease payments.
Furthermore, if there is a violation of such a requirement in connection with
the tenant's operations, it is possible that the Company, as the owner of the
Property, could be held accountable by governmental authorities for such
violation and could be required to correct the violation. See "BUSINESS AND
PROPERTIES -- Environmental Matters" for a discussion of certain environmental
matters relating to the Properties and the measures the Company currently
undertakes by means of prepurchase site assessments, financial assurances and
indemnification provisions and other protective lease terms to address potential
liabilities.
The CPA(R) Partnerships did not have environmental audits performed on
their properties in preparation for the Consolidation. Furthermore, because it
was not customary business practice to obtain environmental audits in connection
with the acquisition of such properties prior to 1988, no environmental audits
were obtained by CPA(R):1-:7 at the time their properties were acquired. Phase I
audits were performed for the properties and by CPA(R):1-:6 in 1994. Based upon
the results of the Phase I investigations conducted in 1993 and 1994 on the
CPA(R):1-6 Properties, Phase II investigations were recommended for 30
Properties. Phase II investigations have been or are in the process of being
performed on 21 of the 30 Properties. Of the remaining nine Properties, the
particular CPA(R) Partnership determined not to proceed with a Phase II
investigation on five Properties and the tenants would not permit a Phase II
investigation on the remaining four.
Environmental audits were conducted on many of the properties acquired by
CPA(R):8 and CPA(R):9 at the time they were acquired. There may, however, be
environmental problems associated with these properties not known to the CPA(R)
Partnerships which would have been disclosed had the CPA(R) Partnerships
obtained new environmental audits in connection with the Consolidation. In the
event preexisting environmental conditions requiring remediation are discovered
subsequent to the Closing Date, the cost of remediation will be borne by the
lessee and the guarantor pursuant to the terms of the lease agreement and any
guarantees or by the Company if the lessee and guarantor cannot meet their
obligation.
Presently, neither the Company nor any of the CPA(R)Partnerships has been
notified by any governmental authority of any non-compliance, liability or other
claim in connection with any of the Properties.
Risk of Investment in Real Property Located Outside the United States. The
Company may invest in property located outside the United States. Such
investments may be affected by factors peculiar to the laws of the jurisdiction
in which such property is located, including but not limited to, land use and
zoning laws, environmental laws, laws relating to the foreign ownership of
property and laws relating to the ability of foreign persons or corporations to
remove profits earned from activities within such country to the person's or
corporation's country of origin. These laws may expose the Company to risks that
are different from and in addition to those commonly found in the United States.
In addition, such foreign investments could be subject to the risks of adverse
market conditions due to changes in national or local economic conditions,
currency fluctuation, changes in interest rates and in the availability, cost
and terms of mortgage funds resulting from varying national economic policies,
changes in real estate and other tax rates and other operating expenses in
particular countries and changing governmental rules and policies.
Potential Claims Against Title to Properties. At the time the Properties
were acquired by the CPA(R) Partnerships, each of the CPA(R) Partnerships
obtained title insurance for its respective Properties. The Manager will, as it
deems necessary, (i) take steps to see that after giving effect to the
Consolidation such title insurance coverage remains effective or that such title
insurance coverage will be available to each such CPA(R) Partnership or (ii)
obtain new title insurance coverage. The General Partners have no actual
knowledge of any
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actions, liens or encumbrances (other than mortgage loans) of third parties
which would have a material adverse effect upon the Consolidation or the
financial condition of the Company.
Dependence on Key Personnel. The Company is dependent on the efforts of
the executive officers of the Manager and the members of the Investment
Committee. While the Company believes that the Manager could find replacements
for its executive officers and Investment Committee members from either within
or outside the Company, the loss of their services could have a temporary
adverse affect on the operations of the Company.
Competition for Investments. The Company faces competition to purchase net
leased properties or provide alternative sources of real estate financing to
businesses from insurance companies, commercial banks, credit companies, pension
funds, private individuals, investment companies, REITs and other real estate
finance companies. There can be no assurance that the Company will find suitable
net leased properties in the future.
Status of the Company under ERISA. The Company has received an opinion of
counsel to the effect that based on certain assumptions concerning the public
ownership and transferability of the Listed Shares, the Listed Shares should be
"publicly-offered securities" for purposes of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and that, consequently, the assets
of the Company should not be deemed "plan assets" of an ERISA plan, individual
retirement account or other non-ERISA plan that invests in the Listed Shares. If
the Company's assets were deemed to be plan assets of any such plan, then, among
other consequences, certain persons exercising discretion as to the Company's
assets would be fiduciaries under ERISA, transactions involving the Company
undertaken at their direction or pursuant to their advice might violate ERISA,
and certain transactions that the Company might enter into in the ordinary
course of its business might constitute "prohibited transactions" under ERISA
and the Code.
If a prohibited transaction were to occur, the Code imposes an excise tax
equal to 15 percent of the amount involved and authorizes the IRS to impose an
additional 100 percent excise tax if the prohibited transaction is not
"corrected." Such taxes would be imposed on any disqualified person who
participates in the prohibited transaction. In addition, certain persons subject
to ERISA, exercising discretion as to the Company's assets who permitted such
prohibited transaction to occur or who otherwise breached their fiduciary
responsibilities, would be required to restore to the plan any profits realized
by these fiduciaries as a result of the transaction or breach and to make good
to the plan any losses incurred by the plan as a result of such transaction or
breach. With respect to an IRA that invests in the Company, the occurrence of a
prohibited transaction involving the individual who established the IRA or his
beneficiary would cause the IRA to lose its tax-exempt status under Section
408(e)(2) of the Code.
BACKGROUND AND REASONS FOR THE CONSOLIDATION
GENERAL
From 1979 through 1991, W.P. Carey & Co. and its Affiliates raised over
$400 million through the offering of Units in the CPA(R) Partnerships. The
CPA(R) Partnerships own 198 net leased properties in 37 states. Each CPA(R)
Partnership has served as a separate investment vehicle for investors interested
in a professionally managed portfolio of net leased real estate. In general, the
CPA(R) Partnerships' original objectives were to provide Unitholders with
increasing quarterly cash distributions from operations, preserve and protect
Unitholders' capital and provide the potential for capital appreciation. Each
CPA(R) Partnership has made regular quarterly cash distributions throughout
various economic cycles, and the CPA(R) Partnerships, collectively, have
distributed over $462 million to Unitholders from their inception through July
15, 1997.
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BACKGROUND OF THE CPA(R) PARTNERSHIPS AND THE GENERAL PARTNERS
The following table sets forth additional information concerning the CPA(R)
Partnerships and the capital raised by each:
NUMBER OF PROPERTIES
TOTAL CAPITAL DATE OF LAST OWNED OR FINANCED BY
RAISED BY ADMISSION OF CPA(R) PARTNERSHIP AS
GENERAL CPA(R) ORIGINAL OF
PARTNERSHIP PARTNERS(1) PARTNERSHIP(2) INVESTORS SEPTEMBER 30, 1997(3)
- ---------- --------------------------------------- ------------------- ------------- ----------------------
CPA(R):1 W.P. Carey & Co. $20,000,000 9/30/79 19
CPA(R):2 W.P. Carey & Co. 27,500,000 9/23/80 14
CPA(R):3 W.P. Carey & Co. 33,000,000 5/13/82 8
CPA(R):4 CCP 42,784,000 6/16/83 9
CPA(R):5 CCP 56,600,000 3/31/84 20
CPA(R):6 CCP 47,930,000 2/13/85 49
CPA(R):7 Seventh Carey 45,274,000 9/17/87 39
CPA(R):8 Eighth Carey 67,749,000 6/30/89 43
CPA(R):9 Ninth Carey 59,990,000 4/30/91 32
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(1) William P. Carey is also a general partner of each CPA(R) Partnership.
(2) As of the final closing date of the original offering of limited partner
interests in each CPA(R) Partnership.
(3) Properties owned jointly are indicated as owned by each CPA(R) Partnership
that owns an interest in such Property.
All of the net proceeds from the offerings of the Units have been invested
in real estate, except for amounts used as working capital. In the opinion of
the General Partners, the CPA(R) Partnerships have met their objectives of
providing Unitholders with increasing cash distributions from operations and
preserving capital. However, as discussed herein, the General Partners have not
yet been able to meet the CPA(R) Partnerships' investment objective of
liquidating on favorable terms.
Since the Units were not listed on any national or regional stock exchange,
or quoted on the National Association of Securities Dealers Automated Quotations
System ("Nasdaq"), there has been limited liquidity available to Unitholders.
Secondary market sales activity in the Units has been limited and sporadic, with
less than two percent of all outstanding Units traded during 1995 and 1996. The
General Partners have monitored transfers of the Units and do not believe
secondary market sales prices accurately reflect the value of the CPA(R)
Partnerships. In 1995, 1996 and through September 30, 1997, secondary market
sales prices were generally below the Total Exchange Value per Unit. See
"SECONDARY MARKET AND OWNERSHIP OF UNITS." The CPA(R) Partnerships intended to
sell their assets and dissolve when economic conditions permitted, during
varying periods ranging from seven to fifteen years after the partnership was
fully invested in real estate.
EFFORTS TO DISPOSE OF PROPERTIES
Because the CPA(R) Partnerships expected to hold their investments for a
number of years after their formation, no efforts to dispose of the Properties
were made by the General Partners in the early years of the CPA(R) Partnerships'
existence. Instead, the General Partners concentrated their initial efforts on
making suitable investments for the CPA(R) Partnerships, consistent with the
CPA(R) Partnerships' investment policies and restrictions, and managing the
Properties efficiently in order to maximize the cash flow from the Properties.
As the contemplated period for disposal of the Properties approached, the
General Partners began to explore the feasibility of selling the Properties.
Since 1987, the General Partners have considered a variety of alternative
approaches to liquidating the first six CPA(R) Partnerships. At that time, the
General Partners considered combining the CPA(R) Partnerships into a master
limited partnership that would have had partnership units listed on the NYSE. In
this transaction, Limited Partners would have exchanged their Units for units of
the master limited partnership.
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This idea was abandoned for a number of reasons, including among others, the
stock market crash in October 1987.
In 1989, the CPA(R) Partnerships authorized the repurchase of Units on the
secondary market in order to give those investors who wished to liquidate their
investment an opportunity to sell their Units at prices the General Partners
believed represented fair value for such Units. The CPA(R) Partnerships did not
implement this repurchase plan for various reasons, including a concern that
such repurchase plan would not be in the best interests of all the Limited
Partners. Some of the CPA(R) Partnerships have repurchased Units on a limited
basis.
In 1991, the General Partners considered converting the first six CPA(R)
Partnerships into separate REITs that would have had their shares listed on a
national securities exchange. After an initial exploration of this alternative,
the General Partners were advised that separate, relatively small REITs advised
by an advisor instead of being internally managed would not be well received by
traditional purchasers of REIT shares. Therefore, the General Partners decided
not to pursue the conversion of the CPA(R) Partnerships into separate REITs.
Throughout this period, the CPA(R) Partnerships also considered the
possibility of selling individual Properties to third parties. The CPA(R)
Partnerships made inquiries from time to time of local real estate brokers
regarding the possibility of selling some of the Properties. While some CPA(R)
Partnerships have sold Properties, as this process continued, the General
Partners became concerned that the process of selling the Properties
individually would take an extended period of time and that certain Properties
would be difficult to sell at fair prices. During the continuation of the
selling process, the CPA(R) Partnerships would continue to be responsible for
all the costs of maintaining the CPA(R) Partnerships as public entities,
including accounting and SEC reporting functions as well as other administrative
costs. The General Partners believe that the cost of operating the CPA(R)
Partnerships over the time period necessary to sell the Properties in such
manner would ultimately reduce the net proceeds to the Limited Partners.
Since 1986 and through June 30, 1997, the CPA(R)Partnerships have sold 55
Properties (excluding portions of Properties sold in connection with
condemnations) for total consideration of approximately $162,000,000. These
sales were made in connection with the exercise of tenant purchase options and
other opportunities deemed by the General Partners to be advantageous for a
CPA(R) Partnership.
The General Partners also considered the alternative of selling the entire
portfolio of Properties in a bulk sale to a third party. This alternative was
not pursued because the General Partners believed that the sales price would
have to be significantly discounted in such a transaction and that the Limited
Partners would not receive fair market value for the Properties and because the
Unitholders would be forced to recognize a significant capital gain if the
Properties were sold for their Appraised Value.
In late 1992, the General Partners again considered the alternatives
available for liquidating the CPA(R) Partnerships, including the options
discussed above, as well as a transaction in which the first six CPA(R)
Partnerships would be combined with the other CPA(R) Partnerships into a single
REIT. As part of such a transaction, the General Partners considered merging
W.P. Carey & Co. into the new entity or having W.P. Carey & Co. serve as an
outside manager to the new entity. This transaction was abandoned because of the
nature of the securities to be received by Limited Partners and regulatory
concerns.
In late 1993, in the course of discussion of a variety of possible
transactions with management of the General Partners, the CPA(R) Partnerships'
investment banker informed management that it believed that the then current
conditions in the public market for REITs made it possible to use equity and
debt capital of a REIT to purchase the Properties of the first six CPA(R)
Partnerships in a REIT transaction.
In July, 1994, the General Partners approved the sale of the Properties
owned by the first six CPA(R) Partnerships to a REIT controlled by management.
The General Partners' approval was based upon a review of the terms of the
transaction, the expected benefits to the Limited Partners and the alternatives
to the sale, as well as a consideration of the fairness of the transaction to
the Limited Partners based upon a review of the appraisal of the Properties and
discussions regarding a fairness opinion.
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45
The sale transaction was dependent upon the ability of the REIT to raise
capital at a price high enough to raise sufficient capital to purchase the
Properties on terms which management and its advisors deemed favorable. In
October 1994, management determined that the needed capital could not be raised
at a price that satisfied its criteria. In addition, the General Partners grew
increasingly concerned about the tax impact on the Limited Partners of the sale
of the Properties. In the proposed transaction, most Limited Partners would have
recognized taxable income immediately upon the sale of the Properties. For these
reasons, the sale transaction was abandoned in October 1994.
The General Partners continued to consider options to achieve the CPA(R)
Partnerships' objectives. Beginning in late 1995, the consideration of these
options included CPA(R):7, CPA(R):8 and CPA(R):9 as these CPA(R) Partnerships
were approaching the time when their liquidation could begin. At that time, the
General Partners were seeking a transaction that would provide liquidity to
those Unitholders that wanted the ability to liquidate their investment but
retain for the CPA(R) Partnerships some flexibility as to the timing and tax
impact of the liquidation. In addition, the General Partners wanted to provide
an opportunity to Unitholders to continue to hold their Units and take advantage
of the continuing benefits of such ownership. Lastly, the General Partners
wanted to provide Limited Partners with an opportunity to retain an investment
which provides them with substantially the same rights as those the Unitholders
have as Limited Partners. The General Partners then proceeded to develop its
plans for the Consolidation.
During the first nine months of 1996, the General Partners engaged the
Independent Appraiser to provide the Fairness Opinion and the Appraisals and
continued working on structuring and analyzing the Consolidation. Management
reported to the Boards of Directors of the General Partners on the progress of
the Consolidation at the Boards' regular meetings in April and July 1996. At
each meeting, the Boards authorized management to proceed with its investigation
of the Consolidation.
The General Partners considered structuring the Company as a REIT. After
careful consideration of this structure, the General Partners concluded that it
was not advisable to structure the Company as a REIT because (i) the
Consolidation of the CPA(R) Partnerships into a REIT would cause the Partners to
realize approximately $336 million in capital gains, (ii) the general partners
were concerned that the Company's capital structure and operations would not
allow it to qualify as a REIT and (iii) the limited liability company structure
provides more operating flexibility than a REIT.
At a special board meeting held on October 5, 1996, management presented to
the Boards the full details of the Consolidation including the potential
advantages and disadvantages of the Consolidation to the Limited Partners. After
a full discussion of the Consolidation at the special meeting, the Boards of the
General Partners voted unanimously to approve the filing of the Registration
Statement and the execution of the Merger Agreements.
TERMS OF THE CONSOLIDATION
Structure of the Merger. If the Consolidation is approved, it will take
the form of a Merger pursuant to which each Participating Partnership will merge
with a Subsidiary Partnership and survive the Merger.
Each Merger is proposed to be effected pursuant to a Merger Agreement
between each Subsidiary Partnership and the respective CPA(R) Partnership. Prior
to or simultaneously with the completion of the Consolidation, the Company will
engage in a series of transactions (the "Formation Transactions") to consolidate
the business of the Participating Partnerships into the Company.
The transactions described below will have occurred or will take place
simultaneously with the closing of the Consolidation.
- The Company was formed as a Delaware limited liability company with the
Manager and the Initial Member as the initial members.
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46
- The Company formed nine limited partnerships. The Company is the General
Partner of each Subsidiary Partnership, and the Initial Member is the
initial limited partner of each Subsidiary Partnership.
- Each newly formed partnership will be merged with each CPA(R) Partnership
whose Limited Partners approve the Consolidation. Each surviving
partnership will be a "Subsidiary Partnership." In connection with the
Consolidation, the following number of Listed Shares per Unit will be
issued to the Unitholders of each Participating Partnership who elect
Listed Shares:
LISTED SHARES
PER UNIT
CPA(R): (EXCHANGE RATIO)
----------------------------------------------------------- ----------------
1.......................................................... 26.30
2.......................................................... 27.96
3.......................................................... 37.93
4.......................................................... 32.97
5.......................................................... 18.37
6.......................................................... 69.03
7.......................................................... 55.39
8.......................................................... 69.55
9.......................................................... 52.63
- CPA(R) Partnership Units exchanged for Listed Shares will be held by the
Company and exchanged on a one-for-one basis for Subsidiary Partnership
Units.
- Unitholders who elect to receive Subsidiary Partnership Units will have
their Units exchanged on a one-for-one basis for Subsidiary Partnership
Units in the Subsidiary Partnership in which they own an interest.
- Each corporate General Partner of the CPA(R) Partnerships will receive
Listed Shares in exchange for a portion of its General Partner interests,
the number of which will vary dependent upon which CPA(R) Partnerships
participate in the Consolidation. See "COMPENSATION, REIMBURSEMENT AND
DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGERS."
- Each corporate General Partner of the CPA(R) Partnerships will contribute
to the Manager its Listed Shares and receive equity in the Manager in
proportion to the value of its contribution. The number of Listed Shares
to be received by each corporate General Partner with respect to each
Participating Partnership is as follows:
NUMBER OF LISTED SHARES
RECEIVED BY MANAGER IF CPA(R)
PARTNERSHIP
CPA(R) PARTNERSHIP PARTICIPATES IN THE CONSOLIDATION
-------------------------------------------- ---------------------------------------
CPA(R):1.................................... 314
CPA(R):2.................................... 156,885
CPA(R):3.................................... 293,075
CPA(R):4.................................... 10,865
CPA(R):5.................................... --
CPA(R):6.................................... 8,847
CPA(R):7.................................... 36,709
CPA(R):8.................................... 155,023
CPA(R):9....................................
-------
TOTAL....................................... 661,718
=======
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- William P. Carey, as General Partner of each of the CPA(R) Partnerships,
will receive Listed Shares in exchange for a portion of his General
Partner interests, the number of which will vary dependent upon which
CPA(R) Partnerships participate in the Consolidation. The number of
Listed Shares to be received by Mr. Carey with respect to each
Participating Partnership is as follows:
NUMBER OF LISTED SHARES
RECEIVED BY MR. CAREY
CPA(R) IF CPA(R) PARTNERSHIP
PARTNERSHIP PARTICIPATES IN THE CONSOLIDATION
----------------------------------------------- ---------------------------------
CPA(R): 1...................................... 35
CPA(R): 2...................................... 1,306
CPA(R): 3...................................... 2,253
CPA(R): 4...................................... 10,865
CPA(R): 5...................................... --
CPA(R): 6...................................... 8,847
CPA(R): 7...................................... 9,177
CPA(R): 8...................................... 38,756
CPA(R): 9...................................... 177
- The General Partners will retain the remainder of their General Partner
interests which will be converted into Limited Partner interests in the
Subsidiary Partnerships.
As a result of the Consolidation, the Unitholders who elect to receive
Listed Shares will cease to own direct interests in the CPA(R) Partnerships.
Unitholders who elect Subsidiary Partnership Units and the Company will own
direct interests in the Subsidiary Partnerships. After the Consolidation, the
Subsidiary Partnerships will own all of the business and operations owned by the
Participating Partnerships prior to the Consolidation and will be responsible
for all of the Participating Partnerships' liabilities.
The General Partners may decide not to pursue the Consolidation at any time
before it becomes effective, whether before or after approval by the
Unitholders.
Effective Time. If approved, the Consolidation is expected to become
effective on or about January 1, 1998 (the "Effective Time").
TOTAL EXCHANGE VALUE AND ALLOCATION OF LISTED SHARES AND SUBSIDIARY PARTNERSHIP
UNITS
General. The Total Exchange Value was determined as of June 30, 1997 and
has been allocated to each of the CPA(R) Partnerships solely to establish a
consistent method of allocating Listed Shares and Subsidiary Partnership Units
for purposes of the Consolidation. The Total Exchange Value of the CPA(R)
Partnerships does not necessarily reflect the aggregate price at which Listed
Shares or Subsidiary Partnership Units may be sold. See "RISK FACTORS." The
number of Listed Shares to be issued to each Participating Partnership upon
consummation of the Consolidation will equal the Total Exchange Value allocated
to the Participating Partnership (reduced by the Total Exchange Value associated
with the number of Subsidiary Partnership Units issued to the Participating
Partnership) divided by $20, an arbitrary amount chosen for the sole purpose of
allocating Listed Shares and which is not intended to imply that the Listed
Shares will trade at a price of $20 per Listed Share. No fractional Listed
Shares will be issued by the Company in connection with the Consolidation. See
"No Fractional Listed Shares" below. As of the date of this Prospectus, the
General Partners do not know of any material change in the financial performance
or condition of any of the CPA(R) Partnerships that will materially affect the
Total Exchange Value.
Adjustments to Exchange Value and Allocation of Shares. All determinations
of the Total Exchange Value for purposes of allocating the Listed Shares among
the CPA(R) Partnerships and then between the Unitholders and the General
Partners, other than the final computation of the expenses of the Consolidation,
were determined as of June 30, 1997 in the manner described below under
"Determination of Exchange Value." Each CPA(R) Partnership will operate and make
distributions prior to the Closing Date such that its
36
48
Exchange Value relative to the Total Exchange Value of the other parties to the
Consolidation remains substantially the same as the relative Total Exchange
Value shown in the Prospectus. No adjustment will be made to these allocations
unless a material change in the value of an asset or a liability is discovered
after June 30, 1997 and before the effective date of the Consolidation which
cannot be adjusted through the CPA(R) Partnerships' distributions. In the event
such a change arises, the consideration to be received by the Unitholders will
either be adjusted as described below or, if the matter relates to a CPA(R)
Partnership and the adjustment would be in excess of 10 percent of such Total
Exchange Value allocated to the CPA(R) Partnership, that CPA(R) Partnership may
not participate without again obtaining the approval of the revised terms by
Unitholders holding a majority of outstanding Units of the CPA(R) Partnership.
In the event a matter is discovered after a CPA(R) Partnership has merged with a
Subsidiary Partnership, there will be no adjustment to the consideration issued
by the Company even though the discovery of the matter effectively could reduce
the value of the assets obtained by the Company from that CPA(R) Partnership.
See "RISK FACTORS -- Reduction in Value from Contingent or Undisclosed
Liabilities."
If a material change in the value of an asset or liability or potential
liability is discovered with respect to a CPA(R) Partnership participating in
the Consolidation between June 30, 1997 and prior to the effective date of the
Consolidation which was not included in the computation of Total Exchange Value
and the relative Total Exchange Value of the parties cannot be maintained
through adjusting distributions that would reduce the corresponding value of the
assets contributed by the other CPA(R) Partnerships, an adjustment may be made
to the Total Exchange Value allocated to that CPA(R) Partnership. If the amount
of the change in the value of an asset or liability can be reasonably determined
and it is in excess of ten percent of the Total Exchange Value allocated to that
CPA(R) Partnership, the Total Exchange Value allocated to that CPA(R)
Partnership will be redetermined and its allocation of Listed Shares adjusted as
though the asset or liability were in existence on June 30, 1997.
DETERMINATION OF TOTAL EXCHANGE VALUE
The Total Exchange Value allocated to each CPA(R) Partnership is computed
as (A) the sum of (i) the estimated fair market value of the real estate assets
thereof as determined by the Independent Appraisals as of March 31, 1997 and
(ii) its Net Other Assets and Liabilities; (B) reduced by (iii) such
Partnership's mortgage and other debt, (iv) its share of Consolidation Expenses
and transfer taxes, (v) the preferred return due to its General Partners
relating to properties previously sold and (vi) the General Partners' retained
interest in such Partnership. Consolidation Expenses, which are expected to
amount to $2,997,000, excluding transfer taxes, are allocated to the CPA(R)
Partnerships in accordance with their relative Total Exchange Values before
giving effect to the Consolidated Expenses.
37
49
The determination of the Total Exchange Value allocated to each CPA(R)
Partnership is summarized in the following table:
DERIVATION OF TOTAL EXCHANGE VALUE
ESTIMATED
CONSOLIDATION
APPRAISED EXPENSES GENERAL GENERAL
VALUE NET OTHER AND PARTNERS' TOTAL PARTNERS' TOTAL
OF REAL ASSETS AND MORTGAGE AND TRANSFER PREFERRED CONSOLIDATION RETAINED EXCHANGE
ESTATE(1) LIABILITIES(2) OTHER DEBT TAXES RETURN(3) VALUE INTEREST(4) VALUE
------------ ----------- ------------- ----------- ----------- ------------ ----------- ------------
CPA(R):1..... $ 33,390,000 $ 747,236 $ (12,591,452) $ (169,517) $ (133,823) $ 21,242,444 $ (198,740) $ 21,043,704
CPA(R):2..... 40,680,000 1,892,610 (7,349,619) (277,610) (1,048,845) 33,896,536 (39,081) 33,857,455
CPA(R):3..... 52,750,000 4,716,559 (300,000) (417,289) (731,823) 56,017,447 (48,843) 55,968,604
CPA(R):4..... 49,880,000 16,467,073 (7,896,487) (434,877) (857,754) 57,157,955 (335,185) 56,822,770
CPA(R):5..... 54,640,000 4,221,823 (15,434,940) (342,508) (1,067,133) 42,017,242 (430,844) 41,586,398
CPA(R):6..... 104,300,000 2,992,356 (39,608,317) (682,208) (18,099) 66,983,732 (461,454) 66,522,278
CPA(R):7..... 70,300,000 6,331,464 (24,046,101) (418,149) (805,015) 51,362,199 (364,527) 50,997,672
CPA(R):8..... 136,670,000 17,439,605 (54,695,751) (792,338) (53,055) 98,568,461 (682,646) 97,885,815
CPA(R):9..... 139,890,000 (1,201,957) (74,476,977) (521,854) (29,830) 63,659,382 (583,438) 63,075,944
------------ ----------- ------------- ----------- ----------- ------------ ----------- ------------
TOTAL........ $682,500,000 $53,606,769 $(236,399,644) $(4,056,350) $(4,745,377) $490,905,398 $(3,144,758) $487,760,640
============ =========== ============= =========== =========== ============ =========== ============
- ---------------
(1) Reflects the Independent Appraisal of the value of the CPA(R) Partnerships'
Properties as of March 31, 1997.
(2) Net Other Assets and Liabilities include cash, net accounts receivable, rent
deposits and net accounts payable, marketable securities as of June 30,
1997, estimates of the realizable value of certain litigation claims of the
CPA(R) Partnerships, the estimated change in value to two Properties as a
result of material events occurring subsequent to the appraisal date, and
adjustments reflecting cash distributions made by the CPA(R) Partnerships in
July 1997.
(3) Includes only amounts payable to the General Partners for properties
previously sold based on the trading prices of Listed Shares as described in
the table entitled "Calculation of Required Listed Share Price for Payment
of General Partners' Preferred Return" under "COMPENSATION, REIMBURSEMENT
AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER."
(4) Represents the General Partners' interest of one percent of CPA(R)
Partnership distributions of Cash from Sales and Financings up to a maximum
of the amounts listed above, which will be retained after the Consolidation.
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50
Net Other Assets and Liabilities Table. The following table sets forth the
components of Net Other Assets and Liabilities which, apart from the appraised
value of real estate resulting from the Independent Appraisal, comprise the
greatest components of Total Exchange Value for the CPA(R) Partnerships. In
general, the Net Other Assets and Liabilities were derived from the unaudited
financial statements as of June 30, 1997.
NET OTHER ASSETS AND LIABILITIES
OF CPA(R) PARTNERSHIPS
NET ACCOUNTS
RECEIVABLE RENT DEPOSITS AND
AND OTHER NET ACCOUNTS
CASH(1) ADJUSTMENTS(2) PAYABLE(3) SECURITIES(4) TOTAL
----------- -------------- ----------------- ------------- -----------
CPA(R):1.................... $ 741,871 $ 845,965 $ (840,600) $ 747,236
CPA(R):2.................... 1,168,955 1,702,513 (978,858) 1,892,610
CPA(R):3.................... 1,110,623 4,661,677 (1,055,741) 4,716,559
CPA(R):4.................... 3,388,952 4,101,467 (1,591,794) $ 10,568,448 16,467,073
CPA(R):5.................... 4,091,246 479,929 (2,104,536) 1,755,184 4,221,823
CPA(R):6.................... 2,889,939 2,874,736 (2,772,319) 2,992,356
CPA(R):7.................... 6,065,650 2,249,155 (1,983,341) 6,331,464
CPA(R):8.................... 6,497,813 1,469,199 (2,745,591) 12,218,184 17,439,605
CPA(R):9.................... 1,122,813 1,164,304 (3,489,074) (1,201,957)
----------- -------------- ----------------- ------------- -----------
Total....................... $27,077,862 $ 19,548,945 $ (17,561,854) $ 24,541,816 $53,606,769
========== =========== ============= ========== ==========
- ---------------
(1) Cash and cash equivalents
(2) Net Accounts Receivable includes Escrow funds, Tenant and insurance
receivables, Accrued interest and Rents receivable, Reserve for uncollected
rent, estimates of the realizable value of certain litigation claims of the
CPA(R) Partnerships and the estimated change in value to two Properties as a
result of material events occurring subsequent to the appraisal date.
(3) Rent Deposits and Net Accounts Payable includes Accrued interest payable,
Escrow liabilities, Accounts payable and accrued expenses, Prepaid rental
income, Security deposits and Accounts payable to Affiliates, and
adjustments reflecting cash distributions made by CPA(R) Partnerships in
July 1997.
(4) Securities include stock and rights to purchase stock. Securities listed on
an exchange or Nasdaq or rights to acquire such securities have been valued
at market value as of June 30, 1997. All other securities have been valued
at book value as reflected on the balance sheets of the respective CPA(R)
Partnerships on June 30, 1997.
ALLOCATION OF LISTED SHARES TO UNITHOLDERS AND GENERAL PARTNERS
The method utilized to allocate Listed Shares to Unitholders and the
General Partners will involve two steps. Listed Shares will first be allocated
among the Participating Partnerships based upon the Total Exchange Value
allocated to each of the Participating Partnerships relative to the Total
Exchange Value of all of the CPA(R) Partnerships. The General Partners believe
that the Total Exchange Value allocated to each of the CPA(R) Partnerships
represent fair estimates of the value of their assets, net of liabilities,
allocable Consolidation Expenses and the General Partners' preferred return and
retained interest, as of June 30, 1997, and constitute a reasonable basis for
allocating the Listed Shares among all of the Participating Partnerships.
The Listed Shares to be received by each Participating Partnership will be
allocated between the Unitholders and the General Partners of each Participating
Partnership based on those provisions of such Partnership's Partnership
Agreement applicable to distributions on liquidation of the CPA(R) Partnership.
The General Partners will receive 733,134 Listed Shares in exchange for
that portion of their General Partner interest which represents the General
Partners' share of the appreciation of the Properties owned by the CPA(R)
Partnerships. The General Partners are generally entitled to a share (ranging
from two to
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51
15 percent) of the increase in the value of the Properties owned by each CPA(R)
Partnership after the Unitholders receive a return of their initial investment
plus a cumulative return which varies by CPA(R) Partnership. In the
Consolidation, the value of the General Partners' interest in the appreciation
of the Properties has been calculated assuming the Properties were sold at the
appraised value and the proceeds distributed to the Unitholders. This method has
been used because the General Partners believe it is the best way to approximate
the value the General Partners are entitled to receive in connection with the
appreciation of the CPA(R) Partnership Properties but at the same time receiving
that value in the same form (Listed Shares) as the Unitholders are receiving
their continuing interest. The General Partners will be issued Listed Shares
only with respect to the appreciation in the value of the portfolios of the
CPA(R) Partnerships that participate in the Consolidation.
The General Partners' Retained Interest represents the one percent interest
in Cash from Sales and Cash from Financings of each Subsidiary Partnership,
which interest will be limited to the dollar amount shown in the table
"Derivation of Total Exchange Value." This interest will be converted from a
General Partner interest in the CPA(R) Partnerships to a Limited Partner
interest in the Subsidiary Partnerships.
The table below shows the allocation of Total Exchange Value and Listed
Shares between the General Partners and the Unitholders in each Participating
Partnership assuming that (1) all CPA(R) Partnerships participate in the
Consolidation and (2) all Unitholders in each CPA(R) Partnership elect to
receive Listed Shares. The actual number of Listed Shares allocated to the
Unitholders of each Participating Partnership upon consummation of the
Consolidation will be reduced to the extent Subsidiary Partnership Units are
issued to the Unitholders in the Participating Partnership.
SUMMARY ALLOCATION OF TOTAL EXCHANGE VALUE AND LISTED SHARES BETWEEN UNITHOLDERS
AND GENERAL PARTNERS(1)
TOTAL
TOTAL EXCHANGE LISTED
EXCHANGE VALUE SHARES
TOTAL VALUE ATTRIBUTABLE LISTED SHARES ATTRIBUTABLE
EXCHANGE ATTRIBUTABLE TO TO GENERAL ATTRIBUTABLE TO TO GENERAL TOTAL LISTED
VALUE UNITHOLDERS(2) PARTNERS(3) UNITHOLDERS(4) PARTNERS(5) SHARES
------------ --------------- ------------ --------------- ------------ ------------
CPA(R):1........................... $ 21,043,704 $ 21,036,720 $ 6,984 1,051,836 349 1,052,185
CPA(R):2........................... 33,857,455 30,693,620 3,163,835 1,534,681 158,192 1,692,873
CPA(R):3........................... 55,968,604 50,062,060 5,906,544 2,503,103 295,327 2,798,430
CPA(R):4........................... 56,822,770 56,388,180 434,590 2,819,409 21,729 2,841,138
CPA(R):5........................... 41,586,398 41,586,398 -- 2,079,320 -- 2,079,320
CPA(R):6........................... 66,522,278 66,168,400 353,878 3,308,420 17,695 3,326,115
CPA(R):7........................... 50,997,672 50,079,940 917,732 2,503,997 45,887 2,549,884
CPA(R):8........................... 97,885,815 94,010,240 3,875,575 4,700,512 193,778 4,894,290
CPA(R):9........................... 63,075,944 63,072,402 3,542 3,153,620 177 3,153,797
------------ ----------- ------------ ---------- ------- ----------
Total.............................. $487,760,640 $ 473,097,960 $14,662,680 23,654,898 733,134 24,388,032
============ =========== ============ ========== ======= ==========
- ---------------
(1) Assumes participation in the Consolidation by all CPA(R) Partnerships and
that all Unitholders elected to receive Listed Shares.
(2) Represents the Limited Partnership interests to be exchanged for Listed
Shares.
(3) Represents the General Partners' interest for its share of appreciation of
the Properties to be exchanged for Listed Shares.
(4) Total Exchange Value Attributable to Unitholders divided by $20.
(5) Total Exchange Value Attributable to the General Partners divided by $20.
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52
ALLOCATION OF LISTED SHARES AND TOTAL OF CUMULATIVE DISTRIBUTIONS AND ASSIGNED
TOTAL EXCHANGE VALUE PER $1,000 ORIGINAL INVESTMENT
The following table sets forth the total number of Shares issued to
Unitholders in each CPA(R) Partnership and the number of Listed Shares to be
issued per $1,000 originally invested and the total of cumulative distributions
and assigned Total Exchange Value.
ALLOCATION OF LISTED SHARES AND TOTAL CUMULATIVE DISTRIBUTIONS AND ASSIGNED
TOTAL EXCHANGE VALUE PER $1,000 ORIGINAL INVESTMENT(1)
PER $1,000 ORIGINAL
INVESTMENT(4)
----------------------------------------------
TOTAL OF CUMULATIVE
TOTAL NUMBER DISTRIBUTIONS AND ASSIGNED
TOTAL EXCHANGE VALUE OF SHARES ASSIGNED TOTAL NUMBER OF
ALLOCABLE TO ALLOCABLE TO TOTAL EXCHANGE EXCHANGE LISTED
UNITHOLDERS(2) UNITHOLDERS(3) VALUE VALUE SHARES(5)
-------------------- -------------- ------------------- -------- ---------
CPA(R):1............ $ 21,036,720 1,051,836 $ 2,260 $1,052 52.59
CPA(R):2............ 30,693,620 1,534,681 3,574 1,118 55.91
CPA(R):3............ 50,062,060 2,503,103 3,940 1,517 75.85
CPA(R):4............ 56,388,180 2,819,409 2,949 1,319 65.93
CPA(R):5............ 41,586,398 2,079,320 2,027 735 36.74
CPA(R):6............ 66,168,400 3,308,420 2,491 1,381 69.03
CPA(R):7............ 50,079,940 2,503,997 2,062 1,108 55.39
CPA(R):8............ 94,010,240 4,700,512 2,169 1,391 69.55
CPA(R):9............ 63,072,402 3,153,620 1,741 1,053 52.63
------------ ----------
$473,097,960 23,654,898
============ ==========
- ---------------
(1) This table assumes 100 percent Partnership Participation in the
Consolidation and that no Subsidiary Partnership Units are issued.
(2) See the table entitled "DERIVATION OF TOTAL EXCHANGE VALUE" for a
determination of the Total Exchange Value for the CPA(R) Partnerships and
the General Partners.
(3) The total number of Listed Shares was calculated by dividing the Total
Exchange Value by $20, an arbitrary figure.
(4) A capital contribution of $500 was required for each Unit in CPA(R):1-5. The
capital contribution for each Unit of the remaining CPA(R)Partnerships was
$1,000. These columns were calculated assuming an original investment of
$1,000 per Unit to facilitate a comparison among the CPA(R) Partnerships.
(5) The number of Listed Shares to be issued per $1,000 original investment was
calculated by dividing the Total Exchange Value allocable to Unitholders per
$1,000 original investment by $20. No fractional Listed Shares will be
issued in connection with the Consolidation. See "No Fractional Listed
Shares."
EXPECTED BENEFITS OF CONSOLIDATION
The General Partners believe that the Consolidation is the best way to
achieve the CPA(R) Partnerships' investment objectives for the following
reasons:
Liquidity Through Stock Exchange Listing. The Company has applied for
listing of the Listed Shares on the NYSE. Accordingly, if the Listed Shares are
listed (listing is a condition to the Consolidation), the Consolidation offers
liquidity to those Unitholders who receive Listed Shares in the Consolidation.
In addition, to enhance trading in, and liquidity of, the Listed Shares, they
will be issued in smaller denominations and therefore larger numbers than the
Units in order to permit a broader base of investors.
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53
Increased Diversification. The Consolidation permits holders of Listed
Shares to participate in a company substantially larger and more diversified
than any of the CPA(R) Partnerships. The Company will have increased tenant,
building type, industry sector and geographic diversity. The size and diversity
of the Company spreads the risk of an investment in the Company over a broader
group of assets and reduces the dependence of the investment upon the
performance of any particular asset or group of assets.
Control of Timing of Liquidation by Investors. By creating a freely
tradable equity interest in the Company, the Consolidation permits Unitholders
to liquidate their interest in the CPA(R) Partnership when such liquidation best
serves the Unitholder. In addition, by controlling the timing of the liquidation
of their CPA(R) investment, Unitholders will have better control of the timing
of the tax impact of the liquidation of their interests. Furthermore, the CPA(R)
Partnerships will not be forced to sell their properties and recognize the
capital gains that would be generated by such sales. If the CPA(R) Partnerships
were liquidated by selling off the Properties at the Appraised Value, the
Unitholders would realize capital gains of approximately $336 million.
Greater Investment Opportunity. The General Partners believe that the
Company will maximize economic value for those Unitholders who receive Listed
Shares in connection with the Consolidation. The CPA(R) Partnerships are not in
a position to take advantage of external growth opportunities because they have
already committed their capital and are not authorized to raise additional funds
or reinvest net sale or refinancing proceeds for new investments. Although there
can be no assurances, the General Partners believe that, with an infinite life
entity, the Company can take advantage of investment opportunities that it
believes are attractive relative to their risks. In addition, the General
Partners believe that the Company may be able to take advantage of its size to
refinance certain CPA(R) Partnership debt at lower interest rates thereby
increasing the amount of cash available for distribution or investment.
Furthermore, the Company's size may provide a more flexible capital structure
and greater access to the capital markets.
Choice of Investment -- Listed Shares or Subsidiary Partnership
Units. Those Unitholders who do not want the risks and opportunities afforded
by the Listed Shares can elect to receive Subsidiary Partnership Units. The
Subsidiary Partnership Units are structured so that their economic interests and
legal rights are substantially the same as the terms of the Units. These include
liquidation of the partnership interest within the expected timeframe through
the redemption of the Subsidiary Partnership Units in each Subsidiary
Partnership at a price determined by an appraisal no later than the approximate
time of redemption of the real estate owned by such Subsidiary Partnership. The
Subsidiary Partnership Units represent an interest in the Subsidiary
Partnerships, and the performance of, and distributions to the holders of, each
series of Subsidiary Partnership Units will be based solely upon the performance
of the Subsidiary Partnership that issued such series and, accordingly, of the
CPA(R) Partnership relating to such series as it existed prior to the
Consolidation.
The General Partners believe that Unitholders desire more control over the
timing of the liquidation of their investments than they would have if the
CPA(R) Partnerships were to continue in existence. Although the Consolidation is
not the only means by which Unitholders could achieve liquidity for their
investments in the CPA(R) Partnerships, the General Partners believe that the
Consolidation is preferable to the alternatives. While Unitholders could sell
their Units in the informal secondary markets for real estate limited
partnership interests, the General Partners believe the NYSE is a more efficient
market and that holders of Listed Shares will get a better price for their
interests on the NYSE than they would in the informal secondary market.
Alternatively, liquidity could be achieved by the sale of all of the CPA(R)
Partnerships' assets and distribution of the net proceeds to Unitholders in a
dissolution of the CPA(R) Partnerships if approved by the favorable vote of the
holders of a majority in interest of the outstanding Units (if such approval is
required by the Partnership Agreement). The General Partners believe that such a
liquidation would not be in the best interests of the Unitholders (even if the
Consolidation were not being offered), principally because the General Partners
believe that higher value can be achieved by holding the CPA(R) Partnerships'
assets rather than disposing of them, particularly in light of the transaction
costs of such dispositions and the tax impact of such liquidation (a capital
gain of approximately $336 million if all the Properties are sold). See
"Alternatives to the Consolidation," below.
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By choosing to receive Listed Shares rather than Subsidiary Partnership
Units in the Consolidation, Unitholders can obtain the opportunity to liquidate
their investment at a time most advantageous and convenient to them. The General
Partners anticipate that the liquidity benefit inherent in the Consolidation may
temporarily be adversely affected by a number of factors, including (i) the
likelihood that some Unitholders will sell their Listed Shares as soon as
possible after the Consolidation, putting downward pressure on the price of
Listed Shares, and (ii) trading value may reflect market uncertainty about the
Company's performance. Given these circumstances, the liquidity aspect of the
Consolidation can be viewed from two perspectives. First, for Unitholders who
must immediately generate cash from any available source, regardless of the loss
of future opportunities, that option will now be available, but may be only at
prices which, while perhaps higher than prices generally being offered for Units
in the secondary market, are less than underlying asset value. Second, other
Unitholders, given the adverse market factors described above, may wish to
consider holding their Listed Shares, focusing on the growth potential of the
Company and treating liquidity as an "incidental" benefit of the Consolidation.
The Subsidiary Partnership Units will not be listed on any national
securities exchange and will not be designated as Nasdaq National Market System
securities, and no public market is expected to develop for the Subsidiary
Partnership Units.
ALTERNATIVES TO THE CONSOLIDATION
Before deciding to recommend the Consolidation, the General Partners
considered alternatives in an effort to achieve maximum Unitholder return and to
give a choice of investment to Unitholders. These alternatives were (i)
continued management of the CPA(R)Partnerships as currently structured, (ii)
conversion of the CPA(R) Partnerships into a single or multiple REITs, (iii)
listing of the Units on a national securities exchange or designation of the
Units as Nasdaq National Market System securities and (iv) liquidation of the
CPA(R) Partnerships. Set forth below are the conclusions of the General Partners
regarding their belief that the Consolidation is more beneficial to the
Unitholders than the alternatives. The General Partners are unable to quantify
the consideration that would be received pursuant to all the alternatives
discussed below.
Continuation of the CPA(R) Partnerships. An alternative to the
Consolidation would be to continue the CPA(R) Partnerships. The CPA(R)
Partnerships would remain separate legal entities with their own assets and
liabilities, governed by their existing Partnership Agreements. While the
disclosure documents used to offer the Units for sale to the public disclosed
the intentions of the CPA(R) Partnerships to liquidate their assets within six
to 15 years after acquisition, each of the CPA(R) Partnerships has a stated life
of approximately 40 years and the Unitholders were advised that the liquidation
of the CPA(R) Partnerships would depend on market conditions as they might
change from time to time. The CPA(R) Partnerships are all operating profitably
and do not need to liquidate to satisfy debt obligations or other current
liabilities or to avert defaults, foreclosures or other adverse business
developments.
A number of advantages would be expected to arise from the continued
operation of the CPA(R) Partnerships. Unitholders would probably continue to
receive regular quarterly distributions of net cash flow arising from operations
and the sale or refinancing of their CPA(R) Partnerships' assets. In addition,
continuing the CPA(R) Partnerships without change avoids whatever disadvantages
may be inherent in the Consolidation. See "RISK FACTORS."
The General Partners rejected this alternative because they concluded that
maintaining the CPA(R) Partnerships, as separate entities, may have the
following potentially negative results when compared with the benefits that the
General Partners perceive may be derived from the Consolidation: (i) a less
efficient and cost effective exit strategy for Unitholders wishing to liquidate
their investment at a future date, (ii) inability of Unitholders to better
control the timing of the tax impact of the liquidation, (iii) illiquidity of
Units on a current basis due to the lack of a large and established secondary
market, (iv) difficulty in valuing the investment due to the limited secondary
market for Units, (v) less flexibility in actively managing the
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portfolio, (vi) limitations on new investments and (vii) no investment choice
provided to the Unitholders based upon their individual investment goals.
Conversion of CPA(R) Partnerships into REITs. The General Partners
explored the possibility of converting each CPA(R) Partnership into a separate
REIT that would have had its shares listed on a national securities exchange.
The General Partners concluded, after consultation with outside advisors, that
separate, relatively small REITs advised by an outside advisor would not be well
received by traditional purchasers of REIT shares. The General Partners,
therefore, determined that this alternative would not fulfill the objectives of
the CPA(R) Partnerships.
Listing of the Units on a National Securities Exchange, Designation of the
Units as Nasdaq National Market System Securities or Support of Secondary
Market. The General Partners explored the possibility of having the Units
listed on a national securities exchange such as the NYSE or having the Units
designated as Nasdaq National Market System securities. The General Partners
concluded that there would be limited trading interest in the Units due to the
limitations on the CPA(R) Partnerships' growth contained in the Partnership
Agreements and the size of some of the CPA(R) Partnerships and that there would
be limited interest in the Units due to the partnership form and the relative
lack of corporate democracy attributes. The General Partners concluded that this
may result in minimal increases in liquidity.
Another alternative which may create liquidity for Unitholders desiring to
dispose of their investments in the CPA(R) Partnerships is the creation or
support of the secondary market for the Units through limited cash tender offers
or repurchase programs sponsored by the CPA(R) Partnerships. While the General
Partners did not perform detailed financial analysis and cannot predict with any
degree of certainty the possible impact of this alternative on the value of
Units, the terms of the Partnership Agreements and federal tax law prohibit this
alternative from being available with respect to a majority of the Units.
Liquidation of the CPA(R) Partnerships. One of the alternatives available
to the General Partners is to proceed with a liquidation of each Partnership in
the normal course and distribute the net liquidation proceeds to the General and
Limited Partners. Through these liquidations, Unitholders' investment in the
CPA(R) Partnerships would be concluded. The General Partners concluded that
there would be several disadvantages to using this strategy to liquidate the
CPA(R) Partnerships. A complete liquidation of the CPA(R) Partnerships would
deprive those Unitholders who do not desire to liquidate their investment in net
leased properties from participating in the benefits of future performance and
possible property value improvements. In addition, liquidation of the CPA(R)
Partnerships' properties does not have certain of the other benefits of the
Consolidation, including (i) permitting Unitholders to hold their investment
until the time when liquidation is appropriate for their individual investment
strategy and (ii) the opportunity to participate in the risks and rewards of the
Company's plans for growth.
The transaction costs associated with the Consolidation are expected to be
significantly less than those which would be incurred in a liquidation of the
CPA(R) Partnerships' assets. If the assets of the CPA(R) Partnerships were
liquidated over time, not only would higher transaction costs likely be
incurred, but distributions to Unitholders from the CPA(R) Partnerships' cash
flow from operations may be reduced since the CPA(R) Partnerships' fixed costs,
such as general and administrative expenses, would not be proportionately
reduced with the liquidation of assets.
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Finally, the complete liquidation of the CPA(R) Partnerships would cause
the recognition of capital gains by Unitholders to the extent the selling price
of the properties exceed their tax basis. The following table provides the total
capital gain that would be recognized if all of the Properties were sold for
their Appraised Value:
CAPITAL
GAINS
------------
CPA(R):1....................................................... $ 18,285,000
CPA(R):2....................................................... 26,354,000
CPA(R):3....................................................... 42,066,000
CPA(R):4....................................................... 47,095,000
CPA(R):5....................................................... 30,722,000
CPA(R):6....................................................... 50,177,000
CPA(R):7....................................................... 23,470,000
CPA(R):8....................................................... 50,764,000
CPA(R):9....................................................... 47,441,000
-----------
TOTAL.......................................................... $336,374,000
===========
The Consolidation will not cause the recognition of any taxable income by
Unitholders. After the Consolidation, Unitholders will recognize taxable income
upon the sale of their Listed Shares for an amount in excess of their tax basis
or in the event the Company sells a property for an amount in excess of the
Company's tax basis. The Company does not expect to sell a significant number of
Properties after the Consolidation, other than sales which occur in the normal
course of business.
COMPARISON OF ALTERNATIVES
General. To assist Unitholders in evaluating the Consolidation, the
General Partners compared the consideration to be received by Unitholders of
each CPA(R) Partnership in the Consolidation to (i) the estimated range of
possible market values of the Listed Shares, assuming consummation of the
Consolidation (ii) estimates of the value of the Units on a liquidation basis
assuming that the assets of each CPA(R) Partnership were sold at their Appraised
Value and the net proceeds distributed to the Unitholders in accordance with the
Partnership Agreements (iii) estimates of the value of each CPA(R) Partnership
on a going-concern basis assuming that the CPA(R) Partnership were to continue
as a stand-alone entity and its assets sold at the end of a period consistent
with the original anticipated holding period of the CPA(R) Partnership and (iv)
the prices at which each CPA(R) Partnership's Units have sold in the illiquid
secondary market. See "SECONDARY MARKET AND OWNERSHIP OF UNITS." Due to the
uncertainty in establishing these values, the General Partners have established
a range of estimated values for certain of the alternatives, representing a high
and low estimated value for the potential consideration. Since the value of the
consideration for alternatives to the Consolidation is dependent upon varying
market conditions, no assurance can be given that the range of estimated values
indicated establishes the highest or lowest possible values. However, the
General Partners believe that analyzing the alternatives in terms of ranges of
estimated value, based on currently available data and, where appropriate,
reasonable assumptions made in good faith, establishes a reasonable framework
for comparing alternatives.
The results of this comparative analysis are summarized in the following
table. Unitholders should bear in mind that the estimated values assigned to the
alternate forms of consideration are based on a variety of assumptions that have
been made by the General Partners. These assumptions relate, among other things,
to projections as to each CPA(R) Partnership's future income, expenses, cash
flow and other significant financial matters, the capitalization rates that will
be used by prospective buyers when each CPA(R) Partnership's assets are
liquidated, securities market conditions and factors affecting the value of
securities of real estate companies, the ultimate asset composition and
capitalization of the Company and appropriate discount rates to apply to
expected cash flows in computing the present value of the cash flows that may be
received with respect to Units of each CPA(R) Partnership. In addition, these
estimates are based upon certain information available to the General Partners
at the time the estimates were computed, and no assurance can be given that the
same conditions analyzed by them in arriving at the estimates of value would
exist at the time of, or
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following, the Consolidation. The assumptions used have been determined by the
General Partners in good faith and, where appropriate, are based upon current
and historical information regarding the CPA(R) Partnerships and current real
estate markets and have been highlighted below to the extent critical to the
conclusions of the General Partners.
No assurance can be given that such consideration would be realized through
any of the designated alternatives, and Unitholders should carefully consider
the following discussions to understand the assumptions, qualifications and
limitations inherent in the presented valuation estimates. The estimated values
presented in the following table are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These estimated
values are based upon certain assumptions that relate, among other things, to
(i) projections as to each CPA(R) Partnership's future revenues, expenses, cash
flow and other significant financial matters, (ii) securities market conditions
and factors affecting the value of securities or real estate companies, (iii)
the ultimate asset composition and capitalization of the Company, (iv) the
capitalization rates that will be used by prospective buyers when each CPA(R)
Partnership's assets are liquidated, (v) selling costs, (vi) appropriate
discount rates to apply to expected cash flows in computing the present value of
the cash flows and (vii) the manner of sale of each CPA(R) Partnership's
properties. Actual results may vary from those set forth below based on numerous
factors, including those listed above, interest rate fluctuations, conditions in
securities markets, tax law changes, supply and demand for properties similar to
those owned by the CPA(R) Partnerships, the manner in which the properties are
sold and changes in availability of capital to finance acquisitions of
properties. The Company's actual results could differ materially from those
estimated in the forward-looking statements as a result of several factors,
including those discussed in "RISK FACTORS." Each element of the table is
described more fully below.
PER $1,000 INVESTMENT
------------------------------------------------------------------------
ESTIMATED RANGE OF RANGE OF TOTAL
TRADING PRICES OF ESTIMATED ESTIMATED SECONDARY EXCHANGE
LISTED SHARES GOING-CONCERN LIQUIDATION MARKET PRICES VALUE
------------------- -------------- ----------- ------------- --------
CPA(R)1............... $ 710 - 1,216 $ 940 $ 922 $ 384 - 780 $1,052
CPA(R)2............... 755 - 1,295 970 1,014 530 - 720 1,118
CPA(R)3............... 1,037 - 1,777 1,330 1,414 816 - 1,050 1,517
CPA(R)4............... 911 - 1,562 1,120 1,227 744 - 950 1,319
CPA(R)5............... 496 - 850 610 711 520 - 658 735
CPA(R)6............... 935 - 1,603 1,290 1,173 855 - 936 1,381
CPA(R)7............... 756 - 1,296 1,050 997 510 - 802 1,108
CPA(R)8............... 959 - 1,643 1,230 1,251 600 - 953 1,391
CPA(R)9............... 722 - 1,238 980 939 600 - 920 1,053
Estimated Valuation of Listed Shares. The General Partners analyzed
selected statistics on certain publicly traded REITs for the purpose of
providing a range of estimated trading values for the Listed Shares. Such
analysis comprised the following components: (i) identification of publicly
traded REITs with portfolios generally regarded as composed primarily of net
leased properties and, in that sense, reasonably comparable to the Company's
portfolio, (ii) determination of the recent trading value of the common stock
and annual distributions per share of such REITs, (iii) derivation of each
selected REIT's distribution yield (annual distribution rate per share divided
by the trading price per share), (iv) identification of a range of possible
distribution yields based on the highest and lowest distribution yields of the
REITs so identified, (v) determination of the pro forma annual distribution per
Listed Share of the Company and (vi) estimation of a possible range of trading
values for the Listed Shares of the Company, by capitalizing the Company's pro
forma annual distribution per Listed Share by the highest and lowest
distribution yield rates for the REITs so identified. The following table sets
forth for each REIT identified by the General Partners, among other things, the
recent trading price per share, the annual distribution, the applicable
distribution yield and the ratio of debt to total capitalization.
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SELECTED NET LEASE REITS(1)
EQUITY MARKET DEBT/TOTAL
PRICE ANNUAL DIVIDEND CAPITALIZATION TOTAL DEBT MARKET
COMPANY SYMBOL (AS OF 9/25/97) DIVIDEND YIELD ($ MILLIONS) ($ MILLIONS) CAPITALIZATION
- ------------------------- ------- --------------- -------- -------- ------------- ------------ --------------
Commercial Net Lease
Realty Inc. ........... NNN $ 16.50 $ 1.20 7.3% $ 386.0 $181.6 32%
Franchise Finance Corp.
of America............. FFA 26.44 1.80 6.8% 1,074.3 382.1 26%
National Golf Properties
Inc. .................. TEE 34.63 1.68 4.9% 730.9 239.8 25%
CCA Prison Realty
Trust.................. PZN 32.00 1.70 5.3% 690.4 -- 0%
Realty Income Corp. ..... O 27.06 1.89 7.0% 622.2 111.4 15%
Trinet Corporate Realty
Trust Inc. ............ TRI 36.00 2.52 7.0% 729.9 359.9 33%
Average.................. 6.4% 23%
- ---------------
(1) Based on information contained in Realty Stock Review issue of September 30,
1997.
The General Partners also researched and compiled analytical data regarding
certain traded equity interests that resulted from the consolidation of real
estate limited partnerships during the past four years. The analytical data on
entities resulting from recent consolidations of public limited partnerships
which disclosed net asset values at the time of the consolidation is summarized
below:
RECENT CONSOLIDATIONS OF PUBLIC LIMITED PARTNERSHIPS
VALUATION STATISTICS
PRICE FOUR WEEKS PRICE AS OF
AFTER CONSOLIDATION SEPTEMBER 25, 1997
APPROXIMATE NET ---------------------- ----------------------
DATE OF ASSET VALUE PRICE PER PREMIUM PRICE PER PREMIUM
CONSOLIDATION PER SHARE(1) SHARE (DISCOUNT) SHARE (DISCOUNT)
------------- ------------ --------- ---------- --------- ----------
Lexington Corporate Properties... 10/93 $10.00 $10.13 1.2% $ 15.13 51.3%
Shurgard Storage Centers......... 3/94 18.90 23.50 24.3 29.06 53.8
Franchise Finance Corporation of
America........................ 6/94 20.00 19.75 (1.2) 26.44 32.2
Realty Income Corporation........ 10/94 20.00 15.38 (23.1) 27.06 35.3
Municipal Mortgage and
Equity(2)...................... 8/96 17.76 15.13 (14.8) 19.25 8.4
Average Premium................ 36.2
- ---------------
(1) Estimated net asset value per share at the time of consolidation based on
information disclosed in the registration statements relating to the
consolidation transactions of each company.
(2) Net Asset Value per Share of Municipal Mortgage and Equity represents the
midpoint of the range of values disclosed in the consolidation documents.
Based upon the above data, the General Partners observed that the
distribution yield on the selected net lease real estate investment trusts
ranged from approximately five percent to approximately 7.5 percent. The General
Partners also observed that for the stock of the entities listed in the table
above resulting from the consolidation of partnerships, within the first twelve
weeks of trading such stocks, traded within a range of 23 percent less than net
asset value to 24 percent higher than net asset value, but that as of September
25, 1997, all of such entities were trading at premiums to net asset value, with
such premiums ranging from eight percent to 54 percent.
The General Partners have used a distribution yield range of seven percent
to 11 percent to estimate the value of the Listed Shares. Use of such range
reflects, in part, the potential variation in the size and capitalization of the
Company which could result from the maximum and minimum participation scenarios.
When the Company's pro forma annual distribution of $1.65 per Share was
capitalized at (i.e., divided by)
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these distribution yield rates, the resulting range of possible value per Listed
Share was between $15 and $23.50. The high value of the estimated trading range
of Listed Shares per $1,000 of original investment for each CPA(R) Partnership
was determined by multiplying the $23.50 per Listed Share figure by the number
of Listed Shares per $1,000 original investment to be received by the
Unitholders of such CPA(R) Partnership. Similarly, the low value of the
estimated trading range of Listed Shares per $1,000 of original investment for
each CPA(R) Partnership was determined by multiplying the $15 per Listed Share
figure by the number of Listed Shares per $1,000 original investment to be
received by the Unitholders of such CPA(R) Partnership.
The General Partners concluded that the per Listed Share price range
established by utilizing a seven percent to 11 percent distribution yield
provides a value range which is consistent with the price range of selected net
lease REITs and a premium range to asset value within the range of
consolidations of other real estate limited partnerships completed during the
past four years.
The General Partners also compared the Company to the selected REITs in
terms of debt ratios and distribution yields. With respect to the distribution
yield, based on pro forma distributions of $1.65 per Listed Share and a
hypothetical share value of $20 per Listed Share, the Company's distribution
yield would be 8.25 percent, which is 29 percent higher than the average
distribution yield of the selected REITs. With respect to the debt ratio, the
Company's debt ratio would be approximately 35 percent, assuming the market
value of the Company's Shares is the Total Exchange Value. The Company's debt
ratio would be higher than the average debt ratio of the selected net lease
REITs. However, unlike the other entities, over 89 percent of the Company's debt
is recourse only to the property subject to the mortgage securing the debt.
COMPARISON OF THE COMPANY WITH SELECTED NET LEASE REITS
AVERAGE AVERAGE
DISTRIBUTION DEBT
YIELD(1) RATIO(2)
------------ --------
SELECTED NET LEASE REITS (see table on page 46)........................ 6.6% 23%
THE COMPANY
Assuming Listed Shares valued at $20 per Listed Share
(100% Participation and no Subsidiary Partnership Units)............. 8.3% 34%
Assuming Listed Shares valued at $15 per Listed Share
(100% Participation and no Subsidiary Partnership Units)............. 11.0% 40%
- ---------------
(1) The Distribution Yield is computed by dividing annualized distributions for
the most recent quarter by the stock price on September 25, 1997. For the
Company, the Distribution Yield is the pro forma distribution divided by the
hypothetical Listed Share price shown.
(2) The Debt Ratio shown is the ratio of debt to total market capitalization
based on stock prices prevailing on September 25, 1997. For the Company, the
Debt Ratio shown is the ratio of debt to total market capitalization based
on the hypothetical Listed Share price shown assuming all the CPA(R)
Partnerships participate in the Consolidation.
The General Partners reached the following conclusions when comparing the
estimated range of values of the Listed Shares with the estimated range of
values of the consideration associated with alternatives to the Consolidation:
(i) it is not possible to assign a specific value to the Listed Shares or to
predict accurately the prices at which the Listed Shares will trade in the
market following the Consolidation; (ii) given the uncertainty as to the value
of the Listed Shares, which is dependent in part upon the capital structure
resulting from the Consolidation, it is appropriate to analyze the Listed Shares
as having a range of potential values; (iii) the Listed Shares, when traded, may
trade at prices higher or lower than the range of values estimated by the
Company, depending upon a variety of factors and market conditions not
susceptible to precise determination; (iv) there are similar difficulties in
establishing the consideration available to Unitholders through alternatives to
the Consolidation, with such values also dependent upon a number of factors and
market conditions not susceptible to precise determination, making it
appropriate to analyze such consideration, for certain of these alternatives as
falling within ranges depending upon a number of assumptions; and (v) the
assumptions used by the General Partners in establishing ranges of estimated
values for the alternatives to the Consolidation may not prove to be accurate,
and such consideration may have a value
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60
higher or lower than the range of estimated values used by the General Partners.
Furthermore, even if based on present market conditions, there is an overlap
between the indicated ranges of estimated values of the Listed Shares versus the
consideration associated with the alternatives to the Consolidation, so that the
lower range of potential values of the Listed Shares following the Consolidation
may be less than potential values for one or more of the alternatives to the
Consolidation, the Listed Shares may still constitute fair consideration for a
CPA(R) Partnership's assets because (i) the Consolidation entails other
potential benefits to Unitholders (e.g., the potential impact on distributions
and the tax deferred nature of the transaction) besides the market value of the
Listed Shares which, in the General Partners' opinion, could outweigh the
possibility that the value of the Listed Shares at the time of the Consolidation
might be less than the value of alternative consideration, (ii) as market
conditions change over time, the range of possible values for the Listed Shares
may improve in relation to the range of potential values for the alternatives to
the Consolidation and (iii) the upper end of the range of estimated potential
values for the Listed Shares is equal to or higher than the highest estimated
value for such alternatives. Notwithstanding the uncertainties in estimating the
value of the Listed Shares, the General Partners believe the available
information suggests that the Listed Shares constitute fair consideration for
the Units taking into account the ranges of estimated values for the Listed
Shares and the ranges of estimated values for alternatives to the Consolidation.
Estimated Going-Concern Values. The General Partners have estimated the
going-concern values of each CPA(R) Partnership by analyzing projected cash
flows and distributions assuming that each CPA(R) Partnership was operated as an
independent stand-alone entity. The analysis incorporated estimates of revenues
and operating expenses for each of the Properties, capital expenditures,
entity-level general and administrative costs and cash flow distributions and
proceeds from sale of the properties. It is assumed the property portfolio is
liquidated in private real estate markets at a residual value based upon
estimated cash flows and residual values utilized in the portfolio appraisal,
and the net proceeds resulting from the liquidation of the properties and other
remaining assets of the CPA(R) Partnership are paid out to Unitholders in a
liquidating distribution in accordance with the provisions of each CPA(R)
Partnership Agreement. Among the factors influencing the discount rates utilized
for each CPA(R) Partnership were leverage, credit quality of tenants, lease
rates in comparison to current market rates and other factors.
The going-concern values was calculated by using the implied portfolio
discount rate used by the Independent Appraiser to determine the appraised value
of the properties of that CPA(R) Partnership. The estimated value of each CPA(R)
Partnership on a going-concern basis is not intended to reflect the
distributions payable to Unitholders if the assets of each CPA(R) Partnership
were to be sold at their current fair market values.
Estimated Liquidation Values. Since one of the alternatives available is
to proceed with a liquidation of the CPA(R) Partnerships and the corresponding
distribution of the net liquidation proceeds to Unitholders, the General
Partners have estimated the liquidation value of each CPA(R) Partnership. In
estimating the liquidation value, the General Partners assumed that the real
estate of each CPA(R) Partnership would be sold at appraised value. This
alternative also assumes that non-real estate assets (except for Marketable
Securities, which are valued at market) are sold at their book value, that the
CPA(R) Partnerships incur selling costs at the time of liquidation (state and
local transfer taxes, real estate commissions and legal and other closing costs)
and that the remaining net liquidation proceeds are distributed among the
Unitholders of each CPA(R) Partnership in accordance with the provisions of each
Partnership Agreement.
The liquidation analysis assumes that the portfolio of each CPA(R)
Partnership is sold in a single transaction at its appraised portfolio value.
Should the assets be liquidated over time, even at prices equal to those
projected, distributions to Unitholders out of the cash flow from operations of
the CPA(R) Partnership might be reduced because the relatively fixed costs of
the CPA(R) Partnership, such as general and administrative expenses, are not
proportionately reduced with the liquidation of assets. However, for
simplification purposes, the sales are assumed to occur concurrently.
Applying these procedures, the General Partners arrived at the liquidation
values set forth in the table. The real estate portfolio appraisal sets forth,
subject to the specified assumptions, limitations and qualifications, the
Independent Appraiser's professional opinion as to the market value of the real
estate portfolio of
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each CPA(R) Partnership as of March 31, 1997. However, while the portfolio
appraisal is not necessarily indicative of the price at which the assets would
sell, the real estate portfolio appraisal assumes that the assets of each CPA(R)
Partnership are disposed of in an orderly manner and are not sold in forced or
distressed sales where sellers might be expected to dispose of their interests
at substantial discounts to their actual value. See "-- Real Estate Appraisal."
Assumptions, Limitations and Qualifications. The General Partners have
estimated a range of possible values for the Listed Shares, which are applicable
for the Company assuming 100 percent participation and Minimum Participation.
Because the Company's equity capitalization may vary by approximately $250
million depending on whether the Consolidation is completed with 100 percent
participation or Minimum Participation, this potential variance could cause a
material difference in the assumptions underlying the Company's estimate of a
range of Listed Share values. This analysis also is based on the assumption that
the market regards the Listed Shares as being comparable to the equity
securities of the selected REITs. No assurance can be given that the market will
treat the Listed Shares in a comparable manner to the equity securities
identified in the tables entitled "Selected Net Lease REITs" and "Recent
Consolidations of Public Limited Partnerships -- Valuation Statistics," or that
market conditions as of the closing of, or following, the Consolidation will be
similar to those existing when the information was compiled.
The prices at which the Listed Shares initially trade may be affected,
among other things, by (i) potential pent-up selling pressures as a result of
the historic illiquidity of investments in the CPA(R) Partnerships, (ii) the
Company's lack of an operating history, (iii) the unfamiliarity of institutional
investors, financial analysts and broker-dealers with the Company and its
prospects as an investment when compared with other equity securities and (iv)
the historical financial performance of the Participating Partnerships. It is
impossible to predict how these factors will impact the prices of the Listed
Shares. Such prices may be either lower or higher than those in the range of
estimated values.
Distribution Comparison. The General Partners have considered the
potential impact of the Consolidation upon distributions that would be made to
Unitholders who exchange their Units for Listed Shares. The following table
compares distributions that will be received by holders of Listed Shares
assuming 100 percent participation and an initial annual distribution rate of
$1.65 with distributions currently being received from the CPA(R) Partnerships.
COMPARISON OF DISTRIBUTIONS BY CPA(R) PARTNERSHIPS AND THE COMPANY PER $1,000
INVESTMENT
DIVIDENDS FROM LISTED SHARES
DISTRIBUTIONS FROM ISSUED IN THE
CPA(R) PARTNERSHIP CPA(R) PARTNERSHIP(1) CONSOLIDATION(2)
------------------------------- ------------------------ ----------------------------
CPA(R):1....................... $70.56 $ 86.78
CPA(R):2....................... 51.12 92.25
CPA(R):3....................... 99.36 125.15
CPA(R):4....................... 98.40 108.78
CPA(R):5....................... 66.72 60.62
CPA(R):6....................... 97.16 113.89
CPA(R):7....................... 73.28 91.39
CPA(R):8....................... 88.16 114.76
CPA(R):9....................... 84.96 86.84
- ---------------
(1) Annualized rate based on distributions paid in July 1997.
(2) Assuming an annual distribution rate of $1.65 per Listed Share.
In evaluating this estimate, Unitholders should bear in mind that a number
of factors affect the level of distributions. These factors include the
distributable income generated by operations, the principal and interest
payments on debt, capital expenditure levels, the Company's policy with respect
to cash distributions and the capitalization and asset composition of the
Company, which will vary based on the CPA(R) Partnerships which
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ultimately participate in the Consolidation. A comparison of the possible
distribution levels of the Company with those of each CPA(R) Partnership does
not show how the Consolidation might affect a Unitholder's distribution level
over a number of years. The distribution rate for Unitholders of CPA(R):5 is
expected to be lower immediately after the Consolidation because CPA(R):5 has
been paying distributions at a higher rate relative to the value of its assets
than the other CPA(R) Partnerships. There can be no assurance that the
distribution rates of the CPA(R) Partnerships can be maintained if the
Consolidation does not occur.
CONDITIONS TO THE CONSOLIDATION
The principal conditions to the Consolidation are: (i) approval of the
Consolidation by CPA(R) Partnerships representing the Minimum Participation
Amount and (ii) approval of the Listed Shares for listing on the NYSE. No
federal or state regulatory requirements must be complied with, or approval must
be obtained in connection with, the Consolidation. The General Partners may
decide not to pursue the Consolidation at any time before it becomes effective,
whether before or after approval by the Unitholders.
RECOMMENDATION OF THE GENERAL PARTNERS AND FAIRNESS DETERMINATION
The General Partners believe the Consolidation to be fair to, and in the
best interests of each of, the CPA(R) Partnerships and the Unitholders. The
General Partners recommend that the Unitholders approve the Consolidation and
elect to receive Listed Shares. Each Unitholder must make his own determination
as to whether to select Listed Shares or Subsidiary Partnership Units based upon
his personal situation, and such decision should be based upon a careful
examination of the Unitholder's personal finances, investment objectives,
liquidity needs, tax situation and expectations as to the Company's future
growth.
Based upon their analysis of the Consolidation, the General Partners
believe that: (i) the terms of the Consolidation, when considered as a whole,
are fair to the Unitholders; (ii) the Listed Shares offered to the Unitholders
were allocated fairly and constitute fair consideration for the interests of the
Unitholders; (iii) the Subsidiary Partnership Units offered to the Unitholders
were allocated fairly and constitute fair consideration for the interests of the
Unitholders; (iv) the terms of the Consolidation and the offered consideration
are fair to the Unitholders under all of the combinations that may result from
the options afforded to Unitholders; and (v) after comparing the potential
benefits and detriments of the Consolidation with those of several alternatives,
the Consolidation is more attractive to the Unitholders than such alternatives.
These beliefs are based upon the General Partners' analysis of the terms of the
Consolidation, an assessment of its potential economic impact upon the
Unitholders, a consideration of the combinations that may result from the
various options available to Unitholders, a comparison of the potential benefits
and detriments of the Consolidation and certain alternatives to the
Consolidation and a review of the financial condition and performance of the
CPA(R) Partnerships and the terms of critical agreements, such as the
Partnership Agreements.
The General Partners also believe that the Consolidation is procedurally
fair for several reasons. First, the Consolidation is required to be approved by
Unitholders holding a majority of the outstanding Units of each CPA(R)
Partnership and is subject to certain conditions set forth under "Conditions to
the Consolidation" above. Second, the General Partners believe that the Total
Exchange Value of the CPA(R) Partnerships has been determined according to a
process that is fair, because the process involved appraisals of all CPA(R)
Partnership properties by the same appraisal firm, the Independent Appraiser,
thereby maximizing consistency among the appraisals. The Total Exchange Value of
the CPA(R) Partnerships also includes the CPA(R) Partnerships' non-real estate
assets and liabilities based principally on the most recent interim unaudited
financial statements. Third, all Participating Investors, including Dissenting
Investors, will be given the opportunity to elect to receive Listed Shares or
Subsidiary Partnership Units.
Although the General Partners believe the terms of the Consolidation are
fair to Unitholders, the General Partners have conflicts of interest with
respect to the Consolidation. These conflicts include, among others, (i) the
determination not to retain independent parties to negotiate the terms of the
Consolidation on behalf of the Unitholders or the CPA(R) Partnerships, (ii) the
General Partners' realization of substantial economic benefits upon completion
of the Consolidation and (iii) the General Partners' relief from certain ongoing
liabilities with respect to Participating Partnerships. For a further discussion
of the conflicts of interest and
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potential benefits of the Consolidation to the General Partners, see "INTERESTS
OF CERTAIN PERSONS IN THE CONSOLIDATION AND CONFLICTS OF INTEREST -- Substantial
Benefits to General Partners."
MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS
The following is a discussion of the material factors underlying the
General Partners' belief that the terms of the Consolidation are fair as a whole
and to the Unitholders.
1. Consideration Offered. Unitholders and the General Partners will be
offered the same form of consideration in the Consolidation with respect to
their capital interest in the properties. The General Partners believe that the
form, allocation and amount of consideration offered to the General Partners and
Unitholders, including Dissenting Investors, constitute fair value. The
allocation of the Listed Shares and the Subsidiary Partnership Units offered to
Unitholders is based on the same valuation methodology which was consistently
applied to each of the CPA(R) Partnerships. Therefore, the General Partners
believe that the Total Exchange Value adequately takes into account the relative
values of each of the CPA(R) Partnerships. In addition, the General Partners
compared the values of the consideration which would have been received by
Unitholders in alternative transactions and concluded that the Consolidation is
fair in light of the values of such consideration.
2. Similarity of CPA(R) Partnerships. The General Partners do not believe
that there are any material differences among the CPA(R) Partnerships that would
affect the fairness of the Consolidation to Unitholders in any particular CPA(R)
Partnership. Substantially all of the assets of the CPA(R) Partnerships are net
leased real estate properties which are almost identical in nature, and the
CPA(R) Partnerships have substantially the same capital structures. In addition,
the investment objectives of each of the CPA(R)Partnerships are substantially
the same. These factors make it easier to fairly compare the value of the CPA(R)
Partnerships relative to each other and the value of the Subsidiary Partnership
Units to the Listed Shares and to fairly allocate the Listed Shares and
Subsidiary Partnership Units among Unitholders and the General Partners.
The primary differences among the CPA(R) Partnerships are as follows:
- Date of Formation. The CPA(R) Partnerships were formed at different
times and, therefore, would have begun liquidation at different times. As
a result, the earlier formed CPA(R) Partnerships have already sold some
Properties.
- Partnership Structure. Although the CPA(R) Partnership Agreements have
slightly different provisions with respect to allocations, distributions
and fees, the General Partners believe the differences in such provisions
are not substantial.
- Size and Diversity. Some of the CPA(R) Partnerships have purchased fewer
properties and are less diverse with respect to the number of tenants,
geographic location and types of the properties.
3. Market Value. To the extent that there is trading in the Units, such
trading takes place in an informal secondary market. The Units do not trade in
any orderly, active market. The Total Exchange Value assigned to the CPA(R)
Partnerships in connection with the Consolidation is greater than the weighted
average value of the CPA(R) Partnerships as reflected by the reported secondary
sales prices of the Units. See "SECONDARY MARKET AND OWNERSHIP OF PARTNERSHIP
UNITS" for the limited information available with respect to secondary market
sales of the Units. A direct comparison of the current or historic prices of the
Listed Shares and the Units cannot be made because there is no current or
historic market price information available with respect to the Listed Shares,
which will not be issued or traded prior to the Consolidation. Therefore, the
determination of the consideration to be received by Participating Investors is
based upon the valuation of the CPA(R) Partnerships as described under
"APPRAISALS AND FAIRNESS OPINION" and is not based upon the current or historic
market prices of the Units. Because there is no active trading market for the
Units, the General Partners believe that historic sales prices of the Units in
the secondary market are not indicative of the value of the underlying assets.
For example, during fiscal year 1996, less than two percent of all the
outstanding Units in the CPA(R) Partnerships traded in the secondary market.
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4. Unitholder Choice of Investment -- Listed Shares or Subsidiary
Partnership Units. Offering Unitholders a choice to exchange their Units for
Listed Shares or Subsidiary Partnership Units does not ensure that the offered
consideration is fair vis-a-vis the value of the consideration available to
Unitholders through the alternatives to the Consolidation, but does enhance the
procedural fairness of the Consolidation by giving all Unitholders the
opportunity to elect Listed Shares or Subsidiary Partnership Units. Through this
element of the Consolidation, the General Partners are attempting to accommodate
the possibly different investment objectives of the Unitholders, with the
Subsidiary Partnership Units providing an investment on substantially the same
economic interests and legal rights as the Units and the Listed Shares
representing equity securities in the Company permitting the holders of Listed
Shares to participate in the Company's potential growth and to have a more
liquid investment. Each Unitholder must make his own determination as to the
form of consideration best suiting his personal situation, and such decisions
should be based upon a careful examination of the Unitholder's personal
finances, investment objectives, liquidity needs, tax situation and expectations
as to the Company's future growth.
5. Independent Appraisals and Fairness Opinion. The General Partners'
belief as to the fairness of the Consolidation as a whole and to the
Unitholders, and the General Partners' statements above regarding the material
terms underlying their belief as to fairness, are partially based upon the
Independent Appraisals. The General Partners attributed significant weight to
the Independent Appraisals and the Fairness Opinion, which they believe support
their conclusion that the Consolidation is fair as a whole, and to the
Unitholders. The Fairness Opinion does not address every possible combination of
CPA(R) Partnerships in the Consolidation because of the extremely large number
of combinations. The General Partners will receive a Fairness Opinion addressing
the actual combination of CPA(R) Partnerships participating in the Consolidation
prior to the closing. The General Partners do not know of any factors that would
materially alter the conclusions made in the Independent Appraisals or the
Fairness Opinion, including developments or trends that have materially affected
or are reasonably likely to materially affect such conclusions. The General
Partners believe that the engagement of the Independent Appraiser to provide the
Independent Appraisals and the Fairness Opinion assisted the General Partners in
the fulfillment of their fiduciary duties to the CPA(R) Partnerships and the
Unitholders, notwithstanding that the Independent Appraiser received fees for
its services, has received fees from the CPA(R) Partnerships in the past and may
receive fees for its services from the Company in the future. See "APPRAISALS
AND FAIRNESS OPINION."
The Fairness Opinion does not address (i) the fairness of any terms of the
Consolidation (other than the fairness of the allocations of the Listed Shares
for the maximum and minimum participation levels as defined therein) or the
amounts or allocations of consolidation costs or the amounts of consolidation
costs borne by Limited Partners at various levels of participation in the
Consolidation, (ii) the relative value of the Listed Shares and the Subsidiary
Partnership Units to be issued in the Consolidation, (iii) the prices at which
the Listed Shares or Subsidiary Partnership Units may trade following the
Consolidation or the trading value of the Listed Shares or Subsidiary
Partnership Units to be received compared with the current fair market value of
the CPA(R) Partnership's portfolio or other assets if liquidated in real estate
markets or (iv) alternatives to the Consolidation.
6. Valuation of Alternatives. The General Partners estimated the value of
the CPA(R) Partnerships as going concerns and if liquidated. See "-- Comparison
to Alternative Considerations" above. On the basis of these calculations, the
General Partners believe that the ultimate value of the Listed Shares will
exceed the going concern value and liquidation value of each CPA(R) Partnership.
7. Cash Available for Distribution Prior to, and After, the
Consolidation. The General Partners believe the Consolidation will be
accomplished without materially decreasing the aggregate cash available from
operations otherwise payable to Unitholders. The effect of the Consolidation and
the cash available for distribution will vary, however, from CPA(R) Partnership
to CPA(R) Partnership. In addition to the receipt of cash available for
distribution, Participating Investors will be able to benefit from the potential
growth of the Company and will also receive enhanced investment liquidity.
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8. Net Book Value of the Partnership. The General Partners calculated the
book value of the CPA(R) Partnerships as of June 30, 1997. This calculation was
done by dividing the total Limited Partners' capital by $1,000 to calculate the
book value per $1,000 invested. This figure was compared to the Total Exchange
Value per $1,000 invested.
SUMMARY OF BOOK VALUE AND TOTAL EXCHANGE VALUE PER $1,000 INVESTED
TOTAL
BOOK VALUE PER EXCHANGE VALUE PER
$1,000 INVESTED $1,000 INVESTED
--------------- ------------------
CPA(R):1..................................... $ 441 $1,052
CPA(R):2..................................... 949 1,118
CPA(R):3..................................... 1,035 1,517
CPA(R):4..................................... 706 1,319
CPA(R):5..................................... 581 735
CPA(R):6..................................... 881 1,381
CPA(R):7..................................... 762 1,108
CPA(R):8..................................... 876 1,391
CPA(R):9..................................... 663 1,053
On the basis of these calculations, the General Partners believe that the
ultimate value of the Listed Shares will exceed the book value of each CPA(R)
Partnership.
The General Partners do not know of any factors that may materially affect
(i) the value of the consideration to be received by the Participating Investors
in the Consolidation, (ii) the value of the Units for purposes of comparing the
expected benefits of the Consolidation to the potential alternatives considered
by the General Partners or (iii) the analysis of the fairness of the
Consolidation. See "RISK FACTORS" and "APPRAISALS AND FAIRNESS OPINION."
RELATIVE WEIGHT ASSIGNED TO MATERIAL FACTORS
The General Partners gave greatest weight to the factors set forth in
paragraphs one through six above in reaching their conclusions as to the
substantive and procedural fairness of the Consolidation.
FAIRNESS TO UNITHOLDERS RECEIVING LISTED SHARES IN THE CONSOLIDATION
The Listed Shares represent equity securities in the Company permitting the
holders of the Listed Shares to participate in the Company's potential growth.
Thus, the holders of Listed Shares will share in both the benefits and risks of
an investment of the Company. In addition, unlike the Subsidiary Partnership
Units, the value of the Listed Shares will be based upon the performance of the
Company and all of its assets, rather than simply the assets of the CPA(R)
Partnership corresponding to the corresponding series of Subsidiary Partnership
Units. Further, the Listed Shares will be listed on the NYSE which should make
an investment in the Listed Shares a more liquid investment than an investment
in the Units. See "COMPARISON OF UNITS, LISTED SHARES AND SUBSIDIARY PARTNERSHIP
UNITS."
On balance, the General Partners have concluded that the Consolidation is
fair to the Unitholders who receive Listed Shares in connection with the
Consolidation because such investment has more growth potential than an
investment in the Units and the Listed Shares should be a more liquid investment
than an investment in the Units.
FAIRNESS TO UNITHOLDERS RECEIVING SUBSIDIARY PARTNERSHIP UNITS IN THE
CONSOLIDATION
The Subsidiary Partnership Units have been structured so that their
economic interests and legal rights are substantially the same as the terms and
conditions of the Units. The performance of, and distributions with respect to,
Subsidiary Partnership Units will be based solely upon the performance of those
assets of the
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corresponding Subsidiary Partnerships. Accordingly, for purposes of the
Subsidiary Partnership Units, it will be deemed that the CPA(R) Partnerships
never engaged in the Consolidation.
In addition, like the Units, the Subsidiary Partnership Units will not be
listed on any national securities exchange and no market for the Subsidiary
Partnership Units is expected to develop. See "COMPARISON OF UNITS, LISTED
SHARES AND SUBSIDIARY PARTNERSHIP UNITS."
On balance, the General Partners have concluded that the Consolidation is
fair to the Unitholders who receive Subsidiary Partnership Units in connection
with the Consolidation, because the Subsidiary Partnership Units have been
structured such that their terms and conditions are substantially the same as
the terms and conditions of the Units.
FAIRNESS IN VIEW OF CONFLICTS OF INTEREST
The General Partners have fiduciary duties to the CPA(R) Partnerships and
the Unitholders. The General Partners, in handling the affairs of the CPA(R)
Partnerships, are expected to exercise good faith, to use care and prudence and
to act with a duty of loyalty to the Unitholders. Under these fiduciary duties,
the General Partners are obligated to ensure that the CPA(R) Partnerships are
treated fairly and equitably in transactions with third parties, especially
where consummation of such transactions may result in the interests of General
Partners being opposed to, or not totally in line with, the interests of the
Limited Partners.
In considering the Consolidation, the General Partners gave full
consideration to these fiduciary duties. However, the Consolidation affords a
number of benefits to the General Partners. The General Partners may be viewed
as having a potential conflict of interest with Unitholders with respect to the
determination of the number of Listed Shares the General Partners and their
Affiliates will receive in the Consolidation in exchange for a portion of their
General Partner interests, retained interest in each Subsidiary Partnership and
the fees payable to the Manager in connection with the Consolidation and
thereafter. In addition, other matters occurring contemporaneously with the
Consolidation may involve conflicts of interest between the General Partners and
the Unitholders. Furthermore, the General Partners will not have any personal
liability for Company obligations and liabilities which occur after the
Consolidation. Unitholders were not separately represented in establishing the
terms of the Consolidation. Such representation might have caused the terms of
the Consolidation to be different, and perhaps more favorable to the Unitholders
in some respects from those described herein. To help mitigate some of these
potential conflicts of interest, the General Partners obtained the Fairness
Opinion and the Independent Appraisal. See "INTEREST OF CERTAIN PERSONS IN THE
CONSOLIDATION AND CONFLICTS OF INTEREST."
CONSEQUENCES IF THE CONSOLIDATION IS NOT APPROVED
If the Consolidation is not consummated for any reason, the CPA(R)
Partnerships presently intend to continue to operate as ongoing businesses in
their current form. In managing the business of the CPA(R) Partnerships, the
General Partners will take whatever actions they deem are appropriate to satisfy
their fiduciary obligations to the Unitholders and the CPA(R) Partnerships. The
General Partners will consider various options relating to the continuation of
the business of the CPA(R) Partnership and the liquidation of the CPA(R)
Partnerships. No other transaction is currently being actively considered by the
CPA(R) Partnerships as an alternative to the Consolidation, although the CPA(R)
Partnerships may from time to time explore other alternatives. The CPA(R)
Partnerships will pay the Consolidation Expenses if the Consolidation is not
approved.
UNITHOLDER ELECTIONS
Each Unitholder must decide whether to approve the Consolidation. In
addition, each Unitholder must decide whether to receive all Listed Shares or
all Subsidiary Partnership Units in connection with the Consolidation. If a
Unitholder whose CPA(R) Partnership approves the Consolidation fails to make an
election with respect to the type of interest he would like to receive in the
Consolidation or fails to return a Consent Card, he will receive all Listed
Shares in the Consolidation.
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These elections are to be made on the Consent Card accompanying this
Prospectus, which must be properly completed and returned to ChaseMellon within
the time frame allowed to Unitholders on voting in the Consolidation. See
"VOTING PROCEDURES -- Consent Card and Vote Required."
ACCOUNTING TREATMENT
Because the Consolidation involves the transfer of assets and liabilities
among entities which have common general partners, management and common
control, the General Partners' interest in the assets and liabilities of the
Company and the Participating Partnerships will carry over their
pre-Consolidation, historical cost basis. The exchange of Limited Partner
interests for Listed Shares will be accounted for as a purchase and recorded at
the fair value of the Listed Shares exchanged.
COSTS AND EXPENSES
All costs and expenses incurred by the Company or the CPA(R) Partnerships
in connection with the Consolidation will be paid by the CPA(R) Partnerships
from cash on hand, whether or not the Consolidation is consummated. The
following is a statement of certain estimated costs and expenses incurred by the
CPA(R) Partnership and the Company in connection with the Consolidation:
Securities and Exchange Commission Registration Fee.............. $ 142,452
NYSE Fee......................................................... 149,498
Legal Fees and Expenses.......................................... 1,100,000
Fairness Opinion................................................. 475,000
Accounting Fees and Expenses..................................... 580,000
Solicitation Fees and Expenses................................... 125,000
Printing and Engraving Expenses.................................. 225,000
Miscellaneous.................................................... 200,050
----------
Total.................................................. $2,997,000
==========
NO FRACTIONAL LISTED SHARES
No fractional Listed Shares will be issued by the Company in the
Consolidation. Each Unitholder who would otherwise be entitled to fractional
Listed Shares will receive one Listed Share for each fractional Listed Share of
0.5 or greater. No Listed Shares will be issued for fractional Listed Shares of
less than 0.5. The maximum allocated Total Exchange Value which a Unitholder
could forfeit if such Unitholder's fractional share was 0.49 is approximately
$10 (on a per Unitholder, not a per Unit, basis), assuming the value of the
Listed Share is equal to $20.
EFFECT OF THE CONSOLIDATION ON DISSENTING INVESTORS
A Unitholder of a Participating Partnership who dissents or abstains from
voting with respect to the Consolidation does not have a statutory right to
elect to be paid the appraised value of his interest in the Participating
Partnership. However, all Unitholders, including Dissenting Investors, will be
given the opportunity to elect to receive Subsidiary Partnership Units instead
of Listed Shares for their Units as described under "The Subsidiary Partnership
Units." Unlike holders of Listed Shares, holders of Subsidiary Partnership Units
will have no right to participate in the Company's earnings in excess of
operating expenses, debt service and other obligations and will not benefit from
any growth in shareholders' equity that might result from the future performance
of the Company but will benefit only from the performance of the assets held by
the Subsidiary Partnership corresponding to the CPA(R) Partnership in which the
Dissenting Investor was a Limited Partner.
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EFFECT OF CONSOLIDATION ON NONPARTICIPATING PARTNERSHIPS
Each Nonparticipating Partnership will continue to operate as a separate
legal entity with its own assets and liabilities. There will be no change in its
investment objectives, policies or restrictions, the Nonparticipating
Partnership will remain subject to the terms of its Partnership Agreement and
the Limited Partners will retain their current interests. Nonparticipating
Partnerships will pay a share of the expenses of the Consolidation.
EFFECTIVE TIME
The Effective Time of the Consolidation will be at the time the
Certificates of Merger with respect to the merger of the Participating
Partnerships with the Subsidiary Partnerships are filed with the Secretary of
State of the State of Delaware or California or at such later time as may be
specified in the Certificates of Merger. It is anticipated that such filings
will be made as promptly as practicable after the requisite approval of the
Unitholders has been obtained and the other conditions to the Consolidation have
been satisfied or waived, if permitted under the Merger Agreements.
TITLE INSURANCE
At the time the Properties were acquired by the CPA(R)Partnerships, each
CPA(R) Partnership received title insurance policies insuring the condition of
title of such Properties. Under such policies, a successor in the interest by
operation of law to each CPA(R) Partnership will become the insured.
