1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1998
REGISTRATION NO. 333-40401
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT
NO. 1 ON FORM S-11 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EOP OPERATING LIMITED PARTNERSHIP
(Exact name of registrant as specified in its governing instrument)
DELAWARE 6798 36-4156801
(State of (Primary Standard (I.R.S. Employer
Organization) Industrial Identification
Classification Number)
Code Number)
EQUITY OFFICE PROPERTIES TRUST
(Exact name of registrant as specified in its governing instrument)
MARYLAND 6798 36-4151656
(State of (Primary Standard (I.R.S. Employer
Organization) Industrial Identification
Classification Number)
Code Number)
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TWO NORTH RIVERSIDE PLAZA, SUITE 2200
CHICAGO, ILLINOIS 60606
(Address of principal executive offices)
STANLEY M. STEVENS
CHIEF LEGAL COUNSEL
TWO NORTH RIVERSIDE PLAZA, SUITE 2200
CHICAGO, ILLINOIS 60606
(Name and address of agent for service)
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Copies to:
J. WARREN GORRELL, JR.
JAMES E. SHOWEN
HOGAN & HARTSON L.L.P.
555 THIRTEENTH STREET, N.W.
WASHINGTON, D.C. 20004-1109
(202) 637-5600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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8,413,308 SHARES
EQUITY OFFICE PROPERTIES TRUST
COMMON SHARES OF BENEFICIAL INTEREST
(PAR VALUE $.01 PER SHARE)
------------------------
This prospectus relates to the possible issuance by Equity Office Properties
Trust (the "Company"), a Maryland real estate investment trust ("REIT"), of up
to 8,413,308 common shares of beneficial interest, $.01 par value per share
("Common Shares"), if and to the extent that the Company elects to issue such
8,413,308 Common Shares (the "Redemption Shares") to holders of up to 8,413,308
Class A units of limited partnership interest ("Units") in EOP Operating Limited
Partnership (the "Operating Partnership"), of which the Company is the managing
general partner and owns approximately 89.6% of the Units, upon tender of such
Units for redemption.
The 8,413,308 Units that may be redeemed for Redemption Shares were issued
in connection with consummation of the transactions contemplated by the
Agreement and Plan of Merger dated as of September 15, 1997, as amended (the
"Merger Agreement"), among the Company, the Operating Partnership, Beacon
Properties Corporation, a Maryland corporation (together with its subsidiaries,
"Beacon"), and Beacon Properties L.P., a Delaware limited partnership, of which
Beacon was the sole general partner ("Beacon Partnership"). Pursuant to the
Merger Agreement, on December 19, 1997, Beacon merged with and into the Company
(the "Corporate Merger") and Beacon Partnership merged with and into the
Operating Partnership (the "Partnership Merger" and together with the Corporate
Merger, the "Beacon Merger"). In the Beacon Merger, (i) the Company issued
80,596,117 Common Shares in exchange for all outstanding shares of common stock,
$.01 par value per share, of Beacon ("Beacon Common Shares"), (ii) the Company
issued 8,000,000 8.98% Series A Cumulative Redeemable Preferred Shares,
liquidation preference $25.00 per share, of the Company ("Series A Preferred
Shares") in exchange for all outstanding shares of 8.98% Series A Cumulative
Redeemable Preferred Stock, liquidation preference $25.00 per share, of Beacon
("Beacon Preferred Shares"), (iii) the Operating Partnership issued 8,570,886
Units of the Operating Partnership in exchange for all outstanding common
partnership units of Beacon Partnership ("Beacon OP Units") not held by Beacon,
and (iv) the Operating Partnership issued to the Company 80,596,117 Units
underlying the Common Shares issued in exchange for the Beacon Common Shares and
8,000,000 Series A Preferred Units underlying the Series A Preferred Shares
issued in exchange for the Beacon Preferred Shares. The Company has registered
the Redemption Shares to permit the holders thereof to sell such shares without
restriction in the open market or otherwise, but the registration of such shares
does not necessarily mean that any of such shares will be offered or sold by the
holders thereof.
The Company will acquire Units in the Operating Partnership in exchange for
any Redemption Shares that the Company may issue to Unit holders.
The Common Shares are listed on the New York Stock Exchange ("NYSE") under
the symbol "EOP." In order to assist the Company in maintaining its
qualification as a REIT for federal income tax purposes, ownership by any person
of more than 9.9% in value or number (whichever is more restrictive) in value of
the Common Shares is restricted in the Company's Declaration of Trust. See
"Shares of Beneficial Interest -- Restrictions on Ownership and Transfer."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON SHARES, INCLUDING:
- If the Company does not effectively manage its rapid growth it may be
unable to make expected distributions to its shareholders;
- If (i) the Company's assets do not generate income sufficient to pay its
expenses and maintain its properties, (ii) the Company is unable to renew
leases or relet space at favorable rents, (iii) new acquisitions fail to
perform as expected or competition results in increased prices for
acquisitions, (iv) the Company is unable to sell properties when
appropriate or (v) unidentified environmental liabilities arise or the
Company suffers uninsured losses, the Company may be unable to pay
distributions to holders of its Common Shares;
- If prevailing interest rates or other factors result in higher interest
rates, increased interest expense would adversely affect cash flow and the
Company's ability to pay distributions to holders of its Common Shares;
- If principal payments on the Company's debt due at maturity cannot be
refinanced, extended or paid with proceeds of other capital transactions,
the Company's cash flow and ability to pay distribution to holders of its
Common Shares could be adversely affected;
- Conflicts of interest between the Company and certain executive officers
and trustees could result in decisions that are not in the Company's best
interest;
- Contingent or undisclosed liabilities acquired in mergers or similar
transactions could adversely affect the Company's financial condition and
ability to pay distributions to holders of its Common Shares; and
- If the Company fails to qualify as a REIT for federal income tax purposes,
the Company will be subject to federal income taxation at regular
corporate rates and, as a result, will have less cash available for
distribution.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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 date of this Prospectus is , 1998.
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TABLE OF CONTENTS
PAGE
----
Summary............................... 2
The Company......................... 2
Acquisition Activity................ 2
Business and Growth Strategies...... 3
Employees........................... 4
The Properties...................... 4
Distributions....................... 5
Tax Status of the Company........... 6
Summary Risk Factors................ 6
Summary Selected Financial
Information...................... 7
Risk Factors.......................... 9
Special Considerations Applicable to
Redeeming Unit Holders........... 9
There Can Be No Assurance That We
Will Effectively Manage Our Rapid
Growth and Expansion Into New
Markets.......................... 9
Our Performance and Share Value Are
Subject to Risks Associated With
the Real Estate Industry......... 10
Debt Financing, Financial Covenants,
Degree of Leverage, and Increases
in Interest Rates Could Adversely
Affect Our Financial
Performance...................... 11
We Do Not Control Our Managed
Properties or Management and Non-
REIT Services Businesses......... 12
Conflicts of Interest Could Result
in Decisions Not in the Company's
Best Interest.................... 12
Environmental Problems are Possible
and May Be Costly................ 13
We are Dependent on Our Key
Personnel........................ 14
Contingent or Undisclosed
Liabilities Acquired in Mergers
or Similar Transactions Could
Adversely Affect Our Financial
Condition........................ 15
The Market Value of Our Publicly
Traded Securities Can be
Adversely Affected by a Number of
Factors.......................... 15
We are Dependent on External Sources
of Capital....................... 16
Our Success as REIT is Dependent on
Compliance with Federal Income
Tax Requirements................. 16
The Company........................... 18
General............................. 18
PAGE
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Operations.......................... 18
Operational Structure............... 18
Acquisition Activity................ 19
Probable Acquisitions............... 19
Business and Growth Strategies...... 19
Employees........................... 20
Price Range of Common Shares and
Distribution History................ 20
Capitalization........................ 21
Selected Financial Information........ 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Overview............................ 24
Results of Operations............... 25
Liquidity and Capital Resources..... 31
Cash Flows.......................... 36
Capital Improvements................ 37
Tenant Improvements and Leasing
Commission Costs................. 37
Year 2000........................... 38
Inflation........................... 39
Funds from Operations............... 39
The Properties........................ 40
General............................. 40
Office Properties by Region......... 40
Office Property Markets and
Submarkets....................... 41
Parking Facilities.................. 47
Tenants............................. 47
Lease Expirations -- Total
Portfolio........................ 49
Lease Distributions................. 50
Occupancy........................... 50
Legal Proceedings................... 50
Management............................ 51
Trustees and Executive and Senior
Officers......................... 51
Compensation of the Board of
Trustees; Payment in Common
Shares........................... 56
Executive Compensation.............. 57
Option Grants in Fiscal Year 1997... 58
Aggregated Option Exercises in
Fiscal Year 1997 and Fiscal
Year-End Option Values........... 58
Compensation Committee Interlocks
and Insider Participation........ 59
Limitation of Liability and
Indemnification.................. 59
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PAGE
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Certain Relationships and Related
Transactions........................ 61
Formation Transactions.............. 61
Leases and Parking Operations....... 62
Equity Group Distributions and
Fees............................. 62
Wright Runstad Acquisition.......... 62
Miscellaneous....................... 63
Policies with Respect to Certain
Activities.......................... 64
Investment Policies................. 64
Financing Policies.................. 64
Lending Policies.................... 65
Conflict of Interest Policies....... 65
Policies with Respect to Other
Activities....................... 66
Principal Shareholders................ 67
Shares of Beneficial Interest......... 69
General............................. 69
Common Shares....................... 69
Preferred Shares Generally.......... 70
Outstanding Preferred Shares........ 70
Power to Issue Additional Common
Shares and Preferred Shares...... 71
Restrictions on Ownership and
Transfer......................... 71
Transfer Agent, Registrar,
Conversion Agent and Distribution
Disbursing Agent................. 74
Certain Provisions of Maryland Law and
the Company's Declaration of Trust
and Bylaws.......................... 75
Classification and Removal of Board
of Trustees; Other Provisions.... 75
Changes in Control Pursuant to
Maryland Law..................... 75
Amendments to the Declaration of
Trust............................ 76
Advance Notice of Trustee
Nominations and New Business..... 76
Anti-takeover Effect of Certain
Provisions of Maryland Law and of
the Declaration of Trust and
Bylaws........................... 77
Maryland Asset Requirements......... 77
Partnership Agreement................. 78
Management.......................... 78
Sales of Assets..................... 78
Removal of the Managing General
Partner; Transfer of the
Company's Interests.............. 78
Reimbursement of the Company;
Transactions with the Company and
Its Affiliates................... 78
PAGE
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Redemption of Units................. 79
Restrictions on Transfer of Units by
Limited Partners................. 79
Issuance of Additional Units and/or
Preference Units................. 79
Capital Contributions............... 80
Distributions; Allocations of Income
and Loss......................... 80
Exculpation and Indemnification of
the Company...................... 80
Amendment of the Partnership
Agreement........................ 81
Term................................ 81
Redemption of Units................... 81
General.............................
Tax Consequences of Redemption...... 82
Comparison of Ownership of Units and
Common Shares.................... 84
Operating Partnership -- Company...... 85
Form of Organization and Assets
Owned............................ 85
Length of Investment................ 85
Permitted Investments............... 85
Additional Equity................... 85
Borrowing Policies.................. 86
Other Investment Restrictions....... 86
Management Control.................. 87
Fiduciary Duties.................... 87
Management Liability and
Indemnification.................. 88
Antitakeover Provisions............. 89
Voting Rights....................... 90
Amendment of the Operating
Partnership Agreement or the
Declaration of Trust............. 91
Vote Required to Dissolve the
Operating Partnership or the
Company.......................... 91
Vote Required to Sell Assets........ 92
Vote Required to Merge.............. 92
Compensation, Fees and
Distributions.................... 92
Liability of Investors.............. 92
Review of Investor Lists............ 93
Units -- Shares....................... 93
Nature of Investment................ 93
Potential Dilution of Rights........ 93
Liquidity........................... 94
Taxation............................ 94
Federal Income Tax Consequences....... 96
Taxation of the Company as a REIT --
General.......................... 96
Requirements for Qualification as a
REIT............................. 98
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PAGE
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Taxation of Taxable U.S.
Shareholders of the Company
Generally........................ 105
Backup Withholding for the Company
Distributions.................... 107
Taxation of Tax-Exempt Shareholders
of the Company................... 107
Taxation of Non-U.S. Shareholders of
the Company...................... 108
Tax Aspects of the Company's
Ownership of Interests in the ZML
Opportunity Partnerships, the
Operating Partnership and the
Subsidiary Partnerships.......... 111
Other Tax Consequences for the
Company, Its Shareholders and the
Noncontrolled Subsidiaries....... 112
PAGE
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ERISA Considerations.................. 113
Employment Benefit Plans,
Tax-Qualified Pension, Profit
Sharing or Stock Bonus Plans and
IRS.............................. 113
Status of the Company and the
Operating Partnership Under
ERISA............................ 113
Experts............................... 114
Legal Matters......................... 114
Available Information................. 114
Glossary.............................. 116
Index to Financial Statements......... F-1
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus. As used herein, "Company"
means Equity Office Properties Trust, a Maryland real estate investment trust,
and one or more of its subsidiaries (including EOP Operating Limited
Partnership, a Delaware limited partnership (the "Operating Partnership")), and
the predecessors thereof or, as the context may require, Equity Office
Properties Trust only or the Operating Partnership only. See "Glossary" for the
meanings of other terms used herein. Unless otherwise required by the context,
all rental and square footage data is approximate and/or on a weighted average
basis, and all Property information is presented as of March 31, 1998. All
references to the historical activities of the Company prior to July 11, 1997,
refer to the activities of the Equity Office Predecessors.
Information contained in this Prospectus contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"). The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in Section 27A of the Securities Act and such
forward-looking statements are included for purposes of complying therewith.
Such forward-looking statements relate to, without limitation, future economic
performance, plans and objectives of management for future operations and
projections of revenue and other financial items, which can be identified by the
use of forward-looking terminology such as "may," "will," "should," "expect,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. The cautionary statements set
forth under the caption "Risk Factors" and elsewhere in this Prospectus identify
important factors with respect to such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
THE COMPANY
The Company was formed in 1996 as a Maryland real estate investment trust
and commenced operations effective with the completion of its initial public
offering (the "IPO") of 28,750,000 common shares of beneficial interest, $.01
par value per share (the "Common Shares"), on July 11, 1997. The Company,
together with the Operating Partnership, was formed to continue and expand the
national office property business organized by Samuel Zell, Chairman of the
Board of Trustees of the Company. The Company, a self-administered and
self-managed real estate investment trust ("REIT"), is the managing general
partner of the Operating Partnership. As of March 31, 1998, the Company owned,
directly or indirectly, 89.6% of the outstanding common units of partnership
interest in the Operating Partnership (the "Units"). The Company owns all of its
assets and conducts substantially all of its business through the Operating
Partnership and its subsidiaries.
As of March 31, 1998, the Company owned or had an interest in 260 office
properties containing approximately 66.6 million square feet of office space
(the "Office Properties") and owned or had an interest in 17 stand-alone parking
facilities containing approximately 16,749 parking spaces (the "Parking
Facilities" and, together with the Office Properties, the "Properties"). To
facilitate maintenance of the Company's qualification as a REIT for federal
income tax purposes, management of properties that are not wholly owned by the
Company and its subsidiaries is generally conducted by Equity Office Properties
Management Corp., a Delaware corporation ("EOP Management Company"), and Beacon
Property Management Corporation, a Delaware corporation ("Beacon Management
Company" and, together with EOP Management Company, the "Management Companies").
The Company's executive offices are located at Two North Riverside Plaza,
Suite 2200, Chicago, Illinois 60606, and its telephone number is (312) 466-3300.
ACQUISITION ACTIVITY
During the period from 1987 through 1997, the Company invested
approximately $10 billion, averaging $2.7 billion annually (calculated on a cost
basis) for the three years ended December 31, 1997, in acquisitions
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of institutional quality office properties throughout the United States. During
the period from the Company's IPO in July 1997 through April 1998, the Company
completed a number of new acquisitions:
BEACON MERGER. On December 19, 1997, the Company, the Operating
Partnership, Beacon Properties Corporation, a Maryland corporation ("Beacon"),
and Beacon Properties, L.P., a Delaware limited partnership of which Beacon was
the sole general partner ("Beacon Partnership"), consummated the transactions
contemplated by the Agreement and Plan of Merger dated September 15, 1997, as
amended, among the Company, the Operating Partnership, Beacon and Beacon
Partnership (the "Merger Agreement"). Pursuant to the Merger Agreement, Beacon
merged with and into the Company and Beacon Partnership merged with and into the
Operating Partnership (the "Beacon Merger"). The acquisition cost of the Beacon
Merger was approximately $4.3 billion.
As a result of the Beacon Merger, the Company acquired interests in 130
Office Properties (the "Beacon Properties") containing approximately 20.9
million rentable square feet of office space. The Beacon Properties are located
in 22 submarkets in six markets: Boston, Atlanta, Chicago, Los Angeles, San Jose
and Washington, D.C.
OTHER ACQUISITIONS. On December 17, 1997, the Company acquired ten Office
Properties, containing an aggregate of approximately 3.34 million square feet,
located in Seattle, Washington, Portland, Oregon and Anchorage, Alaska, from
Wright Runstad Holdings L.P., Wright Runstad Asset Management L.P. and Mellon
Bank, N.A., as Trustee for First Plaza Group Trust ("First Plaza") (the "Wright
Runstad Acquisition"). The purchase price was approximately $640 million. In
addition to the Beacon Merger and the Wright Runstad Acquisition, during the
period from the IPO through April 30, 1998, the Company completed twelve other
acquisition transactions, and partially completed a thirteenth acquisition
transaction, in which it acquired an aggregate of 36 Office Properties,
containing an aggregate of approximately 12.1 million square feet, located in
Boston, New Orleans, Houston, Dallas, Denver, Philadelphia, Los Angeles,
Chicago, San Francisco, Washington, D.C. and Fairfax and Alexandria, Virginia
(the "Other Acquisitions"). The aggregate consideration paid by the Company for
the Other Acquisitions was approximately $2.0 billion, comprised of $1.7 billion
in cash, $163 million in Units and $96 million in assumed liabilities.
Subsequent to the IPO, the Company also acquired three Parking Facilities,
containing approximately 2,141 parking spaces in Chicago, New Orleans and
Pittsburgh for $54.9 million. Giving effect to the Other Acquisitions, as of
April 30, 1998 the Company owned or had an interest in 266 Office Properties
containing 68.7 million square feet.
PROBABLE ACQUISITIONS. The Company has entered into agreements to acquire
an aggregate of twelve additional office properties (the "Probable
Acquisitions"). The Company expects to acquire one office property located in
Denver during May 1998 as well as four office properties located in Denver and
four office properties located in Albuquerque during July 1998. These nine
properties contain an aggregate of approximately 1.4 million square feet. The
aggregate purchase price for these nine properties is approximately $190
million, comprised of approximately $127 million in cash, and approximately $63
million in the form of promissory notes of the Company, payable, at the option
of the Company, in Common Shares. The Company has also entered into an agreement
to acquire three office properties (including one office property currently in
development) located in Dallas containing an aggregate of approximately 1.0
million square feet for aggregate consideration estimated to be $150.0 million
in cash. The Company expects to complete this acquisition by the end of
September 1998.
BUSINESS AND GROWTH STRATEGIES
The Company's primary business objective is to achieve sustainable
long-term growth in cash flow and portfolio value. The Company intends to
achieve this objective by owning and operating institutional quality office
buildings and providing a superior level of service to tenants in central
business districts ("CBDs") and suburban markets across the United States. The
Company intends to supplement this strategy by owning parking facilities.
INTERNAL GROWTH. Management believes that the Company's future internal
growth will come from (i) lease up of vacant space, (ii) tenant roll-over at
increased rents where market conditions permit,
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(iii) repositioning of certain Properties which have not yet achieved
stabilization, and (iv) increasing economies of scale.
As of March 31, 1998, 3.7 million rentable square feet of Office Property
space was vacant, representing 5.6% of the Company's total Office Property
portfolio. Of this amount, 537,900 square feet was leased at an average rent of
$29.14 per square foot, with occupancy to commence in whole or in part during
1998. The Company's average operating expenses for the total vacant space were
$9.38 per square foot as of March 31, 1998.
During the period from March 31, 1998 through December 31, 2002, 4,566
leases for 36.3 million rentable square feet of space are scheduled to expire.
As of March 31, 1998, the average rent for this space was $22.18 per square foot
and the average operating expenses were $8.93 per square foot. The actual rental
rates at which available space will be renewed or relet will depend on
prevailing market factors at the time.
The Company owns certain parcels of undeveloped land acquired in connection
with its acquisition of the Office Properties. The Company is currently
proceeding with the development of two additional office properties totaling
approximately 430,000 square feet. In determining whether to develop land, the
Company considers, among other factors, whether significant pre-leasing can be
arranged or if such development is necessary to protect the Company's investment
in existing Properties.
EXTERNAL GROWTH. The Company is pursuing, and expects to continue to
actively pursue, acquisitions of additional office properties and parking
facilities. Management believes that significant opportunities for external
growth will continue to be available through strategic acquisitions of
institutional quality office properties. Properties may be acquired separately
or as part of a portfolio, and may be acquired for cash and/or in exchange for
equity or debt securities of the Company or the Operating Partnership, and such
acquisitions may be customary real estate transactions and/or mergers or other
business combinations.
PARKING FACILITIES. Management believes that parking facilities offer the
Company attractive investment opportunities which are complementary to
investments in office properties. The Company intends to focus its acquisition
efforts for parking facilities solely on municipal or private parking facilities
that have limited competition, no (or minimal) rental rate restrictions and/or a
superior location proximate to or affiliated with airports, CBDs, entertainment
projects or healthcare facilities.
EMPLOYEES
As of March 31, 1998, the Company had approximately 1,482 employees
providing in-house expertise in property management, leasing, finance, tax,
acquisition, development, disposition, marketing, accounting, information
systems and real estate law. The five most senior executives have an average
tenure of 11 years with the Company or its affiliates and an average of 23 years
experience in the real estate industry. See "The Company."
THE PROPERTIES
The Company's portfolio (based on revenues and square footage as of
December 31, 1997) is the largest office portfolio in the United States
controlled by any publicly traded, full-service office company. Management
believes that the Properties are generally well located in markets that exhibit
strong growth characteristics, are well maintained and professionally managed,
and are generally capable of attracting and retaining high quality tenants while
maintaining high rent, occupancy and tenant retention rates. See "Properties."
The operation of the Properties is under the direction of six regional
managers, each of whom has oversight responsibility for all of the Properties in
his respective region. Each region has strategic and budget planning
responsibility combined with due diligence, property management,
engineering/construction, leasing/marketing, and information systems expertise.
Each regional manager reports to the Company's Executive Vice President -- Real
Estate Operations.
As of March 31, 1998, the Company owned or had an interest in 260 Office
Properties and 17 Parking Facilities. The Company managed an additional 32
office properties through the Management Companies
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(the "Managed Properties"), containing 5.0 million square feet, including 29
office properties owned by certain affiliates of Mr. Zell. See "Properties." The
following table shows the distribution of the Company's Office Properties,
Managed Properties, Parking Facilities and employees by region:
DISTRIBUTION OF OFFICE PROPERTIES, MANAGED PROPERTIES,
PARKING FACILITIES AND EMPLOYEES BY REGION (AS OF MARCH 31, 1998)
OFFICE PROPERTIES MANAGED PROPERTIES PARKING FACILITIES
--------------------- --------------------- -------------------
RENTABLE RENTABLE NUMBER NUMBER
REGION NUMBER SQUARE FEET NUMBER SQUARE FEET NUMBER OF SPACES OF EMPLOYEES
------ ------ ----------- ------ ----------- ------ --------- ------------
Northeast 458
CBD.................... 23 10,022,538 1 312,000 7 3,852
Suburban............... 62 8,946,287 3 978,674 -- --
Central 511(1)
CBD.................... 12 9,359,137 1 877,889 5 4,674
Suburban............... 19 3,980,642 18 2,397,407 -- --
Pacific 133
CBD.................... 7 4,810,336 -- -- -- --
Suburban............... 36 4,887,602 5 320,468 -- --
West 90
CBD.................... 12 4,008,830 -- -- 4 7,464
Suburban............... 20 4,789,652 1 157,311 -- --
Southeast 155
CBD.................... 6 2,887,795 1 130,189 -- --
Suburban............... 45 5,797,339 2 207,664 -- --
Southwest 135
CBD.................... 5 2,588,819 -- -- 1 759
Suburban............... 13 4,531,473 -- 100,558 -- --
--- ---------- -- --------- -- ------ -----
Total............... 260 66,610,450 32 5,482,160 17 16,749 1,482
=== ========== == ========= == ====== =====
- ---------------
(1) 257 of these employees are located at the Company's headquarters in Chicago.