ENVIRONMENTAL MATTERS
The environmental laws of the federal government and of certain state and
local governments impose liability on current property owners for the cleanup of
hazardous and toxic substances discharged on the property. This liability may be
imposed without regard to the timing, cause or person responsible for the
release of such substances onto the property. The lessees are required to comply
with such laws pursuant to the lease agreements, but the Company could be
subject to liability in the event that it acquires property having such
environmental problems. This potential liability could adversely affect the
Unitholders of CPA(R) Partnerships without such environmental liability.
The CPA(R) Partnerships did not have environmental audits performed on
their properties in preparation for the Consolidation. The General Partners
based this decision on the environmental information about the Properties
previously obtained and the cost of new environmental audits. The General
Partners have estimated that the cost of Phase I audits for CPA(R):7, CPA(R):8
and CPA(R):9, those CPA(R) Partnerships which did not have Phase I audits
performed for their properties in 1994, would be approximately $380,000.
Pursuant to lease, guaranty and other agreements with the tenants, such tenants
and guarantors are liable for environmental liabilities.
Furthermore, because it was not customary business practice to obtain
environmental audits in connection with the acquisition of such properties prior
to 1988, no environmental audits were obtained by CPA(R):1 through CPA(R):7 at
the time their properties were acquired. Phase I audits were performed for the
properties by CPA(R):1 through CPA(R):6 in 1994. Environmental audits were
conducted on the properties acquired by CPA(R):8 and CPA(R):9 at the time they
were acquired. There may, however, be environmental problems associated with
these properties not known to the CPA(R) Partnerships which would have been
disclosed had the CPA(R) Partnerships obtained new environmental audits in
connection with the Consolidation. In the event preexisting environmental
conditions requiring remediation are discovered subsequent to the Closing Date,
the cost of remediation will be borne by the lessee and the guarantor pursuant
to the terms of the lease agreement and any guarantees or by the Company, if the
lessee and guarantor cannot meet their obligation to pay.
Neither the Company nor any of the CPA(R) Partnerships has been notified by
any governmental authority or are aware of any non-compliance, liability or
other claim in connection with any of the properties of the CPA(R) Partnerships.
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69
LEGAL PROCEEDINGS
The General Partners and one or more of the CPA(R) Partnerships are
involved in litigation incidental to their businesses, but no material
litigation is currently pending or threatened against the Company, any of the
CPA(R) Partnerships, their properties or the General Partners.
AMENDMENT, TERMINATION AND WAIVER
Subject to applicable law, the Merger Agreements may be amended or waived
by the Company and the General Partners at any time prior to the filing of the
Certificate of Merger with the California or Delaware Secretary of State,
provided that, after approval by Unitholders holding a majority of the
outstanding Units of a CPA(R) Partnership or the Shareholders of the Company,
without the further approval of the Unitholders of such CPA(R) Partnership and
the Shareholders of the Company, no amendment or waiver may be made which (i)
materially and adversely affects the rights of the Unitholders without the
approval of the Unitholders holding a majority in interest of the affected
CPA(R) Partnership, (ii) alters or changes (A) the amount or type of
consideration which a Unitholder of such CPA(R) Partnership shall be entitled to
receive for Units in such CPA(R) Partnership, (B) the Operating Agreement or (C)
the terms and conditions of the Partnership Merger Agreement, if such alteration
or change would adversely affect the Participating Investors or the Shareholders
of the Company, or (iii) waives the condition that CPA(R) Partnerships
representing an aggregate of at least $200 million in Total Exchange Value
participate in the Consolidation.
A Merger Agreement may be terminated at any time prior to the filing of the
Certificate of Merger with the California or Delaware Secretary of State (i) by
the Company and the General Partners, (ii) if the conditions to the merger as
set forth in the Merger Agreement are not satisfied or (iii) if the
Consolidation is not consummated prior to June 30, 1998 or such later date as
mutually agreed in writing by the parties thereto.
APPRAISALS AND FAIRNESS OPINIONS
The CPA(R) Partnerships have engaged the Independent Appraiser, an
independent appraisal firm, to provide an Independent Appraisal of the real
estate of the CPA(R) Partnerships. The Total Exchange Value of each of the
CPA(R) Partnerships and the allocation of Listed Shares and Subsidiary
Partnership Units was determined primarily based on these Independent
Appraisals. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Total Exchange
Value and Allocation of Shares and Subsidiary Partnership Units" and "APPRAISALS
AND FAIRNESS OPINIONS." The CPA(R) Partnerships also engaged the Independent
Appraiser to render the Fairness Opinion. See "APPRAISALS AND FAIRNESS OPINIONS"
regarding the parties providing the Independent Appraisals and Fairness Opinion,
any material relationships with these parties and compensation received or
expected to be received by them and summaries of the Independent Appraisals and
the Fairness Opinion and any assumptions, limitations and qualifications
relating thereto.
DISTRIBUTION POLICY
The following summarizes the Company's current distribution policy with
respect to Listed Shares and the Subsidiary Partnership Units. The Board of
Directors of the Company will have the ability to change the Company's
distribution policy with respect to the Listed Shares without the consent of the
Shareholders. The Board of Directors of the Company will have the discretion to
adopt a distribution reinvestment plan in the future which would permit holders
of Listed Shares to reinvest the distributions they receive from the Company in
additional Listed Shares.
LISTED SHARES
After the Consolidation, the Company intends to make regular quarterly
distributions to the Shareholders. The first distribution after the closing of
the Consolidation is expected to be approximately $0.4125 per Listed Share,
which is equivalent to an annual distribution of $1.65 per Listed Share or an
annual distribution of 8.25 percent based on the Total Exchange Value per Listed
Share of $20.
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70
The following table illustrates the adjustments made to the Company's pro
forma net income before extraordinary items for the 12 months ended June 30,
1997, in estimating its cash available for distribution for the 12 month period
ending June 30, 1998 and in establishing its estimated initial annual
distribution:
MAXIMUM MINIMUM
PARTICIPATION(1) PARTICIPATION(1)
---------------- ----------------
Pro forma net income for the 12 months ended June 30,
1997 before extraordinary items(2)................... $ 42,764 $ 18,159
Adjustments:
Non-cash expenses and other adjustments(3)........... 12,758 5,020
Gains on sales of properties and securities.......... (830) (780)
Excess of minority interest income over distributions
to minority interest.............................. 485 29
Decrease in interest expense(4)...................... 3,747 1,478
Contractual rent increases and new leases(5)......... 2,004 1,028
Lease expirations(6)................................. (3,146) (1,094)
Reduction of cash flow from hotels due to
commencement of renovations(7).................... (1,172) (762)
------- -------
Estimated adjusted cash generated before debt
repayments and capital expenditures for the 12 months
ending June 30, 1998................................. 56,610 23,078
Capital expenditures................................... (4,630) (3,508)
------- -------
Estimated adjusted cash generated before debt
repayments........................................... 51,980 19,570
Principal amortization of mortgage debt(8)............. (7,772) (2,960)
------- -------
Estimated adjusted cash generated after debt
repayments........................................... $ 44,208 $ 16,610
======= =======
Expected initial annual distribution(9)................ $ 40,399 $ 16,848
======= =======
Expected initial annual distribution per Listed
Share................................................ $ 1.65 $ 1.65
======= =======
- ---------------
(1) Maximum participation assumes that all of the CPA(R) Partnerships
participate in the Consolidation; minimum participation assumes that only
CPA(R):1, CPA(R):2, CPA(R):3, CPA(R):5 and CPA(R):7 participate in the
Consolidation.
(2) Reflects the following:
MAXIMUM MINIMUM
PARTICIPATION PARTICIPATION
------------- -------------
Pro forma net income for the 12 months ended December 31,
1996...................................................... $44,220 $18,858
Add: Pro forma net income for the 6 months ended June 30,
1997...................................................... 20,327 8,876
Less: Pro forma net income for the 6 months ended June 30,
1996...................................................... (21,783) (9,575)
------ ------
Pro forma net income for the 12 months ended June 30, 1997
before extraordinary items................................ $42,764 $18,159
====== ======
(3) Reflects the following:
MAXIMUM MINIMUM
PARTICIPATION PARTICIPATION
------------- -------------
Depreciation and amortization............................... $10,012 $ 3,890
Non-cash writedown of real estate assets.................... 3,666 1,350
Vested portion of performance fees paid in stock............ 718 271
Directors' and employee's compensation paid in stock........ 375 375
Operating and financing lease adjustments................... (2,013) (866)
------ ------
$12,758 $ 5,020
====== ======
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Performance fees and a portion of the compensation of Directors and the
Company's sole employee will be paid in the form of Listed Shares.
Operating and financing lease adjustments represent the effect of adjusting
straight-line rents on operating leases and interest income on direct
financing leases included in pro forma net income, to a cash basis.
(4) Represents the estimated decrease in interest expense on amortizing debt for
the 12 months ending June 30, 1998.
(5) Represents the estimated increase in lease revenues due to contractually
scheduled rental adjustments and the commencement of new leases. Scheduled
rental adjustments are based on increases in the Consumer Price index or
fixed increases.
(6) Represents the reduction in lease revenues due to scheduled lease
expirations.
(7) A renovation of the hotel in Livonia, Michigan is expected to commence in
January 1998, resulting in a temporary reduction of operating cash flows.
The renovation will be completed within twelve months of commencement and is
expected to result in an increase in hotel revenues.
(8) Represents scheduled principal amortization on mortgage debt for the 12
months ending June 30, 1998, excluding balloon payments on maturing debt.
(9) Based on estimated average outstanding Listed Shares for the 12 months
ending June 30, 1998.
The Company will consider various factors in determining future
distributions including expected cash flows generated from operating activities,
cash requirements to fund property improvements and expansions, debt service
requirements, the level of cash balances on hand and the Company's ability to
generate funds from operations. These factors will be taken into account in
determining the Company's ability to pay a sustainable level of distributions.
In addition the Company expects to commence acquiring new investments to meet
its growth objectives and such acquisition strategy may affect the Company's
ability to maintain or increase future distribution levels.
The Company intends to utilize cash generated from operations to fund
distributions to shareholders and pay regularly scheduled principal amortization
on mortgage debt. For the three years ended December 31, 1994, 1995 and 1996
cash generated from operations of approximately $45,131,000, $63,276,000 and
$50,983,000, exceeded distributions to the Limited Partners of approximately
$35,589,000, $57,216,000 and $34,173,000, respectively. The increase in cash
generated from operations of approximately $18,145,000 in 1995 is primarily due
to receipt of approximately $15,188,000 in connection with the restructuring of
certain leases. The increase in distributions in 1995 of approximately
$21,627,000 is due to the distribution of proceeds from the sale of certain
properties. For the six months ended June 30, 1996 and 1997 cash generated from
operations of approximately $23,360,000 and $25,406,000 exceeded distributions
of approximately $17,666,000 and $17,336,000, respectively.
Cash flows provided by investing activities for the three years ended
December 31, 1994, 1995 and 1996 amounted to approximately $37,136,000,
$24,327,000 and $19,545,000, respectively, primarily due to the sale of
properties. Most of the Company's properties are subject to net leases under
which the lessees are required to pay all operating expenses of the properties
and structural repairs. Consequently historical cash needs for capital
expenditures on the properties have not been material. Capital expenditures for
the three years ended December 31, 1994, 1995 and 1996 are approximately
$2,492,000, $2,095,000 and $3,420,000, respectively. For the six months ended
June 30, 1996 and 1997 capital expenditures totaled approximately $2,144,000 and
$1,354,000 respectively. Future capital expenditures may be expected to increase
as many of the Company's leases are over 10 years old and are scheduled to
approach their initial expiration dates. If cash generated from operating
activities is not sufficient to fund future capital expenditures, such
expenditures could be funded from the Company's working capital reserves or from
additional borrowing of secured or unsecured debt.
Cash flows from financing activities primarily consists of payment of
mortgage principal in connection with loan prepayments or scheduled principal
amortization, payment of distributions to partners and the refinancing of
mortgage loans. Net cash used in financing activities totaled approximately
$70,045,000, $105,578,000 and $69,686,000 for the three years ended December 31,
1994, 1995 and 1996, respectively, and
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72
$32,660,000 and $25,526,000 for the six months ended June 30, 1996 and 1997
respectively. Scheduled principal payments on debt for the years ended December
31, 1997, 1998 and 1999 are expected to be approximately $40,771,000,
$28,012,000 and $37,832,000, respectively, consisting primarily of balloon
payments on mortgage loans currently in place. Such payments can be funded
partially but not entirely from cash generated from operations. The Company
intends to establish unsecured bank lines of credit or may refinance loans on
selected properties to fund these obligations.
The Company's lease revenues from existing properties are expected to
decrease due to the modification of leases with Policy Management Systems and
Hughes Markets. The modification of those leases resulted in a temporary
increase in lease revenues during 1995, 1996 and the first quarter of 1997. In
July 1994 the Company agreed to accelerate the term of a lease with Policy
Management Systems from the originally scheduled expiration in June 2003 to June
1997, resulting in a corresponding acceleration of the rental income that would
have been paid over the original remaining term of the lease. Annual rents
subsequent to the acceleration increased from approximately $1,850,000 to
approximately $5,200,000. The lease with Policy Management Systems expired in
June 1997. The Company has leased a portion of the property at an annual rental
of approximately $723,000 and is currently re-marketing the remaining space. The
Company believes that annual rents on the property, when fully leased, will
approximate the annual rents received prior to acceleration of the term of the
lease with Policy Management Systems.
The lease with Hughes Markets, Inc. for a property in Los Angeles,
California, expired in April 1996 and was extended for a period of two years
with a significant increase in rent. In connection with the lease extension the
Company was able to increase annual rents during the extension period from
approximately $1,800,000 to approximately $4,000,000. Hughes Markets agreed to
make a lump sum payment of approximately $3,500,000 upon the expiration of the
extended lease term in April 1998, and such amount is recognized on a pro rata,
straight-line basis over the extension term. The Company has entered into an
agreement to lease the Los Angeles property upon termination of the lease with
Hughes Markets for an annual rent of approximately $1,800,000 for a term of nine
years.
The Company intends to commence purchasing additional investments
subsequent to the Consolidation. Such acquisitions may be financed with funds
provided by unsecured lines of credit, additional borrowing on unleveraged
properties or the issuance of additional equity. The total value of the
Company's assets is approximately $750 million and total debt equals
approximately $219 million. Acquisitions of new properties are expected to
increase future lease revenues.
SUBSIDIARY PARTNERSHIP UNITS
The Subsidiary Partnership Units have been structured so that the
determination of their distributions and their other terms and conditions are
substantially the same as the terms and conditions of the Units prior to the
Consolidation. The performance of, and distributions with respect to, Subsidiary
Partnership Units will be based upon the performance of those properties owned
by the corresponding Subsidiary Partnerships. The amount of each distribution
will be determined by the Board of the Company, as General Partner of the
Subsidiary Partnerships, as it had been determined by the Board of the General
Partner of each CPA(R) Partnership.
The Company's objective with respect to the Subsidiary Partnership Units is
to pay distributions to holders of Subsidiary Partnership Units as if the
Consolidation had never occurred. Accordingly, the Company's quarterly
distributions to the holders of Subsidiary Partnership Units will be determined
based upon those assets held from time to time by the Subsidiary Partnerships
after the Consolidation. Specifically, the net cash flows generated by the
properties owned by a Subsidiary Partnership will be decreased by such
Subsidiary Partnership's allocable share of Company administrative expenses,
which will be allocated on the basis of the gross revenue generated by the
Subsidiary Partnerships and the Company reduced by debt service and cash
retained for maintenance of required working capital (the "Amount Available for
Distribution"). Distributions to the holders of Subsidiary Partnership Units
will be satisfied out of the resources of the corresponding Subsidiary
Partnership and the revenues generated by the Properties of that Subsidiary
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73
Partnership. All the adjustments to revenues and expenses of the Company noted
above can and will be specifically identified and will be subject to review of
the Company's independent auditors on an annual basis.
"Net cash flows generated by the properties" means (i) all rent received
from such Properties, less (ii) any debt service payable on debt secured by such
Properties and cash flows used for general and administrative purposes relating
to the Properties, plus (iii) all cash flow generated from the interest income
on short term investments and other investments of the CPA(R) Partnerships, if
any.
In the event of a sale or transfer of a Property to a third party which is
unaffiliated with the Company, the Subsidiary Partnership Units relating to the
Subsidiary Partnership owning such Property would be paid a distribution of the
pro rata portion of the net proceeds of such sale as deemed appropriate by the
Company. Sale proceeds may be paid to the Company by the Subsidiary Partnership
contemporaneously with the distribution to the holders of the Subsidiary
Partnership Units.
On the Redemption Date for each series of Subsidiary Partnership Units, the
Properties owned by each corresponding CPA(R) Partnership at the time of the
Consolidation will be appraised by a third party appraiser. The total value of
the properties will be adjusted by the other assets and liabilities of the
Subsidiary Partnership to determine the redemption value of the Subsidiary
Partnership. The holders of Subsidiary Partnership units will then be paid the
redemption value of the Subsidiary Partnership Units in cash and the Subsidiary
Partnership Units will be fully redeemed at that time. See "DESCRIPTION OF
LISTED SHARES AND SUBSIDIARY PARTNERSHIP UNITS -- Subsidiary Partnership Units."
MINIMUM PARTICIPATION
The Company does not intend to change the expected distribution per share
if less than 100 percent participation in the Consolidation is achieved. If the
Minimum Participation is achieved, the Company believes that operating cash flow
and existing cash balances will be sufficient to sustain the expected per share
distribution rate. Assuming Minimum Participation by the CPA(R) Partnerships,
historical cash flow from operating activities for the year ended December 31,
1996 of approximately $20,059,000 exceeded distributions paid to the Limited
Partners of $14,409,000. For the six months ended June 30, 1997 cash flows from
operating activities of approximately $9,288,000 exceeded distributions paid of
approximately $7,389,000. Cash flows provided by investing activities amounted
to approximately $20,447,000 for the year ended December 31, 1996 consisting
primarily of proceeds from the sale of properties. Capital expenditures for 1996
were $1,101,000. Cash flows used by investing activities for the six months
ended June 30, 1997 totaled approximately $1,306,000 consisting primarily of
capital expenditures. Cash flows used by financing activities for the year ended
December 31, 1996 totaled approximately $36,126,000 and included prepayments of
mortgages of approximately $31,535,000 in connection with the sale of
properties. Cash flows used by financing activities for the six months ended
June 30, 1997 were approximately $9,060,000 and consisted primarily of
distributions paid.
For a discussion of the tax treatment of distributions, see "FEDERAL INCOME
TAX CONSIDERATIONS -- Taxation of Distributions."
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74
COMPARISON OF UNITS, LISTED SHARES AND SUBSIDIARY PARTNERSHIP UNITS
The following summary compares a number of differences between ownership of
Units, Listed Shares and Subsidiary Partnership Units and the effects relating
thereto. The Subsidiary Partnership Units have been structured with
substantially the same economic interests and legal rights as the Units and the
description will only note the differences between CPA(R) Units and the
Subsidiary Partnership Units.
SUBSIDIARY PARTNERSHIP
UNITS LISTED SHARES UNITS
------------------------- ------------------------- -------------------------
ISSUANCE IN SERIES The Units were issued in The Listed Shares will The Subsidiary
series through nine not be issued in series. Partnership Units will
different limited The previous holders of be issued in nine series
partnership offerings. Units who receive Listed to correspond to the
Shares in the nine different CPA(R)
Consolidation will all Partnerships in which
hold identical Listed holders of Subsidiary
Shares. Partnership Units will
own interests.
GENERAL BUSINESS The CPA(R) Partnerships The Company has broad in- The Subsidiary
own net leased commercial vestment objectives. Its Partnership Units will
and industrial real current plans may be represent interests in
estate which are being recast in the discretion the Subsidiary Part-
held until they must be of the Board of nerships. The Company's
sold pursuant to the Directors without the investment policy will
respective partnership consent of the Share- not affect the rights of
agreements. The CPA(R) holders. the holders of
Partnerships are not Subsidiary Partnership
purchasing new Units to distributions,
properties. preferences and
redemptions.
DISTRIBUTIONS AND The CPA(R) Partnerships The initial policy of the The Subsidiary Partner-
DIVIDENDS make quarterly distribu- Company will be to dis- ships will make quarterly
tions of operating cash tribute quarterly cash distributions of
flow as determined by flow from operations operating cash flow as
the Managing General (exclusive of capital determined by the
Partner and distribute related items and Company (as the General
net proceeds from the reserves) to the holders Partner) and distribute
sale or refinancing of of Listed Shares. The net proceeds from the
Property as deemed ap- Board of Directors has sale or refinancing as
propriate by the Managing the discretion to deemed appropriate by
General Partner. The Man- determine whether or not the Company. The General
aging General Partner has and when to declare and Partner has the
the discretion to pay distributions and discretion to determine
determine whether or not the amount of any whether or not and when
and when to pay distributions. Funds for to pay distributions and
distributions and the distributions to the the amount of any dis-
amount of any distribu- holders of Listed Shares tributions.
tions. will be available only
after distributions are
made to holders of Sub-
sidiary Partnership
Units.
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SUBSIDIARY PARTNERSHIP
UNITS LISTED SHARES UNITS
------------------------- ------------------------- -------------------------
MANAGEMENT AND The business and affairs The business and affairs The business and affairs
FIDUCIARY DUTIES of each CPA(R) of the Company are of each Subsidiary
Partnership are managed managed by the Manager Partnership are managed
by the Managing General under the direction of by the Company as
Partner of each the Board of Directors. General Partner of each
Partnership. The Managing Directors can be removed Subsidiary Partnership.
General Partner or any from office by the While the General
other General Partner may affirmative vote of the Partner of each
be removed by the vote holders of at least a Subsidiary Partnership
of a majority in majority of the can be removed by the
interest of the then-outstanding Listed vote of a majority in
Unitholders in each Shares. Although the law interests of holders of
CPA(R) Partnership. in this area is unde- Subsidiary Partnership
Delaware and California veloped, Delaware common Units, the Company may
common law imposes law would most likely im- own a majority of the
fiduciary duties of pose fiduciary duties of Subsidiary Partnership
care, loyalty, good care, loyalty, good Units. Delaware and
faith and fair dealing faith and fair dealing California common law
on the General Partners. on the Directors of the imposes fiduciary duties
Company and the Manager. of care, loyalty, good
The Manager will run the faith and fair dealing
day-to-day operations of on the General Partners.
the Company.
VOTING RIGHTS Under the Partnership Under the Organizational Under the Partnership
Agreements, the Unit- Documents, the holders of Agreements, the Unit-
holders have voting Listed Shares have voting holders have voting
rights with respect to, rights with respect to: rights with respect to,
among other things: (i) (i) election of among other things: (i)
the removal of any Directors, (ii) the sale the removal of any
General Partner and the or disposition of all or General Partner and the
election of a substantially all of the election of a
replacement therefor, assets of the Company at replacement therefor,
(ii) the sale of all or any one time (other than (ii) the sale of all or
substantially all of the sales or dispositions, substantially all of the
assets of the CPA(R) the proceeds of which are assets of the
Partnerships (except for needed to redeem the Sub- Partnerships (except for
sales made in connection sidiary Partnership sales made in connec-
with the liquidation of Units), (iii) the merger tion with the
the CPA(R) Part- or consolidation of the liquidation of the
nerships) and (iii) the Company (where the Partnerships) and (iii)
adoption of the Company is not the the adoption of the
Partnership Agreement surviving entity), (iv) Partnership Agreement
Amendments. the dissolution of the Amendments.
Company and (v) certain
anti-takeover provisions.
Each Unit entitles its Each Listed Share Each Subsidiary Partner-
holder to cast one vote entitles its holder to ship Unit entitles its
on each matter presented cast one vote on each holder to cast one vote
to the Unitholders. matter presented to the on each matter presented
holders of Listed Shares. to the limited partners
of the corresponding
Subsidiary Partnership.
Approval of any matter Approval of any matter Approval of any matter
submitted to Unitholders submitted to the holders submitted to the holders
generally requires of Listed Shares of a series of
approval of a majority generally requires the Subsidiary Partnership
in interest of the Units affirmative vote of Units generally re-
then outstanding. holders of a majority of quires the affirmative
the Listed Shares vote of holders of a
present at a meeting at majority of such series
which a quorum is of the Subsidiary
present. Partnership Units. The
Company may own a ma-
jority of the outstanding
Subsidiary Partnership
Units of each Subsidiary
Partnership.
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SUBSIDIARY PARTNERSHIP
UNITS LISTED SHARES UNITS
------------------------- ------------------------- -------------------------
At any meeting, a Unit- Any action that may be At any meeting, a holder
holder may vote in taken at a meeting may be of Subsidiary Partnership
person, by written proxy taken by written consent Units may vote in person,
or by a signed writing in lieu of a meeting by written proxy or by a
directing the manner in executed by holders of signed writing directing
which his or her vote Listed Shares sufficient the manner in which his
should be cast. Proxies to authorize such action or her vote should be
are revocable at the at a meeting. At any cast. Proxies are
pleasure of the meeting, a holder of revocable at the plea-
Unitholder executing Listed Shares may vote sure of the holder of
them. in person, by written Subsidiary Partnership
proxy or by a signed Units executing them.
writing directing the
manner in which his vote
should be cast. Any proxy
is revocable at the
pleasure of the holder
of Listed Shares
executing it.
SPECIAL MEETINGS A special meeting of the A special meeting of the A special meeting of the
Unitholder of a CPA(R) Shareholders may be holders of Subsidiary
Partnership may be called by the Board of Partnership Units may be
called by the Managing Directors of the Company called by the General
General Partner of the or in accordance with a Partner of the
CPA(R) Partnership or in written request signed Subsidiary Partnership
accordance with a by the holders of at or in accordance with a
written request signed least 10 percent of the written request signed
by at least 10 percent outstanding Listed by at least 10 percent
in interest of the Unit- Shares. in interest of the
holders of that CPA(R) holders of Subsidiary
Partnership. Partnership Units of that
Subsidiary Partnership.
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SUBSIDIARY PARTNERSHIP
UNITS LISTED SHARES UNITS
------------------------- ------------------------- -------------------------
REDEMPTION The Units are not redeem- The Listed Shares are not Holders of Subsidiary
able. The Partnership redeemable, except pursu- Partnership Units will
Agreement does, however, ant to certain change of receive proceeds from
require that the CPA(R) control and business the sale of a Property
Partnership distribute combination provisions of the corresponding
proceeds of the sale of adopted by the Company. Subsidiary Partnership
Properties not required The Listed Shares can be (which does not include
for other CPA(R) sold on the NYSE. the pledge of a Property
Partnership needs. The in connection with the
CPA(R) Partnerships may leveraging of such
sell Properties at any Property). The
time, if such sale is Subsidiary Partnerships
deemed by the General may sell the Properties
Partners to be in the owned by them at any
best interest of the time.
Limited Partners.
In addition, each
Participating
Partnership will be
appraised on a specified
date. As soon as
practicable after the
completion of the
appraisal, holders of
Subsidiary Partnership
Units will be paid the
value of their Units in
cash.
The above provision
providing for redemption
is designed to be
consistent with the
expectations of a
Unitholder that his or
her Units would be
effectively redeemed in
12 to 15 years after the
proceeds from the
offering of Units were
invested. Such
expectation results from
a provision in each of
the Partnership
Agreements that the Gen-
eral Partner should
begin to liquidate each
Partnership within a
specified period after
the equity is invested in
property, market
conditions permitting.
This provision tracks
the timing expectations
of Limited Partners.
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SUBSIDIARY PARTNERSHIP
UNITS LISTED SHARES UNITS
------------------------- ------------------------- -------------------------
LIQUIDATION RIGHTS In the event of the Upon the liquidation of In the event of the
liquidation of a CPA(R) the Company, the holders liquidation of a
Partnership, the assets of Listed Shares will be Subsidiary Partnership,
of the CPA(R) entitled to share the assets of the
Partnership remaining ratably in any assets Subsidiary Partnership
after the satisfaction remaining after satis- remaining after the
of all debts and faction of obligations to satisfaction of all
liabilities of the CPA(R) creditors and any debts and liabilities of
Partnership, the liquidation preferences the Subsidiary
satisfaction of expenses on any Shares (including Partnership, the
of the liquidation of the Partnership Shares) satisfaction of its
the CPA(R) Partnership that may then be expenses of liquidation
and the establishment of outstanding. Therefore, and the establishment of
a reasonable reserve in holders of Listed Shares a reasonable reserve in
connection therewith are will be entitled to a connection therewith are
distributed to distribution based distributed to holders
Unitholders and General proportionately on their of the Subsidiary
Partners pursuant to the ownership of the Company. Partnership Units
terms of each pursuant to the terms of
Partnership Agreement its Partnership Agree-
which provide generally ment, which provide
that Limited Partners generally that Limited
must receive a return of Partners must receive a
their initial capital return of their initial
plus a specified return capital plus a specified
before the General return before the
Partners receive a share General Partners receive
of such distributions. a share of such
distributions.
RIGHT TO COMPEL A CPA(R) Partnership may The vote of holders of A Subsidiary Partnership
DISSOLUTION be dissolved at the the Listed Shares owning may be dissolved at the
election of a majority at least a majority of election of a majority
in interest of the interests in the Company in interest of the
Limited Partners of such is sufficient to cause Limited Partners of such
CPA(R) Partnership. the dissolution of the Partnership.
Company.
EXPENSES OF THE The CPA(R) Partnerships The holders of Listed The holders of Subsidiary
CONSOLIDATION are responsible for all Shares are responsible Partnership Units are not
expenses incurred in the for their pro rata share responsible for any of
Consolidation. of the expenses incurred the expenses incurred in
in the Consolidation. the Consolidation.
LIMITED LIABILITY Limited Partners are not Holders of Listed Shares Holders of Subsidiary
generally liable for are not generally liable Partnership Units are
obligations of the for obligations of the not generally liable for
CPA(R) Partnership. Company. obligations of the
Company or the
Subsidiary CPA(R)
Partnerships.
LIQUIDITY AND MAR- The Units are freely The Listed Shares will be The Subsidiary
KETABILITY transferable. There is freely transferable, and Partnership Units will
no organized market for it is a condition to be freely transferable.
the Units; thus, trading consummation of the The Subsidiary
in the Units is sporadic Consolidation that the Partnership Units will
and occurs solely Listed Shares be listed not be listed on any
through private transac- on the NYSE. national securities
tions. exchange, and no public
market is expected to
develop for the Subsidi-
ary Partnership Units.
RESTRICTIONS ON Units may only be None. Subsidiary Partnership
TRANSFER assigned with the Units may only be
Consent of the General assigned with the
Partner of the CPA(R) consent of the Manager.
Partnership.
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SUBSIDIARY PARTNERSHIP
UNITS LISTED SHARES UNITS
------------------------- ------------------------- -------------------------
CONTINUITY OF EXIS- The Partnership Agree- The Organizational Docu- The Partnership Agree-
TENCE ments provide for the ments provide for ments provide for the
CPA(R) Partnerships to perpetual existence, Subsidiary Partnerships
continue in existence although the expulsion, to continue in existence
until a specified date, bankruptcy or dis- until a specified date,
unless earlier dissolved solution of the Manager unless earlier dissolved
in accordance with the may result in the in accordance with the
applicable CPA(R) dissolution of the applicable Subsidiary
Partnership Agreement. Company. Partnership Agreement.
FINANCIAL REPORTS The CPA(R) Partnerships The Company will be sub- The Subsidiary Partner-
are subject to the ject to the reporting re- ships will be subject to
reporting requirements quirements of the the reporting
of the Exchange Act and Exchange Act and will requirements of the
file annual and file annual and Exchange Act and will
quarterly reports quarterly reports file annual and quarterly
thereunder. The CPA(R) thereunder. The Company reports thereunder. The
Partnerships also currently intends to Subsidiary Partnerships
provide annual and provide annual and currently intend to
quarterly reports, in- quarterly reports to its provide annual and
cluding details of the Shareholders. quarterly reports to
operation of the their holders of
business. Subsidiary Partnership
Units.
PAYMENTS TO THE Fees for a portion of the Fees for the services Fees for a portion of the
GENERAL PARTNERS AND services rendered by the rendered by the Manager services rendered by the
THEIR AFFILIATES General Partners are paid will be paid by the Company are paid to the
to the General Partners Company. The portion of Company or their
or their affiliates. General Partners' affiliates.
general partner
interests in the CPA(R)
Partnerships not
converted to Listed
Shares will be con-
verted to limited
partner interests.
CERTAIN LEGAL RIGHTS Delaware and California Delaware law affords mem- Delaware and California
laws allow a Unitholder bers of a limited laws allow a holder of
to institute legal liability company rights Subsidiary Partnership
action on behalf of the to bring derivative Units to institute legal
CPA(R) Partnership (a actions when the action on behalf of the
partnership derivative managers or members with Subsidiary Partnership
action) to recover authority to do so have (a partnership
damages where the failed to institute an derivative action) to re-
general partner has action to recover cover damages where the
failed to institute the damages and class general partner has
action. In addition, a actions to recover failed to institute the
Unitholder may institute damages. Shareholders may action. In addition, a
legal action on behalf also have rights to holder of Subsidiary
of himself or all other bring actions in federal Partnership Units may
similarly situated courts to enforce institute legal action
interest holders (a federal rights. These on behalf of himself or
class action) to recover rights are comparable to herself or all other
damages. The Part- the rights of the similarly situated
nership Agreements permit Unitholders in the CPA(R) interest holders (a
Unitholders to bring a Partnerships. class action) to recover
derivative action on damages. The Partnership
behalf of the CPA(R) Agreements permit a
Partnerships to the same holder of Subsidiary
extent as a Unitholder Partnership Units to
has such right under bring a derivative
Delaware or California action on behalf of the
law. Unitholders may Subsidiary Partnerships
also have rights to to the same extent as a
bring actions in federal Unitholder has such right
courts to enforce under Delaware or
federal rights. California law.
Unitholders may also
have rights to bring ac-
tions in federal courts
to enforce federal
rights.
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SUBSIDIARY PARTNERSHIP
UNITS LISTED SHARES UNITS
------------------------- ------------------------- -------------------------
INSPECTION OF BOOKS Any Unitholder of a Under Delaware law and Any holder of Subsidiary
AND RECORDS CPA(R) Partnership may the Operating Agreement, Partnership Units may
have access during each Shareholder has the have access during
ordinary business hours right, subject to such ordinary business hours
to certain information reasonable standards as to certain information
regarding the status of may be set forth in the regarding the status of
the business and Organizational Documents the business and finan-
financial condition of or otherwise established cial condition of the
such CPA(R) Partnership by the Board of Subsidiary Partnership,
maintained at the Directors of the in which such holder has
principal office of the Company, to obtain from an interest, maintained
CPA(R) Partnership. In the Company from time to at the principal office
addition, any time upon reasonable of the Partnership. In
Unitholder, upon a written demand for any addition, any holder of
written request to the purpose reasonably Subsidiary Partnership
Managing General Partner related to the Units, upon a written
and the payment of Shareholder's interest request to the
reasonable costs of as a member of the Subsidiary Partnership
fulfilling such re- Company certain and the payment of
quest, is entitled to information regarding reasonable costs of
copy or have copies made the status of the busi- fulfilling such re-
of a current list of ness, affairs and quest, is entitled to
Unitholders and their financial condition of copy or have copies made
respective holdings in the Company. The Board of a current list of
the CPA(R) Partnership of Directors of the holders of Subsidiary
(subject to certain Company has the right to Partnership Units and
limitations), the keep confidential from their holdings in the
Partnership Agreement, the Shareholders, for Partnership in which such
any appraisal obtained such period of time as Unitholder has an
in connection with the the Board deems interest (subject to
acquisition of a Prop- reasonable, any in- certain limitations),
erty and the CPA(R) formation which the Board the Partnership
Partnerships' tax reasonably believes to Agreement, any appraisal
returns, written be in the nature of obtained in connection
partnership agreements, trade secrets or other with the acquisition of
financial statements, information the a Property and the
books and records. In disclosure of which the Subsidiary Partnerships'
addition, pursuant to Board in good faith tax returns, written
Rule 14a-7 under the believes is not in the partnership agreements,
Exchange Act, the best interest of the financial statements,
Unitholders will have Company or could damage books and records. In
the right to obtain a the Company or its addition, pursuant to
list of the Unitholders business or which the Rule 14a-7 under the
from the CPA(R) Company is required by Exchange Act, the
Partnership whenever the law or by agreement with Unitholders will have
CPA(R) Partnership a third party to keep the right to obtain a
solicits proxies or confidential. In list of the holders of
consents. addition, pursuant to Subsidiary Partnership
Rule 14a-7 under the Ex- Units from the
change Act, the Subsidiary Partnership
Shareholders will have whenever the Subsidiary
the right to obtain a Partnership solicits
list of the Share- proxies or consents.
holders from the Company
whenever the Company so-
licits proxies or
consents.
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COMPARISONS OF CPA(R) PARTNERSHIPS AND COMPANY
The information below highlights a number of the significant differences
between the CPA(R) Partnerships and the Company relating to, among other things,
forms of organization, investment objectives, policies and restrictions, asset
diversification, capitalization, management structure and investor rights. These
comparisons are intended to assist Unitholders in understanding how their
investment will be changed if, as a result of the Consolidation, their Units are
exchanged for Listed Shares. Following the captioned sections is a summary
discussion of the expected effects of the Consolidation on Unitholders who
receive Listed Shares in exchange for their Units.
FORM OF ORGANIZATION
CPA(R) PARTNERSHIPS
The CPA(R) Partnerships are limited partnerships organized under California and
Delaware law which were formed for the purpose of investing in a real estate
portfolio consisting primarily of net leased real estate. The CPA(R)
Partnerships have been taxed as partnerships for federal income tax purposes.
COMPANY
The Company is a Delaware limited liability company formed for the purpose of
investing in primarily net leased real estate. The Company expects to qualify as
a partnership for federal income tax purposes.
The CPA(R) Partnerships are limited partnerships under California and
Delaware state law, while the Company is organized as a Delaware Limited
Liability Company. The CPA(R) Partnerships and the Company are each vehicles
appropriate for holding real estate investments and afford passive investors,
such as Unitholders and Shareholders, certain benefits, including limited
liability, a professionally managed portfolio and the avoidance of double-level
taxation. The CPA(R)Partnerships are under the control of their General
Partners, while the Company is governed by its Board of Directors.
LENGTH OF INVESTMENT
CPA(R) PARTNERSHIPS
An investment in each of the CPA(R) Partnerships was presented to Unitholders as
a finite-length investment, with the Unitholders to receive regular cash
distributions out of each CPA(R) Partnership's net operating income and special
distributions of net sale proceeds through the liquidation of each CPA(R)
Partnership's real estate investments. Each of the General Partners of the
CPA(R) Partnerships stated its intention to sell each CPA(R) Partnership's
properties within a period of six to 15 years of the final acquisition of
property. Unitholders were advised that sale of the CPA(R) Partnerships' assets
would, however, be dependent upon market conditions.
COMPANY
Unlike the CPA(R) Partnerships, the Company intends to continue its operations
for an indefinite time period and has no specific plans for the disposition of
the assets acquired through the Consolidation or subsequent acquisitions. The
Company is allowed to retain its net sale or refinancing proceeds for new
investments, capital expenditures, working capital reserves or other appropriate
purposes. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Expected Benefits
from the Consolidation."
Unitholders in each of the CPA(R) Partnerships expect liquidation of their
investments when the assets of the CPA(R) Partnership are liquidated. In
contrast, the Company does not expect to dispose of its investments within any
prescribed period and, in any event, plans to retain the net sale proceeds for
future investments. Holders of Listed Shares are expected to achieve liquidity
for their investments by trading Listed Shares in the public market and not
through the liquidation of the Company's assets. The Listed Shares may trade at
a discount from, or premium to, the liquidation value of the Company's
Properties.
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NATURE OF INVESTMENT
CPA(R) PARTNERSHIPS
The Units of each CPA(R) Partnership constitute equity interests entitling each
Unitholder to its pro rata share of cash distributions made to the Unitholders
of the CPA(R) Partnership. Each of the CPA(R) Partnership Agreements specifies
how cash available for distribution, whether arising from operations or sales or
refinancings, is to be shared among the General Partners and Unitholders. The
distributions made to the Unitholders are not fixed in amount, are determined by
the General Partners and depend upon each CPA(R) Partnership's operating results
and the amounts received upon sale or refinancing of the CPA(R) Partnership's
assets.
COMPANY
The Listed Shares constitute equity interests in the Company. Each holder of
Listed Shares will be entitled to his or her pro rata share of distributions
made with respect to the Listed Shares. The distributions payable to Listed
Shareholders are not fixed in amount and only paid when declared by the Board of
Directors. The Company intends to pay quarterly distributions.
Both the Units and Listed Shares represent equity interests entitling the
holders thereof to participate in the growth of the CPA(R) Partnerships and the
Company, respectively. Distributions and dividends payable with respect to the
Units and Listed Shares depend upon the performance of the CPA(R) Partnerships
and the Company, respectively.
PROPERTIES AND DIVERSIFICATION
CPA(R) PARTNERSHIPS
The investment portfolio of each of the CPA(R) Partnerships is limited to the
assets acquired with the initial equity raised from the Unitholders as well as
the debt financing obtained by the CPA(R) Partnership within the established
borrowing restrictions. The CPA(R) Partnerships are not authorized to issue
additional equity securities to expand their investment portfolios.
COMPANY
The Company is authorized to own and acquire additional net leased real estate,
to make other investments and to issue additional equity and debt securities to
acquire additional assets.
The investment portfolio for each CPA(R) Partnership was limited to the
assets acquired with its initial equity and limited debt financing. If the
Consolidation is approved, the Company will hold an investment portfolio
substantially larger and more diversified than the portfolio of any of the
CPA(R) Partnerships and with the potential for future growth through
acquisition. An investment in the Company should not be viewed as an investment
in a specific pool of assets, but, instead, as an investment in an ongoing real
estate investment business, subject to the risks normally attendant to ongoing
real estate ownership.
PERMITTED INVESTMENTS
CPA(R) PARTNERSHIPS
Each of the CPA(R) Partnerships was authorized to invest in net leased real
estate.
COMPANY
The Company is authorized to invest in net leased real estate or invest in any
other type of asset.
The CPA(R) Partnerships have concentrated their investments almost solely
in net leased real estate. The Company is authorized to make investments in any
asset, including other commercial real estate or mortgage loans. Accordingly,
the Company's investments may be more diversified than the investments of the
CPA(R) Partnerships. The investment diversification, if it occurs, while
potentially serving as a hedge against the risk of
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having all of the Company's investments limited to a single type of asset, would
expose the Company to other risks.
ADDITIONAL EQUITY
CPA(R) PARTNERSHIPS
None of the CPA(R) Partnerships is authorized to issue equity securities other
than the Units. Therefore, no dilution of the Unitholders' distributive share of
cash available for distribution can occur.
COMPANY
The Board of Directors may, in its discretion, issue additional equity
securities. The Company may sell additional equity from time to time to increase
its available capital. The issuance of additional equity interests may result in
the dilution of the interests of the Shareholders.
The CPA(R) Partnerships are not authorized to issue additional Units or
other equity interests, and, therefore, the Units are not subject to dilution,
except as provided in the Partnership Agreements. In contrast, the Company has
substantial flexibility to raise equity capital to finance its business and
affairs through the sale of equity interests. The Company, through the issuance
of new equity securities, may substantially expand its capital base to make new
investments. The issuance of additional equity securities by the Company may
dilute the interests of the holders of Listed Shares (but not holders of
Subsidiary Partnership Units) and the Company may issue equity interests with
priorities or preferences superior to Listed Shares (but not Subsidiary
Partnership Units) with respect to distributions and liquidation proceeds.
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BORROWING POLICIES
CPA(R) PARTNERSHIPS
Each of the CPA(R) Partnerships is authorized to borrow funds necessary,
appropriate or advisable in conducting its business and affairs. The Partnership
Agreements place various restrictions on the authority of the CPA(R)
Partnerships to borrow funds. Furthermore, as a matter of overall policy, each
of the CPA(R) Partnerships has limited the amount it has borrowed to finance its
acquisitions and other business activities. See "BUSINESS AND
PROPERTIES -- Mortgage Debt" for the outstanding borrowings of each of the
CPA(R) Partnerships as of March 31, 1997.
COMPANY
The Company is permitted to borrow, on a secured or unsecured basis, funds to
finance its business without limits.
In conducting its business, the Company may borrow funds without limits.
Borrowing funds may allow the Company to substantially expand its asset base,
but may also increase the Company's risks due to its leveraged investments.
RESTRICTIONS UPON RELATED PARTY TRANSACTIONS
CPA(R) PARTNERSHIPS
Each of the Partnership Agreements restricts the respective CPA(R) Partnership
from entering into certain business transactions with the General Partners and
its affiliates, except to the extent that such transactions were specifically
disclosed in the disclosure document pursuant to which the Units were offered
and sold to the public, with respect to any proposed services to be rendered to
the CPA(R) Partnership, the compensation for such services is required to be
comparable and competitive with that charged by a third party rendering
comparable services and certain other conditions are required to be met. While
the Partnership Agreements do not specify a procedure for authorizing
transactions with their General Partners or Affiliates, it is possible to amend
the Partnership Agreements to authorize such a transaction because each of the
Partnership Agreements may be amended by a majority vote of Unitholders.
COMPANY
The Organizational Documents and the LLCA prohibit the Company from entering
into a transaction with any of the interested parties unless the terms or
conditions of such transactions have been disclosed to the Board of Directors
and approved by a majority of Directors not otherwise interested in the matter
(including a majority of Independent Directors), and such Directors, in
approving the transaction, have determined it to be fair, competitive,
commercially reasonable and on terms and conditions no less favorable to the
Company than those available from unaffiliated third parties. In addition, the
Organizational Documents specifically authorize the Company to acquire property
from interested parties to the extent the terms and conditions of the
acquisition have been approved by a majority of the Directors not otherwise
interested in the transaction (including a majority of the Independent
Directors), and such Directors have made good faith determinations as to the
fairness of the compensation provided for such property.
Except for transactions specifically approved in the Partnership Agreements
(and which were disclosed in the disclosure documents prepared for the offering
and sale of the Units), the CPA(R) Partnerships are not authorized to enter into
transactions with the General Partners and their Affiliates, unless the
transactions are approved in advance by a vote of the Unitholders. The
Organizational Documents of the Company contain similar restrictions, but the
Company may enter into a transaction with its Directors, officers and
significant Shareholders, if the transaction is approved by a majority of the
Directors not interested in the matter following a determination that the
transaction is fair, competitive and commercially reasonable. The
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Organizational Documents do not require the approval of Shareholders for
entering into transactions with interested parties.
MANAGEMENT CONTROL AND RESPONSIBILITY
CPA(R) PARTNERSHIPS
Under each of the Partnership Agreements, the General Partners are, subject to
certain narrow limitations, vested with all management authority to conduct the
business of the CPA(R) Partnership, including authority and responsibility for
overseeing all executive, supervisory and administrative services rendered to
the CPA(R) Partnership. The General Partners have the right to continue to serve
in such capacities unless removed by a majority vote of the Unitholders.
Unitholders have no right to participate in the management and control of the
CPA(R) Partnerships and have no voice in its affairs except for certain limited
matters that may be submitted to a vote of the Unitholders under the terms of
the Partnership Agreements. See "-- Voting Rights." The General Partners are
accountable as fiduciaries to the CPA(R) Partnership and are required to
exercise good faith and integrity in their dealings in conducting the CPA(R)
Partnership's affairs. See "FIDUCIARY RESPONSIBILITY."
COMPANY
The Board of Directors has exclusive control over the Company's business and
affairs, subject only to the restrictions in the Organizational Documents.
Holders of Listed Shares have the right to elect members of the Board of
Directors. The Directors are accountable to the Company as fiduciaries and are
required to exercise good faith and integrity in conducting the Company's
affairs. See "FIDUCIARY RESPONSIBILITY." The Board of Directors has engaged the
Manager to operate the Company on a day-to-day basis.
Holders of Listed Shares have greater control over management of the
Company than the Unitholders have over the CPA(R) Partnerships, because the
members of the Company's Board of Directors are elected by the holders of Listed
Shares. The General Partners do not need to seek re-election, but, instead,
serve unless removed by an affirmative vote of Unitholders owning a majority of
the Units entitled to vote, which is generally an extraordinary event. Holders
of Listed Shares, like Unitholders, are passive investors and must rely upon
management for the prudent administration of their investments.
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MANAGEMENT LIABILITY AND INDEMNIFICATION
CPA(R) PARTNERSHIPS
As a matter of state law, the General Partners have liability for the payment of
CPA(R) Partnership obligations and debts, unless limitations upon such liability
are expressly stated in the obligation. Each of the CPA(R) Partnership
Agreements provides that neither General Partners nor any of the Affiliates
performing services on behalf of the CPA(R) Partnership will be liable to the
CPA(R) Partnership or its Unitholders for any act or omission performed in good
faith, pursuant to authority granted by the Partnership Agreement, in a manner
reasonably believed to be within the scope of authority granted and in the best
interests of the CPA(R) Partnership, provided that such act or omission did not
constitute fraud, misconduct, bad faith or negligence. In addition, the CPA(R)
Partnership Agreements indemnify the General Partners and their Affiliates for
liability, loss, damage, costs and expenses, including attorneys' fees, incurred
by them in conducting the CPA(R) Partnerships' business, except in the case of
fraud, misconduct, bad faith or negligence.
COMPANY
The Company's Directors are not personally liable for ordinary liabilities of
the Company. The Organizational Documents provide that a Director's liability
for breach of fiduciary duty is limited to the full extent allowable under
Delaware Law. The Organizational Documents and state laws provide
indemnification rights to Directors and officers who act in good faith, in a
manner reasonably believed to be in or not opposed to the best interests of the
Company and, with respect to criminal actions or proceedings, without reasonable
cause to believe their conduct was unlawful. In addition, the Organizational
Documents indemnify Directors and officers against amounts paid for settlement,
authorize the Company to advance expenses incurred in defense, upon the
Company's receipt of an appropriate undertaking to repay such amounts if
appropriate, and authorize the Company to carry insurance for the benefit of the
officers and Directors, even for matters to which such persons are not entitled
indemnification. See "FIDUCIARY RESPONSIBILITY." The Company has also agreed to
indemnify the Manager. In the Consolidation, the Company will be assuming all
existing and continuing liabilities of the Participating Partnerships, including
their obligations to indemnify the General Partners.
The General Partners of each of the CPA(R) Partnerships have, under most
circumstances, no liability to its CPA(R) Partnership for acts or omissions it
undertakes when performed in good faith, in a manner reasonably believed to be
within the scope of its authority and in the best interests of the CPA(R)
Partnership. Each General Partner also has, under specified circumstances, a
right to be reimbursed by its CPA(R) Partnership for liability, loss, damage,
costs and expenses it incurs by virtue of serving as General Partner. Although
the standards are expressed somewhat differently, there are similar protections
from liability available to Directors and officers of the Company, when acting
on behalf of the Company, and rights of Directors and officers to seek
indemnification from the Company. The Company believes that the scope of the
liability and indemnification provisions in the organizational documents
provides protection against claims for personal liability against the Company's
Directors and officers which is comparable to, though not identical with, the
protections afforded to the General Partners and their Affiliates under the
Partnership Agreements. In the consolidation, the Company will be assuming all
of the existing and contingent liabilities of the participating partnerships,
including their obligations to indemnify the General Partners.
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ANTITAKEOVER PROVISIONS
CPA(R) PARTNERSHIPS
Changes in management can be effected only by removal of the General Partners,
which action requires a majority vote of Unitholders. Due to transfer
restrictions in the Partnership Agreements, the General Partners may restrict
transfers of the Units and, in particular, affect whether the transferees have
voting rights. An assignee of a Unit may not become a substitute Unitholder,
entitling him or her to vote on matters that may be submitted to the Unitholders
for approval, unless such substitution is consented to by the General Partners,
which consent, in the General Partners' absolute discretion, may be withheld.
The General Partners may exercise this right of approval to deter, delay or
hamper attempts by persons to acquire a majority interest of the Unitholders.
COMPANY
The Organizational Documents contain a number of provisions that may have the
effect of delaying or discouraging a hostile takeover of the Company. The
provisions include, among others, the following: (i) the power of the Board of
Directors to issue additional equity interests in the Company and (ii) the
classified Board of Directors, wherein only one-third of Directors are
re-elected to the Board in any given year and Directors serve three-year terms.
In addition, the Company has a Shareholder Rights Plan. See "DESCRIPTION OF
SHARES."
Certain provisions of the Governing Documents of the Partnerships and the
Company could be used to deter attempts to obtain control of the CPA(R)
Partnerships and the Company in transactions not approved by the General
Partners and the Board of Directors, respectively. Because the Listed Shares are
freely transferable and the Company's Directors are elected by the Shareholders,
there is a greater likelihood of changes in control in the case of the Company
than the CPA(R) Partnerships, notwithstanding those provisions described above.
VOTING RIGHTS
CPA(R) PARTNERSHIPS
Unitholders may, by a majority vote, without the concurrence of the General
Partners, amend the Partnership Agreement, dissolve the CPA(R) Partnership,
remove and/or elect a General Partner and approve or disapprove the sale of all
or substantially all of the CPA(R) Partnership's assets. Unitholders may not
exercise these rights in a way to extend the term of the CPA(R) Partnerships,
change the CPA(R) Partnerships to general partnerships, change the limited
liability of the Unitholders or affect the status of the CPA(R) Partnerships for
federal income tax purposes.
COMPANY
The Company's Board of Directors consists of three classes. Holders of Listed
Shares are entitled to elect one class of the Company's Board of Directors at
each annual meeting of the Company. The Organizational Documents grant holders
of Listed Shares the non-exclusive right, without the approval of the Board of
Directors, to amend the Organizational Documents, dissolve the Company, vote to
remove members of the Board of Directors and approve or disapprove the sale of
substantially all of the Company's assets. In addition, certain other actions
may not be taken by the Board of Directors without the approval of a majority
vote of the holders of Listed Shares, including (i) amending the Certificate of
Formation, (ii) amending certain of the Bylaw provisions, (iii) merging the
Company with or into another entity, unless the Company is the surviving entity
and certain other conditions are met, (iv) selling all or substantially all of
the Company's assets and (v) dissolving the Company.
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Holders of Listed Shares have different voting rights, including the right
to elect Directors on a periodic basis, than the voting rights afforded to
Unitholders.
LIMITED LIABILITY OF INVESTORS
CPA(R) PARTNERSHIPS
Under each of the CPA(R) Partnership Agreements and applicable state law,
assuming the Unitholders do not participate in the control of the business of a
CPA(R) Partnership, the liability of Unitholders, as Unitholders, for the CPA(R)
Partnership's debts and obligations is limited to the amount of their investment
in the CPA(R) Partnership, together with an interest in undistributed income, if
any. The Units are fully paid and non-assessable (subject to the obligation of a
Unitholder to repay wrongful distributions).
COMPANY
Under Delaware law, Shareholders will not be liable for Company debts or
obligations. Listed Shares, upon issuance, will be fully paid and non-assessable
(subject to the obligation of a Shareholder to repay wrongful distributions).
The limitation on personal liability of Shareholders of the Company is
substantially the same as that of Unitholders in the CPA(R) Partnerships.
LIQUIDITY
CPA(R) PARTNERSHIPS
The Units may not be transferred if such transfers would result in the
termination of the CPA(R) Partnership under Section 708 of the Code or cause the
CPA(R) Partnership to lose its classification as a "partnership" for federal
income tax purposes. In addition, no transferee of a Unit has the right to
become a substitute Unitholder (entitling such person to vote on matters
submitted to a vote of the Unitholders) unless, among other things, such
substitution is approved by the General Partners, who may grant or withhold such
consent in their absolute discretion. In view of the foregoing restrictions, it
was never intended that the Units would be actively traded, and no broad-based
secondary market for the Units exists.
COMPANY
The Listed Shares are freely transferable and listed on the NYSE. See "RISK
FACTORS."
The Units constitute illiquid investments and Unitholders may find it
difficult to dispose of their Units, if they wish to do so, or may be obligated
to sell the Units at substantial discounts to facilitate the sale. In contrast,
the Listed Shares will be listed on the NYSE.
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VOTING PROCEDURES
THE VOTE OF EACH UNITHOLDER IS IMPORTANT. EACH UNITHOLDER IS URGED TO MARK,
DATE AND SIGN THE CONSENT CARD AND RETURN IT IN THE ENCLOSED ENVELOPE.
TIME OF VOTING
The vote of the Unitholders with respect to the Consolidation will be
tabulated on December 16, 1997, unless such date is extended by the General
Partners in their sole discretion. The votes will be tabulated by ChaseMellon,
which is not affiliated with the Company, the CPA(R) Partnerships or the General
Partners. See "Consent Card and Vote Required."
RECORD DATE AND OUTSTANDING UNITS
The Consolidation is being submitted for approval to those Persons holding
Units as of the Record Date. The Record Date is October 7, 1997 for all CPA(R)
Partnerships. At the Record Date, the following number of Units were held of
record by the number of Unitholders indicated below:
NUMBER OF UNITS NUMBER OF
PARTNERSHIP HELD OF RECORD UNITHOLDERS
---------------------------------- --------------- ---------------------
CPA(R):1.......................... 40,000 1,718
CPA(R):2.......................... 54,900 1,977
CPA(R):3.......................... 66,000 2,470
CPA(R):4.......................... 85,528 3,045
CPA(R):5.......................... 113,200 3,575
CPA(R):6.......................... 47,930 2,885
CPA(R):7.......................... 45,209 2,281
CPA(R):8.......................... 67,582 3,627
CPA(R):9.......................... 59,918 3,342
Each Unitholder is entitled to one vote for each Unit held. Accordingly,
the number of Units entitled to vote with respect to the Consolidation is
equivalent to the number of Units held of record at the Record Date.
APPROVAL DATE
The Prospectus and form of Consent Card constitutes the General Partners'
notice of the Consolidation. Each Unitholder has until 5:00 p.m., New York Time,
on December 16, 1997, unless extended by the General Partners in their sole
discretion (the "Approval Date") to inform the General Partners whether such
Unitholder wishes to approve or disapprove of his CPA(R) Partnership's
participation in the Consolidation. The General Partners ask that each
Unitholder vote by completing and returning the form of Consent Card
accompanying this Prospectus in the manner described below. A vote to approve a
CPA(R) Partnership's participation in the Consolidation will constitute a vote
to adopt the related CPA(R) Partnership Agreement Amendments to the CPA(R)
Partnership Agreements, while a vote against a CPA(R) Partnership's
participation in the Consolidation will constitute a vote against the
amendments. The General Partners may decide not to pursue the Consolidation with
respect to any CPA(R) Partnership for any reason and at any time before it
becomes effective, whether before or after approval by the Unitholders.
CONSENT CARD AND VOTE REQUIRED
Unitholders who wish to vote FOR the Consolidation, all related
transactions and the Partnership Agreement Amendments should complete, sign and
return the Consent Card relating to their Units which accompanies this
Prospectus. Each Unitholder's attention is directed to the Consent Card and
Election Form contained in this Prospectus as Appendix C. A Consent Card,
Election Form and a letter of instructions have
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been prepared for each Unitholder. Consent Cards and Election Forms must be
delivered in person or by mail or by other delivery service to ChaseMellon at
the following address on, or prior to, the Approval Date:
ChaseMellon Shareholder Services L.L.C.
85 Challenger Road
Ridgefield Park, NJ 07660
Approval of the Consolidation by a CPA(R) Partnership requires the vote of
Unitholders holding a majority of the outstanding Units of the CPA(R)
Partnership as of the Record Date. An automated system administered by
ChaseMellon will tabulate the votes. Abstentions will be tabulated with respect
to the Consolidation and related matters. Broker non-votes are not counted for
purposes of determining whether the Consolidation and related proposals have
been approved. Abstentions and broker non-votes will have the effect of a vote
against the Consolidation. The following number of Units must be voted in favor
of the Consolidation for it to be approved by each respective CPA(R)
Partnership:
NUMBER OF UNITS REQUIRED FOR
PARTNERSHIP APPROVAL OF CONSOLIDATION
--------------------------------------------- ----------------------------
CPA(R):1..................................... 20,001
CPA(R):2..................................... 27,451
CPA(R):3..................................... 33,001
CPA(R):4..................................... 42,765
CPA(R):5..................................... 56,601
CPA(R):6..................................... 23,966
CPA(R):7..................................... 22,605
CPA(R):8..................................... 33,792
CPA(R):9..................................... 29,960
A Unitholder who signs and returns the Consent Card without indicating a
vote will be deemed to have voted FOR the Consolidation and for the adoption of
the Partnership Agreement Amendments and will receive Listed Shares, unless he
elects on his Election Form to receive Subsidiary Partnership Units.
Unitholders who wish to vote AGAINST the Consolidation should also complete
a Consent Card. The failure to return a Consent Card will have the same effect
as abstaining from voting with respect to the Consolidation.
Unitholders of a CPA(R) Partnership which approves and participates in the
Consolidation will receive Listed Shares of the Company, unless the Unitholder
elects to receive Subsidiary Partnership Units. A Unitholder who abstains from
voting by indicating his abstention on the Consent Card will also receive Listed
Shares, unless the Unitholder elects to receive Subsidiary Partnership Units as
indicated on the on his Election Form. A Unitholder who does not return the
Consent Card will receive Listed Shares if his CPA(R) Partnership participates
in the Consolidation.
All questions as to the form of all documents and the validity (including
time of receipt) of all approvals and elections will be determined by the
General Partners, and such determinations shall be final and binding. The
General Partners reserve the absolute right to waive any of the conditions of
the Consolidation or any defects or irregularities in any approval of the
Consolidation or preparation of the form of Consent Card. The General Partners'
interpretation of the terms and conditions of the Consolidation will be final
and binding. The General Partners shall be under no duty to give notification of
any defects or irregularities in any approval of the Consolidation or
preparation of the form of Consent Card and Election Form and shall not incur
any liability for failure to give such notification.
REVOCABILITY OF CONSENT
Unitholders may withdraw or revoke their consent at any time prior to the
Approval Date. To be effective, a written, telegraphic, fax or telex notice of
revocation or withdrawal of the Consent Card must be received by no later than
the Approval Date, addressed as follows: ChaseMellon Shareholder Services
L.L.C.,
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85 Challenger Road, Ridgefield Park, NJ 07660. A notice of revocation or
withdrawal must specify the Unitholder's name and the name of the CPA(R)
Partnership to which such revocation or withdrawal relates.
SOLICITATION OF VOTES; SOLICITATION EXPENSES
Votes of Unitholders may be solicited by the management of the General
Partners or by third parties. Costs of solicitation will be allocated as set
forth in "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Consolidation
Expenses." No party will receive any compensation contingent upon solicitation
of a favorable vote.
Shareholder Communications Corporation ("SCC") will be engaged to assist in
the solicitation of consents. As the end of the solicitation period approaches,
certain Unitholders may receive a call from a representative of SCC if the
General Partners of the CPA(R) Partnerships have not yet received their vote.
Authorization to permit SCC to execute proxies may be obtained by telephonic
transmitted instructions from Unitholders at the sole discretion of the General
Partners. Proxies that are obtained telephonically will be recorded in
accordance with the procedures set forth below. The General Partners believe
that these procedures are reasonably designed to ensure that the identity of the
Unitholder casting the vote is accurately determined and that the voting
instructions of the Unitholder are accurately determined.
In all cases where a telephonic proxy is solicited, the SCC representative
is required to ask the Unitholder for such Unitholder's full name, address,
social security or employer identification number, title (if the person giving
the proxy is authorized to act on behalf of an entity, such as a corporation)
and the number of Units owned and to confirm that the Unitholder has received
the Prospectus in the mail. If the information solicited agrees with the
information provided to SCC by the General Partners, then the SCC representative
has the responsibility to explain the process, read the proposals listed on the
Consent Card and ask for the Unitholder's instructions on each proposal. The SCC
representative, although he is permitted to answer questions about the process,
is not permitted to recommend to the Unitholder how to vote, other than to read
any recommendation set forth in the proxy statement. SCC will record the
Unitholder's instructions on the card. Within 72 hours, SCC will send the
Unitholder a letter or mailgram to confirm the Unitholder's vote and asking the
Unitholder to call SCC immediately if the Unitholder's instructions are not
correctly reflected in the confirmation.
If a Unitholder wishes to participate in the solicitation, but does not
wish to give a consent by telephone, such Unitholder may still submit the
Consent Card originally sent with the Prospectus. Any consent given by a
Unitholder, whether in writing or by telephone, is revocable. A Unitholder may
revoke the accompanying consent or a consent given telephonically at any time
prior to its use by filing with the General Partners a written revocation or
duly executed proxy bearing a later date.
ALTERNATIVES AVAILABLE TO UNITHOLDERS WHO OBJECT TO THE CONSOLIDATION
Unitholders may vote against the Consolidation. If the holders of a
majority of the outstanding Units in the CPA(R) Partnerships representing the
Minimum Participation Amount do not approve the Consolidation, the Consolidation
will not be completed.
Unitholders will retain their current CPA(R) Partnership Units if a
majority of that CPA(R) Partnership's Unitholders vote against the
Consolidation. Even if the Consolidation is completed, a particular CPA(R)
Partnership will not participate in the Consolidation if the holders of at least
a majority of the outstanding Units in that CPA(R) Partnership do not approve
the Consolidation. Rather, that CPA(R) Partnership will continue to operate as a
separate legal entity with its own assets and liabilities, and its investment
objectives, policies and restrictions will not change. As a result, the
Unitholders of that CPA(R) Partnership will retain their current interest in the
CPA(R) Partnership.
Unitholders may elect to receive Subsidiary Partnership Units. Subsidiary
Partnership Units have been structured to allow Unitholders to retain an
investment that provides substantially the same economic interests and legal
rights as his investment in a CPA(R) Partnership.
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UNITHOLDER NAMES AND ADDRESSES
Under Rule 14a-7 of the Exchange Act, the CPA(R) Partnerships are
obligated, upon the written request of a Unitholder, to deliver to the
requesting Unitholder: (i) a statement of the approximate number of Unitholders
in each CPA(R) Partnership and (ii) the estimated cost of mailing a proxy
statement, form of proxy or other similar communication to such Unitholders. In
addition, pursuant to Rule 14a-7, a Unitholder has the right, at his option,
either: (i) to have his CPA(R) Partnership mail (at the Unitholder's expense)
copies of any proxy statement, proxy form or other soliciting material furnished
by the Unitholder to the CPA(R) Partnership's Unitholders designated by the
Unitholder or (ii) to have the CPA(R) Partnership deliver, within five business
days of the receipt of the request, a reasonably current list of the names,
addresses and class of Units held by a CPA(R) Partnership's Unitholders, which
list shall be updated as often as practicable prior to the record date for
Unitholders as to the matters contemplated in this Prospectus.
NO RIGHT OF APPRAISAL
Unitholders of a Participating Partnership who ABSTAIN or vote AGAINST the
Consolidation will not be entitled to dissenters' or appraisal rights under the
Partnership Agreements, or the Delaware or the California Partnership Law. Such
rights, when they exist, give the holders of securities the right to surrender
such securities for an appraised value in cash, if they oppose a merger or
similar reorganization. No such rights will be provided by the CPA(R)
Partnerships or the Company.
Additionally, the common law of both Delaware and California imposes
fiduciary duties of care, loyalty, good faith and fair dealing on the General
Partners in effecting or attempting to effect the Consolidation.
AMENDMENTS TO PARTNERSHIP AGREEMENTS
The Partnership Agreements do not specifically address the merger of the
CPA(R) Partnerships. The General Partners are, therefore, proposing to amend the
Partnership Agreements to include specific provisions authorizing the
Consolidation and the transactions related thereto (the "Partnership Agreement
Amendments"). The proposed Partnership Agreement Amendments expressly authorize
all actions necessary to successfully accomplish the Consolidation.
Unitholders voting in favor of their CPA(R) Partnership's participation in
the Consolidation will also have voted in favor of the proposed CPA(R)
Partnership Agreement Amendments. Since a CPA(R) Partnership's participation in
the Consolidation and the approval of the CPA(R) Partnership Agreement
Amendments both require approval of Unitholders holding a majority of
outstanding Units of the CPA(R) Partnership, the Partnership Agreement
Amendments will be effective as to each CPA(R) Partnership participating in the
Consolidation. See "THE CONSOLIDATION -- Amendments to the Partnership
Agreements."
ISSUANCE OF CERTIFICATES
UNITHOLDERS SHOULD NOT SEND ANY CERTIFICATES WITH THE ENCLOSED CONSENT.
Promptly after the Effective Time, the Company will cause to be mailed to
all Unitholders of record who will receive Shares in the Consolidation a
certificate for the number of Listed Shares to be received by each Unitholder.
Each CPA(R):4 Unitholder will be required to return his CPA(R):4 Partnership
certificate or a lost certificate affidavit. No certificates will be issued to
holders of Subsidiary Partnership Units.
After the Effective Time, there will be no further registration of
transfers of Units that were issued and outstanding immediately before such time
and that were converted or exchanged in the Consolidation for Shares.
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INTERESTS OF CERTAIN PERSONS IN THE CONSOLIDATION
AND CONFLICTS OF INTEREST
A number of conflicts of interest are inherent in the relationships among
the CPA(R) Partnerships, the General Partners and the Unitholders. In
recognition of these conflicts and the resulting need to independently determine
that the Consolidation is in the best interest of the Unitholders, the General
Partners engaged the Independent Appraiser to render the Fairness Opinion and to
independently determine the fair value of the Properties. Certain conflicts of
interest are summarized below.
SUBSTANTIAL BENEFITS TO GENERAL PARTNERS
The General Partners have participated in the initiation and structuring of
the Consolidation and will realize substantial economic benefits if the Company
is able to proceed with and consummate the Consolidation as to some or all of
the CPA(R) Partnerships. For example, if the Consolidation is consummated, the
General Partners will receive 733,134 Listed Shares in exchange for that portion
of their general partner interest which represents the General Partners' share
of the appreciation of properties owned by the CPA(R) Partnerships.
Additionally, if the Consolidation is completed, W.P. Carey & Co. will receive
compensation for investment banking services in connection with the
Consolidation in the form of warrants to purchase Listed Shares. If all the
CPA(R) Partnerships participate in the Consolidation, W.P. Carey & Co. will
receive warrants to purchase 2,284,800 Listed Shares at $21 per Share and
725,930 Listed Shares at $23 per Share. The warrants will be exercisable for 10
years generally beginning one year after the date the Consolidation is
completed. Because the General Partners have a financial interest in the
consummation of the Consolidation, there is an inherent conflict of interest in
their structuring of the terms and conditions of the Consolidation, and the
manner in which the Consolidation has been structured might have been different
if structured by persons having no financial interest in whether or not the
Consolidation proceeded. Certain of the potential benefits to the General
Partners from the Consolidation and the inherent conflicts related thereto are
reviewed below.
A transaction involving the purchase, financing, lease and sale of any
Property by the Company may result in the immediate realization by the Manager
and its Affiliates of substantial commissions, fees, compensation and other
income. Subject to the Management Agreement, the Manager has discretion with
respect to all decisions relating to the occurrence and terms of any such
transaction, except to the extent such transaction involves Affiliates of the
Manager, in which case the allocation of such transaction must be approved by a
majority of the Independent Directors. Potential conflicts may arise in
connection with the determination by the Manager (on behalf of the Company) of
whether to hold or sell a Property, as such determination could impact the
timing and amount of fees payable to the Manager. The Company may purchase, sell
or finance Properties through certain Affiliates of the Manager engaged in the
real estate brokerage business or through other Affiliates of the Company.
Through the Consolidation, the Company will ensure continuity of the
business established by the General Partners. The Properties will continue to be
managed by Affiliates of the General Partners, as long as the Company holds such
investments and the Manager is retained by the Company. Furthermore, the
proceeds from the sale of the Properties can be reinvested by the Company, and
the Manager can manage the properties purchased with such proceeds. The Company
will, therefore, afford ongoing employment opportunities for executive
management and others employed to assist with the administration and day-to-day
operations of the CPA(R) Partnerships. Absent the creation of an infinite-life
vehicle to hold these investments, the CPA(R) Partnerships would have been
dissolved and their assets sold, and W.P. Carey & Co.'s business would have
declined to the extent that new assets would not have been brought under its
control, management or ownership.
For a comparison of the fees and other compensation paid to the General
Partners in connection with their management of the CPA(R) Partnerships to the
fees expected to be paid to the Manager, see "COMPENSATION, REIMBURSEMENTS AND
DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER."
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COMMON GENERAL PARTNERS
W.P. Carey & Co. serves as the corporate general partner of CPA(R):1,
CPA(R):2 and CPA(R):3; CCP serves as the corporate general partner of CPA(R):4,
CPA(R):5 and CPA(R):6; Seventh Carey serves as the corporate general partner of
CPA(R):7; Eighth Carey serves as the corporate general partner of CPA(R):8; and
Ninth Carey serves as the corporate general partner of CPA(R):9. William P.
Carey serves as a general partner of all of the CPA(R) Partnerships. The Boards
of Directors of W.P. Carey & Co., CCP, Seventh Carey, Eighth Carey and Ninth
Carey are comprised of the same persons, except that Stephen H. Hamrick serves
as a Director of only Seventh Carey, Eighth Carey and Ninth Carey.
The General Partners of each CPA(R) Partnership have an independent
obligation to ensure that such CPA(R) Partnership's participation in the
Consolidation is fair and equitable, considering all factors unique to such
CPA(R) Partnership and without regard to whether the Consolidation is fair and
equitable to any of the other participants (including other CPA(R) Partnerships
in which such General Partners may also serve as general partners). The General
Partners have sought to discharge faithfully this obligation to each of the
CPA(R) Partnerships, but it should be borne in mind that each of the General
Partners or their affiliates serves in a similar capacity with respect to the
other CPA(R) Partnerships. If each of the CPA(R) Partnerships had separate
general partners who did not serve in a similar capacity for any of the other
CPA(R) Partnerships, these general partners would have had a totally independent
perspective (not affected by a consideration of the interests of any of the
other CPA(R) Partnerships) which might have led them to advocate positions
during the negotiations and structuring of the Consolidation differently from
those taken by the General Partners.
LACK OF INDEPENDENT REPRESENTATION OF UNITHOLDERS
While the Independent Appraiser has provided the Fairness Opinion, the
CPA(R) Partnerships have not retained any outside representatives to act on
behalf of the Unitholders in negotiating the terms and conditions of the
Consolidation. An independent representative was not engaged because the General
Partners believe that they can fairly represent the interests of the Limited
Partners and because, if an independent representative had been retained for the
CPA(R) Partnerships, either collectively or on an individual basis, the fees and
expenses of the Consolidation would have been higher. No group of Unitholders
was empowered to negotiate the terms and conditions of the Consolidation or to
determine what procedures should be in place to safeguard the rights and
interests of the Unitholders. In addition, no investment banker, attorney,
financial consultant or expert was engaged to represent the interests of the
Unitholders. The General Partners and the management of the General Partners
have been the parties responsible for structuring all the terms and conditions
of the Consolidation. Legal counsel engaged to assist with the preparation of
the documentation for the Consolidation, including this Prospectus, was engaged
by the General Partners and did not serve, or purport to serve, as legal counsel
for the CPA(R) Partnerships or Unitholders. If another representative or
representatives had been retained for the Unitholders, the terms of the
Consolidation might have been different and, possibly, more favorable to the
Unitholders. In particular, had separate representation for each of the CPA(R)
Partnership been arranged by the General Partners, the terms of the
Consolidation may have been different.
While independent representatives were not engaged to represent the
interests of the CPA(R) Partnerships in structuring the Consolidation, the
General Partners believe the procedures used to protect the financial interests
of the Unitholders are fair. For example, the General Partners agreed that the
Listed Shares will be allocated among the CPA(R) Partnerships in accordance with
their respective Total Exchange Values and within the CPA(R) Partnerships
between Unitholders and the General Partners according to the provisions of each
CPA(R) Partnership Agreement. Recognizing the inherent conflict of interest in
having the General Partners establish these numbers independently (without
active involvement from persons not having a financial interest in the
Consolidation), they engaged the Independent Appraiser to value the real estate
portfolios owned by each of the CPA(R) Partnerships. See "APPRAISALS AND
FAIRNESS OPINION."
FIDUCIARY DUTIES OF GENERAL PARTNERS
The General Partners have fiduciary duties to the CPA(R) Partnerships and
the Unitholders. The General Partners, in handling the affairs of the CPA(R)
Partnerships, are expected to exercise good faith, care and
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prudence and to act with a duty of loyalty to the Unitholders. Under these
fiduciary duties, the General Partners are obligated to ensure that the CPA(R)
Partnerships are treated fairly and equitably in transactions with third
parties, especially where consummation of such transactions may result in the
interests of General Partners being opposed to, or not totally in line with, the
interests of the Limited Partners. Accordingly, the General Partners of the
CPA(R) Partnerships are required to assess whether the Consolidation is fair and
equitable, taking into account the unique characteristics of the CPA(R)
Partnerships (such as the CPA(R) Partnerships' gross revenue and expenses, the
prospects for increases or decreases in future cash flow affecting the value of
its assets and the quality of the credit of the CPA(R) Partnerships' tenants)
and the CPA(R) Partnerships' objectives with respect to the timing and manner of
the liquidation of the CPA(R) Partnerships.
FEATURES DISCOURAGING POTENTIAL TAKEOVERS
Certain provisions in the Organizational Documents, as well as statutory
rights under the LLCL, could be used by the Company's management to delay,
discourage or thwart efforts of third parties to acquire control of, or a
significant equity interest in, the Company. See "DESCRIPTION OF SHARES and
Subsidiary Partnership Units -- Restricting Changes in Control and Business
Combination Provisions."
ALLOCATION OF SERVICES AND EXPENSES
Personnel to be used by the Manager currently provide services related to
the operation of other real estate entities affiliated with the Manager which
will not be included in the Consolidation. These entities were formed by the
General Partners and their Affiliates. If the Consolidation is consummated,
employees of the Manager will provide services related to the operation of the
Company and the Nonparticipating Partnerships and these other entities. As a
result, possible conflicts of interest may arise regarding allocation of
services of these employees between the Company and the Nonparticipating
Partnerships and these other entities. Employees will continue to provide
services directly related to the operations of these Nonparticipating
Partnerships and the cost of such services will be reimbursable by the
Nonparticipating Partnerships, all pursuant to the respective Partnership
Agreements. In addition, although Mr. Carey will devote a substantial portion of
his activities to the operations of the Company, he may remain involved in the
business activities of the CPA(R) REITs and any future programs. There may be a
conflict in the allocation of Mr. Carey's services between the Company and such
entities.
NON-ARM'S-LENGTH AGREEMENTS
Except as otherwise provided below, all agreements and arrangements,
including those relating to compensation, between the Company and the Manager or
any of its Affiliates will not be the result of arm's-length negotiations.
Certain provisions of the Organizational Documents, however, target generally
potential conflicts which might otherwise result from such agreements and
arrangements by, among other things, requiring that compensation to the Manager
and its Affiliates be approved by a majority of the Independent Directors and
that terms of future transactions with Affiliates be no less favorable to the
Company than terms which could be obtained from unaffiliated entities providing
similar services as an ongoing activity in the same geographical location. The
initial Independent Directors were selected by W.P. Carey & Co.
COMPETITION WITH THE COMPANY FROM AFFILIATES OF THE MANAGER IN THE PURCHASE,
SALE,
LEASE AND OPERATION OF PROPERTIES
W.P. Carey & Co., its subsidiaries and Affiliates and William P. Carey
currently manage or advise public and private real estate investment
partnerships and REITs whose investment and rate of return objectives are
similar to those of the Company. In addition, they expect to manage or advise,
directly or through Affiliates, additional REITs and other investment entities.
Therefore, those entities may be in competition with the Company with respect to
properties, potential purchasers, sellers and lessees of properties and mortgage
financing for Properties.
The Manager will use best efforts to present suitable investments to the
Company consistent with the investment procedures, objectives and policies of
the Company. However, the Manager and its Affiliates are not restricted from
advising or managing other entities, any of which may have investment objectives
similar
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to those of the Company. In the event a potential investment might be suitable
for the Company and an Affiliate, the decision as to which entity will make the
investment will be made by the Investment Committee. The Investment Committee
serves as the investment committee of the CPA(R) REITs. The Investment Committee
of the Manager will review the investment portfolios of each entity and other
factors such as cash flow, the effect of the acquisition on the diversification
of each entity's portfolio, the length of the term of the lease, renewal
options, the estimated income tax effects of the purchase on each entity, the
policies of each entity relating to leverage, the funds of each entity available
for investment, the length of time such funds have been available for investment
and the various ways in which the potential investment can be structured.
Consideration will be given to joint ownership (e.g., tenancy-in-common or joint
venture arrangement) of a particular property determined to be suitable for the
Company and an Affiliate in order to achieve diversification of each entity's
portfolio and efficient completion of an entity's portfolio. In any joint
ownership, the investment of the investment entities will be on substantially
the same economic terms and conditions, and each investment entity may have a
right of first refusal to purchase the interest of the other if a sale of that
interest is contemplated. To the extent that a particular property might be
determined to be suitable for more than one investment entity, the investment
will be made by the most appropriate investment entity after consideration of
the factors identified above. The Company believes that there are currently a
sufficient number of potential investments available to satisfy the investment
policies of all investment entities for which the Manager and its Affiliates are
responsible. See "RISK FACTORS -- Risks of Joint Ventures."
ADJACENT PROPERTIES
Although it is not expected to occur, if the Manager or any of its
Affiliates acquires Properties that are adjacent to those of the Company, the
value of such Properties may be enhanced by the interests of the Company. It
also is possible that such Properties could be in competition with those of the
Company for prospective tenants.
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNERS
Under California and Delaware partnership law, the General Partners are
accountable to the Limited Partners as fiduciaries and are required to exercise
good faith and integrity in all their dealings in the Partnerships' affairs. The
Partnership Agreements generally provide that the General Partners shall not
have any liability, responsibility or accountability in damages or otherwise to
any other Partner or CPA(R) Partnership for, and the CPA(R) Partnerships agree
to indemnify, pay, protect and hold harmless each General Partner (on the demand
of and to the satisfaction of such General Partner) from and against, any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, proceedings, costs, expenses and disbursements of any kind or nature
whatsoever (including without limitation all costs and expenses of defense,
appeal and settlement of any and all suits, actions or proceedings instituted
against such General Partner or the CPA(R) Partnerships and all costs of
investigation in connection therewith) (collectively, "Liabilities") which may
be imposed on, incurred by, or asserted against such General Partner or a CPA(R)
Partnership in any way relating to or arising out of, or alleged to relate to or
arise out of, any action or inaction on the part of such Partnership or on the
part of such General Partner as a general partner of a CPA(R) Partnership;
provided, that a particular General Partner shall be liable, responsible and
accountable and a CPA(R) Partnership shall not be liable to a particular General
Partner, for any portion of such Liabilities resulting from such General
Partner's own negligence misconduct, fraud, bad faith or other breach of
fiduciary duty to a CPA(R) Partnership or any Partner. As a result, Unitholders
might have a more limited right of action in certain circumstances than they
would have in the absence of such a provision in a Partnership Agreement.
The Partnership Agreements also provide that if any action, suit or
proceeding shall be pending or threatened against a CPA(R) Partnership or any
General Partner relating to or arising, or alleged to relate to or arise, out of
any such action or inaction, each General Partner shall have the right to
employ, at the expense of a CPA(R) Partnership, separate counsel of such General
Partner's choice in such action, suit or proceeding. The satisfaction of the
obligations of a CPA(R) Partnership under the indemnification provisions of a
CPA(R)
85
97
Partnership Agreement will be from and limited to the assets of the CPA(R)
Partnership, and no Partner shall have any personal liability on account
thereof.
INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE COMPANY
The Directors and officers of the Company, in exercising the powers and
responsibilities of managing the Company, owe the Company and its Shareholders a
duty of care and a duty of loyalty. However, under the so-called "business
judgment rule," which could apply by analogy to the Directors and officers of
the Company, the Directors and officers of the Company may not be liable for
errors in judgment or other acts or omissions made in good faith which are done
in a manner they believe to be in the best interests of the Company and are
performed with the care that an ordinarily prudent person in a like position
will use under similar circumstances. In the event any legal action were brought
against the Directors or officers of the Company, they may be able to assert
defenses based on the business judgment rule.
According to the Organizational Documents, all Directors and officers of
the Company are entitled to indemnification from the Company for any loss,
damage or claim (including any reasonable attorney's fees incurred by such
person in connection therewith) due to any act or omission made by him, except
in the case of fraudulent or illegal conduct of such person, provided that any
indemnity shall be paid out of, and to the extent of, the assets of the Company
only (or any insurance proceeds available therefor) and no Shareholder shall
have any personal liability on account thereof. The termination of any action,
suit or proceeding by judgment, order, settlement or conviction or upon a plea
of nolo contendere or its equivalent, shall not of itself create a presumption
that the Director or officer acted fraudulently or illegally.
The indemnification provided by the Organizational Documents is not deemed
to be exclusive of any other rights to which those indemnified may be entitled
under any agreement, vote of Shareholders or Directors or otherwise and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Any repeal or modification of the indemnification provisions contained
in the Organizational Documents will not adversely affect any right or
protection of a Director or officer of the Company existing at the time of such
repeal or modification.
The Company will enter into indemnification agreements with each of its
Directors. The indemnification agreements will require, among other things, that
the Company indemnify its officers and Directors to the fullest extent permitted
by Delaware law and advance to the Directors all related expenses, subject to
reimbursement if it is subsequently determined that indemnification is not
permitted. The Company must also indemnify and advance all expenses incurred by
officers and Directors seeking to enforce their rights under the indemnification
agreements and cover officers and Directors under the Company's Directors and
officers liability insurance. Although the form of indemnification agreement
offers substantially the same scope of coverage afforded by provisions in the
Organizational Documents, it provides greater assurance to officers and
Directors that indemnification will be available, because, as a contract, it
cannot be modified unilaterally in the future by the Board of Directors or by
the Shareholders to eliminate the rights that it provides.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, officers or persons controlling the Company
pursuant to any provisions described in this Consent Solicitation/Prospectus, in
the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
DIRECTORS AND OFFICERS INSURANCE
According to the Organizational Documents, the Company may, if the
Directors of the Company deem it appropriate in their sole discretion, obtain
insurance for the benefit of the Company's Directors and officers, relating to
the liability of such persons. The Directors and officers liability insurance
would insure (i) the officers and Directors of the Company from any claim
arising out of an alleged wrongful act by such persons while acting as Directors
and officers of the Company and (ii) the Company to the extent that it has
indemnified the Directors and officers for such loss.
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BUSINESS AND PROPERTIES
The CPA(R) Partnerships and the Company (or their representatives) from
time to time may make or may have made certain forward-looking statements,
whether orally or in writing, including, without limitation, statements in this
Prospectus and otherwise, regarding the business plan of the CPA(R) Partnerships
and the Company, estimates of future cash flows of the Company, the types of
investments to be made by the Company and hypothetical distribution and returns
to Unitholders. Such statements are qualified in their entirety by reference to,
and are accompanied by, the factors disclosed under the heading "RISK FACTORS."
Such factors could cause actual results to differ materially from those
projected in such forward-looking statements. Accordingly, forward-looking
statements should not be relied upon as a prediction of actual results.
THE COMPANY'S BUSINESS
The Company's objective is to increase shareholder value and its Funds from
Operations through prudent management of its real estate assets and
opportunistic investments. The Company intends to capitalize on its status as a
publicly-traded real estate investment company to take immediate advantage of
the significant opportunities to make net lease and other real estate
investments at attractive returns. The Company expects to evaluate a number of
different opportunities in a variety of property types and geographic locations
and to pursue the most attractive based upon its analysis of the risk/return
tradeoffs.
The Company's business plan is an expansion of the business plans of the
CPA(R) Partnerships. In addition to acquiring additional net leased properties,
the Company intends to:
- Seek additional investment and other opportunities that leverage core
management skills (which include in-depth credit analysis, asset
valuation and sophisticated structuring techniques);
- optimize the current portfolio of properties through expansion of
existing properties, timely dispositions and favorable lease
modifications;
- utilize its enhanced size and access to capital to refinance existing
debt; and
- increase the Company's access to capital.
The Company expects to be a perpetual life, growth-oriented company and,
therefore, instead of selling all of its properties as the CPA(R) Partnerships
had been designed to do, will continue to own properties as long as it believes
ownership helps attain the Company's objectives. The Board of Directors will
have the ability to change investment financing, distribution and other policies
of the Company without the consent of the Shareholders.
MANAGEMENT OF THE COMPANY
The Manager will provide both strategic and day-to-day management for the
Company, including research, investment analysis, acquisition and development
services, asset management, capital funding services, disposition of assets and
administrative services. The Manager has dedicated senior executives in each
area of its organization so that the Company will function as a fully integrated
operating company.
ACQUISITION STRATEGIES
The Manager has a well-developed process with established procedures and
systems for acquiring net leased property. As a result of its reputation and
experience in the industry and the contacts maintained by its professionals, the
Manager has a presence in the net lease market that has provided it with the
opportunity to invest in a significant number of transactions on an ongoing
basis. The Company seeks to utilize the Manager's presence in the net lease
market to acquire additional properties in transactions with both new and
current tenants. In evaluating opportunities for the Company, the Manager
carefully examines the credit, management and other attributes of the tenant and
the importance of the property under consideration to the tenant's operations.
Careful credit analysis is a crucial aspect of every transaction. The Company
believes that the Manager has one of the most extensive underwriting processes
in the industry and has an experienced staff of professionals involved with
underwriting transactions. The Manager seeks to identify those prospective
tenants
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99
whose creditworthiness is likely to improve over time. The Company believes that
the experience of its management in structuring sale-leaseback transactions to
meet the needs of a prospective tenant enables the Manager to obtain a higher
return for a given level of risk than would typically be available by purchasing
a property subject to an existing lease.
The Manager's strategy in structuring its net lease investments for the
Company is to:
(i) combine the stability and security of long-term lease payments,
including rent increases, with the appreciation potential inherent in the
ownership of real estate;
(ii) enhance current returns by utilizing varied lease structures;
(iii) reduce credit risk by diversifying its investments by tenant,
type of facility, geographic location and tenant industry; and
(iv) increase potential returns by obtaining equity enhancements from
the tenant when possible, such as warrants to purchase tenant common stock.
FINANCING STRATEGIES
Consistent with its investment policies, the Company intends to use
leverage, when available on favorable terms. The Company also plans to have in
place a credit facility, which it intends to use primarily to acquire additional
properties and refinance existing debt. In addition, the Manager will
continually seek opportunities and consider alternative financing techniques to
refinance debt, reduce interest expense or improve its capital structure.
TRANSACTION ORIGINATION
In analyzing potential acquisitions, the Manager reviews and structures
many aspects of a transaction, including the tenant, the real estate and the
lease, to determine whether a potential acquisition can be structured to satisfy
the Company's acquisition criteria. The aspects of a transaction which are
reviewed and structured by the Manager include the following:
- Tenant Evaluation. The Manager subjects each potential tenant to an
extensive evaluation of its credit, management, position within its
industry, operating history and profitability. The Manager seeks tenants
it believes will have stable or improving credit. By leasing properties to
such tenants, the Company can generally charge rent that is higher than
the rent charged to tenants with recognized credit and, thereby, enhance
its current return from such properties as compared with properties leased
to companies whose credit potential has already been recognized by the
market. Furthermore, if a tenant's credit does improve, the value of the
Company's properties leased to such tenants will likely increase (if all
other factors affecting value remain unchanged). The Manager may also seek
to enhance the likelihood of a tenant's lease obligations being satisfied,
such as through a letter of credit or a guaranty of lease obligations from
the tenant's corporate parent. Such credit enhancement provides the
Company with additional financial security.
- Leases with Increasing Rents. The Manager seeks to include clauses in
the Company's leases that provide for increases in rent over the term of
the leases. These increases are generally tied to increases in certain
indices such as the consumer price index, in the case of retail stores
participation in gross sales above a stated level, mandated rental
increases on specific dates and by other methods. The Company seeks to
avoid entering into leases that provide for contractual reductions in
rents during their primary term.
- Properties Important to Tenant Operations. The Manager, on behalf of the
Company, generally seeks to acquire properties with operations that are
essential or important to the ongoing operations of the tenant. The
Company believes that such properties provide better protection in the
event that a tenant files for bankruptcy, because leases on properties
essential or important to the operations of a bankrupt tenant are less
likely to be rejected and, thereby, terminated by a bankrupt tenant. The
Manager also seeks to assess the income, cash flow and profitability of
the business conducted at the property, so
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100
that, if the tenant is unable to operate its business, the Company can
either continue operating the business conducted at the property or
re-lease the property to another entity in the industry which can operate
the property profitably.
- Lease Provisions that Enhance and Protect Value. When appropriate, the
Manager attempts to include provisions in the Company's leases that
require the Company's consent to certain tenant activity or require the
tenant to satisfy certain operating tests. These provisions include, for
example, operational and financial covenants of the tenant, prohibitions
on a change in control of the tenant and indemnification from the tenant
against environmental and other contingent liabilities. Including these
provisions in its leases enables the Company to protect its investment
from changes in the operating and financial characteristics of a tenant
that may impact its ability to satisfy its obligations to the Company or
could reduce the value of the Company's Properties.
- Diversification. The Manager attempts to diversify the Company's
portfolio of properties to avoid dependence on any one particular tenant,
type of facility, geographic location and tenant industry. By diversifying
its portfolio, the Company reduces the adverse effect on the Company of a
single underperforming investment or a downturn in any particular
industry.
The Manager employs a variety of other strategies and practices in
connection with the Company's acquisitions. These strategies include attempting
to obtain equity enhancements in connection with transactions. Typically, such
equity enhancements involve warrants to purchase stock of the tenant to which
the property is leased or the stock of the parent of the tenant. In certain
instances, the Company grants to the tenant a right to purchase the property
leased by the tenant, but generally the option purchase price will be not less
than the fair market value of the property. The Manager's practices include
performing evaluations of the physical condition of properties and performing
environmental surveys in an attempt to determine potential environmental
liabilities associated with a property prior to its acquisition.
ACQUISITION AND UNDERWRITING PROCESS
The Manager's Acquisition and Asset Management Department has the primary
responsibility for the origination and negotiation of acquisitions of
properties. Members of this Department will identify potential acquisitions and
conduct negotiations with sellers and tenants. Members of the Acquisition and
Asset Management Department generally structure the terms of any financing the
Company may use to acquire a property.
As a transaction is structured, it is evaluated by the Chairman of the
Investment Committee with respect to the potential tenant's credit, business
prospects, position within its industry and other characteristics important to
the long-term value of the property and the capability of the tenant to meet its
lease obligations. Before a property is acquired, the transaction is reviewed by
the Investment Committee to ensure that it satisfies the Company's investment
criteria. Aspects of the transaction that are typically reviewed by the
Investment Committee include the expected financial returns, the
creditworthiness of the tenant, the real estate characteristics and the lease
terms.
The Investment Committee is not directly involved in originating or
negotiating potential acquisitions, but instead functions as a separate and
final step in the acquisition process. The Manager places special emphasis on
having experienced individuals serve on its Investment Committee and does not
invest in a transaction unless it is approved by the Investment Committee.
The Company believes that the Investment Committee review process gives it
a unique, competitive advantage over other unaffiliated net lease companies
because of the substantial experience and perspective that the Investment
Committee has in evaluating the blend of corporate credit, real estate and lease
terms that combine to make an acceptable risk.
The following people serve on the Investment Committee:
- George E. Stoddard, Chairman, was formerly responsible for the direct
corporate investments of The Equitable Life Assurance Society of the
United States and has been involved with the CPA(R) net lease funds for
over 16 years.
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101
- Frank J. Hoenemeyer, Vice Chairman, was formerly Vice Chairman, Director
and Chief Investment Officer of The Prudential Insurance Company of
America. As Chief Investment Officer, Mr. Hoenemeyer was responsible for
all of Prudential's investments, including stocks, bonds, private
placements, real estate and mortgages.
- Lawrence R. Klein is Benjamin Franklin Professor of Economics Emeritus at
the University of Pennsylvania and its Wharton School. Dr. Klein has been
awarded the Alfred Nobel Memorial Prize in Economic Sciences and
currently advises various governments and government agencies.
The Company invests in properties subject to Triple Net Leases (i.e.,
leases in which the tenant is responsible for real estate taxes and assessments,
repairs and maintenance, insurance and other expenses relating to the property
and has the duty to restore in case of casualty). However, the Company may, in
its discretion, acquire properties subject to leases under which it has more
responsibilities than would normally be the case under a Triple Net Lease and
may make other investments.
ASSET MANAGEMENT
The Company believes that effective management of net lease assets is
essential to maintain and enhance property values. Important aspects of asset
management include restructuring transactions to meet the evolving needs of
current tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process. The Company believes that the Manager's
knowledgeable and experienced professionals are well qualified in these areas of
asset management.
The Manager will monitor, on an ongoing basis, compliance by tenants with
their lease obligations and other factors that could affect the financial
performance of any of its Properties. Such monitoring includes receiving
assurances that each tenant has paid real estate taxes, assessments and other
expenses relating to the Properties it occupies and confirming that appropriate
insurance coverage is being maintained by the tenant. The Manager reviews
financial statements of its tenants and undertakes regular physical inspections
of the condition and maintenance of its Properties. Additionally, the Manager
periodically analyzes each tenant's financial condition, the industry in which
each tenant operates and each tenant's relative strength in its industry.
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PROPERTIES
Upon completion of the Consolidation (assuming participation by all CPA(R)
Partnerships), the Company, through its subsidiaries, will own 198 Properties,
191 of which are currently net leased. The following table provides certain
information with respect to the Properties.
PROPERTY SQUARE
LESSEE LEASE GUARANTOR PROPERTY LOCATION TYPE(1) FOOTAGE ANNUAL RENT
- -------------------------------- -------------------------------- ------------------- -------- --------- -----------
Santee Dairies, Inc.(2) Hughes Markets, Inc. Los Angeles, CA 1 390,000 $ 5,783,992
Dr Pepper Bottling Company of Dr Pepper Holdings, Inc. Irving, TX 2 459,497
Texas Houston, TX 2 262,450
---------
721,947 $ 3,998,000
Detroit Diesel Corporation Detroit, MI 1 2,730,750 $ 3,658,059
Barnstead Thermolyne Corporation Sybron International Corporation Dubuque, IA 1 144,300 $ 452,956
Ormco Corporation Glendora, CA 3 25,000 $ 369,186
Erie Scientific Company Portsmouth, NH 1 95,000 $ 537,058
Nalge Company Rochester, NY 1 221,600 $ 985,378
Kerr Corporation Romulus, MI 1 220,000 $ 966,504
--------- -----------
705,900 $ 3,311,082
Gibson Greetings, Inc. Cincinnati, OH 1 593,340
Berea, KY 2 601,500
---------
1,194,840 $ 3,100,000
Stoody Deloro Stellite, Inc. Industry, CA 1 325,800 $ 2,234,190
Goshen, IN 1 54,270 $ 500,212
--------- -----------
380,070 $ 2,734,402
AmerSig Southeast, Inc. Quebecor Printing Inc. Doraville, GA 1 432,559 $ 1,522,498
AS Memphis, Inc. Olive Branch, MS 1 270,500 $ 980,643
--------- -----------
703,059 $ 2,503,141
Furon Company New Haven, CT 1 110,389
Mickleton, NJ 1 86,175
Aurora, OH 1 147,848
Mantua, OH 1 150,544
Bristol, RI 1 105,642
Aurora, OH 3 26,692
---------
627,290 $ 2,416,049
Pre Finish Metals Incorporated Material Sciences Corporation Walbridge, OH 1 313,704 $ 2,263,395
AutoZone, Inc. Fleming Companies, Inc. 31 Locations: 4 185,990 $ 540,815
NC, TX, AL, GA, IL, $ 844,164
LA, MO
AutoZone, Inc. 13 Locations: 4 70,425 $ 311,686
FL, LA, MO, NC, TN
AutoZone, Inc. 11 Locations: 4 59,400 $ 529,760
FL, GA, NM, SC, --------- -----------
TX 315,815 $ 2,226,425
Orbital Sciences Corporation Chandler, AZ 1 280,000 $ 2,153,739
The Gap, Inc. Erlanger, KY 2 391,000 $ 1,225,994
2 362,750 $ 927,568
--------- -----------
753,750 $ 2,153,562
Simplicity Manufacturing, Port Washington, WI 1 414,236
Inc.(A)
Port Washington, WI 1 5,440
---------
419,676 $ 1,996,712
AP Parts Manufacturing Company AP Parts International, Inc. Toledo, OH 1 1,160,000
Pinconning, MI 1 220,588
---------
1,380,588 $ 1,836,534
NVR, Inc. NVR L.P. Thurmont, MD 1 150,468 $ 729,114
Farmington, NY 1 29,273
Pittsburgh, PA 3 42,000 $ 938,046
Pittsburgh, PA 3 36,000
--------- -----------
257,741 $ 1,667,160
Unisource Worldwide, Inc. Commerce, CA 2 411,579 $ 1,292,800
Anchorage, AK 2 44,712 $ 312,700
--------- -----------
456,291 $ 1,605,500
MAXIMUM
TERM
INCREASE LEASE (MONTH AND % OF
LESSEE FACTOR EXPIRATION YEAR) REVENUES
- -------------------------------- -------- ---------- ---------- --------
Santee Dairies, Inc.(2) Stated 4/98 10/98 7.61%
Dr Pepper Bottling Company of
Texas
CPI 6/14 6/14 5.26%
Detroit Diesel Corporation PPI 6/10 6/30 4.81%
Barnstead Thermolyne Corporation CPI 12/13 12/38
Ormco Corporation CPI 12/13 12/38
Erie Scientific Company CPI 12/13 12/38
Nalge Company CPI 12/13 12/38
Kerr Corporation CPI 12/13 12/38
4.36%
Gibson Greetings, Inc.
Stated 11/13 11/23 4.08%
Stoody Deloro Stellite, Inc. CPI 2/10 2/35
CPI 2/10 2/35
3.60%
AmerSig Southeast, Inc. CPI 12/09 12/34
AS Memphis, Inc. CPI 6/08 6/33
3.29%
Furon Company
PPI 7/12 7/37 3.18%
Pre Finish Metals Incorporated CPI 6/03 6/28 2.98%
AutoZone, Inc. % Sales 1/11 1/26
% Sales 2/11 2/26
AutoZone, Inc. % Sales 8/12 8/37
AutoZone, Inc. % Sales 8/13 8/38
2.93%
Orbital Sciences Corporation CPI 9/09 9/29 2.83%
The Gap, Inc. CPI 2/03 2/43
CPI 2/03 2/43
2.83%
Simplicity Manufacturing,
Inc.(A)
CPI 3/03 3/13 2.63%
AP Parts Manufacturing Company
CPI 12/07 12/22 2.42%
NVR, Inc. CPI 3/14 3/39
CPI 3/14 3/18
2.19%
Unisource Worldwide, Inc. Stated 4/10 4/30
Stated 12/09 12/29
2.11%
- ---------------
(1) Property types are coded as follows: 1 -- Industrial/Manufacturing;
2 -- Distribution/Warehouse; 3 -- Office/Research; 4 -- Retail; 5 -- Hotel;
6 -- Day Care Center
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PROPERTY SQUARE
LESSEE LEASE GUARANTOR PROPERTY LOCATION TYPE(1) FOOTAGE ANNUAL RENT
- -------------------------------- -------------------------------- ------------------- -------- --------- -----------
Cleo Inc. CSS Industries, Inc. Memphis, TN 1 1,006,566 $ 1,500,000
Peerless Chain Company Winona, MN 1 357,760 $ 1,463,425
Information Resources, Inc. Chicago, IL 3 159,600
(33.33% ownership) Chicago, IL 3 92,400
---------
252,000 $ 1,457,788
Red Bank Distribution, Inc.(B) Cincinnati, OH 2 589,150 $ 1,400,567
Brodart Co. Williamsport, PA 3 309,030
Williamsport, PA 3 212,201
---------
521,231 $ 1,344,764
Gould, Inc. Oxnard, CA 3 142,796 $ 1,215,000
Ohmeda Medical Devices Division
Inc. (Sublessee)
Datcon Instrument Company Lancaster, PA 1 70,712 $ 600,262
High Voltage Engineering Corp. Sterling, MA 1 70,000 $ 578,757
--------- -----------
(Lessee for Sterling/Guarantor 140,712 $ 1,179,019
for Lancaster)
Seven Up Bottling Co. of St. KSG, Inc. St. Louis, MO 2 148,100 $ 1,132,310
Louis,
United States Postal Service Bloomingdale, IL 3 116,000 $ 1,089,982
Duff-Norton Company, Inc. Yale International, Inc. Forrest City, AR 1 265,000 $ 1,020,717
Armel, Inc. Kinney Shoe Corporation Ft. Lauderdale, FL 2 80,540 $ 964,941
DeVlieg-Bullard, Inc. McMinnville, TN 1 276,991
Frankenmuth, MI 1 132,400
---------
409,391 $ 953,803
General Electric Company King of Prussia, PA 3 88,578 $ 934,186
Wal-Mart Stores, Inc. West Mifflin, PA 4 118,125 $ 891,129
Anthony's Manufacturing Company, San Fernando, CA 1 95,420
Inc.
San Fernando, CA 1 7,220
San Fernando, CA 1 40,285
San Fernando, CA 1 39,920
---------
182,845 $ 876,000
Hotel Corporation of America Topeka, KS 5 117,590 $ 833,457
Holiday Inn Franchisee
Varo Inc. Imo Industries, Inc. Garland, TX 1 150,203 $ 822,750
United Stationers Supply Co. United Stationers, Inc. New Orleans, LA 2 59,000
Memphis, TN 2 75,000
San Antonio, TX 2 63,321
---------
197,321 $ 812,500
AT&T Corp. Bridgeton, MO 3 55,810 $ 794,764
Agency Management Service, Inc. Continental Casualty Company College Station, TX 3 98,552 $ 771,666
Winn-Dixie Montgomery, Inc. Winn-Dixie Stores, Inc. Montgomery, AL 4 32,690 $ 191,534
Panama City, FL 4 34,710 $ 170,399
Leeds, AL 4 25,600 $ 144,713
Bay Minette, AL 4 34,887 $ 128,472
Brewton, AL 4 30,625 $ 134,500
--------- -----------
158,512 $ 769,618
General Cinema Corp. of Harcourt General, Inc. Burnsville, MN 4 31,837 $ 467,500
Minnesota
General Cinema Corp. of Michigan Canton, MI 4 29,818 $ 233,750
--------- -----------
61,655 $ 701,250
Western Union FSI Bridgeton, MO 3 78,080 $ 656,882
Exide Electronics Corporation Exide Electronics Group, Inc. Raleigh, NC 3 27,770 $ 572,130
Family Dollar Services, Inc. Salisbury, NC 2 311,182 $ 561,600
Swiss-M-Tex, L.P. Travelers Rest, SC 1 178,693
Liberty, SC 1 16,500
---------
195,193 $ 546,095
Motorola, Inc. Urbana, IL 3 46,350 $ 540,000
EXCEL Teleservices, Inc. EXCEL Communications, Inc. Reno, NV 3 53,158 $ 532,800
MAXIMUM
TERM
INCREASE LEASE (MONTH AND % OF
LESSEE FACTOR EXPIRATION YEAR) REVENUES
- -------------------------------- -------- ---------- ---------- --------
Cleo Inc. CPI 12/05 12/15 1.97%
Peerless Chain Company CPI 6/11 6/26 1.93%
Information Resources, Inc.
(33.33% ownership)
CPI 10/10 10/15 1.92%
Red Bank Distribution, Inc.(B) CPI 6/15 6/35 1.84%
Brodart Co.
CPI 6/08 6/28 1.77%
Gould, Inc. Stated 11/99 11/19 1.60%
Ohmeda Medical Devices Division
Inc. (Sublessee)
Datcon Instrument Company CPI 11/13 11/38
High Voltage Engineering Corp. CPI 11/13 11/38
(Lessee for Sterling/Guarantor 1.55%
for Lancaster)
Seven Up Bottling Co. of St. CPI 3/12 3/37 1.49%
Louis,
United States Postal Service Stated 4/06 4/06 1.43%
Duff-Norton Company, Inc. CPI 12/12 12/32 1.34%
Armel, Inc. CPI 9/01 9/16 1.27%
DeVlieg-Bullard, Inc.
CPI 4/06 4/26 1.26%
General Electric Company Market 7/98 7/08 1.23%
Wal-Mart Stores, Inc. CPI 1/07 1/37 1.17%
Anthony's Manufacturing Company,
Inc.
CPI 5/07 5/12 1.15%
Hotel Corporation of America Stated 9/03 9/03 1.10%
Holiday Inn Franchisee
Varo Inc. Stated 9/02 9/07 1.08%
United Stationers Supply Co.
CPI 3/10 3/30 1.07%
AT&T Corp. Stated 11/01 11/11 1.05%
Agency Management Service, Inc. Stated 10/98 10/03 1.02%
Winn-Dixie Montgomery, Inc. % Sales 3/08 3/38
% Sales 3/08 3/38
% Sales 3/04 3/34
% Sales 6/07 6/37
% Sales 10/10 10/30
1.01%
General Cinema Corp. of % Sales 7/06 7/31
Minnesota
General Cinema Corp. of Michigan % Sales 7/05 7/30
0.92%
Western Union FSI Stated 11/01 11/11 0.86%
Exide Electronics Corporation CPI 7/06 7/31 0.75%
Family Dollar Services, Inc. None 4/97 4/98 0.74%
Swiss-M-Tex, L.P.
CPI 8/07 8/31 0.72%
Motorola, Inc. Stated 12/00 12/20 0.71%
EXCEL Teleservices, Inc. Stated 8/06 8/16 0.70%
- ---------------
(1) Property types are coded as follows: 1 -- Industrial/Manufacturing;
2 -- Distribution/Warehouse; 3 -- Office/Research; 4 -- Retail; 5 -- Hotel;
6 -- Day Care Center
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PROPERTY SQUARE
LESSEE LEASE GUARANTOR PROPERTY LOCATION TYPE(1) FOOTAGE ANNUAL RENT
- -------------------------------- -------------------------------- ------------------- -------- --------- -----------
Penn Virginia Resources Penn Virginia Corporation Cuyahoga Falls, OH 1 80,445
Corporation
Pennsylvania Crusher Corporation Broomall, PA 3 22,810
(Joint Tenants)
Duffield, VA 3 12,804
---------
116,059 $ 498,750
Titan Corporation (18.54% San Diego, CA 3 166,403 $ 485,084
ownership)
Wozniak Industries, Inc. Schiller Park, IL 1 84,197 $ 452,400
Childtime Childcare, Inc. 12 Locations: 6 83,694 $ 413,638
(33.93% ownership) AZ, CA, MI, TX
Yale Security Inc. Lemont, IL 1 130,000 $ 399,000
CSK Auto, Inc. Denver, CO 4 8,129 $ 51,709
Glendale, AZ 4 3,406 $ 58,564
Apache Junction, 4 5,055 $ 43,316
AZ
Casa Grande, AZ 4 11,588 $ 56,695
Scottsdale, AZ 4 8,000 $ 118,586
Mesa, AZ 4 3,401 $ 59,955
--------- -----------
39,579 $ 388,825
B&G Contract Packaging, Inc. Maumelle, AR 2 80,000 $ 168,000
80,000 $ 162,000
--------- -----------
2 160,000 $ 330,000
Lockheed Martin Corporation Glen Bumie, MD 2 45,804 $ 310,000
JumboSports Inc. Moorestown, NJ 3 74,066 $ 308,750
Broomfield Tech Center Broomfield, CO 3 60,660 $ 180,081
Corporation
Broomfield, CO 3 40,440 $ 120,054
--------- -----------
101,100 $ 300,135
Payless ShoeSource, Inc. Fontana, CA 4 4,500 $ 183,146
(8 Stores) Rialto, CA 4 4,500
Reynoldsburg, OH 4 3,840
Tallmadge, OH 4 4,000
Anderson, IN 4 4,500
Cuyahoga Falls, OH 4 3,792
Marlon, OH 4 3,900
Fremont, OH 4 4,000
The Southland Corporation (1 Merced, CA 4 4,500 $ 20,370
Store)
Chief Auto Parts, Inc. (3 Sacramento, CA 4 4,400 $ 63,798
Stores)
Stockton, CA 4 4,500
Sacramento, CA 4 4,400
--------- -----------
The Kobacker Company (Obligor 50,832 $ 267,314
for all 12 Stores)
Petrocon Engineering, Inc. Beaumont, TX 3 48,700 $ 118,800
(One Lease applies to three portions $ 103,740
of Facility.) $ 43,200
-----------
$ 265,740
Federal Express Corporation Corpus Christi, TX 2 30,212 $ 189,986
College Station, TX 2 12,080 $ 56,700
-----------
$ 246,686
NYNEX Milton, VT 3 30,624 $ 215,600
Penberthy, Inc. PCC Flow Technologies, Inc. Prophetstown, IL 1 161,878 $ 209,507
Allied Plywood Corporation Manassas, VA 1 60,446 $ 185,000
Rochester Button Company South Boston, VA 1 43,387
Kenbridge, VA 1 38,000
---------
81,387 $ 180,000
Sunds Defibrator Woodhandling, Carthage, NY 1 76,000 $ 144,239
Inc.
Pepsi-Cola Metropolitan Bottling PepsiCo, Inc. Houston, TX 2 17,725 $ 97,568
Company, Inc.
Service Corporation
International (Sublessee)
MAXIMUM
TERM
INCREASE LEASE (MONTH AND % OF
LESSEE FACTOR EXPIRATION YEAR) REVENUES
- -------------------------------- -------- ---------- ---------- --------
Penn Virginia Resources
Corporation
Pennsylvania Crusher Corporation
(Joint Tenants)
Market 8/99 8/34 0.66%
Titan Corporation (18.54% CPI 7/07 7/31 0.64%
ownership)
Wozniak Industries, Inc. Stated 12/03 12/23 0.60%
Childtime Childcare, Inc. CPI 1/16 1/41 0.55%
(33.93% ownership)
Yale Security Inc. Stated 4/11 4/11 0.53%
CSK Auto, Inc. CPI 1/08 1/38
CPI 1/02 1/22
CPI 1/02 1/22
CPI 1/02 1/22
CPI 1/02 1/22
CPI 1/02 1/22
0.51%
B&G Contract Packaging, Inc. Stated 12/97 12/03
Stated 7/98 7/01
0.44%
Lockheed Martin Corporation Stated 4/01 4/21 0.41%
JumboSports Inc. Stated 6/12 6/42 0.41%
Broomfield Tech Center None 12/01 12/01
Corporation
None 5/02 5/02
0.39%
Payless ShoeSource, Inc. None 12/06 12/36
(8 Stores)
The Southland Corporation (1 None 12/06 12/36
Store)
Chief Auto Parts, Inc. (3 None 12/06 12/36
Stores)
The Kobacker Company (Obligor 0.35%
for all 12 Stores)
Petrocon Engineering, Inc. Stated 12/98 12/00
(One Lease applies to three por None 6/97 6/01
of Facility.) None 11/97 11/01
0.35%
Federal Express Corporation Market 5/99 5/09
Market 2/99 2/09
0.32%
NYNEX Stated 2/03 2/13 0.28%
Penberthy, Inc. CPI 4/06 4/26 0.28%
Allied Plywood Corporation Stated 3/02 3/02 0.24%
Rochester Button Company
None 12/16 12/36 0.24%
Sunds Defibrator Woodhandling, CPI 8/05 7/97 0.19%
Inc.
Pepsi-Cola Metropolitan Bottling Stated 10/04 10/04 0.13%
Company, Inc.
Service Corporation
International (Sublessee)
- ---------------
(1) Property types are coded as follows: 1 -- Industrial/Manufacturing;
2 -- Distribution/Warehouse; 3 -- Office/Research; 4 -- Retail; 5 -- Hotel;
6 -- Day Care Center
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105
PROPERTY SQUARE
LESSEE LEASE GUARANTOR PROPERTY LOCATION TYPE(1) FOOTAGE ANNUAL RENT
- -------------------------------- -------------------------------- ------------------- -------- --------- -----------
Popular Stores, Inc. Scottsdale, AZ 4 11,800 $ 95,810
Stair Pans of America, Inc. Fredericksburg, VA 1 45,821 $ 89,810
Inno Tech Industries, Inc. Elyria, OH 1 183,000 $ 60,000
Family Bargain Center Colville, WA 4 15,300 $ 49,255
Cents Stores, Inc. Mesa, AZ 4 11,039 $ 54,000
The Crafters Mall, Inc. Glendale, AZ 4 11,760 $ 47,964
Kinko's, Inc. Canton, OH 4 1,700 $ 47,067
Capin Mercantile Corporation Silver City, NM 4 11,280 $ 36,660
Building 7 Corporation Apache Junction, 4 9,945 $ 23,100
AZ
Moise L. Wexler, Scott Wexler New Orleans, LA 4 1,641 $ 19,692
Scallon's Carpet Castle, Inc. Casa Grande, AZ 4 3,134 $ 17,710
Arthur L. Jones Greensboro, NC 4 1,700 $ 10,725
Petoskey Holiday Inn Petoskey, MI 5 83,462
Alpena Holiday Inn Alpena, MI 5 96,333
Livonia Holiday Inn Livonia, MI 5 158,000
Vacant Columbia, SC 1 168,600
Vacant Sumter, SC 1 87,000
Vacant Garland, TX 1 52,249
Vacant Canton, OH 4 4,800
-----------
Total Revenue $75,996,924
============
MAXIMUM
TERM
INCREASE LEASE (MONTH AND % OF
LESSEE FACTOR EXPIRATION YEAR) REVENUES
- -------------------------------- -------- ---------- ---------- --------
Popular Stores, Inc. % Sales 7/00 7/10 0.13%
Stair Pans of America, Inc. Stated 7/07 7/12 0.12%
Inno Tech Industries, Inc. None 4/98 4/03 0.08%
Family Bargain Center CPI 7/00 1/15 0.06%
Cents Stores, Inc. Stated 1/13 1/13 0.07%
The Crafters Mall, Inc. None Quarterly Renewals 0.06%
Kinko's, Inc. % Sales 8/00 8/10 0.06%
Capin Mercantile Corporation None 5/00 5/05 0.05%
Building 7 Corporation CPI 6/01 6/06 0.03%
Moise L. Wexler, Scott Wexler % Sales 10/05 10/15 0.03%
Scallon's Carpet Castle, Inc. Stated 12/03 12/03 0.02%
Arthur L. Jones CPI 4/99 4/01 0.01%
Petoskey Holiday Inn
Alpena Holiday Inn
Livonia Holiday Inn
Vacant
Vacant
Vacant
Vacant
--------
Total Revenue 100%
=========
- ---------------
(1) Property types are coded as follows: 1 - Industrial/Manufacturing; 2 -
Distribution/Warehouse; 3 - Office/Research; 4 - Retail; 5 - Hotel; 6 - Day
Care Center.
(2) A lease has been entered into with Copeland Beverage Group, Inc. which will
commence when the lease with Santee Dairies expires. The lease with Copeland
provides for an annual rent of $1,800,000 with increases based on the CPI
and is for a term of 9 years.
(A) Simplicity has exercised its option to purchase the property. The sale is
expected to be completed by no later than April 1998.
(B) A suit has been brought to enforce Red Bank's obligations under this lease.
Red Bank is not currently paying the equity portion of the rent due under
the lease ($48,124 per month).
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106
Three Properties owned by the CPA(R) Partnerships, through a subsidiary,
are Holiday Inn hotels two of which are not leased. All of these Holiday Inn
hotels (the "Hotels") are licensed to operate as Holiday Inns. The following
table provides certain information with respect to the Hotels that are not
leased.
NAME LOCATION NUMBER OF ROOMS SQUARE FEET
- ----------------------------------------------- ------------ --------------- -----------
Petoskey Holiday Inn........................... Petoskey, MI 144 83,462
Livonia Holiday Inn............................ Livonia, MI 226 158,000
Alpena Holiday Inn............................. Alpena, MI 148 96,333
The operating results of the Alpena and Petoskey Hotels for the year ended
December 31, 1996 and for the six months ended June 30, 1997 are as follows:
ALPENA PETOSKEY LIVONIA
------- ------- -------
(IN THOUSANDS)
FOR THE YEAR ENDED
DECEMBER 31, 1996:
Revenues.................................................... $ 3,074 $ 2,247 $ 8,716
Management fees*............................................ (59) (43) (195)
Other operating expenses.................................... (2,347) (1,953) (6,108)
------- ------- -------
Operating income......................................... $ 668 $ 251 $ 2,413
======= ======= =======
FOR THE SIX MONTHS ENDED
JUNE 30, 1997:
Revenues.................................................... $ 1,543 $ 1,083 $ 4,408
Management fees*............................................ (46) (22) (133)
Other operating expenses.................................... (1,111) (966) (2,991)
------- ------- -------
Operating income......................................... $ 386 $ 95 $ 1,284
======= ======= =======
- ---------------
* Paid to unaffiliated third parties
The Hotel located in Livonia, Michigan is leased to Livho, Inc. ("Livho"),
a corporation wholly-owned by Francis J. Carey. Livho, will own the Holiday Inn
license and the other licenses necessary for the operation of the hotel. Livho
will rent the hotel from CD for a base rent of $175,000 per year plus a
percentage of the gross receipts at the hotel. CD expects to spend approximately
$4,000,000 to upgrade the hotel so that it will qualify as a Holiday Inn Select
hotel.
DESCRIPTION OF MOST SIGNIFICANT TENANTS
The following is a brief description of the tenants which will pay the most
rent to the Company on an annual basis.
Santee Dairies, Inc., the largest processor of milk products in the West,
processes 235,000 to 260,000 gallons of milk per day. Owned by Hughes Markets,
Inc. and Stake Brothers Markets, the company also processes, bottles and
distributes yogurt, sour cream, ice cream, cottage cheese and fruit juices. The
highlights of Santee's 1996 fiscal year include net sales of $194 million, total
assets of approximately $66 million and a net worth of $26 million. Hughes, the
guarantor of the Santee lease, operates a chain of 51 supermarkets in the
Southern California area, wholly owns a real estate holding company and owns 50
percent of Santee. The highlights of Hughes' fiscal year ending March 1997
included net sales of approximately $1.0 billion, total assets of approximately
$279 million and a net worth of approximately $160 million.
Dr Pepper Bottling Company of Texas is the largest independent franchise
bottler of Dr Pepper brand products, accounting for approximately 13 percent of
the total domestic volume of such products. One of the largest independent soft
drink bottlers in the United States, the Company bottles the following products:
Dr Pepper, Seven-Up, Canada Dry, Sunkist soft drinks, A&W Root Beer, A&W Cream
Soda, Squirt and
95
107
Countrytime lemonade. For the 1996 fiscal year, its net sales totaled over $390
million and its assets totaled over $237 million.
Detroit Diesel is a leading designer and producer of heavy-duty diesel
engines and a broad range of new replacement and re-manufactured parts and
components. The company's markets include on-highway vehicles (truck, bus and
coach), construction, industrial, power generation, military and marine. For the
year ending December 31, 1996, Detroit Diesel's net revenues totaled $1,963
million; its total assets were $1,113 million; its long-term debt was $93
million; and its stockholders' equity was $321 million.
Sybron International Corporation is the parent company of four operating
subsidiaries which hold leadership product positions in laboratory and
professional orthodontic and dental markets in the United States and abroad. The
Sybron companies have become market leaders by developing, manufacturing and
marketing an expanding array of value-added products which meet their customers'
needs. The highlights of Sybron's fiscal year ending September 30, 1996 included
total assets of over $975 million and a net worth of over $283 million.
Gibson Greetings, Inc. designs, manufactures and sells greeting cards,
gift-wrapping paper, stationery, candles, calendars and related gift items. Most
of the greeting cards are designed and printed at the Cincinnati location and
then sent to the Berea facility for shipment to retail stores. In mid-November
1995, the company sold Cleo, Inc., its wholly-owned gift wrap subsidiary, to CSS
Industries, Inc., but continues to produce gift wrapping accessories. In 1996,
Gibson's net sales totaled $390 million; its assets totaled $425 million; its
long-term debt totaled $41 million; and its net worth totaled $256 million.
Started by Charles Stoody in 1921, Stoody Deloro Stellite, Inc. is the
global leader in the application, design and manufacturing of consumable welding
products, products that protect equipment and parts from wear and erosion. SDS's
coatings for metals and formed products are significant due to abrasion, impact,
heat and corrosive environments in industries such as construction, mining,
agriculture, chemical, military and transportation. The company is a profitable
division of Thermadyne Holdings Corporation which manufactures and sells
worldwide a broad range of welding apparatus, commercial and industrial
maintenance equipment and coatings. Thermadyne operates facilities in the U.S.,
Canada, England, Germany, Italy, Japan, Singapore, Mexico and Malaysia. For the
1996 fiscal year, Thermadyne had net sales of $440 million and total assets of
$353 million.
Furon designs and manufactures highly engineered products composed of high
performance polymer materials. The company's parts and components are used
primarily by original equipment manufacturers who reach a broad spectrum of
markets: hydrocarbon processing, utilities, pulp and paper, automotive, truck,
beverage equipment, food processing, semiconductors, electronic assembly and
medical devices and equipment. Most of the components are designed to meet the
particular specifications of each customer. For the fiscal year ended February
5, 1997, Furon's net sales totaled over $390 million; its assets totaled over
$344 million; and its stockholders' equity totaled over $61 million.
Quebecor Printing Inc. is the largest commercial printer in the United
States, Canada and Europe. Based in Canada, the Company has over 23,000
employees and operates 100 printing facilities in the U.S., Canada, France, the
U.K., Spain, Mexico and India. For the 1996 fiscal year, Quebecor Printing Inc.
had revenues of over $3.1 billion and total assets of over $2.9 billion.
Material Sciences Corporation is a technology based manufacturer of
continuously processed specialty coated materials and services. The company is a
market leader in its four principal product groups: laminates and composites,
metalizing and coating, coil coating and electrogalvanizing. For its fiscal year
ending February 28, 1997, the company's net sales totaled over $236 million; its
assets totaled over $202 million; and its stockholders' equity totaled over $121
million.
AutoZone, Inc. currently operates 1,423 auto-part stores in 27 states,
primarily in the Sunbelt and Midwest regions. The "Do-It-Yourself" stores sell
replacement parts (from spark plugs to complete engines), entire lines of
accessories and motor oils for domestic and foreign cars, vans and light trucks.
96
108
Orbital Sciences Corporation designs, manufactures and operates a broad
range of space-related products and services, including small and medium-sized
satellites and personal navigation equipment. The company is the world's leading
provider of small launch vehicles, including the Pegasus and Taurus vehicles.
The Gap, Inc. is one of the largest specialty and private-label clothing
retailers in the United States. Over the past ten years, the company has enjoyed
significant growth through trade names including Gap, GapKids, Baby Gap, Banana
Republic and Old Navy. As of March 1996, The Gap, Inc. operated 1,701 stores
including some outside of the U.S. For the fiscal year ended February 1997, the
company's sales increased 20 percent to $5.3 billion.
97
109
MORTGAGE DEBT
Upon consummation of the Consolidation, the Company will have debt of
approximately $219 million, excluding the debt of unconsolidated joint ventures.
Approximately $194 million of such debt will be limited recourse mortgage debt
secured by mortgages on 108 properties. Substantially all of the mortgage debt
is fixed rate and self-amortizing, and the weighted annual interest rate on the
mortgage debt is 8.9 percent. The following table provides certain information
with respect to the Company's debt, including its proportionate share of the
debt of unconsolidated joint ventures:
NUMBER AS OF INTEREST MATURITY
TENANT/GUARANTOR NAME PROPERTIES JUNE 30, 1997 RATE DATE
- ---------------------------------------------------- ---------- ------------- -------- --------
Broomfield Tech Center Corporation.................. 2 $ 2,250,640 9.00% 9/11
Payless ShoeSource, Inc.(1)......................... 12 1,025,761 10.50% 1/06
Varo Inc............................................ 1 2,485,302 10.00% 10/02
The Gap, Inc........................................ 1 6,259,172 7.25% 5/99
Unisource Worldwide, Inc............................ 1 6,847,993 7.24% 2/10
Pre Finish Metals Incorporated...................... 1 2,347,677 Floating 7/98
Simplicity Manufacturing, Inc....................... 2 5,031,101 10.52% 7/98
Brodart Co.......................................... 1 3,218,698 7.60% 1/04
Arley Corporation................................... 1 4,754,940 10.38% 1/93
Alpena Holiday Inn.................................. 1 7,330,000 (2) (2)
Petoskey Holiday Inn................................ 1 7,330,000 (2) (2)
Motorola, Inc....................................... 1 2,187,826 10.50% 10/96(3)
AutoZone, Inc....................................... 32 8,743,039 9.51% 8/98
General Cinema Corp. of Minnesota, Inc.............. 1 2,039,908 8.50% 7/06
Armel, Inc.......................................... 1 261,060 Floating 1/98
AP Parts Manufacturing Company...................... 2 5,736,608 7.63% 2/01
Wal-Mart Stores, Inc................................ 1 3,464,336 8.25% 8/03
Livonia Holiday Inn................................. 1 2,608,808 Floating 11/97
Swiss-M-Tex, L.P.................................... 2 1,714,176 Floating 9/97
Svbron Acquisition Company.......................... 5 14,311,422 11.25% 1/99
NVR................................................. 2 6,700,000 7.50% 12/02
Topeka Holiday Inn.................................. 1 8,642,294 6.75% 10/06
7.75% 9/03
High Voltage Engineering Corp....................... 2 4,299,203 6.05% 12/98
General Electric Company............................ 1 3,386,923 10.50% 5/98
United Stationers Supply Co......................... 3 2,348,134 7.56% 12/99
Dr. Pepper Bottling Company of Texas................ 2 15,642,067 11.85% 7/99
Orbital Sciences Corporation........................ 1 8,587,426 10.00% 9/20
AmerSig Southeast, Inc.............................. 1 6,300,840 Floating 5/01
AS Memphis, Inc..................................... 1 3,947,300 Floating 5/01
Furon Company....................................... 6 12,700,000 8.42% 7/12
Detroit Diesel Corporation.......................... 1 23,745,378 7.16% 6/10
Red Bank Distribution, Inc.......................... 1 5,440,902 10.00% 8/10
Floating
Information Resources, Inc.......................... 2 7,522,037 10.70% 10/00
Childtime Childcare, Inc............................ 12 1,289,340 9.55% 12/06
Stamford, CT Property(4)............................ 1 6,300,000 10.15%
Titan Corporation................................... 1 1,975,594 9.75% 7/03
Unsecured recourse debt............................. -- 24,711,981 Floating
-------------
108 $233,487,886
=============
- ---------------
(1) Loan encumbers properties leased to Payless ShoeSource, Inc., The Southland
Corporation and Chief Auto Parts, Inc.
(2) Series of bonds maturing between September 1997 and September 2015 with
interest rates ranging from 6.60 percent to 9.00 percent.
(3) Lender continues to accept monthly payments.
(4) This obligation was fully satisfied after June 30, 1997.
98
110
ENVIRONMENTAL MATTERS
The Company will generally undertake a third party Phase I investigation of
potential environmental risks when evaluating an acquisition. A "Phase I
investigation" is an investigation for the presence or likely presence of
hazardous substances or petroleum products under conditions which indicate an
existing release, a post release or a material threat of a release. A Phase I
investigation does not typically include any sampling. The Company may acquire a
property with environmental contamination, subject to a determination of the
level of risk and potential cost of remediation. The Company generally will
require property sellers to fully indemnify it against any environmental problem
or condition existing as of the date of purchase. In some instances, the Company
will be the assignee of or successor to the buyer's indemnification rights.
Additionally, the Company will generally structure its leases to require the
tenant to assume all responsibility for environmental compliance or
environmental remediation and to provide that non-compliance with environmental
laws be deemed a lease default. In certain instances, the Company may also
require a cash reserve, a letter of credit or a guarantee from the tenant, the
parent company or a third party to assure funding of remediation. The value of
these protections depend upon the financial strength of the entity providing the
protection. Where warranted, further assessments are performed by third-party
environmental consulting and engineering firms.
Phase I investigations were performed by the CPA(R) Partnerships on all
CPA(R):1-6 Properties between July 1993 and February 1994. Except as specified
in the following sentence, a Phase I investigation or its substantial equivalent
was conducted on all CPA(R):8-9 Properties around the time of acquisition of
such properties. The CPA(R) Partnerships did not undertake investigations at
Tandem Holdings (St. Louis, MO); Winn-Dixie (Bay Minette and Brewton, AL); M-Tex
(Traveler's Rest and Liberty, SC); Northern Automotive Corporation (Mesa,
Glendale, Apache Junction and Casa Grande, AZ and Denver, CO); Family Bargain
Center (Colville, WA); Capin Mercantile Corporation (Silver City, NM) and the 25
AutoZone stores in Florida, Georgia, Louisiana, Missouri, New Mexico, North
Carolina, South Carolina, Tennessee and Texas.
Based upon the results of the Phase I investigations conducted in 1993 and
1994 on the CPA(R):1-6 Properties, Phase II investigations were recommended for
30 properties. Phase II investigations have been or are in the process of being
performed on 21 of the 30 properties. On five of the properties the particular
CPA(R) Partnership determined not to proceed with a Phase II investigation and
on four of the properties the tenants would not permit a Phase II investigation.
The issues for which Phase II investigations were recommended with respect to
each of the nine properties are: (a) PicWay Shoes, Cleveland, OH (records review
to determine the existence of any underground storage tanks ("UST") due to
former use of property as gas station), (b) Waterbed Outlet, Merced, CA (records
review to determine existence of any USTs due to former use of property as gas
station), (c) Santee Dairies, Los Angeles, CA (geophysical survey to locate
potential USTs), (d) Arley Merchandise, Sumter, SC (tightness test on existing
UST), (e) Stoody Deloro, Goshen, IN (subsurface investigation to determine if
any release from abandoned UST), (f) Industrial General, Belleville, OH (removal
and closure of inactive UST), (g) Industrial General, Bald Knob, AR (soil
testing for potential contamination), (h) Industrial General, Newburyport, MA
(testing of concrete underground leaching pit) and (i) Industrial General,
Forrest City, AR (general housekeeping and regulatory compliance issues). The
Company believes that if any remediation is indicated as a result of Phase II
investigations, the cost of any material remediation would be born by the
lessees pursuant to the terms of the existing leases.
COMPETITION
The Company faces competition from insurance companies, commercial banks,
credit companies, pension funds, private individuals, investment companies,
REITs and other real estate finance companies. The Company also faces
competition from institutions or investors that provide or arrange for other
types of financing through private or public offerings of equity or debt and
from traditional bank financings. The Company believes that its 20 years of
continuous market presence through the CPA(R) Partnerships, the experience of
its management and its ability to underwrite credit and asset-based investment
opportunities allow it to compete effectively.
99
111
EMPLOYEES
The Company has one employee. The Manager has over 60 officers, employees
and directors who will be involved in the operations of the Company.
INSURANCE
Under their leases, the Company's tenants will generally be responsible for
providing adequate insurance on the properties leased. The Company believes the
Properties are covered by adequate fire, flood and property insurance provided
by reputable companies. However, some of the Properties are not covered by
disaster-type insurance with respect to certain hazards (such as earthquakes)
for which coverage is not available or available only at rates which, in the
opinion of the Company, are prohibitive.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing, conflicts
of interest and other policies of the Company. These policies have been
determined by the Company's Board of Directors and generally may be amended or
revised from time to time by the Board of Directors without a vote of the
Shareholders.
INVESTMENT POLICIES
Investments. The Company seeks to acquire and manage a diversified
portfolio of real estate and other assets. In its real estate activities, the
Company seeks to structure leases and to acquire properties subject to leases
that generally provide: (i) that the tenant is responsible for all operating and
capital expenses, as well as environmental and other contingent liabilities,
(ii) for contractual rent increases over the term of the lease and (iii) for
primary lease terms of 5 to 25 years. While the Company generally intends to
hold its Properties for long-term investment, the Company may dispose of a
Property if it deems such disposition to be in its best interests. The Company
may sell Properties to tenants pursuant to purchase options included in certain
leases.
Investments in Real Estate Mortgages. While the Company emphasizes equity
real estate investments in properties subject to long-term leases, it may, in
its discretion, invest in mortgages and other interests related to real estate.
The Company does not presently intend to invest to a significant extent in
mortgages, but may do so. The mortgages in which the Company may invest may be
first mortgages or junior mortgages and may or may not be insured by a
governmental agency.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. The Company 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. The Company
may acquire all or substantially all of the securities or assets of REITs or
similar entities where such investments would be consistent with its investment
policies. The Company may also receive an equity interest or rights to purchase
equity interests in tenants or affiliates of tenants in connection with
sale-leaseback transactions. In any event, the Company 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 the Company would divest itself of
such securities before any such registration would be required.
Joint Ventures and Wholly-Owned Subsidiaries. The Company may enter into
joint ventures or general partnerships and other participations with real estate
developers, owners and others for the purpose of obtaining an equity interest in
a particular property or properties in accordance with the Company's investment
policies. Such investments permit the Company to own interests in large
properties without unduly restricting diversification and, therefore, add
flexibility in structuring the Company's portfolio. See "RISK FACTORS -- Risks
of Joint Ventures."
100
112
The Company may from time to time participate jointly with other entities
sponsored or managed by one of its Affiliates in investments as
tenants-in-common or in some other joint venture arrangement. Any joint
investment will be on substantially the same economic terms and conditions, and
each investment entity may have a right of first refusal to purchase the
interest of the other if a sale of that interest is contemplated.
Engaging in the Purchase and Sale of Investments and Investing in the
Securities of Others for the Purpose of Exercising Control. As part of its
investment activities, the Company may acquire, own and dispose of general and
limited partner interests, stock, warrants, options or other equity interests in
entities and exercise all rights and powers granted to the owner of any such
interests.
Offering Securities in Exchange for Property. The Company may offer
securities in exchange for property.
Repurchasing or Reacquiring Its Own Shares. The Company may purchase or
repurchase Shares from any Person for such consideration as the Board of
Directors may determine in its reasonable discretion, whether more or less than
the original issuance price of such Share or the then trading price of such
Share.
Issuance of Additional Shares. The Board of Directors may, in its
discretion, issue additional equity securities. The Company expects to raise
additional equity from time to time to increase its available capital. The
issuance of additional equity interests may result in the dilution of the
interests of the Shareholders.
FINANCING POLICIES
Issuance of Senior Securities. The Company may at any time issue
securities senior to the Listed Shares, upon such terms and conditions as may be
determined by the Board of Directors.
Borrowing Policy. The Company may, at any time, borrow, on a secured or
unsecured basis, funds to finance its business and in connection therewith
execute, issue and deliver promissory notes, commercial paper, notes,
debentures, bonds and other debt obligations which may be convertible into
Shares or other equity interests or be issued together with warrants to acquire
Shares or other equity interests.
Lending of Money. The Company may, at any time, make (i) mortgage loans
secured by properties, subject to the restrictions upon related party
transactions contained in the Bylaws, (ii) secured loans secured by other assets
and (iii) unsecured loans.
MISCELLANEOUS POLICIES
Making Annual or Other Reports to Shareholders. The Company will be
subject to the reporting requirements of the Exchange Act and will file annual
and quarterly reports thereunder. The Company currently intends to provide
annual and quarterly reports to its Shareholders.
Restrictions Upon Related Party Transactions. The Bylaws prohibit the
Company from engaging in a transaction with a Director, officer, advisor, person
owning or controlling 10% or more of any class of Company's outstanding voting
securities of any affiliate of the aforementioned ("interested parties"), except
to the extent that such transactions are specifically authorized by the terms of
the Bylaws. The Bylaws prohibit the Company from entering into a transaction
with any of the interested parties unless the terms or conditions of such
transaction have been disclosed to the Board of Directors and approved by a
majority of Directors not otherwise interested in the matter (including a
majority of Independent Directors), and such Directors, in approving the
transaction, have determined it to be fair, competitive, commercially reasonable
and on terms and conditions no less favorable to the Company than those
available from unaffiliated third parties. In addition, the Bylaws specifically
authorize the Company to acquire property from interested parties to the extent
the terms and conditions of the acquisition have been approved by a majority of
the Directors not otherwise interested in the transaction (including a majority
of the Independent Directors), and such Directors have made good faith
determinations as to the fairness of the compensation provided for such
property.
Company Control. The Board of Directors has exclusive control over the
Company's business and affairs subject only to the restrictions in the
Organizational Documents. Shareholders have the right to elect
101
113
members of the Board of Directors. The Directors are accountable to the Company
as fiduciaries and are required to exercise good faith and integrity in
conducting the Company's affairs. See "FIDUCIARY RESPONSIBILITY AND
INDEMNIFICATION."
WORKING CAPITAL RESERVES
The Company will maintain working capital reserves or immediate borrowing
capacity in amounts that the Board of Directors determines to be adequate to
meet normal contingencies in connection with the operation of the Company's
business and investments.
CORPORATE PROPERTY ASSOCIATES PARTNERSHIP
SELECTED COMBINED FINANCIAL INFORMATION
The following table sets forth selected combined operating and balance
sheet information on a consolidated pro forma basis for the Company and on a
combined historical basis, assuming 100% participation and minimum
participation, for the CPA(R) Partnerships. The following information should be
read in conjunction with the financial statements and notes thereto for the
Company and the Group included elsewhere in this Consent Solicitation Statement.
The combined historical operating and balance sheet information of the CPA(R)
Partnerships as of December 31, 1995 and 1996 and for the years ended December
31, 1994, 1995 and 1996 have been derived from the historical Combined Financial
Statements audited by Coopers & Lybrand L.L.P., independent accountants, whose
report with respect thereto is included elsewhere in this Consent Solicitation
Statement. The combined historical operating information for the six months
ended June 30, 1996 and 1997 and the years ended December 31, 1992 and 1993 and
the historical balance sheet information as of June 30, 1997, and December 31,
1992, 1993 and 1994, have been derived from the unaudited combined financial
statements of the Group. In the opinion of Management, the combined historical
operating information for the six months ended June 30, 1996 and 1997 and the
historical balance sheet information as of June 30, 1997 include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the information set forth therein.
The unaudited pro forma consolidated operating and balance sheet
information is presented as if the Consolidation transaction and the related
issuance of Listed Shares occurred on June 30, 1997 for the consolidated balance
sheet and January 1, 1996 for the consolidated statements of income. The pro
forma financial information is not necessarily indicative of what the actual
financial position and results of operations of the Company would have been as
of and for the periods indicated, nor does it purport to represent the Company's
future financial position and results of operations.
102
114
CPA(R) PARTNERSHIPS
SELECTED COMBINED FINANCIAL INFORMATION
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1996 (PRO FORMA(2))
------------------------
100% PARTICIPATION(3)
------------------------
NO 5%
HISTORICAL(1) SUBSIDIARY SUBSIDIARY
------------------------------------------------- PARTNERSHIP PARTNERSHIP
1992 1993 1994 1995 1996 UNITS(5) UNITS(6)
-------- -------- -------- --------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Revenues.................................... $102,936 $109,027 $109,137 $ 107,946 $102,731 $ 102,731 $ 102,731
Income before extraordinary items,
attributable to Listed Shares(7)........... 32,245 33,790 38,456 49,363 45,547 44,220 41,933
Pro forma income before extraordinary items
per Listed Share(8)........................ 1.81 1.80
Distributions............................... $ 41,363 $ 50,638 $ 35,589 $ 57,216 $ 34,173
OTHER DATA:
Cash provided by operating activities....... 43,706 45,673 45,131 63,276 50,983
Cash provided by (used in) investing
activities................................. 6,098 21,051 37,136 24,327 19,545
Cash used in financing activities........... (46,444) (66,071) (70,045) (105,578) (69,686)
BALANCE SHEET DATA:
Real estate, net(9)......................... $342,641 $345,199 $330,671 $ 301,505 $271,660
Investment in direct financing leases....... 302,181 260,663 244,746 218,922 215,310
Total assets................................ 706,767 679,284 659,047 582,324 544,728
Mortgages and notes payable................. 373,549 358,768 325,886 274,737 227,548
AS OF AND FOR THE
YEAR ENDED DECEMBER 31, AS OF AND FOR THE SIX MONTHS ENDED JUNE 30,
----------------------- --------------------------------------------------------
1997 (PRO FORMA(2))
-------------------------------------
MINIMUM
MINIMUM PARTICIPATION(4) 100% PARTICIPATION(3) PARTICIPATION(4)
-------------------------- --------------------- ----------------
NO NO 5% NO
SUBSIDIARY 5% SUBSIDIARY HISTORICAL SUBSIDIARY SUBSIDIARY SUBSIDIARY
PARTNERSHIP PARTNERSHIP ------------------ PARTNERSHIP PARTNERSHIP PARTNERSHIP
UNITS(5) UNITS(6) 1996 1997 UNITS(5) UNITS(6) UNITS(5)
----------- ------------- -------- -------- ----------- ----------- -----------
OPERATING DATA:
Revenues.................................... $40,717 $40,717 $ 51,446 $ 50,985 $ 50,985 $ 50,985 $ 21,083
Income before extraordinary items,
attributable to Listed Shares(7)........... 18,858 17,927 22,545 21,022 20,327 19,271 8,876
Pro forma income before extraordinary items
per Listed Share(8)........................ 1.85 1.84 .83 .82 .86
Distributions............................... $ 17,666 $ 17,336
OTHER DATA:
Cash provided by operating activities....... 23,360 25,406
Cash provided by (used in) investing
activities................................. 15,309 (1,354)
Cash used in financing activities........... (32,660) (25,526)
BALANCE SHEET DATA:
Real estate, net(9)......................... $249,030 $ 377,707 $ 377,707 $ 118,657
Investment in direct financing leases....... 216,403 268,142 268,142 117,843
Total assets................................ 540,508 752,046 752,046 273,333
Mortgages and notes payable................. 219,356 219,356 219,356 55,401
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------
1997
PRO FORMA(2)
------------
MINIMUM
PARTICIPATION(4)
----------------
5%
SUBSIDIARY
PARTNERSHIP
UNITS(6)
-----------
OPERATING DATA:
Revenues.................................... $ 21,083
Income before extraordinary items,
attributable to Listed Shares(7)........... 8,439
Pro forma income before extraordinary items
per Listed Share(8)........................ .86
Distributions...............................
OTHER DATA:
Cash provided by operating activities.......
Cash provided by (used in) investing
activities.................................
BALANCE SHEET DATA:
Real estate, net(9)......................... $ 118,657
Investment in direct financing leases....... 117,843
Total assets................................ 273,333
Mortgages and notes payable................. 55,401
- ---------------
Notes:
(1) See the Combined Financial Statements of the CPA(R) Partnerships included
elsewhere herein.
(2) See Pro Forma Condensed Consolidated Financial Statements of the Company
included elsewhere herein.
(3) Reflects pro forma results if all the CPA(R) Partnerships participate in the
Consolidation.
(4) Reflects pro forma results if only CPA(R): 1, CPA(R): 2, CPA(R): 3, CPA(R):
5 and CPA(R): 7 participate in the Consolidation. This combination of CPA(R)
Partnerships has the lowest combined Total Exchange Value in excess of the
$200 million and lowest cash flow necessary for the Consolidation to be
completed.
(5) Reflects pro forma results if the Company issues only Listed Shares and no
Subsidiary Partnership Units.
(6) Reflects pro forma results if the Company issues 95% Listed Shares and 5%
Subsidiary Partnership Units.
(7) See Note 13 to the Combined Financial Statements of the Group included
elsewhere herein.
(8) Computed based on a weighted average number of shares outstanding of:
24,484,170 Listed Shares assuming 100% participation without the issuance of
Subsidiary Partnership Units; 23,301,425 Listed Shares assuming 100%
participation with the issuance of Subsidiary Partnership Units; 10,210,682
Listed Shares assuming minimum participation without the issuance of
Subsidiary Partnership Units; 9,727,035 Listed Shares assuming minimum
participation with the issuance of Subsidiary Partnership Units by the
Company as if the Consolidation transaction had been consummated as of
January 1, 1996.
(9) Real estate includes assets leased under operating leases and operating real
estate.
103
115
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SELECTED FINANCIAL DATA OF THE CPA(R) PARTNERSHIPS
The following tables set forth selected operating and balance sheet data on
a historical and equivalent pro forma basis for the CPA(R) Partnerships. The
following information should be read in conjunction with the financial
statements and notes thereto for the CPA(R) Partnerships. The historical
operating and balance sheet data of the CPA(R) Partnerships as of and for the
years ended December 31, 1992, 1993, 1994, 1995 and 1996 have been derived from
the historical financial statements audited by Coopers & Lybrand L.L.P.,
independent accountants. The historical operating data for the six months ended
June 30, 1996 and 1997 and the historical balance sheet data as of June 30, 1997
have been derived from the unaudited financial statements of the CPA(R)
Partnerships. In the opinion of Management, the historical operating data for
the six months ended June 30, 1996 and 1997 and the historical balance sheet
data as of June 30, 1997 include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
therein.
The unaudited equivalent pro forma operating and balance sheet data is
presented as if the Consolidation transaction and the related issuance of Listed
Shares occurred on June 30, 1997 for the balance sheet data and January 1, 1996
for the operating data.
104
116
SELECTED FINANCIAL DATA
CORPORATE PROPERTY ASSOCIATES
(A CALIFORNIA LIMITED PARTNERSHIP)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ---------------------
----------------------------------------------- JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- --------- ---------
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
OPERATING DATA:
Revenues................................ $ 4,102 $ 4,418 $ 4,480 $ 4,831 $ 4,589 $ 2,293 $ 2,255
Income before extraordinary item(1)..... 1,058 1,160 1,108 1,842 1,927 902 1,077
Income before extraordinary item
allocated:
To General Partners................... 11 12 11 19 19 9 11
To Limited Partners................... 1,047 1,148 1,097 1,823 1,908 893 1,066
Per Unit.............................. 26.18 28.71 27.43 45.58 47.70 22.31 26.66
Ratio of earnings to fixed charges(2)... 1.63 1.69 1.69 2.19 2.43 2.27 2.93
CASH FLOW DATA:
Net cash provided by operating
activities............................ 2,046 2,291 2,216 2,666 2,827 1,374 1,427
Net increase (decrease) in cash and cash
equivalents........................... (171) (146) (421) (65) (8) (216) (123)
Distributions attributable(3):
To General Partners................. 12 13 13 13 14 7 7
To Limited Partners................. 1,234 1,250 1,264 1,333 1,405 702 705
Per Unit............................ 30.86 31.25 31.53 33.32 35.13 8.77 8.82
Payment of mortgage principal(4)........ 972 1,178 1,306 1,417 1,425 673 838
BALANCE SHEET DATA:
Cash and cash equivalents............... 1,505 1,359 938 873 865 742
Total assets............................ 26,776 25,531 24,418 23,530 22,226 21,796
Total liabilities....................... 18,987 17,841 16,889 15,471 13,866 13,076
Partners equity:
General Partners.................... (101) (102) (104) (99) (96) (92)
Limited Partners.................... 7,891 7,793 7,633 8,156 8,456 8,812
Book value per Unit..................... 197.28 194.83 190.82 203.90 211.39 220.31
EQUIVALENT PRO FORMA
PER UNIT DATA(5):
Income before extraordinary item........ 47.60 21.83
Dividends............................... 43.40 21.70
Book value.............................. 562.03
- ---------------
(1) Net income for the year ending December 31, 1996 includes an extraordinary
charge on extinguishment of debt of $255.
(2) The ratio of earnings to fixed charges is computed as income from continuing
operations before minority interest and extraordinary items plus fixed
charges (primarily interest) divided by fixed charges.
(3) Includes distributions attributable to the fourth quarter of each fiscal
year payable in the following fiscal year less distributions in the first
fiscal quarter attributable to the prior year.
(4) Represents scheduled mortgage principal amortization paid.
(5) Equivalent pro forma per Unit data is computed as the Company's pro forma
income before extraordinary items per Unit, dividends and book value per
Unit, assuming 100% participation without the issuance of Subsidiary
Partnership Units, multiplied by the exchange ratio per Unit. Pro forma
dividends are estimated at $1.65 per Listed Share, the Company's pro forma
book value is $21.37 per Listed Share and the exchange ratio is 26.30 Listed
Shares per CPA(R):1 Unit.
105
117
SELECTED FINANCIAL DATA
CORPORATE PROPERTY ASSOCIATES 2
(A CALIFORNIA LIMITED PARTNERSHIP)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ---------------------
----------------------------------------------- JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- --------- ---------
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
OPERATING DATA:
Revenues................................ $ 9,764 $ 6,666 $ 5,161 $ 5,186 $ 4,591 $ 2,238 $ 2,455
Income before extraordinary item(1)..... 4,967 10,711 1,732 2,596 2,625 1,190 1,580
Income before extraordinary item
allocated:
To General Partners................... 50 107 17 26 26 12 16
To Limited Partners................... 4,917 10,604 1,715 2,570 2,599 1,178 1,564
Per Unit.............................. 89.40 192.80 31.18 46.75 47.33 21.46 28.48
Ratio of earnings to fixed charges(2)... 2.47 5.70 2.08 2.90 4.55 3.59 6.54
CASH FLOW DATA:
Net cash provided by operating
activities............................ 5,514 3,978 2,771 6,164 2,792 1,385 1,672
Net increase (decrease) in cash and cash
equivalents........................... (137) 1,284 (181) (3,608) 489 401 102
Distributions attributable(3)(4):
To General Partners................. 39 21 15 15 14 7 7
To Limited Partners................. 3,873 16,352 1,447 1,495 2,256 735 701
Per Unit............................ 70.42 297.31 26.31 27.19 41.11 6.69 6.39
Payment of mortgage principal(5)........ 1,985 1,675 1,617 1,490 937 519 437
BALANCE SHEET DATA:
Cash and cash equivalents............... 3,083 4,367 4,186 578 1,067 1,169
Total assets............................ 63,247 41,736 40,571 33,123 33,683 34,254
Total liabilities....................... 32,708 17,998 16,560 8,037 8,275 7,974
Partners equity:
General Partners.................... 108 183 186 197 208 217
Limited Partners.................... 30,430 23,554 23,825 24,889 25,199 26,063
Book value per Unit..................... 553.27 428.25 433.18 453.35 458.99 474.73
EQUIVALENT PRO FORMA PER UNIT DATA(6):
Income before extraordinary item........ 50.61 23.21
Dividends............................... 46.13 23.07
Book value.............................. 597.51
- ---------------
(1) 1993 net income includes a $7,857 gain on sale of properties, net of an
extraordinary loss on extinguishment of nonrecourse debt of the disposed
properties.
(2) The ratio of earnings to fixed charges is computed as income from continuing
operations before minority interest and extraordinary items plus fixed
charges (primarily interest) divided by fixed charges.
(3) Includes distributions attributable to the fourth quarter of each fiscal
year payable in the following fiscal year less distributions in the first
fiscal quarter attributable to the prior year.
(4) 1993 distributions include a special distribution of $260 per Limited
Partnership Unit ($14,300). Distribution for 1996 include a special
distribution of $15.00 per Limited Partnership Unit ($824).
(5) Represents scheduled mortgage principal amortization paid.
(6) Equivalent pro forma per Unit data is computed as the Company's pro forma
income before extraordinary items per Unit, dividends and book value per
Unit, assuming 100% participation without the issuance of Subsidiary
Partnership Units, multiplied by the exchange ratio per Unit. Pro forma
dividends are estimated at $1.65 per Listed Share, the Company's pro forma
book value is $21.37 per Listed Share and the exchange ratio is 27.96 Listed
Shares per CPA(R):2 Unit.
106
118
SELECTED FINANCIAL DATA
CORPORATE PROPERTY ASSOCIATES 3
(A CALIFORNIA LIMITED PARTNERSHIP)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, -------------------
----------------------------------------------- JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
OPERATING DATA:
Revenues................................... $ 8,478 $ 7,554 $ 7,392 $ 7,249 $ 5,730 $2,661 $ 4,785
Net income................................. 4,900 2,929 3,215 15,976 4,434 2,000 4,195
Net income allocated:
To General Partners...................... 98 59 64 320 89 40 84
To Limited Partners...................... 4,802 2,870 3,151 15,656 4,345 1,960 4,111
Per Unit................................. 72.76 43.49 47.74 237.21 65.84 29.70 62.28
Ratio of earnings to fixed charges(1)...... 3.50 2.67 2.98 13.53 60.00 37.99 152.18
CASH FLOW DATA:
Net cash provided by operating
activities............................... 5,252 4,387 4,647 12,918 3,907 1,720 2,131
Net increase (decrease) in cash and cash
equivalents.............................. 3,021 720 824 (7,693) 338 123 (385)
Distributions attributable(2):
To General Partners...................... 130 93 93 168 66 33 33
To Limited Partners(3)................... 8,032 4,536 4,568 12,208 3,268 1,632 1,639
Per Unit................................. 121.70 68.72 69.21 184.97 49.51 12.36 12.42
BALANCE SHEET DATA:
Cash and cash equivalents.................. 7,308 8,028 8,851 1,158 1,496 1,111
Total assets............................... 57,978 57,171 57,050 33,223 32,530 34,937
Total liabilities.......................... 27,323 28,203 29,524 2,444 637 519
Partners equity:
General Partners......................... 109 75 47 192 215 265
Limited Partners......................... 30,536 28,892 27,479 30,587 31,679 34,152
Book value Unit............................ 462.67 437.76 416.35 463.44 479.99 517.46
EQUIVALENT PRO FORMA
PER UNIT DATA(4):
Income before extraordinary item........... 68.65 31.48
Dividends.................................. 62.58 31.29
Book value................................. 810.56
- ---------------
(1) The ratio of earnings to fixed charges is computed as income from continuing
operations before minority interest and extraordinary items plus fixed
charges (primarily interest) divided by fixed charges.
(2) Includes distributions attributable to the fourth quarter of each fiscal
year payable in the following fiscal year less distributions in the first
fiscal quarter attributable to the prior year.
(3) Include special distributions of $50 and $120 in 1992 and 1995,
respectively, per Limited Partnership Unit.
(4) Equivalent pro forma per Unit data is computed as the Company's pro forma
income before extraordinary items per Unit, dividends and book value per
Unit, assuming 100% participation without the issuance of Subsidiary
Partnership Units, multiplied by the exchange ratio per Unit. Pro forma
dividends are estimated at $1.65 per Listed Share, the Company's pro forma
book value is $21.37 per Listed Share and the exchange ratio is 37.93 Listed
Shares per CPA(R):3 Unit.
107
119
SELECTED FINANCIAL DATA
CORPORATE PROPERTY ASSOCIATES 4
(A CALIFORNIA LIMITED PARTNERSHIP)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ---------------------
----------------------------------------------- JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- --------- ---------
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
OPERATING DATA:
Revenues................................ $ 8,723 $ 9,253 $ 8,443 $ 8,061 $ 9,322 $ 4,069 $ 5,193
Income from continuing operations before
extraordinary item.................... 3,698 4,741 4,443 8,679 6,914 3,015 1,799
Income from continuing operations before
extraordinary item allocated:
To General Partners................... 222 284 266 879 415 181 108
To Limited Partners................... 3,476 4,457 4,177 7,800 6,499 2,834 1,691
Per Unit(3)........................... 40.63 52.08 48.81 91.16 75.95 33.13 19.78
Ratio of earnings to fixed charges(1)... 2.09 2.55 2.76 4.92 5.31 3.41 4.62
CASH FLOW DATA:
Net cash provided by operating
activities............................ 5,071 6,232 5,772 6,099 7,168 3,106 3,742
Net increase (decrease) in cash and cash
equivalents........................... (423) (187) (1,120) 5,070 (2,910) 413 (1,280)
Distributions attributable(2):
To General Partners................... 290 292 293 323 268 132 134
To Limited Partners................... 4,539 4,570 4,590 8,667 4,193 2,093 2,103
Per Unit(3)........................... 53.04 53.41 53.64 101.29 49.00 12.23 12.30
Payment of mortgage principal(4)........ 645 806 1,168 1,158 898 464 398
BALANCE SHEET DATA:
Cash and cash equivalents............... 3,817 3,630 2,509 7,579 4,669 3,389
Total assets............................ 58,331 57,497 56,108 48,508 42,067 38,735
Total liabilities....................... 29,342 28,277 27,322 20,146 11,264 8,369
Partners equity:
General Partners...................... (474) (460) (486) 62 211 184
Limited Partners...................... 29,464 29,681 29,272 28,300 30,592 30,182
Book value per Unit..................... 344.33 346.87 342.09 330.73 357.68 352.89
EQUIVALENT PRO FORMA PER UNIT DATA(5):
Income before extraordinary item........ 59.68 27.37
Dividends............................... 54.40 27.20
Book value.............................. 704.57
- ---------------
(1) The ratio of earnings to fixed charges is computed as income from continuing
operations before minority interest and extraordinary items plus fixed
charges (primarily interest) divided by fixed charges.
(2) Includes distributions attributable to the fourth quarter of each fiscal
year payable in the following fiscal year less distributions in the first
fiscal quarter attributable to the prior year.
(3) Distributions for 1995 include a $50 per Unit special distribution to the
Limited Partners.
(4) Represents scheduled mortgage principal amortization paid.
(5) Equivalent pro forma per Unit data is computed as the Company's pro forma
income before extraordinary items per Unit, dividends and book value per
Unit, assuming 100% participation without the issuance of Subsidiary
Partnership Units, multiplied by the exchange ratio per Unit. Pro forma
dividends are estimated at $1.65 per Listed Share, the Company's pro forma
book value is $21.37 per Listed Share and the exchange ratio is 32.97 Listed
Shares per CPA(R):4 Unit.
108
120
SELECTED FINANCIAL DATA
CORPORATE PROPERTY ASSOCIATES 5
(A CALIFORNIA LIMITED PARTNERSHIP)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ---------------------
----------------------------------------------- JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- --------- ---------
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
OPERATING DATA:
Revenues................................ $18,195 $18,261 $18,125 $15,768 $13,205 $ 6,505 $ 4,971
Income before extraordinary item........ 5,857 4,496 5,557 1,913 7,776 4,652 467
Income before extraordinary item
allocated:
To General Partners................... 351 270 1,011 201 463 314 28
To Limited Partners................... 5,506 4,226 4,546 1,712 7,314 4,337 439
Per Unit.............................. 48.64 37.34 40.16 15.12 64.61 38.31 3.87
Ratio of earnings to fixed charges(1)... 2.10 1.90 2.21 1.54 4.72 1.12 1.67
CASH FLOW DATA:
Net cash provided by operating
activities............................ 6,202 6,241 6,293 4,688 5,606 2,042 1,852
Net increase (decrease) in cash and cash
equivalents........................... (133) (448) 5,633 (5,626) 2,937 3,089 (1,147)
Distributions attributable(2):
To General Partners................... 348 350 352 365 244 122 121
To Limited Partners................... 5,445 5,489 5,516 7,635 3,816 1,904 1,888
Per Unit(3)........................... 48.10 48.49 48.73 67.45 33.71 8.41 8.34
Payment of mortgage principal(4)........ 915 826 725 463 365 118
BALANCE SHEET DATA:
Cash and cash equivalents............... 2,742 2,294 7,927 2,301 5,238 4,091
Total assets............................ 95,637 93,950 92,366 72,268 52,652 50,132
Total liabilities....................... 55,993 55,638 54,478 40,522 17,586 17,414
Partners equity:
General Partners...................... (667) (747) (95) (263) (68) (161)
Limited Partners...................... 40,311 39,058 37,983 32,009 35,133 32,879
Book value per Unit..................... 356.10 345.04 335.54 282.77 310.36 290.45
EQUIVALENT PRO FORMA PER UNIT DATA(5):
Income before extraordinary item........ 33.25 15.25
Dividends............................... 30.31 15.16
Book value.............................. 392.57
- ---------------
(1) The ratio of earnings to fixed charges is computed as income from continuing
operations before minority interest and extraordinary items plus fixed
charges (primarily interest) divided by fixed charges.
(2) Includes distributions attributable to the fourth quarter of each fiscal
year payable in the following fiscal year less distributions in the first
fiscal quarter attributable to the prior year.
(3) 1995 distributions include a special distribution of $20 per Limited
Partnership Unit.
(4) Represents scheduled mortgage amortization paid.
(5) Equivalent pro forma per Unit data is computed as the Company's pro forma
income before extraordinary items per Unit, dividends and book value per
Unit, assuming 100% participation without the issuance of Subsidiary
Partnership Units, multiplied by the exchange ratio per Unit. Pro forma
dividends are estimated at $1.65 per Listed Share, the Company's pro forma
book value is $21.37 per Listed Share and the exchange ratio is 18.37 Listed
Shares per CPA(R):5 Unit.
109
121
SELECTED FINANCIAL DATA
CORPORATE PROPERTY ASSOCIATES 6
A CALIFORNIA LIMITED PARTNERSHIP
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ---------------------
----------------------------------------------- JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- --------- ---------
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
OPERATING DATA:
Revenues(1).............................. $14,177 $15,387 $15,694 $16,738 $16,537 $ 7,997 $ 8,696
Income before extraordinary gain......... 4,254 3,920 3,099 5,771 6,025 2,917 3,521
Income before extraordinary gain
allocated:
To General Partners.................... 255 235 186 347 428 175 211
To Limited Partners.................... 3,999 3,685 2,913 5,424 5,597 2,472 3,309
Per Unit............................... 83.40 76.85 60.76 113.16 116.78 57.20 69.04
Ratio of earnings to fixed charges(2).... 1.78 1.74 1.60 2.23 2.40 2.30 2.72
CASH FLOW DATA:
Net cash provided by operating
activities............................. 6,067 5,532 5,094 11,133 7,616 3,694 4,317
Net increase (decrease) in cash and cash
equivalents............................ 2,011 (1,978) (1,052) (936) (139) 715 (448)
Distributions attributable(3):
To General Partners.................... 279 281 281 286 295 139 141
To Limited Partners.................... 4,368 4,406 4,429 4,483 4,629 2,307 2,327
Per Unit............................... 91.10 91.88 92.26 93.53 96.58 24.07 24.28
Payment of mortgage principal(4)......... 1,072 1,300 1,331 1,356 1,156 859 577
BALANCE SHEET DATA:
Cash and cash equivalents................ 7,443 5,465 4,413 3,477 3,338 2,890
Total assets............................. 96,244 92,570 90,186 88,422 88,154 86,866
Total liabilities........................ 56,882 53,963 53,185 48,318 46,906 44,564
Partners equity:
General Partners....................... (207) (251) (346) (157) (5) 66
Limited Partners....................... 39,569 38,857 37,346 40,260 41,252 42,236
Book value per Unit...................... 825.21 810.36 778.86 839.98 860.68 881.20
EQUIVALENT PRO FORMA PER UNIT DATA(5):
Income before extraordinary item......... 124.94 57.29
Dividends................................ 113.90 56.95
Book value............................... 1,475.17
- ---------------
(1) Revenues for 1995 include $688 which reflect recovery of rents which had
been reserved for in 1994.
(2) The ratio of earnings to fixed charges is computed as income from continuing
operations before minority interest and extraordinary items plus fixed
charges (primarily interest) divided by fixed charges.
(3) Includes distributions attributable to the fourth quarter of each fiscal
year payable in the following fiscal year less distributions in the first
fiscal quarter applicable to the prior year.
(4) Represents scheduled payment of mortgage principal paid.
(5) Equivalent pro forma per Unit data is computed as the Company's pro forma
income before extraordinary items per Unit, dividends and book value per
Unit, assuming 100% participation without the issuance of Subsidiary
Partnership Units, multiplied by the exchange ratio per Unit. Pro forma
dividends are estimated at $1.65 per Listed Share, the Company's pro forma
book value is $21.37 per Listed Share and the exchange ratio is 69.03 Listed
Shares per CPA(R):6 Unit.
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SELECTED FINANCIAL DATA
CORPORATE PROPERTY ASSOCIATES 7
A CALIFORNIA LIMITED PARTNERSHIP
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ---------------------
----------------------------------------------- JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- --------- ---------
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
OPERATING DATA:
Revenues............................... $10,123 $12,243 $13,840 $12,196 $12,731 $ 6,164 $ 6,678
Income (loss) from continuing
operations before extraordinary
item(1).............................. 1,885 (836) 12,049 3,956 4,399 2,101 2,380
Income (loss) from continuing
operations before extraordinary
item(1):
To General Partners................ 113 244 431 187 260 122 143
To Limited Partners................ 1,772 (1,080) 11,618 3,769 4,139 1,979 2,237
Per Unit........................... 39.13 (23.85) 256.62 83.31 91.55 43.78 49.48
Ratio of earnings to fixed
charges(2)........................... 1.52 0.77 4.38 2.63 3.27 3.07 3.61
CASH FLOW DATA:
Net cash provided by operating
activities........................... 4,490 4,139 5,347 5,090 5,499 2,497 2,481
Net increase (decrease) in cash and
cash equivalents..................... 93 1,249 7,266 (5,557) 624 841 474
Distributions attributable(3):
To General Partners................ 191 178 279 206 210 104 106
To Limited Partners(4)............. 2,997 2,784 10,084 3,229 3,289 1,638 1,656
Per Unit........................... 60.62 61.49 222.74 71.38 72.74 18.12 18.31
Payment of mortgage principal(5)....... 560 740 739 1,567 614 449 197
BALANCE SHEET DATA:
Cash and cash equivalents.............. 2,011 3,260 10,526 4,968 5,592 6,066
Total assets........................... 77,074 73,240 66,865 56,229 55,432 55,832
Total liabilities...................... 45,059 43,929 28,806 23,120 21,408 21,188
Partners equity:
General Partners................... (252) (120) 113 111 162 199
Limited Partners................... 32,268 29,431 37,946 32,998 33,863 34,446
Book value per Unit.................... 712.72 650.07 838.13 729.89 749.02 761.93
EQUIVALENT PRO FORMA
PER UNIT DATA(6):
Income before extraordinary item....... 100.26 45.97
Dividends.............................. 91.39 45.70
Book value............................. 1,183.68
- ---------------
(1) 1994 income includes an extraordinary loss of $511,503. 1993 and 1995 net
income includes extraordinary gains of $879,000 and $1,324,000 respectively,
on the extinguishment of debt.
(2) The ratio of earnings to fixed charges is computed as income from continuing
operations before minority interest and extraordinary items plus fixed
charges (primarily interest) divided by fixed charges.
(3) Includes distributions attributable to the fourth quarter of each fiscal
year payable in the following fiscal year less distributions in the first
fiscal quarter attributable to the prior year.
(4) Distributions for 1994 include a special distribution of $150 per Limited
Partnership Unit paid in January 1995.
(5) Represents scheduled principal amortization paid.
(6) Equivalent pro forma per Unit data is computed as the Company's pro forma
income before extraordinary items per Unit, dividends and book value per
Unit, assuming 100% participation without the issuance of Subsidiary
Partnership Units, multiplied by the exchange ratio per Unit. Pro forma
dividends are estimated at $1.65 per Listed Share, the Company's pro forma
book value is $21.37 per Listed Share and the exchange ratio is 55.39 Listed
Shares per CPA(R):7 Unit.
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SELECTED FINANCIAL DATA
CORPORATE PROPERTY ASSOCIATES 8, L.P.
A DELAWARE LIMITED PARTNERSHIP
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, --------------------
----------------------------------------------- JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- -------- ---------
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
OPERATING DATA:
Revenues................................ $13,660 $14,364 $15,190 $15,453 $16,207 $ 8,000 $ 8,213
Income from continuing operations before
extraordinary item.................... 4,312 5,258 6,012 8,338 9,453 4,887 4,837
Income from continuing operations before
extraordinary item allocated:
To General Partners................ 431 526 601 834 965 489 484
To Limited Partners................ 3,881 4,732 5,411 7,504 8,488 4,398 4,354
Per Unit........................... 57.29 69.84 79.86 110.93 125.60 65.08 64.42
Ratio of earnings to fixed charges(1)... 1.64 1.81 2.04 2.65 2.82 2.51 3.21
CASH FLOW DATA:
Net cash provided by operating
activities............................ 6,321 8,377 8,627 10,271 10,948 5,161 5,368
Net increase (decrease) in cash and cash
equivalents........................... (288) 772 979 439 (269) 817 1,648
Distributions attributable (2):
To General Partners................ 630 634 637 644 658 327 331
To Limited Partners................ 5,669 5,702 5,729 5,799 5,919 2,949 2,978
Per Unit........................... 83.68 84.16 84.56 85.76 87.58 21.82 22.03
Payment of mortgage principal(3)........ 303 457 969 3,358 1,769 1,174 620
BALANCE SHEET DATA:
Cash and cash equivalent................ 2,929 3,701 4,681 5,119 4,850 6,498
Total assets............................ 120,971 120,670 116,323 114,890 108,629 109,665
Total liabilities....................... 66,355 67,123 63,242 60,065 50,898 50,402
Partners equity:
General Partners................... (452) (559) (605) (413) (104) 49
Limited Partners................... 55,068 54,105 53,686 55,238 57,835 59,214
Book value per Unit..................... 812.83 798.61 792.42 817.34 855.78 876.18
EQUIVALENT PRO FORMA PER UNIT DATA(4):
Income before extraordinary item........ 125.89 57.73
Dividends............................... 114.76 57.38
Book value.............................. 1,486.28
- ---------------
(1) The ratio of earnings to fixed charges is computed as income from continuing
operations before minority interest and extraordinary items plus fixed
charges (primarily interest) divided by fixed charges.
(2) Includes distributions attributable to the fourth quarter of each fiscal
year payable in the following fiscal year less distributions in the first
fiscal quarter attributable to the prior year.
(3) Represents scheduled mortgage principal amortization paid.
(4) Equivalent pro forma per Unit data is computed as the Company's pro forma
income before extraordinary items per Unit, dividends and book value per
Unit, assuming 100% participation without the issuance Partnership
Subsidiary Units, multiplied by the exchange ratio per Unit. Pro forma
dividends are estimated at $1.65 per Listed Share, the Company's pro forma
book value is $21.37 per Listed Share and the exchange ratio is 69.55 Listed
Shares per CPA(R):8 Unit.
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SELECTED FINANCIAL DATA
CORPORATE PROPERTY ASSOCIATES 9, L.P.
A DELAWARE LIMITED PARTNERSHIP
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, -------------------
----------------------------------------------- JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
OPERATING DATA:
Revenues.................................. $11,920 $12,217 $11,612 $11,947 $12,075 $6,100 $ 5,990
Income before extraordinary item.......... 2,849 3,866 3,908 3,189 5,175 2,544 2,501
Income before extraordinary item
allocated:
To General Partners..................... 285 387 391 319 517 254 250
To Limited Partners..................... 2,564 3,479 3,517 2,870 4,658 2,290 2,251
Per Unit................................ 42.79 58.07 58.69 47.91 77.73 38.22 37.57
Ratio of earnings to fixed charges(1)..... 1.51 1.69 1.76 1.66 2.03 2.00 2.02
CASH FLOW DATA:
Net cash provided by operating
activities.............................. 5,212 6,429 5,807 5,922 6,162 3,164 3,059
Net increase (decrease) in cash and cash
equivalents............................. (614) (614) 297 2 (221) (174) (314)
Distributions attributable(2):
To General Partners.................. 554 557 560 562 566 282 283
To Limited Partners.................. 4,984 5,013 5,037 5,060 5,084 2,539 2,545
Per Unit............................. 83.19 83.66 84.06 84.46 84.85 21.19 21.24
Payment of mortgage principal(3).......... 299 465 530 766 1,465 716 776
BALANCE SHEET DATA:
Cash and cash equivalents................. 1,972 1,358 1,655 1,658 1,437 1,123
Total assets.............................. 108,418 105,608 104,024 101,072 98,518 97,570
Total liabilities......................... 62,900 61,787 62,365 61,840 59,755 59,133
Partners equity:
General Partners..................... (597) (767) (983) (1,226) (1,273) (1,306)
Limited Partners..................... 46,115 44,588 42,642 40,458 40,037 39,742
Book value per Unit....................... 769.64 744.15 711.67 675.22 668.19 663.28
EQUIVALENT PRO FORMA PER UNIT DATA(4):
Income before extraordinary item.......... 95.26 43.68
Dividends................................. 86.84 43.42
Book value................................ 1,124.70
- ---------------
(1) The ratio of earnings to fixed charges is computed as income from continuing
operations before minority interest and extraordinary items plus fixed
charges (primarily interest) divided by fixed charges.
(2) Includes distributions attributable to the fourth quarter of each fiscal
year payable in the following fiscal year less distributions in the first
fiscal quarter attributable to the prior year.
(3) Represents scheduled mortgage principal amortization paid.
(4) Equivalent pro forma per Unit data is computed as the Company's pro forma
income before extraordinary items per Unit, dividends and book value per
Unit, assuming 100% participation without the issuance Subsidiary
Partnership Units, multiplied by the exchange ratio per Unit. Pro forma
dividends are estimated at $1.65 per Listed Share, the Company's pro forma
book value is $21.37 per Listed Share and the exchange ratio is 52.63 Listed
Shares per CPA(R):9 Unit.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OVERVIEW
The following discussion should be read in conjunction with the "Summary
Selected Combined Financial Information," "Selected Combined Financial
Information" and "Combined Financial Statements" and notes thereto included
elsewhere in this Consent Solicitation Statement. The combined financial
statements of the CPA(R) Partnerships consist of nine real estate limited
partnerships. It is intended that after the Consolidation is completed, the
ownership interests of the CPA(R) Partnerships will be controlled by the
Company. Upon completion of the transaction, the Company will have a portfolio
of 198 properties with an appraised value of approximately $682,000 and a
carrying value of $645,849 (net of accumulated depreciation). Total debt will
approximate $219,356, including limited recourse mortgage indebtedness of
$194,347.
The CPA(R) Partnerships are in the business of investing in commercial and
industrial real estate which is net leased to corporations throughout the United
States. Each investment is made pursuant to an extensive evaluation of the
lessee's credit, management, position within its industry, operating history and
profitability. Properties selected for investment are those which Management
concluded as being essential to the operations of the lessees. The CPA(R)
Partnerships' real estate portfolio is diversified by type of property,
geographic location and industry. Net lease investments are structured to
provide stable cash flow by entering into long-term net leases that require
lessees to pay all operating expenses of the properties. Leases may also include
operational and financial covenants that lessees must satisfy in order to
protect the CPA(R) Partnerships' investments.
The CPA(R) Partnerships financed property acquisitions with limited
recourse mortgage debt where the cost of such financing has been favorable. The
real estate portfolio consists of the properties acquired with the proceeds of
the initial offerings of the CPA(R) Partnerships. Pursuant to their partnership
agreements, the CPA(R) Partnerships cannot reinvest the proceeds from the sale
of properties in new investments. Subsequent to the Consolidation, the Company
will have greater operating flexibility to achieve its growth objectives.
Depending on prevailing market conditions, the portfolio's leverage may be
restructured to reduce financing costs and increase cash flow. A substantial
portion of the financing used by the CPA(R) Partnerships has been in the form of
limited recourse mortgage debt. As a publicly traded entity, the Company is
expected to have other financing options available for its capital needs.
Proceeds from property dispositions may be reinvested to increase the
portfolio's rate of return. In addition, the Company will have the option of
raising new equity capital in order to expand the portfolio. Accordingly, future
results may not reflect the present trend of declining lease revenues (the total
of rental income from operating leases and interest income from direct financing
leases).
RESULTS OF OPERATIONS
As noted above, the CPA(R) Partnerships have generally structured leases so
that the lessee is responsible for all operating expenses relating to the leased
properties, including property taxes, insurance, maintenance and repairs. The
leases generally include provisions that have rent increases based on formulas
indexed to increases in the Consumer Price Index ("CPI"), periodic mandated
increases or, for certain retail business, percentage rents on sales above an
established benchmark.
The CPA(R) Partnerships acquired the operations of five hotels subsequent
to the CPA(R) Partnerships entering into lease termination agreements with the
two lessees which had operated the hotels. Since December 31, 1995, the CPA(R)
Partnerships have exchanged an interest in a hotel in Kenner, Louisiana for
units in the operating partnership of a publicly traded real estate investment
trust and sold a hotel in Rapid City, South Dakota.
Comparison of the Six Months Ended June 30, 1997 and 1996. Net income
decreased by $1,271, or 6%, primarily due to the recognition of a gain of $4,644
on the sale of real estate in the six months ended June 30,
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1996 and an increase in non-cash writedowns of real estate of $2,366 during the
six months ended June 30, 1997.
Income before non-cash writedowns of real estate, net gains and
extraordinary items reflected an increase of $5,158, or 25%, due to an increase
in lease revenues, other income and a reduction in interest expense. Lease
revenues increased by $2,148 primarily as a result of a lease modification and
the commencement of new leases. The lease with Hughes Markets, Inc. was extended
effective May 1996 at an annual rental of approximately $4,000. The lease
extension accounted for $1,320 of the increase in lease revenues for the six
month period. The lease with Hughes Markets is scheduled to expire in April
1998. The Company entered into a net lease agreement for the property currently
occupied by Hughes with Copeland Beverage Group, Inc. Copeland's right of
possession of the property and the date which it will be required to commence
paying rent of $1,800 per year shall be the date, on or after April 30, 1998,
that Hughes vacates the property. Scheduled rent increases and the commencement
of new leases in 1996 contributed additional revenues of approximately $928. The
additional lease revenues were partially offset by decreases of approximately
$537 due to the sale of properties in 1996. Other income increased by $3,141
primarily due to the receipt of a distribution of proceeds in connection with a
bankruptcy settlement of a former tenant.
The trend of decreasing expenses for interest and depreciation has
continued as a result of property sales and the retirement of debt. Interest
expense decreased by $2,105 due to the prepayment of mortgage loans in
connection with the sale of properties and scheduled amortization of mortgage
principal. Depreciation expense decreased by $326 due to the sale of properties.
General and administrative expenses increased due to higher accruals for state
and local taxes and an increase in administrative reimbursements. Property
expenses decreased by $186, due to a reduction in property carrying costs as a
result of the net leasing of vacant properties during 1996.
Operating income from hotel properties decreased by $2,019 for the six
months ended June 30, 1997 as compared to the similar period in 1996, due to the
sale of one hotel property in Rapid City, South Dakota and the exchange of
another hotel property in Kenner, Louisiana in 1996 for operating partnership
units of a newly formed, publicly traded real estate investment trust. Excluding
the operations of the hotels sold or exchanged, operating income from the hotels
in Alpena, Petoskey and Livonia, Michigan, increased by approximately $282 or
19%. Revenues from the three hotels increased by 6%, while expenses increased by
only 1%. The growth in revenues is due to a strategy of increasing average room
rates while occupancy generally remained constant. The operations of the Alpena
and Petoskey hotels are seasonal in nature, with the most significant portion of
their earnings historically generated during the third quarter of the year.
Comparison of the Years Ended December 31, 1996 and 1995. Net income
decreased by 14%, due to the realization of nonrecurring gains in 1995. A gain
of $11,500 was recognized in 1995 on the settlement of litigation with a former
tenant. In addition, an extraordinary gain of $3,207 was also recognized in 1995
on the extinguishment of debt. Income before net gains, extraordinary items and
noncash charges for property writedowns would have reflected an increase of 12%
for the comparable periods.
Lease revenues decreased by 1.8%, primarily due to the sales of Properties.
The sale of Properties leased to Industrial General Corporation, Genesco, IBM,
GATX and AutoZone resulted in a $3,000 reduction in lease revenues. The Gibson
lease restructuring in 1995 resulted in an additional $2,250 reduction in lease
revenues for the comparable periods. Annual rent payments on the Gibson lease
were reduced in exchange for receipt of a lump sum payment of $12,200, severing
one of the Properties from the lease and an extension of the lease term on the
remaining properties until November 2013. The severed property was subsequently
leased to a subsidiary of CSS Industries, Inc. in connection with the lease
restructuring. The decrease in lease revenues was partially offset by rent
increases during 1996, which amounted to approximately $3,306. Scheduled rent
increases of $965 affected 17 of the CPA(R) Partnerships' leases accounting for
annual revenues of $16,200. A negotiated rent increase with Hughes Markets, Inc.
resulted in additional lease revenues of $2,341 in 1996. In addition, lease
revenues for 1996 increased by $677 due to the commencement of new leases.
Interest expense decreased by $5,642 in 1996, as compared to 1995, while
total debt decreased by approximately $47,189 during the same period. The
decrease in interest expense has also been affected by the
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127
accelerating amortization of limited recourse mortgage loans. General and
administrative expenses decreased by $762, due to costs associated with state
taxes in 1995 and certain non-recurring costs related to the relocation of the
CPA(R) Partnerships offices in 1995. Property expenses decreased by 2%, due to
certain non-recurring costs incurred in 1995 in connection with assessing
liquidity alternatives for the limited partners of the CPA(R) Partnerships.
Income from hotel operations decreased by $1,000, due to the disposition of
two hotel properties. Operating income from each of the three remaining hotel
properties increased by 7% to 13% in 1996. The increases in operating income are
generally due to higher occupancy rates or increases in average room rates.
Gains realized in 1996 include a gain of $4,400 on the sale of a property
in Hodgkins, Illinois leased to GATX Logistics, Inc. and a gain of $785 on the
sale of a hotel in Rapid City, South Dakota. The sale of the Hodgkins, Illinois
property was influenced by Management's belief that the future value of the
property would be affected by the scheduled expiration of the lease with GATX in
1999. The Rapid City hotel property was sold pursuant to Management's decision
that the hotel would not generate an adequate return on an additional investment
of funds required to maintain the hotel's affiliation with Holiday Inn. During
1996, a writedown of $1,300 was recorded based on an evaluation of the net
realizable value of the Rapid City hotel.
Comparison of the Years Ended December 31, 1995 and 1994. Net income for
1995 reflected an increase of 40 percent primarily due to gains and
extraordinary items. Excluding the effect of such nonrecurring items, income
would have reflected an increase of 13 percent, primarily due to decreases in
expenses for interest, property operations, depreciation and amortization. The
decrease in interest expense is due to the accelerating amortization (scheduled
principal payments) of limited recourse mortgage loans, the satisfaction of
other mortgage loans in connection with property sales or lease restructurings
and the refinancing of selected loans at lower rates of interest. The decrease
in expenses for depreciation and amortization is due to the sale of properties
and the full depreciation of certain components on older properties. Property
expenses for 1994 include nonrecurring costs incurred in connection with
assessing liquidity alternatives for the limited partners of the CPA(R)
Partnerships and costs incurred in successfully resolving disputes with lessees.
Costs involving disputes with lessees decreased in 1995 as a result of the
successful settlement of litigation with The Leslie Fay Company ("Leslie Fay")
and Anthony's Manufacturing Company, Inc. ("Anthony's").
The decrease in lease revenues of 4% was solely due to the sale of
properties in 1994 and 1995. This decrease was partially offset by rent
increases on certain leases. Annualized lease revenues increased by
approximately $1,000 as a result of such rent increases. Hotel operating results
reflected increases of 11% in revenues and earnings. Although several factors
contributed to these increases, the most significant factor was due to the
CPA(R) Partnerships' engagement of a new hotel management company to operate all
five of the hotels in January 1995. The hotel management company raised room
rates at the Kenner, Louisiana and Livonia, Michigan hotels, both of which are
operated as Holiday Inns, with no detrimental impact on occupancy rates. The
Kenner property was transferred to an unaffiliated entity in July 1996 in
exchange for an equity interest in such entity.