DISTRIBUTIONS
Holders of Common Shares are entitled to cash distributions when, if and as
declared by the Company's Board of Trustees. There can be no assurance as to the
payment of distributions on Common Shares in the future because such payment
will depend upon the earnings and financial condition of the Company, as well as
other factors. In order to remain qualified as a REIT under the Code, the
Company must distribute to its shareholders at least 95% of its taxable income
(other than net capital gain) annually. See "Federal Income Tax Considerations
- -- Requirements for Qualification as a REIT -- Annual Distribution Requirements
Applicable to REITs."
The Company's amended and restated declaration of trust (the "Declaration
of Trust") permits the issuance of Preferred Shares having the right to receive
distributions before distributions on the Common Shares are declared and paid.
The Series A Preferred Shares and the Series B Preferred Shares have such
preferential distribution rights.
For a discussion of the tax treatment of distributions to the holders of
Common Shares and Preferred Shares, see "Federal Income Tax Considerations --
Taxation of Taxable U.S. Shareholders of the Company Generally," "-- Taxation of
Tax-Exempt Shareholders of the Company," and "-- Taxation of Non-U.S.
Shareholders of the Company."
5
10
TAX STATUS OF THE COMPANY
The Company intends to elect to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ended December 31,
1997. Commencing with its formation on July 11, 1997, the Company believes that
it has been organized and has operated in a manner so as to qualify for taxation
as a REIT under the Code. The Company believes its organization and proposed
method of operation will enable it to continue to meet the requirements for
qualification and taxation as a REIT. To maintain REIT status, an entity must
meet a number of organizational and operational requirements and is required
each year to distribute at least 95% of its net taxable income (other than net
capital gain). As a REIT, the Company generally is not subject to federal income
tax on net income it distributes currently to its shareholders. If the Company
fails to qualify as a REIT for any taxable year, it will be subject to federal
income tax at regular corporate rates. See "Federal Income Tax Considerations --
Taxation of the Company as a REIT -- General" and "Risk Factors -- Our Success
as a REIT is Dependent on Compliance With Federal Income Tax Requirements." Even
though the Company expects to qualify for taxation as a REIT, the Company will
be subject to certain federal, state and local taxes on its income and property.
SUMMARY RISK FACTORS
See "Risk Factors" for certain factors relevant to an investment in the
Common Shares, including:
- If the Company does not effectively manage its rapid growth, it may be
unable to make expected distributions to holders of its Common Shares;
- If (i) the Company's assets do not generate income sufficient to pay its
expenses and maintain its properties, (ii) the Company is unable to renew
leases or relet space at favorable rents, (iii) new acquisitions fail to
perform as expected or competition results in increased prices for
acquisitions, (iv) the Company is unable to sell properties when
appropriate or (v) unidentified environmental liabilities arise or the
Company suffers uninsured losses, the Company may not be able to pay
distributions to holders of its Common Shares;
- If prevailing interest rates or other factors result in higher interest
rates, increased interest expense would adversely affect cash flow and
the Company's ability to pay distributions to holders of its Common
Shares;
- If principal payments on the Company's debt due at maturity cannot be
refinanced, extended or paid with proceeds of other capital transactions,
the Company's cash flow and ability to pay distributions to holders of
the Common Shares would be adversely affected;
- Conflicts of interest between the Company and certain executive officers
and trustees could result in decisions that are not in the Company's best
interest;
- Contingent or undisclosed liabilities acquired in mergers or similar
transactions could adversely affect the Company's results of operations,
financial condition and ability to pay distributions to holders of its
Common Shares; and
- If the Company fails to qualify as a REIT for federal income tax
purposes, the Company will be subject to federal income taxation at
regular corporate rates and, as a result, will have less cash available
for distribution.
6
11
SUMMARY SELECTED FINANCIAL INFORMATION
The following sets forth summary selected consolidated and combined
financial and operating information on a pro forma basis for the Company and on
an historical basis for the Company and the Company's predecessors ("Equity
Office Predecessors"). The following historical information should be read in
conjunction with the consolidated and combined financial statements and notes
thereto of the Company and Equity Office Predecessors included elsewhere in this
Prospectus. The summary selected consolidated historical and operating
information of the Company at December 31, 1997, and for the period from July
11, 1997 to December 31, 1997, has been derived from the historical consolidated
financial and operating information of the Company audited by Ernst & Young,
LLP, independent auditors, whose report with respect thereto is included
elsewhere in this Prospectus. The summary selected combined historical and
operating information at December 31, 1996 and for the period from January 1,
1997 to July 10, 1997 and the years ended December 31, 1996 and 1995, has been
derived from the historical combined financial and operating information of
Equity Office Predecessors audited by Ernst & Young LLP, independent auditors,
whose report with respect thereto is included elsewhere in this Prospectus. The
summary selected combined financial and operating information of the Equity
Office Predecessors at December 31, 1995 and for the year ended December 31,
1994 has been derived from the historical audited combined financial statements
not included herein. The summary selected combined financial and operating
information of Equity Office Predecessors at December 31, 1994 and 1993, and for
the year ended December 31, 1993, has been derived from the historical unaudited
combined financial statements of Equity Office Predecessors. Unaudited pro forma
operating information for the year ended December 31, 1997 is presented as if
the borrowings under the Credit Facilities at the end of the period,
acquisitions (including the Beacon Merger) that occurred during and subsequent
to the period, the Probable Acquisitions, the IPO and Consolidation, the Private
Debt Offering, the February 1998 Notes Offering and the Series B Preferred
Offering had occurred on January 1, 1997 and, therefore, incorporates certain
assumptions that are described in the notes to the Pro Forma Condensed Combined
Financial Statements included elsewhere in this Prospectus. The unaudited pro
forma balance sheet data is presented as if the borrowings under the Credit
Facilities that occurred subsequent to December 31, 1997, the February 1998
Notes Offering, the Series B Preferred Offering, the UIT Offering, the
acquisitions that occurred subsequent to December 31, 1997, and the Probable
Acquisitions had occurred on December 31, 1997. The pro forma information does
not purport to represent what the Company's financial position or results of
operations would actually have been if these transactions had, in fact, occurred
on such date or at the beginning of the period indicated, or to project the
Company's financial position or results of operations at any future date or for
any future period.
EQUITY OFFICE
PREDECESSORS
(COMBINED
COMPANY HISTORICAL)
FOR THE FOR THE EQUITY OFFICE PREDECESSORS
COMPANY PRO FORMA PERIOD FROM PERIOD FROM (COMBINED HISTORICAL)
FOR THE YEAR ENDED JULY 11, 1997 JAN. 1, 1997 FOR THE YEARS ENDED DECEMBER 31,
DECEMBER 31, TO DEC. 31, TO JULY 10, -----------------------------------------
1997 1997 1997 1996 1995 1994 1993
------------------ ------------- ------------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
REVENUES:
Rental, parking and other........ $ 1,515,398 $ 406,713 $327,017 $493,396 $356,959 $230,428 $150,315
----------- ----------- -------- -------- -------- -------- --------
Total revenues............... $ 1,546,966 $ 412,968 $339,104 $508,124 $371,457 $240,878 $159,246
----------- ----------- -------- -------- -------- -------- --------
EXPENSES:
Interest....................... $ 324,694 $ 76,675 $ 80,481 $119,595 $100,566 $ 59,316 $ 36,755
Depreciation and
amortization................. 280,180 70,346 66,034 96,237 74,156 46,905 29,752
Property operating(1).......... 566,501 155,679 127,285 201,067 151,488 107,412 74,028
General and administrative..... 56,048 17,690 17,201 23,145 21,987 15,603 12,012
Provision for value
impairment................... -- -- -- -- 20,248 -- --
----------- ----------- -------- -------- -------- -------- --------
Total expenses............... $ 1,217,423 $ 320,390 $291,001 $440,044 $368,445 $229,236 $152,547
----------- ----------- -------- -------- -------- -------- --------
Income before (income) loss
allocated to minority
interests, income from
investments in unconsolidated
joint ventures, gain on sales
of real estate, and
extraordinary items.......... $ 329,543 $ 92,578 $ 48,103 $ 68,080 $ 3,012 $ 11,642 $ 6,699
Minority interests allocation.... (33,664) (7,799) (912) (2,086) (2,129) 1,437 1,772
Income from investments in
unconsolidated joint
ventures....................... 12,823 3,173 1,982 2,093 2,305 1,778 --
Gain/(Loss) on sales of real
estate and extraordinary
items(2)....................... (16,240) 12,236 5,338 31,271 1,705 --
----------- ----------- -------- -------- -------- -------- --------
Net income before preferred
dividends...................... 308,702 71,712 61,409 73,425 34,459 16,562 8,471
Preferred dividends.............. (33,710) (649) -- -- -- -- --
----------- ----------- -------- -------- -------- -------- --------
Net income available to Common
Shares......................... $ 274,992 $ 71,063 $ 61,409 $ 73,425 $ 34,459 $ 16,562 $ 8,471
=========== =========== ======== ======== ======== ======== ========
Net income available per weighted
average Common Share
outstanding -- Basic........... $ 1.09 $ .44
===========
Net income available per weighted
average Common Share
outstanding -- Diluted......... $ 1.08 $ .43
===========
Weighted average Common Shares
outstanding -- Basic........... 251,155,672 162,591,477
===========
Weighted average Common Shares
outstanding -- Diluted......... 285,343,812 180,014,027
===========
7
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EQUITY OFFICE
PREDECESSORS
COMPANY COMPANY FOR (COMBINED
PRO FORMA THE PERIOD HISTORICAL) FOR
FOR THE FROM JULY 11, THE PERIOD FROM
YEAR ENDED 1997 TO JAN. 1, 1997 TO
DEC. 31, 1997 DEC. 31, 1997 JULY 10, 1997
------------- ------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
(at end of period)
Investment in real estate after
accumulated depreciation.......... $11,923,009 $10,976,319 --
----------- ----------- -----------
Total assets...................... $12,518,783 $11,751,672 --
----------- ----------- -----------
Mortgage debt, unsecured notes and
lines of credit................... $ 4,717,769 $ 4,284,317 --
----------- ----------- -----------
Total liabilities................. $ 5,025,149 $ 4,591,697 --
----------- ----------- -----------
Minority interests.................. $ 754,918 $ 754,818 --
----------- ----------- -----------
Shareholders'/Owners' equity........ $ 6,738,716 $ 6,405,157 --
----------- ----------- -----------
OTHER DATA:
General and administrative expenses
as a percentage of total
revenues.......................... 3.6% 4.3% 5.1%
----------- ----------- -----------
Number of Office Properties owned at
period end(3)..................... 279 258 --
----------- ----------- -----------
Net rentable square feet of Office
Properties owned at period end (in
millions)(3)...................... 71.4 65.3 --
----------- ----------- -----------
Occupancy of Office Properties owned
at period end(3).................. 95% 94% --
----------- ----------- -----------
Number of Parking Facilities owned
at period end..................... 17 17 --
----------- ----------- -----------
Number of spaces at Parking
Facilities owned at period end.... 16,749 16,749 --
----------- ----------- -----------
Funds from Operations(4)............ $ 163,253 $ 113,022
----------- -----------
Cash flow from operating
activities........................ $ 190,754 $ 95,960
Cash flow used for investing
activities........................ $(1,592,272) $ (571,068)
Cash flow from financing
activities........................ $ 1,630,346 $ 245,851
EQUITY OFFICE PREDECESSORS (COMBINED HISTORICAL)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
(at end of period)
Investment in real estate after
accumulated depreciation.......... $ 3,291,815 $ 2,393,403 $ 1,815,160 $ 1,220,268
----------- ----------- ----------- -----------
Total assets...................... $ 3,912,565 $ 2,650,890 $ 2,090,933 $ 1,318,644
----------- ----------- ----------- -----------
Mortgage debt, unsecured notes and
lines of credit................... $ 1,964,892 $ 1,434,827 $ 1,261,156 $ 798,897
----------- ----------- ----------- -----------
Total liabilities................. $ 2,174,483 $ 1,529,334 $ 1,350,552 $ 845,315
----------- ----------- ----------- -----------
Minority interests.................. $ 11,080 $ 31,587 $ 9,283 $ (15,298)
----------- ----------- ----------- -----------
Shareholders'/Owners' equity........ $ 1,727,002 $ 1,089,969 $ 731,098 $ 488,627
----------- ----------- ----------- -----------
OTHER DATA:
General and administrative expenses
as a percentage of total
revenues.......................... 4.6% 5.9% 6.5% 7.5%
----------- ----------- ----------- -----------
Number of Office Properties owned at
period end(3)..................... 83 73 63 48
----------- ----------- ----------- -----------
Net rentable square feet of Office
Properties owned at period end (in
millions)(3)...................... 29.2 23.1 18.5 13.6
----------- ----------- ----------- -----------
Occupancy of Office Properties owned
at period end(3).................. 90% 86% 88% 80%
----------- ----------- ----------- -----------
Number of Parking Facilities owned
at period end..................... 10 3 -- --
----------- ----------- ----------- -----------
Number of spaces at Parking
Facilities owned at period end.... 7,321 3,323 -- --
----------- ----------- ----------- -----------
Funds from Operations(4)............ $ 160,460 $ 96,104 $ 60,372 --
----------- ----------- ----------- -----------
Cash flow from operating
activities........................ $ 165,975 $ 93,878 $ 73,821 --
Cash flow used for investing
activities........................ $ (924,227) $ (380,615) $ (513,965) --
Cash flow from financing
activities........................ $ 1,057,551 $ 276,513 $ 514,923 --
- -------------------------
(1) Includes property operating expenses, real estate taxes, insurance, as well
as repair and maintenance expenses.
(2) The column entitled "Company Pro Forma for year ended December 31, 1997"
excludes the effect of any gain (loss) on sales of real estate and
extraordinary items.
(3) The pro forma number of Office Properties as of December 31, 1997 includes
Office Properties acquired subsequent to December 31, 1997 and Probable
Acquisitions.
(4) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 defines Funds from Operations as net income (loss) (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring
and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. The Company believes that Funds from Operations is helpful to
investors as a measure of the performance of an equity REIT because, along
with cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes Funds from Operations in accordance
with standards established by NAREIT, which may not be comparable to Funds
from Operations reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently than the Company. Funds from Operations does
not represent cash generated from operating activities in accordance with
GAAP and should not be considered as an alternative to net income
(determined in accordance with GAAP) as an indication of the Company's
financial performance or to cash flow from operating activities (determined
in accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including
its ability to make cash distributions. For a reconciliation of net income
and Funds from Operations, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Funds from Operations."
8
13
RISK FACTORS
Set forth below are the risks that we believe are material to investors who
purchase or own the Company's Common Shares or preferred shares of beneficial
interest, $.01 par value per share ("Preferred Shares," and, collectively with
the Common Shares, the "Shares") or Units of limited partnership interest of the
Operating Partnership, which are redeemable on a one-for-one basis for Common
Shares or their cash equivalent. We refer to the Shares and the Units together
as "securities," and the investors who own Shares and/or Units as
"securityholders."
SPECIAL CONSIDERATIONS APPLICABLE TO REDEEMING UNIT HOLDERS
TAX CONSEQUENCES OF REDEMPTION OF UNITS. The exercise by a Unit holder of
his or her Unit Redemption Right will be treated for tax purposes as a sale of
the Units. Such a sale will be fully taxable to the redeeming Unit holder and
such redeeming Unit holder will be treated as realizing for tax purposes an
amount equal to the sum of the cash or the value of the Common Shares received
in the exchange plus the amount of the Operating Partnership nonrecourse
liabilities considered allocable to the redeemed Units at the time of the
redemption. It is possible that the amount of gain recognized (or even the tax
liability resulting from such gain) could exceed the amount of cash and the
value of other property (e.g., Redemption Shares) received upon such
disposition. See "Redemption of Units -- Tax Consequences of Redemption." In
addition, as a result of fluctuations in the stock price, the price the Unit
holder receives for such Redemption Shares may not equal the value of his Units
at the time of redemption. See "-- The Market Value of our Publicly Traded
Securities can be Adversely Affected by a Number of Factors" below.
POTENTIAL CHANGE IN INVESTMENT UPON REDEMPTION OF UNITS. If a Unit holder
exercises his or her Unit Redemption Right, such Unit holder may receive, at the
Company's election, as managing general partner of the Operating Partnership,
cash or Common Shares of the Company in exchange for the Units. If the Unit
holder receives cash, the Unit holder will no longer have any interest in the
Company and will not benefit from any subsequent increases in share price and
will not receive any future distributions from the Company (unless the Unit
holder currently owns or acquires in the future additional Common Shares or
Units). If the Unit holder receives Common Shares, the Unit holder will become a
shareholder of the Company rather than a holder of Units in the Operating
Partnership. Although an investment in Common Shares is substantially equivalent
to an investment in Units in the Operating Partnership, there are some
differences between ownership of Units and ownership of Common Shares relating
to, among other things, form of organization, permitted investments, policies
and restrictions, management structure, compensation and fees, investor rights
and federal income taxation. These differences, some of which may be material to
investors, are discussed in "Redemption of Units -- Comparison of Ownership of
Units and Common Shares."
THERE CAN BE NO ASSURANCE THAT WE WILL EFFECTIVELY MANAGE OUR RAPID GROWTH AND
EXPANSION INTO NEW MARKETS
We are currently growing rapidly. As of March 31, 1998, we owned interests
in 260 Office Properties containing 66.6 million square feet. We also owned
interests in 17 Parking Facilities containing approximately 16,749 parking
spaces. Our office portfolio grew by 103% (on a square footage basis) and our
parking portfolio grew by 13% (based on the number of parking spaces) from the
time of our IPO in July 1997 through the end of the year. Additionally, the
Beacon Merger, which closed in December 1997, substantially expanded our
operations in Boston and extended our operations to San Jose. The Wright Runstad
Acquisition, which also closed in December 1997, extended our operations to
Seattle, Washington, Portland, Oregon and Anchorage, Alaska. Other recent
acquisitions extended our operations to downtown New Orleans, suburban
Philadelphia, Minneapolis and Pittsburgh. We plan to continue this rapid growth
for the foreseeable future. We plan on managing this growth by applying our
experience to new markets and properties and expect to be successful in that
effort. If we do not effectively manage our rapid growth, however, we may not be
able to make expected distributions to our securityholders.
9
14
OUR PERFORMANCE AND SHARE VALUE ARE SUBJECT TO RISKS ASSOCIATED WITH THE REAL
ESTATE INDUSTRY
GENERAL. If our assets do not generate income sufficient to pay our
expenses, service our debt and maintain our Properties, we may not be able to
make expected distributions to our securityholders. Several factors may
adversely affect the economic performance and value of our Properties. These
factors include changes in the national, regional and local economic climate,
local conditions such as an oversupply of office properties or a reduction in
demand for office properties, the attractiveness of our Properties to tenants,
competition from other available office properties, changes in market rental
rates and the need to periodically repair, renovate and relet space. Our
performance also depends on our ability to collect rent from tenants and to pay
for adequate maintenance, insurance and other operating costs (including real
estate taxes), which could increase over time. Also, the expenses of owning and
operating a property are not necessarily reduced when circumstances such as
market factors and competition cause a reduction in income from the property. If
a property is mortgaged and we are unable to meet the mortgage payments, the
lender could foreclose on the mortgage and take the property. In addition,
interest rate levels, the availability of financing, changes in laws and
governmental regulations (including those governing usage, zoning and taxes) and
the possibility of bankruptcies of tenants may adversely affect our financial
condition and results of operations.
WE MAY BE UNABLE TO RENEW LEASES OR RELET SPACE AS LEASES EXPIRE. When our
tenants decide not to renew their leases upon expiration, we may be unable to
relet the space. Even if the tenants do renew or we can relet the space, the
terms of renewal or reletting (including the cost of required renovations) may
be less favorable than current lease terms. Over the next five years (through
the end of 2002), leases will expire on a total of 55% of the rentable square
feet at our current properties. If we are unable to promptly renew the leases or
relet this space, or if the rental rates upon such renewal or reletting are
significantly lower than expected rates, then our results of operations and
financial condition will be adversely affected. Consequently, our cash flow and
ability to service debt and make distributions to securityholders would be
adversely affected.
NEW ACQUISITIONS MAY FAIL TO PERFORM AS EXPECTED AND COMPETITION FOR
ACQUISITIONS MAY RESULT IN INCREASED PRICES FOR PROPERTIES. We intend to
continue to actively acquire office and parking properties. Newly acquired
properties may fail to perform as expected. We may underestimate the costs
necessary to bring an acquired property up to standards established for its
intended market position. Additionally, we expect other major real estate
investors with significant capital will compete with us for attractive
investment opportunities. These competitors include publicly traded REITs,
private REITs, investment banking firms and private institutional investment
funds. This competition has increased prices for office properties. We expect to
acquire properties with cash from secured or unsecured financings and proceeds
from offerings of equity or debt. We may not be in a position or have the
opportunity in the future to make suitable property acquisitions on favorable
terms. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
BECAUSE REAL ESTATE INVESTMENTS ARE ILLIQUID, WE MAY NOT BE ABLE TO SELL
PROPERTIES WHEN APPROPRIATE. Real estate investments generally cannot be sold
quickly. We may not be able to vary our portfolio promptly in response to
economic or other conditions. This inability to respond promptly to changes in
the performance of our investments could adversely affect our financial
condition, results of operations and ability to service debt and make
distributions to our securityholders.
SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE. We carry comprehensive
liability, fire, extended coverage and rental loss insurance on all of our
Properties. We believe the policy specifications and insured limits of these
policies are adequate and appropriate. There are, however, certain types of
losses, such as lease and other contract claims, that generally are not insured.
Should an uninsured loss or a loss in excess of insured limits occur, we could
lose all or a portion of the capital we have invested in a property, as well as
the anticipated future revenue from the property. In such an event, we might
nevertheless remain obligated for any mortgage debt or other financial
obligations related to the property.
We carry earthquake insurance on all of our Properties, including those
located in California. Our earthquake policies are subject to coverage
limitations which we believe are commercially reasonable. In light of the
California earthquake risk, California building codes since the early 1970s have
established construction standards for all new buildings. The current and
strictest construction standards were adopted in 1987. Of the
10
15
43 properties (as of March 31, 1998) located in California, 12 have been built
since January 1, 1988 and we believe they were constructed in full compliance
with the applicable standards existing at the time of construction. It is
nevertheless a possibility that material losses in excess of insurance proceeds
will occur in the future.
DEBT FINANCING, FINANCIAL COVENANTS, DEGREE OF LEVERAGE, AND INCREASES IN
INTEREST RATES COULD ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE
SCHEDULED DEBT PAYMENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION. Our
business is subject to risks normally associated with debt financing. Cash flow
could be insufficient to pay distributions to securityholders at expected levels
and meet required payments of principal and interest. We may not be able to
refinance existing indebtedness (which in virtually all cases requires
substantial principal payments at maturity) and, if we can, the terms of such
refinancing might not be as favorable as the terms of existing indebtedness. The
total principal amount of our outstanding indebtedness was $4.0 billion as of
March 31, 1998. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources -- Debt Financing."
If principal payments due at maturity cannot be refinanced, extended or paid
with proceeds of other capital transactions, such as new equity capital, our
cash flow will not be sufficient in all years to repay all maturing debt. If
prevailing interest rates or other factors result in higher interest rates, the
increased interest expense would adversely affect cash flow and our ability to
service debt and make distributions to securityholders.
FINANCIAL COVENANTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION. If a
property is mortgaged to secure payment of indebtedness and we are unable to
meet mortgage payments, the mortgagee could foreclose on the property, resulting
in loss of income and asset value. The mortgages on our properties contain
customary negative covenants which, among other things, limit our ability,
without the prior consent of the lender, to further mortgage the property, to
enter into new leases or materially modify existing leases, and to discontinue
insurance coverage. In addition, our Credit Facilities contain certain customary
restrictions, requirements and other limitations on our ability to incur
indebtedness, including total debt to assets ratios, secured debt to total
assets ratios, debt service coverage ratios and minimum ratios of unencumbered
assets to unsecured debt. The Indenture under which our senior unsecured
indebtedness is issued contains certain financial and operating covenants
including, among other things, certain coverage ratios, as well as limitations
on our ability to incur secured and unsecured indebtedness, sell all or
substantially all of our assets and engage in mergers and consolidations and
certain acquisitions. Foreclosure on mortgaged properties or an inability to
refinance existing indebtedness would likely have a negative impact on our
financial condition, results of operations and ability to make distributions to
holders of Common Shares.