Gains in 1995 include a gain on settlement with Leslie Fay, gains from the
completion of several sale transactions which are more fully described in Note
13 to the accompanying Combined Financial Statements and gains on the
extinguishment of debt. The gain on the settlement with Leslie Fay concluded a
dispute which commenced in 1992 after Leslie Fay challenged the previously
agreed to method for determining the purchase price for the property pursuant to
a purchase option. The CPA(R) Partnerships recognized a gain of $11,499 on the
settlement of the dispute and retained ownership of the property. The property,
which was purchased by the CPA(R) Partnerships in 1982 for $9,400, was
subsequently sold in January 1996.
LIQUIDITY AND CAPITAL RESOURCES
The CPA(R) Partnerships' portfolio of Properties was acquired with funds
from the initial offering of each Partnership and with financing provided by
limited recourse mortgage debt. Funds from the initial offerings were also used
to establish working capital reserves in accordance with the provisions of each
partnership agreement. Cash flow from operations has historically been used to
pay scheduled principal payment
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obligations on mortgage debt and to fund quarterly distributions to partners,
generally at an increasing rate each quarter. The CPA(R) Partnerships have
historically maintained cash balances at levels which management deemed prudent
for day-to-day operations and for maintaining reserves for capital needs, such
as paying off maturing mortgages loans, funding improvements at the hotel
properties and for the remarketing of properties. Net proceeds from the sale of
assets or settlement of disputes with lessees have been used to pay off high
rate mortgage debt or to fund special distributions to partners, after reviewing
the adequacy of cash reserves. In accordance with their partnership agreements,
the CPA(R) Partnerships may not use proceeds from the sale of assets for
reinvestment in properties.
Pursuant to the terms of limited recourse mortgage debt, lenders have
recourse only to the properties collateralizing such debt. Three of the CPA(R)
Partnerships have utilized unsecured loans over the past several years to pay
off limited recourse debt. The terms of the recourse loans require borrowers to
meet financial covenants, including debt service coverage ratios, maintenance of
tangible net worth and compliance with limitations on total nonrecourse debt.
The Company expects to meet certain long-term liquidity requirements, such
as capital improvements, scheduled debt maturities and new property acquisitions
through long-term secured and unsecured indebtedness and the issuance of equity
securities. Upon completion of the Consolidation, the Company will have a real
estate portfolio with an appraised value of approximately $682,000, limited
recourse mortgage debt of approximately $194,347 and recourse debt of $24,709.
Management believes that a restructuring of debt will provide an opportunity to
enhance cash flow and future growth. Existing debt may be refinanced with
recourse loans where the cost of such financing is favorable. Historically a
significant amount of cash flow has been used to fund scheduled amortization of
mortgage principal. Scheduled mortgage principal amortization paid in 1996
amounted to $8,844. The Company may use non-amortizing debt in the future to
reduce debt service levels and provide additional cash flow for funding capital
improvements or the acquisition of new properties. As a perpetual life entity,
the Company may utilize unsecured financing to lower financing costs and improve
operating flexibility. Management believes that the Company will have additional
borrowing capacity that can be used to fund capital needs.
The CPA(R) Partnerships have historically distributed a significant portion
of cash flow to their Partners. The Company will initially distribute a
significant portion of its cash flow to Shareholders. In the future, management
will have the ability to evaluate whether a greater return may be realized by
reinvesting excess cash flows, rather than increasing the rate of distributions.
The Company expects to meet its short-term liquidity requirements,
including general and administrative and property expenses, scheduled principal
payment installment obligations and distribution objectives from cash generated
from operations and from existing cash balances. The CPA(R) Partnerships
maintained working capital reserves in order to fund their non-recurring needs,
including capital improvements and maturing debt. The Company's cash balance
after the Consolidation is expected to approximate $21,500. Such cash balance
may decrease in the future as the Company will have the opportunity to use lines
of credit to supplement cash flow from operations to fund short-term liquidity
needs.
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MANAGEMENT FOLLOWING THE CONSOLIDATION
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The individuals who will serve as Directors and executive officers of the
Company upon completion of the Consolidation are listed below.
NAME OFFICE
- ------------------------------------------- -----------------------------------------------------
Francis J. Carey........................... Chairman of the Board, Chief Executive Officer and
Director
Gordon F. DuGan............................ President, Chief Acquisitions Officer and Director
Steven M. Berzin........................... Vice Chairman and Director
Donald E. Nickelson........................ Chairman of the Audit Committee and Director
William P. Carey........................... Chairman of the Executive Committee and Director
Eberhard Faber, IV......................... Director
Barclay G. Jones III....................... Director
Dr. Lawrence R. Klein...................... Director
Charles C. Townsend Jr. ................... Director
Reginald Winssinger........................ Director
Claude Fernandez........................... Executive Vice President -- Financial Operations
John J. Park............................... Executive Vice President, Chief Financial Officer and
Treasurer
H. Augustus Carey.......................... Senior Vice President and Secretary
Samantha K. Garbus......................... Vice President -- Asset Management
Susan C. Hyde.............................. Vice President -- Shareholder Services
Robert C. Kehoe............................ Vice President -- Accounting
Edward V. LaPuma........................... Vice President -- Acquisitions
The following is a biographical summary of the experience of the Directors
and executive officers of the Company.
Francis J. Carey, age 71, was elected in 1997 as Chairman, Chief Executive
Officer and a Director of the Company, at which time he resigned his positions
as President and a Director of W.P. Carey & Co., CPA(R):10, CIP(TM) and
CPA(R):12. He had served as President of W.P. Carey since 1987 and as a Director
since its founding in 1973. Prior to 1987 he was senior partner in Philadelphia,
head of the real estate department nationally and a member of the executive
committee of the Pittsburgh-based firm of Reed Smith Shaw & McClay, counsel for
W.P. Carey & Co. and the Company. He served as a member of the executive
committee and Board of Managers of the Western Savings Bank of Philadelphia from
1972 until its takeover by another bank in 1982, and is former chairman of the
Real Property, Probate and Trust Section of the Pennsylvania Bar Association.
Mr. Carey served as a member of the Board of Overseers of the School of Arts and
Sciences at the University of Pennsylvania from 1983 to 1990. He has also served
as a member of the Board of Trustees and executive committee of the Investment
Program Association since 1990 and on the Business Advisory Council of the
Business Council for the United Nations since 1994. He holds A.B. and J.D.
degrees from the University of Pennsylvania and completed executive programs in
corporate finance and accounting at Stanford University Graduate School of
Business and the Wharton School of the University of Pennsylvania. Mr. Carey is
the father of H. Augustus Carey and the brother of William P. Carey.
Gordon F. DuGan, age 31, was elected Executive Vice President and a
Managing Director of W.P. Carey & Co. in June 1997. Mr. DuGan rejoined W.P.
Carey as Deputy Head of Acquisitions in February 1997. Mr. DuGan was until
September 1995 a Senior Vice President in the Acquisitions Department of W.P.
Carey & Co. Mr. DuGan jointed W.P. Carey & Co. as Assistant to the Chairman in
May 1988, after graduating from the Wharton School at the University of
Pennsylvania where he concentrated in Finance. From October 1995 until February
1997, Mr. DuGan was Chief Financial Officer of Superconducting Core
Technologies, Inc., a Colorado-based wireless communications equipment
manufacturer.
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Steven M. Berzin, age 47, was elected Executive Vice President, Chief
Financial Officer and a Managing Director of W.P. Carey & Co. in July 1997. From
1993 to 1997, Mr. Berzin was Vice President -- Business Development of General
Electric Capital Corporation in the office of the Executive Vice President and,
more recently, in the office of the President, where he was responsible for
business development activities and acquisitions. From 1985 to 1992, Mr. Berzin
held various positions with Financial Guaranty Insurance Company, the last two
being Managing Director, Corporate Development, and Senior Vice President and
Chief Financial Officer. Mr. Berzin was associated with the law firm of Cravath,
Swaine & Moore from 1977 to 1985 and from 1976 to 1977, he served as law clerk
to the Honorable Anthony M. Kennedy, then a United States Circuit Judge. Mr.
Berzin received a B.A. and M.A. in Applied Mathematics from Harvard University,
a B.A. in Jurisprudence and an M.A. from Oxford University, and a J.D. from
Harvard Law School.
Donald E. Nickelson, age 64, serves as Chairman of the Board and Director
of Greenfield Industries, Inc. and Director of Allied Healthcare Products, Inc.
Mr. Nickelson is Vice-Chairman and Director of the Harbor Group, a leverage
buy-out firm. He is also a Director of Sugen Corporation and D.T.I. Industries,
Inc. and Trustee of Mainstay Mutual Fund Group. From 1986 to 1988, Mr. Nickelson
was President of PaineWebber Incorporated, from 1988 to 1990 he was President of
the PaineWebber Group and a Director from 1980 to 1993. Prior to 1986, Mr.
Nickelson served in various capacities with affiliates of PaineWebber
Incorporated and its predecessor firm. From 1988 to 1989, Mr. Nickelson was a
Director of a diverse group of corporations in the manufacturing, service and
retail sectors, including Wyndham Baking Co., Inc., Hoover Group, Inc., Peebles,
Inc. and Motor Wheel Corporation. He is a former Chairman of National Car
Rentals, Inc. Mr. Nickelson is also a former Director of the Chicago Board
Options Exchange and is a former Chairman of the Pacific Stock Exchange.
William P. Carey, age 67, has been active in lease financing since 1959 and
a specialist in net leasing of corporate real estate property since 1964. Before
founding W.P. Carey & Co., in 1973, he served as Chairman of the Executive
Committee of Hubbard, Westervelt & Mottelay (now Merrill Lynch Hubbard), head of
Real Estate and Equipment Financing at Loeb Rhoades & Co. (now Lehman Brothers),
head of Real Estate and Private Placements, Director of Corporate Finance and
Vice Chairman of the Investment Banking Board of duPont Glore Forgan Inc. A
graduate of the University of Pennsylvania's Wharton School of Finance, Mr.
Carey is a Governor of the National Association of Real Estate Investment Trusts
(NAREIT) and a Trustee of The Johns Hopkins University and of other educational
and philanthropic institutions. He has served for many years on the Visiting
Committee to the Economics Department of the University of Pennsylvania and
co-founded with Dr. Lawrence R. Klein the Economics Research Institute at that
university. Mr. Carey also serves as Chairman of the Board and Chief Executive
Officer of CPA(R):10, CIP(TM) and CPA(R):12. Mr. Carey is the brother of Francis
J. Carey and the uncle of H. Augustus Carey.
Eberhard Faber, IV, age 61, is currently a Director of PNC Bank, Chairman
of the Board and Director of the Citizens Voice, a newspaper, a Director of
Ertley's Motorworld, Inc., Vice-Chairman of the Board of Kings College and a
Director of Geisinger Wyoming Valley Hospital. Mr. Faber served as Chairman and
Chief Executive officer of Eberhard Faber, Inc., from 1973 to 1987. Mr. Faber
also served as the Director of the Philadelphia Federal Reserve Bank, including
service as the Chairman of its Budget and Operations Committee from 1980 to
1986. Mr. Faber has served on the boards of several companies, including First
Eastern Bank from 1980 to 1993.
Barclay G. Jones III, age 37, is Vice Chairman and a Managing Director of
W.P. Carey & Co. Mr. Jones joined W.P. Carey & Co. as Assistant to the President
in July 1982, after his graduation from the Wharton School of the University of
Pennsylvania where he majored in Finance and Economics. Mr. Jones has served as
a director of W.P. Carey & Co. since April 1992 and is a director of the Wharton
School Club of New York.
Dr. Lawrence R. Klein, age 77, is Benjamin Franklin Professor Emeritus of
Economics and Finance at the University of Pennsylvania and its Wharton School,
having joined the faculty of the University in 1958. He is a holder of earned
degrees from the University of California at Berkeley and the Massachusetts
Institute of Technology and has been awarded the Alfred Nobel Memorial Prize in
Economic Sciences, as well as a number of honorary degrees. Founder of Wharton
Econometric Forecasting Associates, Inc., Dr. Klein has
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been counselor to various corporations, governments and government agencies,
including the Federal Reserve Board and the President's Council of Economic
Advisers. Dr. Klein joined W.P. Carey & Co. in 1984 as Chairman of the Economic
Policy Committee and as a Director.
Charles C. Townsend, Jr., age 69, currently is an Advisory Director of
Morgan Stanley & Co., having held such position since 1979. Mr. Townsend was a
Partner and a Managing Director of Morgan Stanley & Co. from 1963 to 1978 and
served as Chairman of Morgan Stanley Realty Corporation from 1977 to 1982. Mr.
Townsend holds a B.S.E.E. from Princeton University and an M.B.A. from Harvard
University. Mr. Townsend serves as director of CPA(R):10, CIP(R) and. CPA(R):12.
Reginald Winssinger, age 55, is currently Chairman of the Board and
Director of Horizon Real Estate Group, Inc. Mr. Winssinger has managed
portfolios of diversified real estate assets exceeding $500 million throughout
the United States for more than 20 years. Mr. Winssinger is active in the
planning and development of major land parcels and has developed 20 commercial
properties. Mr. Winssinger is a native of Belgium with more than 25 years of
real estate practice, including 10 years based in Brussels, overseeing
appraisals, construction and management. Mr. Winssinger holds a B.S. in
Geography from the University of California at Berkeley and received a Degree in
Appraisal and Survey in Belgium. Mr. Winssinger presently serves as Honorary
Belgium Consul to the State of Arizona, a position he has held since 1991.
Claude Fernandez, age 45, is a Managing Director, Executive Vice President
and Chief Administrative Officer of W.P. Carey & Co. Mr. Fernandez joined W.P.
Carey & Co. as Assistant Controller in March 1983, was elected Controller in
July 1983, and Vice President in April 1986, First Vice President in April 1987,
Senior Vice President in April 1989 and Executive Vice President in April 1991.
Prior to joining W.P. Carey & Co., Mr. Fernandez was associated with Coldwell
Banker, Inc. in New York for two years and with Arthur Andersen & Co. in New
York for over three years. Mr. Fernandez, a Certified Public Accountant,
received a B.S. degree in Accounting from New York University in 1975 and an
M.B.A. in Finance from Columbia University Graduate School of Business in 1981.
John J. Park, age 33, is a Senior Vice President, Treasurer and a Managing
Director of W.P. Carey & Co. Mr. Park became a First Vice President of W.P.
Carey & Co. in April 1993 and Senior Vice President in October, 1995. Mr. Park
joined W.P. Carey & Co. as an Investment Analyst in December 1987 and became a
Vice President in July 1991. Mr. Park received B.S. in Chemistry from
Massachusetts Institute of Technology in 1986 and an M.B.A. in Finance from the
Stern School of New York University in 1991.
H. Augustus Carey, age 40, is a Senior Vice President and a Managing
Director at W.P. Carey & Co. He returned to W.P. Carey & Co. as a Vice President
in August 1988 and was elected First Vice President in April 1992. Mr. Carey
previously worked for W.P. Carey & Co. from 1979 to 1981 as Assistant to the
President. From 1984 to 1987, Mr. Carey served as a loan officer in the North
American Department of Kleinwort Benson Limited in London, England. He received
his A.B. in Asian Studies from Amherst College in 1979 and a M.Phil. in
Management Studies from Oxford University in 1984. He is the son of Francis J.
Carey and the nephew of William P. Carey.
Samantha K. Garbus, age 29, is a Vice President and Director of Property
Management of W.P. Carey & Co. Ms. Garbus became a Second Vice President of W.P.
Carey & Co. in April 1995 and Vice President in April 1997. Ms. Garbus joined
W.P. Carey & Co. as a Property Management Associate in January 1992. Ms. Garbus
received a B.A. degree in History from Brown University in 1990 and an M.B.A.
from The Stern School of New York University in January 1997.
Susan C. Hyde, age 29, is a Vice President and Director of Investor
Relations of W.P. Carey & Co. Ms. Hyde joined W.P. Carey & Co. in 1990, became a
Second Vice President in April 1995 and Vice President in April 1997. Ms. Hyde
graduated from Villanova University in 1990 where she received a B.S. degree in
Business Administration with a concentration in marketing and a B.A. degree in
English.
Robert C. Kehoe, age 37, a Vice President of W.P. Carey & Co., joined W.P.
Carey & Co. as a Senior Accountant in 1987. Mr. Kehoe became a Second Vice
President of W.P. Carey & Co. in April 1992 and Vice President in July 1997.
Prior to joining W.P. Carey & Co., Mr. Kehoe was associated with Deloitte
Haskins & Sells for three years and was Manager of Financial Controls at CBS
Educational and Professional Publishing
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for two years. Mr. Kehoe received his B.S. degree in Accounting from Manhattan
College in 1982 and his M.B.A. from Pace University in 1993.
Edward V. LaPuma, age 24, is a Vice President and Research Officer for W.P.
Carey & Co. and its Affiliate, Carey Institutional Properties. Mr. LaPuma joined
W.P. Carey & Co. as an Assistant to the Chairman in July 1995, became Second
Vice President in July 1996 and Vice President in April 1997. A graduate of the
University of Pennsylvania, Mr. LaPuma received a B.A. degree in Global Economic
Strategies from The College of Arts and Sciences and a B.S. degree in Economics
with a concentration in Finance from the Wharton School.
DIRECTORS AND PRINCIPAL OFFICERS OF THE MANAGER
The Directors and principal officers of the Manager who will have
responsibility for providing services to the Company are as follows:
NAME OFFICE
- ------------------------------------------------ ----------------------------------------------
William P. Carey................................ Chairman of the Board and Director
Barclay G. Jones, III........................... President and Director
Frank J. Hoenemeyer............................. Vice Chairman of the Investment Committee and
Director
Dr. Lawrence R. Klein........................... Chairman of the Economic Policy Committee and
Director
George E. Stoddard.............................. Chairman of the Investment Committee and
Director
Steven M. Berzin................................ Executive Vice President, Chief Financial
Officer and Director
Gordon F. DuGan................................. Executive Vice President
Claude Fernandez................................ Executive Vice President
H. Augustus Carey............................... Senior Vice President and Secretary
Anthony S. Mohl................................. Senior Vice President -- Property Management
John J. Park.................................... Senior Vice President and Treasurer
Michael D. Roberts.............................. First Vice President and Controller
Gordon J. Whiting............................... First Vice President -- Acquisitions
Information regarding Messrs. W. P. Carey, Jones, Klein, Berzin, DuGan,
Fernandez, Park and H.A. Carey is set forth under "Management -- Directors and
Principal Officers of the Company."
George E. Stoddard, age 80, was until 1979 officer-in-charge of the Direct
Placement Department of The Equitable Life Assurance Society of the United
States ("Equitable") with responsibility for all activities related to
Equitable's portfolio of corporate investments acquired through direct
negotiation. Mr. Stoddard was associated with Equitable for over 30 years. He
holds an A.B. degree from Brigham Young University, an M.B.A. from Harvard
Business School and an LL.B. from Fordham University Law School. Mr. Stoddard
also serves as President and Managing Director of W.P. Carey & Co.
Frank J. Hoenemeyer, age 77, is the former Vice Chairman and Chief
Investment Officer of the Prudential Insurance Company of America, where he was
responsible for Prudential's real estate and securities portfolio, now over $200
billion. Mr. Hoenemeyer was with Prudential of the University of Pennsylvania
for 37 years. He graduated with a B.S. from Xavier University and an M.A. from
the Wharton School.
Anthony S. Mohl, age 35, is a Senior Vice President of W.P. Carey & Co. Mr.
Mohl joined W.P. Carey & Co. as Assistant to the President in September 1987
after receiving an M.B.A. from the Columbia University Graduate School of
Business and became a Second Vice President in January 1990. Mr. Mohl was
employed as an analyst in the strategic planning group of Kurt Salmon Associates
after receiving a B.A. degree in History from Wesleyan University.
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Michael D. Roberts, age 45, First Vice President and Controller of W.P.
Carey & Co., joined W.P. Carey & Co. in April 1989 as a Second Vice President
and Assistant Controller, was named Vice President and Controller in October
1989 and First Vice President in July 1990. From August 1980 to February 1983
and from September 1983 to April 1989, he was employed by Coopers & Lybrand and
held the position of Audit Manager at the time of his departure. A Certified
Public Accountant, Mr. Roberts received a B.A. degree in Sociology from Brandeis
University and an M.B.A. from Northeastern University.
Gordon J. Whiting, age 31, is a First Vice President of W.P. Carey & Co.
Mr. Whiting became a First Vice President of W.P. Carey & Co. in April 1997 and
Vice President in October 1995. Prior to joining W.P. Carey & Co. as a Second
Vice President in September 1994, after Mr. Whiting received an M.B.A. from the
Columbia University Graduate School of Business where he concentrated in
finance, Mr. Whiting founded an import/export Company based in Hong Kong after
receiving a B.S. in Business Management and Marketing from Cornell University.
TERMS OF DIRECTORS OF THE COMPANY
Pursuant to the Organizational Documents, the Board of Directors of the
Company is divided into three classes serving staggered three-year terms. The
terms of the first, second and third classes will expire in 1998, 1999 and 2000,
respectively. The term of Messrs. Berzin, DuGan and Winssinger will expire in
1998; the term of Messrs. F. Carey, Faber and Jones will expire in 1999; and the
term of Messrs. W. Carey, Klein, Townsend and Nickelson will expire in 2000.
Directors for each class will be chosen for a three-year term upon the
expiration of the current class' term beginning in 1998. The staggered terms for
Directors may affect the holder of Listed Shares ability to change control of
the Company, even if a change of control were in the interests of the
Shareholders. An individual who has been elected to fill a vacancy will hold
office only for the unexpired term of the Director being replaced.
The Organizational Documents provide that the number of Directors of the
Company will be fixed by the Board of Directors, but must consist of not fewer
than five nor more than 15 members. One class of Directors will be elected
annually by the affirmative vote of the holders of at least a majority of the
Listed Shares present at a meeting at which a quorum is present. Directors can
be removed from office only by the affirmative vote of the holders of at least a
majority of the Listed Shares. In addition, any vacancy (other than a vacancy
created by an increase in the number of Directors) may be filled, at any regular
meeting or at any special meeting of the Directors called for that purpose, by
the affirmative vote of a majority of the remaining Directors, though less than
a quorum. A vacancy created by an increase in the number of Directors shall be
filled by a majority of the entire Board of Directors. Accordingly, the Board of
Directors could temporarily prevent any holder of Listed Shares from enlarging
the Board of Directors and filling the new Directorships with such holders' own
nominees.
The Board of Directors expects to hold meetings at least quarterly and may
take action on behalf of the Company by unanimous written consent without a
meeting. Directors may participate in meetings by conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other.
COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMPANY
Executive Committee. The Executive Committee may authorize the execution
of contracts and agreements, including those related to the borrowing of money
by the Company. The Executive Committee will exercise, during intervals between
meetings of the Board of Directors and subject to certain limitations, all of
the powers of the full Board of Directors and will monitor and advise the Board
of Directors on strategic business planning for the Company.
Audit Committee. Promptly following the consummation of the Consolidation,
the Board of Directors will establish an audit committee that will consist of
two or more Independent Directors (the "Audit Committee"). (For purposes of the
Company's operations, the term "independent" as applied to a Director means a
person who (i) is not an officer of the Company and (ii) is, in the view of the
Company's Board of Directors, free of any relationship that would interfere with
the exercise of independent judgment.) The Audit
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Committee will be established to make recommendations concerning the engagement
of independent public accountants, review with the independent public
accountants the plans and results of the audit engagement, approve professional
services provided by the independent public accountants, review the independence
of the independent public accountants, consider the range of audit and non-audit
fees and review the adequacy of the Company's internal accounting controls.
The membership of the Committees of the Board of Directors will be
established after the Consolidation.
COMPENSATION OF THE BOARD OF DIRECTORS
The Company intends to pay its Directors who are not officers of the
Company fees for their services as Directors. Such Directors will receive annual
compensation of $35,000. Initially, compensation will be paid in the form of
restricted Listed Shares and options to purchase Listed Shares. This
compensation may be changed by the Board of Directors. Officers or employees of
the Company or Manager who are Directors will not be paid any director fees.
EXECUTIVE COMPENSATION
The Company was organized as a Delaware limited liability company in
October 1996 and will pay no compensation until the Consolidation is completed.
The following table sets forth the base compensation to be awarded to Francis J.
Carey, the Company's Chief Executive Officer on an annualized basis during 1997.
SUMMARY COMPENSATION TABLE
ANNUAL LONG TERM COMPENSATION
SALARY(1) AWARDS & OPTIONS(2)
--------- ----------------------
Francis J. Carey............................................ $ 250,000 121,000
Chairman & Chief Executive Officer
- ---------------
(1) Amount specified is an annualized projection for fiscal year 1997, which
ends December 31, 1997. It does not include bonuses that may be paid.
(2) Upon the effective date of the Consolidation, Mr. Carey will receive options
to purchase 38,500 Listed Shares at $20 per share and a grant of 7,500
Listed Shares as part of his annual compensation. The transferability of the
Listed Shares will be restricted. Mr. Carey will also receive a one-time
grant of options to purchase 75,000 Listed Shares at $20 per Listed Share.
OPTION GRANT IN FISCAL YEAR 1997(1)
POTENTIAL REALIZABLE
VALUE
PERCENT OF AT ASSUMED ANNUAL RATE OF
TOTAL OPTIONS SHARE PRICE APPRECIATION
GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYERS IN PRICE PER EXPIRATION -------------------------
GRANTED(1) FISCAL YEAR SHARE DATE 5% 10%
---------- ------------- --------- ---------- ---------- ----------
Francis J. Carey... 113,500 100% $20 * $1,427,591 $3,617,795
- ---------------
* Expiration Date will be 10 years from the date of grant, which will be the
date the Consolidation is completed.
(1) The options will become exercisable for one-third of the covered shares on
each of the first, second and third anniversary of the date of grant.
1997 LISTED SHARE INCENTIVE PLAN
Prior to the Offering, the Board of Directors will adopt, and the initial
shareholders of the Company will approve, the 1997 Plan for the purpose of
attracting and retaining executive officers, Directors and employees. The 1997
Plan will be administered by the Compensation Committee of the Board of
Directors or its delegate. The Compensation Committee may not delegate its
authority with respect to grants and awards to individuals subject to Section 16
of the Exchange Act. As used in this summary, the term "Administrator" means the
Compensation Committee or its delegate, as appropriate.
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Officers and other employees of the Company and its Affiliates generally
will be eligible to participate in the 1997 Plan. The Administrator selects the
individuals who will participate in the 1997 Plan ("Participants").
The 1997 Plan authorizes the issuance of up to 700,000 Listed Shares. The
Plan provides for the grant of (i) share options which may or may not qualify as
incentive stock options under Section 422 of the Code, (ii) performance shares,
(iii) dividend equivalent rights ("DERs"), issued alone or in tandem with
options, and (iv) restricted shares, which are contingent upon the attainment of
performance goals or subject to vesting requirements or other restrictions. The
Administrator shall prescribe the conditions which must occur for restricted
shares or performance shares to vest and incentive awards to be earned.
In connection with the grant of options under the 1997 Plan, the
Administrator will determine the option exercise period and any vesting
requirements. The initial options granted under the Plan will have 10-year terms
and will become exercisable for one-third of the covered shares (disregarding
fractional shares, if any) on the first and second anniversaries of the date of
grant and, for the balance of the shares, on the third anniversary of the date
of grant subject to acceleration of vesting upon a change in control of the
Company (as defined in the 1997 Plan). An option may be exercised for any number
of whole shares less than the full number for which the option could be
exercised. A Participant will have no rights as a shareholder with respect to
Listed Shares subject to his or her option until the option is exercised. If a
Participant is terminated due to dishonesty or similar reasons, all unexercised
options, whether vested or unvested, will be forfeited. Any Listed Shares
subject to options which are forfeited (or expire without exercise) pursuant to
the vesting requirement or other terms established at the time of grant will
again be available for grant under the 1997 Plan. The exercise price of options
granted under the 1997 Plan may not be less than the fair market value of the
Listed Shares on the date of grant. Payment of the exercise price of an option
granted under the 1997 Plan may be made in cash, cash equivalents acceptable to
the Compensation Committee or, if permitted by the option agreement, by
exchanging Common Shares having a fair market value equal to the option exercise
price.
On the effective date of the Offering, options for 113,500 Listed Shares
and 7,500 restricted Listed Shares will be granted to the sole employee of the
Company. The options will have an exercise price equal to $20 per Listed Share.
No option, DER, restricted Listed Shares or performance shares may be
granted under the 1997 Plan after December 31, 2006. The Board may amend or
terminate the 1997 Plan at any time, but an amendment will not become effective
without shareholder approval if the amendment materially (i) increases the
number of shares that may be issued under the 1997 Plan (other than an
adjustment or automatic increase described above), (ii) changes the eligibility
requirements or (iii) increases the benefits that may be provided under the 1997
Plan. No amendment will affect a Participant's outstanding award without the
Participant's consent.
INCENTIVE COMPENSATION
The Company may award incentive compensation to employees of the Company
and its subsidiaries, including incentive awards under the 1997 Plan that may be
earned on the attainment of performance objectives stated with respect to
criteria described above or other performance-related criteria. The Compensation
Committee may, in its discretion, approve bonuses to executive officers and
certain other officers and key employees if the Company achieves Company-wide,
regional and/or business unit performance objectives determined by it each year.
THE NON-EMPLOYEE DIRECTOR PLAN
Prior to the issuance of the Listed Shares, the Board of Directors will
also adopt, and the Company's shareholders will approve, the Non-Employee
Directors' Plan to provide incentives to attract and retain Independent
Directors.
The Directors' Plan provides for the grant of options and the award of
Listed Shares to each eligible Director of the Company. No Director who is an
employee of the Company or an employee of the Manager is eligible to participate
in the Non-Employee Directors' Plan.
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The Directors' Plan provides that each Independent Director who is a member
of the Board of Directors on the first day of trading of the Listed Shares will
be granted an option to purchase 4,000 Listed Shares at an exercise price of $20
per Listed Share and 1,250 Listed Shares. The exercise price of options granted
under the Directors' Plan may be paid in cash, acceptable cash equivalents,
Listed Shares or a combination thereof. Options issued under the Directors' Plan
are exercisable for ten years from the date of grant.
The option granted under the Directors' Plan shall become exercisable for
1,333 Listed Shares on each of the first and second anniversaries of the date of
grant and for 1,334 Listed Shares on the third anniversary of the date of grant
provided that Trustee is a member of the Board of Directors on such anniversary
date. To the extent an option has become exercisable under the Directors' Plan,
it may be exercised whether or not the Trustee is a member of the Board on the
date or dates of exercise. An option may be exercised for any number of whole
shares less than the full number of which the option could be exercised. A
Trustee will have no rights as a Shareholder with respect to Listed Shares
subject to his or her option, until the option is exercised.
In subsequent annual periods, each Independent Director may also receive
quarterly an award of options to purchase Listed Shares or Restricted Listed
Shares. Awards will be made on each April 1, July 1, October 1 and January 1
(each date, a "Quarterly Award Date") during the term of the Directors' Plan.
Each Independent Director may receive, on each Quarterly Award Date on which he
is a member of the Board of Directors, the number of options to purchase Listed
Shares or restricted Listed Shares having a fair market value on that date that
as nearly as possible equals, but does not exceed $6,250. Restrictions on the
exercisability of the options shall lapse or vest over a three year period. The
transfer of Listed Shares granted to Directors may be restricted, and the
restriction will lapse as specified at the time of the grant.
The terms of outstanding options, the number of Listed Shares for which
options will thereafter be awarded and the number of Listed Shares to be awarded
on a Quarterly Award Date shall be subject to adjustment in the event of a share
dividend, share split, combination, reclassification, recapitalization or other
similar event.
The Directors' Plan provides that the Board of Directors may amend or
terminate the Directors' Plan, but the Directors' Plan may not be amended more
than once every six months, other than to comply with changes in the Code, the
Employee Retirement Income Security Act of 1974 or the rules thereunder. An
amendment will not become effective without shareholder approval if the
amendment materially changes the eligibility requirements or increases the
benefits that may be provided under the Directors' Plan. No options for Listed
Shares may be granted, and no Listed Shares may be awarded under the Directors'
Plan after December 31, 2003.
THE MANAGER
Carey Management LLC, the Manager, will serve as the manager of the
Company. The Manager is a limited liability company and its members are W.P.
Carey & Co., CCP, Seventh Carey, Eighth Carey and Ninth Carey. The Company has
entered into a management agreement with the Manager (the "Management
Agreement") pursuant to which the Manager will manage the Company's day-to-day
affairs. This will include the purchase and disposition of Company investments
and the management of the properties owned by the Company. The Manager and its
Affiliates will receive certain fees and compensation pursuant to the Management
Agreement. See "COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL
PARTNERS AND MANAGER."
SHAREHOLDINGS
Upon consummation of the Consolidation, the Manager will own 661,718 Listed
Shares, which constitutes approximately 3% of the outstanding Listed Shares as
of such date (assuming 100% Partnership Participation). Furthermore, any resale
of the 661,718 Listed Shares that the Manager will own and the resale of any
Shares which may be acquired by Affiliates of the Company are subject to the
provisions of Rule 144 promulgated under the Securities Act, which limits the
number of Shares that may be sold at any one time and the manner of such resale.
Although the Manager is not prohibited from acquiring additional Listed
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Shares. There is no limitation on the ability of the Manager or its Affiliates
to resell any Shares they may acquire in the future.
In addition, upon completion of the Consolidation, the Manager will receive
Warrants to purchase 2,284,800 Listed Shares at $21 per Listed Share and 725,930
Listed Shares at $23 per Listed Share.
MANAGEMENT DECISIONS
The primary responsibility for the selection of Company investments and the
negotiation for such investments will reside in Francis J. Carey, Chairman and
Chief Executive Officer of the Company and Steven M. Berzin, William P. Carey,
Gordon F. DuGan, Barclay G. Jones III and George E. Stoddard, all of whom are
officers or Directors of the Manager. Each potential Company investment will be
submitted for review to the Investment Committee. George E. Stoddard, Chairman,
Frank J. Hoenemeyer and Lawrence R. Klein currently serve as members of the
Investment Committee. The Board of Directors of the Manager has empowered the
Investment Committee to authorize and approve Company investments on behalf of
the Manager. However, the Board of Directors of the Manager retains ultimate
authority to authorize and approve Company investments on behalf of the Manager
and may make such investments on behalf of the Company without the approval of,
and irrespective of any adverse recommendation by, the Investment Committee or
any other Person, except the Board of Directors of the Company.
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS OF THE COMPANY
Pursuant to the Organizational Documents, no Directors or officers of the
Company will be liable, responsible or accountable in damages or otherwise to
the Company or any of the Shareholders for any act or omission performed or
omitted by such Director or officer, except in the case of fraudulent or illegal
conduct of such person.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
According to the Organizational Documents, all Directors and officers of
the Company are entitled to indemnification from the Company. See "FIDUCIARY
RESPONSIBILITY AND INDEMNIFICATION -- Indemnification of Directors and Officers
of the Company."
MANAGEMENT SERVICES PROVIDED BY MANAGER
The Manager will provide both strategic and day-to-day management for the
Company, including acquisition services, research, investment analysis, asset
management, capital funding services, disposition of assets and administrative
services. The Manager will also provide office and other facilities for the
Company's needs. Through the Manager and its Affiliates, the Company will
function as a fully integrated operating company.
The Board has authorized the Manager to make investments in any property on
behalf of the Company. Certain types of transactions, however, require the prior
approval of the Board and a majority of the Independent Directors, including the
following: (i) the allocation of interests in investments made through joint
venture arrangements with Affiliates of the Manager that are public companies,
(ii) the terms of any investment made with the Manager or any affiliate of the
Manager that is not a public company, (iii) transactions that present issues
which involve conflicts of interest for the Manager (other than conflicts
involving the payment of fees or the reimbursement of expenses or joint
investments) and (iv) the lease of assets to the Manager, any Director or an
Affiliate of the Manager.
The Company will reimburse the Manager for all of the costs that it incurs
in connection with the services it provides to the Company, including, but not
limited to: (i) expenses attributable to the Consolidation (including but not
limited to, advertising expenses, expense reimbursement, counsel and accounting
fees), (ii) the cost of goods and services used by the Company and obtained from
entities not affiliated with the Manager, including brokerage fees paid in
connection with the purchase and sale of securities, (iii) administrative
services (including personnel costs, provided, however that no reimbursement
shall be made for costs of personnel to the extent that such personnel are used
in transactions for which the Manager
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receives a separate transactional fee), (iv) rent, depreciation, leasehold
improvement costs, utilities or other administrative items and (v) Acquisition
Expenses, which are defined to include expenses related to the selection and
acquisition of Properties.
The term of the Management Agreement ends on December 31, 1998 and
thereafter will be automatically renewed for successive one-year periods, unless
either party shall give the other party notice of non-renewal not less than 60
days before the end of any such period. Additionally, the Management Agreement
may be terminated (a) immediately by the Company for "Cause" or upon the
bankruptcy of the Manager or a material breach of the Management Agreement by
the Manager or (b) immediately with "Good Reason" by the Manager. "Good Reason"
is defined in the Management Agreement to mean either (i) any failure to obtain
a satisfactory agreement from any successor to the Company to assume and agree
to perform the Company's obligations under the Management Agreement or (ii) any
material breach of the Management Agreement of any nature whatsoever by the
Company. "Cause" is defined in the Management Agreement to mean fraud, criminal
conduct, willful misconduct or willful or negligent breach of fiduciary duty by
the Manager or a breach of the Management Agreement by the Manager.
Following the termination of the Management Agreement by the Company, the
Manager shall be entitled to receive payment of any earned, but unpaid,
compensation and expense reimbursements accrued as of such date and an incentive
fee based on the appraised value of the properties owned by the CPA(R)
Partnership. If the Management Agreement is terminated (i) in connection with a
Change of Control of the Company, (ii) by the Company for any reason other than
Cause or (iii) by the Manager for Good Reason, the Manager also shall be
entitled to the payment of the Termination Fee. The Manager shall be entitled to
receive all accrued, but unpaid, compensation and expense reimbursements and the
Termination Fee in cash within 30 days of the effective date of the termination.
The Manager and its Affiliates expect to engage in other business ventures,
and, as such, their resources will not be dedicated exclusively to the business
of the Company. However, pursuant to the Management Agreement, the Manager must
devote sufficient resources to the administration of the Company to discharge
its obligations. The Management Agreement is not assignable or transferable by
either party without the consent of the other party, except that the Manager may
assign the Management Agreement to an Affiliate that has a net worth of
$3,000,000 or more or for whom the Manager agrees to guarantee its obligations
to the Company, and either the Manager or the Company may assign or transfer the
Management Agreement to a successor entity.
The Manager or its Affiliates will be paid certain fees in connection with
services provided to the Company. In the event the Management Agreement is not
renewed by the Company or is terminated without Cause by the Company or with
Good Reason by the Manager, the Manager will be paid all accrued and unpaid fees
and expense reimbursements and, in certain circumstances, will also be paid a
Termination Fee. The Company will not reimburse the Manager or its Affiliates
for services for which the Manager or its Affiliates are entitled to
compensation in the form of a separate fee. See "COMPENSATION, REIMBURSEMENT AND
DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER."
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SECONDARY MARKET AND OWNERSHIP OF CPA(R) PARTNERSHIP UNITS
SALE PRICES OF UNITS
The Units are not listed on any national or regional securities exchange or
quoted on the Nasdaq System, and there is no established public trading market
for the Units. Secondary sales activity for the Units has been limited and
sporadic. The General Partners monitor transfers of the Units (a) because the
admission of the transferee as a substitute investor requires the consent of the
General Partners under each of the Partnership Agreements and (b) in order to
track compliance with safe harbor provisions to avoid treatment of the CPA(R)
Partnerships as "publicly traded partnerships" for federal income tax purposes.
Set forth in the table that follows is certain information regarding
transactions in the Units. Such information was obtained from the sources
indicated. The transactions reflected in the tables below represent only some of
the transactions in the Units. There have been other secondary transactions in
the Units, although specific information regarding such transactions is not
readily available to the General Partners. Because the information regarding
transactions in the Units included in the tables below is provided without
verification by the General Partners and because the information provided does
not reflect sufficient activity to cause the prices shown to be representative
of the values of the Units, such information should not be relied upon as
indicative of the ability of Unitholders to sell their Units in secondary
transactions or as to the prices at which such Units may be sold. Therefore, the
information presented should not necessary be relied upon by Unitholders in
determining whether or not to vote in favor of the Consolidation.
The General Partners do not believe that the secondary sale prices of the
Units accurately reflect the value of the assets of the CPA(R) Partnerships,
because secondary sale prices are adversely affected by a variety of factors
unrelated to the value of the assets of a CPA(R) Partnership. Units are
generally traded on a sporadic basis. Sale prices can vary dramatically based on
the number of Units sold at one or over time. Additionally, the Tax Reform Act
of 1986 contained provisions which eliminated certain federal income tax
advantages associated with investments in limited partnerships and which caused
limited partnerships to place restrictions on transfers of interests in order to
avoid taxation of income at the partnership and partner levels. Accordingly,
limited partnerships have not been well received by investors and secondary sale
prices have been adversely affected.
While the General Partners receive some information regarding the prices of
secondary transactions in the Units, the General Partners do not receive or
maintain comprehensive information regarding all activities of all
broker/dealers and others known to facilitate secondary sales of the Units. The
General Partners estimate, based solely on the transfer records of the CPA(R)
Partnership, that the number of Units transferred in sale transactions (i.e.,
excluding transactions believed to be between related parties, family members or
the same beneficial owner) were as follows:
SECONDARY MARKET PARTNERSHIP NET UNIT PRICES
FROM JANUARY 1, 1997 THROUGH SEPTEMBER 30, 1997
AS TRACKED BY THE GENERAL PARTNER
WEIGHTED NUMBER OF DOLLAR VALUE
UNIT UNITS OF TRADES
SALES PRICE HIGH LOW TRADED TRACKED
----------- ---- ---- --------- ------------
CPA(R):1............................................. $ 362 $390 $292 815 $ 407,500
CPA(R):2............................................. 331 360 265 734 99,090
CPA(R):3............................................. 468 525 408 675 168,750
CPA(R):4............................................. 438 475 372 641 275,630
CPA(R):5............................................. 279 329 260 1,261 596,453
CPA(R):6............................................. 896 936 855 1,280 1,280,000
CPA(R):7............................................. 737 802 510 692 588,200
CPA(R):8............................................. 906 953 600 2,228 2,228,000
CPA(R):9............................................. 747 920 600 1,258 1,258,000
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Units as of June 30, 1997 by each director and executive officer of
each General Partner and by all Directors and executive officers of the Managing
General Partner and the Company as a group, and, upon consummation of the
Consolidation, the Listed Share ownership of such officers and Directors. The
business address of the individuals listed is 50 Rockefeller Plaza, New York, NY
10020.
CPA(R):1 CPA(R):2 CPA(R):3 CPA(R):4 CPA(R):5 CPA(R):6
---------------- ---------------- ---------------- ---------------- ---------------- --------
LISTED LISTED LISTED LISTED LISTED
UNITS SHARES(1) UNITS SHARES(1) UNITS SHARES(1) UNITS SHARES(1) UNITS SHARES(1) UNITS
----- --------- ----- --------- ----- --------- ----- --------- ----- --------- -----
W.P. Carey.............. 205 5,289(4) 210 5,767(5) 211 7,955(6) 205 6,792(7) 210 3,786(8) 105
F.J. Carey.............. -- -- -- -- -- -- 10 331 -- -- 25
S. M. Berzin(10)........ -- -- -- -- -- -- -- -- -- -- --
G.F. DuGan(10).......... -- -- -- -- -- -- -- -- -- -- --
E. Faber................ -- -- -- -- -- -- -- -- -- -- --
B.G. Jones(10).......... 4 103 -- -- -- -- -- -- -- -- --
L.R. Klein.............. -- -- -- -- -- -- -- -- -- -- --
D.E. Nickelson.......... -- -- 28 769 -- -- -- -- -- -- --
C.C. Townsend Jr........ -- -- -- -- -- -- -- -- -- -- --
R. Winssinger........... -- -- -- -- -- -- -- -- -- -- --
All Directors & officers
as a group ( members).. 209 5,392 258 7,085 253 9,538 215 7,123 210 3,786 150
TOTAL LISTED
SHARES
CPA(R):6 CPA(R):7 CPA(R):8 CPA(R):9 BENEFICIALLY
---------- ---------------- ---------------- ---------------- OWNED AFTER THE
LISTED LISTED LISTED LISTED THE CONSOLIDATION
SHARES(1) UNITS SHARES(1) UNITS SHARES(1) UNITS SHARES(1) COMPANY (2)(3)
--------- ----- --------- ----- --------- ----- --------- ------- ---------------
<
W.P. Carey.............. 7,141(9) 110 6,047(10) 108 7,530(11) 108 5,671(12) 733,134(13) 793,956
F.J. Carey.............. 1,700 13 715 15 1,046 15 788 7,500 12,080
S. M. Berzin(10)........ -- -- -- -- -- -- -- -- --
G.F. DuGan(10).......... -- -- -- -- -- -- -- -- --
E. Faber................ -- -- -- -- -- -- -- 1,250 1,250
B.G. Jones(10).......... -- 4 220 -- -- -- -- -- 323
L.R. Klein.............. -- -- -- -- -- -- -- 1,250 1,250
D.E. Nickelson.......... -- 70 3,848 15 1,046 24 1,260 1,250 8,173
C.C. Townsend Jr........ -- -- -- -- -- -- -- 1,250 1,250
R. Winssinger........... -- -- -- -- -- -- -- 1,250 1,250
All Directors & officers
as a group ( members).. 9,473 222 12,204 158 11,016 164 8,719 751,778 826,186
- ---------------
(1) Listed Share numbers represent the number of Listed Shares each would
receive after the Consolidation when the Units are converted to Listed
Shares. Conversion rates can be found on page 12 of this Consent
Solicitation/Prospectus.
(2) Unless otherwise indicated, each person has sole voting and investment
power with respect to all Units and Listed Shares owned by such person.
(3) Assuming that all CPA(R) Partnerships participate in the Consolidation.
(4) Of these amounts, 5,026 Listed Shares are owned by W.P. Carey & Co., a
corporation in which Mr. W.P. Carey owns a majority of the outstanding
shares.
(5) Of these amounts, 5,208 Listed Shares are owned by W.P. Carey & Co., a
corporation in which Mr. W.P. Carey owns a majority of the outstanding
shares.
(6) Of these amounts 7,121 Listed Shares are owned by W.P. Carey & Co., a
corporation in which Mr. W.P. Carey owns a majority of the outstanding
shares.
(7) Of these amounts, 6,462 Listed Shares are owned by CCP, a corporation in
which Mr. W.P. Carey owns a majority of the outstanding shares.
(8) Of these amounts, 3,419 Listed Shares are owned by CCP, a corporation in
which Mr. W.P. Carey owns a majority of the outstanding shares.
(9) Of these amounts 6,796 Listed Shares are owned by CCP, a corporation in
which Mr. W.P. Carey owns a majority of the outstanding shares.
(10) Of these amounts 5,238 Listed Shares are owned by Seventh Carey, a
corporation in which Mr. W.P. Carey owns a majority of the outstanding
shares.
(11) Of these amounts, 6,827 Listed Shares are owned by Eighth Carey, a
corporation in which Mr. W.P. Carey owns a majority of the outstanding
shares.
(12) Of these amounts, 5,103 Listed Shares are owned by Ninth Carey, a
corporation in which Mr. W.P. Carey owns a majority of the outstanding
shares.
(13) Of this amount, 661,718 Listed Shares will be owned by the Manager, a
limited liability company in which Mr. W.P. Carey owns a majority of the
interests.
(14) Messrs. Berzin, DuGan & Jones own an interest in the Listed Shares owned by
the Manager, W.P. Carey & Co. and its Affiliates through the W.P. Carey &
Co. Partnership Equity Plan.
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No person or group is known by the General Partners to be the beneficial
owner of more than 5% of the outstanding Units of any CPA(R) Partnership at June
30, 1997.
There exists no arrangement known to the CPA(R) Partnerships, the operation
of which may at a subsequent date result in a change of control of the
Partnerships.
DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS
The following summary of certain provisions of the Organizational Documents
does not purport to be complete. Reference is made to the full text of the
Organizational Documents for their entire terms. See "COMPARISON OF UNITS,
LISTED SHARES AND SUBSIDIARY PARTNERSHIP UNITS" for additional information about
the Listed Shares and the Subsidiary Partnership Units.
LISTED SHARES
In the Consolidation, the Listed Shares will not be issued in series.
Accordingly, the holders of Units of all nine CPA(R) Partnerships who acquire
Listed Shares in the Consolidation will receive identical Listed Shares. The
holders of the Listed Shares will bear the expenses of the formation of the
Company and the Consolidation. The performance of, and distributions with
respect to, the Listed Shares will be based upon the performance of the entire
portfolio of the Company's assets.
The Company will pay distributions to holders of the Listed Shares when
declared by its Board of Directors out of funds legally available therefor.
While the initial policy of the Company will be to make quarterly distributions
to the holders of Listed Shares, the level and timing of distributions will
depend on, among other things, the cash flow and earnings of the Company, its
financial condition, debt covenants, reinvestment policies and such other
factors as the Board of Directors deems relevant. Distributions to the holders
of Listed Shares may be subject to preferences on distributions on securities
which may be issued by the Company in the future. The Company does not intend to
distribute to the holders of Listed Shares net cash receipts from sales or
refinancings of assets, but, instead, to retain such funds to make new
investments or for other purposes, taking into account the income tax impact, if
any, of reinvesting such proceeds rather than distributing them. These policies
are within the discretion of the Board of Directors and may be changed from time
to time. It is expected that the Board of Directors, in setting the level of the
distributions to the holders of Listed Shares, will take into account, among
other things, the Company's financial performance, need of funds for working
capital reserves, capital improvements, tax consequences to holders of Listed
Shares and new investment opportunities. See "DISTRIBUTION POLICY."
The Listed Shares are not redeemable, except pursuant to certain
anti-takeover provisions adopted by the Company. See "Restricting Changes in
Control and Business Combination Provisions."
Upon the liquidation of the Company, the holders of Listed Shares will be
entitled to share ratably in any assets remaining after satisfaction of
obligations to creditors, payment of expenses and any liquidation preferences on
any Shares that may then be outstanding. Therefore, holders of Listed Shares
will be entitled to a distribution based proportionately on their ownership of
the Company.
Any matter submitted to the holders of Listed Shares generally requires the
affirmative vote of holders of a majority of the Listed Shares for approval.
There are no cumulative voting rights with respect to the election of Directors.
Listed Shareholders have voting rights with respect to (i) the election and
removal of Directors, (ii) the sale or disposition of all or substantially all
of the assets of the Company at any one time (other than sales or dispositions,
the proceeds of which are needed to redeem the Partnership Shares), (iii) the
merger or consolidation of the Company (where the Company is not the surviving
entity), (iv) the dissolution of the Company and (v) certain anti-takeover
provisions. The holders of Listed Shares will be entitled to one vote for each
Listed Share owned. Any action that may be taken at a meeting may be taken by
written consent in lieu of a meeting executed by holders of Shares sufficient to
authorize such action at a meeting. At any meeting, a holder of Listed Shares
may vote in person, by written proxy or by a signed writing directing the
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manner in which his vote should be cast. Proxies are revocable at the pleasure
of the holder of Listed Shares executing it.
No holders of any Listed Shares have any preemptive rights or any rights to
convert their Listed Shares into any other securities of the Company. Since a
public market for the Listed Shares is a condition to the consummation of the
Consolidation, the Company has applied for listing of the Listed Shares on the
NYSE.
SUBSIDIARY PARTNERSHIP UNITS
The Subsidiary Partnership Units have been structured so that their
economic interests and legal rights are substantially the same as the terms and
conditions of the Units. A series of Subsidiary Partnership Units will be issued
by each of the Subsidiary Partnerships to correspond with the nine CPA(R)
Partnerships. A Subsidiary Partnership Unit will represent a direct ownership
interest in a Subsidiary Partnership as a limited partner. The performance of,
and distributions with respect to, each series of Subsidiary Partnership Units
will be based solely upon the performance of the Subsidiary Partnership that
issued such series. Thus, the performance of, and the distributions to the
holders with respect to, each series of Subsidiary Partnership Units will be
measured by reference to the performance of the CPA(R) Partnership relating to
that series as they existed prior to the Consolidation. See "DISTRIBUTION
POLICY."
A liquidating distribution will be made with respect to a series of
Subsidiary Partnership Units in the following situations: (i) sale of a Property
which is owned by a Subsidiary Partnership (which does not include the pledge of
a Property in connection with the leveraging of such Property) or (ii) as soon
as practicable after appraisals are performed on the CPA(R) Partnerships'
properties no later than the dates listed below.
CPA(R) APPRAISAL DATE
------------------------------------------------- ------------------
CPA(R):1......................................... December 31, 1998
CPA(R):2......................................... December 31, 1998
CPA(R):3......................................... December 31, 1998
CPA(R):4......................................... December 31, 1998
CPA(R):5......................................... December 31, 2001
CPA(R):6......................................... December 31, 2001
CPA(R):7......................................... December 31, 2001
CPA(R):8......................................... December 31, 2002
CPA(R):9......................................... December 31, 2002
The above provision providing for a partial liquidation upon the sale of a
Property and the redemption of the Subsidiary Partnership Units is designed to
be consistent with the expectations of a Unitholder that the liquidation of the
CPA(R) Partnerships would begin no later than a certain date. Such expectation
results from a provision in each of the Partnership Agreements. Thus, that
provision essentially tracks the Partnership Agreement provisions.
Upon the liquidation of a Subsidiary Partnership, after satisfaction of all
of the Subsidiary Partnership's creditors, the holders of each series of
Subsidiary Partnership Units will be entitled to receive out of the assets of
the Subsidiary Partnerships available for distribution therefor, an amount in
cash or in kind equal to the total appraised value on such date of all assets of
the Subsidiary Partnership to the extent such Subsidiary Partnership has not yet
been the subject of a redemption event, minus the related selling expenses which
would be incurred in such a sale (based on local conditions existing at the
time). After payment of the full amount of the liquidation distributions to
which they are entitled, the holders of the Subsidiary Partnership Units will
not be entitled to any further participation in any distribution of assets of
the Company.
The holders of Subsidiary Partnership Units have voting rights with respect
to the following matters relating to the Subsidiary Partnership in which they
own Units: (i) removal of any General Partner and (ii) the sale or all or
substantially all of the assets of the Subsidiary Partnership (except for sales
made in connection with the liquidation of the Subsidiary Partnership). Holders
of each class of Subsidiary Partnership Units will be entitled to the same
percentage vote as they would have been entitled to as Limited Partners on
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matters relating to the CPA(R) Partnership in which they own Units. The
remaining percentage vote will be cast by the Company, which is expected to own
the Subsidiary Partnership Units not owned by Unitholders.
Any action that may be taken at a meeting may be taken by written consent
in lieu of a meeting executed by holders of Subsidiary Partnership Units
sufficient to authorize such action at a meeting. At any meeting, a holder of
Subsidiary Partnership Units may vote in person, by written proxy or by a signed
writing directing the manner in which his vote should be cast. Proxies are
revocable at the pleasure of the holder of Subsidiary Partnership Units
executing it.
Each Subsidiary Partnership is prohibited from issuing any equity
securities without the approval of the holders of the Subsidiary Partnership
Units as long as the Subsidiary Partnership Units are outstanding. No holders of
any Subsidiary Partnership Units have any preemptive rights or any rights to
convert their Subsidiary Partnership Units into any securities of the Company.
The Subsidiary Partnership Units will not be listed on any national
securities exchange and will not be listed on the Nasdaq National Market, and no
public market for the Subsidiary Partnership Units is expected to develop.
RESTRICTING CHANGES IN CONTROL AND BUSINESS COMBINATION PROVISIONS
Certain provisions of the Organizational Documents and the Shareholder
Rights Plan could make more difficult a change of control of the Company by
means of a tender offer, a proxy contest or otherwise. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and management and in the
policies formulated by the Board of Directors and to discourage an unsolicited
takeover of the Company, if the Board of Directors determines that such takeover
is not in the best interests of the Company and its Shareholders. However, these
provisions could have the effect of discouraging certain attempts to acquire the
Company or remove incumbent management, even if some or a majority of
Shareholders deemed such an attempt to be in their best interests.
Additional Classes and Series of Shares. The Organizational Documents of
the Company authorize the Board of Directors (subject to certain restrictions)
to provide for the issuance of Shares in other classes or series, to establish
the number of Shares in each class or series and to fix the preference,
conversion and other rights, voting powers, restrictions, limitations as to
distributions, qualifications or terms or conditions of redemption of such class
or series. The Company believes that the ability of the Board of Directors to
issue one or more classes or series will provide the Company with increased
flexibility in structuring possible future financing and acquisitions and in
meeting other needs which might arise. The additional classes or series, as well
as the Listed Shares and Partnership Shares, will be available for issuance
without further action by the Company's Shareholders, unless such action is
required by applicable law or the rules of any stock exchange or automated
quotation system on which the Company's securities may be listed or traded.
Although the Board of Directors has no intention at the present time of doing
so, it could issue a class or series that could, depending on the terms of such
class or series, impede a merger, tender offer or other transaction that some or
a majority of the Shareholders might believe to be in their best interests or in
which the Shareholders might receive a premium for their Shares over the then
current market price of such Shares.
Staggered Board of Directors. Pursuant to the Organizational Documents,
the Board of Directors of the Company is divided into three classes, serving
staggered three-year terms. See "MANAGEMENT." The terms of the first, second and
third classes will expire in 1998, 1999 and 2000, respectively. Directors for
each class will be chosen for a three-year term upon the expiration of the
current class's term, beginning in 1998. The staggered terms for Directors may
affect the Company's Shareholders' ability to change control of the Company even
if a change of control were in the interests of the Shareholders. An individual
who has been elected to fill a vacancy will hold office only for the unexpired
term of the Director he is replacing.
Number of Directors; Removal; Filling Vacancies. The Organizational
Documents provide that the number of Directors of the Company will be fixed by
the Board of Directors, but must consist of not fewer than five nor more than 15
Directors. After consummation of the Consolidation, the Board will consist of 11
Directors. One class of Directors will be elected annually by the affirmative
vote of the holders of at least a
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majority of the then-outstanding Listed Shares present at a meeting at which a
quorum is present. Directors can be removed from office only by the affirmative
vote of the holders of at least a majority of the then-outstanding Listed
Shares. In addition, any vacancy (other than a vacancy created by an increase in
the number of Directors) may be filled, at any regular meeting or at any special
meeting of the Directors called for that purpose, by the affirmative vote of a
majority of the remaining Directors, though less than a quorum. A vacancy
created by an increase in the number of Directors shall be filled by a majority
of the entire Board of Directors.
Business Combination Provisions. The Organizational Documents of the
Company contain certain business combination provisions (the "Business
Combination Provisions"). The Business Combination Provisions, in general,
provide that the transactions described in paragraphs (i) through (vi) below
(each, a "Business Combination") involving an Interested Party (as defined
below) are not permitted earlier than five years following the most recent date
on which an Interested Party became an Interested Party (the "Five-Year Tolling
Period"), unless either (A) the Business Combination or the transaction which
resulted in the Interested Party becoming an Interested Party is approved by the
Board of Directors prior to the most recent date on which the Interested Party
became an Interested Party (the "Determination Date") or (B) on or subsequent to
the Determination Date, but before the expiration of the Five-Year Tolling
Period, the transaction is approved by two-thirds of the Board of Directors and
two-thirds in interest of the Listed Shareholders other than the Interested
Party.
In addition, the Business Combination Provisions provide that, following
the Five-Year Tolling Period, unless the Business Combination was approved by
the Board of Directors prior to the Determination Date, or the minimum price
criteria and procedural requirements described in paragraphs (a) and (b) below
have been met (collectively, the "Fair Price and Procedural Requirements"), a
Business Combination is permitted only if the Business Combination is
recommended to the Shareholders by the Board of Directors and then approved by
(i) 80% in interest of the Listed Shareholders and (ii) two-thirds in interest
of the Listed Shareholders other than the Interested Party (the voting
requirements of clauses (i) and (ii) to be referred to herein as the "Special
Approval Vote").
An "Interested Party" is defined as any person (other than (a) the Company,
(b) any subsidiary of the Company, (c) the General Partners, and (d) the
Original Shareholders and (e) any affiliate or associate of any person in (c) or
(d) above) that (i) is the beneficial owner, directly or indirectly, of 10% or
more of the voting power of the then outstanding Shares, (ii) is an affiliate or
associate of the Company and within two years prior to the date in question was
the beneficial owner, directly or indirectly, of 10% or more of the then
outstanding Shares or (iii) is an affiliate or associate of any person described
in clauses (i) or (ii) above.
A "Business Combination" includes the following transactions:
(i) Unless the merger, consolidation or exchange of interests does not
alter the contractual rights of the Shares as expressly set forth in the
Company Organizational Documents or change or convert in whole or in part
the outstanding Shares, any merger, consolidation or exchange of interests
of the Company or any subsidiary with (a) any Interested Party or (b) any
other entity (whether or not itself an Interested Party) which is, or after
the merger, consolidation or exchange of interests will be, an affiliate of
an Interested Party that was an Interested Party prior to the transaction;
(ii) Any sale, lease, transfer or other disposition, other than in the
ordinary course of business, in one transaction or a series of transactions
in any 12-month period to any Interested Party or any affiliate of any
Interested Party (other than the Company or any of its subsidiaries) of any
assets of the Company or any subsidiary having, measured as of the time the
transaction or transactions are approved by the Board of Directors of the
Company, an aggregate book value as of the end of the Company's most
recently ended fiscal quarter of 10% or more of the total market value of
the outstanding Shares or of its net worth as of the end of its most
recently ended fiscal quarter;
(iii) The issuance or transfer by the Company or any subsidiary, in
one transaction or a series of transactions, of any of the Shares or any
equity securities of a subsidiary which have an aggregate market value of
5% or more of the total market value of the outstanding Shares to any
Interested Party or any
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affiliate of any Interested Party (other than the Company or any of its
subsidiaries) except pursuant to the exercise of warrants or rights to
purchase securities offered pro rata to all Shareholders or any other
method affording substantially proportionate treatment to the Shareholders;
(iv) The adoption of any plan or proposal for the liquidation or
dissolution of the Company in which anything other than cash will be
received by an Interested Party or any affiliate of any Interested Party;
(v) Any reclassification of securities or recapitalization of the
Company, or any merger, consolidation or exchange of Shares with any of its
subsidiaries which has the effect, directly or indirectly, in one
transaction or a series of transactions, of increasing by 5% or more of the
total number of outstanding Shares, the proportionate amount of the
outstanding Shares or the outstanding number of any class of equity
securities of any subsidiary which is directly or indirectly owned by any
Interested Party or any affiliate of any Interested Party; or
(vi) The receipt by any Interested Party or any affiliate of any
Interested Party (other than the Company or any of its subsidiaries) of the
benefit, directly or indirectly (except proportionately as a Shareholder),
of any loan, advance, guarantee, pledge or other financial assistance or
any tax credit or other tax advantage provided by the Company or any of its
subsidiaries.
(a) Minimum Price Criteria. A Business Combination proposed by an
Interested Party after the expiration of the Five-Year Tolling Period must
obtain the Special Approval Vote unless the Interested Party complies with the
Fair Price and Procedural Requirements or the Board of Directors approves the
Business Combination or the transaction in which the Interested Party became an
Interested Party prior to the Determination Date.
The Fair Price and Procedural Requirements provide that, in a Business
Combination involving cash or other consideration being paid to the
Shareholders, the consideration will be required to be either in cash or in the
same form as the Interested Party paid in acquiring the largest number of Shares
that it has acquired in any one transaction or series of related transactions,
except to the extent that the Shareholders otherwise elect in connection with
their approval of the proposed transaction. In addition, the transaction
constituting the Business Combination must provide for payment of consideration
per Share at least equal to the highest of the following: (i) the highest per
Share price paid by the Interested Party for any of the Shares of the same class
or series acquired by it (A) within the five-year period immediately prior to
the first public announcement of the proposed Business Combination (the
"Announcement Date") or (B) within the five-year period immediately before the
Determination Date, (ii) the highest preferential amount per Share to which the
holders of the Shares of such class or series are entitled in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company,
(iii) the fair market value per Share of the same class or series on the
Announcement Date or the Determination Date, whichever is higher or (iv) the
price per Share equal to the fair market value per Share on the Announcement
Date or on the Determination Date, whichever is higher, multiplied by a fraction
equal to (A) the highest per Share price paid by the Interested Party for any of
the Shares of the same class or series acquired by it within the five-year
period immediately prior to the Announcement Date over (B) the fair market value
per Share of the same class or series on the first day in such five-year period
on which the Interested Party acquired any of the Shares.
For purposes of the Fair Price and Procedural Requirements, the fair market
value of the Shares on the Announcement Date or the Determination Date will be
the highest closing sale price during the 30-day period immediately preceding
the date in question of a Share of the same class or series on the composite
tape for NYSE-listed stocks, or, if Shares of the same class or series are not
quoted on the composite tape, on the NYSE, or, if the Shares of the same class
or series are not listed on the NYSE, on the principal United States securities
exchange registered under the Exchange Act on which the Shares of the same class
or series are listed, or, if the Shares of the same class or series are not
listed on any such exchange, the highest closing bid quotation with respect to a
Share of the same class or series during the 30-day period preceding the date in
question on the NASD automated quotation system or any system then in use, or,
if no such quotations are available, the fair market value on the date in
question of a Share of the same class or series as determined by the Board of
Directors in good faith.
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(b) Procedural Requirements. The Fair Price and Procedural Requirements
also provide that, in order to avoid the Special Approval Vote, after an
Interested Party becomes an Interested Party, it will have to comply with
certain procedural requirements, as well as the minimum price requirements,
unless the Business Combination is approved by the Board of Directors prior to
the Determination Date.
Under the Fair Price and Procedural Requirements, the Special Approval Vote
applies after the expiration of the Five Year Tolling Period (unless the Board
of Directors approves the Business Combination prior to the Determination Date)
if the Company, after the Interested Party has proposed a Business Combination
and after the Determination Date but prior to consummation of such Business
Combination, (A) fails to pay in a timely manner the full amount of any
distributions on any preferred Shares (including any Partnership Shares) then
outstanding, (B) fails to increase the annual rate of distributions made with
respect to any Shares to reflect any recapitalization, reorganization or similar
transaction which has the effect of reducing the number of outstanding Shares or
(C) reduces the annual rate of distributions paid on any class or series of
Shares that are not preferred. The provisions of clauses (A), (B) and (C) do not
apply if no Interested Party or an affiliate or associate of an Interested Party
voted as a member of the Board of Directors in a manner inconsistent with
clauses (A), (B) and (C) and the Interested Party, within 10 days after any act
or failure to act inconsistent with such items, notifies the Board of Directors
that the Interested Party disapproves thereof and requests in good faith that
the Board of Directors rectify such act or failure to act. This provision is
designed to prevent an Interested Party who controls the necessary voting power
from attempting to depress the market price of the Shares prior to consummating
a Business Combination by reducing distributions thereon and thereby reducing
the consideration required to be paid pursuant to the minimum price criteria.
The Special Approval Vote also applies to a proposed Business Combination
after the expiration of the Five Year Tolling Period (unless the Board of
Directors approves the Business Combination prior to the Determination Date) if
the Interested Party acquired any additional Shares (except as part of the
transaction in which it became an Interested Party or by virtue of proportionate
Share splits or distributions) in any transaction subsequent to the time it
proposes a Business Combination. This provision is intended to prevent an
Interested Party from purchasing additional Shares at prices that are lower than
those set by the minimum price criteria after it proposes a Business
Combination.
The Interested Party will be required to meet the Fair Price and Procedural
Requirements with respect to each class or series of Shares, whether or not the
Interested Party owned Shares of that class or series prior to proposing the
Business Combination. If the Fair Price and Procedural Requirements are not met
with respect to each class or series of Shares, the Special Approval Vote will
be applicable unless the Business Combination was approved by the Board of
Directors prior to the Determination Date. In addition, if the transaction is
not of a type which involves the receipt of any cash, securities or other
consideration by Shareholders generally, such as a sale of assets or an issuance
of Company interests to an Interested Party, the minimum price criteria
discussed in paragraph (a) above could not be met and the Special Approval Vote
will be applicable unless the transaction were approved by the Board of
Directors prior to the Determination Date.
Advantages and Disadvantages of the Business Combination Provisions. The
Business Combination Provisions are designed to prevent certain of the potential
inequities of Business Combinations that involve two or more steps. In the first
instance, in order to complete a Business Combination within the Five-Year
Tolling Period, the Interested Party must either (i) obtain the approval by the
Board of Directors prior to the Determination Date or (ii) obtain the approval
of two-thirds of the Board of Directors and two-thirds in interest of the
Shareholders (excluding the vote of the Interested Party). The effect of these
provisions is to place a veto power over certain transactions in the hands of
the Board of Directors and Shareholders, other than the Interested Party.
In the second instance, after the expiration of the Five-Year Tolling
Period, the Interested Party must either assure itself of obtaining the
affirmative votes of at least (i) 80% in interest of all Shareholders and (ii)
two-thirds in interest of the Shareholders (excluding the vote of the Interested
Party) prior to the vote on the Business Combination, or be prepared to meet the
Fair Price and Procedural Requirements. The Fair Price and Procedural
Requirements are designed to protect those Shareholders who have not tendered or
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otherwise sold their Shares to a third party who is attempting to acquire
control, by helping to assure that at least the same price and form of
consideration is paid to such Shareholders in a Business Combination as were
paid to Shareholders in the initial step of the acquisition. In the absence of
these provisions, an Interested Party who acquires control of the Company could
subsequently, by virtue of such control, force minority Shareholders to sell or
exchange their Shares at a price that may not reflect any premium the Interested
Party may have paid in order to acquire its interest. Such a price could be
lower than the price paid by the Interested Party in acquiring control and could
also be in a less desirable form of consideration (e.g., equity or debt
securities of the Interested Party instead of cash).
In many situations, the Fair Price and Procedural Requirements will require
that an Interested Party pay Shareholders a higher price for their Shares and/or
structure the transaction differently from what would be the case without the
provision. Accordingly, the Board of Directors believes that, to the extent a
Business Combination is involved as part of a plan to acquire control of the
Company, the Business Combination Provisions may increase the likelihood that an
Interested Party will negotiate directly with the Board of Directors. The Board
of Directors believes that it is in a better position than individual
Shareholders of the Company to negotiate effectively on behalf of all
Shareholders, in that the Board of Directors is likely to be more knowledgeable
than most individual Shareholders in assessing the business and prospects of the
Company. Therefore, the Board of Directors is of the view that negotiations
between the Board of Directors and an Interested Party will increase the
likelihood that Shareholders in general will receive a higher price for their
Shares than otherwise might be obtained.
Although some substantial acquisitions of equity securities are made
without the objective of effecting a subsequent Business Combination, in many
cases a purchaser acquiring control desires to have the option to consummate
such a Business Combination. Assuming that to be the case, the Business
Combination Provisions will tend to deter a potential purchaser whose objective
is to seek control of the Company at a relatively low price, since acquiring the
remaining equity interest will not be assured unless the applicable voting
requirements were met, the Fair Price and Procedural Requirements were satisfied
or the Board of Directors were to approve the transaction prior to the
Determination Date. The Business Combination Provisions also should help to
deter the accumulation of large blocks of the Shares, which the Board of
Directors believes to be potentially disruptive to the stability of the Company
and which could precipitate a change of control of the Company on terms
unfavorable to other Shareholders.
Tender offers or other non-open market acquisitions of equity securities
usually are made at prices above their prevailing market price. In addition,
acquisitions of equity securities by persons attempting to acquire control
through market purchases may cause the market price of the securities to reach
levels that are higher than might otherwise be the case. The presence of the
Business Combination Provisions may deter such purchases, particularly those of
less than all of the Shares, and may, therefore, deprive the Company's
Shareholders of an opportunity to sell their Shares at a temporarily higher
market price. Because of the Special Approval Vote for approval of any
subsequent Business Combination and the possibility of having to pay a price to
other Shareholders in such a Business Combination that is not less than the
price paid for its initial holdings, the Business Combination Provisions may
make it more costly for a third party to acquire control of the Company. It
should be noted that the Business Combination Provisions will not necessarily
deter persons who might be willing to seek control by acquiring a substantial
portion of the Shares when they have no intention of acquiring the remaining
Shares.
In certain cases, the Fair Price and Procedural Requirements' minimum price
provisions, while providing objective pricing criteria, could be arbitrary and
not indicative of value. In addition, an Interested Party may be unable, as a
practical matter, to comply with all of the procedural requirements. In these
circumstances, unless an Interested Party were assured of obtaining the required
number of affirmative votes from the other Shareholders, it will be forced
either to negotiate with the Board of Directors and offer terms acceptable to
the Board of Directors or to abandon such proposed Business Combination.
Amendments to Business Combination Provisions. The Organizational
Documents provide that the Business Combination Provisions may be amended or
repealed only by a vote of 80% in interest of all Listed
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Shareholders, voting together as a single class, excluding Shares held by any
Interested Party or any affiliate of an Interested Party.
Control Share Acquisition Provisions. The Organizational Documents also
contain control Share acquisition provisions (the "Control Share Acquisition
Provisions"). The Control Share Acquisition Provisions, in general, provide that
any person or entity that acquires one-fifth or more of the outstanding Shares
of any class or series acquires voting rights with respect to the acquired
Shares only to the extent approved by the affirmative vote of two-thirds in
interest of the Listed Shareholders, but excluding any votes cast with respect
to Shares in respect of which the acquirer is entitled to exercise or direct the
exercise of the voting power.
The Control Share Acquisition Provisions provide that a person or entity
acquires Control Shares whenever it acquires Shares that, but for the operation
of the Control Share Acquisition Provisions, will bring its voting power within
any of the following ranges: (i) one-fifth to one-third, (ii) one-third to a
majority or (iii) a majority or more. A "Control Share Acquisition" generally
means the acquisition of Shares that will entitle the acquiring person
immediately after the acquisition to exercise or direct the exercise of the
voting power of Shares within one of these ranges of voting power. Excepted from
the definition of Control Share Acquisition is an acquisition of Shares from any
person whose previous acquisition of Shares was pursuant to the laws of descent
or distribution or the satisfaction of a pledge or other security interest
created in good faith and not for the purpose of circumventing the Control Share
Acquisition Provisions or a merger, consolidation or exchange of interests if
the Company is a party thereto. Subject to certain exceptions, a Control Share
Acquisition does not include the acquisition of Shares in good faith and not for
the purpose of circumventing the Control Share Acquisition Provisions by or from
any person whose voting rights have previously been authorized by the Listed
Shareholders in compliance with the Control Share Acquisition Provisions or any
person whose previous acquisition of the Shares will have constituted a Control
Share Acquisition but for the exclusions in the preceding sentence. In addition,
a Control Share Acquisition does not include the acquisition of Shares by (a)
any subsidiary of the Company, (b) the General Partners and the Original
Shareholders and (c) any affiliate or associate of any person in (b) above.
Voting Rights of Control Shares. Under the Control Share Acquisition
Provisions, a person or entity that acquires Control Shares pursuant to a
Control Share Acquisition acquires voting rights with respect to those control
Shares only to the extent approved by the affirmative vote of two-thirds in
interest of the Listed Shareholders, but excluding any votes cast with respect
to Shares in respect of which the acquirer is entitled to exercise or direct the
exercise of the voting power.
The acquirer may require the Company to hold a meeting of the Listed
Shareholders for the purpose of considering the status of its voting rights by
complying with the requirements of the Organizational Documents. The acquirer
must deliver to the Company an acquiring person statement, which must set forth,
among other things, the terms of the proposed acquisition and representations
that the proposed Control Share Acquisition, if consummated, will not be
contrary to law, and that the acquirer has the financial capacity to make such
acquisition. If the acquirer so requests at the time of delivery of the
acquiring person statement and gives a written undertaking to pay the expenses
of a meeting, the Board of Directors is generally required to call and hold,
within 50 days after receipt of the acquiring person statement and undertaking,
a meeting of the Listed Shareholders to consider the voting rights to be
accorded the Shares to be acquired in the Control Share Acquisition. In
connection with calling the meeting, the Company must send a notice to the
Listed Shareholders which includes or is accompanied by both the acquiring
person statement and a statement by the Board of Directors setting forth its
position or recommendation or stating that it is taking no position or making no
recommendation with respect to the issue of voting rights to be accorded the
Shares acquired in the Control Share Acquisition.
Redemption of Control Shares. If an acquiring person statement has been
delivered on or before the tenth day after the Control Share Acquisition and the
Listed Shareholders do not vote to approve voting rights to the Control Shares,
the Company may redeem the Control Shares from the acquirer at any time during
the 60-day period commencing on the day of a meeting at which the voting rights
of the Control Shares were considered and not approved. If the acquirer fails to
deliver an acquiring person statement on or before the tenth day after the
Control Share Acquisition, the Company may redeem the Control Shares (except
Control
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Shares for which voting rights have been approved) at any time during the period
commencing on the 11th day after the Control Share Acquisition and ending 60
days after the acquiring person statement has been delivered. Any redemption of
Control Shares shall be at the fair value of the Control Shares as of the date
of the last acquisition of Control Shares by the acquirer or, if a meeting is
held to consider the voting rights of the Control Shares, as of the date of the
meeting.
Advantages and Disadvantages of the Control Share Acquisition
Provisions. The Control Share Acquisition Provisions will permit the Listed
Shareholders to review, on a collective basis, the merits of a proposed
acquisition of control of the Company without the time pressure and coercive
atmosphere often present with tender offers and other non-negotiated
transactions. Although a change of control may in certain circumstances be
beneficial to security holders, the Control Share Acquisition Provisions are
intended to provide the Listed Shareholders with the continued ability to make a
reasoned, thoughtful decision on proposed acquisitions of significant voting
power. It also may enhance the Company's bargaining power with a potential
acquirer.
The Control Share Acquisition Provisions also may make it more difficult or
costly for another party to acquire and exercise control of the Company. To the
extent that it has the effect of discouraging a future takeover attempt, it
could prevent Shareholders from realizing any premium over the prevailing market
price that might be involved in any such transaction. The Control Share
Acquisition Provisions also may discourage gradual market purchases by an
acquirer, thereby depriving some Listed Shareholders of an opportunity to sell
their Shares at a temporarily higher market price, though the provisions of the
Control Share Acquisition Provisions may force an acquirer to pay a higher price
for control and Shareholders will thereby benefit. Finally, to the extent that
the Control Share Acquisition Provisions enable the Company to resist a takeover
or a change of control or removal of the Board of Directors, it could make it
more difficult to remove the existing management of the Company, even if such
removal will be beneficial to the Shareholders.
Amendments to Control Share Acquisition Provisions. The Organizational
Documents provide that the Control Share Acquisition Provisions may be amended
or repealed only by a vote of 80% in interest of all Listed Shareholders,
excluding any votes cast with respect to Control Shares held by an acquirer.
Shareholder Rights Plan. The Company intends to enter into the Shareholder
Rights Plan with a rights agent that will provide for the issuance of one right
(a "Right") for each outstanding Share to the Company's Listed Shareholders of
record on a record date to be established by the Board of Directors (the "Rights
Record Date"). Each Right will entitle the holder thereof to buy one Share at a
specified exercise price, which will be subject to adjustment.
Set forth below is a description of the proposed terms of the Listed
Shareholder Rights Plan.
Distribution Date. Until the close of business on the tenth day after the
earlier to occur of (i) the date a person (an "Acquiring Person") (other than
the Company, any subsidiary of the Company, the General Partners, any Affiliate
of the General Partners, the Original Shareholders and any employee benefit plan
of the Company) alone or together with affiliates and associates, has become the
beneficial owner of 5% or more of the outstanding Shares or (ii) the date of the
commencement of, or announcement of, an intention to make a tender offer or
exchange offer the consummation of which will result in the beneficial ownership
by a person or group (other than the Company, any subsidiary of the Company, the
General Partners, any Affiliate of the General Partners, the Original
Shareholders and any employee benefit plan of the Company) of 10% or more of the
outstanding Shares (the earlier of (i) or (ii) being called the "Rights
Distribution Date"), the Rights will be evidenced by the Shares registered in
the name of the holders of the Shares and not be separate Right certificates.
The Shareholder Rights Plan is expected to provide that, until the Rights
Distribution Date, the Rights will be transferred with and only with the Shares.
Until the Rights Distribution Date (or earlier termination or expiration of the
Rights), the transfer of any Shares outstanding as of the Rights Record Date
will also constitute the transfer of the Rights associated with such Shares. As
soon as practicable following the Rights Distribution Date, separate
certificates evidencing the Rights (a "Rights Certificate") will be mailed to
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holders of record of the Shares as of the close of business on the Rights
Distribution Date and such separate Rights Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Rights Distribution Date. The
Rights will expire on the tenth anniversary of the Rights Record Date (the
"Final Expiration Date") unless the Final Expiration Date is extended or unless
the Rights are earlier redeemed by the Company, as described below.
Adjustments to Purchase Price. The purchase price payable (the "Exercise
Price"), and the number of the Shares or other securities or property issuable,
upon exercise of the Rights are subject to adjustment from time to time to
prevent dilution in the event the Company (i) declares or pays any distribution
on the Shares payable in Shares or other securities, (ii) subdivides or splits
the outstanding Shares into a greater number of interest or (iii) combines or
consolidates the outstanding Shares into a smaller number of interests or
effects a reverse split of the outstanding Shares.
Exercise of Rights. In the event that on or after the Rights Distribution
Date, the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold
(in one transaction or a series of transactions other than in the ordinary
course of business), proper provision will be made so that each holder of a
Right will thereafter have the right to receive, upon the exercise thereof at
the then current Exercise Price, that number of partnership interests, common
shares or other equity securities of the acquiring entity which at the time of
such transaction will have a market value of two times the Exercise Price. In
the event that any person, together with its affiliates and associates, becomes
the beneficial owner of 5% or more of the Shares then outstanding, unless such
acquisition is approved by the Board of Directors, each holder of a Right, other
than Rights beneficially owned by the Acquiring Person (which will thereafter be
void), will thereafter have the right to receive upon exercise thereof and
payment of the Exercise Price, the greater of (i) the number of Shares for which
such Right was exercisable immediately prior to such event or (ii) that number
of Shares having a market value of two times the Exercise Price.
Redemption of Rights. At any time prior to the earlier to occur of (i) the
acquisition by a person, together with its affiliates and associates of
beneficial ownership of 5% or more of the outstanding Shares or (ii) the Final
Expiration Date, the Board of Directors may cause the Company to redeem the
Rights in whole, but not in part, at a redemption price of $.01 per Right.
Immediately upon any redemption of the Rights, all rights relating to the Rights
(except the right to receive the redemption price for each Right), including the
right to exercise the Rights, will terminate.
Amendment of Rights Plan. The terms of the Rights may be amended by the
Board of Directors in any manner without the consent of the holders of the
Rights, except that from and after such time as any person becomes an Acquiring
Person, no such amendment may adversely affect the interest of the holders of
the Rights (other than Acquiring Persons).
Effect of the Rights Plan. Although the Rights will not prevent a takeover
of the Company, the Rights may have certain anti-takeover effects. The Rights
could cause substantial dilution to a person or group that attempts to acquire
the Company in a manner or on terms not approved by the Board of Directors. The
Rights, however, should not deter any prospective offerer willing to negotiate
in good faith with the Company.
RESALE OF SHARES
The Listed Shares to be received by the General Partners and their
affiliates as a substitute for a portion of their general partner interests in
the CPA(R) Partnerships will be restricted shares which may only be resold
pursuant to an effective registration statement or pursuant to Rule 144 under
the Securities Act. The General Partners and their affiliates will have the
ability to compel the Company to register the Listed Shares they receive in the
Consolidation. The costs of this registration would be borne by the Company.
Shares received by persons who may be deemed to be "affiliates" of the
Company may be sold by those persons only in accordance with the provisions of
Rule 144 under the Securities Act, pursuant to an effective registration under
the Securities Act, or in transactions that are exempt from registration under
the Securities Act. Rule 144 provides, in general, that those Shares may be sold
by the affiliate only if (i) the number of Shares sold within any three-month
period does not exceed the greater of 1% of the total number of
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outstanding Shares or the average weekly trading volume of the shares during the
four calendar weeks immediately preceding the date on which the notice of sale
is filed with the SEC and (ii) the Shares are sold in transactions directly with
a "market maker" or in "brokers' transactions" within the meaning of Rule 144
under the Securities Act.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Shares will be ChaseMellon
Shareholder Services L.L.P.
COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE
GENERAL PARTNERS AND MANAGER
COMPENSATION PAYABLE BY THE CPA(R) PARTNERSHIPS
Under the Partnership Agreements, the General Partners are entitled to
receive fees in connection with managing the affairs of each CPA(R) Partnership.
The Partnership Agreements also provide that the General Partners are to be
reimbursed for their expenses for services performed for each Partnership, such
as legal, accounting, transfer agent, data processing and duplicating services.
The General Partners are currently entitled to receive the following fees
and distributions from the CPA(R) Partnerships:
PREFERRED
RETURN ON MAXIMUM
PERCENTAGE SALE PERCENTAGE OF
CPA(R) OF CASH OF GAIN ON SALE OF
PROGRAM PROPERTY MANAGEMENT/LEASING FEE DISTRIBUTIONS PROPERTY(1) PROPERTY(2)
- ------------- ---------------------------------------- ------------- ------------- ---------------
CPA(R):1..... 5% of Adjusted Cash from Operations(3) 1% 3% 10%
CPA(R):2..... 5% of Adjusted Cash from Operations(3) 1% 3% 10%
CPA(R):3..... 5% of Adjusted Cash from Operations(3) 2% 3% 10%
CPA(R):4..... 1% of gross lease payments(4) 6% 3% 12%
CPA(R):5..... 1% of gross lease payments(4) 6% 3% 12%
CPA(R):6..... 1% of gross lease payments(4) 6% 3% 12%
CPA(R):7..... 1% of gross lease payments(4) 6% 3% 10%
CPA(R):8..... 3% of gross lease payments over first 10% 3% 15%
five years of original term of each
lease
CPA(R):9..... 3% of gross lease payments over first 10% 3% 15%
five years of original term of each
lease
- ---------------
(1) Preferred returns on the sale of property only after investors receive from
the sale of properties 100% of the amount invested in the CPA(R) Program
plus for CPA(R):1, CPA(R):2 and CPA(R):3, a cumulative annual return of six
percent to nine percent with payments pro rated on the basis of the return
achieved, for CPA(R):4, CPA(R):5 and CPA(R):6, a cumulative annual return of
six percent and for CPA(R):7, CPA(R):8 and CPA(R):9, a cumulative annual
return of eight percent.
(2) Represents maximum share of gain on the sale of a property after all
subordination provisions are satisfied. The General Partners' share of the
gain on the sale of properties is payable only after investors receive from
the sale of properties 100 percent of the amount invested in the CPA(R)
Program plus an annual return of between six percent and nine percent. In
addition, certain of the CPA(R) Partnerships have subordination provisions
relative to the total cash returned to investors.
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(3) "Adjusted Cash from Operations" does not include cash proceeds realized from
the sale, exchange or other disposition of assets of the Partnership or from
financing of Partnership property or the refinancing of any Partnership
indebtedness.
(4) The management fee for properties not subject to leases with an initial term
of 10 years or more is (i) 6% of the gross revenues of such leases where
such Affiliate performs leasing, re-leasing and leasing related services, or
(ii) 3% of gross revenues of such leases where such services are not
performed; provided, however, that in no event shall such management fee
exceed an amount which is competitive for similar services in the same
geographic area and further provided that bookkeeping services and fees paid
to non-Affiliates for management services shall be included in the
management fee.
The general partners of the CPA(R) Partnerships have earned the following
payments over the past three years:
PARTNERSHIP DISTRIBUTIONS
MANAGEMENT REIMBURSED OF CASH FROM
CPA(R) PROGRAM YEAR FEES EXPENSES OPERATIONS TOTAL
- --------------------------- ---- ---------- ----------- ------------ ----------
CPA(R):1................... 1994 $ 44,581 $ 51,607 $ 12,699 $ 108,887
1995 72,881 44,250 13,135 130,266
1996 66,815 43,956 12,919 123,690
CPA(R):2................... 1994 57,148 56,265 14,590 128,003
1995 254,174 51,138 14,917 320,229
1996 101,644 51,394 13,322 166,360
CPA(R):3................... 1994 162,711 84,839 93,127 340,677
1995 930,191 86,183 94,447 1,110,821
1996 218,507 84,519 62,206 365,232
CPA(R):4................... 1994 98,187 160,125 292,697 551,009
1995 91,564 95,644 286,854 474,062
1996 210,254 148,728 221,872 580,854
CPA(R):5................... 1994 156,947 178,840 351,738 687,525
1995 116,825 117,584 345,833 580,242
1996 76,763 113,288 222,848 412,899
CPA(R):6................... 1994 97,849 154,562 280,823 533,234
1995 156,629 152,795 282,718 592,142
1996 111,048 115,128 229,831 456,007
CPA(R):7................... 1994 135,794 113,171 194,804 443,769
1995 102,753 123,492 214,536 440,781
1996 101,181 110,024 174,151 385,356
CPA(R):8................... 1994 199,664 101,761 635,791 937,216
1995 26,777 87,856 641,394 756,027
1996 22,037 135,221 590,134 747,392
CPA(R):9................... 1994 346,802 90,304 558,971 996,077
1995 131,703 93,245 561,616 786,564
1996 7,354 109,085 508,557 624,996
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AMOUNTS PAYABLE TO THE MANAGER AFTER THE CONSOLIDATION
Amounts Payable by the Company.
The following is a description of the fees payable by the Company to the
Manager in connection with the services to be provided by the Manager.
Management Fee. The Manager will be paid a monthly management fee at an
annual rate of .5% of the Total Capitalization of the Company. The Management
Fee and Performance Fee will each be reduced by one-half of the amount received
by the Manager from the Subsidiary Partnerships for property management or
leasing fees and distributions of Cash from Operations. The Total Capitalization
of the Company will be measured each month by adding (i) the average of total
principal amount of the debt owed by the Company (measured as of the first and
last day of each month) and (ii) the Average Market Capitalization of the
Company (measured by multiplying the closing price of the Listed Shares on each
trading day of the month by the total number of Listed Shares issuable in the
Consolidation outstanding each trading day, adding the product for each day and
dividing the sum by the number of trading days in the month).
Performance Fee. The Manager will be paid a monthly Performance Fee at an
annual rate of .5% of the Total Capitalization of the Company. This fee will be
paid in the form of restricted Listed Shares which will vest ratably over five
years. Before such shares are vested, the restricted Listed Shares will not be
transferable and will be subject to forfeiture in the event the Manager is
terminated for cause or resigns. The restricted Listed Shares will vest
immediately in the event of a change of control and certain other circumstances.
The Management Fee and Performance Fee will each be reduced by one-half of the
amount received by the Manager from the Subsidiary Partnerships for property
management or leasing fees and distributions of Cash from Operations. The sale
of the Listed Shares will be restricted pursuant to Rule 144 of the '33 Act. The
fee amount will be divided by the closing price of the Listed Shares on the last
trading day of the month to determine the number of Listed Shares to be paid to
the Manager.
Termination Fee. If the Management Agreement is terminated in connection
with a change of control, by the Company without cause or by the Manager with
Good Reason, the Manager will be entitled to receive a Termination Fee. The
Termination Fee equals the sum of (A) any fees that would be earned by the
Manager upon the disposition of the assets of the Company and the Subsidiary
Partnerships at their appraised value as of the date the Management Agreement is
terminated (the "Termination Date") and (B)(1) if the agreement is terminated by
the Company after a change in control, $50 million if the change in control
occurs on or before December 31, 1998 and thereafter, five times the total fees
paid to the Manager by the Company and the Subsidiary Partnerships in the 12
months preceding the change in control and (2) if the agreement is terminated
without cause or for Good Reason, $50 million if the agreement is terminated
before December 31, 1999; $40 million if the agreement is terminated before
December 31, 2000; $30 million if the agreement is terminated before December
31, 2001; $20 million if the agreement is terminated before December 31, 2002
and $10 million if the agreement is terminated before December 31, 2003.
The Manager may also be paid fees on a transactional basis for
acquisitions, dispositions and other similar transactions. The terms of such
fees will be negotiated with the Board of Directors.
Amounts Payable by the Subsidiary Partnerships.
After the Consolidation, the general partner interest held by the Manager
in each Subsidiary Partnership will be converted to a limited partner interest.
The Manager will be entitled solely to the distributions from the respective
Subsidiary Partnerships described below. Distributions paid to the Manager by
the Subsidiary Partnerships described in the following table will reduce the
management fee and performance fee otherwise payable to the Manager by the
Company each by one-half of the amount paid by the Subsidiary Partnership:
PERCENTAGE OF DISTRIBUTIONS
SUBSIDIARY PARTNERSHIP PROPERTY MANAGEMENT/ LEASING FEE OF CASH FROM OPERATIONS
- ------------------------------- ------------------------------------- ---------------------------
CPA(R):1....................... 5% of Adjusted Cash from Operations 1%
CPA(R):2....................... 5% of Adjusted Cash from Operations 1%
CPA(R):3....................... 5% of Adjusted Cash from Operations 2%
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PERCENTAGE OF DISTRIBUTIONS
SUBSIDIARY PARTNERSHIP PROPERTY MANAGEMENT/ LEASING FEE OF CASH FROM OPERATIONS
- ------------------------------- ------------------------------------- ---------------------------
CPA(R):4....................... 1% of gross lease payments(1) 6%
CPA(R):5....................... 1% of gross lease payments(1) 6%
CPA(R):6....................... 1% of gross lease payments(1) 6%
CPA(R):7....................... 1% of gross lease payments(1) 6%
CPA(R):8....................... 3% of gross lease payments over first 10%
five years of original term of each
lease
CPA(R):9....................... 3% of gross lease payments over first 10%
five years of original term of each
lease.