OUR DEGREE OF LEVERAGE COULD LIMIT OUR ABILITY TO OBTAIN ADDITIONAL
FINANCING. Our Debt to Market Capitalization Ratio (total debt as a percentage
of total debt plus the market value of the outstanding Common Shares, Preferred
Shares and Units) was approximately 30.8% as of March 31, 1998. We have a policy
of incurring indebtedness for borrowed money only through the Operating
Partnership and its subsidiaries and only if upon such incurrence our Debt to
Market Capitalization Ratio would be approximately 50% or less. The degree of
leverage could have important consequences to securityholders, including
affecting our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, development or other general
corporate purposes and making us more vulnerable to a downturn in business or
the economy generally.
RISING INTEREST RATES COULD ADVERSELY AFFECT CASH FLOW. We obtained the
$600 Million Credit Facility in July 1997 and the $1.5 Billion Credit Facility
in October 1997 and sold the $1.25 Billion Notes and MOPPRS in the February 1998
Notes Offering. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources -- Debt Financing."
The $1.25 Billion Notes and MOPPRS have fixed interest rates, but advances under
the Credit Facilities bear interest at a variable rate based upon one-month
LIBOR. We had, as of December 31, 1997, interest rate hedging agreements for
approximately $1.0 billion of our floating rate debt to limit our exposure to
rising interest rates, but terminated these agreements when we paid down the
Credit Facilities with the proceeds of the $1.25 Billion Notes Offering, the
MOPPRS Offering and the Series B Preferred Offering. Although hedging agreements
enable us
11
16
to convert floating rate liabilities to fixed rate liabilities, they expose us
to the risk that the counterparties to such hedge agreements may not perform,
which could increase our exposure to rising interest rates. Generally, however,
the counterparties to hedging agreements which the Company would enter into are
major financial institutions. We may borrow additional money with variable
interest rates in the future, and enter into other transactions to limit our
exposure to rising interest rates as appropriate and cost effective. Increases
in interest rates, or the loss of the benefits of hedging agreements, would
increase our interest expenses, which would adversely affect cash flow and our
ability to service our debt and make distributions to securityholders.
WE DO NOT CONTROL OUR MANAGED PROPERTIES OR MANAGEMENT AND NON-REIT SERVICES
BUSINESSES
WE DO NOT CONTROL OUR MANAGEMENT AND SERVICES BUSINESS. To facilitate
maintenance of our REIT qualification, we have Noncontrolled Subsidiaries that
provide management and other services for properties that we do not wholly own.
As of March 31, 1998, we had five Noncontrolled Subsidiaries: EOP Management
Company and Beacon Management Company (which we refer to together as the
Management Companies), which manage the 32 Managed Properties, 29 of which are
owned by affiliates of Mr. Zell and three of which are owned by unrelated third
parties, and certain properties which are held in partnerships or subject to
participation agreements with unaffiliated third parties (the "Joint Venture
Properties"); Beacon Design Company, which provides third-party tenant design
services; Beacon Construction Company, which provides third-party construction
services; and EOP Office Company, which owns a noncontrolling interest in Wright
Runstad Asset Limited Partnership, which provides third-party development
services. While we generally own substantially all (95% or 99%) of the economic
interest in the Noncontrolled Subsidiaries, their voting stock is owned directly
or indirectly by private companies controlled by Mr. Zell. (See "-- Conflicts of
Interest Could Result in Decisions Not in the Company's Best Interest -- Mr.
Zell's Affiliates Control Our Management Companies and Most of the Managed
Properties" below.) We therefore do not control the timing or amount of
distributions or the management and operation of the Noncontrolled Subsidiaries.
As a result, decisions relating to the declaration and payment of distributions
and the business policies and operations of the Noncontrolled Subsidiaries could
be adverse to our interests or could lead to adverse financial results, which
could adversely affect our financial condition and results of operations and the
ability to make distributions to holders of Common Shares. Also, there are
certain services for our tenants that we would like to provide but are
prohibited from doing so by the REIT tax laws and regulations. Certain such
services are being provided by Tenant Services Corp., which is owned entirely by
affiliates of Mr. Zell. We have no control over, or ownership interest in,
Tenant Services Corp., which operates as an independent contractor.
Consequently, we are not able to assure that Tenant Services Corp. will conduct
its day-to-day operations in a manner consistent with our best interests. We
may, however, terminate the services of Tenant Services Corp. at any time upon
30 days' notice.
CONFLICTS OF INTEREST COULD RESULT IN DECISIONS NOT IN THE COMPANY'S BEST
INTEREST
THERE WERE NO ARM'S LENGTH NEGOTIATIONS IN THE FORMATION TRANSACTIONS. The
transactions pursuant to which we formed the Company in July 1997, which we
sometimes refer to as the "Formation Transactions," were not negotiated at arm's
length. The representations and warranties made by the contributors of
properties to the Company in the Formation Transactions and the indemnification
provided for breach of such representations and warranties may not be as good as
they might have been had they been negotiated at arm's length. Such
indemnification is limited generally to an amount equal to 1% of the value of
consideration paid for the properties and to $15 million with respect to pre-IPO
liabilities of the management business contributed by affiliates of Mr. Zell. If
we incur losses attributable to breaches of the representations and warranties
made by the contributors of properties in the Formation Transactions and such
losses are in excess of the indemnification limit, they would have to be paid
for out of our assets, with the potential consequence of decreasing cash
available for distribution to securityholders. To date, we have no knowledge of
any material breaches of the agreements (which we refer to collectively as the
"Contribution Agreement") pursuant to which the Formation Transactions occurred.
WE COULD SUFFER MONETARY LOSSES IF WE FAIL TO ENFORCE THE CONTRIBUTION
AGREEMENT. Mr. Zell has a substantial economic interest in the companies that
contributed properties and the management business to
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the Company in the Formation Transactions. Consequently, Mr. Zell has a conflict
of interest with respect to his obligation as one of our officers and trustees
to enforce the terms of the Contribution Agreement. If circumstances arise where
we should seek to enforce such agreement, particularly the indemnification
provisions and the remedy provisions for breaches of representations and
warranties, Mr. Zell might assert a position contrary to the Company's. If this
happens and Mr. Zell were to prevail, we would not collect money we might
otherwise be entitled to. Also, the Common Shares and Units that are available
to satisfy claims for such indemnification will be, to the extent not used for
this purpose, available for distribution to entities in which Mr. Zell and
several other of our executive officers and trustees have an economic interest.
This is in accordance with the Contribution Agreement. Consequently, these
executive officers and trustees also have a conflict of interest in pursuing any
claim the Company might have arising out of the Formation Transactions.
MR. ZELL'S AFFILIATES CONTROL OUR MANAGEMENT COMPANIES AND MOST OF THE
MANAGED PROPERTIES. The Management Companies and Beacon Property Management,
L.P. provide property management services and, in most cases, asset management
services to the 37 Joint Venture Properties and to the 32 Managed Properties, 29
of which are owned or controlled by affiliates of Mr. Zell and three of which
are owned by unrelated third parties. Most of these management contracts were
not negotiated on an arm's length basis. While we believe that the management
fees we receive from these properties are at current market rates, there is no
assurance that these management fees will equal at all times those fees that
would be charged by an unaffiliated third party. In this regard, Mr. Zell
controls and has a substantial interest in the private company which has voting
control of the Management Companies. See "-- We Do Not Control Our Managed
Properties or Management and Non-REIT Services Businesses" above.
CERTAIN TRUSTEES AND OFFICERS HAVE CONFLICTS OF INTEREST AND COULD EXERCISE
INFLUENCE IN A MANNER INCONSISTENT WITH SHAREHOLDERS' BEST INTEREST. As of March
1, 1998, Mr. Zell and Ms. Rosenberg owned (as determined in accordance with the
Commission's rules) approximately 3.3%, and all other trustees and executive
officers of the Company as a group owned approximately 2.4%, of the outstanding
Common Shares (in each case including Common Shares issuable upon exchange of
Units). In addition, Mr. Zell and his affiliates may receive distributions of up
to approximately 9.4 million additional Units (representing approximately 3.4%
of the outstanding Common Shares on a fully diluted basis) during the two-year
period ending on or prior to July 11, 1999. These Units were set aside at the
time of the IPO and are issuable if we achieve certain performance objectives,
based on the market price of the Common Shares. Mr. Zell and Ms. Rosenberg have
significant influence on the management and operation of the Company. Such
influence might be exercised in a manner that is inconsistent with the interests
of other securityholders.
MR. ZELL AND HIS AFFILIATES CONTINUE TO BE INVOLVED IN OTHER INVESTMENT
ACTIVITIES. Although Mr. Zell entered into a noncompetition agreement at the
time of the IPO, he and his affiliates have a broad and varied range of
investment interests, including interests in other real estate investment
companies. Mr. Zell and his affiliates may acquire interests in other companies.
He may not be able to control whether any such company competes with the
Company. Consequently, Mr. Zell's continued involvement in other investment
activities could result in competition to the Company as well as management
decisions which might not reflect the interests of our securityholders.
We did not obtain noncompetition agreements with any of the former Beacon
officers or directors in connection with the Beacon Merger. Consequently, any
former officer or director of Beacon could engage in activities in competition
with activities of the Company except in the case of Mr. Sidman, who became one
of our trustees, to the extent that his actions would violate his fiduciary
duties.
WE LEASE OUR CORPORATE OFFICES FROM AN AFFILIATE OF MR. ZELL. Our corporate
offices are at Two North Riverside Plaza in Chicago. We lease our office space
there from one of Mr. Zell's affiliates. We believe, however, that the lease
terms, including the rental rates, reflect current market terms.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND MAY BE COSTLY
Federal, state and local laws and regulations relating to the protection of
the environment may require a current or previous owner or operator of real
estate to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property. The owner or operator may have to pay a
governmental entity
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or third parties for property damage and for investigation and clean-up 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 or operator knew of or caused the presence of the contaminants. Even
if more than one person may have been responsible for the contamination, each
person covered by the environmental laws may be held responsible for all of the
clean-up costs incurred. In addition, third parties may sue the owner or
operator of a site for damages and costs resulting from environmental
contamination emanating from that site.
Environmental laws also govern the presence, maintenance and removal of
asbestos. Such laws require that owners or operators of buildings containing
asbestos properly manage and maintain the asbestos, that they notify and train
those who may come into contact with asbestos and that they undertake special
precautions, including removal or other abatement, if asbestos would be
disturbed during renovation or demolition of a building. Such laws may impose
fines and penalties on building owners or operators who fail to comply with
these requirements and may allow third parties to seek recovery from owners or
operators for personal injury associated with exposure to asbestos fibers.
Independent environmental consultants have conducted Phase I environmental
site assessments at all of our Properties. These assessments included, at a
minimum, a visual inspection of the Properties and the surrounding areas, an
examination of current and historical uses of the Properties and the surrounding
areas and a review of relevant state, federal and historical documents. Where
appropriate, on a property by property basis, these consultants have conducted
additional testing, including sampling for asbestos, for lead in drinking water,
for soil contamination where underground storage tanks are or were located or
where other past site usages create a potential environmental problem, and for
contamination in groundwater.
These environmental assessments have not revealed any environmental
liabilities at the Properties that we believe would have a material adverse
effect on our business, assets, financial condition or results of operations nor
are we aware of any such material environmental liability. Asbestos is in a
number of the Office Properties, but most of these buildings contain only minor
amounts. We believe this asbestos is in good condition and almost none of it is
easily crumbled. We are currently properly managing and maintaining all of the
asbestos and we are following other requirements relating to asbestos. The
presence of asbestos should not present a significant risk as long as compliance
with these requirements continues.
For a few of the Properties, the environmental assessments note potential
offsite sources of contamination, such as underground storage tanks. For some of
the Properties, the environmental assessments note previous uses such as the
former presence of underground storage tanks. In most of these cases, follow-up
soil and/or groundwater sampling has not identified evidence of significant
contamination. In the few cases where contamination has been found, existing
plans to mitigate and monitor the sites and/or financial commitments from
certain prior owners and tenants to cover costs related to mitigation should
prevent the contamination from becoming a significant liability.
We believe that our Properties are in compliance in all material respects
with applicable environmental laws. We believe that the issues identified in the
environmental reports will not have a material adverse effect if we continue to
comply with environmental laws and with the recommendations set forth in these
reports. Unidentified environmental liabilities could arise, however, and could
have an adverse effect on our financial condition, results of operations and
ability to make distributions to holders of Common Shares.
WE ARE DEPENDENT ON OUR KEY PERSONNEL
We depend on the efforts of our executive officers, particularly Messrs.
Zell and Callahan. If they resigned, our operations could be adversely effected.
We do not have employment agreements with either of these officers.
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CONTINGENT OR UNDISCLOSED LIABILITIES ACQUIRED IN MERGERS OR SIMILAR
TRANSACTIONS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
When the Company was formed, we acquired all the assets of the ZML
Opportunity Partnerships (four real estate investment funds sponsored by Mr.
Zell) and certain assets of affiliates of Mr. Zell. These assets were acquired
subject to existing liabilities. Each of the ZML Opportunity Partnerships will
liquidate over the two-year period ending on or prior to July 11, 1999, and the
Units and other assets (including cash from distributions), net of liabilities,
will be distributed to affiliates of Mr. Zell and the limited partners of the
ZML Opportunity Partnerships during such time period. Our recourse against
affiliates of Mr. Zell with respect to liabilities relating to the management
business they contributed when the Company was formed is limited to $15 million.
Our recourse for any unknown liabilities in connection with the contribution of
properties when the Company was formed is limited to 1% of the value of the
consideration paid for those assets and must be asserted prior to July 11, 1999.
Similarly, the assets we acquired in the Beacon Merger were acquired subject to
liabilities and without any recourse with respect to unknown liabilities.
Unknown liabilities with respect to properties acquired when we formed the
Company or in the Beacon Merger might include liabilities for clean-up or
remediation of undisclosed environmental conditions, claims of tenants, vendors
or other persons dealing with the entities prior to the IPO or the Beacon Merger
(if such claims had not been asserted prior to the respective closings of such
transactions), accrued but unpaid liabilities incurred in the ordinary course of
business, and claims for indemnification by general partners, directors,
officers and others indemnified by the ZML Opportunity Partnerships or Beacon.
Similarly, we succeeded to any liabilities that the ZML REITs may have had for
periods prior to the IPO and that Beacon may have had prior to the Beacon
Merger. We also succeeded to any liabilities, including claims for property
transfer taxes, arising out of the contribution to us of properties when the
Company was formed and in connection with the Beacon Merger. In the future, we
may face additional risks of contingent or undisclosed liabilities as a result
of mergers, other business combinations or similar transactions.
THE MARKET VALUE OF OUR PUBLICLY TRADED SECURITIES CAN BE ADVERSELY AFFECTED BY
A NUMBER OF FACTORS
THE LARGE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY AFFECT
THE MARKET PRICE OF OUR PUBLICLY TRADED SECURITIES. As of March 31, 1998, a
majority of our outstanding Common Shares were "Restricted Common Shares" issued
in private placement transactions, primarily the Formation Transactions. These
Shares are not traded in the public stock markets so long as they remain
restricted. Restricted Common Shares, Common Shares issued on redemption of
Units and Common Shares issuable upon conversion of Series B Preferred Shares
may be sold in the public market pursuant to registration rights or pursuant to
Rule 144 under the Securities Act or other available exemptions from
registration. In addition, we have reserved a number of Common Shares for
issuance pursuant to our employee benefit plans, and such Common Shares will be
available for sale from time to time. We have granted options to purchase
additional Common Shares to certain executive officers, employees, trustees and
consultants. The Common Shares issued in the Beacon Merger to affiliates of
Beacon are tradeable within the volume and manner of sale limitations of Rule
144 under the Securities Act. We can not predict the effect that future sales of
Common Shares, or the perception that such sales could occur, will have on the
market prices of our equity securities.
CHANGES IN MARKET CONDITIONS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR
PUBLICLY TRADED SECURITIES. As with other publicly traded equity securities, the
value of our publicly traded securities depends on various market conditions,
which may change from time to time. Among the market conditions that may affect
the value of our publicly traded securities are the following: the extent of
institutional investor interest in the Company; the reputation of REITs and
office REITs generally and the attractiveness of their equity securities in
comparison to other equity securities (including securities issued by other real
estate companies); our financial condition and performance; and general
financial market conditions.
OUR EARNINGS AND CASH DISTRIBUTIONS WILL AFFECT THE MARKET PRICE OF OUR
PUBLICLY TRADED SECURITIES. We believe that the market value of a REIT's equity
securities is based primarily upon the market's perception of the REIT's growth
potential and its current and potential future cash distributions, and is
secondarily based upon the real estate market value of the underlying assets.
For that reason, Shares may trade at prices that are higher or lower than the
net asset value per share. To the extent we retain operating cash flow
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for investment purposes, working capital reserves or other purposes, these
retained funds, while increasing the value of our underlying assets, may not
correspondingly increase the market price of our Shares. Our failure to meet the
market's expectations with regard to future earnings and cash distributions
would likely adversely affect the market price of our publicly traded
securities.
MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR PUBLICLY
TRADED SECURITIES. One of the factors that investors consider important in
deciding whether to buy or sell shares of a REIT is the distribution rate on
such shares (as a percentage of the price of such shares) relative to market
interest rates. If market interest rates go up, prospective purchasers of Shares
may expect a higher distribution rate. Higher interest rates would not, however,
result in more funds for us to distribute and, in fact, would likely increase
our borrowing costs and potentially decrease funds available for distribution.
Thus, higher market interest rates could have a substantial effect on the market
price of our publicly traded securities.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL
To qualify as a REIT, the Company must distribute to its shareholders each
year at least 95% of its net taxable income (excluding any net capital gain).
See "Federal Income Tax Considerations -- Requirements for Qualification as a
REIT -- Annual Distribution Requirements Applicable to REITs." Because of these
distribution requirements, it is not likely that we will be able to fund all
future capital needs, which we expect will continue to be significant, solely
from income from operations. We therefore will have to rely on third-party
sources of capital, which may or may not be available, and, if available, may
not be on favorable terms. Our access to third-party sources of capital depends
on a number of factors, including the market's perception of our growth
potential and our current and potential future earnings. Moreover, additional
equity offerings may result in substantial dilution of the interests of holders
of Common Shares, and additional debt financing may substantially increase our
leverage.
OUR SUCCESS AS A REIT IS DEPENDENT ON COMPLIANCE WITH FEDERAL INCOME TAX
REQUIREMENTS
FAILURE OF THE COMPANY TO QUALIFY AS A REIT WOULD HAVE SERIOUS ADVERSE
CONSEQUENCES TO OUR SECURITYHOLDERS. We believe that, since the IPO in July
1997, the Company has qualified for taxation as a REIT for federal income tax
purposes. We plan to continue to meet the requirements for taxation as a REIT.
Many of these requirements, however, are highly technical and complex. The
determination that the Company is a REIT requires an analysis of various factual
matters and circumstances that may not be totally within our control. For
example, to qualify as a REIT, at least 95% of our gross income must come from
certain sources that are itemized in the REIT tax laws. The Company is also
required to distribute to shareholders at least 95% of its REIT taxable income
(excluding capital gains). The fact that we hold our assets through the
Operating Partnership and its subsidiaries further complicates the application
of the REIT requirements. Even a technical or inadvertent mistake could
jeopardize our REIT status. Furthermore, Congress and the IRS might make changes
to the tax laws and regulations, and the courts might issue new rulings that
make it more difficult, or impossible, for the Company to remain qualified as a
REIT. We do not believe, however, that any pending or proposed tax law changes
would jeopardize our REIT status.
Hogan & Hartson L.L.P., special tax counsel to the Company, has given us an
opinion to the effect that the Company is organized in conformity with the
requirements for qualification and taxation as a REIT under the Code and that
the Company's proposed method of operation will enable it to continue to meet
the requirements for qualification and taxation as a REIT. See "Federal Income
Tax Considerations -- Taxation of the Company as a REIT." The opinion of Hogan &
Hartson L.L.P. is based on assumptions and factual representations made by us
regarding the Company's ability to meet the requirements for qualification as a
REIT and is not binding on the IRS or any court. Moreover, Hogan & Hartson
L.L.P. does not review or monitor the Company's compliance with the requirements
for REIT qualification on an ongoing basis. We cannot guarantee that the Company
will be qualified and taxed as a REIT, because the Company's qualification and
taxation as a REIT will depend upon the Company's ability to meet on an ongoing
basis the requirements imposed under the Code.
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If the Company fails to qualify as a REIT, the Company would be subject to
federal income tax at regular corporate rates. Also, unless the IRS granted the
Company relief under certain statutory provisions, the Company would remain
disqualified as a REIT for four years following the year the Company first
failed to qualify. If the Company failed to qualify as a REIT, the Company would
have to pay significant income taxes and would therefore have less money
available for investments or for distributions to shareholders. This would
likely have a significant adverse affect on the value of our securities. In
addition, the Company would no longer be required to make any distributions to
shareholders. See "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT -- Failure of the Company to Qualify as a REIT."
WE PAY SOME TAXES. Even if the Company qualifies as a REIT, we are required
to pay certain federal, state and local taxes on our income and property. In
addition, any net taxable income earned directly by the Noncontrolled
Subsidiaries is subject to federal and state income tax. See "Federal Income Tax
Considerations -- Other Tax Consequences for the Company, Its Shareholders and
the Noncontrolled Subsidiaries."
WE COULD BE DISQUALIFIED AS A REIT OR HAVE TO PAY TAXES IF OUR PREDECESSORS
OR BEACON DID NOT QUALIFY AS REITS. If one or more of the ZML REITs that merged
into the Company at the time of the IPO or Beacon had failed to qualify as a
REIT throughout the duration of its existence, then it might have had
undistributed "C corporation earnings and profits." If that were the case and
the Company did not distribute such earnings and profits prior to December 31,
1997, the Company might not qualify as a REIT. We believe that each of the ZML
REITs and Beacon qualified as a REIT and that, in any event, neither any ZML
REIT nor Beacon had any undistributed "C corporation earnings and profits" at
the time of its respective merger into the Company. If any ZML REIT or Beacon
failed to qualify as a REIT, an additional concern would be that it would have
recognized taxable gain at the time it was merged into the Company (and the
Company would be liable for the tax on such gain). This would be the case even
though the applicable merger qualified as a "tax-free reorganization," unless
the Company makes a special election that is available under current law. The
Company will make such an election with respect to each of the ZML REITs and
Beacon. This election will have the effect of requiring the Company, if a ZML
REIT or Beacon was not qualified as a REIT, to pay corporate income tax on any
gain existing at the time of the applicable merger on assets acquired in the
merger if such assets are sold within 10 years after the merger of the ZML REITs
or Beacon (as applicable) into the Company. Finally, if a ZML REIT did not
qualify as a REIT, the Company could be precluded from electing REIT status for
up to four years after the year in which such ZML REIT failed to qualify if the
Company were determined to be a "successor" to that ZML REIT. See "Federal
Income Tax Considerations -- Taxation of the Company as a REIT -- General" and
"-- Requirements for Qualification as a REIT."
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THE COMPANY
GENERAL
The Company was formed in 1996 as a Maryland REIT and commenced operations
effective with the completion of its IPO. The Company, together with the
Operating Partnership, was formed to continue and expand the national office
property business organized by Mr. Zell, Chairman of the Board of Trustees of
the Company. The Company, a self-administered and self-managed REIT, is the
managing general partner of the Operating Partnership. As of March 31, 1998, the
Company owned, directly or indirectly, 89.6% of the outstanding Units. The
Company owns all of its assets and conducts substantially all of its business
through the Operating Partnership and its subsidiaries.
As of March 31, 1998, the Company owned or had an interest in 260 Office
Properties containing approximately 66.6 million rentable square feet of office
space and owned or had an interest in 17 Parking Facilities containing
approximately 16,749 parking spaces. To facilitate maintenance of the Company's
qualification as a REIT for federal income tax purposes, management of
properties that are not wholly owned by the Company and its subsidiaries is
generally conducted through EOP Management Company and Beacon Management
Company.