- ---------------
(1) The management fee for properties not subject to leases with an initial term
of less than 10 years is (i) 6% of the gross revenues of such leases where
such Affiliate performs leasing, re-leasing and leasing related services, or
(ii) three percent of gross revenues of such leases where such services are
not performed; provided, however, that in no event shall such management fee
exceed an amount which is competitive for similar services in the same
geographic area and further provided that bookkeeping services and fees paid
to non-Affiliates for management services shall be included in the
management fee.
Incentive Fee. The Manager will be paid an Incentive Fee equal to 15
percent of the amount of the net proceeds received from the sale of a property
previously held by a CPA(R) Partnership in excess of the appraised value of the
equity interest in such property used in the Consolidation less an adjustment
for the share of such net proceeds in excess of the appraised value of the
equity interest attributable to the Manager's interest in the Listed Shares.
FEES PAYABLE OVER PAST THREE YEARS
The following table sets forth the actual amounts of compensation and
distributions paid by the CPA(R) Partnerships on a combined basis to the General
Partners for the last three fiscal years and the amounts that would have been
payable to the Manager and its affiliates over the same period if the
Consolidation had taken place effective January 1, 1994. This comparison assumes
that the Company would have conducted its business the same way as the CPA(R)
Partnerships conducted their business over the same period. This is not expected
to be the case if the Consolidation is consummated.
GENERAL PARTNERS'/MANAGER'S COMPENSATION
HISTORICAL PRO FORMA FOR CONSOLIDATION(1)
------------------------------------------------- -----------------------------------------------
PARTNERSHIP TOTAL GENERAL TOTAL
LEASING/ CASH PARTNERS' CASH PERFORMANCE TOTAL
MANAGEMENT PARTNERSHIP COMPEN- PREFERRED MANAGEMENT COMPEN- FEE- COMPEN-
FEES DISTRIBUTIONS SATION(2) RETURN(3) FEE(4) SATION STOCK(4) SATION(5)
---------- ------------- ---------- ---------- ---------- ---------- ----------- ----------
1994......... $1,299,683 $ 2,435,240 $3,734,923 $ 849,593 $4,150,000 $4,150,000 $ 830,000 $4,980,000
1995......... 1,883,497 2,455,450 4,338,947 962,591 3,940,000 3,940,000 1,618,000 5,558,000
1996......... 915,603 2,035,838 2,951,441 803,813 3,695,000 3,695,00 2,357,000 6,052,000
- ---------------
(1) Reflects estimated management fees that would have been paid to the Manager
if the Consolidation had been completed as of January 1, 1994, assuming
maximum participation without the issuance of Subsidiary Partnership Units.
Actual fees would have depended on the market price of the Listed Shares
(see Note 4).
(2) Each CPA(R) Partnership is subject to a maximum allowable leverage
percentage ranging from 67 percent to 80 percent of the purchase price of
properties. Assuming the CPA(R) Partnerships had achieved the maximum
allowable leverage, additional management fees and distributions of
$884,000, $1,198,000 and $1,044,000 would have been received for 1994, 1995
and 1996 respectively. Achievement of the maximum allowable leverage would
have resulted in an increase in average outstanding debt, and corresponding
assets, of $158,000,000 in 1994, $167,000,000 in 1995 and $204,000,000 in
1996.
(3) Reflects the General Partners' Interest in their subordinated preferred
return related to asset sales consummated in 1994, 1995 and 1996. Pursuant
to the CPA(R) Partnership Agreements, the General Partners may be entitled
to receive
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a subordinated preferred return, measured based upon the cumulative proceeds
arising from the sale of partnership assets. The preferred return is payable
only after the limited partners receive 100 percent of their initial
investment from the proceeds of asset sales and a cumulative annual return
ranging from six percent to nine percent since the inception of the
Partnership. A Partnership's ability to satisfy the requirement may not be
determinable until liquidation of a substantial portion of the Partnership's
assets has been made. For purposes of this presentation, it is assumed that
this requirement has been satisfied.
(4) Management fees and Performance Fees are equal to 0.5 percent of the
Company's Total Capitalization payable in cash and 0.5% thereof payable in
the form of Listed Shares of the Company, respectively, but shall not in any
event be less than the total amount of leasing fees and distributions
otherwise paid to the General Partners of the CPA Partnerships. Total
Capitalization equals the Company's average market capitalization plus the
average outstanding debt for the relevant period. For purposes of the
presentation, in the absence of applicable market values for the Listed
Shares, pro forma Total Capitalization is deemed to be equal to the sum of
the Total Exchange Value and the average outstanding debt of the CPA(R)
Partnerships. The Company's actual market capitalization may increase or
decrease depending on the Company's operating performance and market
conditions; management fees actually paid would increase or decrease
accordingly. The performance fee will be paid in the form of restricted
Listed Shares which will vest ratably over five years. The sale of the
Listed Shares by the Manager will be restricted pursuant to Rule 144 of the
'33 Act. The amounts shown under "Performance Fee -- Stock" represent
amounts of restricted Listed Shares that would have vested in each of the
years 1994, 1995 and 1996.
(5) Assuming the Company had utilized leverage of 67 percent, additional
management fees, paid in cash, of $613,000, $686,000 and $748,000 and the
vested portion of performance fees, paid in Listed Shares, of $340,000,
$1,192,000 and $2,018,000 for the years ended December 31, 1994, 1995 and
1996 respectively would have been paid. Achievement of this level of
leverage would have resulted in an increase in average outstanding debt, and
corresponding assets, of $132,000,000 in 1994, $142,000,000 in 1995 and
$168,000,000 in 1996.
GENERAL PARTNERS PREFERRED RETURN
The General Partners may be entitled to receive a subordinated preferred
return, measured based upon the cumulative proceeds arising from the sale of the
CPA(R) Partnerships' assets. Pursuant to the provisions of the partnership
agreements of the CPA(R) Partnerships, the preferred return may be paid only
after the limited partners of a CPA(R) Partnership receive 100% of their initial
investment from the proceeds of assets sales and a cumulative annual return
ranging from six percent to nine percent since the inception of the affected
Partnership although for certain CPA(R) Partnerships the preferred return can be
paid on a pro rata basis in proportion to the percentage attainment of limited
partner cumulative annual return preferences after certain minimum return
thresholds have been met. The General Partners' interest in such preferred
return amounts to approximately $5,111,000 based upon the cumulative proceeds
from the sale of assets since the inception of the CPA(R) Partnerships through
June 30, 1997, assuming the Limited Partners preferred return has been
satisfied. This amount has been determined based on the terms of each
Partnership Agreement and reflects the preferred return payable to the General
Partners solely in connection with properties which have previously been sold by
the CPA(R) Partnerships and for which such preferred returns were not paid to
the General Partners. The preferred return payable on account of CPA(R):5 was
discounted for purposes of calculating Total Exchange Value to take into account
that the Trigger Price for CPA(R):5 exceeds $20. The CPA(R) Partnerships'
ability to satisfy the subordination provisions of the partnership agreements
may not be determinable until liquidation of a substantial portion of a
Partnership's assets have been made.
To determine whether or not the subordination provisions have been achieved
with respect to the payment of preferred returns relating to properties
previously sold, after the Consolidation, the subordination provision that must
be satisfied for the payment of the preferred return will be deemed satisfied if
the Listed Shares achieve a closing price equal to or in excess of the Trigger
Price indicated in the table below for five consecutive trading days. This price
will provide Unitholders the opportunity to liquidate their interest and to have
received the cumulative annual return required in the CPA(R) Partnership
Agreement before the preferred return may be paid. If any Cash From Sales or
Cash From Financings from transactions involving properties held by a particular
CPA(R) Partnership are distributed, the subordination requirement will be
reduced by the Cash From Sales and Cash From Financings distributed on account
of such transaction and the per share price of the Listed Shares for the
satisfaction of the subordination provision will be recalculated.
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The following table outlines the preferred return the General Partners may
be entitled to receive as of June 30, 1997 and the Listed Share trigger price
that must be achieved before such return will be paid:
CALCULATION OF REQUIRED LISTED SHARE PRICE FOR PAYMENT OF
GENERAL PARTNERS' PREFERRED RETURN
CASH FROM
SALES AND
TOTAL CASH FINANCINGS TO TOTAL SHARES TRIGGER PRICE TO
GENERAL FROM SALES AND BE "RETURNED" ISSUABLE TO BE ACHIEVED TO
PARTNER TOTAL FINANCINGS TO SATISFY PARTNERSHIP SATISFY
CPA(R) PREFERRED CAPITAL DISTRIBUTED TO SUBORDINATION LIMITED SUBORDINATION
PARTNERSHIP RETURN INVESTED LIMITED PARTNERS PROVISION(1) PARTNERS PROVISION
- --------- ----------- ----------- ---------------- ------------- ------------ ----------------
CPA(R):1 $ 133,823 $20,000,000 $ 324,724 $ 19,675,276 1,051,836 $18.71
CPA(R):2 1,048,845 27,500,000 23,631,006 3,868,994 1,534,681 2.52
CPA(R):3 731,823 33,000,000 28,164,538 4,835,462 2,503,103 1.93
CPA(R):4 857,754 42,784,000 9,600,704 33,183,296 2,819,409 11.77
CPA(R):5 1,067,133(2) 56,600,000 8,553,965 48,046,035 2,079,320 23.11
CPA(R):6 18,099 47,950,000 2,266,012 45,683,988 3,308,420 13.81
CPA(R):7 805,015 45,274,000 9,185,813 39,729,962 2,503,997 15.87
CPA(R):8 53,055 67,582,000 -- 67,582,000 4,700,512 14.38
CPA(R):9 29,830 59,915,000 2,154,618 58,525,519 3,153,620 18.56
- ---------------
(1) Includes cash required to satisfy the cumulative return provisions of the
CPA Partnership Agreements where applicable.
(2) Reflects a discount to account for the Trigger Price exceeding $20.
INVESTMENT BANKING FEE
If the Consolidation is completed, W.P. Carey & Co. will receive
compensation for investment banking services in the form of warrants to purchase
Listed Shares. If all the CPA(R) Partnerships participate in the Consolidation,
W.P. Carey & Co. will receive warrants to purchase 2,284,800 Listed Shares at
$21 per Share and 725,930 Listed Shares at $23 per Share. The warrants will be
exercisable 10 years beginning one year after the date the Consolidation is
completed.
The following number of warrants will be payable upon the participation of
the listed CPA(R) Partnership in the Consolidation:
IF CPA(R) PARTNERSHIP PARTICIPATES WARRANTS EXERCISABLE AT WARRANTS EXERCISABLE AT
IN CONSOLIDATION $21 PER LISTED SHARE $23 PER LISTED SHARE
------------------------------------ ----------------------- -----------------------
CPA(R):1.......................... 116,300 37,000
CPA(R):2.......................... 125,400 39,800
CPA(R):3.......................... 159,500 50,700
CPA(R):4.......................... 209,900 66,700
CPA(R):5.......................... 188,600 59,900
CPA(R):6.......................... 344,100 109,300
CPA(R):7.......................... 235,000 74,700
CPA(R):8.......................... 480,600 152,700
CPA(R):9.......................... 425,400 135,130
--------- -------
2,284,800 725,930
========= =======
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APPRAISALS AND FAIRNESS OPINION
GENERAL
Total Exchange Values were determined as of June 30, 1997 and have been
assigned to each of the CPA(R) Partnerships solely to establish a consistent
method of allocating the Listed Shares and Subsidiary Partnership Units for
purposes of the Consolidation. The Total Exchange Values were determined by the
General Partners based primarily on the Independent Appraisal of each CPA(R)
Partnership's portfolio of real estate by the Independent Appraiser. The General
Partner engaged the Independent Appraiser to render an opinion that the
allocation of Listed Shares among the Partnerships is fair to the Unitholders
from a financial point of view. The Independent Appraisals and the Fairness
Opinion rendered by the Independent Appraiser as set forth in Appendix A and
Appendix B. Additionally, copies of the Independent Appraisals and Fairness
Opinion may be obtained without charge upon written request to: Susan C. Hyde,
Director of Shareholder Services, Carey Diversified LLC, 50 Rockefeller Plaza,
New York, NY 10020. The General Partners did not impose any limitations, other
than as described in this Prospectus, on the scope of the investigations
conducted by the Independent Appraiser to enable them to render their
Independent Appraisal and Fairness Opinion. The General Partners have not made
any contacts, other than as described in this Prospectus, with any outside party
regarding the preparation by the outside party of an opinion as to the fairness
of the Consolidation, an appraisal of the CPA(R) Partnerships or their assets or
any other report with respect to the Consolidation.
EXPERIENCE OF INDEPENDENT APPRAISER
Since its founding in 1978, the Independent Appraiser, Robert A. Stanger &
Co., Inc., has provided information, research, investment banking and consulting
services to clients throughout the United States, including major NYSE firms and
insurance companies and over 70 companies engaged in the management and
operation of Partnerships and REITs. The investment banking activities of the
Independent Appraiser include financial management services, asset and
securities valuations, industry and company research and analysis, litigation
support and expert witness services, and due diligence investigations in
connection with both publicly registered and privately placed securities
transactions.
The Independent Appraiser, as part of its investment banking business, is
regularly engaged in the valuation of businesses, their securities, and/or their
assets in connection with mergers, acquisitions, reorganizations and for estate,
tax, corporate and other purposes. The Independent Appraiser's valuation
practice principally involves partnerships, partnership securities and the
assets typically held through partnerships, such as real estate, oil and gas
reserves, cable television systems and equipment leasing assets. The General
Partners selected the Independent Appraiser because of its experience and
reputation in connection with real estate partnerships and real estate assets
and its familiarity with the Properties. The General Partners have engaged the
Independent Appraiser to appraise the real estate portfolios of a number of the
CPA(R) Programs annually since 1989.
INDEPENDENT APPRAISAL
The Independent Appraiser was engaged by the CPA(R)Partnerships to appraise
the real estate portfolios of each CPA(R) Partnership and has delivered a
written summary of its analysis, based upon the review, analysis, scope and
limitations described therein, as to the fair market value of each CPA(R)
Partnership's portfolio of Properties as of March 31, 1997 (the "Independent
Appraisal"). The Independent Appraisal, which contains a description of the
assumptions and qualifications made, matters considered and limitations on the
review and analysis is set forth in Appendix B and should be read in its
entirety. Certain of the material assumptions, qualifications and limitations to
the Independent Appraisal are described below. The Independent Appraiser has
consented to the use of the Independent Appraisal in this Consent/Solicitation
Statement.
Summary of Methodology. Due to the type of real estate assets held by the
CPA(R) Partnerships and the nature of lease terms, the Independent Appraiser was
engaged to value the portfolio of Properties based on the income approach,
utilizing primarily a discounted cash flow analysis as encumbered by current
leases and financing. Such an approach estimates a property's capacity to
produce income through an analysis of the
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rental stream, operating expenses, net income and residual value. The General
Partners believe that use of the income approach in estimating the market value
of the CPA(R) Partnerships' real estate portfolios, is the most appropriate way
of assessing the value of the real estate assets owned by the CPA(R)
Partnerships because that is the method generally used by purchasers valuing
income producing property. The Independent Appraiser concluded that the use of
the income approach was reasonable and appropriate.
In conducting the Independent Appraisal, representatives of the Independent
Appraiser reviewed and relied upon, without independent verification, certain
information supplied by the General Partners and the CPA(R)Partnerships,
including, but not limited to: lease abstracts; renewal and purchase option
status and information relating to the creditworthiness of tenants; financial
schedules of current lease rates, income, expenses, debt service, cash flow and
related financial information; property descriptive information and physical
condition of improvements; information relating to mortgage encumbrances; and,
where appropriate, proposed sales terms and related documentation concerning
certain properties in the portfolios.
Representatives of the Independent Appraiser also performed site
inspections on all of the Properties in the portfolios during 1995 and 1996 in
the context of a prior appraisal of the portfolios. In the course of these site
visits, the physical facilities of the Properties were inspected and information
on the local market, the subject property and the tenant was gathered.
Information gathered during the site inspection was supplemented and updated by
a review of published information concerning economic, demographic and real
estate trends in local, regional and national markets and by information updates
provided by management and obtained through telephonic interviews of local
market information sources.
In addition, the Independent Appraiser discussed with management of the
General Partners the condition of each Property (including any deferred
maintenance, renovations, reconfigurations and other factors affecting the
physical condition of the improvements), competitive conditions in net lease
property markets, tenant credit trends affecting the Properties, certain lease
and financing terms, and historical and anticipated lease revenues and expenses.
The Independent Appraiser also reviewed the acquisition criteria and
parameters used by real estate investors utilizing published information and
information derived from interviews conducted by the Independent Appraiser with
buyers, owners and managers of net lease properties and with financing sources
for net lease property transactions.
The Independent Appraiser then estimated the value of each portfolio of
Properties based solely on the income approach to valuation. Specifically, the
discounted cash flow method, or, where appropriate, the income capitalization
method, was used to determine the value of the leased fee interest in each
Property based upon the lease and financing that encumber the Property. The
value indicated by the income approach represents the amount an investor would
probably pay for the expectation of receiving the net cash flow from the
Property after payment of debt service on existing financing assumed by the
buyer during the subject lease term and the proceeds (after repayment of debt)
from the ultimate sale of the Property.
In applying the discounted cash flow method, the Independent Appraiser
utilized pro forma statements of operations for each Property reflecting the
leases and financing which currently encumber the Properties. Rental revenue
projections were developed for each Property based on the terms of existing
leases (or, in the case of property not subject to long-term net leases, based
on analysis of market rents and historical rents achieved at the subject
property). Property management fees and, where appropriate, vacancy and
collection losses were factored into the analysis. Finally, debt service
payments were deducted from net operating income for each Property, consistent
with the terms of the existing financing encumbering such Property. Where a
capital expense reserve, deferred maintenance or extraordinary capital
expenditure was required, the cash flows (and value) were adjusted accordingly.
Expenses relating solely to investor reporting and accounting were excluded from
the analysis.
The Independent Appraiser assumed that the Properties would be sold after
the expiration of the lease terms and that tenants would renew their leases when
any renewal terms were deemed favorable to the tenants (i.e., where the tenant
has an option to renew at a rental rate below the projected market rate rent at
that time).
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The reversion value of the Property to be realized upon sale was estimated
based on the current economic rental rate which would be reasonable for the
subject Property, escalated at a rate indicative of current expectations in the
marketplace. The market rate net income of the Property in the twelve months
following the sale was then capitalized at an appropriate rate to determine the
reversionary value of the Property. Net proceeds to equity owners were
determined by deducting the appropriate costs of sale and balances due on the
Property's mortgage debt in the projected year of sale based on each mortgage's
amortization schedule. For Properties on which the tenant holds a contractual
purchase option, the terms of the option were reviewed and residual values were
adjusted accordingly.
Distinct discount rates were then applied to the operating cash flow
projections and the reversion values. The selection of the appropriate discount
rate for determining the present value of future operating cash flow streams
from each net leased Property was based on such factors as the creditworthiness
of the tenant, the length of the lease term and the general interest rate
environment.
Specifically, the Independent Appraiser conducted an analytical review of
the available financial statements of the tenants and/or guarantors under the
subject leases, focusing primarily on the balance sheet, profit and loss
statement, cash flow statement and management's discussion of capital resources
and liquidity. Measures of financial strength were derived and considered in
determining the tenant's ability to fulfill the lease obligation. These factors
included size, leverage of capital structure, profitability, cash flow and
liquidity. The Independent Appraiser also reviewed each tenant's and/or
guarantor's corporate debt ratings, if any, issued by such nationally recognized
statistical ratings organizations as Standard & Poor's Corporation and Moody's
Investors Service, Inc., and/or Value Line financial strength ratings.
The Independent Appraiser then reviewed the interest rate environment as of
the date of the Independent Appraisal, including yields-to-maturity among
corporate bonds based on various maturities and credit ratings. This analysis
was conducted to arrive at a base discount rate, determined by the marketplace,
to reflect the risk of holding corporate debt with credit quality commensurate
with the tenant's/guarantor's creditworthiness and a term approximately equal to
the remaining lease term for each Property. Premiums deemed appropriate were
then added to the base rate to reflect real estate, leverage and above-market
lease rate risk.
Discount rates applied to the reversion value of the real estate upon sale
were based on acquisition criteria and projection parameters for various
property types (e.g. industrial/warehouse, retail, office, etc.) in use in the
marketplace by real estate investors, after adjusting for such factors as
property age, quality, anticipated functional and/or economic obsolescence, and
competitive position.
Finally, the discounted present value of the equity cash flow stream from
operations after debt service, the discounted present value of net proceeds from
property sales, and the balance as of March 31, 1997 of outstanding debt
encumbering the Property were aggregated for each Property to arrive at the
appraised value of the Properties. The resulting property values were adjusted
for any joint venture interests based on information provided by the General
Partners and the Partnership and were then added to determine a total estimated
portfolio valuation.
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Conclusion as to Appraised Value. Based on the valuation methodology
described above, the Independent Appraiser estimated the value of the portfolio
of Properties held by each CPA(R) Partnership as follows:
REAL ESTATE
PARTNERSHIP NAME PORTFOLIO VALUE CONCLUSION
----------------------------------------------- --------------------------
CPA(R):1..................................... $ 33,390,000
CPA(R):2..................................... 40,680,000
CPA(R):3..................................... 52,750,000
CPA(R):4..................................... 49,880,000
CPA(R):5..................................... 54,640,000
CPA(R):6..................................... 104,300,000
CPA(R):7..................................... 70,300,000
CPA(R):8..................................... 136,670,000
CPA(R):9..................................... 139,890,000
------------
TOTAL.......................................... $682,500,000
============
Assumptions, Limitations and Qualifications of the Independent
Appraisal. The appraisal report has been prepared on a limited summary basis in
conformity with the departure provisions of the Uniform Standards of
Professional Appraisal Practice. As such, the report differs from a
self-contained appraisal report in that (i) the data is limited to the summary
data and conclusions presented and (ii) the Cost and Market Approaches were
excluded, and the conclusions were based upon the Income Approach.
The Independent Appraiser utilized certain assumptions to determine the
Appraised Value of the Portfolios. The Independent Appraisal reflects the
Independent Appraiser's valuation of the real estate portfolios of the CPA(R)
Partnerships as of March 31, 1997 in the context of the information available on
such date. Events occurring after March 31, 1997 and before the Closing could
affect the properties or assumptions used in preparing the Independent
Appraisal. The Independent Appraiser has no obligation to update the Independent
Appraisal on the basis of subsequent events. In connection with preparing the
Independent Appraisal, the Independent Appraiser was not engaged to, and
consequently did not prepare any written report or compendium of its analysis
for internal or external use beyond the analysis set forth in Appendix B. The
Independent Appraiser will not deliver any additional written summary of the
analysis.
See Appendix B for a discussion of the specific assumptions, limitations
and qualifications of the Independent Appraisal.
Compensation and Material Relationships. The Independent Appraiser has
been paid an aggregate fee of $475,000 by the CPA(R) Partnerships for preparing
the Independent Appraisal. In addition, the Independent Appraiser is entitled to
reimbursement for reasonable legal, travel and out-of-pocket expenses incurred
in making site visits and preparing the valuations, subject to an aggregate
maximum of $20,000 and is entitled to indemnification against certain
liabilities, including certain liabilities under federal securities laws. The
fee was negotiated between the General Partners and the Independent Appraiser
and payment thereof is not dependent upon completion of the Consolidation. The
General Partners or an affiliate has engaged the Independent Appraiser to
appraise the portfolios of a number of the CPA(R) Programs, including the CPA(R)
Partnerships, annually since 1989, and together, during the past two years, have
paid the Independent Appraiser aggregate fees of approximately $774,000. The
CPA(R) Programs, the Company and affiliates may engage the Independent Appraiser
to provide appraisal and other services in the future. There is no contract,
agreement or understanding between the Company, the CPA(R) Programs or the
Advisor and the Independent Appraiser regarding any future engagement.
FAIRNESS OPINION
General. The Independent Appraiser was engaged by the General Partners to
conduct an analysis of the allocation of Listed Shares among the CPA(R)
Partnerships pursuant to the Consolidation and has delivered a written summary
of its determination, based on the review, analysis, scope and limitations
described therein,
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as to the fairness of the allocations of Listed Shares among the CPA(R)
Partnerships, from a financial point of view, pursuant to the Consolidation (the
"Fairness Opinion"). The full text of the Fairness Opinion, which contains a
description of the assumptions and qualifications made, matters considered and
limitations imposed on the review and analysis is set forth in Appendix A and
should be read in its entirety. Certain of the material assumptions,
qualifications and limitations to the Fairness Opinion are described below. The
summary set forth below does not purport to be a complete description of the
analyses used by the Independent Appraiser in rendering the Fairness Opinion.
Arriving at a fairness opinion is a complex analytical process not necessarily
susceptible to partial analysis or amenable to summary description.
Except for certain assumptions described more fully below, which the CPA(R)
Partnerships advised the Independent Appraiser that it will be reasonable to
make, the CPA(R) Partnerships imposed no conditions or limitations on the scope
of the Independent Appraiser's investigation or the methods and procedures to be
followed in rendering the Fairness Opinion. The CPA(R) Partnerships have agreed
to indemnify the Independent Appraiser against certain liabilities arising out
of the Independent Appraiser's engagement to prepare and deliver the fairness
opinion. Upon consummation of the Consolidation, such indemnity obligations with
respect to the Participating Partnerships will be obligations of the Company.
Selection of the Independent Appraiser. The Partnership selected the
Independent Appraiser because of its experience in providing similar services to
other parties in connection with transactions comparable to the Consolidation,
the Independent Appraiser's reputation in connection with real estate
partnerships and real estate assets and the Independent Appraiser's prior
experience in the valuation of the Partnerships' assets. The General Partners
have engaged the Independent Appraiser to appraise the real estate portfolios of
a number of CPA(R) Partnerships annually since 1989. The compensation payable by
the CPA(R) Partnerships to the Independent Appraiser in connection with the
rendering of the Fairness Opinion is not contingent on the approval or
completion of the Consolidation.
Summary of Materials Considered. The Independent Appraiser's analysis of
the Consolidation involved the following: (i) review of a draft of this Consent
Solicitation Statement/Prospectus in substantially the form which will be filed
with SEC and provided to Unitholders; (ii) review of the financial statements of
the CPA(R) Partnerships contained in Forms 10-K, as amended, filed with the SEC
for the CPA(R) Partnerships' 1995 and 1996 fiscal year, and Forms 10-Q, as
amended, filed with the SEC for the quarter ended June 30, 1997; (iii) review of
certain operating and financial information (including property level financial
data) relating to the business, financial condition and results of operations of
the CPA(R) Partnerships, and discussions with management of the CPA(R)
Partnerships regarding the operations and business plan, and the historical
financial statements, budgets and future prospects of the CPA(R)Partnerships;
(iv) review of the Appraisals of the portfolio of properties of each CPA
Partnership; (v) review of the methodology used by the General Partners to
allocate Listed Shares among the Partnerships; and (vi) conduct of such other
studies, analyses, inquiries and investigations as the Independent Appraiser
deemed appropriate.
Analysis and Conclusions. The General Partners of the Partnerships
requested that the Independent Appraiser opine as to the fairness, from a
financial point of view, of the allocation of Listed Shares among the
Partnerships assuming all Partnerships elect to participate in the Consolidation
(the "Maximum Participation" scenario) and assuming the minimum number of
Partnerships participate in the Consolidation comprised of CPA(R):1, CPA(R):2,
CPA(R):3, CPA(R):5 and CPA(R):7 (the "Minimum Participation" scenario).
The Independent Appraiser's evaluation of the fairness from a financial
point of view of the allocations of Listed Shares pursuant to the Consolidation
employed, but was not limited to, comparisons of the Exchange Value to be
contributed to the Company by each Partnership to the Exchange Value of the
Partnerships as a group.
In its evaluation of the fairness of the allocation of Listed Shares among
the CPA(R) Partnerships, the Independent Appraiser observed that the Exchange
Values were assigned to the CPA(R) Partnerships by the General Partners based
on: Independent Appraisals provided by the Independent Appraiser of the
estimated value of the real estate portfolio of each Partnership as of March 31,
1997; valuations made by the General Partners of other Partnership assets and
liabilities as of June 30, 1997; and adjustments made by the General Partners to
the foregoing values to reflect cash distributions made by the CPA Partnerships
in July 1997, the
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General Partners' 1% interest in sale/refinancing proceeds which will be
retained in the Consolidation, certain returns due to the General Partners
relating to properties which have previously been sold by the CPA Partnerships,
estimates of the realizable value of certain litigation claims of the CPA
Partnerships, the estimated change in value of two properties as a result of
material events occurring subsequent to the appraisal date, and estimated
transfer taxes associated with each CPA Partnership's portfolio; and costs of
the Consolidation to be allocated among the Partnerships in proportion to their
Total Exchange Value before such cost allocation. The Independent Appraiser also
observed that the General Partners intend to make such pre-consolidation cash
distributions to Limited Partners in each CPA(R) Partnership as may be necessary
to cause the relative Total Exchange Values of the Participating Partnerships as
of the closing date to be substantially equivalent to the relative estimated
Total Exchange Values as shown in the Consent Solicitation Statement/Prospectus.
Relying on these Total Exchange Values, the Independent Appraiser observed
that the allocation of Listed Shares offered to each CPA(R) Partnership reflects
the net value of the assets contributed to the Company by each CPA(R)
Partnership after deducting a pro rata share of the costs associated with the
Consolidation. The Independent Appraiser believes that basing such allocations
on the value of net assets contributed to the Company is fair from a financial
point of view.
Based on the foregoing, the Independent Appraiser concluded that, based
upon its analysis and the assumptions, limitations and qualifications thereto,
and as of the date of the information considered in the Fairness Opinion, the
allocation of Listed Shares offered pursuant to the Consolidation among the
CPA(R) Partnerships in the Maximum Participation and Minimum Participation
scenarios is fair, from a financial point of view, to the Unitholders.
Assumptions. In rendering its opinion, the Independent Appraiser relied,
without independent verification, on the accuracy and completeness of all
financial and other information contained in the Consent Solicitation
Statement/Prospectus or that was otherwise publicly available or furnished or
otherwise communicated to the Independent Appraiser. The Independent Appraiser
has not made an independent evaluation or appraisal of the determinations of the
non-real estate assets and liabilities of the Partnerships. The Independent
Appraiser relied upon the balance sheet value determinations for the
Partnerships and the adjustments made by the General Partners to the real estate
Independent Appraisals to arrive at the Exchange Values. The Independent
Appraiser also relied upon the assurance of the CPA(R) Partnerships and the
General Partners that the calculations made to determine all allocations among
each CPA(R) Partnership and, within each Partnership between the General
Partners and the Unitholders, are consistent with the provisions of each
Partnership Agreement relating to cash distributions rules, that any financial
projections or pro forma statements or adjustments provided to the Independent
Appraiser were reasonably prepared and adjusted on bases consistent with actual
historical experience and reflect the best currently available estimates and
good faith judgments, that no material changes have occurred in the
Partnerships' values subsequent to valuation dates cited above or in the real
estate portfolio values subsequent to March 31, 1997 which are not reflected in
the Partnerships' Exchange Values herein, and that the CPA(R) Partnerships and
the General Partners are not aware of any information or facts regarding the
CPA(R) Partnerships that would cause the information supplied to the Independent
Appraiser to be incomplete or misleading.
Limitations and Qualifications of Fairness Opinion. The Independent
Appraiser was not asked to and therefore did not perform an analysis with
respect to any combinations of CPA(R) Partnership participation other than those
noted above. Further, the Independent Appraiser is not opining as to whether or
not any specified combination will result from the Consolidation. The
Independent Appraiser was not requested to and did not: (a) select the method of
determining the allocation of the Listed Shares or Subsidiary Partnership Units
or establish the allocations; (b) make any recommendations to the Unitholders,
General Partners or the CPA(R) Partnerships with respect to whether to approve
or reject the Consolidation or whether to elect to receive Listed Shares or
Subsidiary Partnership Units; or (c) express any opinion as to (i) the impact of
the Consolidation with respect to combinations of Participating Partnerships
other than those specifically identified in the Fairness Opinion; (ii) the tax
consequences of the Consolidation for Unitholders or for the Company, (iii) the
potential impact of any preferential return to holders of Subsidiary Partnership
Units or the Company's fee structure on the cash flow received from, or the
market value of, Listed Shares of the
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Company received by Participating Partnerships; (iv) the potential capital
structure of the Company or its impact on the financial performance of the
Listed Shares or the Subsidiary Partnership Units; (v) the potential impact on
the fairness of the allocations of any subsequently discovered environmental or
contingent liabilities; or (vi) whether or not alternative methods of
determining the relative amounts of Listed Shares and Subsidiary Partnership
Units to be issued would have also provided fair results or results
substantially similar to those of the allocation methodology used.
Further, the Independent Appraiser did not express any opinion as to (a)
the fairness of any terms of the Consolidation (other than the fairness of the
allocations for the combinations of Participating Partnerships as described
above) or the amounts or allocations of Consolidation costs or the amounts of
Consolidation costs borne by Unitholders at various levels of participation in
the Consolidation; (b) the relative value of the Listed Shares and the
Subsidiary Partnership Units to be issued in the Consolidation; (c) the prices
at which the Listed Shares or Subsidiary Partnership Units may trade following
the Consolidation or the trading value of the Listed Shares or Subsidiary
Partnership Units to be received compared with the current fair market value of
the Partnerships' portfolios or other assets if liquidated in real estate
markets; and (d) alternatives to the Consolidation.
In connection with preparing the Fairness Opinion, the Independent
Appraiser was not engaged to, and consequently did not, prepare any written
report or compendium of its analysis for internal or external use beyond the
analysis set forth in Appendix A. The Independent Appraiser will not deliver any
additional written summary of the analysis.
Compensation and Material Relationships. The Independent Appraiser has
been paid a fee of $475,000 by the Partnerships for preparing the Fairness
Opinion. In addition, the Independent Appraiser will be reimbursed for all
reasonable out-of-pocket expenses, including legal fees, up to a maximum of
$20,000 and indemnified against certain liabilities, including certain
liabilities under the federal securities laws. The fee was negotiated between
the Partnerships and the Independent Appraiser. Payment of the fee to the
Independent Appraiser is not dependent upon completion of the Consolidation. The
Independent Appraiser has rendered consulting and appraisal services to the
General Partners and their affiliates and the Partnerships in the past. In
addition, the General Partners and affiliates have paid certain nominal amounts
to Independent Appraiser for subscriptions to publications of the Independent
Appraiser. The Independent Appraiser has been compensated for preparing the
Independent Appraisals and the compensation for such services is summarized
above under "Real Estate Independent Appraisals by the Independent
Appraiser -- Compensation and Material Relationships." Such engagements were
made by the Partnerships pursuant to separate agreements.
INCOME TAX CONSEQUENCES
The following is a discussion of the material tax considerations that may
be relevant to a prospective Shareholder. It is impractical to set forth in this
Prospectus all aspects of federal, state, local and foreign tax law which may
impact upon a Shareholder's participation in the Company. Furthermore, the
discussion of various aspects of federal, state, local and foreign taxation
contained herein is based on the Internal Revenue Code of 1986 (the "Code"),
existing laws, judicial decisions and administrative regulations
("Regulations"), rulings and practice, all of which are subject to change. Any
change could be retroactive so as to apply to the Company and/or its properties.
The following discussion is generally directed to the federal tax treatment
of a U.S. resident individual Shareholder subject to regular federal income tax.
Separate sections herein describe in summary form the federal tax treatment of
certain other classes of potential Shareholders including IRAs, Keoghs,
corporate pension and profit-sharing trusts and other tax-exempt entities. There
is no discussion of the federal tax treatment of non-resident aliens and foreign
corporations. The discussion herein of the particular tax concerns of these
classes of potential Shareholders is only a general summary.
To the extent that the discussion involves matters of law, it represents
the opinion of Reed Smith Shaw & McClay as to all material federal income tax
aspects of the Consolidation. The Company has received an opinion from its
counsel Reed Smith Shaw & McClay, LLP (i) that the Company and each
Participating
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Partnership will be classified as partnerships for federal tax purposes,
provided, (a) that each Participating Partnership is not a publicly traded
partnership for Federal income tax purposes or 90 percent or more of its gross
income consists of qualifying income as defined in Code Section 7704(d) and 90
percent or more of the Company's gross income consists of qualifying income as
described in Code Section 7704(d), and (b) the Company and each Participating
Partnership is organized as described in and operates in compliance with its
governing agreements and, (ii) that the Consolidation will be a non-taxable
transaction with respect to Unitholders who become holders of Listed Shares
except for any amount by which (a) the excess of (1) a Unitholder's share of his
Participating Partnership's liabilities immediately before the Consolidation
over (2) that Unitholder's share of the liabilities of the Company immediately
after the Consolidation exceeds (b) the Unitholder's basis in his Partnership
interest immediately before the Consolidation, (iii) that the Consolidation will
be a non-taxable transaction with respect to Subsidiary Partnership Unitholders
except for any amount by which (a) the excess of (1) a Subsidiary Partnership
Unitholder's share of his Participating Partnership's liabilities immediately
before the Consolidation over (2) that Subsidiary Partnership Unitholder's share
of the liabilities of his Participating Partnership immediately after the
Consolidation exceeds (b) the Subsidiary Partnership Unitholder's basis in his
Partnership interest immediately before the Consolidation, (iv) which confirms
the opinions attributed to it in this Prospectus, and (v) which concludes that
in the aggregate, the remaining federal income tax consequences of owning Shares
in the Company referred to in this Prospectus will occur or be realized by the
Shareholders. No rulings have been sought from the IRS with respect to any of
the tax matters described in this Prospectus. The opinions of counsel are
dependent upon the present provisions of the Code, Regulations and existing
administrative and judicial interpretations thereof, all of which are subject to
change. A copy of the opinion of counsel filed as exhibit 8.1 to the Company's
Registration Statement filed with the Commission on (333- ),
can be obtained without charge by contacting Susan C. Hyde -- Director of
Shareholder Services of Carey Diversified LLC, 50 Rockefeller Plaza, New York,
NY 10020 or by calling 1-800-733-8481 ext. CPA.
UNITHOLDERS SHOULD CONSULT THEIR TAX ADVISORS CONCERNING THEIR INDIVIDUAL
TAX SITUATIONS WITH RESPECT TO THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES
ARISING FROM OWNING SHARES.
NEW TAX LAW PROVISIONS
The Taxpayer Relief Act of 1997 (the "1997 Tax Act") became law on August
6, 1997. Among the changes relevant to Unitholders are the following:
- The maximum capital gain rate applicable to the sale of a capital
asset (not including gain attributable to depreciation on real estate) held for
more than 18 months is 20%;
- The maximum capital gain rate applicable to the sale of a capital
asset held for more than 12 months but not more than 12 months is 28%;
- In general, gain attributable to depreciation on real estate is
subject to tax at a maximum rate of 25%;
- A large partnership, like the Company, beginning in 1998, may elect
to be an "electing large partnership." In general, an electing large partnership
separately reports to its partners its (a) passive activity income and loss, (b)
income and loss from other than passive activities, (c) net capital gain
allocable to (i) passive activity sources and (ii) other sources, (d) tax exempt
interest, (e) net alternative minimum tax adjustments separately reported for
passive activity loss limitations, other activities and credits, (f) income tax
credits, (g) cancellation of indebtedness income, and (h) other items as to be
provided in IRS Regulations.
Other special rules also will apply to electing large partnerships. Seventy
percent of an electing large partnership's deductions that would be
miscellaneous itemized deductions are disallowed and the remaining 30 percent
pass through to the partners and are not subject to the 2% floor. See
"Deductibility of Fees," below. An electing large partnership will not terminate
if 50% or more of its interests are sold or exchanged in a 12-month period.
Also, if the IRS changes an item of partnership income, gain, loss, deduction,
or credit, the partnership generally will be liable for interest and penalties,
and (i) the change will affect the partners in the year the IRS makes the change
as opposed to the partners in the year the partnership originally reported the
item (thus, a partner's prior year's return would not be affected), or (ii) the
partnership can pay tax on the
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item at the highest rate (corporate or individual). In addition, the
partnership's K-1s must be mailed to its partners by March 15th of each year.
The Company currently is evaluating whether to elect to be treated as an
electing large partnership; and
* For tax years beginning in 1998, a partnership's tax year will close
with respect to a partner on the date of that partner's death. As a result, a
portion of the partnership's items of income, loss, gain, deduction or credit
flow through to the decedent's last life time income tax return and the
remainder of the partnership's items are included on the estate's and/or
beneficiaries' income tax returns.
The 1997 Tax Act is complicated and many of its provisions potentially are
subject to varying interpretation. There are no judicial decisions,
administrative regulations, rulings, or practice addressing the 1997 Tax Act
yet. As a result, there are uncertainties concerning interpretations of the 1997
Tax Act.
CLASSIFICATION AS "PARTNERSHIPS"
The federal income tax consequences of owning Shares in the Company
described herein are dependent upon the classification of the Company and the
Participating Partnerships as partnerships for federal income tax purposes
rather than as associations taxable as corporations. For federal tax purposes, a
limited liability company, like the Company, is treated as a partnership and its
shareholders are treated as partners if certain conditions are satisfied. The
Company intends to satisfy those conditions and, therefore, with certain
exceptions, a Shareholder's federal income tax treatment will be substantially
similar to that of a Unitholder.
No ruling will be sought from the IRS that the Company or the Participating
Partnerships will be treated as partnerships for federal income tax purposes.
Further, it is not likely that the Company or the Participating Partnerships
would receive a ruling that they would be treated as partnerships for federal
income tax purposes if they sought such a ruling because they do not satisfy all
of the IRS criteria for obtaining such a ruling. The Company and the
Participating Partnerships will rely on an opinion of counsel that they will be
classified as partnerships for federal tax purposes. The opinion of counsel is
not binding on the IRS or the courts.
Counsel's opinion as to partnership status assumes and is conditioned on
the following: (1) the Company is organized and will operate throughout its
existence in compliance with the Delaware LLCL and in accordance with the terms
and provision of the Operating Agreement; (2) the Participating Partnerships
were organized and will continue to operate throughout their existence in
substantial compliance with applicable state statutes concerning limited
partnerships and in accordance with the terms and provisions of their
partnership agreements, all as presently in effect and as amended. The Company
believes that such conditions will be satisfied.
If for any reason any Participating Partnership were treated for federal
income tax purposes as an association taxable as a corporation in any taxable
year: (1) the income, deductions and losses of such Participating Partnership
would not pass through to the Company and then the Shareholders; (2) the
Participating Partnership would be required to pay federal income taxes on its
taxable income at rates up to a maximum of 35%, thereby substantially reducing
the amount of cash available for distribution to the Company and then the
Shareholders; (3) state and local taxes also could be imposed on such
Participating Partnership; and (4) any distributions to the Company from such
Participating Partnership would be treated as taxable dividends to the extent of
the current and accumulated earnings and profits of that Participating
Partnership. In addition, the change in a Participating Partnership's status for
tax purposes could be treated by the IRS as a taxable event, in which case the
Company and the Shareholders could have a tax liability under circumstances in
which they would not receive any cash distributions. Similar consequences would
result if the Company were treated as a corporation in any taxable year.
Effective January 1, 1997, in general, a noncorporate domestic entity with
two or more owners will be treated as partnership for federal income tax
purposes unless the entity affirmatively elects to be treated as a corporation.
Neither the Company nor any Participating Partnership will elect to be treated
as a corporation.
An entity qualifying as a partnership could be taxed as a corporation under
special rules applicable to a publicly traded partnership. If a publicly traded
partnership does not satisfy income tests set forth in the Code,
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it will be taxed as a corporation. The Company will be a publicly traded
partnership, but the Participating Partnerships are not expected to be publicly
traded partnerships.
For federal income tax purposes, a publicly traded partnership is treated
as a corporation unless 90 percent or more of its gross income for each tax year
of its existence is "qualifying income." Qualifying income, in relevant part,
includes: rents from real property, gain from the sale or other disposition of
real property, gain from the sale or disposition of a capital asset or
depreciable property held for more than one year, real property held for more
than one year used in the trade or business that is not inventory, all interest
and dividends and gain from the sale or other disposition of stock, securities
or foreign currencies, or other income, including but not limited to, gains from
options, futures or forward contacts derived with respect to the business of
investing in such stock, securities or currencies.
With few exceptions, the properties owned by the Participating Partnerships
produce income that will be qualifying income for the Company. Because it
anticipates that at least 90 percent of its gross income will be qualifying
income, the Company anticipates that it will be taxable for federal income tax
purpose as a partnership and not as a corporation.
TAX CONSEQUENCES OF THE CONSOLIDATION
Counsel has rendered an opinion that except to the limited extent discussed
below, the Consolidation will be a non-taxable transaction with respect to the
Unitholders who become Shareholders and with respect to Subsidiary Partnership
Unitholders.
The Consolidation will involve a merger of the Subsidiary Partnerships into
each Participating Partnership, pursuant to which, among other things, the
Unitholders who become Shareholders will receive Shares in the Company in
exchange for their limited partner interests in the Participating Partnerships.
Subsidiary Partnership Unitholders will continue to own their interest(s) in
their respective Subsidiary Partnership(s). While different federal income tax
characterizations of these transactions are possible, assuming that the
Participating Partnerships and the Company are treated as partnerships (see
"Classification as 'Partnerships'," above), the substance and effect of the
Consolidation should be a contribution by the Unitholders who become
Shareholders of their Participating Partnership interests to the Company in
exchange for Shares in the Company.
However, a Unitholder who becomes a Shareholder or who remains a Subsidiary
Partnership Unitholder would recognize taxable income in the amount by which (a)
the excess of (i) a Unitholder's share of his Participating Partnership's
liabilities immediately before the Consolidation over (ii) that Unitholder's
share of the liabilities of the Company or the Subsidiary Partnership, as the
case may be, immediately after the Consolidation exceeds (b) the Unitholder's
basis in his Partnership interest immediately before the Consolidation. In
addition, to the extent such liability reduction is disproportionate as among
the Partners in the particular Participating Partnership, a Unitholder will
recognize ordinary income to the extent any reduction in his or her share of
liabilities is attributable to the Participating Partnership's "substantially
appreciated inventory" and "unrealized receivables" (including the Participating
Partnership's previously allowed depreciation and cost recovery deductions
subject to recapture) as those terms are defined in Section 751 of the Code. The
Company anticipates that the Participating Partnerships will have no or an
insignificant amount of unrealized receivables or substantially appreciated
inventory items. Any gain will generally be treated as gain from the sale of a
capital asset. See "Treatment of Gain or Loss on Disposition of Shares," below
and "New Tax Law Provisions," above. The Company does not anticipate that any
Unitholder who acquired his or her CPA Partnership Interest from such CPA
Partnership will recognize any gain or loss as a result of the Consolidation.
The Manager will receive a percentage of the Listed Shares issued in the
Consolidation in consideration for its contribution to the Company of a portion
of its interests in the Participating Partnerships. See "Historical Cash
Distributions and Assigned Exchange Value -- Allocation of Listed Shares Between
Limited Partners and General Partners." The issuance by the Company of Shares to
the Manager may reduce the percentage of the Company's nonrecourse debt that is
allocated to the Shareholders. Any such reduction will be treated as a deemed
distribution to the Shareholders, reducing their basis in the Shares received in
the
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Consolidation. To the extent that any such deemed distribution exceeds a
Shareholder's adjusted basis for the Shares received in the Consolidation, gain
will be recognized by such Shareholder. See "Treatment of Cash Distributions
from the Company," below. In addition, the IRS may contend that the adjustment
of the relative rights among the Manager and Shareholders may be viewed as a
taxable disposition of a portion of the Unitholders who become Shareholders
interests in such Participating Partnerships.
The tax basis of the Shares received by a Shareholder will equal the
adjusted tax basis of his limited partner interest immediately prior to the
Consolidation (i) increased by his share, if any, of the liabilities of the
Company (which include the Company's share of the liabilities of the
Participating Partnership) and the taxable gains, if any, on the Consolidation
and (ii) decreased (but not below zero) by his share, if any, of the
Participating Partnership's liabilities immediately prior to the Consolidation.
The holding period of the Shares will include the holding period of such
Shareholder for his limited partnership interest. A Subsidiary Partnership
Unitholder will calculate his basis in this same manner using his Subsidiary
Partnership as the reference and his holding period for his Units will not
change.
The Participating Partnerships will be deemed terminated for federal income
tax purposes as a result of the Consolidation. If the Consolidation occurs on
any day other than December 31, this will result in a short taxable year for
these Partnerships. Each Unitholder in a Participating Partnership must report,
in his or her taxable year that includes the date on which the Consolidation is
consummated, an allocable share of all income, gain, loss and deduction of such
Participating Partnership for the period January 1 of the year in which the
Consolidation occurs until the consummation of the Consolidation. A Unitholder
whose taxable year differs from that of the Participating Partnership could have
"bunching" of income because of the termination. However, a Unitholder whose
taxable year is the calendar year will not experience any "bunching" of income.
In addition, as a consequence of the termination of each Participating
Partnership, each Participating Partnership will begin a new depreciation period
for its assets (39 years for its depreciable real property) thereby reducing the
annual depreciation deductions.
TAX CONSEQUENCES OF CONSOLIDATION TO SUBSIDIARY PARTNERSHIP UNITHOLDERS
Subsidiary Partnership Unitholders will be treated as owners of interests
in their Subsidiary Partnership. Subsidiary Partnership Unitholders will receive
an IRS Form K-1 from their Subsidiary Partnership reporting their share of the
Subsidiary Partnership's items of income, deduction, gain and loss.
SHAREHOLDERS OR SUBSIDIARY PARTNERSHIP UNITHOLDERS, NOT PARTNERSHIP, SUBJECT TO
TAX
The Company and each Subsidiary Partnership, is required to report to the
IRS each item of its income, gain, loss, deduction and items of tax preference,
if any. The Company and each Subsidiary Partnership will file a federal and may
file a Delaware partnership return of income but the Company will not itself be
subject to any federal or Delaware income taxes. See "Classification as a
Partnership," above and "State and Local Tax Consequences," below.
Each Shareholder will report on his personal income tax return his
distributive share of each item of the Company's income, gain, loss, deduction,
credit and tax preference. Each Shareholder will be taxed on his pro rata share
of the Company's taxable income, whether or not he has received or will receive
any cash distributions from the Company. A Shareholder's share of the taxable
income of the Company and the income tax payable by such Shareholder with
respect to such taxable income may exceed the cash actually distributed to him.
A Subsidiary Partnership Unitholder is taxed on the same manner with respect to
his Subsidiary Partnership.
The income tax returns of the Company or a Subsidiary Partnership may be
audited by the IRS, and such audit may result in the audit of the returns of the
Shareholders or the Subsidiary Partnership Unitholders. Various deductions
claimed by the Company or the Subsidiary Partnership Unitholders on its returns
could be disallowed in whole or in part on audit, which would result in an
increase in the taxable income or a decrease in the taxable loss of the Company
or the Subsidiary Partnership with no associated increase in distributions with
which to pay any resulting increase in tax liabilities of the Shareholders or
Subsidiary Partnership Unitholders.
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Each Shareholder is required to treat partnership items on his return
consistently with their treatment on the Company's return, unless a Shareholder
files a statement with the IRS identifying the inconsistency. Failure to satisfy
this requirement could result in an adjustment to conform the treatment of the
items by such Shareholder with its treatment on the Company's return, and may
cause such Shareholder to be subject to penalties. The same rules apply to a
Subsidiary Partnership Unitholder with respect to his Subsidiary Partnership.
Audits of partnership items are conducted at the Company level in a single
proceeding, rather than in separate proceedings with each Shareholder.
Administrative adjustment of determinations of the Company items made on audit
can be initiated by the Tax Matters Partners (the "TMP") or by any other
Shareholder. Suits challenging IRS determinations may be brought by the Manager,
who has been designated by the Company as the TMP or, if the TMP fails to act,
by other Shareholders owning certain minimum interests. Only one such action may
be litigated. All Shareholders generally will be bound (subject to certain
exceptions) by the outcome of final partnership administrative adjustments by
the IRS resulting from an audit handled by the TMP, as well as by the outcome of
judicial review of such adjustments. The Company will be the TMP of each
Participating Partnership and these audit rules apply to such Partnerships in
the same manner as they apply to the Company. See "New Tax Law Provisions" above
for a discussion of electing large partnerships.
ALLOCATIONS OF PROFITS AND LOSSES
A portion of each Participating Partnership's income, gain, loss, and
deduction will be allocated to the Manager as limited partner of each
Participating Partnership and the remainder will be allocated to the Company and
the Subsidiary Partnership Unitholders. Items allocated by the Company to the
owners of Listed Shares will be shared among them according to the respective
number of Listed Shares owned by each Shareholder. These allocation provisions
will be recognized for federal income tax purposes only if they are considered
to have "substantial economic effect" and are not retroactive allocations or are
determined to be in accordance with the partners' interests in the Partnership.
Certain special allocations are required by the Code and Regulations for
contributed property (Section 704(c) allocations) and other tax compliance items
such as the basis adjustments required under a Code Section 754 election. See
"Tax Elections," below. Allocations under Section 704(c) of the Code will
require gain inherent in contributed property to be allocated to the person or
persons who contributed it and may require the allocation of depreciation
deductions from property contributed or deemed to be contributed to a
partnership, or property whose book value is adjusted by a partnership on
admission of new partners, away from the contributing or previously admitted
partner where there is unrealized gain inherent in such property. As a
consequence of the Consolidation, the Shareholders will be deemed to have
contributed their partnership Units to the Company. The Manager will select the
method for making allocations under Section 704(c) of the Code. See, "Tax
Consequences of the Consolidation," above.
The Company will allocate its taxable income and losses among the
Shareholders in proportion to the number of Shares owned by them based on the
number of months during the year for which the Shareholder was a record owner of
the Shares. The Company will treat the Shareholder who is the record owner of
such Share as of the close of business on the last day of the month as having
been the owner of such Share for the entire month. Hence, in the case of a sale
or other transfer of a Share recorded before the last day of a calendar month,
the transferor Shareholder will not be allocated any taxable income for the
month in which the record transfer occurs, and the transferee Shareholder will
be allocated all taxable income for such month. Therefore, taxable income or
loss may be allocated to a Shareholder even though such income or loss was not
actually realized by such Shareholder. Furthermore, transferees of Shares may
recognize income during a period for which they did not receive distributions.
The Code generally requires that items of partnership income and deduction
be allocated among transferors and transferees of partnership interests, as well
as among partners whose interests otherwise vary during a taxable period, on a
daily basis. The Company's proposed allocation method will not comply with this
requirement. In the event a monthly convention is not allowed by Regulations (or
only applies to transfers of
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less than all of a partner's interest), the IRS may contend that taxable income
or losses of the Company must be reallocated among the Shareholders. If the IRS
were to sustain any such contention, the Shareholders respective tax liabilities
would be adjusted to the possible detriment of certain Shareholders. The Manager
is authorized to revise the Company's method of allocation between transferors
and transferees (as well as among partners whose interests otherwise vary during
a taxable period) to comply with any future Regulations. Similarly, the IRS
could challenge the allocations made by the Subsidiary Partnerships.
The Company believes that the allocations under the Participating
Partnership Agreements and the Operating Agreement should be regarded as meeting
the standards of Section 704(b) of the Code. Counsel is unable to opine to that
effect, however, because, among other things, allocations to preserve uniformity
as among Shares are not in technical compliance with the Regulations.
PASSIVE ACTIVITY LOSS LIMITATIONS
The Code provides that deductions from passive trade or business
activities, to the extent they exceed income from all such passive activities
(exclusive of portfolio income), generally may not be deducted against other
income of individuals, estates, trusts, closely held C corporations or personal
service corporations.
Passive income, gain, losses and credits from a publicly traded
partnership, such as the Company, may only be applied against other items of
income, gain and loss from that publicly traded partnership. Any unused passive
activity losses and credits are treated as suspended losses and credits, and can
be carried forward and treated as deductions and credits from passive activities
in the next taxable year. Suspended losses and credits attributable to passive
trade or business activities are allowed in full upon a fully taxable
disposition of the taxpayer's entire interest in the activity to an unrelated
party. Suspended passive activity losses of a publicly traded partnership, such
as the Company, are allowed only upon a disposition of all of a Shareholder's
interest in the publicly traded partnership. If an interest in a passive
activity is transferred by reason of death, the amount of suspended passive
activity losses that may be deducted are reduced to the extent of any step-up in
the basis of the interest in the passive activity which occurs at the time. A
gift of an interest in a passive activity does not trigger recognition of
suspended passive activity losses, but permits the donee to increase his basis
in the interest by the amount of those losses up to the fair market value of
such interest.
Pursuant to the legislative history of the legislation that included the
passive activity loss rules in the Code, income generated by the Company will
constitute portfolio income to the Shareholders, not passive activity income.
Shareholders will not be able to offset passive activity losses from other
sources with income generated by the Company. See "Investment and Other
Limitations on the Deduction of Interest" below. However, suspended passive
activity losses from the Company can offset passive income from the Company. In
contrast, passive activity income allocated by a Subsidiary Partnership to a
Subsidiary Partnership Unitholder will be passive activity income so long as the
Subsidiary Partnership is not a publicly traded partnership. The Company does
not anticipate that the Subsidiary Partnerships will be publicly traded
partnerships.
DEDUCTIBILITY OF FEES
All expenditures of the Company and the Participating Partnerships must
constitute ordinary and necessary business expenses in order to be deductible,
unless the deduction of any such item is otherwise expressly permitted by the
Code (e.g., interest and certain taxes). In addition, all expenditures for
personal services must be reasonable in amount and, in order to be deductible,
must represent payment for services actually rendered during the current taxable
year rather than in future years.
The Company and the Participating Partnerships intend to claim deductions
both for property management fees and for expense reimbursements payable to the
Manager or its affiliates. The Company believes, on advice of counsel, that the
management fees and reimbursements payable to the Manager will be deductible as
ordinary and necessary business expenses by the Company and/or the Participating
Partnerships. However, because the Company's belief depends upon essentially
factual determinations, no assurance can be given that the deduction of any of
the fees paid to the Manager will not be successfully challenged by the IRS.
These issues are essentially questions of fact with respect to which counsel
cannot opine. If all or a portion of such
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deductions were to be disallowed, the Company's taxable income would be
increased or its losses would be reduced.
The Company may pay acquisition fees to the Manager, its Affiliates or
others in connection with the acquisition of properties. The Company intends to
add Acquisition Fees paid to the basis of the property acquired. Also, the
Participating Partnership Agreements permit and the Operating Agreement permits
the Participating Partnerships and the Company to pay a fee to the Manager or
its Affiliates in connection with the sale of a partnership property. The
Participating Partnerships and the Company intend to treat these expenses as
expenses of sale of the property involved, thereby decreasing any gain or
increasing any loss recognized thereupon.
The Code limits the deductibility of an individual's miscellaneous itemized
deductions, including investment expenses, to the amount by which such
deductions exceed 2% of his adjusted gross income. Individual Shareholders and
Subsidiary Partnership Unitholders will be subject to this limitation in
determining their deductibility of their allocable share of the Company's
management fees and other expenses unless the Company or the Participating
Partnerships are deemed to be engaged in a trade or business. If the Company
elects to be treated as an electing large partnership, this limitation no longer
will apply to Shareholders. See "New Tax Law Provisions", above. Subsidiary
Partnership Unitholders remain subject to this rule.
ORGANIZATION AND CONSOLIDATION EXPENSES
The Participating Partnerships and the Company will incur expenses in
connection with the Company's organization and the Consolidation. Expenses of
organizing the Company ("organization expenses") or of issuing and marketing
Shares in the Company ("syndication expenses") may not be deducted by the
Company, any Shareholder or any Subsidiary Partnership Unitholder. However, an
election is permitted to amortize organization expenses (but not syndication
expenses) over a period of not less than 60 months. Organization expenses are
defined as expenditures that are (i) incident to the creation of a partnership;
(ii) chargeable to capital accounts; and (iii) of a character that, if expended
incident to the creation of a partnership having an ascertainable life, would be
amortized over such life. The Company and each Subsidiary Partnership intends to
make such an election. Syndication expenses are defined as expenditures
connected with the issuing and marketing of interests in the Company.
Registration fees, printing costs, selling and promotional material costs and
legal fees for securities and tax advice pertaining to registration of the
Shares with the SEC are syndication expenses and, therefore, do not qualify for
amortization.
START-UP EXPENDITURES
Section 195 of the Code provides that "start-up expenditures" may, at the
election of the taxpayer, be amortized ratably over a period of not less than 60
months (beginning with the month that the business begins). The determination of
whether an item is a start-up expenditure is based on the facts and
circumstances in each case.
The Company may seek to deduct certain expenses incurred by it prior to the
commencement of any rental activity or of its ownership interest in the
Participating Partnerships. The IRS may disallow any such deductions as not
having been incurred in connection with an existing trade or business of the
Participating Partnerships and/or the Company. If the IRS were successful in
such disallowance, such disallowed expenses would be available as deductions
only through amortization over the applicable start-up expenditure period (to
the extent a proper election is in place and such expenses qualify as start-up
expenditures).
The Participating Partnerships and the Company intend to take steps to
preserve their right to amortize start-up expenses commencing with the date of
the Consolidation, in the event it is ultimately determined that the Company
began business at that time. Although the Participating Partnerships and the
Company are advised by counsel and tax accountants, because of the uncertainty
that presently surrounds these matters, no opinion of counsel will be received
with respect to these deductions and there can be no assurance that, despite the
Participating Partnerships' or the Company's best efforts, they will be able to
preserve their right to amortize the above described expenses.
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TAX AND "AT RISK" BASIS OF SHARES
The manner of calculating a Shareholder's initial adjusted basis for his
Shares has been discussed above. See "Tax Consequences of the Consolidation,"
above. Each Shareholder's initial adjusted basis for his Share(s) will be
increased by the amount of (i) his share of items of income and gain of the
Company and (ii) any increase in his proportionate share of the Company's share
of nonrecourse indebtedness to which the Participating Partnerships' or the
Company's properties are subject (limited to the fair market value of the
property securing such indebtedness), and reduced, but not below zero, by (a)
the amount of his share of items of the Company loss and deduction and
expenditures which are neither properly deductible nor properly chargeable to
his capital account, (b) the amount of any cash distributions (including any
decrease in his or her share of liabilities) and (c) the basis of any property
distributions received by such Shareholder. Subsidiary Partnership Unitholders
calculate their basis for their Subsidiary Partnership Units in the same manner
with reference to the Subsidiary Partnership's liabilities, items of income,
loss, deduction, gain, and credit and distributions. See "Treatment of Gain or
Loss on Disposition of Shares" and "New Tax Law Provisions."
The amount of the Company's losses that may be deducted by a Shareholder is
limited to the adjusted basis of the Shareholder's Shares. Any excess losses are
carried over until the Shareholder has sufficient basis to deduct such losses.
Deductibility of a Shareholder's share of the Company's losses is further
limited by his "at risk" basis as determined pursuant to the "at risk" rules
found in Section 465 of the Code. The "at risk" rules provide that a taxpayer
may not deduct losses from an activity for a taxable year to the extent such
losses exceed the aggregate amount for which the taxpayer is considered "at
risk" with respect to the activity. Any loss in excess of a taxpayer's amount
"at risk" will be allowed as a deduction in succeeding taxable years if and to
the extent the taxpayer is "at risk" with respect to the activity in such
subsequent year. The "at risk" rules apply to essentially all Shareholders
except those that are C corporations owned by more than five individuals during
the last half of the corporation's taxable year. If the Company's "at risk"
basis in the Participating Partnerships or a Shareholder's "at risk" basis in
the Company is decreased below zero in any year (e.g., due to the Company's or
the Shareholder's receipt of a cash distribution or a decrease in its or his
share of liabilities included in its or his "at risk" basis), the Company and
the Shareholder will recognize income to the extent his or its "at risk" basis
is below zero. However, the amount of income which must be recognized in these
circumstances is limited to the net losses previously allowed to the Company
from the Participating Partnerships or to the Shareholder from the Company.
A Shareholder will be deemed to be "at risk" with respect to its share of
qualified nonrecourse financing secured by real property. However, a Shareholder
will not be considered to have amounts "at risk" to the extent he is protected
against losses through guarantees, stop-loss agreements or other similar
arrangements. To the extent that any borrowing by a Participating Partnership or
the Company is qualified nonrecourse financing, the "at risk" rules should not
limit the deductibility of any Participating Partnership and/or Company losses,
if any. However, to the extent that any borrowings by a Participating
Partnership or the Company is not qualified nonrecourse financing, the "at risk"
rules could apply to limit the deductibility of losses by the Company or
Shareholders, respectively. The same rules apply to Subsidiary Partnership
Unitholders.
The passive activity loss limitations are applied after the "at risk" rules
are applied. Therefore, a loss not currently deductible under the "at risk"
rules would be suspended pursuant to the "at risk" rules, not the passive
activity loss rules. Any such suspended losses could later become subject to the
passive activity loss rules when they would otherwise be deductible under the
"at risk" rules. See "Passive Activity Loss Limitations," above.
TREATMENT OF CASH DISTRIBUTIONS FROM THE COMPANY
Cash distributions (which are considered to include any reduction in
Participating Partnership and/or the Company nonrecourse indebtedness) made to
Shareholders, other than those in exchange for or in redemption of all or part
of their Share(s), generally will not affect a Shareholder's distributive share
of income or loss from the Company. Such distributions may represent
distributions of income, returns of capital or both. A
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distribution of income or a return of capital generally does not result in any
recognition of gain or loss for federal income tax purposes but reduces a
Shareholder's adjusted basis in his Shares. Cash distributions in excess of a
Shareholder's adjusted basis in his Shares will result in the recognition of
gain to the extent of such excess. Ordinarily, any such recognized gain will be
treated as gain from the sale or exchange of Shares. Cash distributions from
operations or in redemption of all or part of that Subsidiary Partnership
Unitholder's interest in the Subsidiary Partnership made by a Subsidiary
Partnership to a Subsidiary Partnership Unitholder will be taxable as described
above. A cash distribution made by a Subsidiary Partnership to a Subsidiary
Partnership Unitholder in redemption of all of that Subsidiary Partnership
Unitholder's interest in the Subsidiary Partnership also could result in
recognition of loss by such Subsidiary Partnership Unitholder if the Subsidiary
Partnership Unitholder's basis for his interest in the Subsidiary Partnership
exceeds the sum of the cash received and his allocable share of nonrecourse
indebtedness. See "Tax Consequences of the Consolidation" and "Tax and 'At Risk'
Basis of Shares," above and "Treatment of Gain or Loss on Disposition of
Shares," below.
TREATMENT OF GAIN OR LOSS ON DISPOSITION OF SHARES OF UNITS
Any gain or loss recognized by a Shareholder upon the sale or exchange of
his Shares will generally be treated as capital gain or loss, except that the
portion of any proceeds of sale which is attributable to any unrealized
receivables (which term includes, for these purposes, allocable depreciation
recapture attributable to underlying partnership property (see "Depreciation
Recapture," below) or appreciated inventory items (to the extent that the value
of such inventory items of the Company exceeds the basis of such property, had
such property been disposed of by the Company prior to the sale of such
Shareholder's share) will generally be treated as ordinary income. See "New Tax
Law Provisions" above for a discussion of capital gains tax rates. Shareholders
which are corporations or trusts are taxable on amounts representing
depreciation recapture attributable to underlying Participating Partnership or
Company property upon distribution of Shares to their shareholders or
beneficiaries.
The installment method of reporting income or gain is not available for a
sale or exchange of Listed Shares because the Code prohibits use of the
"installment method" to report gain on the sale or exchange of publicly traded
property. Additionally, gains, if any, on sale of a Subsidiary Partnership
Unitholder's interest sold on the installment method, are taxable in the year of
sale or exchange to the extent of any ordinary income realized, even if the sale
or exchange is otherwise reported on the "installment method." See "Installment
Sales" and "Depreciation Recapture," below.
In determining the amount received upon the sale or exchange of a Share, a
Shareholder must include, among other things, his allocable share of
non-recourse indebtedness. Therefore, it is possible that the gain or other
income recognized on the sale of a Share may exceed the cash proceeds of the
sale and, in some cases, the income taxes payable with respect to the sale may
exceed such cash proceeds. The same rules apply to the sale by a Subsidiary
Partnership Unitholder of his Units.
The IRS has ruled that a partner must maintain an aggregate adjusted tax
basis in his aggregate partnership interest (consisting of all interests
acquired in separate transactions). On the sale of a portion of such aggregate
interest, a partner would be required to allocate, on the basis of the relative
fair market values of such interests on the date of sale, his aggregate tax
basis between the portion of the interest sold and the portion of the interest
retained. This requirement, if applicable to the Company, effectively would
preclude a Shareholder owning Shares that were purchased at different prices on
different dates from controlling the timing of the recognition of the inherent
gain or loss in his Shares by selecting the specific Shares that he would sell.
The ruling does not address whether this aggregation requirement, if applicable,
results in the tacking of the holding period of older Shares on the holding
period of more recently acquired Shares. Because the application of this ruling
in the context of a publicly traded partnership, such as the Company, is not
clear, a person acquiring Shares and considering the subsequent purchase of
additional Shares should consult his professional tax advisor as to the possible
tax consequences of the ruling.
When a Shareholder or Subsidiary Partnership Unitholder subject to the
passive activity loss limitations disposes of his entire interest in the
Partnership in a fully taxable disposition to an unrelated party, his
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suspended passive activity losses, if any, from the Partnership will be
deductible. If a Shareholder or Subsidiary Partnership Unitholder subject to the
passive activity loss limitations disposes of less than his entire interest in
his respective partnership or disposes of his interests in a transaction which
is not fully taxable, any suspended passive activity will remain suspended. See
"Passive Activity Loss Limitations," above.
TREATMENT OF GIFTS OF SHARES
Generally, no gain or loss is recognized for income tax purposes as a
result of a gift of property. However, in the event that a gift of a Share is
made at a time when a Shareholder's allocable share of nonrecourse indebtedness
exceeds the adjusted basis for his Share, such Shareholder will recognize gain
upon the transfer of such Share to the extent of such excess. Any such gain will
generally be treated as capital gain. Gifts of Shares may also be subject to a
gift tax imposed pursuant to the rules generally applicable to all gifts of
property. The same rules also apply to gifts of Subsidiary Partnership Units.
A gift of a Share or Subsidiary Partnership Unit will not cause any
suspended passive activity losses to be deductible. The donee's basis for the
Subsidiary Partnership Unit Share is the donor's basis immediately before the
gift plus any suspended passive activity losses allocable to the gifted Share.
However, the donee's basis for purposes of determining loss on a later
disposition cannot exceed the fair market value of the Share or Unit on the date
of the gift. Consequently, if the sum of the donor's basis for the Share or Unit
and suspended passive activity losses exceed the Share's or Unit's fair market
value, a portion of the suspended passive activity losses could be lost and
would never be deductible.
ISSUANCE OF ADDITIONAL SHARES
The Company may issue new Shares to finance the acquisition of additional
properties or for other purposes. On any issuance of additional Shares, the
capital accounts of the existing Shareholders will be adjusted to reflect a
revaluation of the Company's properties (based on their then fair market value,
net of liabilities, to which they are then subject). Any resulting unrealized
gain or loss will be allocated among the existing Shareholders and subsequent
allocations of taxable income, gain, loss and deduction will be made in
accordance with the Regulations. See "Allocations of Profits and Losses," above.
The issuance of additional Shares also could result in a decrease in a
Shareholder's share of nonrecourse debt. Any such reduction would be treated as
a distribution of cash. See "Treatment of Cash Distributions from the Company,"
above.
TREATMENT OF GAIN OR LOSS ON SALE OF PROPERTY
Gains or losses realized by the Company on sales of property held for more
than one year will be treated as long-term capital gain or loss, (i) unless it
is determined that the Company or the Participating Partnership that owns the
property is a "dealer" in real estate for federal income tax purposes, (ii)
except to the extent that the properties sold constitute Section 1231 Assets
(real property assets used in a trade or business and held for more than one
year), and (iii) except to the extent the company sells personal property and
has depreciation recapture. See "New Tax Law Provisions," above "Section 1231
Assets" include depreciable real property of the type which the Company and/or
the Participating Partnerships own and intend to acquire. If the properties sold
constitute Section 1231 assets, a Shareholder's or Subsidiary Partnership
Unitholder's proportionate share of gains and losses from the sale of such
assets would be combined with any other Section 1231 gains or losses recognized
by him during the year. The net Section 1231 gain would be taxed as capital
gain, except that if the Shareholder or Subsidiary Partnership Unitholder has
reported net Section 1231 losses in any of the five years prior to such sale,
any net Section 1231 gains would be reported as ordinary income to the extent of
such reported losses. Net Section 1231 losses would be taxed as ordinary losses.
See "New Tax Law Provisions" for a discussion of capital gains rates.
In the event that the entity owning the property is determined to be a
"dealer," any gain or loss on the sale or other disposition of a property by
such entity would be treated as ordinary income or loss. Although none of the
Participating Partnerships nor the Company anticipates being deemed a "dealer"
in real estate, there can be no assurance that the proposed course of activities
of the Company may not result in it being
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deemed "dealer." The Company intends to conduct its activities, and to consult
with a tax professional from time to time with regard to the structuring of its
operations and transactions, to avoid being deemed a "dealer." However, since
the determination of "dealer" status is essentially factual and will depend upon
the nature of the properties acquired and the conduct of activities by the
Company, counsel is unable to express an opinion as to whether the Company or
any Participating Partnership might be deemed a "dealer."
A foreclosure of a mortgage on a property or the acceptance of a deed in
lieu of foreclosure is deemed to be a disposition of such property. In such
transactions, the Company or a Participating Partnership may recognize gain in
an amount equal to the excess, if any, of the outstanding mortgage over the
adjusted basis of such property.
In certain other circumstances, the gain allocable to the Shareholders or
Subsidiary Partnership Unitholders upon a sale, exchange or other disposition of
Partnership property may exceed any resulting cash distributable to the
Shareholders or Subsidiary Partnership Unitholders and in some cases the income
taxes payable by the Shareholders or Subsidiary Partnership Unitholders with
respect to such gain may exceed the cash distributable, if any, to such
Shareholders or Subsidiary Partnership Unitholders.
SALE-LEASEBACK TRANSACTIONS
Many of the Participating Partnerships Investments are and a number of the
Company's investments may be in the form of sale-leaseback transactions wherein
the Participating Partnership or the Company either (i) purchased or will
purchase property free of encumbrances, net lease such property back to the
seller and obtain separate mortgage financing or (ii) purchase property subject
to a mortgage and/or an existing net lease. If a Sale-Leaseback transaction were
recharacterized as a financing arrangement, the Participating Partnership or the
Company, as the case may be, would not be entitled to depreciation deductions
with respect to the property, and the lease payments received by the
Participating Partnership or the Company and, in certain circumstances, any gain
on the sale of such property could be treated, at least in part, as interest
income. Such a recharacterization could increase a Shareholder's or a Subsidiary
Partnership Unitholder's share of ordinary income and decrease such
Shareholder's or a Subsidiary Partnership Unitholder's share of capital gain.
The Participating Partnerships and the Company will attempt to structure each
net lease transaction to be recognized as a leasing arrangement for federal
income tax purposes and not treated as a financing arrangement or conditional
sale.
On June 3, 1996, the IRS proposed regulations under Code Section 467. Code
Section 467 applies to rental agreements that have increasing or decreasing
rents or prepaid or deferred rents. For lease-backs or long term agreements
entered into for tax avoidance purposes ("disqualified lease-backs or long term
agreements"), the proposed Regulations under Code Section 467 provide that the
rent effectively must be leveled and accrued economically. Both rent and
interest would be accrued for each period similar to a mortgage. These
Regulations do not define what constitutes a tax avoidance purpose. For leases
other than disqualified lease-backs or long term agreements, the Regulations
under Code Section 467 provide that rent properly allocated to each period must
be accrued in that period and interest is deemed to be paid or earned on any
deferred on prepaid rent. These Regulations are proposed to apply to
disqualified lease-backs and long term agreements entered into after June 3,
1996 and other leases entered into after the date final regulations are issued.
The Company and the Participating Partnerships engage in long-term sale
lease-back transactions; however, based on current law and interpretations
thereof, neither the Company nor the Participating Partnerships believe that
their typical transactions would be found to have a tax avoidance purpose. Also,
neither the Company nor the Participating Partnerships anticipate having any
significant deferred or prepaid rent. However, because these Regulations are new
and not entirely clear, neither the Company nor the Participating Partnerships
can determine with any assurance how these Regulations, if adopted, might apply
to them.
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ACQUISITION OF STOCK, OPTIONS AND WARRANTS
The Company currently owns (directly or through the Participating
Partnerships) and may invest in the stock of, or other interests in, or warrants
or other rights to purchase the stock of or other interests (an "Equity
Interest") in any tenant or the parent or controlling person of any tenant of
the Company. If the acquisition of such Equity Interest occurs contemporaneously
with the purchase of property in a Sale-Leaseback transaction or the execution
of a lease and no separate consideration is provided for such acquisition, the
purchaser will be required to allocate the price paid between the property and
the Equity Interest based upon the relative fair market values of each, or in
the case of a lease, the lessor may be required to recognize rental income equal
to the value of the Equity Interest. Upon the sale or exchange of such Equity
Interest, the gain or loss will generally be capital gain or loss and will be
short-term or long-term depending on the property's holding period. Upon the
exercise of an option or warrant, the price paid for the option or warrant will
be added to the exercise price to determine the Participating Partnership's or
the Company's basis in the stock or other interest acquired. The holding period
for the stock or other interest acquired through such an exercise will commence
on the day after the date of exercise of the option or warrant. Should an option
or warrant owned by the Participating Partnerships or the Company expire or
lapse unexercised, the Participating Partnerships or the Company, respectively
will sustain a loss equal to the amount paid for the option or warrant. Such
loss will generally be a capital loss and will be short-term or long-term
depending on the Participating Partnership's or the Company's holding period.
TAX ELECTIONS
The Company and the Participating Partnerships may make various elections
for federal income tax reporting purposes which could result in various items of
income, gain, loss, deduction and credit being treated differently for tax
purposes than for accounting purposes.
The Code provides for optional adjustments to the basis of partnership
property for measuring both depreciation and gain upon distributions of
partnership property (Section 734) and transfers of Shares (Section 743)
provided that a partnership election has been made pursuant to Section 754. The
Operating Agreement and the Participating Partnership Agreements each require
that a Section 754 election be made. Any such election, once made, is
irrevocable without the consent of the IRS.
The IRS has ruled that under the Code and applicable Regulations, the
Section 754 election will generally allow a Shareholder who purchases Shares
from another Shareholder in the open market to increase his share of the tax
basis in the Participating Partnership's properties to reflect the purchaser's
purchase price for such Shares, as if such purchaser had acquired a direct
interest in the Company's assets and of its proportionate share of the Company's
assets. If a Shareholder's adjusted basis in his Shares is less than his
proportionate share of the adjusted basis of the Company's property at the time
of acquisition of such Shares, such Shareholder's basis in his share of the
Company's property must be reduced by such an amount resulting in adverse
consequences to such Shareholder.
The Company will calculate the basis adjustment for subsequent purchasers
who furnish certain information to the Company. For purchasers who do not
furnish this information, the Company intends to provide information to enable
them to calculate the basis adjustment for themselves.
The calculations and adjustments in connection with any Section 754
election would depend, among other things, on the day on which a transfer occurs
and the price at which the transfer occurs. In order to help reduce the
complexity of these calculations and the resulting administrative cost to the
Company, the Operating Agreement provides that the Company will apply the
following methods in making the necessary adjustments: (i) the price paid by a
transferee for his Shares will be deemed to be the lowest quoted trading price
of the Shares during the month in which the transfer was deemed to occur,
irrespective of the actual price paid; and (ii) the transfer will be deemed to
occur at the close of business on the last day of the calendar month in which
the transfer occurs, irrespective of when the transfer actually occurs. The
application of these conventions would yield a less favorable tax result, as
compared to adjustments based on actual price, to a transferee who paid more
than the lowest quoted trading price for his Shares.
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The calculations under Section 754 are highly complex, and there is little
legal authority dealing with the mechanics of the calculations, particularly in
the context of large, publicly-held partnerships. It is possible the IRS might
take the position that the adjustments made by the Company do not meet the
requirements of the Code or the Regulations, particularly given the special
assumptions to be applied by the Company for administrative convenience. If the
IRS were to sustain such a position, any increased depreciation deductions
allowable to a transferee of Shares as the result of the Section 754 election
might be reduced, and any gain allocable to a transferee on the sale of the
Company's and the Participating Partnerships' properties might be increased.
Similar rules will apply with respect to any transfer of Units in a
Participating Partnership or a Subsidiary Partnership Unitholder.
The Manager is authorized by the Operating Agreement and by the
Participating Partnership Agreements to cause the Participating Partnerships and
the Company to make or revoke any election required or allowed to be made by
partnerships under the Code. Such election(s) may increase or decrease taxable
income or loss. See "New Tax Law Provisions" above for a discussion of electing
large partnerships.
DEPRECIATION
Current tax law provides for an accelerated cost recovery system ("ACRS")
of depreciation. Under this system, the cost of eligible nonresidential real
property, whether new or used, generally must be depreciated over a 39-year
period using the straight-line method.
Furthermore, under ACRS, eligible personal property is divided into six
classes, i.e., 3-year, 5-year, 7-year, 10-year, 15-year, and 20-year property.
This property, whether new or used, generally must be depreciated over specified
periods using a statutorily prescribed accelerated method of depreciation or, if
the taxpayer so elects, using the straight-line method over various periods.
The depreciation periods are lengthened in certain circumstances where real
property is leased to a tax-exempt entity or owned by a partnership having
tax-exempt entities as partners. For this purpose, "tax-exempt entities" do not
include those entities which would be taxable on their allocable share of
Partnership income as "unrelated business taxable income."
Generally, as a result of the deemed termination of the Participating
Partnerships, all nonresidential real property owned by the Participating
Partnerships at the time of the Consolidation and any other real property
acquired by the Company will be subject to a 39 year recovery period, and will
be depreciated using the straight-line method. Any personal property acquired by
the Company generally will be depreciated over a seven-year recovery period
using the double declining balance method (switching to straight-line at a time
to maximize the depreciation deductions). As a result, the amount of the
depreciation deductions of each Participating Partnership after the
Consolidation will be less than the normal depreciation deductions before the
Consolidation. If the Consolidation occurs in 1998 and the Company and
Participating Partnerships elect to be treated as electing large partnership, it
is possible, but not certain, that the Participating Partnership will not
terminate and their depreciation deduction will not change. See "New Tax Law
Provisions" above. If, for tax purposes, a Participating Partnership is not
considered the owner of a CPA Property held at the time of the Consolidation
(for example, where a lease is treated as a financing arrangement rather than a
"true lease"), the Shareholders would not be entitled to depreciation deductions
with respect to that Property. It is anticipated that the Participating
Partnerships will be treated as the owners for tax purposes of all of the CPA
Properties held at the time of the Consolidation. In addition, if any tax-exempt
entities hold Shares and the Company's allocations are not considered to be
"qualified allocations," then a portion of the Company's depreciation
deductions, corresponding to the tax-exempt entities' percentage interest in the
Company, may be required to be depreciated over somewhat longer recovery periods
than those otherwise applicable. See "Allocations of Profits and Losses" and
"Tax Elections" above, and "Investment by Qualified Pension and Profit-Sharing
Plans (Including Keoghs), Stock Bonus Plans, and Individual Retirement
Accounts," below.
DEPRECIATION RECAPTURE
The Code provides that excess depreciation (the excess of accelerated
depreciation over straight-line depreciation) on depreciable real property,
other than low-income housing, and all depreciation on depreciable
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real property eligible for ACRS where other than straight-line depreciation is
used, is subject to recapture as ordinary income (to the extent of gain) when
the property is sold regardless of how long it is held before such sale. Since
the Participating Partnerships and the Company will only claim straight-line
depreciation, it is unlikely that non-corporate Shareholders of the Company will
be subject to depreciation recapture with respect to the Company's depreciable
real property whether or not eligible for depreciation under ACRS. However, if
depreciable real property is sold or otherwise disposed of within 12 months of
its acquisition, then all depreciation, including straight-line, will be subject
to recapture as ordinary income upon such disposition. See "New Tax Law
Provisions," above for a discussion of the special rate applicable to gain
allocable to depreciation on real property.
Additionally, under the Code, a corporate Shareholder is required to
recognize as ordinary income 20% of its distributive share of the Company's gain
from the disposition of depreciable real property, to the extent of the
depreciation deductions claimed thereon, regardless of whether straight-line
depreciation was used.
The Code also provides that all depreciation on tangible personal property
and certain items of real property such as elevators and escalators is, to the
extent of any gain recognized, subject to recapture as ordinary income when such
property is sold, regardless of how long it is held before sale. The Company
and/or the Participating Partnerships will own items of such property and,
accordingly, the Company and the Shareholders may be subject to depreciation
recapture with respect thereto.
ALTERNATIVE MINIMUM TAX
Individual and corporate taxpayers have potential liability for alternative
minimum tax. Certain items from the Company could affect a Shareholder's
alternative minimum tax liability. Since such liability is dependent upon each
Shareholder's own circumstance, Shareholders should consult their own tax
advisors concerning the alternative minimum tax consequences of being a
Shareholder. Likewise, Subsidiary Partnership Unitholders should consult their
own tax advisors concerning the alternative minimum tax consequences of being a
Unitholder.
INSTALLMENT SALES-IMPUTED INTEREST
If a sale or exchange of the Company's or a Participating Partnership's
real or personal property requires a payment or payments to be made in more than
one tax year, the Code allows any gain recognized to be reported on the
installment method." The Code provides that interest is payable on the
applicable percentage of tax deferred in connection with installment sales of
all non-dealer property the sale price of which exceeds $150,000. Such interest
is payable when the aggregate face amounts of installment obligations held by a
taxpayer which are issued during the taxable year exceed $5,000,000 and until
any such installment obligation is satisfied. A Shareholder will be treated as
owning a proportionate share of any Company or Participating Partnership
installment obligation and the $5,000,000 threshold is measured at the
Shareholder level. Interest must be paid on the deferred tax at the rate
applicable to underpayments of tax in effect for the month with which the
taxpayer's taxable year ends. The same rules apply with respect to any
Subsidiary Partnership Unitholder's interest in a Participating Partnership that
holds an installment obligation.
The Code provides that a dealer may not report dealer gains on the
installment method. A dealer with respect to real property is a taxpayer who
holds real property for sale to customers in the ordinary course of the
taxpayer's trade or business. The Company does not anticipate that it or any
Participating Partnership will be a dealer in real property. Therefore, neither
a Shareholder nor a Subsidiary Partnership Unitholder who is not a dealer in
real property should be eligible to report any gain from an installment sale by
the Company or any Participating Partnership of property on the installment
method. Additionally, the Code provides that if an installment obligation
arising from the disposition of non-dealer property is pledged as security for
any indebtedness, the net proceeds of such secured indebtedness shall be treated
as a payment with respect to the installment obligation.
If, upon an installment sale of property, the Participating Partnerships or
the Company were to receive a rate of interest on any installment obligation
from the buyer which is below the rate provided by law, the sales terms would be
recharacterized in a manner which would increase ordinary income to the
Participating
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Partnerships or the Company, while decreasing in a corresponding manner, first,
any long-term capital gains, and second, any depreciation recapture. Such
interest income would be recognized by the Participating Partnerships and/or the
Company according to the original issue discount rules. (See "Accrual of
Original Issue Discount," below.) Because the terms of sale of properties will
be determined in part by then-current market conditions and negotiations with
potential buyers, no assurance can be given that interest income will not be
imputed on installment sales.
ACCRUAL OF ORIGINAL ISSUE DISCOUNT
The Code contains extensive rules relating to the tax accounting for
original issue discount ("OID"). The Participating Partnerships and the Company
will be subject to the OID rules with respect to its installment sales. OID can
arise with respect to an installment sale if (i) the interest rate varies
according to fixed (non-floating) terms, (ii) the debtor is permitted to defer
interest payments to years after such interest accrues, (iii) the amount of the
creditor's share of income or appreciation from the mortgaged property under a
right of participation is determined in a year before payment of such amount is
due, or (iv) interest is imputed on an installment sale. See "Installment
Sales -- Imputed Interest," above. The Participating Partnerships or the Company
may sell properties on an installment basis with any or all of the preceding
terms and therefore may be subject to the OID rules.
Recognition of OID as an item of income in any year will have the effect of
either reducing losses, if any, allocable to Shareholders or increasing the
amount of income which Shareholders must report from the Company without the
receipt of cash distributions with which to pay any tax resulting from the
reporting of such income. However, the Company expects the amount of OID, if
any, which the Company might recognize in any year would be minor in comparison
with cash distributions allocable to Shareholders in such year. Investment
Interest and Other Limitations on the Deduction of Interest
A Shareholder's or a Subsidiary Partnership Unitholder's (that is not a
corporation) investment interest expense may be deducted only up to the
Shareholder's or the Subsidiary Partnership Unitholder's net investment income
(i.e., the income from interest, dividends, rents, royalties and net short-term
capital gains from investment property to the extent it exceeds the expenses,
including straight line depreciation, incurred in earning such income). Interest
subject to the investment interest limitation includes all interest on debt
incurred in connection with property held for investment (including property
subject to a net lease) but not incurred in connection with the taxpayer's trade
or business, other than consumer interest and qualified residence interest.
To the extent that the Participating Partnerships' or the Company's
properties are considered to be "investment assets," the amount of mortgage
interest allocated to each Shareholder or Subsidiary Partnership Unitholder,
other than a corporation, may be deductible by him only to the extent it does
not exceed his net investment income plus the amount by which certain deductions
attributable to property subject to a net lease exceeds the net income of such
property. The amount of interest not deductible due to such limitation, if any,
may be carried over to subsequent years within certain limits. The Participating
Partnerships and the Company anticipate that substantially all of their
properties will be treated as investment assets and that substantially all of
their mortgage interest deductions allocated to the Shareholders or Subsidiary
Partnership Unitholder will be subject to the above rules on disallowance and
carryover. However, unless the Participating Partnerships or the Company realize
a loss for tax purposes in any taxable year, the Company anticipates that
neither a Shareholder nor a Subsidiary Partnership Unitholder will have any
"excess investment interest" subject to disallowance attributable to his
interest in the Company. Should the Company or a Subsidiary Partnership suffer a
loss for any reason, the Shareholders and Subsidiary Partnership Unitholders of
that Subsidiary Partnership may realize "excess investment interest" because of
their investment in the Company or that Subsidiary Partnership.
In addition to the "investment interest" limitation described above,
Section 265(a)(2) of the Code disallows certain deductions for interest paid by
a taxpayer or a related person on indebtedness incurred or continued to purchase
or carry tax-exempt obligations. A Shareholder for whom tax-exempt obligations
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constitute a significant portion of his net worth should consider the impact of
Section 265(a)(2) of the Code on his ability to deduct his allocable share of
the Company's or his Subsidiary Partnership's interest expense.
Neither the Participating Partnerships nor the Company anticipate that they
will prepay any interest, but either or both may be required by prospective
lenders to pay certain amounts commonly referred to as "points" which may be
considered prepayments of interest for federal income tax purposes. The Code
requires that interest prepayments (including "points") be capitalized and
amortized over the life of the loan with respect to which they were paid.
CONSTRUCTION EXPENSES
The Participating Partnerships or the Company may incur expenditures in
connection with the construction of improvements on real property, some of which
must be capitalized for federal income tax purposes. The Code provides that
interest and real estate taxes incurred during the construction period of
improved real property which would otherwise be deductible must be added the
basis of the property and recovered through depreciation deductions. See
"Depreciation," above.
INVESTMENT BY QUALIFIED PENSION AND PROFIT-SHARING PLANS (INCLUDING KEOGHS),
STOCK BONUS PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS
Qualified pension and profit-sharing plans (including Keoghs), stock bonus
plans and IRA's (each a "Qualified Plan") are generally exempt from taxation
except to the extent that their "unrelated business taxable income" (as defined
in Section 512 of the Code) exceeds $1,000 during any fiscal year. The IRS has
ruled that an exempt employee's trust which becomes a limited partner in a
partnership carrying on a trade or business will realize such unrelated business
taxable income. There can be no assurance that the activities of the Company or
any Participating Partnership would not be characterized as the conduct of a
trade or business by the IRS. Even to the extent the activities of the Company
or any Participating Partnership were not so characterized, since the Company's
and each Participating Partnership's income will be primarily rental income from
"debt-financed property," a portion of each Qualified Plan's distributive share
of the Company's (or if a Subsidiary Partnership Unitholder, the Subsidiary
Partnership) taxable income (including capital gain) will constitute unrelated
business taxable income. This portion is determined in accordance with the
provisions of Section 514(a) of the Code and is that portion of the Qualified
Plan's distributive share of its partnership's income which is approximately
equivalent to the ratio of that partnership's share of debt to the basis of the
partnership's share of the partnership's property. Therefore, a Qualified Plan
that purchases Shares in the Company may be required to report all or a portion
of its pro rata share of the Company's taxable income as unrelated business
taxable income. If, and to the extent that, the Qualified Plan's unrelated
business taxable income from all sources exceeds $1,000 in any year, the
Qualified Plan could incur a tax liability with respect to such excess at such
tax rates as would be applicable to such organizations if such organizations
were not otherwise exempt from taxation. The same results apply with respect to
a Qualified Plan that remains as a Subsidiary Partnership Unitholder.