The principal executive offices of the Company are located at Two North
Riverside Plaza, 22nd Floor, Chicago, Illinois 60606, and their telephone number
is (312) 466-3300. The Company maintains regional offices in Los Angeles,
Denver, Houston, Chicago, Atlanta and Washington, D.C.
OPERATIONS
The operation of the Properties is under the direction of six regional
managers, each of whom has oversight responsibility for all of the Properties in
his respective region. Each region has strategic and budget planning
responsibility combined with due diligence, property management,
engineering/construction, leasing/marketing and information systems expertise.
Each regional manager reports to the Company's Executive Vice President -- Real
Estate Operations.
OPERATIONAL STRUCTURE
The Operating Partnership is the entity through which the Company owns the
Properties. The ownership and management structure of the Company is intended to
(i) enable the Company to acquire assets in transactions that may defer some or
all of the sellers' tax consequences and (ii) enable the Company to comply with
certain technical and complex requirements under the federal tax rules and
regulations relating to the assets and income permitted for a REIT.
The Management Companies provide office property and asset management
services to 32 Managed Properties, 29 of which are owned by affiliates of Mr.
Zell. The Management Companies and Beacon Properties Management, L.P., a
Delaware limited partnership ("BPMLP") provide office property and asset
management services to 37 Joint Venture Properties. The Management Companies and
BPMLP collect property management fees for the performance of such services. See
"Risk Factors -- We Do Not Control Our Managed Properties or Management and
Non-REIT Services."
The 37 Joint Venture Properties are held in partnerships or are subject to
participation agreements with unaffiliated third parties. Thirty of the Joint
Venture Properties are Office Properties and seven are Parking Facilities. The
Company or a subsidiary is the managing general partner of each of the Joint
Venture Properties (except for Civic Parking L.L.C., where a subsidiary of the
Company is one of two managing members).
The Company's acquisition and oversight of its Parking Facilities is
administered through a wholly owned subsidiary, Equity Capital Holdings, L.P.
All but one of the Parking Facilities are leased to and operated by third-party
parking garage service companies under leases where such service companies bear
the operating expenses.
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ACQUISITION ACTIVITY
During the period from 1987 through 1997, the Company invested
approximately $10 billion, averaging $2.7 billion annually (calculated on a cost
basis) for the three years ended December 31, 1997, in acquisitions of
institutional quality office properties throughout the United States. During the
period from the Company's IPO in July 1997 through April 1998, the Company
completed a number of new acquisitions:
BEACON MERGER. On December 19, 1997, the Company, the Operating
Partnership, Beacon and Beacon Partnership consummated the transactions
contemplated by the Merger Agreement, whereby Beacon merged with and into the
Company and Beacon Partnership merged with and into the Operating Partnership.
The acquisition cost of the Beacon Merger was approximately $4.3 billion.
As a result of the Beacon Merger, the Company acquired interests in 130
Office Properties containing approximately 20.9 million rentable square feet of
office space. The Beacon Properties are located in 22 submarkets in six markets:
Boston, Atlanta, Chicago, Los Angeles, San Jose and Washington, D.C.
OTHER ACQUISITIONS. On December 17, 1997, the Company consummated the
Wright Runstad Acquisition in which it acquired ten Office Properties,
containing an aggregate of approximately 3.34 million square feet, located in
Seattle, Washington, Portland, Oregon and Anchorage, Alaska, from Wright Runstad
Holdings L.P., Wright Runstad Asset Management L.P. and Mellon Bank, N.A., as
Trustee for First Plaza. The purchase price was approximately $640 million. In
addition to the Beacon Merger and the Wright Runstad Acquisition, during the
period from the IPO through April 30, 1998, the Company completed the Other
Acquisitions in which it acquired 36 Office Properties, containing an aggregate
of approximately 12.1 million square feet, located in Boston, New Orleans,
Houston, Denver, Dallas, Philadelphia, Los Angeles, Chicago, San Francisco,
Washington, D.C. and Fairfax and Alexandria, Virginia. The aggregate
consideration paid by the Company for the Other Acquisitions was approximately
$2.0 billion, comprised of $1.7 billion in cash, $163 million in Units and $96
million in assumed liabilities. Subsequent to the IPO, the Company also acquired
three Parking Facilities, containing approximately 2,141 parking spaces in
Chicago, New Orleans and Pittsburgh for $54.9 million. Giving effect to the
Other Acquisitions, as of April 30, 1998 the Company owned or had an interest in
266 Office Properties containing 68.7 million square feet.
PROBABLE ACQUISITIONS. The Company has entered into agreements to acquire
an aggregate of twelve additional office properties in the Probable
Acquisitions. The Company expects to acquire one office property located in
Denver during May 1998 as well as four office properties located in Denver and
four office properties located in Albuquerque during July 1998. These nine
properties contain an aggregate of approximately 1.4 million square feet. The
aggregate purchase price for these nine properties is approximately $190
million, comprised of approximately $127 million in cash, and approximately $63
million in the form of promissory notes of the Company, payable, at the option
of the Company, in Common Shares. The Company has also entered into an agreement
to acquire three office properties (including one office property currently in
development) located in Dallas containing an aggregate of approximately 1.0
million square feet for aggregate consideration estimated to be $150.0 million
in cash. The Company expects to complete this acquisition by the end of
September 1998.
BUSINESS AND GROWTH STRATEGIES
The Company's primary business objective is to achieve sustainable
long-term growth in cash flow and portfolio value. The Company intends to
achieve this objective by owning and operating institutional quality office
buildings and providing a superior level of service to tenants in central
business districts ("CBDs") and suburban markets across the United States. The
Company intends to supplement this strategy by owning parking facilities.
INTERNAL GROWTH. Management believes that the Company's future internal
growth will come from (i) lease up of vacant space, (ii) tenant roll-over at
increased rents where market conditions permit, (iii) repositioning of certain
Properties which have not yet achieved stabilization, and (iv) increasing
economies of scale.
As of March 31, 1998, 3.7 million rentable square feet of Office Property
space was vacant, representing 5.6% of the Company's total Office Property
portfolio. Of this amount, 537,900 square feet was leased at an average rent of
$29.14 per square foot, with occupancy to commence in whole or in part during
1998. The
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Company's average operating expenses for the total vacant space were $9.38 per
square foot as of March 31, 1998.
During the period from March 31, 1998 through December 31, 2002, 4,566
leases for 36.3 million rentable square feet of space are scheduled to expire.
As of March 31, 1998, the average rent for this space was $22.18 per square foot
and the average operating expenses were $8.93 per square foot. The actual rental
rates at which available space will be renewed or relet will depend on
prevailing market factors at the time.
The Company owns certain parcels of undeveloped land acquired in connection
with its acquisition of the Office Properties. The Company is currently
proceeding with the development of two additional office properties totaling
approximately 430,000 square feet. In determining whether to develop land, the
Company considers, among other factors, whether significant pre-leasing can be
arranged or if such development is necessary to protect the Company's investment
in existing Properties.
EXTERNAL GROWTH. The Company is pursuing, and expects to continue to
actively pursue, acquisitions of additional office properties and parking
facilities. Management believes that significant opportunities for external
growth will continue to be available through strategic acquisitions of
institutional quality office properties. Properties may be acquired separately
or as part of a portfolio, and may be acquired for cash and/or in exchange for
equity or debt securities of the Company or the Operating Partnership, and such
acquisitions may be customary real estate transactions and/or mergers or other
business combinations.
PARKING FACILITIES. Management believes that parking facilities offer the
Company attractive investment opportunities which are complementary to
investments in office properties. The Company intends to focus its acquisition
efforts for parking facilities solely on municipal or private parking facilities
that have limited competition, no (or minimal) rental rate restrictions and/or a
superior location proximate to or affiliated with airports, CBDs, entertainment
projects or healthcare facilities.
EMPLOYEES
As of March 31, 1998, the Company had approximately 1,482 employees
providing in-house expertise in property management, leasing, finance, tax,
acquisition, development, disposition, marketing, accounting, information
systems and real estate law. The five most senior executives have an average
tenure of 11 years with the Company or its affiliates and an average of 23 years
experience in the real estate industry.
PRICE RANGE OF COMMON SHARES AND DISTRIBUTION HISTORY
The Common Shares began trading on the NYSE on July 8, 1997, under the
symbol "EOP." On , 1998, the last reported sales price per Common
Share on the NYSE was , and there were approximately holders of
record of the Common Shares. The table below sets forth the historical quarterly
high and low closing sales price per Common Share reported on the NYSE and the
distributions paid by the Company with respect to each such period.
PERIOD HIGH LOW DISTRIBUTIONS
------ ---- --- -------------
1997
- ----
Third Quarter (from July 9, 1997)..................... $33 15/16 $26 1/16 $.26(1)
Fourth Quarter........................................ $34 11/16 $29 -- $.30
1998
- ----
First Quarter......................................... $31 7/8 $28 -- $.32
Second Quarter (through , 1998).............
- ---------------
(1) The Company paid a distribution of $.26 per Common Share on October 9, 1997,
to shareholders of record on September 29, 1997, for the period from July
11, 1997 (the closing of the IPO), through September 30, 1997, which is
approximately equivalent to a quarterly distribution of $.30 and an annual
distribution of $1.20 per Common Share.
20
25
The Credit Facilities prohibit distributions in respect of the Operating
Partnership's Units, and thus the Company's shares of beneficial interest
therein, if such distributions exceed, on an aggregate annual basis, 90% of
Funds from Operations. In addition, there can be no assurance as to the payment
of distributions on Common Shares in the future because such payment will depend
upon the earnings and financial condition of the Company, as well as other
factors. In order to remain qualified as a REIT under the Code, the Company must
distribute to its shareholders at least 95% of its taxable income (other than
net capital gain) annually. See "Federal Income Tax Considerations --
Requirements for Qualification as a REIT -- Annual Distribution Requirements
Applicable to REITs."
The Declaration of Trust permits the issuance of Preferred Shares having
the right to receive distributions before distributions on the Common Shares are
declared and paid. The Series A Preferred Shares and Series B Preferred Shares
have such preferential distribution rights. See "Shares of Beneficial Interest
- --Series A Preferred Shares -- Distributions" and "-- Series B Preferred Shares
- -- Ranking."
For a more detailed discussion of the tax treatment of distributions to the
holders of Common Shares and Preferred Shares, see "Federal Income Tax
Considerations -- Taxation of Taxable U.S. Shareholders of the Company
Generally," "-- Taxation of Tax-Exempt Shareholders of the Company" and "--
Taxation of Non-U.S. Shareholders of the Company."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 on a historical basis and a Pro Forma Basis. The information
set forth in the table should be read in conjunction with the financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" included elsewhere in this Prospectus.
DECEMBER 31, 1997
-------------------------
PRO FORMA
HISTORICAL BASIS
----------- -----------
(IN THOUSANDS)
Debt:
Mortgage Debt(1).......................................... $ 2,063,017 $ 2,111,126
Credit Facilities(1)...................................... 2,041,300 858,761
Notes Payable............................................. 180,000 1,747,882
Minority Interest......................................... 725,206 725,306
Shareholders' Equity........................................ 6,405,157 6,738,716
----------- -----------
Total Capitalization................................... $11,414,680 $12,181,791
=========== ===========
- ---------------
(1) See Notes 7 and 8 of the notes to the December 31, 1997 Historical
Consolidated and Combined Financial Statements of the Company and the Equity
Office Predecessors for information relating to the indebtedness.
21
26
SELECTED FINANCIAL INFORMATION
The following sets forth selected consolidated and combined financial and
operating information on a pro forma basis for the Company and on an historical
basis for the Company and the Equity Office Predecessors. The following
historical information should be read in conjunction with the consolidated and
combined financial statements and notes thereto of the Company and Equity Office
Predecessors included elsewhere in this Prospectus. The selected consolidated
historical and operating information of the Company at December 31, 1997, and
for the period from July 11, 1997 to December 31, 1997, has been derived from
the historical consolidated financial and operating information of the Company
audited by Ernst & Young LLP, independent auditors, whose report with respect
thereto is included elsewhere in this Prospectus. The selected combined
historical and operating information at December 31, 1996 and for the period
from January 1, 1997 to July 10, 1997 and the years ended December 31, 1996 and
1995, has been derived from the historical combined financial and operating
information of Equity Office Predecessors audited by Ernst & Young LLP,
independent auditors, whose report with respect thereto is included elsewhere in
this Prospectus. The selected combined financial and operating information of
the Equity Office Predecessors at December 31, 1995 and for the year ended
December 31, 1994 has been derived from the historical audited combined
financial statements not included herein. The selected combined financial and
operating information of Equity Office Predecessors at December 31, 1994 and
1993, and for the year ended December 31, 1993, has been derived from the
historical unaudited combined financial statements of Equity Office
Predecessors. Unaudited pro forma operating information for the year ended
December 31, 1997 is presented as if the borrowings under the Credit Facilities
at the end of the period, acquisitions (including the Beacon Merger) that
occurred during and subsequent to the period, the Probable Acquisitions, the IPO
and Consolidation, the Private Debt Offering, the February 1998 Notes Offering,
and the Series B Preferred Offering had occurred on January 1, 1997 and,
therefore, incorporates certain assumptions that are described in the notes to
the Pro Forma Condensed Combined Financial Statements included elsewhere in this
Prospectus. The unaudited pro forma balance sheet data is presented as if the
borrowings under the Credit Facilities that occurred subsequent to December 31,
1997, the February 1998 Notes Offering, the Series B Preferred Offering, the UIT
Offering, the acquisitions that occurred subsequent to December 31, 1997, and
the Probable Acquisitions had occurred on December 31, 1997. The pro forma
information does not purport to represent what the Company's financial position
or results of operations would actually have been if these transactions had, in
fact, occurred on such date or at the beginning of the period indicated, or to
project the Company's financial position or results of operations at any future
date or for any future period.
EQUITY OFFICE
PREDECESSORS
(COMBINED
COMPANY HISTORICAL)
FOR THE FOR THE EQUITY OFFICE PREDECESSORS
COMPANY PERIOD FROM PERIOD FROM (COMBINED HISTORICAL)
PRO FORMA FOR JULY 11, 1997 JAN. 1, 1997 FOR THE YEARS ENDED DECEMBER 31,
THE YEAR ENDED TO DEC. 31, TO JULY 10, -----------------------------------------
DEC. 31, 1997 1997 1997 1996 1995 1994 1993
-------------- ------------- ------------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
REVENUES:
Rental, parking and other............. $ 1,515,398 $ 406,713 $327,017 $493,396 $356,959 $230,428 $150,315
----------- ----------- -------- -------- -------- -------- --------
Total revenues.................... $ 1,546,966 $ 412,968 $339,104 $508,124 $371,457 $240,878 $159,246
----------- ----------- -------- -------- -------- -------- --------
EXPENSES:
Interest............................ $ 324,694 $ 76,675 $ 80,481 $119,595 $100,566 $ 59,316 $ 36,755
Depreciation and amortization....... 280,180 70,346 66,034 96,237 74,156 46,905 29,752
Property operating(1)............... 556,501 155,679 127,285 201,067 151,488 107,412 74,028
General and administrative.......... 56,048 17,690 17,201 23,145 21,987 15,603 12,012
Provision for value impairment...... -- -- -- -- 20,248 -- --
----------- ----------- -------- -------- -------- -------- --------
Total expenses.................... $ 1,217,423 $ 320,390 $291,001 $440,044 $368,445 $229,236 $152,547
----------- ----------- -------- -------- -------- -------- --------
Income before (income) loss
allocated to minority interests,
income from investments in
unconsolidated joint ventures,
gain on sales of real estate, and
extraordinary items............... $ 329,543 $ 92,578 $ 48,103 $ 68,080 $ 3,012 $ 11,642 $ 6,699
Minority interests allocation......... (33,664) (7,799) (912) (2,086) (2,129) 1,437 1,772
Income from investments in
unconsolidated joint ventures....... 12,823 3,173 1,982 2,093 2,305 1,778 --
Gain/(Loss) on sales of real estate
and extraordinary items(2).......... (16,240) 12,236 5,338 31,271 1,705 --
----------- ----------- -------- -------- -------- -------- --------
Net income before preferred
dividends........................... 308,702 71,712 61,409 73,425 34,459 16,562 8,471
Preferred dividends................... (33,710) (649) -- -- -- -- --
----------- ----------- -------- -------- -------- -------- --------
Net income available to Common
Shares.............................. $ 274,992 $ 71,063 $ 61,409 $ 73,425 $ 34,459 $ 16,562 $ 8,471
=========== =========== ======== ======== ======== ======== ========
Net income available per weighted
average Common Share outstanding --
Basic............................... $ 1.09 $ .44
=========== ===========
Net income available per weighted
average Common Share outstanding --
Diluted............................. $ 1.08 $ .43
=========== ===========
Weighted average Common Shares
outstanding -- Basic................ 251,155,672 162,591,477
=========== ===========
Weighted average Common Shares
outstanding -- Diluted.............. 285,343,812 180,014,027
=========== ===========
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EQUITY OFFICE
PREDECESSORS
COMPANY (COMBINED
PRO FORMA COMPANY FOR HISTORICAL) FOR
FOR THE PERIOD FROM THE PERIOD FROM
THE YEAR ENDED JULY 11, 1997 TO JAN. 1, 1997 TO
DEC. 31, 1997 DEC. 31, 1997 JULY 10, 1997
-------------- ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
(at end of period)
Investment in real estate after accumulated
depreciation................................ $11,923,009 $10,976,319 --
----------- ----------- -----------
Total assets................................ $12,518,783 $11,751,672 --
----------- ----------- -----------
Mortgage debt, unsecured notes and lines of
credit...................................... $ 4,717,769 $ 4,284,317 --
----------- ----------- -----------
Total liabilities........................... $ 5,025,149 $ 4,591,697 --
----------- ----------- -----------
Minority interests........................... $ 754,918 $ 754,818 --
----------- ----------- -----------
Shareholders'/Owners' equity................. $ 6,738,716 $ 6,405,157 --
----------- ----------- -----------
OTHER DATA:
General and administrative expenses as a
percentage of total revenues................ 3.6% 4.3% 5.1%
----------- ----------- -----------
Number of Office Properties owned at period
end(3)...................................... 279 258 --
----------- ----------- -----------
Net rentable square feet of Office Properties
owned at period end (in millions)(3)........ 71.4 65.3 --
----------- ----------- -----------
Occupancy of Office Properties owned at
period end(3)............................... 95% 94% --
----------- ----------- -----------
Number of Parking Facilities owned at period
end......................................... 17 17 --
----------- ----------- -----------
Number of spaces at Parking Facilities owned
at period end............................... 16,749 16,749 --
----------- ----------- -----------
Funds from Operations(4)..................... $ 163,253 $ 113,022
----------- -----------
Cash flow from operating activities.......... $ 190,754 $ 95,960
Cash flow used for investing activities...... $(1,592,272) $ (571,068)
Cash flow from financing activities.......... $ 1,630,346 $ 245,851
EQUITY OFFICE PREDECESSORS (COMBINED HISTORICAL)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
(at end of period)
Investment in real estate after accumulated
depreciation................................ $ 3,291,815 $ 2,393,403 $ 1,815,160 $ 1,220,268
----------- ----------- ----------- -----------
Total assets................................ $ 3,912,565 $ 2,650,890 $ 2,090,933 $ 1,318,644
----------- ----------- ----------- -----------
Mortgage debt, unsecured notes and lines of
credit...................................... $ 1,964,892 $ 1,434,827 $ 1,261,156 $ 798,897
----------- ----------- ----------- -----------
Total liabilities........................... $ 2,174,483 $ 1,529,334 $ 1,350,552 $ 845,315
----------- ----------- ----------- -----------
Minority interests........................... $ 11,080 $ 31,587 $ 9,283 $ (15,298)
----------- ----------- ----------- -----------
Shareholders'/Owners' equity................. $ 1,727,002 $ 1,089,969 $ 731,098 $ 488,627
----------- ----------- ----------- -----------
OTHER DATA:
General and administrative expenses as a
percentage of total revenues................ 4.6% 5.9% 6.5% 7.5%
----------- ----------- ----------- -----------
Number of Office Properties owned at period
end(3)...................................... 83 73 63 48
----------- ----------- ----------- -----------
Net rentable square feet of Office Properties
owned at period end (in millions)(3)........ 29.2 23.1 18.5 13.6
----------- ----------- ----------- -----------
Occupancy of Office Properties owned at
period end(3)............................... 90% 86% 88% 80%
----------- ----------- ----------- -----------
Number of Parking Facilities owned at period
end......................................... 10 3 -- --
----------- ----------- ----------- -----------
Number of spaces at Parking Facilities owned
at period end............................... 7,321 3,323 -- --
----------- ----------- ----------- -----------
Funds from Operations(4)..................... $ 160,460 $ 96,104 $ 60,372 --
----------- ----------- ----------- -----------
Cash flow from operating activities.......... $ 165,975 $ 93,878 $ 73,821 --
Cash flow used for investing activities...... $ (924,227) $ (380,615) $ (513,965) --
Cash flow from financing activities.......... $ 1,057,551 $ 276,513 $ 514,923 --
- ---------------
(1) Includes property operating expenses, real estate taxes, insurance, as well
as repair and maintenance expenses.
(2) The column entitled "Company Pro Forma for the year ended December 31, 1997"
excludes the effect of any gain (loss) on sales of real estate and
extraordinary items.
(3) The pro forma number of Office Properties as of December 31, 1997 includes
Office Properties acquired subsequent to December 31, 1997 and Probable
Acquisitions.
(4) The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. The Company believes that Funds from Operations is helpful
to investors as a measure of the performance of an equity REIT because,
along with cash flow from operating activities, financing activities and
investing activities, it provides investors with an indication of the
ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. The Company computes Funds from
Operations in accordance with standards established by NAREIT, which may not
be comparable to Funds from Operations reported by other REITs that do not
define the term in accordance with the current NAREIT definition or that
interpret the current NAREIT definition differently than the Company. Funds
from Operations does not represent cash generated from operating activities
in accordance with GAAP and should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is it indicative of funds available to fund the Company's
cash needs, including its ability to make cash distributions. For a
reconciliation of net income and Funds from Operations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Funds from Operations."
23
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of the consolidated and combined
financial condition and results of operations should be read in conjunction with
the Consolidated Financial Statements of the Company and the Combined Financial
Statements of Equity Office Predecessors and Notes thereto contained herein. All
references to the historical activities of the Company prior to July 11, 1997,
the date of the Company's IPO contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations refer to the
activities of the Equity Office Predecessors. Terms employed herein as defined
terms, but without definition, shall have the meaning set forth in the financial
statements. Statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical facts may
be forward-looking statements within the meaning of Section 27A of the
Securities Act. The Company intends such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements contained
in Section 27A of the Securities Act and such forward-looking statements are
included for purposes of complying therewith. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of December 31,
1997.
On July 11, 1997, following the completion of the IPO and the related
formation transactions, the Company owned 90 office properties containing
approximately 32.2 million rentable square feet and 14 parking facilities
containing 14,785 spaces. During the period from July 11, 1997 to December 31,
1997, the Company acquired an additional 168 office properties containing
approximately 33.1 million square feet and three parking facilities containing
1,964 spaces. The aggregate purchase price for these acquisitions was in excess
of $6 billion. These acquisitions, which included the successful completion of
the merger with Beacon in December, effectively doubled the size of the
Company's portfolio in its first six months as a public company, giving it a
total of 258 office buildings with approximately 65.3 million rentable square
feet, and 17 parking facilities with approximately 16,749 spaces.
The Company owns substantially all of its assets and conducts substantially
all of its business through the Operating Partnership and its subsidiaries. At
December 31, 1997, the Company owned, directly or indirectly, approximately
89.5% of the outstanding Units.
In addition to the acquisition activity detailed above, the Company was
also active in the capital markets. Below is a schedule of significant capital
events which have taken place since the IPO on July 11, 1997 (see "-- Liquidity
and Capital Resources" below for the details of these transactions):
- On July 15, 1997, the Company closed on a $600 million revolving line of
credit (the "$600 Million Credit Facility").
- On September 3, 1997, the Company completed a private placement of $180
million senior unsecured notes (the "$180 Million Notes Offering").
- On October 2, 1997, the Company closed on a $1.5 billion unsecured term
loan (the "$1.5 Billion Credit Facility").
- In October 1997, the Company completed two private placements of a total
of 9,685,034 Restricted Common Shares.
- In connection with the Beacon Merger and other acquisitions which took
place since the IPO, the Company issued a total of 87,861,544 Common
Shares, an additional 17,282,043 Units, 8,000,000 8.98% Series A
Cumulative Redeemable Preferred Shares, liquidation preference $25.00 per
share (the "Series A Preferred Shares"), and warrants to purchase
5,000,000 Restricted Common Shares.
- In February 1998, the Company completed a $1.25 billion private placement
of senior unsecured notes (the "$1.25 Billion Notes Offering") and a
private placement of $250 million MandatOry Par Put Remarketed Securities
("MOPPRS") (the "$250 Million MOPPRS Offering").
24
29
- In February 1998, the Company completed a $300 million private placement
(the "Series B Preferred Offering") of 5.25% Series B Convertible,
Cumulative Redeemable Preferred Shares, liquidation preference of $50.00
per share (the "Series B Preferred Shares").
- In April 1998, the Company completed a $44 million private placement of
Restricted Common Shares (the "UIT Offering").
RESULTS OF OPERATIONS
GENERAL
The following discussion is based primarily on the Consolidated Financial
Statements of the Company and the Combined Financial Statements of Equity Office
Predecessors, as applicable, as of December 31, 1997 and 1996 and for each of
the years ended December 31, 1997, 1996 and 1995.
The Company receives income primarily from rental revenue from Office
Properties (including reimbursements from tenants for certain operating costs),
parking revenue from Office Properties and stand-alone Parking Facilities, and,
to a lesser extent, fees from noncombined affiliates for the management of the
Managed Properties.
As of December 31, 1997, the Company owned or had an interest in 258 Office
Properties totaling approximately 65.3 million square feet, and 17 stand-alone
Parking Facilities with approximately 16,749 spaces, including properties
acquired through the Beacon Merger (the "Total Portfolio"). Of the Total
Portfolio, 71 of these Office Properties, totaling approximately 22.6 million
square feet and three Parking Facilities were acquired prior to January 1, 1996;
11 Office Properties, totaling approximately 6.1 million square feet, and seven
Parking Facilities were acquired in 1996; and 176 Office Properties, totaling
approximately 36.6 million square feet, and seven Parking Facilities were
acquired during the year ended December 31, 1997. As a result of this rapid
growth in the size of the Total Portfolio, the financial data presented shows
large increases in revenues and expenses from year to year. For the foregoing
reasons, the Company does not believe its year to year financial data is
comparable. Therefore, the analysis below shows changes resulting from
Properties that were held during the entire period for the years being compared
(the "Core Portfolio") and the changes in Total Portfolio. The Core Portfolio
for the comparison between the year ended December 31, 1997 and 1996 consists of
70 Office Properties and three Parking Facilities acquired prior to January 1,
1996. The Core Portfolio for these comparisons excludes Barton Oaks Plaza II, a
118,529 square foot Office Property which was sold in January 1997, 8383
Wilshire, a 417,463 square foot Office Property, which was sold in May 1997, and
28 State Street, a 570,040 square foot Office Property, which was undergoing
major redevelopment for the periods discussed. The Core Portfolio for the
comparison between the years ended December 31, 1996 and 1995 consists of the 63
Office Properties acquired prior to January 1, 1995. The Core Portfolio for
these comparisons includes Barton Oaks Plaza II and 8383 Wilshire.
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30
YEARS ENDED DECEMBER 31, 1997 AND 1996
The table below represents selected operating information for the Total
Portfolio and for the Core Portfolio for the years ended December 31, 1997 and
1996.
TOTAL PORTFOLIO CORE PORTFOLIO
----------------------------------------- -----------------------------------------
INCREASE/ % INCREASE/ %
1997 1996 (DECREASE) CHANGE 1997 1996 (DECREASE) CHANGE
-------- -------- ---------- ------ -------- -------- ---------- ------
($ IN THOUSANDS)
Property revenues............ $733,730 $493,396 $240,334 48.7% $458,968 $427,936 $ 31,032 7.3%
Interest income.............. 13,392 9,608 3,784 39.4% 1,056 1,882 (826) (43.9)%
Fees from noncombined
affiliates................. 4,950 5,120 (170) (3.3)% -- -- --
-------- -------- -------- ------ -------- -------- -------- -----
Total revenues............. 752,072 508,124 243,948 48.0% 460,024 429,818 30,206 7.0%
-------- -------- -------- ------ -------- -------- -------- -----
Interest expense............. 157,156 119,595 37,561 31.4% 93,606 110,566 (16,960) (15.3)%
Depreciation and
amortization............... 136,380 96,237 40,143 41.7% 85,999 84,411 1,588 1.9%
Property operating
expenses................... 282,964 201,067 81,897 40.7% 177,972 176,432 1,540 0.9%
General and administrative... 34,891 23,145 11,746 50.7% N/A N/A N/A N/A
-------- -------- -------- ------ -------- -------- -------- -----
Total expenses........... 611,391 440,044 171,347 38.9% 357,577 371,409 (13,832) (3.7)%
-------- -------- -------- ------ -------- -------- -------- -----
Income before allocation to
minority interests, income
from investment in
unconsolidated joint
ventures, gain on sales of
real estate and
extraordinary items........ 140,681 68,080 72,601 106.6% 102,447 58,409 44,038 75.4%
Minority interests........... (8,711) (2,086) (6,625) (317.6)% (1,679) (1,986) 307 15.5%
Income from unconsolidated
joint ventures............. 5,155 2,093 3,062 146.3% 2,432 2,093 339 16.2%
Gain on sales of real estate
and extraordinary items.... (4,004) 5,338 (9,342) (175.0)% (16,311) -- (16,311) --
-------- -------- -------- ------ -------- -------- -------- -----
Net income................... $133,121 $ 73,425 $ 59,696 81.3% $ 86,889 $ 58,516 $ 28,373 48.5%
======== ======== ======== ====== ======== ======== ======== =====
Property revenues less
property operating expenses
before depreciation,
amortization and general
and administrative
expenses................... $450,766 $292,329 $158,437 54.2% $280,996 $251,504 $ 29,492 11.7%
======== ======== ======== ====== ======== ======== ======== =====
Property Revenues. The increase in rental revenues, tenant reimbursements,
parking income and other income ("Property Revenues") in the Core Portfolio
resulted from a combination of occupancy and rental rate increases. The weighted
average occupancy of the Core Portfolio increased from approximately 88.5% at
January 1, 1996 to 94.8% as of December 31, 1997. This increase represents
approximately 1.4 million square feet of additional occupancy in the Core
Portfolio between January 1, 1996 and December 31, 1997. Included in Property
Revenues for the Core Portfolio are lease termination fees of approximately $3.7
million and $5.6 million for the years ended December 31, 1997 and 1996,
respectively (which are included in the other revenue category on the
consolidated and combined statement of operations). These fees are related to
specific tenants who have paid a fee to terminate their lease obligations before
the end of the contractual term of the lease. Although the Company has
historically experienced similar levels of such termination fees, there is no
way of predicting the timing or amounts of future lease termination fees. The
straight-line rent adjustment which is included in rental revenues for the Core
Portfolio for the years ended December 31, 1997 and 1996, was approximately
$14.6 million and $13.9 million, respectively. The straight-line rent adjustment
which is included in rental revenues for the Total Portfolio for the years ended
December 31, 1997 and 1996 was approximately $27.7 million and $18.4 million,
respectively. Other income for 1996 also includes approximately $8.8 million
relating to the Company's share of a litigation settlement.
Interest Income. Interest income for the Total Portfolio increased by
approximately $3.8 million to $13.4 million for the year ended December 31,
1997, compared to $9.6 million for the year ended December 31, 1996. This
increase in interest income is primarily due to having a greater amount of cash
reserves invested in short term investments pending investment in property
acquisitions prior to the IPO. Prior to the Consolidation, each of the entities
involved in the Consolidation needed to maintain separate cash
26
31
reserves which in the aggregate were higher than the cash reserves the Company
anticipates maintaining going forward. Due to the availability of borrowings
under the Company's Credit Facilities, the Company currently maintains lower
cash reserves which are targeted to be between $25 and $50 million (although the
cash balance may at times be more or less in anticipation of pending
acquisitions or other transactions). The lower cash balance will result in lower
interest income in future periods; however, this loss in income should be offset
by savings on interest expense on the Company's Credit Facilities.
Fees from Noncombined Affiliates. Fees from noncombined affiliates
decreased in 1997 from approximately $5.1 million in 1996 to $4.9 million in
1997. These fees are expected to continue to decrease in future periods as the
Managed Properties are sold. Fee income for the years ended December 31, 1997
and 1996, of approximately $0.4 million and $1.3 million, respectively, was
related to properties which have been sold.
Interest Expense. Interest expense increased by approximately $37.6 million
for the Total Portfolio to $157.2 million for the year ended December 31, 1997
compared to $119.6 million for the year ended December 31, 1996. This increase
resulted from having more debt outstanding in 1997. The increase in total debt
and the related increase in interest expense was directly related to property
acquisitions. While the Company's total debt and total interest expense have
increased due to acquisition activity, the total debt as a percentage of total
assets decreased from 50% of total assets at December 31, 1996 to 36.5% of total
assets at December 31, 1997, and the Company's interest coverage ratio increased
from 2.4 times in 1996 to 2.8 times in 1997. In addition, the weighted average
interest rate on the Company's debt decreased from approximately 7.7% at
December 31, 1996 to approximately 7.2% at December 31, 1997. The decrease in
interest expense in the Core Portfolio of $17.0 million is primarily due to the
replacement of secured debt with unsecured debt.
Depreciation and Amortization. Depreciation and amortization increased for
the Total Portfolio as a result of properties acquired during 1997 and the
recording of substantially all the Company's assets and liabilities at their
fair market value in connection with the Consolidation and the Company's IPO.
The increase in depreciation in the Core Portfolio resulted from the
recording of substantially all the Company's assets and liabilities at their
fair market value in connection with the Consolidation and the Company's IPO.
The decrease in amortization in the Core Portfolio resulted from the write-off
of deferred financing and leasing costs at the time of the Consolidation and the
Company's IPO.
Property Operating Expenses. The increase in real estate taxes and
insurance, repairs and maintenance, and property operating expenses ("Property
Operating Expenses") in the Core Portfolio relates primarily to increases in
real estate taxes due to higher property valuations partially offset by real
estate tax refunds recorded in the year ended December 31, 1997.
General and Administrative Expenses. General and administrative expenses
for the Total Portfolio increased by approximately $11.8 million to $34.9
million for the year ended December 31, 1997, compared to $23.1 million for the
year ended December 31, 1996. General and administrative expenses as a
percentage of total revenues was approximately 4.6% for the years ended December
31, 1997 and 1996. The primary reasons for the increase in general and
administrative expenses are the significant increase in the size of the
Company's portfolio and increased expenses associated with becoming a public
company. While general and administrative expenses will continue to increase as
the size of the Company's portfolio increases, it is anticipated that general
and administrative expenses as a percentage of total revenue will initially
remain stable (or increase slightly), as the full costs of running a public
company are reflected in operations, and then decrease over time as the Company
realizes increased economies of scale.
Parking Operations. Included in the Total and Core Portfolio selected
operating information, for the years ended December 31, 1997 and 1996, are
results of operations from the stand-alone Parking Facilities, the summarized
information for which is presented below. As of December 31, 1997, the Company
owned or had an interest in 17 stand-alone Parking Facilities with approximately
16,749 spaces. Of the Total Portfolio, three Parking Facilities were acquired
prior to January 1, 1996; seven Parking Facilities were acquired in 1996; and
seven Parking Facilities were acquired during the year ended December 31, 1997.
The Core Portfolio for the comparison between the years ended December 31, 1997
and 1996 consist of three Parking Facilities acquired prior to January 1, 1996.
27
32
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
TOTAL PARKING PORTFOLIO CORE PARKING PORTFOLIO
--------------------------------------- ---------------------------------------
INCREASE/ % INCREASE/ %
1997 1996 (DECREASE) CHANGE 1997 1996 (DECREASE) CHANGE
------- ------- ---------- ------ ------- ------- ---------- ------
(DOLLARS IN THOUSANDS)
Property revenues......... $22,577 $10,203 $12,374 121.3% $10,238 $ 9,873 $ 365 3.7%
Interest income........... 249 141 108 76.6% 239 141 98 69.5%
------- ------- ------- ----- ------- ------- ------ -----
Total revenues........ 22,826 10,344 12,482 120.7% 10,477 10,014 463 4.6%
------- ------- ------- ----- ------- ------- ------ -----
Interest expense.......... 5,427 1,814 3,613 199.2% 2,724 1,645 1,079 65.6%
Depreciation and
amortization............ 4,031 1,432 2,599 181.5% 1,708 1,359 349 25.7%
Property operating
expenses................ 5,124 3,152 1,972 62.6% 2,619 3,081 (462) (15.0)%
------- ------- ------- ----- ------- ------- ------ -----
Total expenses........ 14,582 6,398 8,184 127.9% 7,051 6,085 966 15.9%
------- ------- ------- ----- ------- ------- ------ -----
Income before allocation
to minority interests
and income from
investment in
unconsolidated joint
ventures................ 8,244 3,946 4,298 108.9% 3,426 3,929 (503) (12.8)%
Minority interests........ (323) (252) (71) (28.2)% (323) (252) (71) (28.2)%
Income from unconsolidated
joint ventures.......... 2,461 -- 2,461 -- -- -- -- --
------- ------- ------- ----- ------- ------- ------ -----
Net income................ $10,382 $ 3,694 $ 6,688 181.1% $ 3,103 $ 3,677 $ (574) (15.6)%
======= ======= ======= ===== ======= ======= ====== =====
Property revenues less
property operating
expenses before
depreciation,
amortization and general
and administrative
expenses................ $17,453 $ 7,051 $10,402 147.5% $ 7,619 $ 6,792 $ 827 12.2%
======= ======= ======= ===== ======= ======= ====== =====
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33
YEARS ENDED DECEMBER 31, 1996 AND 1995
The table below presents selected operating information for the Total
Portfolio and for the Core Portfolio for the years ended December 31, 1996 and
1995.
TOTAL PORTFOLIO CORE PORTFOLIO
------------------------------------------ -----------------------------------------
INCREASE/ % INCREASE/ %
1996 1995 (DECREASE) CHANGE 1996 1995 (DECREASE) CHANGE
-------- -------- ---------- ------- -------- -------- ---------- ------
(DOLLARS IN THOUSANDS)
Property revenues.......... $493,396 $356,959 $136,437 38.2% $349,810 $327,017 $ 22,793 7.0%
Interest income............ 9,608 8,599 1,009 11.7% -- -- -- --
Fees from noncombined
affiliates............... 5,120 5,899 (779) (13.2)% -- -- -- --
-------- -------- -------- ------- -------- -------- -------- ------
Total revenues......... 508,124 371,457 136,667 36.8% 349,810 327,017 22,793 7.0%
-------- -------- -------- ------- -------- -------- -------- ------
Interest expense........... 119,595 100,566 19,029 18.9% 85,225 85,371 (146) (0.2)%
Depreciation and
amortization............. 96,237 74,156 22,081 29.8% 71,969 68,226 3,743 5.5%
Property operating
expenses................. 201,067 151,488 49,579 32.7% 143,511 137,103 6,408 4.7%
General and
administrative........... 23,145 21,987 1,158 5.3% -- -- -- --
Provision for value
impairment............... -- 20,248 (20,248) (100.0)% -- 20,248 (20,248) (100.0)%
-------- -------- -------- ------- -------- -------- -------- ------
Total expenses......... 440,044 368,445 71,599 19.4% 300,705 310,948 (10,243) (3.3)%
-------- -------- -------- ------- -------- -------- -------- ------
Income before allocation to
minority interests,
income from investment in
unconsolidated joint
ventures, gain on sales
of real estate and
extraordinary items...... 68,080 3,012 65,068 2,160.3% 49,105 16,069 33,036 205.6%
Minority interests, net of
extraordinary gain of
$20,035 in 1995 for the
total and core
portfolios............... (2,086) (2,129) 43 2.0% (1,733) (2,023) 290 14.3%
Income from unconsolidated
joint ventures........... 2,093 2,305 (212) (9.2)% 2,093 2,305 (212) (9.2)%
Gain on sales of real
estate and extraordinary
items.................... 5,338 31,271 (25,933) (82.9)% -- 31,271 (31,271) (100.0)%
-------- -------- -------- ------- -------- -------- -------- ------
Net income................. $ 73,425 $ 34,459 $ 38,966 113.1% $ 49,465 $ 47,622 $ 1,843 3.9%
======== ======== ======== ======= ======== ======== ======== ======
Property revenues less
property operating
expenses before
depreciation,
amortization and general
and administrative
expenses................. $292,329 $205,471 $ 86,858 42.3% $206,299 $189,914 $ 16,385 8.6%
======== ======== ======== ======= ======== ======== ======== ======
Property Revenues. The increase in Property Revenues in the Core Portfolio
resulted from a combination of occupancy and rental rate increases. The weighted
average occupancy of the Core Portfolio increased from approximately 87.5% at
January 1, 1995 to 94.3% as of December 31, 1996. This increase represents
approximately 1.3 million square feet of additional occupancy in the Core
Portfolio between January 1, 1995 and December 31, 1996. Included in Property
Revenues for the Core Portfolio are lease termination fees of $5.6 million and
$5.0 million for the years ended December 31, 1996 and 1995, respectively (these
amounts are included in the other revenue category on the combined statements of
operations). These fees are related to specific tenants who have paid a fee to
terminate their lease obligations before the end of the contractual term of the
lease. Although the Company has historically experienced similar levels of such
termination fees, there is no way of predicting the timing or amounts of future
lease termination fees. The straight-line rent adjustment which is included in
rental revenues for the Core Portfolio for the years ended December 31, 1996 and
1995, was approximately $6.8 million and $10.5 million, respectively. The
straight-line rent adjustment which is included in rental revenues for the Total
Portfolio for the years ended December 31, 1996 and 1995, was approximately
$18.4 million and $12.7 million, respectively. Other income for 1996 also
includes approximately $8.8 million relating to the Company's share of a
litigation settlement.
29
34
Interest Income. Interest income for the Total Portfolio increased by
approximately $1.0 million to $9.6 million for the year ended December 31, 1996
compared to $8.6 million for the year ended December 31, 1995. This increase in
interest income is due primarily to having a larger amount of cash invested in
short term investments pending the purchase of new acquisitions.
Fees from Noncombined Affiliates. Fee income from the Managed Properties
for the Total Portfolio decreased as a result of disposition activities in 1995
and 1996 which reduced the number of properties being managed.
Interest Expense. Interest expense increased by approximately $19.0 million
for the Total Portfolio to $119.6 million for the year ended December 31, 1996
compared to $100.6 million for the year ended December 31, 1995. This increase
was primarily the result of increased debt obtained to finance acquisitions.
Depreciation and Amortization. The increase in depreciation and
amortization in the Core Portfolio was related to depreciation of capital and
tenant improvements made at properties in the Core Portfolio in 1995 and 1996
and the amortization of leasing commissions and loan fees paid during that time
period.
Property Operating Expenses. The increase in Property Operating Expenses in
the Core Portfolio resulted from an increase in maintenance expenses in 1996 and
real estate tax refunds received in 1995, with approximately $1.9 million
relating to a single property, which reduced the tax expense in 1995.
General and Administrative. General and administrative expenses increased
by approximately $1.1 million to $23.1 million for the year ended December 31,
1996 compared to $22.0 million for the year ended December 31, 1995. General and
administrative expenses as a percentage of total revenues was approximately 4.6%
and 5.9% for the years ended December 31, 1996 and 1995, respectively. While
general and administrative expenses will continue to increase as the size of the
Company's portfolio increases, it is anticipated that general and administrative
expenses as a percentage of total revenues will initially remain stable (or
increase slightly), as the full costs of running a public company are reflected
in operations, and then decrease over time as the Company realizes increased
economies of scale.
Provision for Value Impairment. During 1995, the Financial Accounting
Standards Board issued Statement No. 121 "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of" which established accounting standards for
the evaluation of the potential impairment of such assets. This statement was
adopted by Equity Office Predecessors as of January 1, 1995. Rental properties
are individually evaluated for impairment when conditions exist which may
indicate that it is probable that the sum of expected future cash flows (on an
undiscounted basis) from a rental property are less than its historical net cost
basis. Upon determination that a permanent impairment has occurred, rental
properties are reduced to their fair value. As a result of cash deficits, San
Felipe Plaza was evaluated for impairment and accordingly, during the year ended
December 31, 1995, Equity Office Predecessors recorded a provision for value
impairment of approximately $20.2 million, of which $17.5 million related to the
adjustment of investment in real estate and approximately $2.7 million related
to unamortized lease acquisition costs.
Parking Operations. Included in the Total Portfolio numbers above are
results of operations from the stand-alone Parking Facilities, the summarized
information for which is presented below. As of December 31, 1996, the Company
owned or had an interest in 10 stand-alone Parking Facilities with approximately
7,144 spaces. During the year ended December 31, 1995, the Company acquired
three Parking Facilities with
30
35
approximately 3,128 spaces. Of the Total Parking Portfolio, there were no
Parking Facilities acquired prior to January 1, 1995, therefore there is not a
Core Portfolio for comparison purposes.
TOTAL PARKING
PORTFOLIO
YEARS ENDED
DECEMBER 31,
----------------
1996 1995
------- ------
(DOLLARS IN
THOUSANDS)
Property revenues........................................... $10,203 $5,391
Interest income............................................. 141 17
------- ------
Total Revenues............................................ 10,344 5,408
------- ------
Interest expense............................................ 1,814 937
Depreciation and amortization............................... 1,432 722
Property operating expenses................................. 3,152 1,797
------- ------
Total expenses............................................ 6,398 3,456
------- ------
Income before allocation to minority interests.............. 3,946 1,952
Minority interests.......................................... (252) --
------- ------
Net income.................................................. $ 3,694 $1,952
======= ======
Property revenues less property operating expenses before
depreciation, amortization and general and administrative
expenses.................................................. $ 7,051 $3,594
======= ======
Dispositions of Property. Equity Office Predecessors sold two Office
Properties in 1997: Barton Oaks Plaza II (118,529 net rentable square feet) was
sold in January 1997 and 8383 Wilshire (417,463 net rentable square feet) was
sold in May 1997. In January 1996, Equity Office Predecessors sold the
condominium portion, comprised of a 210-room hotel, at Three Lakeway, a
mixed-use property. Below is a summary of the operations of these Office
Properties for the years ended December 31, 1997, 1996 and 1995.
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------- ------ -------
(DOLLARS IN THOUSANDS)
Property revenues......................................... $ 3,246 $9,959 $ 9,445
------- ------ -------
Interest expense.......................................... 36 956 4,910
Depreciation and amortization............................. 451 2,286 2,262
Property operating expenses............................... 1,468 4,869 3,068
------- ------ -------
Total expenses.......................................... 1,955 8,111 10,240
------- ------ -------
Income before gain on sales of real estate and
extraordinary items..................................... 1,291 1,848 (795)
Gain on sales of real estate and extraordinary items...... 13,088 5,338 --
------- ------ -------
Net income (loss)......................................... $14,379 $7,186 $ (795)
======= ====== =======
Property revenues less property operating expenses before
depreciation, amortization and general and
administrative expenses................................. $ 1,778 $5,090 $ 6,377
======= ====== =======
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Net cash provided from operations represents the primary source of
liquidity to fund distributions, debt service, recurring capital costs and
non-revenue enhancing tenant improvements. Prior to the IPO, the Company made
annual distributions equal to approximately 100% of taxable income. Cash
generated in excess of taxable income (resulting primarily from non-cash items
such as depreciation and amortization) was retained for working capital and to
fund capital improvements and non-revenue enhancing tenant improvements. The
Company intends to make regular quarterly distributions to holders of Series A
Preferred Shares, Series B Preferred Shares, Common Shares and Units. The
distribution rates for the Preferred Shares are as follows: for each Series A
Preferred Share 8.98% per annum ($2.245 per share), and for each Series B
31
36
Preferred Share 5.25% per annum ($2.625 per share). The current distribution
rate for each Common Share and Unit is $1.28 per annum per Common Share and
Unit.
The Company intends to fund recurring capital costs and non-revenue
enhancing tenant improvements from cash from operations and draws under the
Credit Facilities. The Company has no contractual obligations for material
capital costs, other than the Probable Acquisitions, a $38 million development
commitment and those obligations in connection with customary tenant
improvements in the ordinary course of business. The Company also expects that
the Credit Facilities will provide for temporary working capital, unanticipated
cash needs, and funding of acquisitions.