Section 514(c)(9) of the Code excludes from treatment as "debt-financed
property" certain investments in real property and improvements by, among
others, a pension, profit sharing, or stock bonus trust which qualifies under
Section 401 of the Code (a "Qualified Trust"). A Qualified Trust does not
include an IRA which is not a sponsored IRA for which a determination letter has
been issued under Section 401(a) of the Code. It is not clear that the
acquisition or improvement of any real property by the Participating
Partnerships or the Company will be an acquisition or improvement contemplated
by Section 514(c)(9) of the Code with respect to a Qualified Trust. Furthermore,
even if so contemplated, there can be no assurance that any acquisition or
improvement of real property by the Participating Partnership or the Company
which is otherwise "debt-financed" will qualify for the exclusion under Section
514(c)(9) of the Code with respect to any Qualified Trust, especially since many
of the Participating Partnership's or the Company's properties are expected to
be leased to the sellers thereof.
In considering an investment in the Company of a portion of the assets of a
Qualified Plan, a fiduciary should also consider among other things (i) the
definition of plan assets under "ERISA" and the status of
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labor regulations regarding the definition of plan assets and (ii) whether the
investment satisfies the diversification requirements of Section 404(a)(l)(C) of
ERISA.
CERTAIN FEDERAL ESTATE TAX MATTERS
For federal estate tax purposes, an asset owned by a decedent is taxed at
its fair market value on the date of death of the decedent or, in some cases, an
alternate date prescribed by the Code. The basis for a Share received from a
decedent will be determined by adding the decedent's share of the Company's
liabilities to the estate tax value of the Share. As a result, the taxable gain
which a successor Shareholder may realize upon the sale of a Share may be lower
or higher than the taxable gain which would have been realized by the decedent
if the decedent had transferred the Company interest during his lifetime.
Upon the death of an individual Shareholder, suspended passive activity
losses are deductible by the deceased shareholder only to the extent that the
suspended passive activity losses exceed the difference between the new
Shareholder's (who received his interest from the decedent) basis for the Share
and the adjusted basis for the Share the deceased Shareholder had immediately
before his death. The same consequences apply with respect to Units owned by a
decedent. See "Passive Activity Loss Limitations," and "Tax and 'At-Risk' Basis
of Shares," above. Any passive activity losses disallowed pursuant to this rule
are lost permanently.
TAX PENALTIES AND INTEREST
The time period during which the IRS must claim any deficiencies with
respect to partnership items in tax returns of Shareholders is generally three
years from the time that the Company files its partnership return, but not
commencing earlier than the due date for such return. The statute of limitations
may be extended automatically for certain Shareholders or Subsidiary
Partnerships Unitholders for which certain information is not provided. The
period may be extended with respect to any Shareholder or Subsidiary Partnership
Unitholder by agreement between the IRS and such Shareholder or Subsidiary
Partnership Unitholder. In addition, the period may be extended for all
Shareholders or Subsidiary Partnership Unitholders by an agreement entered into
by the TMP with the IRS. For settlements entered into after the date of
enactment of the 1997 Tax Act, the one-year partner-level statute of limitations
on assessments for underpayments resulting from partnership level adjustments
does not begin to run until all partnership level items are settled.
The Code imposes penalties of up to 20 percent on any underpayment of tax
attributable to a substantial understatement, valuation misstatement, negligence
or disregard of rules and regulations. The penalty is increased to 40% for any
underpayment attributable to a gross valuation misstatement.
A substantial understatement subject to the penalty does not include any
amount attributable to (i) the tax treatment of any item if there was
substantial authority for the treatment, or (ii) the tax treatment of any item
with respect to which the relevant facts are adequately disclosed in the return
if there was a reasonable basis for the position. If, however, any item of
understatement is attributable to a "tax shelter", the amount of understatement
is reduced only by the portion of the understatement that is attributable to tax
treatment for which there was "substantial authority" and with respect to which
the taxpayer "reasonably believed" that the tax treatment adopted was "more
likely than not the proper treatment". A "tax shelter" is defined to include a
partnership if the "principal purpose" of the partnership is the "avoidance or
evasion of federal income tax". It is possible that the IRS would take the
position that the Company or any Participating Partnership is a tax shelter for
this purpose and require the higher degree of proof applicable to tax shelters.
TERMINATION OF THE COMPANY FOR TAX PURPOSES
Under Section 708(b) of the Code, if (i) at any time no part of the
business of the Company continues to be carried on by any of the partners in the
Company or (ii) within a 12-month period 50% or more of the total interests in
partnership capital and profits are sold or exchanged, a termination of the
Company would occur for federal income tax purposes, and the taxable year of the
Company would close. It is possible that Shares representing 50% or more of the
capital and profits interests in the Company might be sold or exchanged
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within a single 12-month period. For this purpose, a Share that changes hands
several times during a 12-month period will only be deemed sold or exchanged
once.
The tax results would be the same as the treatment of the Participating
Partnerships in the Consolidation. See "Tax Consequences of the Consolidation."
Generally, a Shareholder would not recognize any taxable gain or loss as a
result of the deemed termination of the Company. A Shareholder, however, would
recognize gain to the extent, if any, that the Shareholder's pro rata share of
the Company's cash (and the reduction, if any, in the Shareholder's pro rata
share of the Company's indebtedness) at the date of a termination exceeded the
adjusted tax basis of his Shares. Also, the Company's taxable year would
terminate. If the Shareholder's taxable year were other than the calendar year,
the inclusion of more than one year of Company income in a single taxable year
of the Shareholder could result. Finally, a termination of the Company could
cause the Subsidiary Partnerships, the Company, the Subsidiary Partnerships'
property or the Company's property to become subject to unfavorable statutory or
regulatory changes enacted after the date of the Consolidation and prior to the
termination but which were not previously applicable to the Subsidiary
Partnerships or the Company or their assets. A deemed termination of the Company
will likely cause a deemed termination of the Subsidiary Partnerships. As a
result, if the Company is terminated, the Subsidiary Partnership Unitholders and
the Subsidiary Partnerships would experience the tax consequences described
above. See "New Tax Law Provisions," for a discussion of electing large
partnerships.
The Participating Partnerships will likely be deemed terminated for federal
income tax purposes as a result of the Consolidation. See "Tax Consequences of
the Consolidation," and "Depreciation," above for the impact of such a
termination.
STATE AND LOCAL TAX CONSEQUENCES
In addition to the federal income tax aspects described above, prospective
Shareholders should consider potential state tax consequences of an investment
in the Company. Each Shareholder is advised to consult his own tax advisor to
determine whether the state in which he is a resident imposes an income tax upon
his share of the taxable income of the Company, or an estate or inheritance tax,
and whether an income tax or other return also must be filed in those states
where the Company acquires real property.
The Company will inform each Shareholder and each Subsidiary Partnership
will inform each holder of Subsidiary Partnership Units of his share of income
or losses to be reported to each of the states in which the Subsidiary
Partnerships own or the Company owns property. Personal exemptions, computed in
various ways, are allowed by some states and may reduce the amount of tax owed,
if any, to a particular state. The Subsidiary Partnerships or the Company may be
required to withhold state taxes from distributions to the Company or
Shareholders or pay state or local taxes. Any such withholding or payment would
reduce distributions by the Company to the Shareholders and by each Subsidiary
Partnership to its holders of Subsidiary Partnership Units.
To the extent that a nonresident Shareholder or a holder of Subsidiary
Partnership Units pays tax to a state by virtue of the Company's or a Subsidiary
Partnership's operations within that state, he may be entitled to a deduction or
credit against tax owed to his state of residence with respect to the same
income, and should consult his tax adviser in that regard. In addition, payment
of such state taxes presently constitutes a deduction for federal income tax
purposes if the taxpayer itemizes deductions.
NECESSITY OF PROSPECTIVE SHAREHOLDERS OBTAINING PROFESSIONAL ADVICE
The foregoing analysis is not intended as a substitute for careful tax
planning. The tax matters relating to the Company, the Subsidiary Partnerships
and the transactions described herein are complex and are subject to varying
interpretations. Moreover, the effect of existing income tax laws, the meaning
and impact of which is not yet clear, and of proposed changes in income tax laws
will vary with the particular circumstances of each Unitholder and, in reviewing
this Prospectus, these matters should be considered. Accordingly with respect to
federal income tax consequences of the Consolidation as they may relate to
individual Unitholders, each Unitholder should consult with and rely on his
professional tax advisor. In no event should the Participating Partnerships,
Company, General Partners, Manager or any of their affiliates, counsel or any
other professional
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advisors or counsel engaged by any of them, be considered as guarantors of the
tax consequences of an investment in the Company. Unitholders should look to,
and rely on, their professional tax advisors with respect to the tax
consequences of the Consolidation and this investment.
LEGAL MATTERS
Reed Smith Shaw & McClay has delivered an opinion to the effect that the
discussion under "INCOME TAX CONSIDERATIONS" fairly summarizes the federal
income tax considerations that are likely to be material to a Unitholder whose
Units are exchanged for Listed Shares or Subsidiary Partnership Units in the
Consolidation. Richards, Layton & Finger has delivered an opinion to the effect
that, upon the consummation of the Consolidation, the Shares offered pursuant to
this Prospectus will be validly issued, fully paid and nonassessable.
EXPERTS
The financial statements included in the Annual Reports on Form 10-K for
the year ended December 31, 1996, of the individual CPA(R) Partnerships
incorporated by reference in this Consent Solicitation Statement, the combined
balance sheets of the CPA(R) Partnerships (the "Group") as of December 31, 1995
and 1996 and the combined statements of income, partners capital and cash flows
for each of the three years in the period ended December 31, 1996 and the
balance sheet of Carey Diversified LLC as of August 31, 1997, included in this
Consent Solicitation Statement, have been incorporated and included herein,
respectively, in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
GLOSSARY OF TERMS
"Acquisition Expenses" means the expenses of the Company related to the
selection and acquisition of properties by the Company, whether or not such
properties are acquired, including but not limited to legal fees and expenses,
travel and communications expenses, costs of appraisals and fairness letters,
non-refundable option payments on property not acquired, accounting fees and
expenses, costs of title reports and title insurance, transfer and recording
taxes and miscellaneous expenses.
"Adjusted Cash from Operations" means cash receipts from the ordinary
day-to-day operations of the Partnership (including all interest on Partnership
investments and mortgages held by the Partnership) without deduction for any
management fee or for depreciation and amortization of intangibles such as
organization, underwriting and debt placement costs but after deducting all
other expenses, debt amortization and provisions for reserves established by the
Manager which it deems to be reasonably required for the proper operation of the
business of a Subsidiary Partnership.
"Affiliate" means, with respect to any Person, (i) any Person directly or
indirectly controlling, controlled by or under common control with such Person,
(ii) any Person owning or controlling 10% or more of the outstanding voting
securities of such Person, (iii) any officer, director or partner of such Person
or of any Person specified in (i) or (ii) above and (iv) any company in which
any officer, director or partner of any Person specified in (iii) above is an
officer, director or partner.
"Amount Available for Distribution" means with respect to a Subsidiary
Partnership, the net cash flows generated by the properties owned by such
Subsidiary Partnership on the date of the Consolidation (i) decreased by each
Property's allocable share of the Company's administrative expenses which will
be allocated on the basis of the gross revenue, less debt service, generated by
each Property owned by the Partnerships and the Company and (ii) increased for
any cash flows used to pay Consolidation expenses.
"Appraised Value" means the value according to an appraisal made by an
independent qualified appraiser. Such qualification may be demonstrated by
membership in a nationally recognized appraisal society such as American
Institute of Real Estate Appraisers ("M.A.I."), Society of Real Estate
Appraisers ("S.R.E.A.") or their equivalent, but is not limited thereto.
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183
"Approval Date" means December 16, 1997, the date by which Unitholders'
Consent Cards must be received by the General Partners.
"Audit Committee" means the committee of the Board of Directors consisting
of two or more Independent Directors established to make recommendations
concerning the engagement of independent public accountants, review with the
independent public accountants the plans and results of the audit engagement,
approve professional services provided by the independent public accountants,
review the independence of the independent public accountants, consider the
range of audit and non-audit fees and review the adequacy of the Company's
internal accounting controls.
"Average Market Capitalization" means, for the relevant period, the closing
price of the Listed Shares on each trading day of the period multiplied by the
total number of Listed Shares outstanding on each trading day (including "Listed
Shares Equivalent Units"), adding the product for each day and dividing the sum
by the number of trading days in the period; provided, however that this
definition may be adjusted to account for changes to the capital structure of
the Company. For purposes of this calculation, the number of "Listed Share
Equivalent Units" is equal to the sum of the product of (i) the total number of
Subsidiary Partnership Units outstanding for each Subsidiary Partnership and
(ii) the Subsidiary Partnership Exchange Ratio for each Subsidiary Partnership.
"Business Combination" means one of the following transactions: (i) unless
the merger, consolidation or exchange of interests does not alter the contract
rights of the Shares as expressly set forth in the Company organizational
documents or change or convert in whole or in part the outstanding Shares, any
merger, consolidation or exchange of interests of the Company or any subsidiary
with (a) any Interested Party or (b) any other entity (whether or not itself an
Interested Party) which is, or after the merger, consolidation or exchange of
interest will be, an affiliate of an Interested Party that was an Interested
Party prior to the transaction; (ii) any sale, lease, transfer or other
disposition, other than in the ordinary course of business, in one transaction
or a series of transactions in any 12-month period to any Interested Party or
any affiliate of any Interested Party (other than the Company or any of its
subsidiaries) of any assets of the Company or any subsidiary having, measured as
of the time the transaction or transactions are approved by the Board of
Directors of the Company, an aggregate book value as of the end of the Company's
most recently ended fiscal quarter of 10% or more of the total market value of
the outstanding Shares or of its net worth as of the end of its most recently
ended fiscal quarter; (iii) the issuance or transfer by the Company or any
subsidiary, in one transaction or a series of transactions, of any of the Shares
or any equity securities of a subsidiary which have an aggregate market value of
5% or more of the total market value of the outstanding Shares to any Interested
Party or any affiliate of any Interested Party (other than the Company or any of
its subsidiaries) except pursuant to the exercise of warrants or rights to
purchase securities offered pro rata to all Shareholders or any other method
affording substantially proportionate treatment to the Shareholders; (iv) the
adoption of any plan or proposal for the liquidation or dissolution of the
Company in which anything other than cash will be received by an Interested
Party or any affiliate of any Interested Party; (v) any reclassification of
securities or recapitalization of the Company, or any merger, consolidation or
exchange of Shares with any of its subsidiaries which has the effect, directly
or indirectly, in one transaction or a series of transactions, of increasing by
5% or more of the total number of outstanding Shares, the proportionate amount
of the outstanding Shares or the outstanding number of any class of equity
securities of any subsidiary which is directly or indirectly owned by any
Interested Party; or (vi) the receipt by any Interested Party or any affiliate
of any Interested Party (other than the Company or any of its subsidiaries) of
the benefit, directly or indirectly (except proportionately as a Shareholder),
of any loan, advance, guarantee, pledge or other financial assistance or any tax
credit or other tax advantage provided by the Company or any of its
subsidiaries.
"Cash from Financings" means the net cash proceeds realized by a CPA(R)
Partnership from the financing of a CPA(R) Partnership property or the
refinancing of any CPA(R) Partnership indebtedness.
"Cash from Sales" means the net cash proceeds realized by a CPA(R)
Partnership from the sale, exchange or other disposition of any of its assets.
Cash From Sales shall not include net cash proceeds realized from the financing
of CPA(R) Partnership property or the refinancing of any CPA(R) Partnership
indebtedness.
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184
"CCP" means Carey Corporate Property, Inc., managing general partner of
CPA(R):4, CPA(R):5 and CPA(R):6.
"Closing Date" means the date on which the Merger is consummated and on
which the Participating Investors shall receive Listed Shares or Subsidiary
Partnership Units in exchange for their Units pursuant to the Prospectus.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any similar law or provision enacted in lieu thereof, unless the
context indicates otherwise.
"Commission" means the Securities and Exchange Commission.
"Company" means Carey Diversified LLC.
"Consent Card" means the card accompanying this Prospectus to be used by
the Unitholder to vote his wishes to approve or disapprove of his CPA(R)
Partnership's participation in the Consolidation.
"Consolidation" means the merger of up to nine Subsidiary Partnerships with
and into the CPA(R) Partnerships.
"Consolidation Expenses" means all of the costs and expenses incurred by
the Company or the CPA(R) Partnerships in connection with the Consolidation
including such expenses as: (i) the preparing, printing, filing and delivering
of the Registration Statement and the Prospectus (including any Partnership
Agreement Amendments thereof or supplements thereto); (ii) the preparing and
printing of the Prospectus, other solicitation material and related documents
and the filing and/or recording of such certificates or other documents
necessary to comply with the laws of the State of Delaware for the formation of
a limited partnership, the merger of a limited partnership into another limited
partnership and for the continued good standing of a limited partnership; (iii)
the qualification or registration of the limited liability company interests
under state securities or 'Blue Sky' laws; (iv) the filing fees payable to the
United States Securities and Exchange Commission and to the National Association
of Securities Dealers, Inc.; (v) the fees of the Company's counsel; and (vi) all
solicitation expenses, including the cost of all sales literature and the costs
related to investor and broker/dealer sales and information meetings and the
cost of solicitation and tabulation of the consents and elections.
"Control Shares" means Shares that, but for the operation of the Control
Share Acquisition Provisions, bring their holder's voting power within any of
the following ranges: (i) one-fifth to one-third; (ii) one-third to a majority;
or (iii) a majority or more.
"Control Share Acquisition" means the acquisition of Shares, with certain
exceptions listed under "DESCRIPTION OF LISTED SHARES AND SUBSIDIARY PARTNERSHIP
UNITS -- Control Share Acquisition Provisions," that will entitle the acquiring
person immediately after the acquisition to exercise or direct the exercise of
the voting power of Shares within one of the ranges designating Control Shares.
"Control Share Acquisition Provisions" means Control Share acquisition
provisions contained in the Organizational Documents.
"CPA(R):1" means Corporate Property Associates.
"CPA(R):2" means Corporate Property Associates 2.
"CPA(R):3" means Corporate Property Associates 3.
"CPA(R):4" means Corporate Property Associates 4, a California limited
partnership.
"CPA(R):5" means Corporate Property Associates 5.
"CPA(R):6" means Corporate Property Associates 6 -- a California limited
partnership.
"CPA(R):7" means Corporate Property Associates 7 -- a California limited
partnership.
"CPA(R):8" means Corporate Property Associates 8, L.P., a Delaware limited
partnership.
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185
"CPA(R):9" means Corporate Property Associates 9, L.P., a Delaware limited
partnership.
"CPA(R) Partnerships" or "Partnerships" means CPA(R):1, CPA(R):2, CPA(R):3,
CPA(R):4, CPA(R):5, CPA(R):6, CPA(R):7, CPA(R):8 and CPA(R):9.
"CPA(R) Programs" means, collectively, the CPA(R) Partnerships and the
CPA(R) REITs.
"CPA(R) REITs" means Corporate Property Associates 10 Incorporated, Carey
Institutional Properties, Inc. and Corporate Property Associates 12
Incorporated, all Maryland corporations.
"Directors" means persons authorized to manage and direct the affairs of
the Company and who are members of the Board of Directors of the Company.
"Dissenting Investors" means Unitholders who vote against the
Consolidation.
"Distribution" means any transfer of money or property by a Partnership to
a Partner without consideration.
"Dividend Payment Date" means the date on which the Company makes a
distribution.
"Effective Time" means the date and time as of which a Merger is effective.
"Eighth Carey" means Eighth Carey Corporate Property, Inc., managing
general partner of CPA(R):8.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934.
"Exchange Ratio" means the number of Listed Shares issued in exchange for
each CPA(R) Partnership Unit in the Consolidation.
"Fairness Opinion" means the opinion of the Independent Appraiser to the
CPA(R) Partnerships as to the fairness, from a financial point of view, of the
allocation of Listed Shares to the CPA(R) Partnerships.
"Fiscal Quarter" means the three-month period ending on the last day of the
third, sixth, ninth and twelfth calendar months of each Fiscal Year of the
Partnership.
"Fiscal Year" means the twelve-month period ending on December 31.
"Formation Transactions" means the series of transactions which together
comprise the Consolidation.
"Funds from Operations" means net income (loss) before depreciation,
amortization, other noncash items, extraordinary items and gains or losses on
sales of assets.
"General Partners" means the general partners of each of the CPA(R)
Partnerships which include William Polk Carey, W.P. Carey & Co., CCP, Seventh
Carey, Eighth Carey and Ninth Carey.
"General Partners' Preferred Return" means the three percent of the Cash
from Sales owed to the General Partners in connection with the sale of
properties by the CPA(R) Partnerships prior to the Consolidation.
"General Partners' Retained Interest" means the portion of the Total
Consolidation Value allocated to the General Partners that is retained by the
General Partners in the form of limited partner interests in the Subsidiary
Partnerships.
"Good Reason" means (i) any failure to obtain a satisfactory agreement from
any successor to the Company to assume and agree to peform the Company's
obligations under the Management Agreement, (ii) any breach of the Management
Agreement of any nature by the Company or (iii) a change in control of the
Company.
"Independent Appraisal" means the appraisal of the Properties performed by
the Independent Appraiser.
"Independent Appraiser" means Robert A. Stanger & Co., Inc.
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186
"Independent Director" means a Director of the Company who (i) is not an
officer of the Company and (ii) is, in the view of the Company's Board of
Directors, free of any relationship that would interfere with the exercise of
independent judgment.
"Initial Member" means Carey Property Advisors L.P.
"Interested Party" means any person (other than (a) the Company, (b) any
subsidiary of the Company, (c) the General Partners and the Original
Shareholders, and (d) any affiliate or associate of any person in (c) above)
that: (i) is the beneficial owner, directly or indirectly, of 10% or more of the
outstanding Shares, (ii) is an affiliate or associate of the Company and at any
time within the two year period immediately prior to the date in question was
the beneficial owner, directly or indirectly, of 10% or more of the then
outstanding Shares, or (iii) is an affiliate or associate of any person
described in clauses (i) or (ii) above.
"Investment Committee" means the committee of the board of directors of the
Manager primarily responsible for the approval of investments to be made by the
Company.
"IRS" means Internal Revenue Service
"LLCA" means the Delaware Limited Liability Company Act (6 Del.C.
sec.sec. 18-101 et seq.)
"Limited Partner" means any person or entity in his, her or its capacity as
a limited partner of a CPA(R) Partnership and whose name and address are set
forth on the books and records of the Partnership.
"Listed Shareholder" means a Shareholder of the Company who owns Listed
Shares.
"Listed Shares" means a limited liability company interest in the Company
representing a share of all of the income, loss and capital of the Company.
"Management Agreement" means the agreement between the Company and the
Manager relating to the management of the Company by the Manager.
"Manager" means Carey Management LLC.
"Merger" means the merger of a Subsidiary Partnership into a CPA(R)
Partnership.
"Merger Agreements" or "Partnership Merger Agreements" means each Agreement
and Plan of Merger to be entered into by each Subsidiary Partnership and the
respective CPA(R) Partnership.
"Minimum Participation Amount" means $200 million.
"NASD" means the National Association of Securities Dealers, Inc.
"Nasdaq" means the National Association of Securities Dealers Automated
Quotations System.
"Net Lease or Triple Net Lease" means a lease in which the tenant
undertakes to pay all or substantially all the cash expenses, excluding debt
service, related to the leased property.
"Net Other Assets and Liabilities" means with respect to any CPA(R)
Partnership (A) the sum of (i) cash, (ii) accounts receivable, (iii) security
deposits, (iv) cash held in escrow, (v) the value of all securities and (vi) the
value of any claims in bankruptcy and (vii) any post March 31, 1997 adjustment
to the value of any Properties, less (B) the sum of (i) accounts payable, (ii)
accrued interest, (iii) accrued rent, (iv) rent deposits, (v) escrowed
liabilities, (vi) prepaid rent and (vii) transfer taxes payable upon
consummation of the Consolidation.
"Ninth Carey" means Ninth Carey Corporate Property, Inc., managing general
partner of CPA(R):9.
"Nonparticipating Partnership" means a CPA(R) Partnership which does not
participate in the Consolidation.
"NYSE" means the New York Stock Exchange.
"Operating Agreement" means the limited liability company agreement of the
Company.
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187
"Organizational Documents" means the Certificate of Formation, the
Operating Agreement and the Bylaws of the Company, as amended.
"Original Shareholder" means Carey Management LLC.
"Participating Investor" means a Unitholder of a Participating Partnership.
"Participating Partnership" means a CPA(R) Partnership which participates
in the Consolidation.
"Partner" means the General Partner and any Limited Partner where no
distinction is required by the context in which the term is used.
"Partnership" means a CPA(R) Partnership.
"Partnership Agreement Amendments" means the amendments of the partnership
agreements expressly authorizing the Consolidation.
"Partnership Interest" or "Interest" means the interest of each Partner in
the profits, losses, distributions, capital and assets of a Partnership.
"Partnership Merger Agreement" means the Agreement and Plan of Merger to be
executed by a Subsidiary Partnership and a Participating Partnership in
connection with the Consolidation.
"Person" means any natural person, partnership, corporation, limited
liability company, association or other legal entity.
"Prime Rate" means the rate of interest announced as the Prime Rate from
time to time by the Company's primary lender.
"Property or Properties" means the partial or entire interests in real
property, including leasehold interests and personal and mixed property
connected therewith held by the CPA(R) Partnerships or the Company.
"Prospectus" shall mean the Prospectus Statement which is included in the
registration statement filed with the Securities and Exchange Commission in
connection with the issuance of the Shares in the Consolidation.
"Proxy" means a written authorization signed by a Partner or the Partner's
duly authorized attorney-in-fact giving another person the power to vote with
respect to the limited partner interest of that Partner or a written
authorization signed by a Shareholder or the Shareholder's duly authorized
attorney-in-fact giving another person the power to vote with respect to the
limited liability company interest of that Shareholder. "Signed," for the
purpose of this paragraph, means the placing of the Partner's or Shareholder's
name on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the Partner or the Partner's duly authorized
attorney-in-fact or the Shareholder or the Shareholder's duly authorized
attorney-in-fact.
"Purchase Price of Property" means the price paid upon the purchase of a
particular property, including the amount of any acquisition fees and all liens
and mortgages on the property, but excluding points and prepaid interest.
"Registration Statement" means the Company's Registration Statement on Form
S-4 filed with the Securities and Exchange Commission in the form in which it
becomes effective, as the same may at any time and from time to time thereafter
be amended or supplemented.
"Redemption Date" means the date as of which a Participating Partnership's
Properties are appraised for purposes of redeeming the corresponding class of
outstanding Partnership Shares.
"REIT" means real estate investment trust.
"Right" means a right to buy one Share at a specified exercise price, which
will be subject to adjustment.
"Rights Certificate" means a certificate evidencing a Right.
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188
"Rights Distribution Date" means the earlier of (i) the date an Acquiring
Person, alone or together with affiliates and associates, has become the
beneficial owner of 5% or more of the outstanding Shares or (ii) the date of the
commencement of, or announcement of, an intention to make a tender offer or
exchange offer the consummation of which will result in the beneficial ownership
by a person or group (other than the Company, any subsidiary of the Company, any
employee benefit plan of the Company or any subsidiary of the Company or the
General Partners or their affiliates) of 10% or more of the outstanding Shares.
"Rights Record Date" means a record date established by the Board of
Directors for determining the Company's Shareholders of record who will be
entitled to a Right for each outstanding Share held by such person.
"Securities Act" means the Securities Act of 1933, as amended.
"Seventh Carey" means Seventh Carey Corporate Property, Inc., managing
general partner of CPA(R):7.
"Shareholder" means a member of the Company and holder of Shares.
"Shareholder Rights Plan" means the Shareholder rights plan adopted by the
Company.
"Shareholders" means the holders of the Shares collectively.
"Shares" means the Listed Shares of the Company, and includes any other
limited liability company interests that the Company may issue in the future.
"Solicitation/Communication Costs" means all of the costs and expenses
associated with communication to and solicitation of the Unitholders incurred by
the Company or the Partnerships in connection with the Consolidation.
"Solicitation Materials" means the Prospectus and any additional material
used to solicit consents in connection with the Consolidation.
"Solicitation Period" means the period commencing on the date of delivery
of this Consent Solicitation Statement and continuing until the later of (i)
October 29, 1997 and (ii) such later date as may be selected by the General
Partners.
"Subsidiary Partnership" means a limited partnership formed by the Company
which will merge with and into a CPA(R) Partnership in connection with the
Consolidation but for purposes of this Prospectus only, in certain sections, is
used to refer to the surviving CPA(R) Partnership.
"Subsidiary Partnership Unit" means a limited partnership unit in a
Subsidiary Partnership.
"Tabulator" means ChaseMellon Shareholder Services.
"Termination Fee" means an amount equal to the sum of (A) any fees that
would be earned by the Manager upon the disposition of the assets of the Company
and the Subsidiary Partnerships at their appraisal value measured as of the date
the Management Agreement is terminated, (the "Termination Date") and (B)(1) if
the agreement is terminated by the Company after a change in control, $50
million if the change in control occurs on or before December 31, 1998 and
thereafter, five times the total fees paid to the Manager by the Company and the
Subsidiary Partnership in the 12 months preceding the change in control and (2)
if the agreement is terminated without cause or good reason, $50 million if the
agreement is terminated before December 31, 1999; $40 million if the agreement
is terminated before December 31, 2000; $30 million if the agreement is
terminated before December 31, 2001; $20 million if the agreement is terminated
before December 31, 2002 and $10 million if the agreement is terminated before
December 31, 2003.
" '33 Act" means the Securities Act of 1933, as amended.
"Total Capitalization" means, for a specified period, the sum of (i) the
average of the total principal amount of the debt outstanding (measured as of
the first and last day of each period) and (ii) the Average Market
Capitalization of the Company over the same period.
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189
"Total Consolidation Value" means, with respect to the Participating
Partnership, the sum of (i) the Appraised Value of the real estate of such
partnerships and (ii) Net Other Assets and Liabilities less the sum of (A) the
outstanding principal amount of all debt of the Participating Partnerships and
(B) Consolidation Expenses and (C) the General Partners' Preferred Return.
"Total Exchange Value" means Total Consolidation Value less the General
Partners' Retained Interest. The Total Exchange Value is the value of the
Participating Partnerships being distributed in the form of Subsidiary
Partnership Units and Listed Shares.
"Triple Net Lease" means a lease in which the tenant is responsible for
real estate taxes and assessments, repairs and maintenance, insurance, other
expenses relating to the property and the duty to restore in case of casualty.
"Unit" means an interest of a Limited Partner in a CPA(R) Partnership
representing a specific initial capital contribution of $500 per unit for
CPA(R):1 through CPA(R):5 and $1,000 per Unit for CPA(R):6 through CPA(R):9.
"Unitholders" means limited partners in the CPA(R) Partnerships.
"W.P. Carey & Co." means W.P. Carey & Co., Inc., a New York corporation.
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INDEX TO FINANCIAL STATEMENTS
PAGE NO.
--------
CAREY DIVERSIFIED LLC
Pro Forma (unaudited):
ASSUMING 100% PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS:
Condensed Consolidated Balance Sheet as of June 30, 1997...................... F-2
Notes to Condensed Consolidated Balance Sheet................................. F-3
Condensed Consolidated Statements of Income for the year ended December 31,
1996 and six months ended June 30, 1997...................................... F-5
Notes to Condensed Consolidated Statements of Income.......................... F-6
ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS:
Condensed Consolidated Balance Sheet as of June 30, 1997...................... F-8
Notes to Condensed Consolidated Balance Sheet................................. F-9
Condensed Consolidated Statements of Income for the year ended December 31,
1996 and six months ended June 30, 1997...................................... F-12
Notes to Condensed Consolidated Statements of Income.......................... F-13
ASSUMING MINIMUM PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS:
Condensed Consolidated Balance Sheet as of June 30, 1997...................... F-16
Notes to Condensed Consolidated Balance Sheet................................. F-17
Condensed Consolidated Statements of Income for the year ended December 31,
1996 and six months ended June 30, 1997...................................... F-19
Notes to Condensed Consolidated Statements of Income.......................... F-20
ASSUMING MINIMUM PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS:
Condensed Consolidated Balance Sheet as of June 30, 1997...................... F-22
Notes to Condensed Consolidated Balance Sheet................................. F-23
Condensed Consolidated Statements of Income for the year ended December 31,
1996 and six months ended June 30, 1997...................................... F-26
Notes to Condensed Consolidated Statements of Income.......................... F-27
Historical:
Report of Independent Accountants............................................. F-30
Balance Sheet as of August 31, 1997........................................... F-31
Notes to Balance Sheet........................................................ F-32
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
Combined Financial Statements:
Report of Independent Accountants............................................. F-35
Combined Balance Sheets as of December 31, 1995 and December 31, 1996 and
(unaudited) as of June 30, 1997.............................................. F-36
Combined Statements of Income for the year ended December 31, 1994, 1995 and
1996 and (unaudited) for the six months ended June 30, 1996 and 1997......... F-37
Combined Statements of Partners' Capital for the years ended December 31,
1994, 1995 and 1996 and (unaudited) for the six months ended June 30, 1997... F-38
Combined Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996 and (unaudited) for the six months ended June 30, 1996 and 1997..... F-39
Notes to Combined Financial Statements........................................ F-40
Supplemental Schedule:
Schedule III -- Real Estate and Accumulated Depreciation...................... F-55
F-1
191
CAREY DIVERSIFIED LLC
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
ASSUMING 100% PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP
UNITS:
The following unaudited pro forma Condensed Consolidated Balance Sheet has
been presented as if the Consolidation transaction and the related issuance of
Listed Shares had occurred on June 30, 1997. This unaudited pro forma Condensed
Consolidated Balance Sheet should be read in conjunction with the balance sheet
of Carey Diversified LLC as of August 31, 1997 and the combined financial
statements of the Group, and notes thereto included elsewhere herein. In
management's opinion, all adjustments necessary to reflect the Consolidation
transaction and the related issuance of Listed Shares have been made.
The exchange of Limited Partner (non-controlling) interests for Listed
Shares will be accounted for as a purchase and recorded at the fair value of the
Listed Shares exchanged. The exchange of the General Partner's interest for
Listed Shares will be accounted for on the historical basis of accounting.
This unaudited pro forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been at
June 30, 1997, nor does it purport to represent the future financial position of
the Company.
GROUP PRO FORMA PRO FORMA
HISTORICAL(1) ADJUSTMENTS CONSOLIDATED
-------------- ----------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Real estate leased to others:
Accounted for under the operating method, net............. $225,294 $ 129,611(2) $354,905
Net investment in direct financing leases................. 216,403 51,739(2) 268,142
Operating real estate, net.................................. 23,736 (934)(2) 22,802
Real estate held for sale................................... 14,816 6,557(2) 21,373
Equity investments.......................................... 13,523 30,131(2) 43,654
Cash and cash equivalents................................... 27,079 (5,566)(3) 21,513
Other assets, net........................................... 19,657 19,657
-------- -------- --------
Total assets....................................... $540,508 $ 211,538 $752,046
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL/MEMBERS' EQUITY
Mortgage notes payable...................................... $194,347 $194,347
Note payable to affiliate................................... 300 300
Notes payable............................................... 24,709 24,709
Accounts payable to affiliates.............................. 3,046 $ 3,642(4) 6,688
Other liabilities........................................... 10,958 10,958
-------- -------- --------
Total liabilities.................................. 233,360 3,642 237,002
-------- -------- --------
Minority interest........................................... (578) (5,538)(5) (6,116)
-------- -------- --------
Redeemable minority interest................................
PARTNERS' CAPITAL/MEMBERS' EQUITY
Partners' capital........................................... 307,726 (307,726)(6)
Listed Shares, no par value; 24,388,057 shares issued and
outstanding............................................... 521,160(6) 521,160
-------- -------- --------
307,726 213,434 521,160
-------- -------- --------
Total liabilities and partners' capital/members'
equity........................................... $540,508 $ 211,538 $752,046
======== ======== ========
See accompanying notes to pro forma condensed consolidated balance sheet.
F-2
192
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSUMING 100% PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP
UNITS:
(1) Reflects the Group's unaudited historical combined balance sheet as of June
30, 1997.
(2) Reflects adjustments to record the Limited Partners' interest in the assets
of the Company at their fair value, as follows:
APPRAISED REAL ESTATE
VALUE OF COST OF ASSETS AT GENERAL
REAL ESTATE ACQUISITION HISTORICAL PARTNERS' NET
ASSETS OF ASSETS COST INTEREST ADJUSTMENT
----------- ----------- ----------- --------- ----------
Real estate accounted for under the
operating method, net................ $ 354,467 $ 5,316 $(225,294) $(4,878) $129,611
Net investment in direct financing
leases............................... 266,098 3,991 (216,403) (1,947) 51,739
Operating real estate, net............. 22,430 336 (23,736) 36 (934)
Equity investments..................... 44,127 662 (13,523) (1,135) 30,131
Real Estate Held for Sale.............. 21,300 319 (14,816) (246) 6,557
The real estate assets of the Company have been appraised by an independent
appraiser. The carrying value of the non-real estate assets and the
liabilities of the Company are deemed to approximate their fair values.
The General Partners' effective interest in the assets and liabilities of
the Company is approximately 3.63%, consisting of a 1% interest in the
liquidating proceeds of the Participating Partnerships and an approximate
3.01% interest in the Listed Shares of the Company.
(3) Decrease in cash reflects the following:
Payment of transaction costs....................................... $2,997
Payment of transfer taxes on properties............................ 1,059
Payment of deferred leasing fees................................... 1,510
------
$5,566
======
After the Consolidation, certain deferred leasing fees will be paid for
leasing services rendered by the General Partners of certain CPA(R)
Partnerships prior to the Consolidation. Such leasing fees were previously
accrued by the CPA(R) Partnerships.
(4) Net increase reflects the following:
Accrual of preferred return....................................... $ 5,111
Payment of deferred leasing fees to Corporate General Partners.... (1,510)
Distribution payable in respect of minority interest.............. 41
-------
$ 3,642
=======
The Corporate General Partners may be entitled to receive a preferred
return, measured based upon the cumulative proceeds arising from the sale
of the CPA(R) Partnership's assets. The preferred return amounts to $5,111
based upon the cumulative proceeds from the sale of assets since the
inception of the CPA(R) Partnerships through June 30, 1997, assuming all
requisite subordination requirements for the payment of such returns have
been satisfied. After the Consolidation, the preferred return will be paid
to the Manager if the Listed Shares achieve specified closing prices for
five consecutive trading days.
Upon completion of the Consolidation, the Participating Partnerships will
distribute excess cash to the holders of Subsidiary Partnership Units,
including the Company, in an amount sufficient to allow the
F-3
193
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
Company to fund the payment of transaction costs and transfer taxes on the
properties. The Manager and the Individual General Partner will be entitled
to a portion of such distributions in accordance with their 1% interest in
the liquidating distributions of the Participating Partnerships.
(5) Decrease reflects the following:
Corporate General Partners' preferred return....................... $5,111
Distribution to Manager............................................ 41
General Partners' share of transaction costs and transfer taxes.... 386
------
$5,538
======
The capital interest of the Corporate and Individual General Partners is
classified under minority interest. The general partnership interests
include an interest in the income, losses and distributions of the
operating cash flows of the CPA(R) Partnerships which range from 1% to 10%
of such amounts. The General Partners are also entitled to a share of the
liquidation proceeds from the disposition of Partnership assets and payment
of a preferred return subject to the satisfaction of certain subordination
provisions. The General Partner's share of liquidation proceeds may range
from 1% to 15% of the liquidating proceeds of each CPA(R) Partnership.
Pursuant to the Consolidation, the Corporate General Partners of the CPA(R)
Partnerships will contribute their General Partnership interests to a newly
organized manager of the Company (the "Manager") in exchange for an
interest in the Manager. The Manager will retain the Corporate General
Partners' interests in the income, losses and operating cash flows of the
CPA(R)Partnerships. The Manager and the Individual General Partner will
retain an interest in the liquidating proceeds of each CPA(R) Partnership
equal to 1% of such proceeds. The Individual General Partner will retain
his interest in each Participating Partnership and such interest will be
held in a limited partnership capacity. The General Partners' share of
liquidation proceeds in excess of 1%, assuming a sale of CPA(R) Partnership
assets at their appraised values, will be exchanged by the Manager and the
Individual General Partner for 733,134 Listed Shares of the Company upon
consummation of the Consolidation.
(6) Increase in partners' capital reflects the following:
Exchange of limited partner and certain general partnership
interests for Listed Shares at historical cost................. $307,726
Adjustment of limited partners' interest based upon the fair
value of Listed Shares exchanged............................... 206,866
Issuance of Warrants............................................. 6,568
--------
$521,160
========
If the Consolidation is completed, W.P. Carey & Co. will receive
compensation for investment banking services in the form of warrants to
purchase Listed Shares. If all the CPA(R) Partnerships participate in the
Consolidation, W.P. Carey & Co. will receive warrants to purchase 2,284,000
Listed Shares at $21 per share and 725,930 Listed Shares at $23 per share.
The warrants generally will be exercisable over 10 years beginning one year
after the date the Consolidation is completed. The increase in capital of
$6,568 reflecting the issuance of warrants is equal to the estimated fair
value of the warrants.
(7) Pro forma book value per share as of June 30, 1997 is $21.37, which is
computed as total equity divided by Listed Shares outstanding.
F-4
194
CAREY DIVERSIFIED LLC
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE UNAUDITED SIX MONTHS
ENDED JUNE 30, 1997
ASSUMING 100% PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP
UNITS:
The following unaudited pro forma Condensed Consolidated Statements of
Income are presented as if the Consolidation transaction and the related
issuance of Listed Shares had occurred as of January 1, 1996. The unaudited pro
forma Condensed Consolidated Statements of Income should be read in conjunction
with the balance sheet of Carey Diversified LLC as of August 31, 1997 and the
combined financial statements of the Group, and notes thereto included elsewhere
herein. In management's opinion, all adjustments necessary to reflect the
Consolidation transaction have been made.
The exchange of Limited Partner (non-controlling) interests for Listed
Shares will be accounted for as a purchase and recorded at the fair value of the
Listed Shares exchanged. The exchange of the General Partner's interest for
Listed Shares will be accounted for on the historical basis of accounting.
These unaudited pro forma Condensed Consolidated Statements of Income are
not necessarily indicative of what actual results of operations of the Company
would have been, nor do they purport to represent the results of operations for
future periods.
YEAR ENDED DECEMBER 31, 1996 SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------------- --------------------------------------------
CPA(R) CPA(R)
PARTNERSHIPS PRO FORMA PRO FORMA PARTNERSHIPS PRO FORMA PRO FORMA
HISTORICAL(1) ADJUSTMENTS CONSOLIDATED HISTORICAL(1) ADJUSTMENTS CONSOLIDATED
------------- ----------- ------------ ------------- ----------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues:
Rental income................. $ 44,576 $ 44,576 $23,675 $ 23,675
Interest income from direct
financing leases............ 32,644 32,644 16,278 16,278
Other interest income......... 1,681 1,681 568 568
Other income.................. 1,901 1,901 3,431 3,431
Revenues of hotel
operations.................. 21,929 21,929 7,033 7,033
-------- ----------- ------- -----------
102,731 102,731 50,985 50,985
-------- ----------- ------- -----------
Expenses:
Interest...................... 23,200 23,200 10,086 10,086
Depreciation and
amortization................ 11,274 $(1,220)(2) 10,054 5,462 $(476)(2) 4,986
General and administrative.... 3,747 925(3) 4,672 2,611 388(3) 2,999
Property expenses............. 4,008 1,184(4) 5,192 1,532 819(4) 2,351
Writedown to net realizable
value....................... 1,300 1,300 3,666 3,666
Operating expense of hotel
operations.................. 15,947 15,947 5,272 5,272
-------- ------- ----------- ------- ----- -----------
59,476 889 60,365 28,629 731 29,360
-------- ------- ----------- ------- ----- -----------
Income before net gains,
minority interest and
extraordinary items....... 43,255 (889) 42,366 22,356 (731) 21,625
Gains on sale of real estate and
securities, net(5)............ 5,474 (487)(6) 4,987
-------- ------- ----------- ------- ----- -----------
Income before minority
interest and extraordinary
items..................... 48,729 (1,376) 47,353 22,356 (731) 21,625
Minority interest income........ (3,182) 49(7) (3,133) (1,334) 36(7) (1,298)
-------- ------- ----------- ------- ----- -----------
Income before extraordinary
items..................... $ 45,547 $(1,327) $ 44,220 $21,022 $(695) $ 20,327
======== ======= =========== ======= ===== ===========
Pro forma income before
extraordinary items per Listed
Share......................... $ 1.81 $ 0.83
=========== ===========
Pro forma weighted average
number of Listed Shares
outstanding................... 24,484,170 24,624,734
=========== ===========
Ratio of earnings to fixed
charges(8).................... 2.98 3.14
=========== ===========
See accompanying notes to pro forma condensed consolidated statements of income.
F-5
195
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
ASSUMING 100% PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP
UNITS:
(1) Reflects the Group's historical audited combined income statements for the
year ended December 31, 1996 and unaudited combined income statements for
the six months ended June 30, 1997.
(2) Reflects changes in connection with adjustment of Limited Partners' interest
in real estate assets to fair value and adoption of new depreciable lives
for such assets as follows:
YEAR ENDED SIX MONTHS
ASSETS AT REVISED DECEMBER 31, ENDED
FAIR VALUE LIFE 1996 JUNE 30, 1997
---------- ------- ------------ --------------
Buildings and improvements... $ 282,524 40 $ 7,063 $ 3,532
Personal property............ 16,371 7 2,339 1,170
-------- -------
9,402 4,702
Less: historical depreciation
expense.................... (10,668) (5,196)
-------- -------
Difference................... (1,266) (494)
Elimination of General
Partners' (3.63%)
interest................... 46 18
-------- -------
Net decrease in expense...... $ (1,220) $ (476)
======== =======
(3) Increase in general and administrative expenses as follows:
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1996 JUNE 30, 1997
------------ --------------
Directors' compensation.......................... $225 $113
Employee compensation............................ 400 125
Other expenses of a public company............... 300 150
---- ----
$925 $388
==== ====
F-6
196
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME -- (CONTINUED)
(4) The Company will pay a management fee and a performance fee each at an
annual rate of .5% of the Total Capitalization of the Company. The
performance fee will be paid in the form of restricted Listed Shares issued
by the Company. Restricted Listed Shares will vest over a five year period
at 20% per year. Total Capitalization will be determined by adding the
average total principal amount of debt owed by the Company and the Average
Market Capitalization of the Company. The fees will be reduced by any
payments made to the Manager and Individual General Partner by the CPA(R)
Partnerships for distributions of operating cash flows and CPA(R)
Partnership leasing fees. Such reduction may not exceed the total management
and performance fees incurred by the Company in any fiscal year. Pro forma
management and performance fees payable by the Company are as follows:
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1996 JUNE 30, 1997
------------ --------------
Average market capitalization.................... $487,761 $487,761
Average debt..................................... 251,143 223,452
-------- --------
738,904 711,213
Partial year pro-ration.......................... N/A x.5
-------- --------
Total market capitalization for the period....... 738,904 355,607
-------- --------
Management fee @ .5%............................. 3,695 1,778
Performance fee, vested portion, @ .5%........... 739 725
Reductions:
Partnership distributions to minority
interests...................................... (2,334) (1,156)
Partnership leasing fees......................... (916) (528)
-------- --------
Net fee.......................................... $ 1,184 $ 819
======== ========
Pursuant to the management agreement, average market capitalization is to
be calculated on a daily basis based on the market price of the Listed
Shares. As such information is not available on a historical basis, Average
Market Capitalization is equal to the Total Exchange Value and average debt
is equal to the average combined debt as of the beginning and end of the
period.
(5) The Manager will be paid an incentive fee equal to 15% of the amount of the
proceeds received from the sale of any property acquired in connection with
the Consolidation in excess of the appraised value of the property used in
the Consolidation, less an adjustment for the share of such net proceeds in
excess of the appraised value of the equity interest attributable to the
Manager's interest in the Listed Shares. No adjustment has been reflected in
the pro forma Statements of Income for incentive fees that would have been
paid in connection with any such sales during the year ended December 31,
1996 and the six months ended June 30, 1997.
(6) Represents an adjustment for estimated disposition fees payable to the
Manager on sales of properties. Subject to approval by the Board of
Directors of the Company, the Manager may be entitled to receive a
disposition fee on the sale of properties. The amount of such fee will be
determined by agreement with the Board of Directors. For purposes of this
presentation it is assumed that disposition fees average historical levels,
namely 3% of the sales price of properties.
(7) Reflects minority interest share of pro forma adjustments.
(8) The ratio of earnings to fixed charges is computed as income from operations
before minority interest plus fixed charges (primarily interest) divided by
fixed charges.
F-7
197
CAREY DIVERSIFIED LLC
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS:
The following unaudited pro forma Condensed Consolidated Balance Sheet has
been presented as if the Consolidation transaction and the related issuance of
Listed Shares had occurred on June 30, 1997. This unaudited pro forma Condensed
Consolidated Balance Sheet should be read in conjunction with the balance sheet
of Carey Diversified LLC as of August 31, 1997 and the combined financial
statements of the Group, and notes thereto included elsewhere herein. In
management's opinion, all adjustments necessary to reflect the Consolidation
transaction and the related issuance of Listed and Subsidiary Partnership Units
have been made. For purposes of the pro forma balance sheet presentation it is
assumed that holders of 5% Limited Partnership interests elect to receive
Subsidiary Partnership Units.
The exchange of Limited Partner (non-controlling) interests for Listed
Shares will be accounted for as a purchase and recorded at the fair value of the
Listed Shares exchanged. The exchange of the General Partner's interest for
Listed Shares will be accounted for on the historical basis of accounting.
This unaudited pro forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been at
June 30, 1997, nor does it purport to represent the future financial position of
the Company.
CPA(R)
PARTNERSHIPS PRO FORMA PRO FORMA
HISTORICAL(1) ADJUSTMENTS CONSOLIDATED
-------------- ----------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Real estate leased to others:
Accounted for under the operating method, net......... $225,294 $ 129,611(2) $354,905
Net investment in direct financing leases............. 216,403 51,739(2) 268,142
Operating real estate, net.............................. 23,736 (934)(2) 22,802
Real estate held for sale............................... 14,816 6,557(2) 21,373
Equity investments...................................... 13,523 30,131(2) 43,654
Cash and cash equivalents............................... 27,079 5,566(3) 21,513
Other assets, net....................................... 19,657 19,657
-------- -------- --------
Total assets.................................. $540,508 $ 211,538 $752,046
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL/MEMBERS' EQUITY
Mortgage notes payable.................................. $194,347 $194,347
Note payable to affiliate............................... 300 300
Notes payable........................................... 24,709 24,709
Accounts payable to affiliates.......................... 3,046 $ 3,857(4) 6,903
Other liabilities....................................... 10,958 10,958
-------- -------- --------
Total liabilities............................. 233,360 3,857 237,217
-------- -------- --------
Minority interest....................................... (578) (5,540)(5) (6,118)
-------- -------- --------
Redeemable minority interest............................ 23,442(6) 23,442
-------- --------
PARTNERS' CAPITAL/MEMBERS' EQUITY
Partners' capital....................................... 307,726 (307,726)(7)
Listed Shares, no par value; 23,205,312 shares issued
and outstanding....................................... 497,505(7) 497,505
-------- -------- --------
307,726 189,779 497,505
-------- -------- --------
Total liabilities and partners'
capital/members'
equity...................................... $540,508 $ 211,538 $752,046
======== ======== ========
See accompanying notes to pro forma condensed consolidated balance sheet.
F-8
198
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS:
(1) Reflects the CPA(R) Partnerships unaudited historical combined balance sheet
as of June 30, 1997.
(2) Reflects adjustments to record the Limited Partners' interest in the assets
of the Company at their fair value, as follows:
APPRAISED REAL ESTATE
VALUE OF COST OF ASSETS AT GENERAL
REAL ESTATE ACQUISITION HISTORICAL PARTNERS' NET
ASSETS OF ASSETS COST INTEREST ADJUSTMENT
----------- ----------- ----------- --------- ----------
Real estate accounted for
under the operating
method, net.............. $ 354,467 $ 5,316 $ (225,294) $ (4,878) $129,611
Net investment in direct
financing leases......... 266,098 3,991 (216,403) (1,947) 51,739
Operating real estate,
net...................... 22,430 336 (23,736) 36 (934)
Equity investments......... 44,127 662 (13,523) (1,135) 30,131
Real estate held for
sale..................... 21,300 319 (14,816) (246) 6,557
The real estate assets of the Company have been appraised by an independent
appraiser. The carrying value of the non-real estate assets and the
liabilities of the Company are deemed to approximate their fair values.
The General Partners' effective interest in the assets and liabilities of
the Company is approximately 3.63%, consisting of a 1% interest in the
liquidating proceeds of the Participating Partnerships and an approximate
3.01% interest in the Listed Shares of the Company.
(3) Decrease in cash reflects the following:
Payment of transaction costs........................................ $2,997
Payment of transfer taxes on properties............................. 1,059
Payment of deferred leasing fees.................................... 1,510
------
$5,566
======
After the Consolidation, certain deferred leasing fees will be paid for
leasing services rendered by the Corporate General Partners of certain
CPA(R) Partnerships prior to the Consolidation. Such leasing fees were
previously accrued by the CPA(R) Partnerships.
(4) Net increase reflects the following:
Accrual of preferred return........................................ $ 5,111
Payment of deferred leasing fees to Corporate General Partners..... (1,510)
Distribution payable to Subsidiary Partnership Unitholders......... 213
Distribution payable in respect of minority interest............... 43
-------
$ 3,857
=======
The Corporate General Partners may be entitled to receive a preferred
return, measured based upon the cumulative proceeds arising from the sale
of the CPA(R) Partnerships' assets. The preferred return amounts to $5,111
based upon the cumulative proceeds from the sale of assets since the
inception of the CPA(R) Partnerships through June 30, 1997, assuming all
requisite subordination requirements for the payment of such returns have
been satisfied. After the Consolidation, the preferred return will be paid
to the Manager if the Listed Shares achieve specified closing prices for
five consecutive trading days.
F-9
199
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
Upon completion of the Consolidation, the Participating Partnerships will
distribute excess cash to the holders of Subsidiary Partnership Units,
including the Company, sufficient to allow the Company to fund the payment
of transaction costs and transfer taxes on properties. Subsidiary
Partnership Unitholders will be entitled to a pro-rata portion of such
distributions in accordance with their interests in the underlying assets
of the Participating Partnerships. A newly organized manager of the Company
(the "Manager") and the Individual General Partner will also be entitled to
a portion of such distributions in accordance with their 1% limited
partnership interest in the liquidating distributions of the Participating
Partnerships.
(5) Decrease reflects the following:
Corporate General Partners' preferred return........................ $5,111
Distribution to Manager............................................. 43
General Partners' share of transaction costs and transfer taxes..... 386
------
$5,540
======
The capital interest of the Corporate and Individual General Partners is
classified under minority interest. The General Partnership interests
include an interest in the income, losses and distributions of the
operating cash flows of the CPA(R) Partnerships which range from 1% to 10%
of such amounts. The General Partners are also entitled to a share of the
liquidation proceeds from the disposition of CPA(R) Partnership assets and
payment of a preferred return subject to the satisfaction of certain
subordination provisions. The General Partners' share of liquidation
proceeds may range from 1% to 15% of the liquidating proceeds of each
CPA(R) Partnership. Pursuant to the Consolidation, the Corporate General
Partners of the CPA(R) Partnerships will contribute their General
Partnership interests to the Manager in exchange for an interest in the
Manager. The Manager will retain the Corporate General Partners' interests
in the income, losses and operating cash flows of the CPA(R) Partnerships.
The Manager and the Individual General Partner will retain an interest in
the liquidating proceeds of each CPA(R) Partnership equal to 1% of such
proceeds. The Individual General Partner will retain his interest in each
Participating Partnership and such interest will be held in a limited
partnership capacity. The General Partners' share of liquidation proceeds
in excess of 1%, assuming a sale of CPA(R) Partnership assets at their
appraised values, will be exchanged by the Manager and the Individual
General Partner for 733,134 Listed Shares of the Company upon consummation
of the Consolidation.
(6) Increase represents the following:
Issuance of Subsidiary Partnership Units at redemption value....... $23,655
Distributions payable to holders of Subsidiary Partnership Units... (213)
-------
$23,442
=======
For purposes of this presentation it is assumed that holders of 5% of
Limited Partnership Units elect to receive Subsidiary Partnership Units,
representing an interest in the capital, income and distributions of an
individual Subsidiary Partnership. Subsidiary Partnership Units are
expected to be redeemed based on scheduled appraisal dates for each CPA(R)
Partnership's properties commencing December 31, 1998 through December 31,
2002. The redeemable minority interest is recorded at its redemption value.
F-10
200
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(7) Increase in partners' capital reflects the following:
Exchange of limited partner and certain general partnership
interests for Listed Shares and Subsidiary Partnership Units at
historical cost................................................. $307,726
Adjustment of Limited Partners' interest based upon the fair value
of Listed Shares exchanged...................................... 206,866
Issuance of Subsidiary Partnership Units for 5% of Limited
Partnership interests........................................... (23,655)
Issuance of Warrants.............................................. 6,568
--------
$497,505
========
If the Consolidation is completed, W.P. Carey & Co. will receive
compensation for investment banking services in the form of warrants to
purchase Listed Shares. If all the CPA(R) Partnerships participate in the
Consolidation, W.P. Carey & Co. will receive warrants to purchase 2,284,000
Listed Shares at $21 per share and 725,930 Listed Shares at $23 per share.
The warrants generally will be exercisable over 10 years beginning one year
after the date the Consolidation is completed. The increase in capital of
$6,568 reflecting the issuance of warrants is equal to the estimated fair
value of the warrants.
(8) Pro forma book value per share as of June 30, 1997 is $21.44, which is
computed as total equity divided by Listed Shares outstanding.
F-11
201
CAREY DIVERSIFIED LLC
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE UNAUDITED SIX MONTHS
ENDED JUNE 30, 1997
ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS:
The following unaudited pro forma Condensed Consolidated Statements of
Income are presented as if the Consolidation transaction and the related
issuance of Listed Shares had occurred as of January 1, 1996. The unaudited pro
forma Condensed Consolidated Statements of Income should be read in conjunction
with the balance sheet of Carey Diversified LLC as of August 31, 1997 and the
combined financial statements of the CPA(R) Partnerships and notes thereto
included elsewhere herein. In management's opinion, all adjustments necessary to
reflect the Consolidation transaction have been made. For purposes of the pro
forma financial statement presentation, it is assumed that holders of 5% of
Limited Partnership Units elect to receive Subsidiary Partnership Units.
The exchange of Limited Partner (non-controlling) interests for Listed
Shares will be accounted for in accordance with purchase accounting principles.
The carrying value of the Limited Partners' interests in the assets and
liabilities of the Company will be adjusted to their estimated fair value. The
exchange of the General Partners' interest for Listed Shares will be accounted
for on the historical basis of accounting. Such exchange will be treated as a
reorganization of interests under common control.
These unaudited pro forma Condensed Consolidated Statements of Income are
not necessarily indicative of what actual results of operations of the Company
would have been, nor do they purport to represent the results of operations for
future periods.
YEAR ENDED DECEMBER 31, 1996
------------------------------------------- SIX MONTHS ENDED JUNE 30, 1997
CPA(R) -------------------------------------------
PARTNERSHIPS PRO FORMA PRO FORMA GROUP PRO FORMA PRO FORMA
HISTORICAL(1) ADJUSTMENTS CONSOLIDATED HISTORICAL(1) ADJUSTMENTS CONSOLIDATED
------------- ----------- ------------ ------------- ----------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues:
Rental income......................... $ 44,576 $ 44,576 $ 23,675 $ 23,675
Interest income from direct financing
leases.............................. 32,644 32,644 16,278 16,278
Other interest income................. 1,681 1,681 568 568
Other income.......................... 1,901 1,901 3,431 3,431
Revenues of hotel operations.......... 21,929 21,929 7,033 7,033
-------- ----------- -------- -----------
102,731 102,731 50,985 50,985
-------- ----------- -------- -----------
Expenses:
Interest.............................. 23,200 23,200 10,086 10,086
Depreciation and amortization......... 11,274 $(1,220)(2) 10,054 5,462 $ (476)(2) 4,986
General and administrative............ 3,747 925(3) 4,672 2,611 388(3) 2,999
Property expenses..................... 4,008 1,184(4) 5,192 1,532 819(4) 2,351
Writedown to net realizable value..... 1,300 1,300 3,666 3,666
Operating expense of hotel
operations.......................... 15,947 15,947 5,272 5,272
-------- ------- ----------- -------- ------- -----------
59,476 889 60,365 28,629 731 29,360
-------- ------- ----------- -------- ------- -----------
Income before net gains, minority
interest, and extraordinary items... 43,255 (889) 42,366 22,356 (731) 21,625
Gains on sale of real estate and
securities, net(5).................... 5,474 (487)(6) 4,987
-------- ------- ----------- -------- ------- -----------
Income before minority interest, and
extraordinary items................. 48,729 (1,376) 47,353 22,356 (731) 21,625
Minority interest income................ (3,182) (2,238)(7) (5,420) (1,334) (1,020)(7) (2,354)
-------- ------- ----------- -------- ------- -----------
Income before extraordinary items
attributable to Listed Shares....... $ 45,547 $(3,614) $ 41,933 $ 21,022 $(1,751) $ 19,271
======== ======= =========== ======== ======= ===========
Pro forma income before extraordinary
items per Listed Share................ $ 1.80 $ 0.82
=========== ===========
Pro forma weighted average number of
Listed Shares outstanding............. 23,301,425 23,441,989
=========== ===========
Ratio of earnings to fixed charges(8)... 2.98 3.14
=========== ===========
See accompanying notes to pro forma condensed consolidated statements of income.
F-12
202
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS
OF INCOME
(AMOUNTS IN THOUSANDS)
ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS:
(1) Reflects the CPA(R) Partnerships historical combined income statements for
the year ended December 31, 1996 and unaudited for the six months ended June
30, 1997.
(2) Reflects changes in connection with adjustment of Limited Partners' interest
in real estate assets to fair value and adoption of new depreciable lives
for such assets as follows:
YEAR ENDED SIX MONTHS
ASSETS AT REVISED DECEMBER 31, ENDED
FAIR VALUE LIFE 1996 JUNE 30, 1997
---------- ------- ------------ --------------
Buildings and improvements... $ 282,524 40 $ 7,063 $ 3,532
Personal property............ 16,371 7 2,339 1,170
-------- -------
9,402 4,702
Less: historical depreciation
expense.................... (10,668) (5,196)
-------- -------
Difference................... (1,266) (494)
Elimination of General
Partners' (3.63%)
interest................... 46 18
-------- -------
Net decrease in expense...... $ (1,220) $ (476)
======== =======
(3) Increase in general and administrative expenses as follows:
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1996 JUNE 30, 1997
------------ --------------
Directors' compensation.......................... $225 $113
Employee compensation............................ 400 125
Other expenses of a public company............... 300 150
---- ----
$925 $388
==== ====
F-13
203
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS
OF INCOME -- (CONTINUED)
(4) The Company will pay a management fee and a performance fee each at an
annual rate of .5% of the Total Capitalization of the Company. The
performance fee will be paid in the form of restricted Listed Shares issued
by the Company. Restricted Listed Shares will vest over a five year period
at 20% per year. Total Capitalization will be determined by adding the
average total principal amount of debt owed by the Company and the Average
Market Capitalization of the Company. The fees will be reduced by any
payments made to the Manager and Individual General Partner by the CPA(R)
Partnerships for distributions of operating cash flows and CPA(R)
Partnership leasing fees. Such reduction may not exceed the total management
and performance fees incurred by the Company in any fiscal year. Pro forma
management and performance fees payable by the Company are as follows:
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1996 JUNE 30, 1997
------------ --------------
Average market capitalization.................... $487,761 $487,761
Average debt..................................... 251,143 223,452
-------- --------
738,904 711,213
Partial year pro-ration.......................... N/A x.5
-------- --------
Total market capitalization for the period....... 738,904 355,607
-------- --------
Management fee @ .5%............................. 3,695 1,778
Performance fee, vested portion, @ .5%........... 739 725
Reductions:
Partnership distributions to minority
interests...................................... (2,334) (1,156)
Partnership leasing fees......................... (916) (528)
-------- --------
Net fee.......................................... $ 1,184 $ 819
======== ========
Pursuant to the management agreement Average Market Capitalization is to be
calculated on a daily basis based on the market price of the Listed Shares.
As such information is not available on a historical basis, Average Market
Capitalization is equal to the Total Exchange Value and average debt is
equal to the average combined debt as of the beginning and end of the
period.
(5) The Manager will be paid an incentive fee equal to 15 percent of the amount
of the proceeds received from the sale of any property acquired in
connection with the Consolidation in excess of the appraised value of the
property used in the Consolidation, less an adjustment for the share of such
net proceeds in excess of the appraised value of the equity interest
attributable to the Manager's interest in the Company's Listed Shares. No
adjustment has been reflected in the pro forma statements of income for
incentive fees that would have been paid in connection with any such sales
during the year ended December 31, 1996 and the six months ended June 30,
1997.
(6) Represents an adjustment for disposition fees payable to the Manager on
sales of properties. Subject to approval by the Board of Directors of the
Company, the Manager may be entitled to receive a disposition fee on the
sale of properties. The amount of such fee will be determined by agreement
with the Board of Directors. For purposes of this presentation it is assumed
that disposition fees average historical levels, namely 3% of the sales
price of properties.
F-14
204
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS
OF INCOME -- (CONTINUED)
(7) Reflects the following:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ------------------
Minority interest income.................. 49 36
Redeemable minority interest income....... (2,287) (1,056)
------ ----
(2,238) (1,020)
====== ====
The Manager will retain the interest of the General Partners in the income
and losses of the Subsidiary Partnerships. Such interests range from 1% to
10% of the income and losses of each CPA(R) Partnership. Minority interest
income represents the General Partners share of pro forma adjustments based
on such interests.
Redeemable minority interest income represents the interest of the
Subsidiary Partnership Unitholders in the income of the Participating
Partnerships. For purposes of this presentation it is assumed that holders
of 5% of Limited Partnership Units elect to receive Subsidiary Partnership
Units, representing an interest in the capital, income and distributions of
an individual Subsidiary Partnership.
(8) The ratio of earnings to fixed charges is computed as income from operations
before minority interest plus fixed charges (primarily interest) divided by
fixed charges.
F-15
205
CAREY DIVERSIFIED LLC
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
ASSUMING MINIMUM PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP
UNITS:
The following unaudited pro forma Condensed Consolidated Balance Sheet has
been presented as if the Consolidation transaction and the related issuance of
Listed Shares had occurred on June 30, 1997. This unaudited pro forma Condensed
Consolidated Balance Sheet should be read in conjunction with the balance sheet
of Carey Diversified LLC as of August 31, 1997 and the combined financial
statements of the CPA(R) Partnerships, and notes thereto included elsewhere
herein. In management's opinion, all adjustments necessary to reflect the
Consolidation transaction and the related issuance of Listed Shares have been
made.
The exchange of Limited Partner (non-controlling) interests for Listed
Shares will be accounted for as a purchase and recorded at the fair value of the
Listed Shares exchanged. The exchange of the General Partners' interest for
Listed Shares will be accounted for on the historical basis of accounting.
This unaudited pro forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been at
June 30, 1997, nor does it purport to represent the future financial position of
the Company.
GROUP PRO FORMA PRO FORMA
HISTORICAL(1) ADJUSTMENTS CONSOLIDATED
------------- ----------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Real estate leased to others:
Accounted for under the operating method, net........ $ 72,070 $ 31,659(2) $103,729
Net investment in direct financing leases............ 81,077 36,766(2) 117,843
Operating real estate, net............................. 15,553 (625)(2) 14,928
Real estate held for sale.............................. 5,132 5,494(2) 10,626
Equity investments..................................... (646) 4,714(2) 4,068
Cash and cash equivalents.............................. 13,178 (1,625)(3) 11,553
Other assets, net...................................... 10,586 10,586
-------- -------- --------
Total assets................................. $ 196,950 $ 76,383 $273,333
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL/MEMBERS' EQUITY
Mortgage notes payable................................. $ 44,343 $ 44,343
Note payable to affiliate.............................. 1,451 1,451
Notes payable.......................................... 9,607 9,607
Accounts payable to affiliates......................... 544 $ 3,804(4) 4,348
Other liabilities...................................... 4,226 4,226
-------- -------- --------
Total liabilities............................ 60,171 3,804 63,975
-------- -------- --------
Minority interest...................................... 428 (4,021)(5) (3,593)
-------- -------- --------
Redeemable minority interest...........................
PARTNERS' CAPITAL/MEMBERS' EQUITY
Partners' capital...................................... 136,351 (136,351)(6)
Listed Shares, no par value; 10,172,716 shares issued
and outstanding...................................... 212,951(6) 212,951
-------- -------- --------
136,351 76,600 212,951
-------- -------- --------
Total liabilities and partners'
capital/members' equity.................... $ 196,950 $ 76,383 $273,333
======== ======== ========
See accompanying notes to pro forma condensed consolidated balance sheet.
F-16
206
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSUMING MINIMUM PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP
UNITS:
(1) Reflects the Group's unaudited historical combined balance sheet as of June
30, 1997. The Group, assuming minimum participation, consists of Corporate
Property Associates, Corporate Property Associates 2, Corporate Property
Associates 3, Corporate Property Associates 5 and Corporate Property
Associates 7, representing the combination of CPA(R) Partnerships having the
lowest combined net cash provided by operating activities, which also
satisfies the criteria for minimum exchange value needed to consummate the
Consolidation.
(2) Reflects adjustments to record the Limited Partners' interest in the assets
of the Company at their fair value, as follows:
APPRAISED REAL ESTATE
VALUE OF COST OF ASSETS AT GENERAL
REAL ESTATE ACQUISITION HISTORICAL PARTNERS' NET
ASSETS OF ASSETS COST INTEREST ADJUSTMENT
----------- ----------- ----------- --------- ----------
Real estate accounted for under the
operating method, net.............. $ 103,892 $ 1,650 $ (72,070) $ (1,813) $ 31,659
Net investment in direct financing
leases............................. 118,073 1,875 (81,077) (2,105) 36,766
Operating real estate................ 14,660 233 (15,554) 36 (625)
Equity investments................... 4,270 68 646 (270) 4,714
Real estate held for sale............ 10,770 171 (5,132) (315) 5,494
The real estate assets of the Company have been appraised by an independent
appraiser. The carrying value of the non-real estate assets and the
liabilities of the Company are deemed to approximate their fair values.
The General Partners' effective interest in the assets and liabilities of
the Company is approximately 5.42%, consisting of a 1% interest in the
liquidating proceeds of the Participating Partnerships and an approximate
4.89% interest in the Listed Shares of the Company.
(3) Decrease in cash reflects the following:
Payment of transaction costs........................................ $1,249
Payment of transfer taxes on properties............................. 376
------
$1,625
======
(4) Net increase reflects the following:
Accrual of preferred return........................................ $ 3,787
Distribution payable in respect of minority interest............... 17
------
$ 3,804
======
The Corporate General Partners may be entitled to receive a preferred
return, measured based upon the cumulative proceeds arising from the sale
of the Group's assets. The preferred return amounts to $3,787 based upon
the cumulative proceeds from the sale of assets since the inception of the
Partnerships through June 30, 1997, assuming all requisite subordination
requirements for the payment of such returns have been satisfied. After the
Consolidation, the preferred return will be paid to the Manager if the
Listed Shares achieve specified closing prices for five consecutive trading
days.
Upon completion of the Consolidation, the Participating Partnerships will
distribute excess cash to the holders of Subsidiary Partnership Units,
including the Company, in an amount sufficient to allow the Company to fund
the payment of transaction costs and transfer taxes on properties. A newly
organized
F-17
207
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
manager (the "Manager") and the Individual General Partner will be entitled
to a portion of such distributions in accordance with their 1% interest in
the liquidating distributions of the Participating Partnerships.
(5) Decrease reflects the following:
Corporate General Partners' preferred return........................ $3,787
General Partners' share of transaction costs and transfer taxes..... 217
Distribution payable to Manager..................................... 17
------
$4,021
======
The capital interest of the Corporate and Individual General Partners is
classified under minority interest. The General Partnership interests
include an interest in the income, losses and distributions of the
operating cash flows of the CPA(R) Partnerships which range from 1% to 10%
of such amounts. The General Partners are also entitled to a share of the
liquidation proceeds from the disposition of Partnership assets and payment
of a preferred return subject to the satisfaction of certain subordination
provisions. The General Partners' share of liquidation proceeds may range
from 1%, to 15% of the liquidating proceeds of each CPA(R) Partnership.
Pursuant to the Consolidation, the Corporate General Partners of the CPA(R)
Partnerships will contribute their General Partnership interests to the
Manager in exchange for an interest in the Manager. The Manager will retain
the Corporate General Partners' interests in the income, losses and
operating cash flows of the CPA(R) Partnerships. The Manager and the
Individual General Partner will retain an interest in the liquidating
proceeds of each CPA(R) Partnership equal to 1% of such proceeds. The
Individual General Partner will retain his interest in each Participating
Partnership and such interest will be held in a limited partnership
capacity. The General Partners' share of liquidation proceeds in excess of
1%, assuming a sale of CPA(R) Partnership assets at their appraised values,
will be exchanged by the Manager and the Individual General Partner for
499,754 Listed Shares of the Company upon consummation of the
Consolidation.
(6) Increase in partners' capital reflects the following:
Exchange of limited partner and certain general partnership
interests for Listed Shares at historical cost.................. $136,351
Adjustment of limited partners' interest based upon the fair value
of Listed Shares exchanged...................................... 74,229
Issuance of Warrants.............................................. 2,371
--------
$212,951
========
If the Consolidation is completed, W.P. Carey & Co. will receive
compensation for investment banking services in the form of warrants to
purchase Listed Shares. If the minimum number of CPA(R) Partnerships
participate in the Consolidation, W.P. Carey & Co. will receive warrants to
purchase 824,800 Listed Shares at $21 per share and 262,100 Listed Shares
at $23 per share. The warrants generally will be exercisable over 10 years
beginning one year after the date the Consolidation is completed. The
increase in capital of $2,371, reflecting the issuance of warrants is equal
to the estimated fair value of the warrants.
(7) Pro forma book value per share as of June 30, 1997 is $20.94, which is
computed as total equity divided by Listed Shares outstanding.
F-18
208
CAREY DIVERSIFIED LLC
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE UNAUDITED SIX MONTHS
ENDED JUNE 30, 1997
ASSUMING MINIMUM PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP
UNITS:
The following unaudited pro forma Condensed Consolidated Statements of
Income are presented as if the Consolidation transaction and the related
issuance of Listed Shares had occurred as of January 1, 1996. The unaudited pro
forma Condensed Consolidated Statements of Income should be read in conjunction
with the balance sheet of Carey Diversified LLC as of August 31, 1997 and the
combined financial statements of the Group, and notes thereto included elsewhere
herein. In management's opinion, all adjustments necessary to reflect the
Consolidation transaction have been made.
The exchange of Limited Partner (non-controlling) interests for Listed
Shares will be accounted for as a purchase and recorded at the fair value of the
Listed Shares exchanged. The exchange of the General Partner's interest for
Listed Shares will be accounted for on the historical basis of accounting.
These unaudited pro forma Condensed Consolidated Statements of Income are
not necessarily indicative of what actual results of operations of the Company
would have been, nor do they purport to represent the results of operations for
future periods.
YEAR ENDED DECEMBER 31, 1996 SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------------- ------------------------------------------
GROUP PRO FORMA PRO FORMA GROUP PRO FORMA PRO FORMA
HISTORICAL(1) ADJUSTMENTS CONSOLIDATED HISTORICAL(1) ADJUSTMENTS CONSOLIDATED
------------- ----------- ------------ ------------- ----------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues:
Rental income.................... $14,303 $ 14,303 $ 7,773 $ 7,773
Interest income from direct
financing leases............... 13,602 13,602 6,621 6,621
Other interest income............ 646 646 279 279
Other income..................... 96 96 1,815 1,815
Revenues of hotel operations..... 12,070 12,070 4,595 4,595
------- ---------- ------- ----------
40,717 40,717 21,083 21,083
------- ---------- ------- ----------
Expenses:
Interest......................... 6,106 6,106 2,420 2,420
Depreciation and amortization.... 4,288 $ (397)(2) 3,891 2,082 $(139)(2) 1,943
General and administrative....... 1,703 925(3) 2,628 1,205 388(3) 1,593
Property expenses................ 2,413 507(4) 2,920 885 320(4) 1,205
Writedown to net realizable
value.......................... 1,300 1,300 1,350 1,350
Operating expense of hotel
operations..................... 9,082 9,082 3,443 3,443
------- ------- ---------- ------- ----- ----------
24,892 1,035 25,927 11,385 569 11,954
------- ------- ---------- ------- ----- ----------
Income before net gains
minority interest and
extraordinary items.......... 15,825 (1,035) 14,790 9,698 (569) 9,129
Gains on sale of real estate and
securities, net(5)............... 5,336 (469)(6) 4,867
------- ------- ---------- ------- ----- ----------
Income before minority interest
and extraordinary items...... 21,161 (1,504) 19,657 9,698 (569) 9,129
Minority interest income........... (855) 56(7) (799) (281) 28(7) (253)
------- ------- ---------- ------- ----- ----------
Income before extraordinary
items........................ $20,306 $(1,448) $ 18,858 $ 9,417 $(541) $ 8,876
======= ======= ========== ======= ===== ==========
Pro forma income before
extraordinary items per Listed
Share............................ $ 1.85 $ 0.86
========== ==========
Pro forma weighted average number
of Listed Shares outstanding..... 10,210,682 10,264,877
========== ==========
Ratio of earnings to fixed
charges(8)....................... 4.17 4.75
========== ==========
See accompanying notes to pro forma condensed consolidated statements of income.
F-19
209
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
ASSUMING MINIMUM PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP
UNITS:
(1) Reflects the Group's historical combined income statement for the year ended
December 31, 1996 and unaudited for the six months ended June 30, 1997. The
Group, assuming minimum participation, consists of Corporate Property
Associates, Corporate Property Associates 2, Corporate Property Associates
3, Corporate Property Associates 5 and Corporate Property Associates 7,
representing the combination of partnerships having the lowest combined net
cash provided by operating activities, which also satisfies the criteria for
minimum exchange value needed to consummate the Consolidation.
(2) Reflects changes in connection with adjustment of Limited Partners' interest
in real estate assets to fair value and adoption of new depreciable lives
for such assets as follows:
YEAR ENDED SIX MONTHS
ASSETS AT REVISED DECEMBER 31, ENDED
FAIR VALUE LIFE 1996 JUNE 30, 1997
---------- ------- ------------ --------------
Buildings and improvements........ $ 88,536 40 $ 2,213 $ 1,107
Personal property................. 10,572 7 1,510 755
Less: historical depreciation
expense......................... (4,143) (2,009)
------- -------
Difference........................ (420) (147)
Elimination of General Partners'
(5.42%) interest................ 23 8
------- -------
Net decrease in expense........... $ (397) $ (139)
======= =======
(3) Increase in general and administrative expenses as follows:
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1996 JUNE 30, 1997
------------ --------------
Directors' compensation........................... $225 $113
Employee compensation............................. 400 125
Other expenses of a public company................ 300 150
---- ----
$925 $388
==== ====
F-20
210
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME -- (CONTINUED)
(4) The Company will pay a management fee and a performance fee each at an
annual rate of .5% of the Total Capitalization of the Company. The
performance fee will be paid in the form of restricted Listed Shares issued
by the Company. Restricted Listed Shares will vest over a five year period
at 20% per year. Total Capitalization will be determined by adding the
average total principal amount of debt owed by the Company and the Average
Market Capitalization of the Company. The fees will be reduced by any
payments made to the Manager and Individual General Partner by the CPA(R)
Partnerships for distributions of operating cash flows and Partnership
leasing fees. Such reduction may not exceed the total management and
performance fees incurred by the Company in any fiscal year. Pro forma
management and performance fees payable by the Company are as follows:
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1996 JUNE 30, 1997
------------ --------------
Average market capitalization..................... $203,454 $203,454
Average debt...................................... 70,263 56,237
-------- --------
273,717 259,691
Partial year pro-ration........................... N/A x .50
-------- --------
Total market capitalization for the period........ 273,717 129,846
-------- --------
Management fee @ .5%.............................. 1,369 649
Performance fee, vested portion, @ .5%............ 274 267
Reductions:
Partnership distributions to minority interests... (571) (274)
Partnership leasing fees.......................... (565) (322)
-------- --------
Net fee........................................... $ 507 $ 320
======== ========
Pursuant to the management agreement average market capitalization is to be
calculated on a daily basis based on the market price of the Listed Shares.
As such information is not available on a historical basis, Average Market
Capitalization is equal to Total Exchange Value and average debt is equal to
the average combined debt as of the beginning and end of the period.
(5) The Manager will be paid an incentive fee equal to 15% of the amount of the
proceeds received from the sale of any property acquired in connection with
the Consolidation in excess of the appraised value of the property used in
the Consolidation, less an adjustment for the share of such net proceeds in
excess of the appraised value of the equity interest attributable to the
Manager's interest in the Company's Listed Shares. No adjustment has been
reflected in the pro forma Statements of Income for incentive fees that
would have been paid in connection with any such sales during the year ended
December 31, 1996 and the six months ended June 30, 1997.
(6) Represents an adjustment for estimated disposition fees payable to the
Manager on sales of properties. Subject to approval by the Board of
Directors of the Company, the Manager may be entitled to receive a
disposition fee on the sale of properties. The amount of such fee will be
determined by agreement with the Board of Directors. For purposes of this
presentation it is assumed that disposition fees average historical levels,
namely 3% of the sales price of properties.
(7) Reflects the minority interest share of pro forma adjustments.
(8) The ratio of earnings to fixed charges is computed as income from operations
before minority interest plus fixed charges (primarily interest) divided by
fixed charges.
F-21
211
CAREY DIVERSIFIED LLC
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
ASSUMING MINIMUM PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP
UNITS:
The following unaudited pro forma Condensed Consolidated Balance Sheet has
been presented as if the Consolidation transaction and the related issuance of
Listed Shares had occurred on June 30, 1997. This unaudited pro forma Condensed
Consolidated Balance Sheet should be read in conjunction with the balance sheet
of Carey Diversified LLC as of August 31, 1997 and the combined financial
statements of the CPA(R) Partnerships, and notes thereto included elsewhere
herein. In management's opinion, all adjustments necessary to reflect the
Consolidation transaction and the related issuance of Listed and Subsidiary
Partnership Units have been made. For purposes of the pro forma balance sheet
presentation it is assumed that holders of 5% of Limited Partnership interests
elect to receive Subsidiary Partnership Units.
The exchange of Limited Partner (non-controlling) interests for Listed
Shares will be accounted for as a purchase and recorded at the fair value of the
Listed Shares exchanged. The exchange of the General Partner's interest for
Listed Shares will be accounted for on the historical basis of accounting.
This unaudited pro forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been at
June 30, 1997, nor does it purport to represent the future financial position of
the Company.
GROUP PRO FORMA PRO FORMA
HISTORICAL(1) ADJUSTMENTS CONSOLIDATED
------------- ----------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Real estate leased to others:
Accounted for under the operating method, net............... $ 72,070 $ 31,659(2) $103,729
Net investment in direct financing leases................... 81,077 36,766(2) 117,843
Operating real estate, net.................................... 15,553 (625)(2) 14,928
Real estate held for sale..................................... 5,132 5,494(2) 10,626
Equity investments............................................ (646) 4,714(2) 4,068
Cash and cash equivalents..................................... 13,178 (1,625)(3) 11,553
Other assets, net............................................. 10,586 10,586
-------- -------- --------
Total assets......................................... $ 196,950 $ 76,383 $273,333
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL/MEMBERS' EQUITY
Mortgage notes payable........................................ $ 44,343 $ 44,343
Note payable to affiliate..................................... 1,451 1,451
Notes payable................................................. 9,607 9,607
Accounts payable to affiliates................................ 544 $ 3,890(4) 4,434
Other liabilities............................................. 4,226 4,226
-------- -------- --------
Total liabilities.................................... 60,171 3,890 64,061
-------- -------- --------
Minority interest............................................. 428 (4,021)(5) (3,593)
-------- -------- --------
Redeemable minority interest.................................. 9,587(6) 9,587
-------- --------
PARTNERS' CAPITAL/MEMBERS' EQUITY
Partners' capital............................................. 136,351 (136,351)(7)
Listed Shares, no par value; 9,689,069 shares issued and
outstanding................................................. 203,278(7) 203,278
-------- -------- --------
136,351 66,927 203,278
-------- -------- --------
Total liabilities and partners' capital/members'
equity............................................. $ 196,950 $ 76,383 $273,333
======== ======== ========
See accompanying notes to pro forma condensed consolidated balance sheet.
F-22
212
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSUMING MINIMUM PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP
UNITS:
(1) Reflects the Group's unaudited historical combined balance sheet as of June
30, 1997. The Group, assuming minimum participation, consists of Corporate
Property Associates, Corporate Property Associates 2, Corporate Property
Associates 3, Corporate Property Associates 5 and Corporate Property
Associates 7, representing the combination of partnerships having the lowest
combined net cash provided by operating activities, which also satisfies the
criteria for minimum exchange value needed to consummate the Consolidation.
(2) Reflects adjustments to record the Limited Partners' interest in the assets
of the Company at their fair value, as follows:
APPRAISED REAL ESTATE
VALUE OF COST OF ASSETS AT GENERAL
REAL ESTATE ACQUISITION HISTORICAL PARTNERS' NET
ASSETS OF ASSETS COST INTEREST ADJUSTMENT
----------- ----------- ----------- --------- ----------
Real estate accounted for under
the operating method, net.... $ 103,892 $ 1,650 $ (72,070) $ (1,813) $ 31,659
Net investment in direct
financing leases............. 118,073 1,875 (81,077) (2,105) 36,766
Operating real estate.......... 14,660 233 (15,554) 36 (625)
Equity investments............. 4,270 68 646 (270) 4,714
Real estate held for sale...... 10,770 171 (5,132) (315) 5,494
The real estate assets of the Company have been appraised by an independent
appraiser. The carrying value of the non-real estate assets and the
liabilities of the Company are deemed to approximate their fair values.
The General Partners' effective interest in the assets and liabilities of
the Company is approximately 5.42%, consisting of a 1% interest in the
liquidating proceeds of the Participating Partnerships and an approximate
4.89% interest in the Listed Shares of the Company.
(3) Decrease in cash reflects the following:
Payment of transaction costs........................................ $1,249
Payment of transfer taxes on properties............................. 376
------
$1,625
======
(4) Net increase reflects the following:
Accrual of preferred return........................................ $ 3,787
Distribution payable to Subsidiary Partnership Unitholders......... 86
Distribution payable in respect of minority interest............... 17
-------
$ 3,890
=======
The Corporate General Partners may be entitled to receive a preferred
return, measured based upon the cumulative proceeds arising from the sale
of the Group's assets. The preferred return amounts to $3,787 based upon
the cumulative proceeds from the sale of assets since the inception of the
Partnerships through June 30, 1997, assuming all requisite subordination
requirements for the payment of such returns have been satisfied. After the
Consolidation, the preferred return will be paid to the Manager if the
Listed Shares achieve specified closing prices for five consecutive trading
days.
F-23
213
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
Upon completion of the Consolidation, the Participating Partnerships will
distribute excess cash to the holders of Subsidiary Partnership Units,
including the Company, in an amount sufficient to allow the Company to fund
the payment of transaction costs and transfer taxes on properties.
Subsidiary Partnership Unitholders will be entitled to a pro-rata portion
of such distributions in accordance with their interests in the underlying
assets of the Participating Partnerships. A newly organized manager (the
"Manager") and the Individual General Partner, will also be entitled to a
portion of such distributions in accordance with their 1% interest in the
liquidating distributions of the Participating Partnerships.
(5) Decrease reflects the following:
Corporate General Partners' preferred return........................ $3,787
General Partners' share of transaction costs and transfer taxes..... 217
Distribution to Manager............................................. 17
------
$4,021
======
The capital interest of the Corporate and Individual General Partners is
classified under minority interest. The General Partnership interests
include an interest in the income, losses and distributions of the
operating cash flows of the CPA(R) Partnerships which range from 1% to 10%
of such amounts. The General Partners are also entitled to a share of the
liquidation proceeds from the disposition of Partnership assets and payment
of a preferred return subject to the satisfaction of certain subordination
provisions. The General Partners' share of liquidation proceeds may range
from 1% to 15% of the liquidating proceeds of each CPA(R) Partnership.
Pursuant to the Consolidation, the Corporate General Partners of the CPA(R)
Partnerships will contribute their General Partnership interests to the
Manager in exchange for an interest in the Manager. The Manager will retain
the Corporate General Partners' interests in the income, losses and
operating cash flows of the CPA(R) Partnerships. In addition, the Manager
and Individual General Partner will retain an interest in the liquidating
proceeds of each Partnership equal to 1% of such proceeds. The Individual
General Partner will retain his interest in each Participating Partnership
and such interest will be held in a limited partnership capacity. The
General Partners' share of liquidation proceeds in excess of 1%, assuming a
sale of CPA(R) Partnership assets at their appraised values, will be
exchanged by the Manager and the Individual General Partner for 499,754
Listed Shares of the Company upon consummation of the Consolidation.
(6) Increase represents the following:
Issuance of Subsidiary Partnership Units at redemption value........ $9,673
Distributions payable to Subsidiary Partnership Unitholders......... (86)
------
$9,587
======
For purposes of this presentation it is assumed that holders of 5% of
Limited Partnership Units elect to receive Subsidiary Partnership Units,
representing an interest in the capital, income and distributions of an
individual Subsidiary Partnership. Subsidiary Partnership Units are
expected to be redeemed based on scheduled appraisal dates for each CPA(R)
Partnership's properties commencing December 31, 1998 through December 31,
2002. The redeemable minority interest is recorded at its redemption value.
F-24
214
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(7) Increase in partners' capital reflects the following:
Exchange of limited partner and certain general partnership
interests for Listed Shares and Subsidiary Partnership Units at
historical cost................................................. $136,351
Adjustment of limited partners' interest based upon the fair value
of Listed Shares exchanged...................................... 74,229
Issuance of Subsidiary Partnership Units for 5% of Limited
Partnership interests........................................... (9,673)
Issuance of Warrants.............................................. 2,371
--------
$203,278
========
If the Consolidation is completed, W.P. Carey & Co. will receive
compensation for investment banking services in the form of warrants to
purchase Listed Shares. If the minimum number of CPA(R) Partnerships
participate in the Consolidation, W.P. Carey & Co. will receive warrants to
purchase 824,800 Listed Shares at $21 per share and 262,100 Listed Shares
at $23 per share. The warrants generally will be exercisable over 10 years
beginning one year after the date the Consolidation is completed. The
increase in capital of $2,371, reflecting the issuance of warrants is based
on the estimated fair value of the warrants.
(8) Pro forma book value per share as of June 30, 1997 is $28.21, which is
computed as total equity divided by Listed Shares outstanding.
F-25
215
CAREY DIVERSIFIED LLC
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE UNAUDITED SIX MONTHS
ENDED JUNE 30, 1997
ASSUMING MINIMUM PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP
UNITS:
The following unaudited pro forma Condensed Consolidated Statements of
Income are presented as if the Consolidation transaction and the related
issuance of Listed Shares had occurred as of January 1, 1996. The unaudited pro
forma Condensed Consolidated Statements of Income should be read in conjunction
with the balance sheet of Carey Diversified LLC as of August 31, 1997 and the
combined financial statements of the Group, and notes thereto included elsewhere
herein. In management's opinion, all adjustments necessary to reflect the
Consolidation transaction have been made. For purposes of the pro forma income
statement presentation it is assumed that holders of 5% of Limited Partnership
Units elect to receive Subsidiary Partnership Units.
The exchange of Limited Partner (non-controlling) interests for Listed
Shares will be accounted for in accordance with purchase accounting principles.
The carrying value of the Limited Partners' interests in the assets and
liabilities of the Company will be adjusted to their estimated fair value. The
exchange of the General Partners' interest for Listed Shares will be accounted
for on the historical basis of accounting. Such exchange will be treated as a
reorganization of interests under common control.
These unaudited pro forma Condensed Consolidated Statements of Income are
not necessarily indicative of what actual results of operations of the Company
would have been, nor do they purport to represent the results of operations for
future periods.