The anticipated size of the Company's distributions will not allow the
Company, using only cash from operations, to retire all of its debt as it comes
due and, therefore, the Company will be required to repay maturing debt with
funds from debt and/or equity financing.
DEBT FINANCING
The table below summarizes the mortgage debt, unsecured notes and credit
facility indebtedness outstanding at December 31, 1997 and 1996, including a net
premium on mortgage debt (net of accumulated amortization of approximately $2.1
million) of approximately $1.2 million recorded in connection with the Company's
Consolidation and debt assumed in connection with certain of the Company's
acquisitions.
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
Debt Summary:
Balance
Fixed rate................................................ $2,219,496 $1,304,075
Variable rate............................................. 2,064,821 660,817
---------- ----------
Total.................................................. $4,284,317 $1,964,892
========== ==========
Percent of total debt:
Fixed rate................................................ 51.8% 66.4%
Variable rate............................................. 48.2% 33.6%
---------- ----------
Total.................................................. 100.0% 100.0%
========== ==========
Weighted average interest
Rate at end of period:
Fixed rate................................................ 7.5% 7.9%
Variable rate............................................. 6.9% 7.3%
---------- ----------
Weighted average....................................... 7.2% 7.7%
========== ==========
The variable rate debt shown above bore interest at a 30-day LIBOR-based
floating interest rate. The 30-day LIBOR at December 31, 1997 was 5.7188%
resulting in a weighted average spread over LIBOR at December 31, 1997 of
approximately 1.2%.
MORTGAGE FINANCING
Immediately prior to the IPO, the Company had approximately $1.94 billion
of mortgage financing outstanding of which $1.38 billion was fixed rate
financing and $560 million was variable rate financing. The Company utilized the
net IPO proceeds of $564.5 million and approximately $33.9 million of cash on
hand to repay $253.1 million of fixed rate mortgage financing and $345.3 million
of variable rate mortgage debt. In October 1997, the Company closed on the $1.5
Billion Credit Facility and used approximately $236 million of the proceeds to
repay the majority of the Company's remaining variable rate mortgage debt
outstanding at that time. The Company also assumed approximately $627.5 million
of secured debt (excluding the Company's share of unconsolidated secured debt of
approximately $92.4 million) in connection with the Beacon Merger, $248.3
million of secured debt in connection with the Wright Runstad Acquisition and
$14.7 million of secured debt in connection with other acquisitions. In
addition, in December 1997, the Company obtained an $80 million mortgage loan on
the three Properties located in New Orleans. The proceeds from this loan were
32
37
used to repay a portion of the $600 Million Credit Facility. As of December 31,
1997, the Company's total mortgage debt (excluding the Company's share of
unconsolidated debt of approximately $92.4 million) consisted of approximately
$2.0 billion of fixed rate debt with a weighted average interest rate of
approximately 7.53% and $23.5 million of variable rate debt bearing interest at
the 30-day LIBOR plus 1%. The Company's mortgage debt as of December 31, 1997
will mature as follows:
(DOLLARS IN THOUSANDS)
----------------------
1998........................................................ $ 83,792
1999........................................................ 52,908
2000........................................................ 151,236
2001........................................................ 432,962
2002........................................................ 69,584
Thereafter.................................................. 1,271,378
----------
Subtotal.................................................. 2,061,860
Net premium (net of accumulated amortization of $2.1
million).................................................. 1,157
----------
Total..................................................... $2,063,017
==========
The instruments encumbering the properties restrict transfer of the
properties, prohibit liens and require payment of taxes on the property,
maintenance of the property in good condition, maintenance of insurance on the
property and lender consent to leases with material tenants.
CREDIT FACILITIES
Lines of Credit. On July 15, 1997, the Company obtained the $600 Million
Credit Facility to be used for acquisitions and other general corporate
purposes. Amounts were drawn on the $600 Million Credit Facility to repay the
balance outstanding on the Equity Office Predecessors credit facility which was
terminated when the $600 Million Credit Facility was obtained. The $600 Million
Credit Facility matures on July 15, 2000. The Company paid a commitment fee of
approximately $1.0 million at the closing of the facility. Prior to the Company
obtaining an investment grade credit rating on its unsecured debt of BBB- or
Baa3 or better from two or more credit rating agencies, the $600 Million Credit
Facility initially bore interest at LIBOR plus 110 basis points, and required
payment of a quarterly unused commitment fee between .15% and .25% of the unused
portion of the facility, depending on the average unfunded balance of the
facility during the quarter. In November 1997, the facility was amended and the
interest rate was reduced to LIBOR plus 100 basis points. In December 1997, the
Operating Partnership through which the Company issues its indebtedness,
received an investment grade credit rating on its senior unsecured debt from
Moody's (Baa1), Duff & Phelps (BBB+) and Standard & Poor's (BBB). Per the terms
of the facility, these credit ratings resulted in the interest rate on the $600
Million Credit Facility being reduced from LIBOR plus 100 basis points to LIBOR
plus 60 basis points, and the unused commitment fee was replaced with a facility
fee equal to .20% per annum. In addition, a competitive bid option, whereby the
lenders participating in the facility bid on the interest rate to be charged,
became available for up to $250 million of the $600 Million Credit Facility. As
of December 31, 1997, the balance of the $600 Million Credit Facility was
approximately $559 million. Subsequent to year end, the Company repaid $509
million of the $600 Million Credit Facility with available cash and the proceeds
of the $1.25 Billion Notes Offering, the $250 Million MOPPRS Offering and the
Series B Preferred Offering described below, leaving a balance of $50 million
outstanding as of March 31, 1998.
Term Loan Facility. In October 1997, the Company obtained the $1.5 Billion
Credit Facility. The $1.5 Billion Credit Facility is available for the
acquisition of properties and general corporate purposes. The $1.5 Billion
Credit Facility carried an interest rate equal to LIBOR plus 100 basis points
subject to an increase or decrease upon the receipt of an investment grade
unsecured debt rating. As mentioned above, the Operating Partnership received
investment grade credit ratings in December 1997 resulting in a reduction in the
interest rate to LIBOR plus 80 basis points. The $1.5 Billion Credit Facility
matures on July 1, 1998, and may be extended to October 1, 1998. The Company
paid an underwriting fee on the $1.5 Billion Credit Facility at closing of
approximately $4.9 million. In addition, an unused commitment fee is payable
quarterly in arrears based upon the unused amount of the $1.5 Billion Credit
Facility as follows: .15% per annum if the unused
33
38
amount is between 0% to 33%; .20% per annum if the unused amount is more than
33% but less than 66%; .25% per annum if the unused amount is greater than 66%.
In October 1997, the Company used approximately $236 million of proceeds from
the $1.5 Billion Credit Facility to repay the majority of the variable rate
property mortgage indebtedness outstanding. The Company repaid $150 million on
the $1.5 Billion Credit Facility with proceeds from the $200 million private
placement of Common Shares in October 1997. Under the terms of the $1.5 Billion
Credit Facility, any amounts repaid cannot be drawn. In addition, amounts were
drawn from the $1.5 Billion Credit Facility for property acquisitions and
general corporate purposes. As of December 31, 1997, the outstanding balance on
the $1.5 Billion Credit Facility was approximately $1.044 billion. Subsequent to
December 31, 1997, the entire $1.044 billion outstanding was repaid with
proceeds received from the issuance of the Series B Preferred Offering, the
$1.25 Billion Notes Offering and the $250 Million MOPPRS Offering. The amount
available to draw under the $1.5 Billion Credit Facility as of March 31, 1998
was approximately $306 million.
Beacon Lines of Credit. The Company assumed $533 million in unsecured debt
in connection with the Beacon Merger relating to the outstanding balance of the
Beacon lines of credit at the time of the closing of the Beacon Merger. The
Company repaid $95 million of the Beacon lines prior to December 31, 1997 and
repaid the remaining balance of the lines in February 1998 with the proceeds of
the unsecured $1.25 Billion Notes Offering, the $250 Million MOPPRS Offering and
the Series B Preferred Offering. The lines were terminated upon repayment in
February 1998.
UNSECURED NOTES
$180 Million Notes Offering. In September 1997, the Company completed the
$180 Million Notes Offering with an unaffiliated party. The terms of the $180
Million Notes Offering consist of four tranches with maturities from seven to 10
years which were priced at an interest rate spread over the corresponding
Treasury rate. The Company used the proceeds of these notes to repay a portion
of the $600 Million Credit Facility. In addition, the Company terminated $150
million of the $700 million of hedge agreements described below at a cost of
approximately $3.9 million for the $180 Million Notes Offering. This amount will
be amortized to interest expense over the respective term of each tranche.
$1.25 Billion Notes Offering. In February 1998, the Company completed the
private placement of the $1.25 Billion Notes Offering. The $1.25 Billion Notes
Offering consists of four tranches with maturities of five to 20 years.
$250 Million MandatOry Par Put Remarketed Securities Offering. In February
1998, the Company issued $250 million of 6.376%, MOPPRS, due February 15, 2012,
which are subject to mandatory tender on February 15, 2002.
The table below summarizes the Company's senior unsecured notes as of March
31, 1998:
STATED EFFECTIVE
TRANCHE AMOUNT RATE RATE(A)
------- -------------- ------ ---------
4 Year MOPPRS due 2002............................... $ 250,000,000 6.38% 6.42%
5 Year Notes due 2003................................ 300,000,000 6.38% 6.77%
7 Year Notes due 2004................................ 30,000,000 7.24% 7.24%
7 Year Notes due 2005................................ 400,000,000 6.63% 7.06%
8 Year Notes due 2005................................ 50,000,000 7.36% 7.67%
9 Year Notes due 2006................................ 50,000,000 7.44% 7.73%
10 Year Notes due 2007................................ 50,000,000 7.42% 7.69%
10 Year Notes due 2008................................ 300,000,000 6.75% 7.03%
20 Year Notes due 2018................................ 250,000,000 7.25% 7.56%
-------------- ----- -----
$1,680,000,000 6.74% 7.04%
============== ===== =====
- ---------------
(A) Includes the cost of the terminated interest rate protection agreements and
offering and transaction costs.
On March 5, 1998, the Operating Partnership filed a registration statement
(the "Exchange Offer Registration Statement") relating to a registered offer to
exchange the senior unsecured notes issued in the
34
39
$180 Million Notes Offering, the $1.25 Billion Notes Offering and the $250
Million MOPPRS Offering for registered securities of the Operating Partnership
with terms identical in all material respects to the terms of the existing
Notes.
Interest Rate Protection Agreements. In order to limit the market risk
associated with variable rate debt, the Company entered into several interest
rate protection agreements. These agreements effectively converted floating rate
debt to a fixed rate basis, as well as hedged anticipated financing
transactions. Net amounts paid or received under these agreements are recognized
as an adjustment to interest expense when such amounts were incurred or earned.
Settlement amounts paid or received under these agreements are deferred and
amortized as an adjustment to interest expense over the term of the related
financing transaction on the straight-line method which approximates the
effective yield method. A summary of the various interest rate hedge agreements
is as follows: (1) On June 4, 1997, the Company entered into interest rate
protection agreements with major U.S. financial institutions for $700 million of
indebtedness. As a result of this arrangement, the Company essentially "locked
into" U.S. Treasury rates in effect as of June 4, 1997, for $700 million in
indebtedness. In August 1997, the Company terminated $150 million of the $700
million of hedge agreements at a cost of $3.9 million. The terminated agreements
pertained to the $180 Million Notes Offering. The portion of the $180 Million
Notes Offering protected by these agreements consisted of three tranches with
maturities of eight, nine and ten years, respectively. (2) On October 6, 1997,
the Company entered into an additional $450 million of interest rate protection
agreements with major U.S. financial institutions based on the U.S. Treasury
rates in effect as of that date. In connection with the $1.25 Billion Notes
Offering and the $250 Million MOPPRS Offering, the Company terminated $700
million of hedge agreements at a cost of approximately $32.6 million. The cost
of the terminated hedge agreements will be amortized to interest expense over
the respective terms of each tranche. The Company terminated the remaining $300
million of hedge agreements in 1998 at a cost of approximately $7.4 million
which will be reflected as an extraordinary loss. (3) Equity Office Predecessors
entered into an interest rate swap agreement in October 1995 which effectively
fixed the interest rate on a $93.6 million loan at 6.94% through the maturity of
the loan on June 30, 2000.
Equity Office Predecessors sold several interest rate protection agreements
(aggregating $173 million of LIBOR based agreements) in June 1997 at a cost of
approximately $1.1 million.
Restrictions and Covenants. Agreements or instruments relating to the $600
Million Credit Facility, the $180 Million Notes Offering, the $1.5 Billion
Credit Facility, the $1.25 Billion Notes Offering and the $250 Million MOPPRS
Offering contain certain restrictions and requirements regarding total debt to
assets ratios, secured debt to total assets ratios, debt service coverage
ratios, minimum ratio of unencumbered assets to unsecured debt and other
limitations.
EQUITY ISSUANCES
Below is a summary of the equity securities issued in connection with
various transactions occurring from and after the IPO:
- At the time of the IPO, the Company issued 151,678,030 Common Shares and
the Operating Partnership issued an additional 11,877,647 Units.
- In October 1997, the Company completed two private placements for a total
of 9,685,034 Restricted Common Shares.
- The Operating Partnership issued 5,958,030 Units in connection with
various acquisitions during 1997 (excluding the Wright Runstad
Acquisition).
- On December 17, 1997, the Company purchased a portfolio of 10 properties
from an affiliate of Wright Runstad and Company, and also made a 30%
noncontrolling investment in Wright Runstad Asset Limited Partnership, a
development and property management company. The Company issued 3,435,688
Common Shares and the Operating Partnership issued an additional
2,753,127 Units in connection with this transaction. In addition, the
Company issued five-year warrants to purchase an additional 5,000,000
Restricted Common Shares at a price of $39.375 per share.
35
40
- On December 19, 1997, the Company completed the Beacon Merger. In
connection with the merger, the Company issued 80,596,117 Common Shares
and 8,000,000 Series A Preferred Shares with a liquidation preference of
$25 per share and the Operating Partnership issued an additional
8,570,886 Units. In addition, the Company assumed the obligation to issue
4,732,822 additional Common Shares upon exercise of Beacon stock options,
of which 3,829,739 Common Shares had been issued as of December 31, 1997.
- During the year, the Company also issued 298,000 restricted Common Shares
to senior executives, and 5,055 Common Shares to trustees as
compensation.
- In February 1998, the Company completed the Series B Preferred Offering.
The Series B Preferred Shares are convertible at any time at the option
of the holder to Common Shares at a conversion price of $35.70 per Common
Share (equivalent to a conversion ratio of 1.40056 Common Shares for each
Series B Preferred Share). The Series B Preferred Shares are non-callable
for five years with a mandatory call in 2008. The annual distribution of
$2.625 per share will be paid in quarterly distributions of $.65625.
Proceeds from the Series B Preferred Offering were used to pay down
amounts outstanding under the Credit Facilities.
- In April 1998, the Company sold 1,628,009 Restricted Common Shares to
Merrill Lynch, Pierce, Fenner & Smith Incorporated in the UIT Offering.
Merrill Lynch, Pierce, Fenner & Smith Incorporated deposited these
Restricted Common Shares with the trustee of the Equity Investor Fund
Cohen & Steers Realty Majors Portfolio (A Unit Investment Trust) (the
"UIT"), in exchange for units in the UIT. The Company used the net
proceeds from the UIT Offering to pay down amounts outstanding under the
Credit Facilities.
CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
For discussion purposes, the cash flows for the year ended December 31,
1997 combine the cash flows of Equity Office Predecessors for the period January
1, 1997 to July 10, 1997 and the cash flows of the Company for the period July
11, 1997 to December 31, 1997. The cash flows for the year ended December 31,
1996 represent solely the cash flows of Equity Office Predecessors.
Consequently, the comparison of the periods provides only limited information
regarding the cash flows of the Company.
Cash and cash equivalents decreased by approximately $181.5 million, to
approximately $228.9 million at December 31, 1997, compared to $410.4 million at
December 31, 1996. This decrease was the result of approximately $2.2 billion
invested in new acquisitions, capital and tenant improvements, and payment of
leasing commissions reduced by approximately $286.7 million of cash generated by
operations and $1.9 billion generated from financing activities (including the
$181.1 million contributed by Equity Office Predecessors). Net cash provided by
operating activities increased by approximately $120.7 million to approximately
$286.7 million from $166.0 million primarily due to the additional cash flow
generated by the increase in the number of properties owned. Net cash used for
investing activities increased by approximately $1.3 billion from $0.9 billion
to $2.2 billion mainly due to an increase in the amount of real estate assets
purchased during the year ended December 31, 1997 compared to the year ended
December 31, 1996. Net cash provided by financing activities increased by
approximately $0.8 billion from $1.1 billion to $1.9 billion due to net proceeds
from the sale of common stock, an increase in proceeds from lines of credit and
unsecured notes, partially offset by a decrease in proceeds from mortgage notes
and an increase in principal payments on mortgage notes and lines of credit.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Cash and cash equivalents increased by approximately $299.3 million, to
approximately $410.4 million at December 31, 1996, compared to $111.1 million at
December 31, 1995. This increase was the result of $166 million of cash
generated by operations, $1.1 billion generated from financing activities,
reduced by $924.2 million invested in new acquisitions, capital and tenant
improvements, and payment of leasing commissions.
36
41
Net cash provided by operating activities increased by $72.1 million from $93.9
million to $166.0 million primarily due to the additional cash flow generated by
the increase in the number of properties owned. Net cash used for investing
activities increased by $543.6 million from $380.6 million to $924.2 million
mainly due to an increase in the amount of real estate assets purchased during
1996 compared to 1995. Net cash provided by financing activities increased by
$781.1 million from $276.5 million to $1.1 billion due to an increase in capital
contributions and to an increase in proceeds received on mortgage notes, and a
net decrease in principal payments on mortgage notes and revolving lines of
credit offset in part by distributions to minority interest partners.
CAPITAL IMPROVEMENTS
The Company has a history of acquiring and repositioning undercapitalized
and poorly managed properties, many of which have required significant capital
improvements due to deferred maintenance and/or required substantial renovation
to enable them to compete effectively. A number of the properties also have had
significant amounts of shell space requiring build out at the time of
acquisition. The Company takes these capital improvements and revenue enhancing
tenant improvements into consideration at the time of acquisition in determining
the amount of equity and debt financing required to purchase the property and
fund the improvements. Therefore, capital improvements made during the first
five years after acquisition of these properties are treated separately from
typical recurring capital expenditures, non-revenue enhancing tenant
improvements and leasing commissions required once these properties have reached
stabilized occupancy, and deferred maintenance and renovations planned at the
time of acquisition have been completed. Capital improvements (including tenant
improvements and leasing commissions for shell space) for the years ended
December 31, 1997, 1996 and 1995 were approximately $78.0 million, $100.3
million and $48.8 million, respectively or $1.19, $3.49 and $2.16 per square
foot, respectively. These amounts include approximately $31.2 million, $47.3
million and $16.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively, for the redevelopment of the 28 State Street Building.
The Company considers capital expenditures to be recurring expenditures
relating to the ongoing maintenance of the Office Properties. The table below
summarizes capital expenditures for the years ended December 31, 1997, 1996 and
1995. The capital expenditures set forth below are not necessarily indicative of
future capital expenditures.
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
Number of Office Properties............................. 258 81 71
Rentable Square Feet (in millions)...................... 65.3 28.7 22.6
Annual Capital Expenditures per square foot............. $.08 $.16 $.14
TENANT IMPROVEMENTS AND LEASING COMMISSION COSTS
The Company distinguishes its tenant improvements and leasing commissions
between those that are revenue enhancing (i.e., required for space which is
vacant at the time of acquisition or that has been vacant for nine months or
more) and non-revenue enhancing (i.e., required to maintain the revenue being
generated from currently leased space). The table below summarizes the revenue
enhancing and non-revenue enhancing tenant improvements and leasing commissions
for the years ended December 31, 1997, 1996 and 1995. The number of Office
Properties shown below for all periods presented excludes Barton Oaks Plaza II
and 8383 Wilshire which were sold in January 1997 and May 1997, respectively.
The tenant improvement and leasing commission costs set forth below are
presented on an aggregate basis and do not reflect significant regional
37
42
variations and, in any event, are not necessarily indicative of future tenant
improvement and leasing commission costs:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
Number of Office Properties........................... 258 81 71
Rentable square feet (in millions).................... 65.3 28.7 22.6
Revenue enhancing tenant improvements and leasing
commissions:
Amounts (in thousands).............................. $18,272 $31,534 $20,981
Per square foot improved............................ $ 19.74(1) $ 30.26(2) $ 22.89
Per total square foot............................... $ .27(1) $ 1.10(2) $ .93
Non-revenue enhancing tenant improvements and leasing
commissions:
Renewal space
Amounts (in thousands).............................. $ 8,334 $15,486 $10,008
Per square foot improved............................ $ 5.73(1) $ 6.79(2) $ 7.82
Per total square foot............................... $ .12(1) $ .54(2) $ .44
Retenanted space
Amounts (in thousands).............................. $14,806 $31,987 $ 8,446
Per square foot improved............................ $ 15.10(1) $ 20.64(2) $ 19.80
Per square foot total............................... $ .22(1) $ 1.11(2) $ .37
---------- ---------- ----------
Total non-revenue enhancing (in thousands)............ $23,140 $47,473 $18,454
Per square foot improved.............................. $ 9.50(1) $ 12.39 $ 10.81
Per total square foot................................. $ .35(1) $ 1.65 $ .81
- ---------------
(1) The per square foot calculations as of December 31, 1997 are calculated
taking the total dollars anticipated to be expended on tenant improvements
for tenants taking occupancy during the year ended December 31, 1997,
divided by the total square footage being improved or total building square
footage. The actual amounts expended as of December 31, 1997 for revenue
enhancing and non-revenue enhancing renewal and released space were $18.4
million, $12.4 million and $33.5 million, respectively.
(2) The per square foot calculations as of December 31, 1996 are calculated
taking the total dollars anticipated to be expended on tenant improvements
in process at December 31, 1996, divided by the total square footage being
improved or total building square footage. The actual amounts expended as of
December 31, 1996 for revenue enhancing and non-revenue enhancing renewal
and retenanted space were approximately $30.6 million, $14 million and $20.8
million, respectively.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
The Company does not believe that the impact of the recognition of the year
2000 by its information and operating technology systems will have a material
adverse effect on the Company's financial condition or results of operations.
The majority of any necessary system changes will be upgraded in the normal
course of business. The Company has initiated formal communications with all of
its significant suppliers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own year 2000 issues. There can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted or would
not have an adverse effect on the Company's systems.
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43
INFLATION
Substantially all of the office leases require the tenant to pay, as
additional rent, a portion of any increases in real estate taxes (except, in the
case of certain California leases, which limit the ability of the landlord to
pass through to the tenants the effect of increased real estate taxes
attributable to a sale of real property interests) and operating expenses over a
base amount. In addition, many of the office leases provide for fixed increases
in base rent or indexed calculations (based on the Consumer Price Index or other
measures). The Company believes that inflationary increases in expenses will be
offset, in part, by the expense reimbursements and contractual rent increases
described above.
FUNDS FROM OPERATIONS
Management of the Company believes Funds from Operations, as defined by
NAREIT, to be an appropriate measure of performance for an equity REIT. While
Funds from Operations is a relevant and widely used measure of operating
performance of equity REITs, it does not represent cash flow from operations or
net income as defined by generally accepted accounting principles ("GAAP"), and
it should not be considered as an alternative to these indicators in evaluating
liquidity or operating performance of the Company.
The following table reflects the calculation of the Company's and Equity
Office Predecessor's combined Funds from Operations for the years ended December
31, 1997, 1996 and 1995 on an historical basis.