YEAR ENDED DECEMBER 31, 1996 SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------------- --------------------------------------------
GROUP PRO FORMA PRO FORMA GROUP PRO FORMA PRO FORMA
HISTORICAL(1) ADJUSTMENTS CONSOLIDATED HISTORICAL(1) ADJUSTMENTS CONSOLIDATED
-------------- ----------- ------------ -------------- ----------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues:
Rental income..................... $ 14,303 $ 14,303 $ 7,773 $ 7,773
Interest income from direct
financing leases................ 13,602 13,602 6,621 6,621
Other interest income............. 646 646 279 279
Other income...................... 96 96 1,815 1,815
Revenues of hotel
operations...................... 12,070 12,070 4,595 4,595
------- --------- ------- ---------
40,717 40,717 21,083 21,083
------- --------- ------- ---------
Expenses:
Interest.......................... 6,106 6,106 2,420 2,420
Depreciation and amortization..... 4,288 $ (397)(2) 3,891 2,082 $(139)(2) 1,943
General and administrative........ 1,703 925(3) 2,628 1,205 388(3) 1,593
Property expenses................. 2,413 507(4) 2,920 885 320(4) 1,205
Writedown to net realizable
value........................... 1,300 1,300 1,350 1,350
Operating expense of hotel
operations...................... 9,082 9,082 3,443 3,443
------- ------- --------- ------- ----- ---------
24,892 1,035 25,927 11,385 569 11,954
------- ------- --------- ------- ----- ---------
Income before net gains, minority
interest, and extraordinary
items........................... 15,825 (1,035) 14,790 9,698 (569) 9,129
Gains on sale of real estate and
securities, net(5)................ 5,336 (469)(6) 4,867
------- ------- --------- ------- ----- ---------
Income before minority interest
and extraordinary items......... 21,161 (1,504) 19,657 9,698 (569) 9,129
Minority interest income............ (855) (875)(7) (1,730) (281) (409)(7) (690)
------- ------- --------- ------- ----- ---------
Income before extraordinary items
attributable to Listed Shares
(8)............................. $ 20,306 $(2,379) $ 17,927 $ 9,417 $(978) $ 8,439
======= ======= ========= ======= ===== =========
Pro forma income before
extraordinary items per Listed
Share............................. $ 1.84 $ 0.86
========= =========
Pro forma weighted average number of
Listed Shares outstanding......... 9,727,035 9,781,230
========= =========
Ratio of earnings to fixed charges
(8)............................... 4.17 4.75
========= =========
See accompanying notes to pro forma condensed consolidated statements of income.
F-26
216
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
ASSUMING MINIMUM PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP
UNITS:
(1) Reflects the Group's historical combined income statements for the year
ended December 31, 1996 and unaudited for the six months ended June 30,
1997. The Group, assuming minimum participation, consists of Corporate
Property Associates, Corporate Property Associates 2, Corporate Property
Associates 3, Corporate Property Associates 5 and Corporate Property
Associates 7, representing the combination of partnerships having the lowest
combined net cash provided by operating activities, which also satisfies the
criteria for minimum exchange value needed to consummate the Consolidation.
(2) Reflects changes in connection with adjustment of Limited Partners' interest
in real estate assets to fair value and adoption of new depreciable lives
for such assets as follows:
YEAR ENDED SIX MONTHS
ASSETS AT REVISED DECEMBER 31, ENDED
FAIR VALUE LIFE 1996 JUNE 30, 1997
---------- ------- ------------ -------------
Buildings and improvements....... $ 88,536 40 $ 2,213 $ 1,107
Personal property................ 10,572 7 1,510 755
Less: historical depreciation
expense........................ (4,143) (2,009)
------- -------
Difference....................... (420) (147)
Elimination of General Partners'
(5.42%) interest............... 23 8
------- -------
Net decrease in expense.......... $ (397) $ (139)
======= =======
(3) Increase in general and administrative expenses as follows:
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1996 JUNE 30, 1997
------------ --------------
Directors' compensation.......................... $225 $113
Employee compensation............................ 400 125
Other expenses of a public company............... 300 150
---- ----
$925 $388
==== ====
F-27
217
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME -- (CONTINUED)
(4) The Company will pay a management fee and a performance fee each at an
annual rate of .5% of the Total Capitalization of the Company. The
performance fee will be paid in the form of restricted Listed Shares issued
by the Company. Restricted Listed Shares will vest over a five year period
at 20% per year. Total Capitalization will be determined by adding the
average total principal amount of debt owed by the Company and the Average
Market Capitalization of the Company. The fees will be reduced by any
payments made to the Manager and the Individual General Partner by the
CPA(R) Partnerships for distributions of operating cash flows and
Partnership leasing fees. Such reduction may not exceed the total management
and performance fees incurred by the Company in any fiscal year. Pro forma
management and performance fees payable by the Company are as follows:
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1996 JUNE 30, 1997
------------ --------------
Average market capitalization.................... $203,454 $203,454
Average debt..................................... 70,263 56,237
-------- --------
273,717 259,691
Partial year pro-ration.......................... N/A x .50
-------- --------
Average total assets for the period.............. 273,717 129,846
-------- --------
Management fee @ .5%............................. 1,369 649
Performance fee, vested portion, @ .5%........... 274 267
Reductions:
Partnership distributions to minority
interests...................................... (571) (274)
Partnership leasing fees......................... (565) (322)
-------- --------
Net fee.......................................... $ 507 $ 320
======== ========
Pursuant to the management agreement, Average Market Capitalization will be
calculated on a daily basis based on the market price of the Listed Shares.
As such information is not available on a historical basis, Average Market
Capitalization is equal to the Total Exchange Value including Subsidiary
Partnership Units and average debt is equal to the average combined debt as
of the beginning and end of the period.
(5) The Manager will be paid an incentive fee equal to 15% of the amount of the
proceeds received from the sale of any property acquired in connection with
the Consolidation in excess of the appraised value of the property used in
the Consolidation, less an adjustment for the share of such net proceeds in
excess of the appraised value of the equity interest attributable to the
Manager's interest in the Company's Listed Shares. No adjustment has been
reflected in the pro forma statements of income for incentive fees that
would have been paid in connection with any such sales during the year ended
December 31, 1996 and the six months ended June 30, 1997.
(6) Represents an adjustment for estimated disposition fees payable to the
Manager on sales of properties. Subject to approval by the Board of
Directors of the Company, the Manager may be entitled to receive a
disposition fee on the sale of properties. Such fee will be determined by
agreement with the Board of Directors. For purposes of this presentation it
is assumed that disposition fees average historical levels, namely 3% of the
sales price of properties.
F-28
218
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME -- (CONTINUED)
(7) Reflects the following:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ------------------
Minority interest income.................. $ 56 $ 28
Redeemable minority interest income....... (931) (437)
---- ----
$(875) $ (409)
==== ====
The Manager will retain the interest of the General Partners in the income
and losses, of the Subsidiary Partnerships. Such interests range from 1% to
10% of the income and losses of each CPA(R) Partnership. Minority interest
income represents the General Partners' share of pro forma adjustments
based on such interests.
Redeemable minority interest income represents the interest of the
Subsidiary Partnership Unitholders in the income of the Participating
Partnerships. For purposes of this presentation it is assumed that holders
of 5% of Limited Partnership Units elect to receive Subsidiary Partnership
Units, representing an interest in the capital, income and distributions of
an individual Subsidiary Partnership.
(8) The ratio of earnings to fixed charges is computed as income from operations
before minority interest plus fixed charges (primarily interest) divided by
fixed charges.
F-29
219
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Carey Diversified LLC:
We have audited the accompanying balance sheet of Carey Diversified LLC as
of August 31, 1997. The balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on the balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Carey Diversified LLC as of August
31, 1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
October 10, 1997
F-30
220
CAREY DIVERSIFIED LLC
BALANCE SHEET
AUGUST 31, 1997
ASSETS
Cash.................................................................. $500
====
MEMBERS' EQUITY
Listed shares, no par value, 25 shares issued and outstanding (Note
4).................................................................. $500
====
See accompanying notes to balance sheet.
F-31
221
CAREY DIVERSIFIED LLC
NOTES TO BALANCE SHEET
(1) FORMATION OF THE COMPANY
Carey Diversified LLC, a limited liability company, was formed under the
laws of the state of Delaware on October 15, 1996 for the purpose of
acquiring up to nine public limited partnerships in the Corporate Property
Associates series of limited partnerships (the "CPA(R) Partnerships"), if
approved by the holders of a majority of the outstanding units of each of
the individual partnerships. The acquisition will be accomplished by a
consolidation by merger (the "Consolidation") of the CPA(R) Partnerships
into nine subsidiary partnerships (the "Subsidiary Partnerships") of the
Company which will be formed for this purpose. The Consolidation will not
occur unless the CPA(R) Partnerships approving the Consolidation represent
at least $200,000,000 Exchange Value, as defined. In exchange for acquiring
all of the limited partners' and a portion of the general partners'
interests in the Partnerships, the Company will issue 24,388,032 Listed
Shares. The Manager will retain the Corporate General Partners interest in
the income, losses and operating cash flow of the Subsidiary Partnerships
which range from 1% to 9%.
The Company will acquire and own industrial and commercial property net
leased to creditworthy corporations and other creditworthy entities and
will continue the net lease business operations of the CPA(R) Partnerships.
Upon completion of the Consolidation the Company will own a portfolio of
198 properties with a carrying value of $646,000,000, that are net leased
to 76 tenants. The real estate assets of the CPA(R) Partnerships are
subject to limited recourse mortgage debt of approximately $194,347,000.
The Company expects to be taxed as a partnership for Federal and most state
and local income tax purposes.
(2) MANAGEMENT AGREEMENT
The Company has entered into a Management Agreement with Carey Management
LLC (the "Manager") pursuant to which the Manager will provide personnel
and such administrative support as may be required to carry on the
operations of the Company. The Company will pay the Manager a cash
management fee of .5% per annum of the Total Capitalization of the Company,
as defined. The Manager will also be paid a performance fee in like amount,
which will be paid in the form of restricted Listed Shares issued by the
Company which will vest ratably over five years. Before such Listed Shares
are vested, they will not be transferable and will be subject to forfeiture
in the event the Manager is terminated for cause or resigns. The Listed
Shares will vest immediately in the event of a change in control or certain
other circumstances.
Management and performance fees due to the Manager will be reduced by the
sum of distributions of operating cash flow, management fees and leasing
fees paid by the Subsidiary Partnerships to the Manager and the Individual
General Partner.
Subject to approval by the Board of Directors of the Company, the Manager
may be entitled to receive a disposition fee on the sale of properties.
Such fee will be determined by agreement with the Board of Directors. The
Manager shall be paid an incentive fee equal to 15% of the amount of the
proceeds received from the sale of any property acquired in connection with
the Consolidation in excess of the appraised value of the property used in
the Consolidation, less an adjustment for the share of such net proceeds in
excess of the appraisal value of the equity interest attributable to the
Manager's interest in the Listed Shares.
(3) REDEEMABLE MINORITY INTEREST
Each Subsidiary Partnership is authorized to issue Subsidiary Partnership
Units to unitholders of the CPA(R) Partnership who choose not to receive
Listed Shares and wish to retain a security that is substantially similar
to the CPA(R) Partnerships Units. The terms and conditions of the
Subsidiary Partnership Units are substantially the same as the terms of the
CPA(R) Partnerships Units. The
F-32
222
CAREY DIVERSIFIED LLC
NOTES TO BALANCE SHEET -- (CONTINUED)
performance of, and distributions with respect to the Subsidiary
Partnership Units will be based solely upon the performance of the assets
owned by the Subsidiary Partnership corresponding to such units.
Subsidiary Partnership Units will be redeemed by the Company as soon as
practicable after appraisals are performed on the properties. Such
appraisals will commence as of December 31, 1998 and the final appraisal
will be made no later than December 31, 2002. The Subsidiary Partnership
Units will not be listed on any national securities exchange or the Nasdaq
National Market System.
(4) LISTED SHARES
The Company is authorized to issue Listed Shares, representing interests in
the income, loss and capital of the Company. Listed Shares will be issued
to holders of units of all nine CPA(R) Partnerships who choose to receive
such shares upon consummation of the Consolidation. Holders of Listed
Shares will bear a pro rata portion of the cash costs of the formation of
the Company and the Consolidation. Such costs will approximate $2,997,000.
The performance of and distributions with respect to the Listed Shares will
be based upon the performance of the entire portfolio of the Company's
assets. Listed Shares are not redeemable, except pursuant to certain
anti-takeover provisions adopted by the Company. The Company will pay
distributions to holders of Listed Shares when declared by its Board of
Directors out of available funds.
Approval of any matter submitted to the holders of Listed Shares generally
requires the affirmative vote of holders of a majority of the Listed Shares
that are present at a meeting at which a quorum is present. There are no
cumulative voting rights with respect to: (i) the election and removal of
directors; (ii) the sale or disposition of all or substantially all of the
assets of the Company at any one time; (iii) the merger or consolidation of
the Company (where the Company is not the surviving entity); (iv) the
dissolution of the Company; and (v) certain anti-takeover provisions. The
holders of the Listed Shares will be entitled to one vote for each Listed
Share owned.
If the Consolidation is completed, W. P. Carey & Co., Inc. will receive
compensation for investment banking services in the form of warrants to
purchase Listed Shares. If all the CPA(R) Partnerships participate in the
Consolidation, W. P. Carey & Co., Inc. will receive warrants to purchase
2,284,000 Listed Shares at $21 per share and 725,930 Listed Shares at $23
per share. The warrants generally will be exercisable over 10 years
beginning one year after the date the Consolidation is completed. The
compensation of $6,568,000 is based on the estimated fair value of the
warrants.
(5) ADDITIONAL CLASSES AND SERIES OF SHARES
The Organizational Documents of the Company authorize the Board of
Directors (subject to certain restrictions) to provide for the issuance of
Shares in other classes or series, to establish the number of Shares in
each class or series and to fix the preference, conversion and other
rights, voting powers, restrictions, limitations as to distributions,
qualifications or terms or conditions of redemption of such class or
series. The Company believes that the ability of the Board of Directors to
issue one or more classes or series will provide the Company with increased
flexibility in structuring possible future financing and acquisitions, and
in meeting other needs which might arise. The additional classes or series,
as well as the Listed Shares, will be available for issuance without
further action by the Company's Shareholders, unless such action is
required by applicable law or the rules of any stock exchange or automated
quotation system on which the Company's securities may be listed or traded.
(6) NON-EMPLOYEE DIRECTORS' SHARE PLAN
Non-employee directors will be granted options for Listed Shares, and may
elect to receive Listed Shares in lieu of fees, under the 1997 Non-Employee
Directors' Share Plan. The Plan provides that each non-
F-33
223
CAREY DIVERSIFIED LLC
NOTES TO BALANCE SHEET -- (CONTINUED)
employee director will be automatically granted an option to purchase 4,000
Listed Shares (i) at the effective time of the Consolidation or upon his
initial election or appointment thereafter, and (ii) on a quarterly basis
beginning in 1999, options or restricted shares with a total value of
$6,250. Such options will have an exercise price equal to the fair market
value of Listed Shares on the date of grant, and will expire at the earlier
of 10 years after the date of grant or one year after the optionee ceases
serving as a director. Such options generally will become exercisable one
year after grant, subject to earlier exercisability in the event of death,
disability, or a change in control (as defined), and will be forfeited in
the event of cessation of service as a director within 10 months after the
date of grant. The plan also will permit a non-employee director to elect
to be paid any directors' fees in the form of Listed Shares. A director who
makes such election will receive Listed Shares having a fair market value
equal to the amount of fees he has elected to forego, with such Shares
issuable at the time the fees otherwise would have been paid or on a
deferred basis. A total of 300,000 Listed Shares are reserved for grant
under the plan. The number and kind of shares reserved and automatically
granted under the plan are subject to adjustment in the event of stock
splits, stock dividends, and other extraordinary events.
(7) LISTED SHARE INCENTIVE PLAN
The 1997 Listed Share incentive plan authorizes the issuance of up to
700,000 Listed Shares to eligible officers and employees of the Company and
its affiliates. The Plan provides for the grant of (i) share options which
may or may not qualify as incentive stock options under Section 422 of the
Internal Revenue Code, (ii) performance shares, (iii) dividend equivalent
rights issued alone or in tandem with option and (iv) restricted shares,
which are contingent upon the attainment of goals or subject to vesting
requirements. On the effective date of the Offering, options to purchase
113,500 Listed Shares and 7,500 Restricted Shares will be granted to the
sole employee of the Company. The options will have an exercise price of
$20 per Listed Share.
F-34
224
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Corporate Property Associates Partnerships:
We have audited the combined balance sheets of Corporate Property
Associates Partnerships, as described in Note 1, as of December 31, 1995 and
1996, and the related combined statements of income, partners' capital and cash
flows for each of the three years in the period ended December 31, 1996. We have
also audited the financial statement schedule included in this Consent
Solicitation Statement. These financial statements and financial statement
schedule are the responsibility of the General Partners. Our responsibility is
to express an opinion on these financial statements and financial statement
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 audits 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 the
General Partners, 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of Corporate Property
Associates Partnerships as of December 31, 1995 and 1996, and the combined
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. In addition, in our opinion, the Schedule of Real Estate
and Accumulated Depreciation as of December 31, 1996, when considered in
relation to the basic financial statements taken as a whole, presents, fairly,
in all material respects, the financial information required to be included
therein.
COOPERS & LYBRAND L.L.P.
New York, New York
March 22, 1997
F-35
225
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- ------------
(UNAUDITED)
ASSETS
Real estate leased to others:
Accounted for under the operating method, net........... $260,617 $247,580 $225,294
Net investment in direct financing leases............... 218,922 215,310 216,403
-------- -------- --------
Real estate leased to others......................... 479,539 462,890 441,697
Operating real estate, net................................ 40,888 24,080 23,736
Real estate held for sale................................. 12,785 434 14,816
Cash and cash equivalents................................. 27,711 28,553 27,079
Equity investments........................................ 4,260 13,660 13,523
Other assets, net of accumulated amortization of $1,914
and $2,023 at December 31, 1995 and 1996 and $1,842 at
June 30, 1997........................................... 17,141 15,111 19,657
-------- -------- --------
Total assets.................................... $582,324 $544,728 $540,508
======== ======== ========
LIABILITIES
Mortgage notes payable.................................... $247,478 $202,339 $194,347
Notes payable to affiliate................................ 2,550 500 300
Notes payable............................................. 24,709 24,709 24,709
Accounts payable to affiliates............................ 2,283 2,543 3,046
Other liabilities......................................... 14,005 11,342 10,958
-------- -------- --------
Total liabilities............................... 291,025 241,433 233,360
-------- -------- --------
Minority interest......................................... (1,597) (750) (578)
-------- -------- --------
Commitments and contingencies
PARTNERS' CAPITAL
Partners' capital......................................... 292,896 304,045 307,726
-------- -------- --------
Total liabilities and partners' capital......... $582,324 $544,728 $540,508
======== ======== ========
The accompanying notes are an integral part of the combined financial
statements.
F-36
226
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
FOR THE YEARS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------------------- ---------------------------
1994 1995 1996 1996 1997
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues:
Rental income.................... $ 41,645 $ 42,255 $ 44,576 $21,549 $23,675
Interest income from direct
financing leases.............. 40,213 36,391 32,644 16,256 16,278
Other interest income............ 1,294 1,700 1,681 992 568
Other income..................... 3,453 2,523 1,901 290 3,431
Revenues of hotel operations..... 22,532 25,077 21,929 12,359 7,033
-------- -------- -------- -------- -------
109,137 107,946 102,731 51,446 50,985
-------- -------- -------- -------- -------
Expenses:
Interest......................... 33,120 28,842 23,200 12,191 10,086
Depreciation and amortization.... 13,321 12,810 11,274 5,788 5,462
General and administrative....... 3,663 4,509 3,747 2,006 2,611
Property expenses................ 8,151 4,086 4,008 1,718 1,532
Writedowns to net realizable
value......................... 2,889 3,619 1,300 1,300 3,666
Operating expenses of hotel
operations.................... 16,177 18,037 15,947 8,879 5,272
-------- -------- -------- -------- -------
77,321 71,903 59,476 31,882 28,629
-------- -------- -------- -------- -------
Income before net gains,
minority interest in
income and
extraordinary items.... 31,816 36,043 43,255 19,564 22,356
Gain on sales of real estate and
securities, net.................. 9,646 4,964 5,474 4,644
Gain on settlement................. 11,499
-------- -------- -------- -------- -------
Income before minority
interest in income and
extraordinary items.... 41,462 52,506 48,729 24,208 22,356
Minority interest in income........ (3,006) (3,143) (3,182) (1,663) (1,334)
-------- -------- -------- -------- -------
Income before
extraordinary items.... 38,456 49,363 45,547 22,545 21,022
Extraordinary gain (loss) on
extinguishments of debt, net of
minority interest of $98, $(205)
and $3 in 1994, 1995 and 1996.... (1,014) 3,207 (252) (252)
-------- -------- -------- -------- -------
Net income............... $ 37,442 $ 52,570 $ 45,295 $22,293 $21,022
======== ======== ======== ======== =======
The accompanying notes are an integral part of the combined financial
statements.
F-37
227
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND (UNAUDITED) FOR THE SIX-MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
Balance, December 31, 1993................................ $295,959
Distributions to partners................................. (35,589)
Net income, 1994.......................................... 37,442
--------
Balance, December 31, 1994................................ 297,812
Distributions to partners................................. (57,216)
Purchase of Limited Partnership Units..................... (270)
Net income, 1995.......................................... 52,570
--------
Balance, December 31, 1995................................ 292,896
Distributions to partners................................. (34,173)
Purchase of Limited Partnership Units..................... (17)
Change in unrealized appreciation, marketable
securities.............................................. 44
Net income, 1996.......................................... 45,295
--------
Balance, December 31, 1996................................ 304,045
Distributions to partners................................. (17,336)
Change in unrealized appreciation, marketable
securities.............................................. (5)
Net income, six months ended June 30, 1997................ 21,022
--------
Balance, June 30, 1997 (unaudited)........................ $307,726
========
The accompanying notes are an integral part of the combined financial
statements.
F-38
228
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED
DECEMBER 31, FOR THE SIX MONTHS
------------------------------ ENDED JUNE 30,
1994 1995 1996 --------------------------
------- -------- ------- 1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income...................................................... $37,442 $ 52,570 $45,295 $ 22,293 21,022
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of deferred financing costs, net
of amortization of deferred gains and deferred rental
income...................................................... 13,108 12,670 10,905 5,630 5,288
Extraordinary (gain) loss..................................... 1,014 (3,207) 252 252
Net gain on sales............................................. (9,646) (4,964) (5,474) (4,644)
Gain on settlement............................................ (11,499)
Minority interest in income................................... 3,006 3,143 3,182 1,663 1,334
Distributions to minority interest............................ (2,435) (2,670) (2,334) (1,172) (1,162)
Scheduled rents on operating and direct financing leases
(less) greater than income recognized....................... 31 364 (1,343) (323) (993)
Write-downs to net realizable value........................... 2,889 3,619 1,300 1,300 3,666
Restructuring consideration received.......................... 1,950 15,188
Net changes in operating assets and liabilities and other..... (2,228) (1,938) (800) (1,639) (3,749)
------- -------- ------- ------- -------
Net cash provided by operating activities................. 45,131 63,276 50,983 23,360 25,406
------- -------- ------- ------- -------
Cash flows from investing activities:
Purchases of real estate and capital expenditures............... (2,492) (2,095) (3,420) (2,144) (1,354)
Installment and settlement proceeds............................. 2,286 5,436
Proceeds from sales of real estate and securities............... 37,608 22,736 23,394 17,453
Other........................................................... (266) (1,750) (429)
------- -------- ------- ------- -------
Net cash used in investing activities..................... 37,136 24,327 19,545 15,309 (1,354)
------- -------- ------- ------- -------
Cash flows from financing activities:
Distributions to partners....................................... (35,589) (57,216) (34,173) (17,666) (17,336)
Payments of mortgage principal.................................. (60,281) (60,349) (63,171) (35,655) (20,692)
Release of escrow funds in connection with mortgage
prepayments................................................... 2,395
Proceeds from mortgage financings and notes payable............. 27,400 10,000 28,189 23,400 12,700
Proceeds from notes payable to affiliate........................ 2,550 1,000 1,000
Payments of notes payable to affiliate.......................... (3,050) (3,050) (200)
Deferred financing costs........................................ (505) (293) (603) (434) (178)
Other........................................................... (1,070) (270) (273) (255) 180
------- -------- ------- ------- -------
Net cash used in financing activities..................... (70,045) (105,578) (69,686) (32,660) (25,526)
------- -------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents...... 12,222 (17,975) 842 6,009 (1,474)
Cash and cash equivalents, beginning of period.................... 33,464 45,686 27,711 27,711 28,553
------- -------- ------- ------- -------
Cash and cash equivalents, end of period.................. $45,686 $ 27,711 $28,553 $ 33,720 $ 27,079
======= ======== ======= ======= =======
Supplemental schedule of noncash investing and financing activities:
In July 1996, the Group exchanged its interest in a hotel property and
related assets and liabilities for units in the operating partnership of a
publicly-traded real estate investment trust (see Note 15). The assets and
liabilities transferred were as follows:
Operating real estate, net of accumulated depreciation............................... $16,098
Mortgage note payable................................................................ (7,304)
Other assets and liabilities transferred, net........................................ 69
-------
Equity investment.................................................................... $ 8,863
=======
The accompanying notes are an integral part of the combined financial
statements.
F-39
229
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS
UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF COMBINATION
The combined financial statements consist of interests in nine Corporate
Property Associates real estate limited partnerships (individually, the
"Partnership") and their wholly-owned subsidiaries (collectively, the "Group")
which have been presented on a combined basis because of the affiliated general
partners, common management and common control and because the entities are
expected to be the subject of a consolidation by merger with Carey Diversified
LLC. All material inter-entity transactions have been eliminated. The General
Partners' interest in the Group is classified under minority interest as such
interest will be maintained subsequent to the consolidation.
The Group is engaged in the net leasing of industrial and commercial real
estate. In accordance with the Amended Agreements of Limited Partnership of each
Partnership (the "Agreements"), the Subsidiaries will terminate between 2004 and
2050. The primary entities referred to above are as follows:
Corporate Property Associates
Corporate Property Associates 2
Corporate Property Associates 3
Corporate Property Associates 4, a California limited partnership
Corporate Property Associates 5
Corporate Property Associates 6 -- a California limited partnership
Corporate Property Associates 7 -- a California limited partnership
Corporate Property Associates 8, L.P., a Delaware limited partnership
Corporate Property Associates 9, L.P., a Delaware limited partnership
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Unaudited Financial Information
The combined financial statements as of June 30, 1997 and for the six
months ended June 30, 1996 and 1997 are unaudited; however, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the combined financial statements for the
interim periods have been made. The results of interim periods are not
necessarily indicative of results to be obtained for a full year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Real Estate Leased to Others
Real estate is leased to others on a net lease basis, whereby the tenant is
generally responsible for all operating expenses relating to the property,
including property taxes, insurance, maintenance, repairs, renewals and
improvements.
The Group diversifies its real estate investments among various corporate
tenants engaged in different industries and by property type throughout the
United States. No lessee currently represents 10% or more of total leasing
revenues (see Note 10).
F-40
230
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The leases are accounted for under either the direct financing or operating
methods. Such methods are described below:
Direct financing method -- Leases accounted for under the direct
financing method are recorded at their net investment (Note 5). Unearned
income is deferred and amortized to income over the lease terms so as to
produce a constant periodic rate of return on the Group's net investment in
the lease.
Operating method -- Real estate is recorded at cost, revenue is
recognized as rentals are earned and expenses (including depreciation) are
charged to operations as incurred. When scheduled rentals vary during the
lease term, income is recognized on a straight-line basis so as to produce
a constant periodic rent.
Substantially all of the Group's leases provide for either scheduled rent
increases, periodic rent increases based on formulas indexed to increases in the
Consumer Price Index or sales overrides.
Operating Real Estate
Land and buildings and personal property are carried at cost. Major
renewals and improvements are capitalized while replacements, maintenance and
repairs which do not improve or extend the lives of the respective assets are
expensed currently.
Real Estate Held for Sale
Real estate held for sale is accounted for at the lower of cost or fair
value, less costs to sell.
Long-Lived Assets
Effective January 1, 1995, the Group adopted the provisions of Statement of
Financial Accounting Standards No. 121 -- Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of ("SFAS 121"). Pursuant
to SFAS 121, the Group assesses the recoverability of its long-lived assets,
including residual interests of real estate assets, based on projections of cash
flows over the life of such assets. In the event that such cash flows are
insufficient, the assets are adjusted to their estimated fair value. Prior to
the adoption of SFAS 121, the Company assessed the recoverability of its
long-lived assets, including residual interests, based on either projections of
cash flows over the life of such assets or, for vacant properties, the estimated
fair value. The adoption of SFAS 121 did not have a material effect on the
Group's combined financial condition or results of operations.
Depreciation
Depreciation is computed using the straight-line method over the estimated
useful lives of the properties which range from 5 to 50 years.
Cash Equivalents
The Group considers all short-term, highly liquid investments that are both
readily convertible to cash and have a maturity of generally three months or
less at the time of purchase to be cash equivalents. Items classified as cash
equivalents include commercial paper and money market funds. Substantially all
of the Group's cash and cash equivalents at December 31, 1995 and 1996 and at
June 30, 1997 were held in the custody of three financial institutions.
Newly Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 -- Earnings per Share ("SFAS No. 128"),
which establishes standards for computing and
F-41
231
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
presenting earnings per share. SFAS No. 128 will be effective for financial
statements issued for periods ending after December 15, 1997. Earlier
application is not permitted. Management has not reached a determination about
the effects of this change on the Company's financial statements.
Other Assets and Liabilities
Included in other assets are accrued rents and interest receivable, escrow
funds and deferred charges. Included in other liabilities are accrued interest
payable, accounts payable and accrued expenses, deferred rental income and
deferred gains.
Escrow funds are funds which are restricted, primarily as additional
collateral on the mortgage financing for certain of the Group's hotel
properties. Such restricted amounts totaled $2,929 and $754 at December 31, 1995
and 1996, respectively and $903 at June 30, 1997. Escrow funds of $2,395 were
used in 1996 to fund mortgage prepayments.
Deferred charges are costs incurred in connection with mortgage financing
and refinancing and are amortized over the terms of the mortgages.
Deferred rental income is the aggregate difference for operating method
leases between scheduled rents which vary during the lease term and rent
recognized on a straight-line basis. Also included in deferred rental income are
lease restructuring fees received which are recognized over the remainder of the
initial lease terms.
Deferred gains consist of assets acquired in excess of liabilities assumed
in connection with acquiring certain hotel operations and certain funds received
in connection with two loan refinancings which are being amortized into income
over 20 and 24 years, respectively. The deferred gain on the acquisition of
hotel operations was realized in 1996 in connection with the sale of such
hotels.
Equity Investments
The Group's limited partner interests in two real estate limited
partnerships in which such ownership is less than 50% are accounted for under
the equity method, i.e., at cost, increased or decreased by the Group's pro rata
share of earnings or losses, less distributions. Equity income in the limited
partnerships has been included in other income in the accompanying combined
financial statements. The Group's income from these equity investments was $600,
$565 and $583 in 1994, 1995 and 1996, respectively, and $290 and $297 for the
six months ended June 30, 1996 and 1997, respectively. Distributions received
from such investments were $902, $850 and $795 in 1994, 1995 and 1996,
respectively, and $290 and $397 in each of the six months ended June 30, 1996
and 1997. The Group is the sole limited partner in the two partnerships with the
general partner interests owned by Corporate Property Associates 10 Incorporated
("CPA(R):10"), an affiliate. An ownership interest in a third limited
partnership in which CPA(R):10 owned the general partner interest was written
off in 1995.
An interest in the operating partnership of a publicly-traded real estate
trust which interest was acquired in July 1996 is also accounted for under the
equity method. The share of income from this investment was $572 in 1996 and
$731 for the six months ended June 30, 1997 (see Note 15). Distributions
received were $253 in 1996 and $767 for the six months ended June 30, 1997.
Federal Income Taxes
Each CPA(R) Partnership is not liable for Federal income tax purposes as
each partner recognizes his proportionate share of income or loss in his tax
return. Accordingly, no provision for income taxes is recognized for financial
statement purposes.
F-42
232
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Distributions and Profits and Losses
Partners' distributions and profits and losses are allocated in accordance
with the terms of the Agreements of individual Partnerships.
Reclassifications
Certain 1994 and 1995 amounts have been reclassified to conform to the 1996
financial statement presentation.
3. TRANSACTIONS WITH RELATED PARTIES
The Agreements of each of the CPA(R) Partnerships provide that the General
Partners (consisting of W. P. Carey & Co., Inc. ("W.P. Carey") or affiliated
companies as Corporate General Partners and William P. Carey as Individual
General Partner) are allocated between 1% and 10%, for the applicable
Partnership, of the profits and losses as well as Distributable Cash From
Operations, as defined, and the Limited Partners are allocated between 90% and
99%, for the applicable Partnership, of the profits and losses as well as
Distributable Cash From Operations. The partners are also entitled to receive an
allocation of gains and losses from the sale of properties and to receive net
proceeds from such sales with such allocation and distribution as defined in the
Agreements. The General Partners may be entitled to receive a subordinated
preferred return, measured based upon the cumulative proceeds arising from the
sale of the Group's assets. Pursuant to the provisions of the Agreements, the
preferred return may be paid only after the limited partners of a Partnership
receive 100% of their initial investment from the proceeds of asset sales and a
cumulative annual return ranging from 6% to 9% since the inception of the
affected Partnership. The General Partners interest in such preferred return
amounts to $5,111 based upon the cumulative proceeds from the sale of assets
since the inception of the Partnerships through June 30, 1997. The Group's
ability to satisfy the subordination provisions of the Agreement will not be
determinable until either liquidation of a substantial portion of a
Partnership's assets are made, formal plans of liquidation are adopted or
limited partnership units are converted to other securities which provide the
security holder with greater liquidity than a limited partnership unit. The
Group believes that as of the report date, ultimate payment of the preferred
return is reasonably possible, but not probable, as defined pursuant to
Statement of Financial Accounting Standards No. 5.
Under the Agreements, certain affiliates are entitled to receive property
management or leasing fees and reimbursement of certain expenses incurred in
connection with the operations of the CPA(R) Partnerships. General and
administrative reimbursements consist primarily of the actual cost of personnel
needed in providing administrative services necessary to the operation of the
CPA(R) Partnerships. Property management and leasing fees in 1994, 1995 and 1996
were $1,299, $1,886 and $916, respectively, and $426 and $528 for the six months
ended June 30, 1996 and 1997, respectively. General and administrative
reimbursements in 1994, 1995 and 1996 were $991, $852 and $911, respectively,
and $479 and $677 for the six months ended June 30, 1996 and 1997, respectively.
For the years ended December 31, 1994, 1995 and 1996, fees aggregating
$922, $652 and $902, respectively, and $411 and $213 for the six months ended
June 30, 1996 and 1997, respectively, were incurred for legal services in
connection with the Group's operations and were provided by a law firm in which
the Secretary of the Corporate General Partners of the Partnerships is a
partner.
The Group is a participant in an agreement with W.P. Carey and certain
affiliates for the purpose of leasing office space used for the administration
of the Group, other affiliated real estate entities and W.P. Carey and for
sharing the associated costs. Pursuant to the terms of the agreement, the
Group's share of rental, occupancy and leasehold improvement costs is based on
adjusted gross revenues, as defined. Net expenses incurred in 1994, 1995 and
1996 were $523, $964 and $720, respectively, and $397 and $355 for the
F-43
233
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
six months ended June 30, 1996 and 1997, respectively. The increase for 1995 was
due,in part, to certain nonrecurring costs related to the relocation of the
Group's offices.
In November 1995, the Group borrowed $2,550 from W.P. Carey in connection
with the retirement of a mortgage loan. The loans from W.P. Carey were evidenced
by two promissory notes, bearing interest at the prime rate and required the
Group to pay the entire principal amount and accrued interest thereon on demand.
In addition, the notes allowed the CPA(R) Partnerships to prepay the note, in
whole or in part, at any time without penalty. As of June 30, 1997 the
outstanding balance on the remaining note was $300.
4. REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE OPERATING METHOD
Real estate leased to others, at cost, and accounted for under the
operating method is summarized as follows:
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- --------
Land............................................... $ 74,533 $ 73,310 $ 69,447
Buildings.......................................... 273,688 266,193 247,930
-------- -------- --------
348,221 339,503 317,377
Less: Accumulated depreciation..................... 87,604 91,923 92,083
-------- -------- --------
$260,617 $247,580 $225,294
======== ======== ========
The scheduled future minimum rents, exclusive of renewals, under
noncancellable operating leases amount to $40,683 in 1997, $37,900 in 1998,
$31,516 in 1999, $29,998 in 2000, $28,205 in 2001 and aggregate $326,933 through
2016.
Contingent rentals were $998, $1,583 and $1,697 in 1994, 1995 and 1996,
respectively.
5. NET INVESTMENT IN DIRECT FINANCING LEASES
Net investment in direct financing leases is summarized as follows:
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- --------
Minimum lease payments receivable.................. $462,037 $426,491 $429,626
Unguaranteed residual value........................ 214,431 210,146 210,886
-------- -------- --------
676,468 636,637 640,512
Less: Unearned income.............................. 457,546 421,327 424,109
-------- -------- --------
$218,922 $215,310 $216,403
======== ======== ========
The scheduled future minimum rents, exclusive of renewals, under
noncancellable direct financing leases amount to $28,228 in 1997, $28,183 in
1998, $28,198 in 1999, $28,322 in 2000, $29,017 in 2001 and aggregate $426,491
through 2016.
Contingent rentals were approximately $5,394, $4,889 and $3,444 in 1994,
1995 and 1996, respectively.
F-44
234
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. OPERATING REAL ESTATE
Operating real estate relating to the Group's hotel operations is
summarized as follows:
DECEMBER 31,
------------------- JUNE 30,
1995 1996 1997
------- ------- ----------
Land................................................. $ 6,435 $ 3,867 $ 3,867
Buildings............................................ 41,740 27,979 27,998
Personal property.................................... 7,194 5,581 5,824
------- ------- -------
55,369 37,427 37,689
Less: Accumulated depreciation....................... 14,481 13,347 13,953
------- ------- -------
$40,888 $24,080 $ 23,736
======= ======= =======
7. MORTGAGE NOTES PAYABLE AND NOTES PAYABLE
A. MORTGAGE NOTES PAYABLE:
Mortgage notes payable, substantially all of which are limited recourse
obligations, are collateralized by the assignment of various leases and by real
property with a carrying amount of approximately $398,639, before accumulated
depreciation. As of December 31, 1996, mortgage notes payable have interest
rates varying from 6.35% to 11.85% per annum and mature from 1997 to 2020.
Scheduled principal payments during each of the next five years following
December 31, 1996 and thereafter are as follows:
YEAR ENDING DECEMBER 31,
------------------------------------------------------------
1997........................................................ $ 40,771
1998........................................................ 28,012
1999........................................................ 37,832
2000........................................................ 4,836
2001........................................................ 22,440
Thereafter.................................................. 68,448
--------
$202,339
========
B. NOTES PAYABLE:
The Group's notes payable which aggregate $24,709 at December 31, 1995 and
1996 and June 30, 1997 provide for quarterly payments of interest at a variable
rate of the London Inter-Bank Offered Rate plus 4.25% per annum with such notes
maturing between July 1999 and December 1999 at which time balloon payments for
the entire outstanding principal balance will be due. Each note obligation is
recourse to the assets of a specific Partnership.
Covenants under the notes limit the amount of limited recourse indebtedness
the applicable Partnership may incur. Additionally, each Partnership must
maintain certain debt coverage ratios, minimum net worth and aggregate appraised
property values. The debt coverage ratios requires each Partnership to maintain
ratios of free operating cash flow, as defined, to the debt service on the
applicable note ranging from 3:1 to 3.4:1 over the terms of the note. The net
worth and aggregate property value minimums range from $15,000 to $25,000. Under
the covenants, certain of the Partnerships have limitations on the amount of
total indebtedness which such Partnership may incur. The Company is in
compliance with the covenants of the note payable agreements.
F-45
235
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The note payable agreements require that the lender be offered the proceeds
from property sales as a principal payment. To date, the lender has declined to
accept all mandatory offers of proceeds. Except for the application of proceeds
from property sales and other limited circumstances, no loan prepayments may be
made until 1999.
Interest paid by the Group on mortgages and notes payable aggregated
approximately $31,016, $28,197 and $23,805 in 1994, 1995 and 1996, respectively,
and $12,557 and $10,161 for the six months ended June 30, 1996 and 1997,
respectively.
8. DISTRIBUTIONS TO PARTNERS
Distributions declared and paid to partners are summarized as follows:
1994:
Quarterly................................................ $35,589
=======
1995:
Quarterly................................................ $35,962
Special.................................................. 21,254
-------
$57,216
=======
1996:
Quarterly................................................ $33,350
Special.................................................. 823
-------
$34,173
=======
Distributions declared and paid for the six month period ended June 30,
1997 were comprised of quarterly distributions of $16,544 and special
distributions of $792.
9. INCOME FOR FEDERAL TAX PURPOSES
Income for financial statement purposes differs from income for Federal
income tax purposes because of the difference in the treatment of certain items
for income tax purposes and financial statement purposes. A reconciliation of
accounting differences is as follows:
1994 1995 1996
------- ------- -------
Net income per Statements of Income................... $37,442 $52,570 $45,295
Excess tax depreciation............................... (11,383) (10,489) (8,440)
Difference in recognition of gain from sales.......... 11,439 7,272 3,532
Difference in the recognition of restructuring fees... 14,491
Difference in timing of recognition of purchase
installments as income.............................. 2,286 (5,881)
Writedowns to net realizable value.................... 2,889 11,019 1,300
Minority interest..................................... 3,006 3,143 3,182
Other................................................. (3,184) (448) (3,244)
------- ------- -------
Income reported for Federal income tax purposes..... $42,495 $71,677 $41,625
======= ======= =======
10. INDUSTRY SEGMENT INFORMATION
The Group's operations consist of two business segments (i) the investment
in and the leasing of industrial and commercial real estate and (ii) owning and
operating hotels.
F-46
236
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
For the years ended December 31, 1994, 1995 and 1996 and for the six months
ended June 30, 1996 and 1997, the Group earned its net leasing revenues (i.e.,
rental income and interest income from direct financing leases) from over 75
lessees. A summary of net leasing revenues including all lease obligors
representing more than $1,000 in revenues for any annual period is as follows:
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30, 1997
--------------------------------------------- -----------------------------
1994 % 1995 % 1996 % 1996 % 1997 %
------- --- ------- --- ------- --- ------- --- ------- ---
Hughes Markets, Inc............... 1,717 2 1,734 2 4,463 5 1,571 4 2,892 7
Advanced System Applications,
Inc............................. $ 3,404 4% $ 4,693 6% $ 4,586 6% $ 2,320 6% $ 2,267 6%
Dr Pepper Bottling Company of
Texas........................... 3,998 5 3,998 5 3,998 5 1,999 5 1,999 5
Detroit Diesel Corporation........ 3,502 4 3,496 5 3,645 5 1,823 5 1,823 5
Gibson Greetings, Inc............. 7,810 10 7,234 9 3,384 4 1,687 5 1,721 4
Sybron Acquisition Company........ 3,311 4 3,311 4 3,311 4 1,656 4 1,656 4
Stoody Deloro Stellite, Inc....... 2,091 3 2,551 3 2,624 3 1,317 4 1,385 3
Quebecor Printing................. 2,313 3 2,569 3 2,533 3 1,271 3 1,309 3
AutoZone, Inc..................... 2,354 3 2,444 3 2,304 3 1,142 3 1,215 3
Furon Company..................... 2,539 3 2,539 3 2,528 3 1,289 3 1,208 3
Pre Finish Metals Incorporated.... 2,237 3 2,436 3 2,408 3 1,197 3 1,208 3
Orbital Sciences Corporation...... 2,008 2 2,154 3 2,154 3 1,077 3 1,077 3
The Gap, Inc...................... 2,154 3 2,154 3 2,154 3 1,077 3 1,077 3
Simplicity Manufacturing, Inc..... 1,997 2 1,997 3 1,997 3 998 3 998 2
AP Parts Manufacturing, Inc....... 1,526 2 1,526 2 1,729 2 857 2 918 2
NVRyan, L.P....................... 1,846 2 1,803 3 1,814 2 924 2 908 2
Cleo, Inc......................... 1,793 2 891 2 915 2
Peerless Chain Company............ 1,269 1 1,280 2 1,611 2 757 2 854 2
Unisource Worldwide, Inc. ........ 1,646 2 1,656 2 1,646 2 823 2 827 2
Red Bank Distribution, Inc........ 1,313 2 1,350 2 1,401 2 700 2 700 2
Brodart, Co....................... 1,323 2 1,319 2 1,314 2 658 2 655 2
Gould, Inc........................ 1,125 1 1,133 1 1,215 2 608 2 608 2
High Voltage Engineering
Corporation..................... 1,140 1 1,168 1 1,179 1 591 2 587 1
Spreckels Industries, Inc......... 880 1 1,021 1 1,021 1 510 1 510 1
Anthony's Manufacturing Company,
Inc............................. 1,348 2 1,073 1 876 1 438 1 438 1
GATX Logistics, Inc............... 1,834 2 1,399 2 381 1 381 1 331 1
New Valley Corporation............ 1,046 1 605 1 604 1 302 1
Other............................. 24,127 30 20,003 25 18,547 26 8,941 24 9,867 26
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
$81,858 100% $78,646 100% $77,220 100% $37,805 100% $39,953 100%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Results for the hotel properties are summarized as follows:
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30, 1997
---------------------------------- -------------------
1994 1995 1996 1996 1997
-------- -------- -------- ------- -------
Revenues........................................ $ 22,532 $ 25,077 $ 21,929 $12,359 $ 7,033
Management fees paid to unaffiliated hotel
managers...................................... (583) (594) (547) (363) (200)
Other operating expenses........................ (15,594) (17,443) (15,400) (8,516) (5,072)
-------- -------- -------- ------- -------
$ 6,355 $ 7,040 $ 5,982 $ 3,480 $ 1,761
======== ======== ======== ======= =======
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CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. GAIN ON SETTLEMENT
In August 1995, the Group reached a settlement with The Leslie Fay Company
("Leslie Fay") and its surety company regarding Leslie Fay's lease with the
Group. In connection with the settlement, the Group recognized a gain of
$11,499, which consisted of aggregate net cash received from Leslie Fay and the
surety company of $18,840 and the waiving of the $383 interest obligation that
had been accrued on the Leslie Fay monthly payments, offset by the writedown of
$7,400 and aggregate management fees, payable to an affiliate, of $324 on the
monthly payments received from Leslie Fay since the beginning of the dispute in
1992. Of the rent received, $5,436 was received in 1995. Under the settlement
agreement, Leslie Fay was required to dismiss with prejudice all of its suits
filed against the Group, and the Group's bankruptcy claim against Leslie Fay, as
an unsecured creditor, was reduced to $2,650. On June 30, 1997 The Group
received securities with a market value of $1,619 as a distribution on its
claim. Such distribution represents 79% of the total settlement amount; however,
there is no assurance that the remaining amount of the claim will be
distributed.
As the fair value of the property was no longer impacted by the Leslie Fay
lease, the Group wrote down the estimated fair value of the property, net of
anticipated selling costs, to $2,000 and recognized a noncash charge of $7,400,
which is netted against the gain of settlement.
In January 1996, the Group sold the vacant property to a third party, net
of transaction costs, for $1,854. The Group recognized an additional writedown
on the property to an amount equal to the net sales proceeds, resulting in a
charge to income in 1995 of $146. Accordingly, no gain or loss was recognized in
1996 in connection with the sale.
12. GAINS AND LOSSES ON SALE
SIGNIFICANT SALES OF PROPERTIES AND SECURITIES ARE SUMMARIZED AS FOLLOWS:
1996
In January 1996, the Group sold a multi-tenant property in Helena, Montana
whose primary tenant was IBM Corporation ("IBM") for $4,800. Net of closing
costs, the Group received cash proceeds of $1,741 and assigned a mortgage loan
obligation of $2,854 and accrued interest of $12 thereon to the purchaser. A
gain of $90 was recognized on the sale. All of the Group's leases at the Helena
property, including the IBM lease, were assigned to the purchaser.
In April 1996, the Group sold its warehouse property in Hodgkins, Illinois
leased to GATX Logistics, Inc. ("GATX") for $13,200 and assigned the GATX lease
to the purchaser. Net of the costs of sale and amounts necessary to satisfy the
$3,209 balance on the mortgage loan collateralized by the Hodgkins property, the
Group received cash proceeds of $9,661 and recognized a gain of $4,408. The
Group used $7,477 of the cash proceeds from the Hodgkins sale to satisfy two
mortgage loan obligations which were scheduled to mature in 1996.
In 1985, the Group purchased a hotel in Rapid City, South Dakota, which it
operated as a Holiday Inn, with $6,800 of tax-exempt bonds which were supported
by a letter of credit issued by a third party. In September 1994, the Group was
advised by Holiday Inn that it would need to upgrade the hotel's physical plant
by January 1997 in order to meet the requirements of a modernization plan
adopted by Holiday Inn or surrender its Holiday Inn license. As the cost of such
upgrade was estimated to be $1,925 Management concluded that such additional
investment would not justify compliance with the modernization plan. Although
Management was considering an affiliation with another national hotel chain,
earnings were expected to decline after any change in affiliation.
In 1995, under an agreement with the issuer of the letter of credit
supporting the $6,800 tax-exempt mortgage bond on the Rapid City property, the
Group agreed to use its best efforts to sell the hotel property in exchange for
an extension of the letter of credit from October 1995 to October 1997. Annual
cash flow from
F-48
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CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the hotel (hotel earnings, adjusted for depreciation and amortization, less debt
service on the tax-exempt bonds) for 1995, the last full year of operations, was
$305. In 1995, the Group reevaluated the net realizable value of the property
and recognized a noncash charge of $1,000. In 1996, the Group recognized an
additional charge of $1,300 as a writedown to net realizable value to an amount
Management believed would approximate the proceeds from a sale.
In October 1996, the Group sold the property and the operating assets and
liabilities of the hotel for $4,105. The Group recognized a gain of $785 on the
sale. The bond was paid off by utilizing the net proceeds from the sale, $302 of
cash and various escrow accounts which had been held by the bond trustee or
issuer of the letter of credit. The gain includes the recognition of the release
of unamortized deferred gains relating to the acquisition of the hotel operation
in 1991 from the former lessee.
1995
In December 1995, the Group sold the food service facility in Jupiter,
Florida, at which it operated a restaurant, for $4,140, recognizing a gain on
the sale of $1,019.
In June 1995, the Group sold its property in Allentown, Pennsylvania, which
it purchased in June 1983 for $11,702, to its lessee, Genesco, Inc. ("Genesco")
for $15,200 and recognized a gain on the sale of $3,330, net of certain costs.
In connection with the sale, the Group paid off an existing limited recourse
mortgage loan on the Genesco property for $5,723.
In August 1985, the Group purchased from and net leased to Industrial
General Corporation ("IGC") and certain of its wholly-owned subsidiaries, seven
properties located in Elyria and Bellville, Ohio, Forrest City and Bald Knob,
Arkansas, Carthage, New York, Saginaw, Michigan and Newburyport, Massachusetts
for $9,100. Subsequent to the purchase, the Group agreed to exchange the Saginaw
property for an expansion of the Newburyport facility, severed the Carthage
property from the lease and entered into a lease with FMP/Rauma Group ("FMP")
and sold the Forrest City property. On July 28, 1995, IGC filed a voluntary
petition of bankruptcy under Chapter 11 of the United States Bankruptcy Code. In
connection with IGC's sale of its plastics division, on September 14, 1995, the
Group entered into a series of transactions which resulted in the termination of
the IGC lease, the sale of the Bald Knob, Bellville and Newburyport properties
and the full satisfaction of the mortgage loan obligation collateralized by all
of the IGC properties and the FMP property which had been scheduled to mature on
September 1, 1995. In connection with the sale of the Bald Knob property to IGC,
the Group received cash of $987 and IGC, with the consent of the mortgage
lender, assumed the Group's mortgage obligation of $720 and accrued interest of
$6. Additionally, the Group is scheduled to receive an additional $200 from IGC
over an eight-month period commencing in 1996. The Bellville and Newburyport
properties were sold for $2,400 in cash to the third party which acquired the
assets of the IGC plastics division. The Group used $2,200 of the proceeds to
pay off the remaining balance on the matured mortgage loan obligation on the IGC
and FMP properties. In connection with the sale of the three properties, the
Group realized a loss of $1,720 in 1995. In December 1994, the Group also sold
the Forrest City property for $650 and realized a loss of $887 on such sale in
1994.
In January 1984, the Group purchased properties in Gordonsville, Virginia
and in North Bergen, New Jersey for $7,000 and entered into a net lease with
Liberty Fabrics of New York ("Liberty"). In December 1993, Liberty notified the
Group of its intention to exercise its purchase option on the properties.
Pursuant to the lease, the purchase price would be the greater of $7,000 or fair
market value as encumbered by the lease. On October 18, 1994, Liberty filed suit
to compel the Group to transfer title of the properties to Liberty for $9,359,
the fair market value which had been determined pursuant to the purchase option
appraisal process. Because the Group believed fair market value of the
properties exceeded $9,359, Management challenged the Liberty suit to seek a
higher purchase price. On December 29, 1994, the Group and Liberty terminated
the lease and agreed that the properties would be transferred to Liberty for
$9,359, subject to a final determination of the fair value of the property. If
the fair market value was determined to be greater than $9,359, Liberty
F-49
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CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
would have the right within 30 days of the determination to rescind the
transfer, in which case all proceeds would be returned to Liberty, title of the
properties transferred back to the Group and Liberty would pay all rents in
arrears for the period from the initial transfer of title to Liberty. In January
1996, the Court ruled in favor of Liberty. As a result of this ruling, Liberty
no longer had the right to rescind the transaction. Accordingly, the Group
recognized a gain in 1995 on the sale of the properties of $2,334.
1994
In November 1994, Pace Membership Warehouse, Inc. ("Pace"), a former
subsidiary of Kmart corporation ("Kmart"), purchased a property in Tampa,
Florida owned by the Group and a property owned by CPA(R) 10 in Des Moines, Iowa
for an aggregate purchase price of $14,150. In connection with Kmart's sale of
Pace's business operations in 1994, the acquirer did not assume the operations
at the Pace properties. Based on the provisions in the Pace leases, the Group
and CPA(R):10 were able to negotiate the sale of the properties. Pursuant to a
fairness opinion performed by an independent investment banking firm, $7,000 of
the purchase price was allocated to the Group. A portion of the Group's proceeds
from the sale were used to satisfy the remaining $3,290 mortgage balance on the
Tampa property. In connection with the sale, the Group recognized a gain of
$2,028, net of certain costs.
In October 1994, the Group sold its properties leased to Mid-Continent
Bottlers, Inc.'s ("Mid-Continent") to the lessee for $17,800 and sold the
Group's 3.29% limited partnership interest in Midcon Bottlers, L.P., an
affiliate of Mid-Continent, for $700. In connection with the sales, the Group
recognized gains of $7,814 and $683, respectively. The Group used $3,895 of the
sales proceeds to satisfy the Mid-Continent mortgage loan. In addition, the
Group used a portion of the proceeds to prepay certain mortgage loans on
properties which remain subject to leases.
Proceeds from the Genesco, Pace and Mid-Continent sales were used to fund
special distributions to partners of $13,334 in 1995.
13. EXTRAORDINARY GAINS AND LOSSES ON EXTINGUISHMENT OF DEBT
1996
In 1996, the Group obtained $6,400 of new limited recourse mortgage
financing on one of its properties leased to The Gap, Inc. (the "Gap"). Proceeds
from the mortgage financing were used to pay off the remaining balance of $6,195
on an existing mortgage loan on the Gap property, certain refinancing costs and
prepayment charges of $255. The prepayment charges have been reflected as an
extraordinary charge on the extinguishment of debt in the accompanying combined
financial statements. The new mortgage loan is a limited recourse obligation and
is collateralized by a deed of trust and a lease assignment. The loan bears
interest at 7.25% per annum and provides for monthly payments of principal and
interest of $58 based on a 15-year amortization schedule. The retired mortgage
loan provided for quarterly payments of $211 at an annual interest rate of 10%.
The new mortgage loan has a term of three years and a balloon payment of $5,608
will be due on the maturity date, May 1, 1999.
1995
In connection with the sale of its property in Jupiter, Florida in December
1995, the Group satisfied the mortgage notes collateralized by the Jupiter
property. Under a prior agreement, certain principal and interest payments were
deferred through 1995. The prior agreement provided that the payment of deferred
amounts would be forgiven under certain circumstances including the payment in
full of all other amounts due under the mortgage notes. At the time of sale, the
Group paid all amounts due and met the conditions for forgiveness of the
deferred amounts. Accordingly, the Group recognized an extraordinary gain of
$1,324 on the extinguishment of debt on the satisfaction of the Jupiter property
mortgage notes.
F-50
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CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Group recognized a gain on the satisfaction of the mortgage loan
collateralized by the property leased to Anthony's Manufacturing Company, Inc.
("Anthony's"). In May 1995, the Group paid off and satisfied the mortgage loan
collateralized by the Anthony's properties. The lender accepted payments
aggregating $5,440 to satisfy an outstanding principal balance of $6,854 and
accrued interest thereon of $705. In connection with the satisfaction of the
debt, the Group recognized an extraordinary gain on the extinguishment of debt
of $2,088, net of certain related legal costs. To pay off the mortgage
obligation, the Group used the $1,550 received from Anthony's under a settlement
agreement.
1994
In December 1994, using, in part, proceeds from the Mid Continent sale, the
Group paid off mortgage loans on three other properties with a combined
outstanding balance of $8,376. In connection with paying the mortgages, the
Group paid prepayment charges of $470 and wrote off unamortized financing costs
of $42 and recognized an extraordinary loss of $512.
In June 1990, the Group purchased land and buildings in Detroit and
Redford, Michigan for $31,500, of which $24,000 was financed by a limited
recourse mortgage loan, and entered into a net lease with an initial lease term
of twenty years with Detroit Diesel Corporation ("Detroit Diesel"). The mortgage
loan provided for quarterly interest only payments at an annual rate of 11.28%
with payments of principal commencing on December 15, 1995. On May 25, 1994, the
Group prepaid the existing $24,000 mortgage loan and obtained $25,000 of new
mortgage financing. The new mortgage loan bears interest at the rate of 7.16%
per annum and provided for quarterly interest only payments of $448 through
December 15, 1995 at which time quarterly interest and principal payments of
$690 commenced and which are payable through June 15, 2010 at which time the
loan will be fully amortized.
Pursuant to the Detroit Diesel lease, Detroit Diesel was entitled to a rent
reduction equal to 70% of any benefit realized from the refinancing of the
mortgage loan in exchange for its paying 70% of the costs incurred in connection
with any such refinancing other than prepayment premiums. In lieu of paying any
refinancing costs, Detroit Diesel consented to allowing the Group to refinance
the mortgage debt for $1,000 in excess of the original mortgage financing and
for the Group to keep any proceeds which remained after prepaying the original
mortgage loan and paying prepayment charges and the financing costs of the new
loan. The Detroit Diesel lease was amended so that rentals under the lease
reflect the refinancing benefits. Although gross rents under the lease
decreased, total equity rents (i.e., rent, net of debt service requirements)
over the remaining initial term are scheduled to increase by approximately
$2,804. In connection with paying off the original mortgage loan, the Group
incurred an extraordinary charge on the extinguishment of debt as a result of
paying a prepayment charge of $600.
14. WRITEDOWNS TO NET REALIZABLE VALUE
SIGNIFICANT WRITEDOWNS OF PROPERTIES TO NET REALIZABLE VALUE ARE SUMMARIZED AS
FOLLOWS:
As described in Note 16, Simplicity Manufacturing, Inc. ("Simplicity")
notified the Group that it was exercising its option to purchase the property it
leases from the Group in Port Washington, Wisconsin on April 1, 1998. Although
the appraisal process has not yet been completed, the Group has concluded that
it is not likely that the agreed-upon exercise price will be in excess of the
minimum exercise price of $9,684. Accordingly, the Group has recognized a
noncash charge of $2,316 in 1997 on the writedown of the property to its
estimated net realizable value of $9,684.
The Group owns two properties in Sumter and Columbia, South Carolina leased
to Arley Merchandise Corporation ("Arley"). A limited recourse mortgage loan of
$4,765, collateralized by the properties and an assignment of the Arley lease,
matured in January 1993. The Group and the lender entered into a forbearance
F-51
241
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
agreement at that time and attempted to reach an agreement to restructure the
loan. Such agreement was not reached and the forbearance agreement expired in
July 1995.
In May 1997, the lender made a demand for payment of the entire outstanding
principal balance of the loan. Although the Group made certain offers to the
lender, the lender rejected such offers and, in June 1997, the lender initiated
a lawsuit for the purpose of foreclosing on the Arley properties. The Group is
evaluating whether it will contest the foreclosure action. In connection with
such foreclosure the Group has estimated that the fair value of the Arley
properties is approximately $3,940 and has recorded a change of $1,350 on the
writedown of the Arley properties to their estimated net realizable value. As
the loan is limited recourse, the lender's sole recourse is to the Arley
properties.
The Group owned a hotel property in Rapid City, South Dakota which it sold
in October 1996. As more fully described in Note 12, the Group reevaluated the
net realizable value of the property in 1995 and recognized a noncash charge of
$1,000 on the writedown. An additional noncash charge of $1,300 was recorded in
1996.
In connection with the sale of the IGC properties as described in Note 12,
the Group retained ownership of a property in Elyria, Ohio and has written off
its carrying value of $692 in 1995.
In January 1991, the Group and CPA(R):10 formed a limited partnership, Hope
Street Connecticut Limited Company ("Hope Street"), for the purpose of
purchasing land and an office building in Stamford, Connecticut for $11,000. The
Group contributed $1,500 to Hope Street for a 31.915% limited partnership
interest and CPA(R):10 contributed $3,200 for a 68.085% general partnership
interest. Hope Street used this equity and assumed an existing limited recourse
mortgage loan of $6,300 collateralized by the property and also assumed an
existing net lease, as lessor, with Xerox Corporation ("Xerox"), as lessee. The
Xerox lease provided for annual rent of $1,300 with an initial term through
August 31, 1995 and two five-year renewal terms at Xerox's option. The mortgage
loan was an interest only obligation with annual debt service of $639 and was
scheduled to mature on September 1, 1995 with a balloon payment of $6,300 due at
that time.
In August 1995, Xerox vacated the property at the end of the initial term.
Hope Street was unsuccessful in its efforts to remarket the property and find a
new lessee even at a substantially lower annual rental. Based on its assessment
of current conditions for the Stamford market, the general partner concluded
that the net realizable value of the property was less than the outstanding
balance of the mortgage loan. Given these circumstances, the general partner
considered various alternatives, including negotiating with the lender to extend
the maturity, restructure the loan or satisfy the balloon payment obligation at
a substantial discount. All of these alternatives were rejected by the lender.
Since the Group does not anticipate receiving any further cash distributions
from Hope Street nor does the Group have any obligation to Hope Street, the
Group wrote off its remaining equity investment in Hope Street and recognized a
charge of $1,173 in 1995.
The Group owns three properties located in Reno, Nevada; Bridgeton,
Missouri and Moorestown, New Jersey. On April 1, 1993, the lessee, New Valley
Corporation ("New Valley"), filed a petition of voluntary bankruptcy seeking
reorganization under Chapter 11 of the United States Bankruptcy Code. In
connection with the bankruptcy filing, the Bankruptcy Court approved New
Valley's termination of its lease with the Group for the Moorestown, New Jersey
property in May 1993. In 1993, the Group wrote down the Moorestown property to
its estimated net realizable value of $2,960 and recognized a charge of $2,144
on the writedown. In December 1994, the Bankruptcy Court also approved the
termination of New Valley's lease on the Reno property effective December 31,
1994. In connection with the lease termination, the Group recognized a charge of
$1,143 and wrote down the Reno property in 1994 to its estimated net realizable
value of $3,295.
In 1994, the Group entered into contracts to sell two properties formerly
leased to NVRyan L.P. ("NVRyan") in Jefferson, Georgia and Fredricksburg,
Virginia, respectively. As the proposed purchase prices were in excess of the
carrying value of such properties, the Group recognized charges of $1,746 and
wrote
F-52
242
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
down the Jefferson and Fredricksburg properties to an amount equal to the
anticipated sales proceeds. In addition the Group recognized a charge of $1,089
in 1993 on the writedown of a property in Plant City, Florida formerly leased to
NVRyan to the anticipated sales proceeds when the lessee of the property
informed the Group of its intention to exercise its purchase option. The
Jefferson and Plant City properties were sold in 1994 with no gain or loss
recognized at the time of sale. The sale of the Fredricksburg property was not
completed. In addition, the Group has written down properties held for sale to
an amount equal to the estimated sales proceeds when such amount is less than
the carrying value of such property.
15. EXCHANGE TRANSACTION
The Group purchased a hotel property in Kenner, Louisiana, in June 1988.
The Group assumed operating control of the hotel in 1992 after evicting the
lessee due to its financial difficulties. On July 30, 1996, the Group completed
a transaction with American General Hospitality Operating Partnership L.P. (the
"Operating Partnership"), the operating partnership of a newly-formed real
estate investment trust, American General Hospitality Corporation, ("AGH"), in
which the Group received 920,672 limited partnership units in exchange for the
hotel property and its operations. In connection with the exchange the Group and
the Operating Partnership assumed the mortgage loan obligation collateralized by
the hotel property of $7,304. AGH owns an 81.3% equity interest in the Operating
Partnership.
The exchange of the hotel property for limited partnership units was
treated as a nonmonetary exchange for tax and financial reporting purpose. The
Group's interest in the Operating Partnership is being accounted for under the
equity method. After one year, the Group will have the right to convert its
equity interest in the Operating Partnership to shares of common stock in AGH on
a one-for-one basis. AGH completed an initial public offering during 1996. The
Partnership's carrying value for the limited partnership units at the time of
the exchange of $9,292 was based on the historical basis of assets transferred,
net of liabilities assumed by the Operating Partnership; cash contributed and
costs incurred to complete the exchange.
As of December 31, 1996, the audited consolidated financial statements of
AGH reported total assets of $243,115 and shareholders' equity of $127,461 and
for the period from July 31, 1996 to December 31, 1996 revenues of $13,496,
income before minority interest of $6,326 and net income of $5,129. As of August
6, 1997, AGH's quoted per share market value was 27 1/8 resulting in an
aggregate value of approximately $24,973. The carrying value of the equity
interest in the Operating Partnership as of December 31, 1996 was $9,612. For
the period from July 31, 1996 to December 31, 1996, and for the six months ended
June 30, 1997, the Group's share of the Operating Partnership's earnings were
$572 and $731, respectively.
Between January 1995 and July 1996, the Group had engaged an affiliate of
AGH to manage the operations of Kenner on their behalf. Such affiliate is
currently engaged to manage the operations of three of the Group's hotel
properties.
16. REAL ESTATE HELD FOR SALE
In September 1996, the Group entered into a purchase and sale agreement for
the sale of the Group's property in Louisville, Kentucky, leased to Winn-Dixie
Stores, Inc. ("Winn-Dixie") for $1,100 less selling costs, which includes a 5%
brokerage commission. The Winn-Dixie lease is scheduled to expire in December
1999. The carrying value of the Winn-Dixie property at June 30, 1997 was $434.
The property was sold in August 1997, at which time the Group received $995
after selling costs.
In March 1997, Simplicity Manufacturing, Inc. ("Simplicity") notified the
Group that it was exercising its option to purchase the property it leases from
the Group in Port Washington, Wisconsin on April 1, 1998. The option price will
be the greater of $9,684 or fair market value, capped at $12,000. An appraisal
process to determine fair market value has commenced. After paying the limited
recourse mortgage loan, the Group will realize cash proceeds of up to $7,678 and
no less than $5,362, before any selling costs. Annual cash flow from
F-53
243
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the property (rent less mortgage debt service on the property) is $934. The
carrying value of the Simplicity property at June 30, 1997 was $9,684.
In December 1996, KSG, Inc. ("KSG") notified the Group that it was
exercising its option to purchase the property it leases in Hazelwood, Missouri.
The exercise price will be the greater of $4,698 (the Group's purchase price for
the property in March 1987) and fair market value as encumbered by the lease.
The option provides that the sale of the property occur no later than March 8,
1998. An appraisal process to determine fair market value has commenced. Annual
cash flow from the KSG property is approximately $820. The carrying value of the
KSG property at June 30, 1997 was $4,698.
17. ENVIRONMENTAL MATTERS
Substantially all of the Group's properties, other than the hotel
properties, are currently leased to corporate tenants, all of which are subject
to environmental statutes and regulations regarding the discharge of hazardous
materials and related remediation obligations. The Group generally structures a
lease to require the tenant to comply with all laws. In addition, substantially
all of the Group's net leases include provisions which require tenants to
indemnify the Group from all liabilities and losses related to their operations
at the leased properties. The costs for remediation, which are expected to be
performed and paid by the affected tenant, are not expected to be material. In
the event that the Group absorbs a portion of any costs because of a tenant's
failure to fulfill its obligations, Management believes such expenditures will
not have a material adverse effect on the Group's financial condition, liquidity
or results of operations.
In 1994, based on the results of Phase I environmental reviews performed in
1993, the Group voluntarily conducted Phase II environmental reviews on certain
of its properties. The Group believes, based on the results of Phase I and Phase
II reviews, that its leased properties are in substantial compliance with
Federal and state environmental statutes and regulations. Portions of certain
properties, which do not include any of the hotel properties, have been
documented as having a limited degree of contamination, principally in
connection with surface spills from facility activities and leakage from
underground storage tanks. For those conditions which were identified, the Group
has advised the affected tenants of the Phase II findings and of their
obligations to perform required remediation.
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable and
accrued expenses approximate fair value because of the short maturity of these
items.
The Group estimates that the fair value of mortgage notes payable and other
notes payable approximates the carrying amounts for such loans at December 31,
1996. The fair value of debt instruments was evaluated using a discounted cash
flow model with discount rates which take into account the credit of the tenants
and interest rate risk.
F-54
244
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996
INITIAL COST COST INCREASE
TO COMPANY CAPITALIZED (DECREASE)
--------------------------- SUBSEQUENT TO IN NET
DESCRIPTION ENCUMBRANCES LAND BUILDINGS ACQUISITION(a) INVESTMENT(b)
- ----------------------------------------------- ------------ ----------- ------------ -------------- -------------
Operating Method:
Office, warehouse and manufacturing buildings
leased to Broomfield Tech Center
Corporation................................... $ 2,250,640 $ 354,970 $ 3,073,575 $ 559,647
Office and manufacturing buildings leased to
IMO Industries Inc. .......................... 2,485,302 685,026 2,006,559 2,617,652
Office and manufacturing buildings formerly
leased to IMO Industries, Inc. ............... 221,474 448,641 4,384 $ (38,155)
Distribution facilities and warehouses leased
to The Gap, Inc. ............................. 6,259,172 1,363,909 19,065,813 225,569
Supermarkets leased to Winn-Dixie Stores,
Inc. ......................................... 191,942 904,589 6,749,989 111,880
Land leased to Kobacker Stores, Inc. .......... 395,944 1,236,735 (176,112)
Warehouse and manufacturing plant leased to Pre
Finish Metals Incorporated.................... 2,347,677 636,000 16,470,208 33,652
Retail store in Greensboro, North Carolina..... 40,946 186,926 14,508
Retail store in New Orleans, Louisiana......... 129,065 188,599 15,776
Retail stores on adjacent sites leased to
Kinko's of Ohio, Inc. and Color Tile, Inc. ... 47,350 581,034 10,795
Warehouse and distribution center leased to,
Maybelline, Inc., and B&G Contract Packaging,
Inc. ......................................... 216,000 3,048,862 25,103
Land leased to Unisource Worldwide, Inc. ...... 2,278,415 3,575,000
Centralized telephone bureau leased to Excel
Telecommunications, Inc. ..................... 1,139,600 3,379,679 505,662 (1,230,690)
Building leased to Sports & Recreation,
Inc. ......................................... 677,600 4,908,238 (2,625,838)
Dairy processing facility leased to Hughes
Markets, Inc. ................................ 2,029,682 9,699,041 26,000
Office building in Beaumont, Texas leased to
Petrocon Engineering, Inc. ................... 510,000 4,490,000 612,462 (4,346,960)
Office, manufacturing and warehouse buildings
leased to Continental Casualty Company........ 1,311,193 1,800,000 6,710,638 105,000
Warehouse and distribution center leased to
Family Dollar Stores, Inc. ................... 946,865 291,540 5,708,460 153,179
Manufacturing facilities leased to Arley
Merchandise Corporation....................... 4,754,940 256,000 7,544,000 8,555
GROSS AMOUNT AT WHICH CARRIED
AT CLOSE OF PERIOD(c)(d)
------------------------------------------- ACCUMULATED
DESCRIPTION LAND BUILDINGS TOTAL DEPRECIATION DATE ACQUIRED
- ----------------------------------------------- ----------- ------------ ------------ ----------- --------------------
Operating Method:
Office, warehouse and manufacturing buildings
leased to Broomfield Tech Center
Corporation................................... $ 354,970 $ 3,633,222 $ 3,988,192 $2,194,402 November 17, 1978
Office and manufacturing buildings leased to
IMO Industries Inc. .......................... 685,026 4,624,211 5,309,237 2,391,393 April 20, 1979
Office and manufacturing buildings formerly
leased to IMO Industries, Inc. ............... 183,319 453,025 636,344 453,025 April 20, 1979
Distribution facilities and warehouses leased July 6, 1979 and
to The Gap, Inc. ............................. 1,363,909 19,291,382 20,655,291 10,590,278 February 16, 1988
March 12, 1984, June
17, 1987, March 17 &
Supermarkets leased to Winn-Dixie Stores, 21, 1988, and
Inc. ......................................... 904,589 6,861,869 7,766,458 2,069,929 October 26, 1990
Land leased to Kobacker Stores, Inc. .......... 1,060,623 1,060,623 January 17, 1979
Warehouse and manufacturing plant leased to Pre December 11, 1980
Finish Metals Incorporated.................... 636,000 16,503,860 17,139,860 8,382,550 and June 30, 1986
Retail store in Greensboro, North Carolina..... 40,946 201,434 242,380 139,023 September 2, 1980
Retail store in New Orleans, Louisiana......... 129,065 204,375 333,440 144,842 January 5, 1981
Retail stores on adjacent sites leased to
Kinko's of Ohio, Inc. and Color Tile, Inc. ... 47,350 591,829 639,179 415,828 October 1, 1980
Warehouse and distribution center leased to,
Maybelline, Inc., and B&G Contract Packaging,
Inc. ......................................... 216,000 3,073,965 3,289,965 1,608,633 April 9, 1981
Land leased to Unisource Worldwide, Inc. ...... 3,575,000 3,575,000 April 29, 1980
Centralized telephone bureau leased to Excel
Telecommunications, Inc. ..................... 1,139,600 2,654,651 3,794,251 143,692 November 24, 1981
Building leased to Sports & Recreation,
Inc. ......................................... 359,068 2,600,932 2,960,000 325,117 November 24, 1981
Dairy processing facility leased to Hughes
Markets, Inc. ................................ 2,055,682 9,699,041 11,754,723 6,440,728 June 1, 1983
Office building in Beaumont, Texas leased to
Petrocon Engineering, Inc. ................... 278,801 986,701 1,265,502 498,078 August 11, 1983
Office, manufacturing and warehouse buildings
leased to Continental Casualty Company........ 1,800,000 6,815,638 8,615,638 5,115,164 October 20, 1983
Warehouse and distribution center leased to
Family Dollar Stores, Inc. ................... 291,540 5,861,639 6,153,179 2,069,770 December 16, 1983
Manufacturing facilities leased to Arley
Merchandise Corporation....................... 256,000 7,552,555 7,808,555 2,391,593 July 13, 1984
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
OF INCOME
DESCRIPTION IS COMPUTED
- ----------------------------------------------- -------------
Operating Method:
Office, warehouse and manufacturing buildings
leased to Broomfield Tech Center
Corporation................................... 10-30 yrs.
Office and manufacturing buildings leased to
IMO Industries Inc. .......................... 17 yrs.
Office and manufacturing buildings formerly
leased to IMO Industries, Inc. ............... 17 yrs.
Distribution facilities and warehouses leased
to The Gap, Inc. ............................. 5-50 yrs.
Supermarkets leased to Winn-Dixie Stores,
Inc. ......................................... 5-40 yrs.
Land leased to Kobacker Stores, Inc. ..........
Warehouse and manufacturing plant leased to Pre
Finish Metals Incorporated.................... 5-30 yrs.
Retail store in Greensboro, North Carolina..... 15-35 yrs.
Retail store in New Orleans, Louisiana......... 15-35 yrs.
Retail stores on adjacent sites leased to
Kinko's of Ohio, Inc. and Color Tile, Inc. ... 15-35 yrs.
Warehouse and distribution center leased to,
Maybelline, Inc., and B&G Contract Packaging,
Inc. ......................................... 30 yrs.
Land leased to Unisource Worldwide, Inc. ......
Centralized telephone bureau leased to Excel
Telecommunications, Inc. ..................... 30 yrs.
Building leased to Sports & Recreation,
Inc. ......................................... 30 yrs.
Dairy processing facility leased to Hughes
Markets, Inc. ................................ 5-36 yrs.
Office building in Beaumont, Texas leased to
Petrocon Engineering, Inc. ................... 30 yrs.
Office, manufacturing and warehouse buildings
leased to Continental Casualty Company........ 10-40 yrs.
Warehouse and distribution center leased to
Family Dollar Stores, Inc. ................... 30 yrs.
Manufacturing facilities leased to Arley
Merchandise Corporation....................... 30 yrs.
F-55
245
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
INITIAL COST TO COST INCREASE
COMPANY CAPITALIZED (DECREASE)
--------------------------- SUBSEQUENT TO IN NET
DESCRIPTION ENCUMBRANCES LAND BUILDINGS ACQUISITION(a) INVESTMENT(b)
- ----------------------------------------------- ------------ ----------- ------------ -------------- -------------
Operating Method -- (Continued):
Manufacturing and office buildings leased to
Penn Virginia Corporation..................... 453,192 3,246,808 3,112
Land leased to Exide Electronics Corporation... 1,170,000
Motion picture theaters leased to Harcourt
General Corporation........................... 2,039,908 1,387,000 5,113,000 36,459
Office and research facility leased to Gould,
Inc. ......................................... 1,422,000 8,418,500 34,587
Office/Manufacturing facility in leased to Inno
Tech Industries, Inc. ........................ 122,884 568,756 (691,640)
Office facility leased to Motorola, Inc. ...... 2,187,829 387,000 3,981,000 11,455
Warehouse and manufacturing facility leased to
Martin Marietta Corporation................... 398,475 2,590,092 26,491
Warehouse and office facility leased to Kinney
Shoe Corporation/Armel, Inc. ................. 261,060 1,360,935 3,899,415 8,000
Manufacturing and office facility leased to
Yale Security, Inc. .......................... 1,884,503 300,000 3,400,000
Manufacturing facilities leased to AP Parts
Manufacturing Company, Inc. .................. 5,736,608 443,500 11,256,500 1,733,087
Manufacturing facilities leased to Anthony's
Manufacturing Company, Inc. .................. 3,200,000 8,300,000
Manufacturing facilities leased to Swiss M-Tex,
L.P. ......................................... 1,714,176 420,440 4,379,560 1,300 (127,721)
Land leased to AutoZone, Inc. ................. 3,234,924 7,199,219 60,795 (206,920)
Retail stores formerly leased to Yellow Front
Stores, Inc. ................................. 4,934,160 3,897,549 329,838 (2,238,493)
Office facility leased to NYNEX................ 275,363 1,955,820 24,093
Land leased to Sybron Acquisition Company...... 424,604 742,246 4,230
Office facility leased to Advanced System
Applications, Inc., and United States Postal
Service....................................... 298,417 1,484,340 14,835,661 57,244 610,000
Manufacturing and office facility leased to
Allied Plywood, Inc. ......................... 661,196 1,932,997 13,383
GROSS AMOUNT AT WHICH CARRIED
AT CLOSE OF PERIOD(c)(d)
------------------------------------------- ACCUMULATED
DESCRIPTION LAND BUILDINGS TOTAL DEPRECIATION DATE ACQUIRED
- ----------------------------------------------- ----------- ------------ ------------ ----------- --------------------
Operating Method -- (Continued):
Manufacturing and office buildings leased to
Penn Virginia Corporation..................... 453,192 3,249,920 3,703,112 2,391,080 August 7, 1984
Land leased to Exide Electronics Corporation... 1,170,000 1,170,000 N/A June 20, 1985
Motion picture theaters leased to Harcourt July 17, 1985 and
General Corporation........................... 1,387,000 5,149,459 6,536,459 1,855,848 July 31, 1986
Office and research facility leased to Gould,
Inc. ......................................... 1,423,875 8,451,212 9,875,087 3,125,698 November 25, 1985
Office/Manufacturing facility in leased to Inno
Tech Industries, Inc. ........................ August 30, 1985
Office facility leased to Motorola, Inc. ...... 387,000 3,992,455 4,379,455 1,469,228 December 23, 1985
Warehouse and manufacturing facility leased to
Martin Marietta Corporation................... 401,541 2,613,517 3,015,058 925,009 May 15, 1986
Warehouse and office facility leased to Kinney
Shoe Corporation/Armel, Inc. ................. 1,360,935 3,907,415 5,268,350 1,340,471 September 17, 1986
Manufacturing and office facility leased to
Yale Security, Inc. .......................... 300,000 3,400,000 3,700,000 85,000 August 13, 1985
Manufacturing facilities leased to AP Parts
Manufacturing Company, Inc. .................. 443,500 12,989,587 13,433,087 3,815,719 December 23, 1986
Manufacturing facilities leased to Anthony's
Manufacturing Company, Inc. .................. 3,200,000 8,300,000 11,500,000 2,725,001 February 24, 1987
Manufacturing facilities leased to Swiss M-Tex,
L.P. ......................................... 292,719 4,380,860 4,673,579 1,362,919 August 24, 1987
January 17 & May 2,
1986 August 24, 1987
Land leased to AutoZone, Inc. ................. 7,053,094 7,053,094 & August 24, 1988
Retail stores formerly leased to Yellow Front
Stores, Inc. ................................. 3,332,294 3,590,760 6,923,054 801,945 January 29, 1988
Office facility leased to NYNEX................ 275,363 1,979,913 2,255,276 588,475 January 29, 1988
Land leased to Sybron Acquisition Company...... 746,476 746,476 December 22, 1988
Office facility leased to Advanced System
Applications, Inc., and United States Postal
Service....................................... 1,485,075 15,502,170 16,987,245 4,107,715 September 29, 1988
Manufacturing and office facility leased to
Allied Plywood, Inc. ......................... 661,627 1,945,949 2,607,576 210,811 March 31, 1989
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
OF INCOME
DESCRIPTION IS COMPUTED
- ----------------------------------------------- -------------
Operating Method -- (Continued):
Manufacturing and office buildings leased to
Penn Virginia Corporation..................... 5-30 yrs.
Land leased to Exide Electronics Corporation...
Motion picture theaters leased to Harcourt
General Corporation........................... 30 yrs.
Office and research facility leased to Gould,
Inc. ......................................... 30 yrs.
Office/Manufacturing facility in leased to Inno
Tech Industries, Inc. ........................ N/A
Office facility leased to Motorola, Inc. ...... 30 yrs.
Warehouse and manufacturing facility leased to
Martin Marietta Corporation................... 30 yrs.
Warehouse and office facility leased to Kinney
Shoe Corporation/Armel, Inc. ................. 30 yrs.
Manufacturing and office facility leased to
Yale Security, Inc. .......................... 30 yrs.
Manufacturing facilities leased to AP Parts
Manufacturing Company, Inc. .................. 30 yrs.
Manufacturing facilities leased to Anthony's
Manufacturing Company, Inc. .................. 30 yrs.
Manufacturing facilities leased to Swiss M-Tex,
L.P. ......................................... 30 yrs.
Land leased to AutoZone, Inc. ................. N/A
Retail stores formerly leased to Yellow Front
Stores, Inc. ................................. 30 yrs.
Office facility leased to NYNEX................ 30 yrs.
Land leased to Sybron Acquisition Company...... N/A
Office facility leased to Advanced System
Applications, Inc., and United States Postal
Service....................................... 30 yrs.
Manufacturing and office facility leased to
Allied Plywood, Inc. ......................... 30 yrs.
F-56
246
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
INITIAL COST TO COST INCREASE
COMPANY CAPITALIZED (DECREASE)
--------------------------- SUBSEQUENT TO IN NET
DESCRIPTION ENCUMBRANCES LAND BUILDINGS ACQUISITION(a) INVESTMENT(b)
- ----------------------------------------------- ------------ ----------- ------------ -------------- -------------
Operating Method -- (Continued):
Manufacturing and office in Fredericksburg,
Virginia...................................... 87,936 1,110,847 3,458 (456,203)
Manufacturing facilities leased to Amerisig,
Inc. ......................................... 10,248,140 3,957,645 15,961,355 13,782
Land leased to High Voltage Engineering
Corporation................................... 805,487 1,720,000 1,601
Manufacturing facility leased to Mayfair Molded
Products Corporation.......................... 793,325 2,456,675 4,356
Distribution and office facilities leased to
Federal Express Corporation................... 394,544 2,102,456 49,041
Land leased to Dr Pepper Bottling Company of
Texas......................................... 4,586,706 7,351,740 34,370
Manufacturing facilities leased to Furon
Company....................................... 12,542,043 4,187,766 19,104,746 127,177 (1,551,221)
Manufacturing facility leased to Detroit Diesel
Corporation................................... 23,745,378 4,986,450 26,513,550 8,130
Engineering and Fabrication Facility leased to
Orbital Sciences Corporation.................. 8,587,426 3,675,966 7,757,081 5,976,705
Land leased to NVRyan L.P. .................... 2,377,669 3,342,854 23,850
Distribution facility leased to PepsiCo........ 156,327 829,488 15,075
Land leased to Childtime Childcare, Inc. ...... 528,164 1,170,448
Land and building leased to General Electric
Company....................................... 3,386,923 1,253,772 6,519,634
Hotel complex leased to Hotel Corporation of
America....................................... 8,569,627 762,839 8,241,162
------------ ----------- ------------ ----------- ------------
$116,381,682 $76,319,048 $262,632,914 $ 13,631,443 $(13,079,953)
============ =========== ============ =========== ============
GROSS AMOUNT AT WHICH CARRIED
AT CLOSE OF PERIOD(c)(d)
------------------------------------------- ACCUMULATED
DESCRIPTION LAND BUILDINGS TOTAL DEPRECIATION DATE ACQUIRED
- ----------------------------------------------- ----------- ------------ ------------ ----------- --------------------
Operating Method -- (Continued):
Manufacturing and office in Fredericksburg, March 31 and
Virginia...................................... 54,566 691,472 746,038 75,161 December 29, 1989
Manufacturing facilities leased to Amerisig,
Inc. ......................................... 3,961,025 15,971,757 19,932,782 4,072,514 June 24, 1988
Land leased to High Voltage Engineering
Corporation................................... 1,721,601 1,721,601 N/A November 10, 1988
Manufacturing facility leased to Mayfair Molded
Products Corporation.......................... 794,388 2,459,968 3,254,356 661,365 December 8, 1988
Distribution and office facilities leased to March 24 and June
Federal Express Corporation................... 401,526 2,144,515 2,546,041 541,376 30, 1989
Land leased to Dr Pepper Bottling Company of
Texas......................................... 7,386,110 7,386,110 N/A June 30, 1989
Manufacturing facilities leased to Furon
Company....................................... 3,863,089 18,005,379 21,868,468 4,154,768 January 29, 1990
Manufacturing facility leased to Detroit Diesel
Corporation................................... 4,987,737 26,520,393 31,508,130 5,782,813 June 15, 1990
Engineering and Fabrication Facility leased to
Orbital Sciences Corporation.................. 3,676,492 13,733,260 17,409,752 2,850,054 September 29, 1989
Land leased to NVRyan L.P. .................... 3,366,704 3,366,704 May 16, 1989
Distribution facility leased to PepsiCo........ 158,717 842,173 1,000,890 200,045 November 16, 1989
Land leased to Childtime Childcare, Inc. ...... 1,170,448 1,170,448 January 4, 1991
Land and building leased to General Electric
Company....................................... 1,253,772 6,519,634 7,773,406 1,745,123 December 21, 1988
Hotel complex leased to Hotel Corporation of
America....................................... 762,839 8,241,162 9,004,001 1,661,000
----------- ------------ ------------ -----------
$73,310,193 $266,193,259 $339,503,452 $91,923,183
=========== ============ ============ ===========
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
OF INCOME
DESCRIPTION IS COMPUTED
- ----------------------------------------------- -------------
Operating Method -- (Continued):
Manufacturing and office in Fredericksburg,
Virginia...................................... 30 yrs.
Manufacturing facilities leased to Amerisig,
Inc. ......................................... 30 yrs.
Land leased to High Voltage Engineering
Corporation................................... N/A
Manufacturing facility leased to Mayfair Molded
Products Corporation.......................... 30 yrs.
Distribution and office facilities leased to
Federal Express Corporation................... 30 yrs.
Land leased to Dr Pepper Bottling Company of
Texas......................................... N/A
Manufacturing facilities leased to Furon
Company....................................... 30 yrs.
Manufacturing facility leased to Detroit Diesel
Corporation................................... 30 yrs.
Engineering and Fabrication Facility leased to
Orbital Sciences Corporation.................. 30 yrs.
Land leased to NVRyan L.P. .................... N/A
Distribution facility leased to PepsiCo........ 30 yrs.
Land leased to Childtime Childcare, Inc. ...... N/A
Land and building leased to General Electric
Company....................................... 30 yrs.
Hotel complex leased to Hotel Corporation of
America....................................... 30 yrs.