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
----------- ---------- ---------
(DOLLARS IN THOUSANDS)
Income before income from investment in unconsolidated joint
ventures, gain on sales of real estate, extraordinary
items and minority interests.............................. $ 140,681 $ 68,080 $ 3,012
Add back (deduct):
(Income) allocated to minority interests.................. (1,701) (2,086) (2,129)
Income from investment in unconsolidated joint ventures... 5,155 2,093 2,305
Provision for value impairment............................ -- -- 20,248
Depreciation and amortization (real estate related)....... 130,465 92,373 72,668
Net amortization of loan premiums and discounts........... 2,324 -- --
Preferred dividends....................................... (649) -- --
----------- ---------- ---------
Funds from Operations before effect of adjusting
straight-line rental revenue and expenses included in
Funds from Operations to a cash basis(1).................. 276,275 160,460 96,104
----------- ---------- ---------
Deferred rental revenue................................... (27,740) (18,427) (12,663)
Deferred rental expense................................... 2,206 788 --
----------- ---------- ---------
Funds from Operations excluding straight-line rental revenue
and expense adjustments................................... $ 250,741 $ 142,821 $ 83,441
=========== ========== =========
Cash Flow provided by (used for):
Operating Activities...................................... $ 286,714 $ 165,975 $ 93,878
Investing Activities...................................... $(2,163,340) $ (924,227) $(380,615)
Financing Activities(2)................................... $ 1,876,197 $1,057,551 $ 276,513
Ratio of earnings to combined fixed charges and preferred
share distributions..................................... 1.81 1.49 1.21
- ---------------
(1) The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. The Company believes that Funds from Operations is helpful
to investors as a measure of the performance of an equity REIT because,
along with cash flow from operating activities, financing activities and
investing activities, it provides investors with an indication of the
ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. The Company computes Funds from
Operations in accordance with standards established by NAREIT which may not
be comparable to Funds from Operations reported by other REITs that do not
define the term in accordance with the current NAREIT definition or that
interpret the current NAREIT definition differently than the Company. Funds
from Operations does not represent cash generated from operating activities
in accordance with GAAP, nor does it represent cash available to pay
distributions, and should not be considered as an alternative to net income
(determined in accordance with GAAP) as an indication of the Company's
financial performance or to cash flow from operating activities (determined
in accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including
its ability to make cash distributions.
(2) For the year ended December 31, 1997, cash flow provided by financing
activities includes approximately $181.1 million in cash contributed from
Equity Office Predecessors in connection with the Consolidation.
39
44
THE PROPERTIES
GENERAL
The Company's portfolio (based on revenue and square footage as of December
31, 1997) is the largest portfolio of office properties of any publicly traded,
full-service office company in the United States. As of March 31, 1998, the
Company owned or had an interest in 260 Office Properties containing
approximately 66.6 million rentable square feet of office space and owned or had
an interest in 17 Parking Facilities containing approximately 16,749 parking
spaces. The Office Properties are located in 78 submarkets in 39 markets in 24
states and the District of Columbia. The Office Properties, by rentable square
feet, are located approximately 51% in CBDs and approximately 49% in suburban
markets. As of March 31, 1998, the Office Properties were, on a weighted average
basis, 94% occupied by a total of 5,705 tenants, with no single tenant
accounting for more than 1.5% of annualized rent (except for the U.S. General
Services Administration, which accounted for 3.5% of annualized rent). An
additional 537,900 square feet (approximately 0.8% of the rentable square
footage of the Office Properties) was leased, with occupancy to commence in
whole or in part during 1998.
All Property data is as of March 31, 1998.
OFFICE PROPERTIES BY REGION
PERCENTAGE ANNUALIZED
OF TOTAL NET
OFFICE PERCENTAGE EFFECTIVE
PORTFOLIO OF RENT PER
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO NUMBER OCCUPIED
OF SQUARE SQUARE PERCENTAGE RENT ANNUALIZED OF SQUARE
REGION PROPERTIES FEET FEET OCCUPIED ($000S)(1) RENT LEASES FOOT(2)
------ ---------- -------- ---------- ---------- ---------- ---------- ------ ----------
Northeast............ 85 18,968,825 28.5% 95.0% $ 473,240 33.8% 1,445 $14.75
Central.............. 31 13,339,779 20.0 93.1 287,506 20.6 1,171 11.32
Pacific.............. 43 9,697,938 14.6 93.8 212,435 15.2 664 13.57
West................. 32 8,798,482 13.2 95.2 158,251 11.3 1,051 10.85
Southeast............ 51 8,685,134 13.0 96.7 157,259 11.2 698 11.10
Southwest............ 18 7,120,292 10.7 92.6 109,901 7.9 676 8.79
--- ---------- ----- ---- ---------- ----- ----- ------
Total/Weighted
Average.......... 260 66,610,450 100.0% 94.4% $1,398,591 100.0% 5,705 12.26
=== ========== ===== ========== ===== =====
ANNUALIZED
RENT PER
OCCUPIED
SQUARE
REGION FOOT(1)
------ ----------
Northeast............ $26.26
Central.............. 23.15
Pacific.............. 23.35
West................. 18.90
Southeast............ 18.72
Southwest............ 16.66
------
Total/Weighted
Average.......... $22.23
- -------------------------
(1) Annualized Rent is the monthly contractual rent under existing leases as of
March 31, 1998 multiplied by 12. This amount reflects total rent before any
rent abatements and includes expense reimbursements, which may be estimates.
Total rent abatements for leases in effect as of March 31, 1998 for the 12
months ending March 31, 1999 are approximately $9.3 million.
(2) Annualized Net Effective Rent is calculated for leases in effect as of March
31, 1998 as follows: Annualized Rent, calculated as described above, was
reduced by the estimated operating expenses per square foot, based on 1997
actual operating expense for Properties owned as of January 1, 1997 and
based on the Company's estimate of annual operating expense for Properties
acquired subsequent to January 1, 1997.
40
45
The following table sets forth certain information relating to each Office
Property as of March 31, 1998.
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO
OF YEAR/BUILT SQUARE SQUARE PERCENTAGE RENT ANNUALIZED
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1) RENT
-------- ---------- ---------- -------- ---------- ---------- ---------- ----------
NORTHEAST REGION
Stamford, CT
Shelton
Shelton Point...................... 1 1985/93 159,848 0.2% 96.2% $ 2,307 0.2%
Stamford
One Stamford Plaza............... 1..... 1986/94 212,244 0.3 100.0 5,255 0.4
Two Stamford Plaza............... 1 1986/94 253,020 0.4 97.4 6,794 0.5
Three Stamford Plaza............. 1 1980/94 241,575 0.4 100.0 5,592 0.4
Four Stamford Plaza.............. 1 1979/94 260,581 0.4 100.0 5,177 0.4
177 Broad Street................. 1 1989 187,573 0.3 99.4 4,564 0.3
300 Atlantic Street.............. 1 1987/96 272,458 0.4 100.0 7,332 0.5
Canterbury Green(3).............. 1 1987 224,405 0.3 98.0 6,796 0.5
--- ---------- ----- ---------- -----
Stamford Total/Weighted Average.. 8 1,811,704 2.7 99.0 43,817 3.1
Washington, D.C.
Central Business District
1111 19th Street................. 1 1979/93 252,014 0.4 97.0 7,154 0.5
1620 L Street.................... 1 1989 156,272 0.2 98.0 4,361 0.3
One Lafayette Centre............. 1 1980/93 314,634 0.5 99.5 9,814 0.7
East End
1333 H Street.................... 1 1982 244,585 0.4 90.9 6,289 0.4
Alexandria/Old Town
1600 Duke Street................. 1 1985 68,770 0.1 100.0 1,626 0.1
Crystal City
Polk and Taylor
Buildings(4)(5)................ 2 1970 902,371 1.4 99.9 24,519 1.8
Fairfax Center
Centerpointe I & II.............. 2 1988-90 407,723 0.6 99.8 7,150 0.5
Fair Oaks Plaza.................. 1 1986 177,917 0.3 95.3 2,742 0.2
Herndon/Dulles
Northridge I..................... 1 1988 124,319 0.2 100.0 3,312 0.2
Reston
Reston Town Center............... 3 1990 726,045 1.1 100.0 20,211 1.4
Rosslyn/Ballston
1300 North 17th Street........... 1 1980 380,199 0.6 99.7 10,196 0.7
1616 N. Fort Myer Drive.......... 1 1974 292,826 0.4 100.0 7,296 0.5
Tyson's Corner
E. J. Randolph................... 1 1983 164,906 0.2 100.0 3,743 0.3
John Marshall I.................. 1 1981 255,558 0.4 100.0 5,154 0.4
--- ---------- ----- ---------- -----
Washington D.C. Total/Weighted
Average 18 4,468,139 6.7 99.0 113,568 8.1
Boston
Downtown -- Financial District
100 Summer Street................ 1 1974/90 1,037,801 1.6 100.0 31,128 2.2
150 Federal Street............... 1 1988 529,730 0.8 99.0 18,019 1.3
175 Federal Street............... 1 1977 207,366 0.3 92.4 4,693 0.3
2 Oliver Street-147 Milk
Street......................... 1 1988 270,302 0.4 92.8 4,685 0.3
225 Franklin Street.............. 1 1966/96 916,722 1.4 99.0 34,316 2.5
28 State Street(6)............... 1 1968/97 570,040 0.9 59.8 11,531 0.8
75-101 Federal Street(4)(7)...... 2 1988 811,054 1.2 93.8 25,922 1.9
One Post Office Square(4)(8)..... 1 1981 765,780 1.1 99.2 22,642 1.6
Rowes Wharf(4)(8)................ 3 1987 344,698 0.5 98.4 12,068 0.9
Russia Wharf..................... 1 1978-82 312,833 0.5 94.6 4,933 0.4
South Station(3)................. 1 1988 178,959 0.3 99.5 6,319 0.5
Downtown -- Government Center
Center Plaza..................... 1 1969 637,069 1.0 94.5 15,536 1.1
East Cambridge
One Canal Park................... 1 1987 98,154 0.1 67.9 1,869 0.1
Riverview I & II................. 2 1985-86 263,892 0.4 100.0 7,257 0.5
Ten Canal Park................... 1 1987 110,843 0.2 100.0 2,179 0.2
Northwest
Crosby Corporate Center.......... 6 1996 337,285 0.5 97.8 4,839 0.3
New England Executive Park....... 9 1970/85 817,008 1.2 89.6 16,467 1.2
The Tower at New England
Executive Park(12)............. 1 1971/98 195,228 0.3 36.5 1,632 0.1
South
Westwood Business Center......... 1 1985 164,985 0.2 90.3 3,014 0.2
ANNUALIZED
NET
EFFECTIVE ANNUALIZED
RENT PER RENT PER
NUMBER OCCUPIED OCCUPIED
OF SQUARE SQUARE
PROPERTY LEASES FOOT(2) FOOT(1)
-------- ------ ---------- ----------
NORTHEAST REGION
Stamford, CT
Shelton
Shelton Point...................... 13 $ 8.96 $14.99
Stamford
One Stamford Plaza............... 11 14.07 24.76
Two Stamford Plaza............... 20 16.47 27.56
Three Stamford Plaza............. 15 13.26 23.15
Four Stamford Plaza.............. 9 10.74 19.87
177 Broad Street................. 17 14.23 24.47
300 Atlantic Street.............. 26 15.65 26.91
Canterbury Green(3).............. 18 20.97 30.89
-----
Stamford Total/Weighted Average.. 129 14.33 24.43
Washington, D.C.
Central Business District
1111 19th Street................. 28 18.13 29.25
1620 L Street.................... 16 18.27 28.47
One Lafayette Centre............. 21 19.18 31.36
East End
1333 H Street.................... 22 16.09 28.30
Alexandria/Old Town
1600 Duke Street................. 10 15.25 23.65
Crystal City
Polk and Taylor
Buildings(4)(5)................ 9 19.86 27.21
Fairfax Center
Centerpointe I & II.............. 17 9.81 17.57
Fair Oaks Plaza.................. 34 9.23 16.17
Herndon/Dulles
Northridge I..................... 1 19.94 26.64
Reston
Reston Town Center............... 83 18.03 27.84
Rosslyn/Ballston
1300 North 17th Street........... 32 18.34 26.89
1616 N. Fort Myer Drive.......... 14 15.54 24.92
Tyson's Corner
E. J. Randolph................... 16 14.76 22.70
John Marshall I.................. 2 13.31 20.17
-----
Washington D.C. Total/Weighted
Average 305 16.61 25.68
Boston
Downtown -- Financial District
100 Summer Street................ 25 14.44 29.99
150 Federal Street............... 22 21.57 34.37
175 Federal Street............... 31 12.92 24.50
2 Oliver Street-147 Milk
Street......................... 48 12.13 18.67
225 Franklin Street.............. 20 22.27 37.83
28 State Street(6)............... 15 23.90 33.82
75-101 Federal Street(4)(7)...... 70 20.19 34.09
One Post Office Square(4)(8)..... 67 17.42 29.81
Rowes Wharf(4)(8)................ 44 16.55 35.59
Russia Wharf..................... 46 8.23 16.68
South Station(3)................. 29 14.06 35.47
Downtown -- Government Center
Center Plaza..................... 83 12.64 25.80
East Cambridge
One Canal Park................... 4 15.49 28.03
Riverview I & II................. 4 15.60 27.50
Ten Canal Park................... 1 11.13 19.66
Northwest
Crosby Corporate Center.......... 6 10.86 14.67
New England Executive Park....... 83 12.17 22.48
The Tower at New England
Executive Park(12)............. 3 13.29 22.90
South
Westwood Business Center......... 17 9.59 20.23
41
46
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO
OF YEAR/BUILT SQUARE SQUARE PERCENTAGE RENT ANNUALIZED
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1) RENT
-------- ---------- ---------- -------- ---------- ---------- ---------- ----------
West
Wellesley Office Park............ 8 1963-84 641,793 1.0% 99.0% $ 16,299 1.2%
--- ---------- ----- ---------- -----
Boston Total/Weighted Average.... 44 9,211,542 13.8 92.8 245,348 17.5
New York City
Third Avenue
850 Third Avenue................. 1 1960/96 562,567 0.8 99.2 16,804 1.2
Philadelphia
Conshohocken
Four Falls Corporate Center(4)... 1 1988 254,355 0.4 99.8 6,239 0.4
Center City
1601 Market Street............... 1 1970 681,289 1.0 94.8 13,326 1.0
1700 Market Street............... 1 1969 825,547 1.2 85.8 14,414 1.0
King of Prussia/Valley Forge
Oak Hill Plaza(4)................ 1 1982 164,360 0.2 100.0 3,007 0.2
Walnut Hill Plaza(4)............. 1 1985 149,716 0.2 94.7 2,779 0.2
Main Line
One Devon Square(4).............. 1 1984 73,267 0.1 64.4 877 0.1
Two Devon Square(4).............. 1 1985 63,226 0.1 100 1,012 0.1
Three Devon Square(4)............ 1 6,000 0.0 100.0 218 0.0
Plymouth Meeting/Blue Bell
One Valley Square(4)............. 1 1982 70,289 0.1 100.0 1,229 0.1
Two Valley Square(4)............. 1 1990 70,622 0.1 92.1 1,246 0.1
Three Valley Square(4)........... 1 1984 84,605 0.1 97.7 1,579 0.1
Four and Five Valley Square(4)... 2 1988 68,321 0.1 100.0 1,340 0.1
--- ---------- ----- ---------- -----
Philadelphia Total/Weighted
Average........................ 13 2,511,597 3.8 92.3 47,265 3.4
Norfolk
Norfolk
Dominion Tower(4)................ 1 1987 403,276 0.6 95.7 6,438 0.5
--- ---------- ----- ---------- -----
NORTHEAST REGION
TOTAL/WEIGHTED AVERAGE........... 85 18,968,825 28.5% 95.0% $ 473,240 33.8%
CENTRAL REGION
Chicago
Downtown-Central Loop
161 N. Clark..................... 1 1992 1,010,520 1.5% 80.4% $ 19,379 1.4%
200 West Adams................... 1 1985/96 677,222 1.0 91.2 12,930 0.9
30 N. LaSalle Street(3).......... 1 1974/90 925,950 1.4 95.1 19,448 1.4
One North Franklin............... 1 1991 617,592 0.9 99.3 14,109 1.0
Downtown-West Loop
10 & 30 S. Wacker................ 2 1983-87 2,003,288 3.0 95.7 62,668 4.5
101 N. Wacker.................... 1 1980/1990 575,294 0.9 87.3 11,089 0.8
Civic Opera House................ 1 1929/1996 841,778 1.3 96.7 13,164 0.9
O'Hare
Presidents Plaza................. 4 1980-82 815,604 1.2 96.4 16,589 1.2
1700 Higgins..................... 1 1986 133,876 0.2 100.0 2,491 0.2
Oak Brook
AT&T Plaza....................... 1 1984 224,847 0.3 97.9 5,041 0.4
Oakbrook Terrace Tower........... 1 1988 772,928 1.2 87.9 17,580 1.3
Westbrook Corporate Center....... 5 1985-96 1,107,372 1.7 92.9 27,553 2.0
Lake County
Tri-State International.......... 5 1986 546,263 0.8 88.9 10,913 0.8
--- ---------- ----- ---------- -----
Chicago Total/Weighted Average... 25 10,252,534 15.4 92.6 232,954 16.7
Indianapolis
Downtown
Bank One Center/Tower............ 2 1990 1,057,877 1.6 94.0 19,727 1.4
Cleveland
Downtown
BP Tower......................... 1 1985 1,242,144 1.9 94.8 18,871 1.3
Columbus
Downtown
One Columbus Building............ 1 1987 407,472 0.6 92.5 8,933 0.6
Suburban
Community Corporate Center....... 1 1987 250,169 0.4 100.0 4,867 0.3
One Crosswoods Center............ 1 1984 129,583 0.2 97.2 2,155 0.2
--- ---------- ----- ---------- -----
Columbus Total/Weighted Average.. 3 787,224 1.2 95.7 15,955 1.1
CENTRAL REGION TOTAL/WEIGHTED
AVERAGE........................ 31 13,339,779 20.0% 93.1% $ 287,506 20.6%
ANNUALIZED
NET
EFFECTIVE ANNUALIZED
RENT PER RENT PER
NUMBER OCCUPIED OCCUPIED
OF SQUARE SQUARE
PROPERTY LEASES FOOT(2) FOOT(1)
-------- ------ ---------- ----------
West
Wellesley Office Park............ 89 $16.60 $25.66
-----
Boston Total/Weighted Average.... 707 15.06 28.71
New York City
Third Avenue
850 Third Avenue................. 27 16.94 30.10
Philadelphia
Conshohocken
Four Falls Corporate Center(4)... 44 16.49 24.59
Center City
1601 Market Street............... 69 11.82 20.63
1700 Market Street............... 47 10.49 20.35
King of Prussia/Valley Forge
Oak Hill Plaza(4)................ 4 10.81 18.30
Walnut Hill Plaza(4)............. 19 13.12 19.60
Main Line
One Devon Square(4).............. 9 13.10 18.57
Two Devon Square(4).............. 6 10.53 16.00
Three Devon Square(4)............ 1 30.90 36.37
Plymouth Meeting/Blue Bell
One Valley Square(4)............. 7 11.57 17.49
Two Valley Square(4)............. 6 12.17 19.17
Three Valley Square(4)........... 6 12.76 19.10
Four and Five Valley Square(4)... 5 13.07 19.62
-----
Philadelphia Total/Weighted
Average........................ 223 11.11 20.40
Norfolk
Norfolk
Dominion Tower(4)................ 54 9.15 16.68
-----
NORTHEAST REGION
TOTAL/WEIGHTED AVERAGE........... 1,445 $14.75 $26.26
CENTRAL REGION
Chicago
Downtown-Central Loop
161 N. Clark..................... 56 $10.75 $23.85
200 West Adams................... 61 9.43 20.94
30 N. LaSalle Street(3).......... 113 8.35 22.09
One North Franklin............... 55 9.66 23.00
Downtown-West Loop
10 & 30 S. Wacker................ 124 17.35 32.68
101 N. Wacker.................... 37 9.37 22.07
Civic Opera House................ 206 5.70 16.17
O'Hare
Presidents Plaza................. 66 9.05 21.09
1700 Higgins..................... 16 10.65 18.61
Oak Brook
AT&T Plaza....................... 27 15.35 22.90
Oakbrook Terrace Tower........... 55 17.12 25.87
Westbrook Corporate Center....... 101 18.28 26.79
Lake County
Tri-State International.......... 42 14.82 22.47
-----
Chicago Total/Weighted Average... 959 11.70 24.54
Indianapolis
Downtown
Bank One Center/Tower............ 80 11.41 19.83
Cleveland
Downtown
BP Tower......................... 38 7.74 16.02
Columbus
Downtown
One Columbus Building............ 30 16.42 23.70
Suburban
Community Corporate Center....... 43 12.24 19.46
One Crosswoods Center............ 21 10.22 17.11
-----
Columbus Total/Weighted Average.. 94 13.38 21.19
CENTRAL REGION TOTAL/WEIGHTED
AVERAGE........................ 1,171 $11.32 $23.15
42
47
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO
OF YEAR/BUILT SQUARE SQUARE PERCENTAGE RENT ANNUALIZED
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1) RENT
-------- ---------- ---------- -------- ---------- ---------- ---------- ----------
PACIFIC REGION
Los Angeles
Downtown
550 S. Hope...................... 1 1991 566,434 0.9% 80.7% $ 9,732 0.7%
Two California Plaza(3).......... 1 1992 1,329,809 2.0 88.2 26,224 1.9
Pasadena
Pasadena Towers.................. 2 1990-91 439,367 0.7 92.3 10,966 0.8
Westwood
10880 Wilshire Boulevard(3)...... 1 1970/92 534,047 0.8 90.1 13,547 1.0
10960 Wilshire Boulevard......... 1 1971/92 543,804 0.8 94.8 15,083 1.1
--- ---------- ----- ---------- -----
Los Angeles Total/Weighted
Average........................ 6 3,413,461 5.1 88.8 75,551 5.4
Orange County
Anaheim Stadium Area
500 Orange Tower(9).............. 1 1988 290,765 0.4 94.1 5,081 0.4
Town & Country
1100 Executive Tower............. 1 1987 366,747 0.6 100.0 6,590 0.5
Airport Office Area
1920 Main Plaza.................. 1 1988 305,662 0.5 90.3 5,842 0.4
2010 Main Plaza.................. 1 1988 280,882 0.4 89.9 6,111 0.4
--- ---------- ----- ---------- -----
Orange County Total/Weighted
Average........................ 4 1,244,056 1.9 94.0 23,624 1.7
San Diego
University Town Center
The Plaza at La Jolla
Village(4)..................... 5 1987-90 635,419 1.0 100.0 15,169 1.1
Smith Barney Tower............... 1 1987 187,999 0.3 85.0 3,528 0.3
--- ---------- ----- ---------- -----
San Diego Total/Weighted
Average........................ 6 823,418 1.2 96.6 18,697 1.3
San Francisco
Downtown -- Financial District
201 Mission Street............... 1 1981 483,289 0.7 99.6 9,655 0.7
580 California................... 1 1984 313,012 0.5 99.2 8,219 0.6
60 Spear Street Building......... 1 1967/87 133,782 0.2 100.0 3,302 0.2
One Maritime Plaza............... 1 1967/90 523,929 0.8 86.9 13,605 1.0
One Market....................... 1 1976/95 1,460,081 2.2 97.0 38,695 2.8
--- ---------- ----- ---------- -----
San Francisco Total/Weighted
Average........................ 5 2,914,093 4.4 96.0 73,476 5.3
San Jose
Mountain View
Shoreline Technology Park........ 12 1985-91 726,508 1.1 100.0 13,450 1.0
Santa Clara
Lake Marriott Business Park...... 7 1981 401,402 0.6 100.0 4,418 0.3
Sunnyvale
Sunnyvale Business Center........ 3 1990 175,000 0.3 100.0 3,219 0.2
--- ---------- ----- ---------- -----
San Jose Total/Weighted
Average........................ 22 1,302,910 2.0 100.0 21,087 1.5
PACIFIC REGION TOTAL/WEIGHTED
AVERAGE........................ 43 9,697,938 14.6% 93.8% $ 212,435 15.2%
WEST REGION
Anchorage
Midtown
Calais Office Center(3).......... 2 1975 190,599 0.3% 99.8% $ 3,542 0.3%
Phoenix
Central Corridor
49 East Thomas Road(10).......... 1 1974/93 18,892 0.0 71.1 114 0.0
One Phoenix Plaza(11)............ 1 1989 586,403 0.9 100.0 7,316 0.5