F-57
247
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996
INITIAL COST TO COST
COMPANY CAPITALIZED
--------------------------- SUBSEQUENT TO
DESCRIPTION ENCUMBRANCES LAND BUILDINGS ACQUISITION(a)
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Direct financing method:
Office buildings and warehouses leased to Unisource
Worldwide, Inc........................................ $4,569,578 $ 298,655 $ 9,956,345 $ 9,528
Retail stores leased to Kobacker Stores, Inc........... 629,817 2,008,850 105,207
Centralized Telephone Bureau leased to New Valley
Corporation........................................... 893,200 5,050,489
Computer Center leased to AT&T Corporation............. 369,600 6,985,844 3,189
Warehouse and manufacturing buildings leased to Gibson
Greetings, Inc........................................ 1,904,186 17,239,235
Warehouse and manufacturing buildings leased to Cleo,
Inc................................................... 1,133,761 15,142,206
Manufacturing and product testing buildings leased to
Simplicity Manufacturing, Inc......................... 5,031,101 472,700 11,527,300
Manufacturing, distribution and office buildings leased
to Brodart Co......................................... 3,218,689 241,550 6,141,429
Manufacturing facility to Spreckels Industries, Inc.... 444,730 5,055,270
Manufacturing facilities leased to Rochester Button
Company, Inc.......................................... 86,663 2,815,596 4,429
Office and research facility leased to Exide
Electronics Corporation............................... 2,030,000 1,500
Manufacturing facilities leased to DeVlieg Bullard,
Inc................................................... 310,032 4,782,667
Manufacturing facility leased to Penberthy Products,
Inc................................................... 48,968 1,028,333
Manufacturing facility and warehouse leased to Stoody
Deloro Stellite, Inc.................................. 2,815,000 11,885,000
Manufacturing facilities leased Sunds Defibrator
Woodhandling, Inc..................................... 24,750 669,427
Retail stores leased to AutoZone, Inc.................. 5,508,115 12,649,956 98,930
Manufacturing facility leased to Peerless Chain
Company............................................... 829,000 6,991,000
Retail facility leased to Wal-Mart Stores, Inc......... 3,464,336 1,467,000 5,208,000 10,250
Manufacturing and warehouse facility leased to KSG,
Inc................................................... 1,099,700 3,598,220 104
Manufacturing and office facilities leased to Sybron
Acquisition Company................................... 13,886,818 1,984,406 22,383,348 138,318
Manufacturing and office facilities leased to NVRyan
L.P................................................... 4,322,331 570,729 12,904,948 321,200
Manufacturing and generating facilities leased to High
Voltage Engineering Corporation....................... 3,493,716 688,000 7,242,000 7,394
Office/warehouse facilities leased to Stationers
Distributing Company.................................. 2,348,134 1,120,000 3,510,000 293
Bottling and Distribution facilities lease to Dr Pepper
Bottling Company of Texas............................. 11,055,361 20,848,260 97,467
Office/warehouse facility leased to Red Bank
Distribution, Inc..................................... 5,440,902 1,572,296 9,065,704 11,302
Day care facilities leased to Childtime Childcare,
Inc................................................... 761,176 1,686,816
----------- ----------- ------------ --------
$63,730,074 $18,374,926 $208,406,243 $ 809,111
=========== =========== ============ ========
GROSS AMOUNT AT
INCREASE WHICH CARRIED AT
(DECREASE) CLOSE OF PERIOD(c)
IN NET ------------------
DESCRIPTION INVESTMENT(b) TOTAL
- ------------------------------------------------------- ------------- ------------------
Direct financing method:
Office buildings and warehouses leased to Unisource
Worldwide, Inc........................................ $ 655,180 $ 10,919,708
Retail stores leased to Kobacker Stores, Inc........... (376,015) 1,738,042
Centralized Telephone Bureau leased to New Valley
Corporation........................................... (52,236) 5,891,453
Computer Center leased to AT&T Corporation............. 60,569 7,419,202
Warehouse and manufacturing buildings leased to Gibson
Greetings, Inc........................................ (5,845,212) 13,298,209
Warehouse and manufacturing buildings leased to Cleo,
Inc................................................... (4,933,279) 11,342,688
Manufacturing and product testing buildings leased to
Simplicity Manufacturing, Inc......................... 12,000,000
Manufacturing, distribution and office buildings leased
to Brodart Co......................................... (189,424) 6,193,555
Manufacturing facility to Spreckels Industries, Inc.... 5,500,000
Manufacturing facilities leased to Rochester Button
Company, Inc.......................................... (1,003,639) 1,903,049
Office and research facility leased to Exide
Electronics Corporation............................... 2,031,500
Manufacturing facilities leased to DeVlieg Bullard,
Inc................................................... 5,092,699
Manufacturing facility leased to Penberthy Products,
Inc................................................... 1,077,301
Manufacturing facility and warehouse leased to Stoody
Deloro Stellite, Inc.................................. 14,700,000
Manufacturing facilities leased Sunds Defibrator
Woodhandling, Inc..................................... 694,177
Retail stores leased to AutoZone, Inc.................. (321,900) 12,426,986
Manufacturing facility leased to Peerless Chain
Company............................................... 7,820,000
Retail facility leased to Wal-Mart Stores, Inc......... 6,685,250
Manufacturing and warehouse facility leased to KSG,
Inc................................................... 4,698,024
Manufacturing and office facilities leased to Sybron
Acquisition Company................................... 24,506,072
Manufacturing and office facilities leased to NVRyan
L.P................................................... 457,579 14,254,456
Manufacturing and generating facilities leased to High
Voltage Engineering Corporation....................... 7,937,394
Office/warehouse facilities leased to Stationers
Distributing Company.................................. (732,255) 3,898,038
Bottling and Distribution facilities lease to Dr Pepper
Bottling Company of Texas............................. 20,945,727
Office/warehouse facility leased to Red Bank
Distribution, Inc..................................... 10,649,302
Day care facilities leased to Childtime Childcare,
Inc................................................... 1,686,816
------------ ------------
$(12,280,632) $215,309,648
============ ============
DESCRIPTION DATE ACQUIRED
- ------------------------------------------------------- -------------------------------------------------
Direct financing method:
Office buildings and warehouses leased to Unisource
Worldwide, Inc........................................ December 28, 1979 and April 29, 1980
Retail stores leased to Kobacker Stores, Inc........... January 17, 1979
Centralized Telephone Bureau leased to New Valley
Corporation........................................... November 24, 1981
Computer Center leased to AT&T Corporation............. November 24, 1981
Warehouse and manufacturing buildings leased to Gibson
Greetings, Inc........................................ January 26, 1982
Warehouse and manufacturing buildings leased to Cleo,
Inc................................................... January 26, 1982
Manufacturing and product testing buildings leased to
Simplicity Manufacturing, Inc......................... March 3, 1983
Manufacturing, distribution and office buildings leased
to Brodart Co......................................... June 15, 1988
Manufacturing facility to Spreckels Industries, Inc.... December 30, 1983
Manufacturing facilities leased to Rochester Button
Company, Inc.......................................... April 11, 1984
Office and research facility leased to Exide
Electronics Corporation............................... June 20, 1985
Manufacturing facilities leased to DeVlieg Bullard,
Inc................................................... April 3, 1986
Manufacturing facility leased to Penberthy Products,
Inc................................................... April 3, 1986
Manufacturing facility and warehouse leased to Stoody
Deloro Stellite, Inc.................................. February 14, 1985 and December 22, 1986
Manufacturing facilities leased Sunds Defibrator
Woodhandling, Inc..................................... August 30, 1985
Retail stores leased to AutoZone, Inc.................. January 17, 1986 May 2, 1986; August 28, 1987 and
March 31, 1989
Manufacturing facility leased to Peerless Chain
Company............................................... June 18, 1986
Retail facility leased to Wal-Mart Stores, Inc......... August 7, 1986
Manufacturing and warehouse facility leased to KSG,
Inc................................................... March 12, 1987
Manufacturing and office facilities leased to Sybron
Acquisition Company................................... December 22, 1988
Manufacturing and office facilities leased to NVRyan
L.P................................................... March 31, 1989 and May 16, 1989
Manufacturing and generating facilities leased to High
Voltage Engineering Corporation....................... November 10, 1988
Office/warehouse facilities leased to Stationers
Distributing Company.................................. December 29, 1988
Bottling and Distribution facilities lease to Dr Pepper
Bottling Company of Texas............................. June 30, 1989
Office/warehouse facility leased to Red Bank
Distribution, Inc..................................... July 20, 1990
Day care facilities leased to Childtime Childcare,
Inc................................................... January 4, 1991
F-58
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CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996
GROSS
AMOUNT AT
WHICH
CARRIED
AT CLOSE
OF
INITIAL COST TO COSTS PERIOD(c)(d)(e)
COMPANY CAPITALIZED DECREASE ----------
------------------------ PERSONAL SUBSEQUENT TO IN NET
DESCRIPTION ENCUMBRANCES LAND BUILDING PROPERTY ACQUISITION(a) INVESTMENT(b) LAND
------- ------------ ---------- ----------- ---------- -------------- ------------- ----------
Operating real estate(e):
Hotels located in:
Alpena, Michigan....... $ 7,330,000 $ 210,000 $ 7,551,000 $ 742,500 $ 925,869 $ 210,000
Petoskey, Michigan..... 7,330,000 527,000 7,211,000 765,500 629,241 527,000
Livonia, Michigan...... 7,566,921 3,130,000 12,410,000 2,260,000 1,064,874 3,130,000
----------- ---------- ----------- ---------- ---------- ----------
$22,226,921 $3,867,000 $27,172,000 $3,768,000 $2,619,884 $3,867,000
=========== ========== =========== ========== ========== ==========
LIFE ON WHICH
GROSS AMOUNT AT WHICH CARRIED DEPRECIATION
AT CLOSE OF PERIOD(c)(d)(e) IN LATEST
-------------------------------------- STATEMENT OF
PERSONAL ACCUMULATED INCOME
DESCRIPTION PROPERTY BUILDING TOTAL DEPRECIATION DATE ACQUIRED IS COMPUTED
------- ---------- ----------- ----------- ------------ ----------------- -------------
Operating real estate(e):
Hotels located in:
Alpena, Michigan....... $1,661,869 $ 7,557,500 $ 9,429,369 3,585,930 March 6, 1987 7-30 yrs
Petoskey, Michigan..... 1,388,241 7,217,500 9,132,741 3,526,080 June 30, 1987 7-30 yrs
Livonia, Michigan...... 2,530,713 13,204,161 18,864,874 6,234,972 November 20, 1987
---------- ----------- ----------- -----------
$5,580,823 $27,979,161 $37,426,984 $ 13,346,982 June 15, 1988 5-30 yrs
========== =========== =========== ===========
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CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO SCHEDULE OF REAL ESTATE
AND ACCUMULATED DEPRECIATION
(a) Consists of the cost of improvements and acquisition costs subsequent to
acquisition, including legal fees, appraisal fees, title costs, other
related professional fees and purchases of furniture, fixtures, equipment
and improvements at the hotel properties.
(b) The decrease in net investment is primarily due to the amortization of
unearned income producing constant periodic rate on the net investment in
direct financing leases, which differ from scheduled minimum lease rentals,
sales of properties, and writedowns of properties to net realizable value.
(c) At December 31, 1996, the aggregate cost of real estate owned by the Company
and its subsidiaries for Federal income tax purposes is $601,230,573.
(d)
RECONCILIATION OF REAL ESTATE ACCOUNTED
FOR UNDER THE OPERATING METHOD
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
Balance at beginning of year.................................... $360,009,561 $348,220,453
Additions....................................................... 514,977 2,842,338
Sales........................................................... (14,157,435)
Writedowns to net realizable value.............................. (319,685)
Reclassification from (to) investment in direct financing
lease......................................................... (4,630,293) 3,700,000
Reclassification to real estate held for sale................... (7,354,107) (1,101,904)
------------ ------------
Balance at end of year.......................................... $348,220,453 $339,503,452
============ ============
RECONCILIATION OF ACCUMULATED DEPRECIATION
DECEMBER DECEMBER
31, 31,
1995 1996
----------- -----------
Balance at beginning of year...................................... $80,610,386 $87,603,614
Depreciation expense.............................................. 9,975,404 9,334,741
Reclassification to real estate held for sale..................... (2,249,921)
Reclassification to direct financing lease........................ (732,255) (667,565)
Writeoff resulting from sales of property......................... (4,347,537)
----------- -----------
Balance at end of year............................................ $87,603,614 $91,923,253
=========== ===========
(e)
RECONCILIATION FOR OPERATING REAL ESTATE
DECEMBER DECEMBER
31, 31,
1995 1996
----------- -----------
Balance at beginning of year...................................... $69,187,881 $55,369,375
Additions......................................................... 1,580,013 578,005
Reclassification to real estate held for sale..................... (9,442,947)
Writedown to net realizable value................................. (1,000,000)
Sales and exchange of property.................................... (4,955,572) (18,520,396)
----------- -----------
Balance at close of year.......................................... $55,369,375 $37,426,984
=========== ===========
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250
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO SCHEDULE OF REAL ESTATE
AND ACCUMULATED DEPRECIATION -- (CONTINUED)
RECONCILIATION OF ACCUMULATED DEPRECIATION
OPERATING REAL ESTATE
DECEMBER DECEMBER
31, 31,
1995 1996
----------- -----------
Balance at beginning of year...................................... $17,915,786 $14,481,112
Depreciation expense.............................................. 2,267,157 1,215,149
Reclassification to real estate held for sale..................... (3,834,823)
Writeoff resulting from sales and exchange........................ (1,867,008) (2,349,279)
----------- -----------
Balance at end of year............................................ $14,481,112 $13,346,982
=========== ===========
F-61
251
APPENDIX A
252
Corporate Property Associates
Corporate Property Associates 2
Corporate Property Associates 3
Corporate Property Associates 4
Corporate Property Associates 5
Corporate Property Associates 6
Corporate Property Associates 7
Corporate Property Associates 8
Corporate Property Associates 9
50 Rockefeller Center
New York, New York 10020
Gentlemen:
You have requested that Robert A. Stanger & Co., Inc. ("Stanger") provide
an opinion to Corporate Property Associates, Corporate Property Associates 2,
Corporate Property Associates 3, Corporate Property Associates 4, Corporate
Property Associates 5, Corporate Property Associates 6, Corporate Property
Associates 7, Corporate Property Associates 8 and Corporate Property Associates
9 (the "CPA Partnerships") as to the fairness from a financial point of view to
the limited partners of the CPA Partnerships (the "Unitholders") of certain
allocations of shares (the "Listed Shares") which would be effective following
the approval by the CPA Partnerships of a proposed consolidation (the
"Consolidation") of the CPA Partnerships into Carey Diversified LLC, a newly
formed limited liability company organized in Delaware (the "Company").
We have been advised by the General Partners and the CPA Partnerships that
(i) 24,388,032 or 10,172,692 Listed Shares will be issued in the Consolidation
assuming Maximum and Minimum Participation as defined below, and that such
Listed Shares shall be allocated to the CPA Partnerships as summarized on
Exhibit I hereto; and (ii) Unitholders in each CPA Partnership may elect to
retain an interest in the CPA Partnership in which they are limited partners and
receive subsidiary partnership units (the "Subsidiary Partnership Units") which
will be issued in nine series. We have been advised that the distributions to
the holders of each series of Subsidiary Partnership Units will be measured by
reference to the performance of those properties that are attributable to the
respective CPA Partnerships as they existed prior to the Consolidation.
Stanger, founded in 1978, provides information, research, investment
banking and consulting services to clients throughout the United States,
including major New York Stock Exchange member firms and insurance companies and
over seventy companies engaged in the management and operation of partnerships
and real estate investment trusts. The investment banking activities of Stanger
include financial advisory services, asset and securities valuations, industry
and company research and analysis, litigation support and expert witness
services, and due diligence investigations in connection with both publicly
registered and privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly engaged
in the valuation of businesses and their securities in connection with mergers,
acquisitions, and reorganizations and for estate, tax, corporate and other
purposes. In particular, Stanger's valuation practice principally involves
partnerships, partnership securities and assets typically owned through
partnerships including, but not limited to, real estate, mortgages secured by
real estate, oil and gas reserves, cable television systems, and equipment
leasing assets.
In arriving at the opinion set forth below, we have:
- Performed appraisals of each Partnership's portfolio of real properties
pursuant to a separate engagement between Stanger and the Partnerships;
- Reviewed a draft of the Consent Solicitation Statement/Prospectus in
substantially the form which will be filed with the Securities & Exchange
Commission (the "SEC") and provided to Unitholders by the CPA
Partnerships and the Company;
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253
- Reviewed the financial statements of the CPA Partnerships contained in
Forms 10-K, as amended, filed with the SEC for the CPA Partnerships' 1995
and 1996 fiscal years and Forms 10-Q, as amended, filed with the SEC for
the quarter ended June 30, 1997;
- Reviewed certain operating and financial information (including property
level financial statements and operating budgets for each property)
relating to the business, financial condition and results of operations
of the CPA Partnerships and discussed with management of the CPA
Partnerships the operations, business plan, historical financial
statements, budgets and future prospects of the CPA Partnerships;
- Reviewed the methodology used by the General Partners to allocate Listed
Shares among the CPA Partnerships; and
- Conducted such other studies, analyses and inquiries as we deemed
appropriate.
The CPA Partnerships requested that Stanger opine as to the fairness, from
a financial point of view, of the allocation of the Listed Shares among the CPA
Partnerships assuming all Unitholders elect to receive Listed Shares and that
either all CPA Partnerships elect to participate in the Consolidation (the
"Maximum Participation Scenario") or the minimum number of CPA Partnerships
participate in the Consolidation (the "Minimum Participation Scenario"). The
Minimum Participation Scenario assumes the consolidation of only CPA:1, CPA:2,
CPA:3, CPA:5, and CPA:7.
To evaluate the fairness, from a financial point of view, of the allocation
of Listed Shares among the CPA Partnerships, we compared the estimated net asset
value to be contributed to the Company by each CPA Partnership to the estimated
net asset value of the CPA Partnerships as a Group. We observed that Total
Exchange Values were assigned to the CPA Partnerships by the General Partners
based on: (i) appraisals provided by Stanger of the estimated value of the real
estate portfolio of each CPA Partnership as of March 31, 1997; (ii) valuations
made by the General Partners of each CPA Partnership's other assets and
liabilities as of June 30, 1997; (iii) adjustments made by the General Partners
to the foregoing values to reflect cash distributions made by the CPA
Partnership in July 1997, the estimated value of litigation claims of certain
CPA Partnerships, the General Partners' 1% interest in sale/financing proceeds
which will be retained in the Consolidation, certain returns due to the General
Partners which relate to properties which have previously been sold by the CPA
Partnerships, and the estimated change in the value of two properties as a
result of material events occurring subsequent to the appraisal date; and (iv)
the costs of the Consolidation to be allocated among the CPA Partnerships in
proportion to their Total Exchange Value before such cost allocation. We further
observed that the General Partners intend to make such pre-consolidation cash
distributions to Unitholders in each CPA Partnership as may be necessary to
cause the relative Total Exchange Values of the CPA Partnerships as of the
closing date to be substantially equivalent to the relative Total Exchange
Values as of June 30, 1997. Relying on these Total Exchange Values, we observed
that the allocation of Listed Shares offered to each CPA Partnership reflects
the net value of the assets contributed to the Company by each CPA Partnership
after deducting a pro rata share of the costs associated with the Consolidation.
In rendering this opinion, Stanger relied, without independent
verification, on the accuracy and completeness of all financial and other
information contained in the Consent Solicitation Statement/ Prospectus or that
was otherwise publicly available or furnished or otherwise communicated to us.
Stanger has not made an independent evaluation or appraisal of the
determinations of the non-real estate assets and liabilities of the CPA
Partnerships. Stanger relied upon the balance sheet value determinations for the
CPA Partnerships and the adjustments made by the General Partners to arrive at
the Total Exchange Values. We have also relied upon the assurance of the CPA
Partnerships and the General Partners that the calculations made to determine
Listed Share allocations among the CPA Partnership and within each CPA
Partnership between the General Partners and the Unitholders are consistent with
the provisions of each CPA Partnership's Partnership Agreement, that any
financial projections or pro forma statements or adjustments provided to us were
reasonably prepared and adjusted on bases consistent with actual historical
experience and reflect the best currently available estimates and good faith
judgments, that no material changes have occurred in the CPA Partnerships' asset
or liability values subsequent to valuation dates cited above or in the real
estate
2
254
portfolio values subsequent to March 31, 1997 which are not reflected in the
Partnerships' Exchange Values, and that the CPA Partnerships and the General
Partners are not aware of any information or facts regarding the CPA
Partnerships that would cause the information supplied to us to be incomplete or
misleading.
We were not asked to and therefore did not perform an analysis with respect
to any combinations of CPA Partnership participation other than those noted
above. Further, we are not opining as to whether or not any specified
combination will result from the Consolidation. We were not requested to and did
not: (a) select the method of determining the allocation of the Listed Shares or
Subsidiary Partnership Units or establish the allocation; (b) make any
recommendations to the Unitholders, General Partners or the CPA Partnerships
with respect to whether to approve or reject the Consolidation or whether to
elect to receive Listed Shares or Subsidiary Partnership Units; or (c) express
any opinion as to (i) the impact of the Consolidation with respect to
combinations of participating CPA Partnerships other than those specifically
identified herein; (ii) the tax consequences of the Consolidation for
Unitholders or for the Company; (iii) the potential impact of any preferential
return on Subsidiary Partnership Units or the Company's fee structure on the
cash flow received from, or the market value of, Listed Shares of the Company
received by the CPA Partnerships; (iv) the potential capital structure of the
Company or its impact on the financial performance of the Listed Shares or the
Subsidiary Partnership Units; (v) the potential impact on the fairness of the
allocations of any subsequently discovered environmental or contingent
liability; or (vi) whether or not alternative methods of determining the
relative amounts of Listed Shares and Subsidiary Partnership Units to be issued
would have also provided fair results or results substantially similar to those
of the allocation methodology used.
Further, we are not expressing any opinion as to (a) the fairness of any
terms of the Consolidation (other than the fairness of the allocations of the
Listed Shares for the combinations of participating CPA Partnerships as
described above) or the amounts or allocations of Consolidation costs or the
amounts of Consolidation costs borne by Unitholders at various levels of
participation in the Consolidation; (b) the relative value of the Listed Shares
and the Subsidiary Partnership Units to be issued in the Consolidation; (c) the
prices at which the Listed Shares or Subsidiary Partnership Units may trade
following the Consolidation or the trading value of the Listed Shares or
Subsidiary Partnership Units to be received compared with the current fair
market value of the CPA Partnerships' portfolios or other assets if liquidated
in real estate markets; and (d) alternatives to the Consolidation.
Based upon and subject to the foregoing, it is our opinion that the
allocation of the Listed Shares to the CPA Partnerships pursuant to the
Consolidation assuming the participation scenarios cited herein is fair to the
Unitholders of the CPA Partnerships from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the CPA Partnerships and the General Partners that our entire analysis
must be considered as a whole and that selecting portions of analyses and the
factors considered, without considering all analyses and factors, could create
an incomplete view of the evaluation process underlying this opinion.
Our opinion is based on business, economic, real estate market, and other
conditions as of the date of our analysis and addresses the Consolidation in the
context of information available as of the date of our analysis. Events
occurring after that date could affect the value of the assets of the CPA
Partnerships or the assumptions used in preparing the opinion.
Very truly yours,
/s/ ROBERT A. STANGER & CO., INC.
- ------------------------------------
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
October 15, 1997
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255
EXHIBIT I
ALLOCATION OF LISTED SHARES
ALLOCATION OF
LISTED SHARES(1)
----------------
Corporate Property Associates................................. 1,052,185
Corporate Property Associates 2............................... 1,692,873
Corporate Property Associates 3............................... 2,798,430
Corporate Property Associates 4............................... 2,841,138
Corporate Property Associates 5............................... 2,079,320
Corporate Property Associates 6............................... 3,326,115
Corporate Property Associates 7............................... 2,549,884
Corporate Property Associates 8, L.P.......................... 4,894,290
Corporate Property Associates 9, L.P.......................... 3,153,797
- ---------------
(1) Assumes all Unitholders elect to receive Listed Shares.
256
APPENDIX B
257
PORTFOLIO APPRAISAL REPORT
CORPORATE PROPERTY ASSOCIATES 1
CORPORATE PROPERTY ASSOCIATES 2
CORPORATE PROPERTY ASSOCIATES 3
CORPORATE PROPERTY ASSOCIATES 4
CORPORATE PROPERTY ASSOCIATES 5
CORPORATE PROPERTY ASSOCIATES 6
CORPORATE PROPERTY ASSOCIATES 7
CORPORATE PROPERTY ASSOCIATES 8
CORPORATE PROPERTY ASSOCIATES 9
258
TABLE OF CONTENTS
PAGE
----
Letter of Transmittal................................................................. 1
Identification of Subject Portfolios.................................................. 4
Property Ownership and History........................................................ 4
Purpose of Appraisal.................................................................. 4
Function of Appraisal................................................................. 4
Scope of Appraisal.................................................................... 4
Date of Valuation..................................................................... 6
Value Definition...................................................................... 6
Valuation Methodology................................................................. 7
Site Inspections and Data Gathering................................................. 8
Lease Review........................................................................ 9
Market Rental Rates................................................................. 9
Highest and Best Use................................................................ 9
Operational Projections............................................................. 10
Reversion........................................................................... ...
Selection of Discount Rates......................................................... 11
Portfolio Value Conclusions........................................................... 13
Portfolio Summaries................................................................... 14
Assumptions and Limiting Conditions................................................... 32
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259
May 15, 1997
W. P. Carey & Co., Inc.
620 Park Avenue, 4th Floor
New York, NY 10020
Gentlemen:
You have engaged Robert A. Stanger & Co., Inc. ("Stanger") to estimate the
value of the real property portfolios (the "Portfolios") owned by Corporate
Property Associates 1, Corporate Property Associates 2, Corporate Property
Associates 3, Corporate Property Associates 4, Corporate Property Associates 5,
Corporate Property Associates 6, Corporate Property Associates 7, Corporate
Property Associates 8 and Corporate Property Associates 9, (hereinafter the
"Partnerships"). Such appraisal reflects the estimated market value of the
leased fee interests or, where appropriate, fee simple interests in the
portfolios of real property owned by the Partnerships (the "Portfolio
Valuations") as of March 31, 1997.
This report is prepared in accordance with an agreement between Robert A.
Stanger & Co., Inc. and W. P. Carey & Co., Inc. ("Carey") and the Partnership,
dated April 7, 1997. Pursuant to the agreement, Stanger has been engaged to
perform the appraisal on a limited scope basis using a summary report format in
conformity with the departure provisions of the Uniform Standards of
Professional Appraisal Practice of the Appraisal Institute, relying solely upon
the Income Approach to value. As such, the report differs from a self-contained
appraisal report in that (i) the data is limited to the summary data and
conclusions presented, and (ii) the cost and market approaches were excluded and
the conclusions were based upon the income approach. Due to the type of the real
estate owned by the Partnerships and the nature of the lease terms, the
engagement calls for these assets to be valued utilizing a discounted cash flow
analysis, subject to existing leases and debt in place. We have therefore valued
the net cash flows related to triple net leases with reversion to underlying
real estate value only after the primary lease term and any renewal options
deemed favorable to the tenant have been exhausted.
Our valuation has been based in part upon information supplied to us by
Carey and the Partnerships including but not limited to: lease abstracts;
renewal and purchase option status; information relating to the creditworthiness
of tenants; schedules of current lease rates, income, expenses, cash flow and
related financial information; property descriptive information, physical
condition of improvements and acquisition appraisals; information relating to
mortgage encumbrances; and, where appropriate, proposed sales terms, sales
agreements and supporting documentation. We have also visited the offices of
Carey and the Partnerships in New York, New York and have interviewed relevant
management personnel. We have relied upon such information and have assumed that
the information provided by Carey and the Partnerships is accurate and complete.
We have not attempted to independently verify such information.
We are advised by Carey and the Partnerships that the purpose of the
appraisals is to estimate the value of the leased fee interests or, where
appropriate, fee simple interests in the Portfolios under market conditions as
of the appraisal date and subject to existing leases and debt in place, and that
the Portfolio Valuations will be used in connection with a proposed merger of
Partnerships in exchange for shares of a newly formed limited liability company
(the "LLC") and assumption of existing indebtedness (the "Transaction"). Stanger
understands that the Portfolio Valuations may be reviewed and utilized in
connection with the Transaction and Stanger agrees to the use of the Portfolio
Valuations for this purpose subject to the terms and conditions of the
agreements related thereto.
For these purposes, this summary appraisal report was prepared stating our
opinion as to the market value of the Portfolios as of March 31, 1997. This
report may be summarized and referenced in the proxy statement for the
Partnerships relating to the Transaction, subject to prior review by Stanger.
However, the attached summary appraisal report should be reviewed in its
entirety and is subject to the assumptions and limiting
1
260
conditions contained herein. Background information and analysis upon which
value conclusions are based has been retained in our files.
Our review was undertaken solely for the purpose of providing an opinion of
value, and we make no representation as to the adequacy of such review for any
other purpose. Our opinion is expressed with respect to the total value of each
of the real estate portfolios, assuming existing financing and lease contracts,
in which the Partnerships have an interest and not with respect to limited
partners' allocations. Stanger has no present or contemplated future interest in
the properties, the Partnerships, the proposed LLC or Carey.
The appraisal is only an estimate of the aggregate market value of the
leased fee interests or, where appropriate, fee simple interests in the
Portfolios as of the date of valuation and should not be relied upon as being
the equivalent of the price that would necessarily be received in the event of a
sale or other disposition of the properties in the Portfolios. Changes in
corporate financing rates generally, changes in individual tenant
creditworthiness, changes in tenant motivation with respect to the exercise of
renewal or purchase options, or changes in real estate property markets may
result in higher or lower values of real property. The use of other valuation
methodologies might produce a higher or lower value. However, in our opinion,
the use of the discounted cash flow methodology and, where appropriate, the
income capitalization method, is appropriate and reasonable. Our opinion is
subject to the assumptions and limiting conditions set forth herein. We have
used methods and assumptions deemed appropriate in our professional judgment;
however, future events may demonstrate that the assumptions were incorrect or
that other, different methods or assumptions may have been more appropriate.
This abbreviated valuation report provides our value conclusion with
respect to the Portfolios, definitions of value, and discussions of the
valuation methodology employed, assumptions, and limiting conditions.
Sincerely,
/s/ ROBERT A. STANGER & CO., INC.
--------------------------------------
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
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261
IDENTIFICATION OF SUBJECT PORTFOLIOS
The subjects of this appraisal are the real property portfolios (the
"Portfolios") in which Corporate Property Associates, Corporate Property
Associates 1, Corporate Property Associates 2, Corporate Property Associates 3,
Corporate Property Associates 4, Corporate Property Associates 5, Corporate
Property Associates 6, Corporate Property Associates 7, Corporate Property
Associates 8 and Corporate Property Associates 9 (the "Partnerships") own leased
fee or fee simple interests. The Portfolios include office, industrial/warehouse
facilities, retail and hotel properties. A listing of the properties in each
Portfolio is provided in the "Portfolio Summaries" section of this report.
PROPERTY OWNERSHIP AND HISTORY
During the past three years, the properties have been owned continuously by
the Partnerships, with the exception of the Furon property located at 1395
Danner Drive, Aurora, Ohio, which we have been advised will be acquired during
the second quarter of 1997 by Corporate Property Associates 8 and Corporate
Property Associates 9 through an exchange for two other properties currently
owned and leased to the Furon Company by Corporate Property Associates 8 and 9.
PURPOSE OF APPRAISAL
The purpose of this appraisal is to estimate the market value of the leased
fee or, where appropriate, fee simple interests in the real property Portfolios
subject, as appropriate, to existing leases and debt in place under market
conditions as of March 31, 1997.
FUNCTION OF APPRAISAL
The function of this appraisal is to provide a current estimate of market
value of the Portfolios for use solely by the Partnerships in connection with
the proposed merger of the Partnerships in exchange for shares of a newly formed
limited liability company and the assumption of existing indebtedness. No
representation is made as to the adequacy of this appraisal for any other
purpose.
SCOPE OF APPRAISAL
The Portfolio Valuations have been prepared on a limited scope basis using
a summary report format in conformity with the departure provisions of the
Uniform Standards of Professional Appraisal Practice of the Appraisal Institute,
in accordance with agreements between Robert A. Stanger & Co., Inc. and Carey
and the Partnerships, dated April 7, 1997. Pursuant to the agreements, Stanger
has relied solely upon the income approach to value and did not employ the
"cost" or "sales comparison" approaches (as described below).
In estimating the value of a property, appraisers typically consider three
approaches to value: the cost approach, the market data or sales comparison
approach, and the income approach. The value estimate by the cost approach
incorporates separate estimates of the value of the unimproved site under its
highest and best use and the value of the improvements less observed accrued
depreciation resulting from physical wear and tear and functional and/or
economic obsolescence. The market data or sales comparison approach involves a
comparative analysis of the subject property with other similar properties that
have sold recently or that are currently offered for sale in the market. The
income approach involves an economic analysis of the property based on its
potential to provide future net annual income. With respect to leased properties
and the valuation of leased fee interests, a discounted cash flow analysis
("DCF") is commonly utilized. The DCF method ascribes a present value to the
future cash flows associated with operating the property and the ultimate
reversion value of the property, based upon a discount rate commensurate with
the risks inherent in ownership of the property and with rates of return offered
by alternative investment opportunities.
Pursuant to the terms of our engagement, the Portfolio Valuations were
performed solely using the income approach. Since a primary buyer group for
properties of the type appraised herein is investors, the
3
262
income approach was deemed an appropriate valuation methodology. Further, given
the primary criteria used by buyers of properties of the type appraised herein
and the existence of generally long-term net leases on the properties, the cost
approach was considered less reliable than the income approach. The sales
comparison approach was also considered less reliable than the income approach
given the primary criteria used by buyers of properties of the type appraised
herein, the existence of generally long-term net leases on the properties, and
the relative lack of sufficient reliable data from recent transactions involving
properties comparable to the subject properties. Consequently, given these
factors, the income approach was considered a reasonable approach to valuation
for the subject Portfolio.
In addition, unless otherwise noted in this report, the leased fee
interests have been valued utilizing a discounted cash flow analysis applied to
equity cash flows after debt service based on existing financing, which
financing has been represented by the owner as being assumable. We have
therefore valued net cash flows related to the lease without reversion to
underlying real estate value until the primary lease term and any renewal or
purchase options deemed favorable to the tenant have been exhausted. Fee simple
property interests were valued utilizing either the income capitalization and/or
the discounted cash flow method. Changes in corporate financing rates generally,
in individual tenant creditworthiness, in tenant motivation with respect to the
exercise of renewal options, or in real estate property markets may result in
higher or lower values of real property. The use of other valuation
methodologies might produce a higher or lower value. Our opinion is subject to
the assumptions and limiting conditions set forth herein.
Departures -- Uniform Standards of Professional Practice -- With respect to
limited appraisals, the departure provisions of the Uniform Standards of
Professional Appraisal Practice permit departures from the specific guidelines
of Standard 1. In this report the following departures were taken:
Standard Rule 1-4 (a) The cost and market approaches are excluded, and the
conclusions are based solely on the income approach (see
Valuation Methodology).
DATE OF VALUATION
The date of valuation for the Portfolios is March 31, 1997.
VALUE DEFINITION
Market value, as defined by the Appraisal Institute, is the most probable
price as of a specified date, in cash, in terms equivalent to cash, or in other
precisely revealed terms, for which the specified property rights should sell
after reasonable exposure in a competitive market under all conditions requisite
to a fair sale, with the buyer and seller each acting prudently, knowledgeably
and for self-interest, and assuming that neither is under undue duress. As used
in this report, market value is based on a sale of the subject property rights
for cash and the assumption of existing third-party indebtedness encumbering the
properties.
Implicit in this definition is the consummation of a sale as of a specified
date and the passing of title from seller to buyer under conditions whereby:
(a) buyer and seller are typically motivated;
(b) both parties are well informed or well advised, and each acts in a
manner he considers in his own best interest;
(c) a reasonable time is allowed for exposure in the open market;
(d) payment is made in terms of cash in U.S. dollars or the
substantial equivalent thereof, and the assumption of existing
indebtedness;
(e) the price represents the normal consideration for the property
sold unaffected by special sales concessions granted by anyone
associated with the sale.
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The property rights appraised in this report are leased fee interests and,
where appropriate, fee simple interests. Leased fee interest is defined as an
ownership interest held by a landlord with the right to use and occupancy
conveyed by lease to others, and usually consists of the right to receive rent
and the right to repossession at the termination of the lease. Fee simple
interest is defined as absolute ownership unencumbered by any other interest or
estate, subject only to the limitations of eminent domain, escheat, police
power, and taxation.
The appraisal includes the value of land, land improvements such as paving,
fencing, on-site sewer and water lines, the buildings and, with respect to the
hotel properties only, furniture fixtures and equipment necessary to achieve the
operating results which formed the basis of the valuation as of March 31, 1997.
Except for the hotel furniture, fixtures and equipment, as noted above, the
appraisal does not include supplies, materials on hand, inventories, furniture,
equipment or other personal property, company records, or current or intangible
assets that may exist; it pertains only to items considered as real estate.
VALUATION METHODOLOGY
Pursuant to the terms of this engagement, Stanger has estimated the
aggregate value of the Partnerships' leased fee or, where appropriate, fee
simple interests in the Portfolios based solely on the income approach to
valuation. (Appraisers typically consider three approaches in valuing real
property: the cost approach, the income approach, and the sales comparison, or
market data, approach. The type and age of a property, the nature of the leases,
market conditions and the quantity and quality of data affect the applicability
of each approach in a specific appraisal situation.)
The income approach is based on the assumption that the value of a property
or portfolio of properties can be represented by the present worth of future
cash flows. In these Portfolio Valuations, a discounted cash flow ("DCF")
analysis is used to determine the value of the leased fee interests in the
portfolios of properties based upon the lease and financing that encumber each
property, reflecting representations by the owner that such financing is
assumable. Fee simple property interests are valued utilizing either the income
capitalization and/or the discounted cash flow method. The indicated value by
the income approach represents the amount an investor might reasonably be
expected to pay for the expectation of receiving the net cash flow after debt
service from each Portfolio's properties during the subject lease terms and the
proceeds from the ultimate sale of each Portfolio's properties after repayment
of remaining mortgage debt.
Unless otherwise noted herein, in applying the DCF analysis, we utilized
pro forma statements of operations for each of the properties prepared in
accordance with the leases and financing which currently encumber the
properties. The properties are assumed to be sold after the expiration of the
initial lease term and any renewal terms deemed favorable to the tenants (i.e.,
where the tenant has an option to renew at a rental rate materially below the
projected market rate rent at the time of the renewal option, it is assumed that
such option will be exercised).
The reversion value of the properties which can be realized upon sale is
calculated based on the current economic rental rate deemed reasonable for each
property, escalated at a rate indicative of current expectations in the
marketplace for the property. The market-rate net income of the properties at
the year of sale is then capitalized at an appropriate rate reflecting the age,
anticipated functional and economic obsolescence and competitive position of the
properties to determine the reversion value of the properties. Where properties
were deemed to have reached the limit of functional utility and useful life at
the time of lease expiration, the reversion was computed based on estimated land
value. Net proceeds to equity owners were determined by deducting estimated
costs of sale and principal and any accrued interest balances due on the
properties' mortgage debt in the projected year of sale based on each mortgage's
amortization schedule.
Finally, (i) the discounted present value of the equity cash flow stream
from operations (after debt service) and the discounted present value of net
proceeds from sale, and (ii) the outstanding debt balance as of March 31, 1997
for each property were summed to arrive at a total estimated value for each
Portfolio. The resulting Portfolio Values were then adjusted for any joint
venture interests in the properties based on information provided by Carey and
the Partnerships to arrive at the final Portfolio Values.
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The following describes more fully the steps involved in the valuation
methodology.
SITE INSPECTIONS AND DATA GATHERING
In conducting the Portfolio Valuations, representatives of Stanger
performed site inspections of the properties during 1995 and 1996 in the context
of a prior appraisal of the Portfolios. In the course of these site visits, the
physical facilities of each property were inspected, current market rental rates
for competing properties were obtained, information on the local market was
gathered, and where possible, the tenant's facilities manager was interviewed
concerning the property, its role in company operations, and other factors.
Information gathered during the site inspection was supplemented by a review of
published information concerning economic, demographic and real estate trends in
local, regional and national markets, and by information updates provided by
management and obtained through telephonic interviews of local market
information sources.
In conducting the appraisals, Stanger also interviewed and relied upon
Carey management personnel to obtain information relating to the condition of
each property, including any deferred maintenance, capital budgets, known
environmental conditions, status of on-going or newly planned property
additions, reconfigurations, improvements, and other factors affecting the
physical condition of the property improvements.
Stanger also interviewed Carey's management and acquisitions personnel
regarding competitive conditions in net lease property markets, tenant credit
trends affecting the properties, certain lease and financing factors, and
historical and anticipated lease revenues and expenses. Stanger also reviewed
historical operating statements for each of the properties in the subject
Portfolios.
In addition, Stanger reviewed the acquisition criteria and projection
parameters used by real estate investors. Such reviews included a search of real
estate data sources and publications concerning real estate buyer's criteria,
interviews with sources deemed appropriate in certain local markets (including
local appraisers and real estate brokers) to confirm acquisition criteria used,
and direct telephonic interviews with major national investors, owners and
managers of net lease property portfolios and financing sources for net lease
transactions in the marketplace, to investigate the interaction of such factors
as required equity rates of return, initial equity yield requirements, tenant
credit profile, type of property, and the terms of available financing.
Stanger also compiled data on actual transactions involving net leased
properties, from which acquisition criteria and parameters were extracted.
Information on actual property transactions was obtained during the site
inspections and from direct telephonic interviews of local appraisers and real
estate brokers, and major national investors, owners and managers of net leased
properties, and from other publicly available sources. In addition, Stanger
reviewed data provided by Carey on actual acquisitions and sales involving Carey
and affiliated entities.
LEASE REVIEW
Lease abstracts were provided by Carey and the Partnerships and were relied
upon in the preparation of operational projections for each property (as
discussed below). Stanger reviewed such lease abstracts and interviewed Carey
management personnel to ascertain any renegotiated terms and modifications and
the status of various options and other factors. Provisions considered and
incorporated into the operational projections included current lease rate,
escalation factors, percentage rent provisions, renewal options and terms, and
purchase options and terms.
MARKET RENTAL RATES
Representatives of Stanger collected available data on rental rates at
competing properties in each local or regional market. Data collected at the
time of the site inspection was updated with published data and direct
telephonic contacts with local brokers and leasing agents.
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HIGHEST AND BEST USE
Highest and best use is defined as:
The reasonable probable and legal use of vacant land or an improved
property, which is physically possible, appropriately supported,
financially feasible, and that results in the highest value. The four
criteria the highest and best use must meet are legal permissibility,
physical possibility, financial feasibility, and maximum profitability.
In conformity with the provisions of its engagement, Stanger evaluated each
site's highest and best use as currently improved. Based upon the review of each
of the sites, the highest and best use of each of the properties remains as
currently improved, unless otherwise noted herein.
OPERATIONAL PROJECTIONS
Based on the lease and market rent analysis, rental revenue projections
were developed for each property in each of the Portfolios based on the terms of
existing leases (or, in the case of property not subject to long-term net
leases, based on analysis of market rents and historical rents achieved at the
property). Where lease terms included percentage rent provisions, available
sales data were reviewed for each property and sales levels were projected based
on escalation factors deemed appropriate in light of the current level of sales,
area trends and parameters utilized by buyers of similar properties. Percentage
rents were then calculated based on the resulting sales levels and contract
provisions relating to sales breakpoints and percentage rent participations.
Lease renewals were analyzed based on escalated current market rental
rates. The annual market rent escalation rates utilized were based on local
market conditions in the area of each property, inflation rates, the projected
holding period of the property and rental rate growth parameters applied by
investors in similar type properties. Where projected market rental rates at the
time of a renewal option materially exceeded the contractual lease renewal rate,
the renewal option was assumed to be exercised.
Where appropriate, vacancy and collection losses were factored into the
analysis. A property management fee deemed appropriate for retaining a
professional real estate organization to manage the specific type of property
was included in the projections. In the case of net leased properties, the fee
utilized was 1% of rental revenues. Expenses relating solely to partnership
investor reporting and accounting were excluded.
Debt service payments were deducted from net operating income for each
property consistent with the terms of the existing financing. For properties
where existing debt matures during the lease term, the refinancing capability of
the property was reviewed based upon lending criteria utilized by financing
sources, including loan-to-value ratios and debt service coverage requirements.
For properties meeting such lending criteria, debt balances at maturity of the
existing mortgage were considered refinanced at interest rates and amortization
schedules deemed appropriate for the property. Finally, where a capital expense
reserve, deferred maintenance or extraordinary capital expenditures were
required for an individual property, the cash flows and value were adjusted
accordingly.
REVERSION
In the course of performing the appraisals, Stanger reviewed available
sales transactions of similar investment properties as well as market data
relating to overall capitalization rates for similar properties in the general
location of the subject properties. As described above, acquisition criteria
used by buyers of similar properties were also reviewed. Based upon these
reviews and considering such factors as age, quality, anticipated functional and
economic obsolescence, competitive position of the property, the projected date
of sale, and buyers' acquisition criteria, appropriate terminal capitalization
rates were selected. Where properties were deemed to have reached the limit of
functional utility and useful life at the time of lease expiration, the
reversion was computed based on escalated land value.
Based upon current market rate rents, estimated escalation factors, and the
estimated vacancy rate and other property operating expenses incurred by the
owner, net operating income during the twelve months following the lease
expiration was estimated. The resulting net operating income estimate was
capitalized to
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determine residual value. The residual value was discounted, after deducting
appropriate sales expenses and mortgage balances, if any, outstanding at the
time of sale, to a present value. The discount rate employed was based on
current acquisition criteria and target rates of return among commercial
property investors.
Where any property lease included a purchase option for the lessee, the
purchase option price was compared to the projected value of the property based
on projected market rental rates (and where appropriate, contractual rent under
the lease agreement). Where the purchase option price was less than the
projected market value of the property or the purchase option provided a
significant financial benefit to the tenant relative to its remaining lease
obligation, the purchase option was deemed exercised; otherwise the purchase
option was deemed expired.
SELECTION OF DISCOUNT RATES
Distinct discount rates were then applied to the operating cash flow
projections and the reversion values.
- OPERATING CASH FLOW -- The selection of the appropriate discount rate for
determining the present value of future operating cash flow streams from
each net leased property was based primarily upon such factors as the
creditworthiness of the tenant, the length of the lease term, and the
general interest rate environment.
Specifically, Stanger conducted an analytical review of the financial
statements of the tenants/guarantors under the subject leases. In the
course of this review, Stanger analyzed the most recent available
financial statements of the tenants/guarantors, focusing primarily on the
balance sheet, profit and loss statement, cash flow statement and
management's discussion of capital resources and liquidity. Various
measures of financial strength were derived and reviewed to evaluate the
tenant's ability to fulfill the lease obligation. These factors
encompassed size, leverage, capital structure, profitability, cash flow,
debt service and fixed charges coverage and liquidity. Stanger also
investigated each tenant's/guarantor's corporate debt ratings, if any,
issued by Nationally Recognized Statistical Rating Organizations (for
example, Standard & Poors and/or Moody's), and financial strength ratings
assigned by Value Line.
Stanger also reviewed the interest rate environment as of the date of the
Portfolio Valuations, including long-term corporate bond yields. In
particular, data sources were screened to determine the yield-to-maturity
among corporate bonds based on various maturities and credit ratings.
This analysis was conducted to establish a base discount rate, determined
by the marketplace, to reflect the risk of holding corporate debt with
credit quality commensurate with the lease guarantor's creditworthiness
and a term approximately equal to the remaining lease term for each
property. Premiums deemed appropriate were then added to the base
discount rate to reflect the risks associated with real estate, leverage,
and, where appropriate, above-market lease rates or factors unique to the
individual lease or tenant. In particular, where contract rent exceeded
market rent, the base discount rate used to value the operating cash flow
stream was adjusted to reflect the creditworthiness of the tenant and the
risk associated in realizing such excess rent.
Where operating cash flows were comprised of base rent and percentage
rent components, distinct discount rates were applied to the base rent
and percentage rent reflective of the relative risk associated with each
cash flow stream.
- REVERSION VALUE -- To determine appropriate discount rates to apply to
the reversion value of the real estate upon final lease expiration, the
acquisition criteria and projection parameters in use in the marketplace
by real estate investors for various property types (e.g.
industrial/warehouse, retail, office, etc.) were reviewed (as described
above). Discount rates deemed appropriate were applied to the reversion
value of each property after adjusting for such factors as property age,
quality, anticipated functional and economic obsolescence, competitive
position, and any unique property-related factors.
The resulting discounted present value of operating cash flows and the
discounted present value of net sale proceeds were added to outstanding debt
balances as of March 31, 1997 for each property. The resulting values were
adjusted for any joint venture interests in the properties (based on information
provided by Carey) and were summed to arrive at a total estimated value for each
Portfolio.
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PORTFOLIO VALUE CONCLUSIONS
Based upon the review as described above, it is our opinion that the market
value of the leased fee interests or, where appropriate, fee simple interests in
the Portfolios as encumbered by existing indebtedness and lease agreements as of
March 31, 1997 is as follows:
PORTFOLIO
VALUE
PARTNERSHIP NAME CONCLUSION
------------------------------------------------------------- ------------
Corporate Property Associates 1.............................. $ 33,390,000
Corporate Property Associates 2.............................. 40,680,000
Corporate Property Associates 3.............................. 52,750,000
Corporate Property Associates 4.............................. 49,880,000
Corporate Property Associates 5.............................. 54,640,000
Corporate Property Associates 6.............................. 104,300,000
Corporate Property Associates 7.............................. 70,300,000
Corporate Property Associates 8.............................. 136,670,000
Corporate Property Associates 9.............................. 139,890,000
------------
TOTAL.............................................. $682,500,000
============
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CORPORATE PROPERTY ASSOCIATES
PORTFOLIO SUMMARY
MARCH 31, 1997
PROPERTY
PROPERTY NAME ADDRESS TYPE
- -------------------------------------------- --------------------------- -----------------
Broomfield Tech............................. 3400 Industrial Lane Office/Warehouse
Broomfield, CO
Broomfield Tech............................. 3401 Industrial Lane Office/Warehouse
Broomfield, CO
Chief Auto Parts -- Stockton................ 1339 S. Sutter Street Retail
Stockton, CA
Southland -- Merced......................... 1414 R Street Retail
Merced, CA
Payless Shoes -- Rialto..................... 681 Foothill Road Retail
Rialto, CA
Payless Shoes -- Fontana.................... 9780 Sierra Avenue Retail
Fontana, CA
Chief Auto Parts -- Sacramento.............. 3121 Marysville Boulevard Retail
(Marysville) Sacramento, CA
Chief Auto Parts -- Sacramento.............. 1900 Broadway Retail
(Broadway) Sacramento, CA
Payless Shoes -- Cuyahoga Falls............. 1965 State Road Retail
Cuyahoga Falls, OH
Payless Shoes -- Talmadge................... 355 West Avenue Retail
Talmadge, OH
Payless Shoes -- Freemont................... 111 East State Street Retail
Freemont, OH
Payless Shoes -- Reynoldsburg............... 6736 East Main Street Retail
Reynoldsburg, OH
Payless Shoes -- Marion..................... 1240 Mt. Vernon Avenue Retail
Marion, OH
Payless Shoes -- Anderson................... 1816 E. 53rd Street Retail
Anderson, IN
Varo -- Walnut.............................. 2201-2203 Walnut Street Light Industrial
Garland, TX
Vacant Facility............................. 553 & 555 N. 5th Street Light Industrial
Garland, TX
The Gap..................................... 3434 Mineola Pike Distribution/
Erlanger, KY Warehouse
Unisource Worldwide......................... 1930 Spur Avenue Distribution/
Anchorage, AK Warehouse
Winn-Dixie.................................. 1211 Broadway West Retail
Louisville, KY
PreFinish Metals............................ 30610 East Broadway Industrial
Walbridge, OH
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CORPORATE PROPERTY ASSOCIATES 2
PORTFOLIO SUMMARY
MARCH 31, 1997
PROPERTY
PROPERTY NAME ADDRESS TYPE
- ---------------------------------------------------- ------------------------- --------------
Pre-Finish Metals................................... 30610 East Broadway Industrial
Walbridge, OH
Unisource Worldwide................................. 2600 S.W. Commerce Way Industrial
Commerce,CA
Arthur L. Jones..................................... 2729 Ring Road Retail
Greensboro, NC
Kinko's of Ohio..................................... 4032 Belden Village Ave. Retail
Canton, OH
Wexler.............................................. 9890 Lake Forrest Ave. Retail
New Orleans, LA
Color Tile.......................................... 4030 Belden Village Ave. Retail
Canton, OH
Maybelline/B&G...................................... 1401 Murphy Drive Distribution/
Maumelle, AR Warehouse
EXCEL............................................... 5205 Mill Street Office/R&D
Reno, NV
AT&T................................................ 12976 Hollenberg Road Office/R&D
Bridgeton, MO
Western Union....................................... 13022 Hollenberg Road Office/R&D
Bridgeton, MO
Sports & Recreation................................. 308 West Route 38 Retail
Moorestown, NJ
Gibson Greetings -- Cincinnati...................... 2100 Section Road Industrial
Cincinnati, OH
Cleo................................................ 4025 Viscount Road Industrial
Memphis, TN
Gibson Greetings -- Berea........................... Walnut Meadow Lane Industrial
Berea,KY
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CORPORATE PROPERTY ASSOCIATES 3
PORTFOLIO SUMMARY
MARCH 31, 1997
PROPERTY
PROPERTY NAME ADDRESS TYPE
- ------------------------------------------------------- ---------------------- -----------
EXCEL.................................................. 5205 Mill Street Office/R&D
Reno, NV
AT&T................................................... 12976 Hollenberg Road Office/R&D
Bridgeton, MO
Western Union.......................................... 13022 Hollenberg Road Office/R&D
Bridgeton, MO
Sports & Recreation.................................... 308 West Route 38 Retail
Moorestown, NJ
Gibson Greetings -- Cincannati......................... 2100 Section Road Industrial
Cincinnati, OH
Cleo................................................... 4025 Viscount Road Industrial
Memphis, TN
Gibson Greetings -- Berea.............................. Walnut Meadow Lane Industrial
Berea, KY
Santee Dairies......................................... 231 East 23rd Street Dairy
Los Angeles, CA
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CORPORATE PROPERTY ASSOCIATES 4
PORTFOLIO SUMMARY
MARCH 31, 1997
PROPERTY
PROPERTY NAME ADDRESS TYPE
- -------------------------------------------------- ------------------------- -----------------
Santee Dairies.................................... 231 East 23rd Street Dairy
Los Angeles, CA
Simplicity Manufacturing..........................
(2 buildings) 500 North Spring Street Industrial
Port Washington, WI
Brodart Company................................... 500 Arch Street & Industrial
(2 buildings) 1609 Memorial Avenue
Williamsport, PA
Petrocon Engineering.............................. 3115 Executive Boulevard Office
Beaumont, TX
Agency Management................................. 3001 East By-Pass Office/
College Station, TX Light Industrial
Family Dollar..................................... Airport & Distribution/
Cedar Springs Road Warehouse
Salisbury, NC
Winn-Dixie........................................ U.S. 411 & Retail
Courson Boulevard
Leeds, AL
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CORPORATE PROPERTY ASSOCIATES 5
PORTFOLIO SUMMARY
MARCH 31, 1997
PROPERTY
PROPERTY NAME ADDRESS TYPE
- ------------------------------------- ------------------------- --------------------
Spreckles/Duff-Norton................ Hwy. 1 North Industrial
Forrest City, AR
Rochester Button -- Kenbridge........ 221 Main Street Industrial
Kenbridge, VA
Rochester Button -- So. Boston....... 1100 Noblin Avenue & Industrial
315 Edmund Street
South Boston, VA
Arley -- Columbia.................... 3130 Bluff Road Warehouse/
Columbia, SC Light Manufacturing
Arley -- Sumter...................... Shaw Street Industrial
Sumter, SC
Penn Virginia -- Duffield............ U.S. Hwy. 58 -- 421 West Office
Duffield, VA
Penn Virginia -- Broomall............ 600 Abbott Drive Office/Warehouse
Broomall, PA
Penn Virginia -- Cuyahoga Falls...... 601 Munroe Falls Ave. Industrial
Cuyahoga Falls, OH
Exide Electronics.................... 3201 Spring Forrest Road Office
Raleigh, NC
General Cinema....................... 43555 Ford Road Cinema
Canton, MI
Inno Tech............................ 154 Olive Street Industrial
Elyria, OH
Sunds Defibrator..................... 571 West End Avenue Industrial/
Woodhandling Carthage, NY Manufacturing
Gould (Spectramed)................... 1900 Williams Drive Office/R&D
Oxnard, CA
Holiday Inn -- Petoskey.............. U.S. Hwy. 131 South Hotel
Petoskey, MI
Holiday Inn -- Alpena................ 1000 U.S. 23 North Hotel
Alpena, MI
DeVlieg-Bullard -- McMinnville....... Morrison Street Industrial
McMinnville, TN
Penberthy Products................... Lincoln & Locust Street Industrial
Prophetstown, IL
DeVlieg-Bullard -- Frankenmuth....... 126 North Main Street Industrial
Frankenmuth, MI
Stoody Deloro........................ 1201 Eisenhower Drive Industrial
North Goshen, IN
Winn-Dixie........................... 2252 Mt. Meigs Road Retail
Montgomery, AL
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CORPORATE PROPERTY ASSOCIATES 6
PORTFOLIO SUMMARY
MARCH 31, 1997
PROPERTY
PROPERTY NAME ADDRESS TYPE
- ------------------------------------------------ ------------------------- ------------------
Holiday Inn -- Petoskey......................... U.S. Highway 131 South Hotel
Petoskey, MI
Holiday Inn -- Alpena........................... 1000 U.S. 23 North Hotel
Alpena, MI
Stoody Deloro................................... 16425 Gale Avenue Industrial
Industry, CA
Yale Security................................... 16300 W. 103rd Street Industrial
Lemont, IL
Motorola........................................ 1101 East University Ave. Office/R&D
Urbana, IL
Autozone (31 properties)........................ See Attached Schedule Retail
Lockheed Martin................................. 6721 Baymeadow Drive Office/Industrial
Glen Burnie, MD
Peerless Chain.................................. 1416 E. Sanborn Street Industrial
Winona, MN
General Cinema.................................. 14551 Burnhaven Circle Cinema
Burnsville, MN
Wal-Mart (Sams Club)............................ 2930 Lebanon Church St. Retail
West Mifflin, PA
Armel/Kinney Shoes.............................. 3499 N.W. 53rd Street Office/Warehouse
Ft. Lauderdale, FL
A.P. Parts -- Toledo............................ 315-543 Matzinger Street Industrial
Toledo, OH
A.P. Parts -- Pinconning........................ 401 E. 5th Street Industrial
Pinconning, MI
Anthony's Manufacturing......................... See Note (1) below Industrial
San Fernando, CA
Holiday Inn -- Livonia.......................... 17123 Laurel Park Drive Hotel
Livonia, MI
Winn-Dixie...................................... 1315 West 15th Street Retail
Panama City, FL
- ---------------
(1) Anthony's Manufacturing is located at the following addresses: 12400 and
12918 Gladstone, San Fernando, CA; 12391 Montero Avenue, San Fernando, CA;
12812 Arroyo Street, San Fernando, CA; and 12354 Gladstone Avenue, San
Fernando, CA.
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CORPORATE PROPERTY ASSOCIATES 6
PORTFOLIO SUMMARY -- (CONTINUED)
MARCH 31, 1997
AUTOZONE LOCATIONS
2006 West Franklin Avenue 295 Craft Highway 1001 Sixth Avenue S.E.
Gastonia, NC Chickasaw, AL Decatur, AL
5136 N. Tyron Street 2501 South Boulevard 1030 Ninth Avenue
Charlotte, NC Montgomery, AL Bessemer, AL
421 South Center Street 950 32nd Street 1420 14th Street
Statesville, NC Columbus, GA Phenix City, AL
1214 Morgantown Blvd 1400 Vandalia Road 407 Holcomb Avenue
Lenoir, NC Collinsville, IL Mobile, AL
2602 South Congress 2609 Washington Avenue 1300 E. Prien Lake Road
Austin, TX Alton, IL Lake Charles, LA
1925 Waco Drive 310 E. Edwardsville Road 2905 Big Bend Boulevard
Waco, TX Wood River, IL Maplewood, MO
2321 Horne Road 521 Carlyle Road 9710 Page Avenue
Corpus Christi, TX Belleville, IL Overland, MO
3201 Leopard Street 3011-3013 Cypress Drive 3405 Gravois Avenue
Corpus Christi, TX West Monroe, LA St. Louis, MO
1211 Rio Grande 9007 Greenwell Springs Rd. 9644 St. Charles Rock Road
Victoria, TX Baton Rouge, LA Breckenridge, MO
1411 Pleasanton Road E. Medorm St. & Hwy. 171 2003 Mac Arthur Drive
San Antonio, TX Lake Charles, LA West Orange, TX
1819 Nederland Avenue
Nederland, TX
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CORPORATE PROPERTY ASSOCIATES 7
PORTFOLIO SUMMARY
MARCH 31, 1997
PROPERTY NAME ADDRESS PROPERTY TYPE
- --------------------------------------------- ------------------------- --------------------
Holiday Inn -- Livonia....................... 17123 N. Laurel Avenue Hotel
Livonia, MI
Seven-Up Bottling............................ 555 McDonnell Boulevard Distribution/
St. Louis, MO Warehouse
Winn-Dixie................................... Highway 59 & W. 53rd St. Retail
Bay Minette, AL
M-Tex, Travelers Rest........................ Highway 25 Industrial
Travelers Rest, SC
M-Tex, Liberty............................... Peachtree Street Industrial
Liberty, SC
Autozone (13 properties)..................... See Attached Schedule Retail
Northern Auto/Popular Stores................. 7214 E. Thomas Road Retail
Scottsdale, AZ
Northern Automotive/Scallon's................ 310 E. Florence Blvd. Retail
Casa Grande, AZ
Northern Automotive/Building 7............... 555 W. U.S. Highway 60 Retail
Apache Junction, AZ
Northern Auto/Crafters Mall.................. 4322 W. Bell Road Retail
Glendale, AZ
Northern Auto/Advanced Paper................. 1255 W. Guadalupe Retail
Mesa, AZ
Capin Mercantile Corp........................ 1410 Pinos Altos Road Retail
Silver City, NM
Northern Automotive.......................... 2953 West 30th Avenue Retail
Denver, CO
Family Bargain Center........................ 1150 Main Street Retail
Colville, WA
NYNEX........................................ Catamount Drive Office/R&D
Milton, VT
The Gap...................................... 1500 Jamike Avenue Distribution/
Erlanger, KY Warehouse
Policy Management Systems.................... One ASA Plaza Office
Bloomingdale, IL
Sybron/Kerr Manufacturing.................... 28200 Wick Road Industrial/
Romulus, MI Manufacturing
Sybron/Barnstead............................. 2555 Kerper Boulevard Industrial/
Dubuque, IA Manufacturing
Sybron/Erie Scientific....................... Post Road Industrial/
Portsmouth, NH Manufacturing
Sybron/Nalge................................. 75 Panorama Creek Drive Industrial/
Rochester, NY Manufacturing
Sybron/Ormco................................. 1308 South Lone Hill Ave. Office/R&D
Glendora, CA
NVR -- Thurmont.............................. 210 N. Carroll Street Industrial
Thurmont, MD
NVR -- Farmington............................ 1043 Hook Road Industrial
Farmington, NY
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CORPORATE PROPERTY ASSOCIATES 7
PORTFOLIO SUMMARY -- (CONTINUED)
MARCH 31, 1997
PROPERTY NAME ADDRESS PROPERTY TYPE
- --------------------------------------------- ------------------------- --------------------
Stair Plans America.......................... 29 Synan Road Industrial
Fredericksburg, VA
Allied Plywood............................... 7891 Notes Drive Industrial/Light
Manasas, VA Manufacturing
Holiday Inn -- Topeka........................ 605 Fairlawn Hotel
Topeka, KS
AUTOZONE LOCATIONS
8102 North Davis Highway
Pensacola, FL
1301 W. 15th Street
Panama City, FL
3520 Main Street
Jacksonville, FL
10418 Florida Boulevard
Baton Rouge, LA
6152 Plank Road
Baton Rouge, LA
2740 Highway 190 West
Hammond, LA
129 Centre Pointe Drive
St. Peters, MO
35 E. Mexico Road
St. Peters, MO
721 South Lafayette St.
Shelby, NC
399 E. Cannon Boulevard
Kannapolis, NC
220 Fleming Drive
Morgantown, NC
5317 Ringold Road
East Ridge, TN
3315 Chapman Highway
Knoxville, TN
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CORPORATE PROPERTY ASSOCIATES 8
PORTFOLIO SUMMARY
MARCH 31, 1997
PROPERTY
PROPERTY NAME ADDRESS TYPE
- -------------------------------------------------- --------------------------- --------------
Policy Management................................. One ASA Plaza Office
Bloomingdale, IL
Sybron/Kerr Manufacturing......................... 28200 Wick Road Industrial/
Romulus, MI Manufacturing
Sybron/Barnstead.................................. 2555 Kerper Boulevard Industrial/
Dubuque, IA Manufacturing
Sybron/Erie Scientific............................ Post Road Industrial/
Portsmouth, NH Manufacturing
Sybron/Nalge...................................... 75 Panorama Creek Drive Industrial/
Rochester, NY Manufacturing
Sybron/Ormco...................................... 1308 South Lone Hill Ave. Office/R&D
Glendora, CA
NVR -- Thurmont................................... 210 N. Carroll Street Industrial
Thurmont, MD
NVR -- Farmington................................. 1043 Hook Road Industrial
Farmington, NY
Stair Plans America............................... 29 Synan Road Industrial
Fredericksburg, VA
Allied Plywood.................................... 7891 Notes Drive Industrial
Manasas, VA
American Signature -- Olive Branch................ 8649 Hacks Cross Industrial
Olive Branch, MS
American Signature -- Doraville................... 3101 McCall Boulevard Industrial
Doraville, GA
Autozone (11 properties).......................... See Footnote 1 below Retail
Wozniak Industries................................ 3700 N. Rose Street Industrial
Schiller Park, IL
General Electric.................................. 720 Vanderburg Road Office/R&D
King of Prussia, PA
United Stationers (3 properties).................. See Footnote 2 below Distribution/
Warehouse
Furon Buildings (6 properties).................... See Footnote 3 below 5-Industrial
1-Office
High Voltage...................................... 13 Pratt Junction Industrial
Sterling, MA
Datcon Instrument................................. 1811 Rohrerstown Road Industrial
Lancaster, PA
Federal Express................................... 3205 Longmire Drive Distribution/
College Station, TX Warehouse
Dr. Pepper Buildings.............................. See Footnote 4 below Distribution/
Warehouse
Orbital Sciences.................................. 3380 S. Price Road Industrial
Chandler, AZ
Detroit Diesel.................................... 13400 Outer Drive W. Industrial
Detroit, MI
19
278
CORPORATE PROPERTY ASSOCIATES 8
PORTFOLIO SUMMARY -- (CONTINUED)
MARCH 31, 1997
PROPERTY
PROPERTY NAME ADDRESS TYPE
- -------------------------------------------------- --------------------------- --------------
Winn-Dixie *...................................... Douglas Avenue/Route 31 Retail
Brenton, AL
Holiday Inn -- Topeka............................. 605 Fairlawn Hotel
Topeka, KS
- ---------------
* Property is subject to a ground lease.
(1) The locations of the facilities leased to Autozone are as follows:
7035 Atlantic Boulevard 4909 Central Avenue
Jacksonville, FL Albuquerque, NM
5350 Beach Boulevard 760 Broadway
Jacksonville, FL Farmington, NM
209 S. Slappey Boulevard 6126 St. Andrews Road
Albany, GA Lexington, SC
2616 Community Road 5320 W. Bellfort Avenue
Brunswick, GA Houston, TX
2318 Milledgeville Road 5615 Babcock Road
Augusta, GA San Antonio, TX
2215 Pio Nono Avenue
Macon, GA
(2) The three locations of facilities leased to United Stationers are: 3615
Highpoint Drive, San Antonio, TX; 2483 Harbor Ave., Memphis, TN; and
Elmwood/Plauche Industrial Park, New Orleans, LA.
(3) The six locations of facilities leased to Furon are: 407 East Street, New
Haven, CT; Interstate 295 & Harmony Road, Mickleton, NJ; 1199 S. Chillicothe
Road, Aurora, OH; 10585 Main Street, Mantua, OH; 386 Metacoro Ave., Bristol,
RI; and 1395 Danner Drive, Aurora, OH.
(4) The two locations of facilities leased to Dr. Pepper Bottling are: 2304
Century Center Blvd., Irving, TX and 2400 Holly Hill Drive, Houston, TX.
20
279
CORPORATE PROPERTY ASSOCIATES 9
PORTFOLIO SUMMARY
MARCH 31, 1997
PROPERTY
PROPERTY NAME ADDRESS TYPE
- ------------------------------------------------- ----------------------- ----------------
American Signature -- Doraville.................. 3101 McCall Blvd. Industrial
Doraville, GA
General Electric................................. 720 Vanderburg Road Office/R&D
King of Prussia, PA
Furon Buildings (6 properties)................... See Footnote 1 below 5 -- Industrial
1 -- Office
Dr. Pepper (2 properties)........................ See Footnote 2 below Distribution/
Warehouse
Orbital Sciences................................. 3380 S. Price Road Industrial
Chandler, AZ
Detroit Diesel................................... 13400 Outer Drive W. Industrial
Detroit, MI
Childtime (12 properties)........................ See Footnote 3 below Retail
Federal Express.................................. 201 S. Padre Island Dr. Distribution/
Corpus Christi, TX Warehouse
NV Ryan -- Pittsburgh............................ 100 Ryan Court & 111 Office
Ryan Court,
Pittsburgh, PA
Pepsi............................................ 15180 Grand Point Dr. Distribution/
Houston, TX Warehouse
Titan............................................ 3033 Science Park Road Office/R&D
San Diego, CA
Vacant Facility *................................ 835 Hope Street Office/R&D
Stanford, CT
Information Resources............................ 150 N. Clinton Street & Office
564 West Randolph
Chicago, IL
Red Bank Distribution............................ 4000 Red Bank Road Distribution/
Cincinnati, OH Warehouse
- ---------------
* Management has represented that the property is being given to lender in
satisfaction of nonrecourse debt obligation.
(1) The locations of the six buildings leased to Furon are as follows: 407 East
Street, New Haven, CT; Interstate 295 & Harmony Road, Mickletown, NJ; 1199
S. Chillicothe Road, Aurora, OH; 10585 Main Street, Mantua, OH; 386 Metacon
Ave., Bristol, RI; and 1395 Danner Drive, Aurora, OH.
(2) The locations of the two buildings leased to Dr. Pepper Bottling are as
follows: 2304 Century Center Blvd., Irving, TX and 2400 Holly Hill Drive,
Houston, TX.
(3) The locations of the twelve buildings leased to Childtime are as follows:
5792 W. Oakland Street, Chandler, AZ; 7090 N. Thornydale Road, Tucson, AZ;
1485 Vega Street, Alhambra, CA; 3656 Riverside Drive, Chino, CA; 12421
Springdale Street, Garden Grove, CA; 13881 N. Prospect Ave., Tustin, CA;
34203 Ford Road, Westland, MI; 2171 Fifteen Mile Road, Sterling Heights, MI;
32503 Ann Arbor Trail, Westland, MI; 1028 MacArthur Drive, Carrolton, TX;
550 W. Danieldale Road, Duncanville, TX and 1597 Glencairn Lane, Lewisville,
TX.
21
280
ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal report is subject to the assumptions and limiting conditions
as set forth below.
1. No responsibility is assumed for matters of a legal nature affecting the
portfolio properties or the titles thereto. Titles to the properties are assumed
to be good and marketable and the properties are assumed free and clear of all
liens unless otherwise stated.
2. The Portfolio Valuations assume (a) responsible ownership and competent
management of the properties; (b) there are no hidden or unapparent conditions
of the properties' subsoil or structures that render the properties more or less
valuable (no responsibility is assumed for such conditions or for arranging for
engineering studies that may be required to discover them); (c) full compliance
with all applicable federal, state and local zoning, access and environmental
regulations and laws, unless noncompliance is stated, defined and considered in
the Portfolio Valuations; and (d) all required licenses, certificates of
occupancy and other governmental consents have been or can be obtained and
renewed for any use on which the value estimates contained in the Portfolio
Valuations are based.
3. The Appraiser shall not be required to give testimony or appear in court
because of having made the appraisal with reference to the portfolio in
question, unless arrangements have been previously made therefore.
4. The information contained in the Portfolio Valuations or upon which the
Portfolio Valuations are based has been provided by or gathered from sources
assumed to be reliable and accurate. Some of such information has been provided
by the owner of the properties. The Appraiser shall not be responsible for the
accuracy or completeness of such information, including the correctness of
estimates, opinions, dimensions, exhibits and other factual matters. The
Portfolio Valuations and the opinion of value stated therein are as of the date
stated in the Portfolio Valuations. Changes since that date in portfolios,
external and market factors can significantly affect property values.
5. Disclosure of the contents of the appraisal report is governed by the
Bylaws and Regulations of the professional appraisal organization with which the
Appraiser is affiliated.
6. Neither all, nor any part of the content of the report, or copy thereof
(including conclusions as to the portfolios' values, the identity of the
Appraiser, professional designations, reference to any professional appraisal
organizations, or the firm with which the Appraiser is connected) shall be used
for any purpose by anyone other than the client specified in the report,
including, but not limited to, the mortgagee or its successors and assignees,
mortgage insurers, consultants, professional appraisal organizations, any state
or federally approved financial institution, any department, agency or
instrumentality without the previous written consent of the Appraiser; nor shall
it be conveyed by anyone to the public through advertising, public relations,
news sales or other media, without the written consent and approval of the
Appraiser.
7. On all appraisals subject to completion, repairs or alterations, the
appraisal report and value conclusions are contingent upon completion of the
improvements in a workmanlike manner.
8. The physical condition of the improvements considered by the Portfolio
Valuations are based on visual inspection by the Appraiser or other
representatives of Stanger and on representations by the owner. Stanger assumes
no responsibility for the soundness of structural members or for the condition
of mechanical equipment, plumbing or electrical components. The Appraiser has
made no survey of the properties.
9. The projections of income and expenses and the valuation parameters
utilized are not predictions of the future. Rather, they are the Appraiser's
best estimate of current market thinking relating to future income and expenses.
The Appraiser makes no warranty or representations that these projections will
materialize. The real estate market is constantly fluctuating and changing. It
is not the Appraiser's task to predict or in any way warrant the conditions of a
future real estate market; the Appraiser can only reflect what the investment
community, as of the date of the appraisal, envisions for the future in terms of
rental rates, expenses, supply and demand. We have used methods and assumptions
deemed appropriate in our professional judgment; however, future events may
demonstrate that the assumptions were incorrect or that other different methods
or assumptions may have been more appropriate.
22
281
ASSUMPTIONS AND LIMITING CONDITIONS -- (CONTINUED)
10. The Portfolio Valuations represent normal consideration for the
properties sold based on the buyer's assumption of existing third-party
indebtedness and unaffected by special terms, services, fees, costs, or credits
incurred in the transaction.
11. Unless otherwise stated in the report, the existence of hazardous
materials, which may or may not be present on the properties, was not disclosed
to the Appraiser by the owner. The Appraiser has no knowledge of the existence
of such materials on or in the properties. However, the Appraiser is not
qualified to detect such substances. The presence of substances such as
asbestos, ureaformaldehyde foam insulation, oil spills, or other potentially
hazardous materials may affect the values of the portfolios. The portfolio value
estimates are predicated on the assumption that there is no such material on or
in the portfolio properties that would cause a loss of value. No responsibility
is assumed for such conditions, or for any expertise or engineering knowledge
required to discover them. The client is urged to retain an expert in this
field, if desired.
12. For purposes of this report, it is assumed that each property is free
of any negative impact with regard to the Environmental Cleanup Responsibility
Act (ECRA) or any other environmental problems or with respect to non-compliance
with the Americans with Disabilities Act (ADA). No investigation has been made
by the Appraiser with respect to any potential environmental or ADA problems.
Environmental and ADA compliance studies are not within the scope of this
report.
13. Pursuant to the Engagement Agreement, the Portfolio Valuations have
been prepared on a limited scope basis in conformity with the departure
provisions of the Uniform Standards of Professional Appraisal Practice and the
Standards of Professional Appraisal Practice of the Appraisal Institute, relying
solely on the income approach to value primarily utilizing discounted cash flow
analysis assuming leases and debt in place. Further, the engagement calls for
delivery of a summary appraisal report in which the content has been limited to
that data presented herein. As such, the summary appraisal report is not
designed to meet the requirements of Title XI of the Federal Financial
Institutions Reform, Recovery and Enforcement Act of 1989. Therefore, federally
regulated institutions should not rely on this report for financing purposes.
14. The Portfolio Valuations reported herein may not reflect the premium or
discount a potential buyer may assign to an assembled portfolio of properties or
to a group of properties in a particular local market which provides
opportunities for enhanced market presence and penetration. In addition, where
properties are owned jointly with other entities affiliated with the general
partner, minority interest discounts were not applied.
15. The appraisal is solely for the purpose of providing our opinion of the
values of the Portfolios, and we make no representation as to the adequacy of
such a review for any other purpose. The properties in the portfolios are
generally leased to corporate tenants under long-term triple net leases. The
owner has directed that the leased fee interests be valued based on existing
lease contracts and debt in place using a discounted cash flow analysis. The use
of other valuation methodologies might produce a higher or lower value.
16. In addition to these general assumptions and limiting conditions, any
assumptions and conditions applicable to specific properties have been retained
in our files.
23
282
APPENDIX C
283
Exhibit 99.3
CONSENT CARD
--------------------------------------------------------------------
CAREY DIVERSIFIED, LLC
CONSENT VOTE OF UNITHOLDERS AS OF RECORD DATE
OCTOBER 7, 1997
CONSENT
This Consent is solicited by the General Partners on behalf of the
Unitholders or holders of votes of Corporate Property
Associates 1-9 ("CPA(R):1-9").
(Continued, and to be dated and signed, on reverse side.)
ELECTION FORM
-------------------------------------------------------------------------
ELECTION FORM
(Continued, and to be dated and signed, on reverse side.)
284
CONSENT CARD INSTRUCTIONS
(Please read carefully and follow instructions)
Please note that if you fail to properly complete your CONSENT CARD, your
vote(s) will be cast AGAINST the proposed consolidation. If you fail to return
your CONSENT CARD your inaction has the same effect as a vote cast AGAINST the
proposed consolidation. If the consolidation is approved, you will not
participate in the Election Process and you will receive Listed Shares.
Carefully read and follow these instructions:
* Your ownership positions in CPA(R); 1-9 are listed to the right of
your name and address on your Consent Card.
* To vote all your holdings in the same manner, simply mark an "X" in
the appropriate box that appears in the top right corner of your
Consent Card (your choices are FOR, AGAINST or ABSTAIN).
If you wish to withhold your vote as to any individual CPA(R) in
which you own partnership interests, simply draw a line through the
appropriate partnership listing that appears to the middle right of
your Consent card.
* SIGN AND DATE YOUR COMPLETED CONSENT CARD.
* Place your Consent Card along with your Election Form into the
postage paid envelope provided. This envelope is addressed to
ChaseMellon Shareholder Services, LLC.
- --------------------------------------------------------------------------------
ELECTION FORM INSTRUCTIONS
(Please read carefully and follow instructions)
Please note that if you fail to property complete and or return your ELECTION
FORM and the consolidation is approved, you will receive LISTED SHARES for all
your holdings. If you fail to return your CONSENT CARD, and the consolidation is
approved, you will not participate in the Election Process and you will receive
Listed Shares.
Carefully read and follow these instructions:
* Your ownership positions in CPA(R); 1-9 are listed to the right of
your name and address on your Election Form.
* You may receive either LISTED SHARES or SUBSIDIARY PARTNERSHIP UNITS
for your holdings.
* To receive LISTED SHARES for all your holdings, simply indicate by
drawing an "X" in the appropriate box located on the middle left side
of your Election Form.
If you wish to receive Subsidiary Partnership Units for your holdings
in any particular Limited Partnership, simply mark an "X" in the
appropriate box next to the appropriate partnership listing that
appears to the middle of your Election Form.
* SIGN AND DATE YOUR COMPLETED ELECTION FORM.
* Place your Election Form along with your Consent Card into the
postage paid envelope provided. This envelope is addressed to
ChaseMellon Shareholder Services, LLC.
285
CONSENT CARD
THE GENERAL PARTNERS OF CORPORATE PROPERTY ASSOCIATES 1-9 ("CPA(R):1-9")
RECOMMEND THAT YOU VOTE FOR (FOR THE CONSOLIDATION).
PROPOSAL:
To adopt the Partnership Agreement Amendments and approve the Plan of
Consolidation and all related transactions, all as described in the Prospectus,
in which CPA(R):1-9 will be consolidated into a newly-formed Delaware limited
liability company, Carey Diversified LLC ("CD"), which will trade publicly on
the New York Stock Exchange. Investors in CPA(R):1-9 will be offered the
opportunity to exchange current partnership units for listed shares of CD.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
You may withhold your vote as to any individual CPA(R) Partnership in which you
own partnership interests by drawing a line through that partnership as listed
to the right.
(Please note our records indicate you have the ownership positions as indicated
to the right of your name and address below.)
CPA(R):1 CPA(R):4 CPA(R):7
CPA(R):2 CPA(R):5 CPA(R):8
CPA(R):3 CPA(R):6 CPA(R):9
SIGNATURE Dated , 1997
------------------------------------------- ----------------
Please sign exactly as your name appears above. PLEASE MARK, SIGN, DATE AND
MAIL THIS CONSENT CARD PROMPTLY, USING THE ENCLOSED ENVELOPE.
+ FOLD CARD HERE +
ELECTION FORM
THE GENERAL PARTNERS OF CORPORATE PROPERTY ASSOCIATES 1-9 ("CPA(R):1-9")
RECOMMEND THAT YOU ELECT TO RECEIVE LISTED SHARES FOR ALL YOUR HOLDINGS.
SUBSIDIARY
LISTED PARTNERSHIP
SHARES UNITS
I ELECT TO RECEIVE LISTED SHARES For my CPA(R):1 [ ] [ ]
FOR ALL MY HOLDINGS EXCEPT AS holdings, I elect
STATED TO THE RIGHT. to receive:
[ ]
For my CPA(R):2 [ ] [ ]
holdings, I elect
to receive:
For my CPA(R):3 [ ] [ ]
holdings, I elect
to receive:
For my CPA(R):4 [ ] [ ]
holdings, I elect
to receive:
For my CPA(R):5 [ ] [ ]
holdings, I elect
to receive:
For my CPA(R):6 [ ] [ ]
holdings, I elect
to receive:
For my CPA(R):7 [ ] [ ]
holdings, I elect
to receive:
For my CPA(R):8 [ ] [ ]
holdings, I elect
to receive:
For my CPA(R):9 [ ] [ ]
holdings, I elect
to receive:
SIGNATURE Dated , 1997
------------------------------------------- ----------------
Please sign exactly as your name appears above. PLEASE MARK, SIGN, DATE AND
MAIL THIS ELECTION FORM PROMPTLY, USING THE ENCLOSED ENVELOPE.
286
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Indemnification is provided for in Article VIII of the Amended and Restated
Limited Liability Company Agreement of the Registrant and such provisions are
incorporated herein by reference.
Reference is hereby made to the captions "FIDUCIARY RESPONSIBILITY AND
INDEMNIFICATION -- Indemnification of Directors and Officers of the Company" and
"FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION -- Directors and Officers
Insurance" in the Prospectus, which is part of this Registration Statement, for
a more detailed description of indemnification and insurance arrangements
between the Company and its officers and directors.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS
(a) 1. Consolidated Financial Statements
The following combined financial statements are filed as part of this
Report:
Report of Independent Accountants.
ASSUMING 100% PARTICIPATION WITHOUT THE ISSUANCE OF PARTNERSHIP SHARES:
Pro Forma Condensed Consolidated Balance Sheet of Carey Diversified LLC as
of June 30, 1997.
Pro Forma Notes to Condensed Consolidated Balance Sheet.
Pro Forma Condensed Consolidated Statements of Income of Carey Diversified
LLC for the year ended December 31, 1996 and six months ended June 30,
1997.
Pro Forma Notes to Condensed Consolidated Statements of Income.
ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF PARTNERSHIP SHARES:
Pro Forma Condensed Consolidated Balance Sheet of Carey Diversified LLC as
of June 30, 1997.
Pro Forma Notes to Condensed Consolidated Balance Sheet.
Pro Forma Condensed Consolidated Statements of Income of Carey Diversified
LLC for the year ended December 31, 1996 and six months ended June 30,
1997.
Pro Forma Notes to Condensed Consolidated Statements of Income.
ASSUMING MINIMUM PARTICIPATION WITHOUT THE ISSUANCE OF PARTNERSHIP SHARES:
Pro Forma Condensed Consolidated Balance Sheet of Carey Diversified LLC as
of June 30, 1997.
Pro Forma Notes to Condensed Consolidated Balance Sheet.
Pro Forma Condensed Consolidated Statements of Income of Carey Diversified
LLC for the year ended December 31, 1996 and six months ended June 30,
1997.
Pro Forma Notes to Condensed Consolidated Statements of Income.
ASSUMING MINIMUM PARTICIPATION WITH THE ISSUANCE OF PARTNERSHIP SHARES:
Pro Forma Condensed Consolidated Balance Sheet of Carey Diversified LLC as
of June 30, 1997.
Pro Forma Notes to Condensed Consolidated Balance Sheet.
Pro Forma Condensed Consolidated Statements of Income of Carey Diversified
LLC for the year ended December 31, 1996 and six months ended June 30,
1997.
Pro Forma Notes to Condensed Consolidated Statement of Income.
II-1
287
Report of Independent Accountants.
Historical Balance Sheet of Carey Diversified LLC as of August 31, 1997.
Notes to Balance Sheet.
Report of Independent Accountants.
Combined Balance Sheets of the Corporate Property Associates Partnerships
as of December 31, 1995 and 1996 and (unaudited) as of June 30, 1997.
Combined Statements of Income of the Corporate Property Associates
Partnerships for the years ended December 31, 1994, 1995 and 1996 and
(unaudited) for the three months ended June 30, 1996 and 1997.
Combined Statements of Partners' Capital of the Corporate Property
Associates Partnerships for the years ended December 31, 1994, 1995 and
1996 and (unaudited) for the six months ended June 30, 1997.
Combined Statements of Cash Flows of the Corporate Property Associates
Partnerships for the years ended December 31, 1994, 1995 and 1996 and
(unaudited) for the six months ended June 30, 1996 and 1997.
Notes to Combined Financial Statements.
Schedule III - Real Estate and Accumulated Depreciation
(b) Exhibits
EXHIBIT NO. EXHIBIT
- ----------- ----------------------------------------------------------------------------------
2.1 Form of Certificate of Merger of CPA(R):1
2.2 Form of Certificate of Merger of CPA(R):2
2.3 Form of Certificate of Merger of CPA(R):3
2.4 Form of Certificate of Merger of CPA(R):4
2.5 Form of Certificate of Merger of CPA(R):5
2.6 Form of Certificate of Merger of CPA(R):6
2.7 Form of Certificate of Merger of CPA(R):7
2.8 Form of Certificate of Merger of CPA(R):8
2.9 Form of Certificate of Merger of CPA(R):9
2.10 Form of Agreement of Merger of CPA(R):1
2.11 Form of Agreement of Merger of CPA(R):2
2.12 Form of Agreement of Merger of CPA(R):3
2.13 Form of Agreement of Merger of CPA(R):4
2.14 Form of Agreement of Merger of CPA(R):5
2.15 Form of Agreement of Merger of CPA(R):6
2.16 Form of Agreement of Merger of CPA(R):7
2.17 Form of Agreement of Merger of CPA(R):8
2.18 Form of Agreement of Merger of CPA(R):9
3.1 Form of Amended and Restated Limited Liability Company Agreement of Carey
Diversified LLC
3.2 Bylaws of Carey Diversified LLC
4.1 Form of Listed Share Stock Certificate
5.1 Opinion of Delaware Counsel, Richards, Layton & Finger
8.1 Opinion of Reed Smith Shaw & McClay LLP as to Certain Tax Matters
8.2 Opinion of Reed Smith Shaw & McClay LLP as to Certain ERISA Matters
10.1 Form of Management Agreement Between Carey Management LLC and the Company
10.2 Non-Employee Directors' Incentive Plan
10.3 1997 Share Incentive Plan
10.4 Investment Banking Engagement Letter between W.P. Carey & Co. and the Company
II-2
288
10.5 Non-Statutory Listed Share Option Agreement
21 List of Registrant Subsidiaries
23.1 Consent of Coopers & Lybrand, LLP
23.2 Consent of Richards, Layton & Finger (included in Exhibit 5.1)
23.3 Consent of Reed Smith Shaw & McClay LLP (included in Exhibit 8.1)
23.4 Consent of Barclay G. Jones
23.5 Consent of Steven M. Berzin
23.6 Consent of Gordon Dugan
23.7 Consent of Donald Nickelson
23.8 Consent of Eberhard Faber
23.9 Consent of Charles C. Townsend, Jr.
23.10 Consent of Lawrence R. Klein
23.11 Consent of Reginald Winssinger
99.1 Fairness Opinion of Robert A. Stanger & Co., Inc.
99.2 Independent Appraisal of Fair Market Value of the CPA(R) Partnerships' Real Estate
Portfolios
99.3 Consolidation Consent Card, Election Form and Instructions
99.4 Amendment to the Amended Agreement of Limited Partnership of CPA(R):1
99.5 Amendment to the Amended Agreement of Limited Partnership of CPA(R):2
99.6 Amendment to the Amended Agreement of Limited Partnership of CPA(R):3
99.7 Amendment to the Amended Agreement of Limited Partnership of CPA(R):4
99.8 Amendment to the Amended Agreement of Limited Partnership of CPA(R):5
99.9 Amendment to the Amended Agreement of Limited Partnership of CPA(R):6
99.10 Amendment to the Amended Agreement of Limited Partnership of CPA(R):7
99.11 Amendment to the Amended Agreement of Limited Partnership of CPA(R):8
99.12 Amendment to the Amended Agreement of Limited Partnership of CPA(R):9
99.13 Amended and Restated Agreement of Limited Partnership of CPA(R):1
99.14 Amended and Restated Agreement of Limited Partnership of CPA(R):2
99.15 Amended and Restated Agreement of Limited Partnership of CPA(R):3
99.16 Amended and Restated Agreement of Limited Partnership of CPA(R):4
99.17 Amended and Restated Agreement of Limited Partnership of CPA(R):5
99.18 Amended and Restated Agreement of Limited Partnership of CPA(R):6
99.19 Amended and Restated Agreement of Limited Partnership of CPA(R):7
99.20 Amended and Restated Agreement of Limited Partnership of CPA(R):8
99.21 Amended and Restated Agreement of Limited Partnership of CPA(R):9
99.22 Listed Share Purchase Warrant
- ---------------
II-3
289
ITEM 22. UNDERTAKINGS
(a)(1) The undersigned registrant undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through the 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 that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, or purposes of determining
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.
(b) 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 incorporated 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.
(c) 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.
II-4
290
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York on the 14th day of
October, 1997.
CAREY DIVERSIFIED LLC
By: /s/ FRANCIS J. CAREY
------------------------------------
Francis J. Carey, Chairman and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints William P. Carey, Francis J. Carey and
Steven M. Berzin his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and any other
documents in connection therewith, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated.
NAME TITLE
- --------------------------------------------------------
Francis J. Carey Chairman of the Board and By: /s/ FRANCIS J. CAREY
Chief Executive Officer ---------------------------------
(Principal Executive October 14, 1997
Officer) of the Registrant
William P. Carey Director of the Registrant By: /s/ WILLIAM P. CAREY
---------------------------------
October 14, 1997
Gordon F. Dugan President of the By: /s/ GORDON F. DUGAN
Registrant ---------------------------------
October 14, 1997
Steven M. Berzin Vice Chairman of the By: /s/ STEVEN M. BERZIN
Registrant ---------------------------------
October 14, 1997
Claude Fernandez Executive Vice President, By: /s/ CLAUDE FERNANDEZ
---------------------------------
October 14, 1997
John J. Park Executive Vice President By: /s/ JOHN J. PARK
and Chief Financial ---------------------------------
Officer of the Registrant October 14, 1997
(Principal Financial
Officer)
II-5
291
EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
EXHIBIT NO. EXHIBIT PAGES
- ----------- ----------------------------------------------------------------------- ------------
2.1 Form of Certificate of Merger of CPA(R):1..............................
2.2 Form of Certificate of Merger of CPA(R):2..............................
2.3 Form of Certificate of Merger of CPA(R):3..............................
2.4 Form of Certificate of Merger of CPA(R):4..............................
2.5 Form of Certificate of Merger of CPA(R):5..............................
2.6 Form of Certificate of Merger of CPA(R):6..............................
2.7 Form of Certificate of Merger of CPA(R):7..............................
2.8 Form of Certificate of Merger of CPA(R):8..............................
2.9 Form of Certificate of Merger of CPA(R):9..............................
2.10 Form of Agreement of Merger of CPA(R):1................................
2.11 Form of Agreement of Merger of CPA(R):2................................
2.12 Form of Agreement of Merger of CPA(R):3................................
2.13 Form of Agreement of Merger of CPA(R):4................................
2.14 Form of Agreement of Merger of CPA(R):5................................
2.15 Form of Agreement of Merger of CPA(R):6................................
2.16 Form of Agreement of Merger of CPA(R):7................................
2.17 Form of Agreement of Merger of CPA(R):8................................
2.18 Form of Agreement of Merger of CPA(R):9................................
3.1 Form of Amended and Restated Limited Liability Company Agreement of
Carey Diversified LLC..................................................
3.2 Bylaws of Carey Diversified LLC........................................
4.1 Form of Listed Share Stock Certificate.................................
5.1 Opinion of Delaware Counsel, Richards, Layton & Finger.................
8.1 Opinion of Reed Smith Shaw & McClay LLP as to Certain Tax Matters......
8.2 Opinion of Reed Smith Shaw & McClay LLP as to Certain ERISA Matters....
10.1 Form of Management Agreement Between Carey Management LLC and the
Company................................................................
10.2 Non-Employee Directors' Incentive Plan.................................
10.3 1997 Share Incentive Plan..............................................
10.4 Investment Banking Engagement Letter between W.P. Carey & Co. and the
Company................................................................
10.5 Non-Statutory Listed Share Option Agreement............................
21 List of Registrant Subsidiaries........................................
23.1 Consent of Coopers & Lybrand...........................................
23.2 Consent of Richards, Layton & Finger (included in Exhibit 5.1).........
23.3 Consent of Reed Smith Shaw & McClay LLP (included in Exhibit 8.1)......
23.4 Consent of Barclay G. Jones............................................
23.5 Consent of Steven M. Berzin............................................
23.6 Consent of Gordon Dugan................................................
23.7 Consent of Donald Nickelson............................................
23.8 Consent of Eberhard Faber..............................................
23.9 Consent of Charles C. Townsend, Jr.....................................
23.10 Consent of Lawrence R. Klein...........................................
23.11 Consent of Reginald Winssinger.........................................
99.1 Fairness Opinion of Robert A. Stanger & Co., Inc.......................
292
SEQUENTIALLY
NUMBERED
EXHIBIT NO. EXHIBIT PAGES
- ----------- ----------------------------------------------------------------------- ------------
99.2 Independent Appraisal of Fair Market Value of the CPA(R) Partnerships'
Real Estate Portfolios.................................................
99.3 Consolidation Consent Card Election Form and Instructions..............
99.4 Amendment to the Amended Agreement of Limited Partnership of
CPA(R):1...............................................................
99.5 Amendment to the Amended Agreement of Limited Partnership of
CPA(R):2...............................................................
99.6 Amendment to the Amended Agreement of Limited Partnership of
CPA(R):3...............................................................
99.7 Amendment to the Amended Agreement of Limited Partnership of
CPA(R):4...............................................................
99.8 Amendment to the Amended Agreement of Limited Partnership of
CPA(R):5...............................................................
99.9 Amendment to the Amended Agreement of Limited Partnership of
CPA(R):6...............................................................
99.10 Amendment to the Amended Agreement of Limited Partnership of
CPA(R):7...............................................................
99.11 Amendment to the Amended Agreement of Limited Partnership of
CPA(R):8...............................................................
99.12 Amendment to the Amended Agreement of Limited Partnership of
CPA(R):9...............................................................
99.13 Amended and Restated Agreement of Limited Partnership of CPA(R):1......
99.14 Amended and Restated Agreement of Limited Partnership of CPA(R):2......
99.15 Amended and Restated Agreement of Limited Partnership of CPA(R):3......
99.16 Amended and Restated Agreement of Limited Partnership of CPA(R):4......
99.17 Amended and Restated Agreement of Limited Partnership of CPA(R):5......
99.18 Amended and Restated Agreement of Limited Partnership of CPA(R):6......
99.19 Amended and Restated Agreement of Limited Partnership of CPA(R):7......
99.20 Amended and Restated Agreement of Limited Partnership of CPA(R):8......
99.21 Amended and Restated Agreement of Limited Partnership of CPA(R):9......
99.22 Listed Share Purchase Warrant..........................................
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