--- ---------- ----- ---------- -----
Phoenix Total/Weighted Average... 2 605,295 0.9 99.1 7,430 0.5
Minneapolis
Minneapolis -- Central Business
District LaSalle Plaza........... 1 1991 588,908 0.9 98.1 15,347 1.1
Denver
Southeast
Denver Corporate Center II &
III............................ 2 1981/93-97 358,357 0.5 100.0 6,341 0.5
The Quadrant..................... 1 1985 313,302 0.5 87.1 5,290 0.4
--- ---------- ----- ---------- -----
Denver Total/Weighted Average.... 3 671,659 1.0 94.0 11,631 0.8
St. Louis
Mid County
Interco Corporate Tower.......... 1 1986 339,163 0.5 100.0 7,209 0.5
ANNUALIZED
NET
EFFECTIVE ANNUALIZED
RENT PER RENT PER
NUMBER OCCUPIED OCCUPIED
OF SQUARE SQUARE
PROPERTY LEASES FOOT(2) FOOT(1)
-------- ------ ---------- ----------
PACIFIC REGION
Los Angeles
Downtown
550 S. Hope...................... 36 $10.72 $21.30
Two California Plaza(3).......... 31 13.24 22.37
Pasadena
Pasadena Towers.................. 34 17.40 27.04
Westwood
10880 Wilshire Boulevard(3)...... 45 16.90 28.16
10960 Wilshire Boulevard......... 33 17.40 29.27
-----
Los Angeles Total/Weighted
Average........................ 179 13.06 24.92
Orange County
Anaheim Stadium Area
500 Orange Tower(9).............. 49 11.66 18.57
Town & Country
1100 Executive Tower............. 25 10.52 17.97
Airport Office Area
1920 Main Plaza.................. 37 12.25 21.16
2010 Main Plaza.................. 30 15.98 24.19
-----
Orange County Total/Weighted
Average........................ 141 11.63 20.21
San Diego
University Town Center
The Plaza at La Jolla
Village(4)..................... 89 16.46 23.87
Smith Barney Tower............... 18 13.61 22.09
-----
San Diego Total/Weighted
Average........................ 107 15.34 23.51
San Francisco
Downtown -- Financial District
201 Mission Street............... 18 9.44 20.05
580 California................... 27 16.16 26.46
60 Spear Street Building......... 9 13.35 24.69
One Maritime Plaza............... 38 19.25 29.87
One Market....................... 114 16.17 27.31
-----
San Francisco Total/Weighted
Average........................ 206 14.77 26.26
San Jose
Mountain View
Shoreline Technology Park........ 12 15.44 18.51
Santa Clara
Lake Marriott Business Park...... 16 7.05 11.01
Sunnyvale
Sunnyvale Business Center........ 3 16.24 18.40
-----
San Jose Total/Weighted
Average........................ 31 12.96 16.18
PACIFIC REGION TOTAL/WEIGHTED
AVERAGE........................ 664 $13.57 $23.35
WEST REGION
Anchorage
Midtown
Calais Office Center(3).......... 36 $ 9.96 $18.62
Phoenix
Central Corridor
49 East Thomas Road(10).......... 14 1.33 8.50
One Phoenix Plaza(11)............ 1 11.92 12.48
-----
Phoenix Total/Weighted Average... 15 11.57 12.39
Minneapolis
Minneapolis -- Central Business
District LaSalle Plaza........... 30 10.44 26.55
Denver
Southeast
Denver Corporate Center II &
III............................ 15 10.14 17.69
The Quadrant..................... 38 11.14 19.40
-----
Denver Total/Weighted Average.... 53 9.93 18.43
St. Louis
Mid County
Interco Corporate Tower.......... 33 11.60 21.26
43
48
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO
OF YEAR/BUILT SQUARE SQUARE PERCENTAGE RENT ANNUALIZED
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1) RENT
-------- ---------- ---------- -------- ---------- ---------- ---------- ----------
Albuquerque
Downtown
500 Marquette Building........... 1 1985 230,022 0.3% 93.6% $ 3,412 0.2%
Oklahoma City
Northwest
Atrium Towers.................... 2 1980/95 155,865 0.2 88.5 1,228 0.1
5100 Brookline(4)................ 1 1974 105,459 0.2 83.3 842 0.1
--- ---------- ----- ---------- -----
Oklahoma City Total/Weighted
Average........................ 3 261,324 0.4 86.4 2,070 0.1
Portland
Downtown
1001 Fifth Avenue................ 1 1980 368,138 0.6 95.6 6,298 0.5
Dallas
LBJ/Quorum
Four Forest(4)................... 1 1985 394,324 0.6 93.4 5,894 0.4
Lakeside Square.................. 1 1987 397,328 0.6 98.3 7,913 0.6
North Central Plaza Three........ 1 1986/94 346,575 0.5 80.4 4,665 0.3
Central
8080 NCX......................... 1 1984/95 283,707 0.4 86.7 4,192 0.3
North Central Expressway
9400 NCX......................... 1 1981/95 379,556 0.6 89.2 4,811 0.3
Preston Center
Preston Commons.................. 3 1986 418,604 0.6 90.6 8,460 0.6
Sterling Plaza................... 1 1984/94 302,747 0.5 88.8 5,122 0.4
--- ---------- ----- ---------- -----
Dallas Total/Weighted Average.... 9 2,522,841 3.8 90.0 41,058 2.9
Ft. Worth
W/SW Fort Worth
Summitt Office Park.............. 2 1974/93 239,095 0.4 96.2 2,805 0.2
Seattle
Bellevue -- Central Business
District
One Bellevue Center(3)........... 1 1983 344,715 0.5 98.9 7,146 0.5
Rainer Plaza(3).................. 1 1986 410,855 0.6 98.3 8,763 0.6
Seattle -- Central Business
District
1111 Third Avenue................ 1 1980 528,282 0.8 97.9 9.309 0.7
First Interstate Center.......... 1 1983 915,883 1.4 98.4 19,583 1.4
Second and Seneca Buildings...... 2 1991/1996 480,272 0.7 99.6 10,036 0.7
Nordstrom Medical Tower.......... 1 1986 101,431 0.2 97.8 2,611 0.2
--- ---------- ----- ---------- -----
Seattle Total/Weighted Average... 7 2,781,438 4.2 98.5 57,447 4.1
WEST REGION TOTAL/WEIGHTED
AVERAGE........................ 32 8,798,482 13.2% 95.2% $ 158,251 11.3%
SOUTHEAST REGION
Ft. Lauderdale
Downtown
First Union Center............... 1 1991 225,500 0.3% 99.0% $ 6,129 0.4%
Orlando
Central Business District
SunTrust Center.................. 1 1988 640,385 1.0 94.5 14,945 1.1
Palm Beach County, FL
West Palm Beach
One Clearlake Centre............. 1 1987 215,104 0.3 92.8 3,876 0.3
Sarasota
Downtown
Sarasota City Center............. 1 1989 247,891 0.4 88.6 4,135 0.3
Tampa
Westshore/Airport
Tampa Commons.................... 1 1985 254,808 0.4 99.5 4,824 0.3
Westshore Center................. 1 1984 215,523 0.3 99.4 3,577 0.3
--- ---------- ----- ---------- -----
Tampa Total/Weighted Average..... 2 470,331 0.7 99.5 8,402 0.6
Atlanta
Central Perimeter
One Perimeter Center............. 4 1972-86 1,264,027 1.9 94.0 21,910 1.6
Two Perimeter Center............. 11 1971-1985 980,708 1.5 98.9 15,588 1.1
Three Perimeter Center........... 14 1970-89 557,435 0.8 98.4 10,119 0.7
Four Perimeter Center............ 3 1978-81 483,796 0.7 99.7 8,883 0.6
Central Park..................... 2 1986 612,733 0.9 92.4 11,435 0.8
Lakeside Office Park............. 5 1972-78 390,721 0.6 97.1 6,084 0.4
Midtown
Promenade II..................... 1 1990 770,840 1.2 97.1 16,783 1.2
ANNUALIZED
NET
EFFECTIVE ANNUALIZED
RENT PER RENT PER
NUMBER OCCUPIED OCCUPIED
OF SQUARE SQUARE
PROPERTY LEASES FOOT(2) FOOT(1)
-------- ------ ---------- ----------
Albuquerque
Downtown
500 Marquette Building........... 31 $ 8.10 $15.84
Oklahoma City
Northwest
Atrium Towers.................... 38 4.81 8.90
5100 Brookline(4)................ 61 4.26 9.59
-----
Oklahoma City Total/Weighted
Average........................ 99 3.97 9.17
Portland
Downtown
1001 Fifth Avenue................ 53 11.01 17.89
Dallas
LBJ/Quorum
Four Forest(4)................... 55 9.09 16.01
Lakeside Square.................. 22 11.67 20.27
North Central Plaza Three........ 36 8.99 16.75
Central
8080 NCX......................... 35 9.33 17.03
North Central Expressway
9400 NCX......................... 67 6.86 14.21
Preston Center
Preston Commons.................. 68 16.65 22.32
Sterling Plaza................... 71 10.69 19.05
-----
Dallas Total/Weighted Average.... 354 9.60 18.09
Ft. Worth
W/SW Fort Worth
Summitt Office Park.............. 62 6.27 12.20
Seattle
Bellevue -- Central Business
District
One Bellevue Center(3)........... 38 13.30 20.97
Rainer Plaza(3).................. 59 14.01 21.70
Seattle -- Central Business
District
1111 Third Avenue................ 55 11.45 18.00
First Interstate Center.......... 74 14.63 21.73
Second and Seneca Buildings...... 34 13.56 20.97
Nordstrom Medical Tower.......... 25 18.42 26.32
-----
Seattle Total/Weighted Average... 285 13.52 20.96
WEST REGION TOTAL/WEIGHTED
AVERAGE........................ 1,051 $10.85 $18.90
SOUTHEAST REGION
Ft. Lauderdale
Downtown
First Union Center............... 21 $17.89 $27.44
Orlando
Central Business District
SunTrust Center.................. 46 14.57 24.68
Palm Beach County, FL
West Palm Beach
One Clearlake Centre............. 33 10.14 19.41
Sarasota
Downtown
Sarasota City Center............. 32 11.33 18.84
Tampa
Westshore/Airport
Tampa Commons.................... 22 11.55 19.03
Westshore Center................. 37 8.90 16.70
-----
Tampa Total/Weighted Average..... 59 10.28 17.96
Atlanta
Central Perimeter
One Perimeter Center............. 127 11.72 18.45
Two Perimeter Center............. 75 9.34 16.07
Three Perimeter Center........... 56 11.72 18.45
Four Perimeter Center............ 7 11.68 18.41
Central Park..................... 69 13.01 20.20
Lakeside Office Park............. 39 8.42 16.04
Midtown
Promenade II..................... 24 15.08 22.43
44
49
PERCENTAGE
OF TOTAL
OFFICE PERCENTAGE
PORTFOLIO OF
NUMBER RENTABLE RENTABLE ANNUALIZED PORTFOLIO
OF YEAR/BUILT SQUARE SQUARE PERCENTAGE RENT ANNUALIZED
PROPERTY PROPERTIES RENOVATED FEET FEET OCCUPIED ($000S)(1) RENT
-------- ---------- ---------- -------- ---------- ---------- ---------- ----------
Northwest
Paces West....................... 2 1988 641,263 1.0% 99.3% $ 13,127 0.9%
--- ---------- ----- ---------- -----
Atlanta Total/Weighted Average... 42 5,701,523 8.6 96.8 103,930 7.4
Charlotte
Uptown
Wachovia Center.................. 1 1972/94 581,666 0.9 100.0 6,909 0.5
Raleigh/Durham
South Durham
University Tower................. 1 1987/92 181,221 0.3 94.3 3,209 0.2
Nashville
Downtown
Nations Bank Plaza............... 1 1977/95 421,513 0.6 97.9 5,723 0.4
--- ---------- ----- ---------- -----
SOUTHEAST REGION TOTAL/WEIGHTED
AVERAGE........................ 51 8,685,134 13.0% 96.7% $ 157,259 11.2%
SOUTHWEST REGION
New Orleans
Central Business District
LL&E Tower....................... 1 1987 545,157 0.8% 84.4% $ 7,255 0.5%
Texaco Center.................... 1 1984 619,714 0.9 89.7 9,161 0.7
Metairie/E. Jefferson
One Lakeway Center............... 1 1981/96 289,112 0.4 94.7 4,095 0.3
Two Lakeway Center............... 1 1984/96 440,826 0.7 95.8 6,549 0.5
Three Lakeway Center............. 1 1987/96 462,890 0.7 95.0 7,027 0.5
--- ---------- ----- ---------- -----
New Orleans Total/Weighted
Average........................ 5 2,357,699 3.5 91.3 34,087 2.4
Austin
Central Business District
Franklin Plaza................... 1 1987 517,849 0.8 88.3 9,367 0.7
One American Center(3)........... 1 1984 505,770 0.8 93.1 9,228 0.7
San Jacinto Center............... 1 1987 400,329 0.6 96.2 7,304 0.5
--- ---------- ----- ---------- -----
Austin Total/Weighted Average.... 3 1,423,948 2.1 25,900 1.9
Houston
Galleria/West Loop
San Felipe Plaza(4).............. 1 1984 959,466 1.4 92.4 14,849 1.1
North/North Belt
Intercontinental Center.......... 1 1983/91 194,801 0.3 99.4 2,715 0.2
Northborough Tower(4)............ 1 1983/90 207,908 0.3 95.4 2,744 0.2
North Loop/Northwest
Brookhollow Central.............. 3 1972-1981 797,971 1.2 88.7 10,719 0.8
West
Destec Tower..................... 1 1982 574,216 0.9 98.7 10,644 0.8
--- ---------- ----- ---------- -----
Houston Total/Weighted Average... 7 2,734,362 4.1 93.4 41,672 3.0
San Antonio
Northwest
Union Square..................... 1 1986 194,398 0.3 97.6 2,690 0.2
Colonade I....................... 1 1983 168,637 0.3 93.6 2,399 0.2
Northwest Center................. 1 1984/94 241,248 0.4 94.7 3,153 0.2
--- ---------- ----- ---------- -----
San Antonio Total/Weighted
Average........................ 3 604,283 0.9 95.3 8,242 0.6
--- ---------- ----- ---------- -----
SOUTHWEST REGION TOTAL/WEIGHTED
AVERAGE........................ 18 7,120,292 10.7% 92.6% $ 109,901 7.9%
--- ---------- ----- ---------- -----
PORTFOLIO TOTAL/WEIGHTED AVERAGE.... 260 66,610,450 100.0% 94.4% $1,398,591 100.0%
=== ========== ===== ========== =====
ANNUALIZED
NET
EFFECTIVE ANNUALIZED
RENT PER RENT PER
NUMBER OCCUPIED OCCUPIED
OF SQUARE SQUARE
PROPERTY LEASES FOOT(2) FOOT(1)
-------- ------ ---------- ----------
Northwest
Paces West....................... 44 $13.84 $20.62
-----
Atlanta Total/Weighted Average... 441 11.52 18.83
Charlotte
Uptown
Wachovia Center.................. 9 6.52 11.88
Raleigh/Durham
South Durham
University Tower................. 36 11.63 18.78
Nashville
Downtown
Nations Bank Plaza............... 21 6.78 13.87
-----
SOUTHEAST REGION TOTAL/WEIGHTED
AVERAGE........................ 698 $11.10 $18.72
SOUTHWEST REGION
New Orleans
Central Business District
LL&E Tower....................... 33 $ 9.26 $15.76
Texaco Center.................... 28 10.32 16.48
Metairie/E. Jefferson
One Lakeway Center............... 52 8.57 14.95
Two Lakeway Center............... 84 10.01 15.50
Three Lakeway Center............. 52 10.26 15.98
-----
New Orleans Total/Weighted
Average........................ 249 8.95 15.84
Austin
Central Business District
Franklin Plaza................... 37 11.48 20.50
One American Center(3)........... 34 9.99 19.59
San Jacinto Center............... 43 9.00 18.96
-----
Austin Total/Weighted Average.... 114 9.42 19.72
Houston
Galleria/West Loop
San Felipe Plaza(4).............. 125 9.47 16.74
North/North Belt
Intercontinental Center.......... 12 6.84 14.02
Northborough Tower(4)............ 15 7.28 13.83
North Loop/Northwest
Brookhollow Central.............. 53 8.38 15.14
West
Destec Tower..................... 24 11.83 18.78
-----
Houston Total/Weighted Average... 229 8.71 16.32
San Antonio
Northwest
Union Square..................... 22 7.05 14.18
Colonade I....................... 27 7.85 15.20
Northwest Center................. 35 7.37 13.79
-----
San Antonio Total/Weighted
Average........................ 84 7.05 14.31
-----
SOUTHWEST REGION TOTAL/WEIGHTED
AVERAGE........................ 676 $ 8.79 $16.66
-----
PORTFOLIO TOTAL/WEIGHTED AVERAGE.... 5,705 $12.26 $22.23
=====
- ---------------
(1) Annualized Rent is the monthly contractual rent under existing leases as of
March 31, 1998, multiplied by 12. This amount reflects total base rent
before any rent abatements, but includes expense reimbursements, which may
be estimates. Total rent abatements for leases in effect as of March 31,
1998, for the 12 months ending March 31, 1999, are approximately $9.3
million.
(2) Annualized Net Effective Rent is calculated for leases in effect as of
March 31, 1998, as follows: Annualized Rent, calculated as described above,
was reduced by the estimated operating expenses per square foot, based on
1997 actual operating expenses for Properties owned as of January 1, 1997,
and based on the Company's estimate of annual operating expenses for
Properties acquired subsequent to January 1, 1997.
45
50
(3) This Office Property is held subject to a ground lease.
(4) This Office Property is held in a partnership with an unaffiliated third
party and, in the case of San Felipe Plaza, an affiliated party.
(5) The Company owns a 10% interest in this Office Property. The Company's
joint venture partner has advised the Company of its exercise of its
buy-sell right under the joint venture documents. In response to this
advice, the Company has determined that it will acquire the joint venture
partner's interest in the Office Property, based on an assumed value for
the Property of $175.5 million.
(6) This Office Property recently underwent major redevelopment and tenants
commenced occupancy in May 1997.
(7) This Office Property is held in a private real estate investment trust in
which the Company and the Trust own 51.6% of the outstanding shares.
(8) As of the date hereof, the Company is involved in continuing discussions
with its joint venture partner in One Post Office Square and Rowes Wharf
with respect to the Company's control over property management of such
Properties. Such joint venture partner did not consent to the transfer to
the Company of Beacon's joint venture interest in these Properties which
occurred as a result of the Beacon Merger. Although the Company believes
that such consent was not required, unless the Company is able to reach an
agreement with respect to day-to-day management of such Properties, it is
possible that the joint venture partner could challenge the transfer of
such Properties in the Beacon Merger, or seek to trigger the buy-sell
remedy contained in the joint venture documents.
(9) This Office Property is held subject to an interest in the improvements at
the Property held by an unaffiliated third party. In addition, the Company
has a mortgage interest in such improvements.
(10) This Office Property was purchased in conjunction with the purchase of One
Phoenix Plaza for the sole purpose of providing additional parking for the
tenants of One Phoenix Plaza.
(11) This Office Property is 100% leased to a single tenant on a triple net
basis, whereby the tenant pays for certain operating expenses directly
rather than reimbursing the Company. The amounts shown above for annualized
rent include the amounts for reimbursement of expenses paid by the Company
but do not make any adjustments for expenses paid directly by the tenant.
(12) This Office Property is currently undergoing a major renovation which is
scheduled to be completed by the end of 1998.
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PARKING FACILITIES
Information concerning the Parking Facilities as of March 31, 1998 is set
forth below.
APPROXIMATE MANAGEMENT NUMBER OF
NUMBER OF COMPANY PARKING
PROPERTY NAME SPACES CITY OR LESSEE(1) FACILITIES
------------- ----------- ---- ------------ ----------
Boston Harbor Garage.................... 1,380 Boston Standard Parking 1
1602-34 Chancellor Garage............... 416 Philadelphia Central Parking 1
15th & Sansom St. Garage................ 313 Philadelphia Central Parking 1
Juniper/Locust St. Garage............... 541 Philadelphia Central Parking 1
1111 Sansom St. Garage.................. 250 Philadelphia Central Parking 1
1616 Sansom St. Garage.................. 240 Philadelphia Central Parking 1
Adams Wabash Garage..................... 670 Chicago Standard Parking 1
Stanwix Parking Garage.................. 712 Pittsburgh Standard Parking 1
Milwaukee Center(2)..................... 876 Milwaukee Standard Parking 1
Capitol Commons Garage(2)(3)............ 950 Indianapolis Central Parking 1
601 Tchoupitoulas Garage................ 759 New Orleans Central Parking 1
North Loop Transportation Center(3)..... 1,172 Chicago Standard Parking 1
Theater District Garage(3).............. 1,006 Chicago Standard Parking 1
Civic Parking(4)........................ 7,464 St. Louis Central Parking 4
------ --
Total................................. 16,749 17
====== ==
- ---------------
(1) With the exception of Capitol Commons Garage, all of the named Parking
Facilities are operated by the designated third-party Service Company under
a lease agreement whereby the Company and the Service Company share the
gross receipts from the parking operation or the Company receives a fixed
payment from the Service Company, and the Company bears none of the
operational expenses. In the case of the Capitol Commons Garage, the
operating agreement provides for the Company's receipt of a percentage of
net receipts and, therefore, results in an insignificant amount of
nonqualifying gross income for REIT qualification purposes relative to the
total gross income of the Company.
(2) This Parking Facility is held subject to a ground lease.
(3) Each of these Parking Facilities is held in a partnership with an
unaffiliated third party. The Company or a Subsidiary is the managing
general partner of each such partnership.
(4) The Company has a 50% membership interest in a portfolio of four Parking
Facilities serving the St. Louis, Missouri area.
TENANTS
As of March 31, 1998, the Office Properties were leased to 5,705 tenants;
no single tenant accounted for more than 1.5% of the Company's aggregate
annualized rent or 1.2% of aggregate occupied square feet (except for the U.S.
General Services Administration, acting on behalf of various agencies or
departments of the U.S. government, which accounted for 3.5% of annualized rent
and 3.1% of occupied square feet).
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LEASE EXPIRATION BY REGION AS OF MARCH 31, 1998
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
CENTRAL Square Feet(1).......... 831,839 976,069 1,386,731 903,221 1,129,223
REGION % Square Feet(2)........ 6.2% 7.3% 10.4% 6.8% 8.5%
TOTALS Annualized Rent(3)...... 19,662,316 25,720,926 35,382,249 20,010,855 27,275,611
Number of Leases........ 167 179 176 159 149
Rent Per Square Foot.... $ 23.64 $ 26.35 $ 25.51 $ 22.15 $ 24.15
NORTHEAST Square Feet(1).......... 1,071,304 1,405,471 1,805,589 3,062,085 3,093,647
REGION % Square Feet(2)........ 5.6% 7.4% 9.5% 16.1% 16.3%
TOTALS Annualized Rent(3)...... 26,863,536 36,237,880 46,758,958 85,479,255 82,281,601
Number of Leases........ 212 199 237 219 220
Rent Per Square Foot.... $ 25.08 $ 25.78 $ 25.90 $ 27.92 $ 26.60
SOUTHEAST Square Feet(1).......... 603,026 1,360,034 1,249,925 1,458,653 883,608
REGION % Square Feet(2)........ 6.9% 15.7% 14.4% 16.8% 10.2%
TOTALS Annualized Rent(3)...... 10,940,629 22,439,810 25,271,118 27,194,739 17,128,932
Number of Leases........ 115 147 137 117 111
Rent Per Square Foot.... $ 18.14 $ 16.50 $ 20.22 $ 18.64 $ 19.39
SOUTHWEST Square Feet(1).......... 614,321 609,935 1,385,634 996,849 930,791
REGION % Square Feet(2)........ 8.6% 8.6% 19.5% 14.0% 13.1%
TOTALS Annualized Rent(3)...... 9,299,326 9,575,435 24,520,688 17,002,173 16,421,391
Number of Leases........ 158 114 130 95 97
Rent Per Square Foot.... $ 15.14 $ 15.70 $ 17.70 $ 17.06 $ 17.64
WEST Square Feet(1).......... 755,284 917,926 1,223,990 1,295,815 1,028,883
REGION % Square Feet(2)........ 8.6% 10.4% 13.9% 14.7% 11.7%
TOTALS Annualized Rent(3)...... 13,773,994 16,511,547 22,394,176 25,626,770 19,980,697
Number of Leases........ 264 196 192 159 111
Rent Per Square Foot.... $ 18.24 $ 17.99 $ 18.30 $ 19.78 $ 19.42
PACIFIC Square Feet(1).......... 340,157 1,131,697 1,329,824 1,712,605 770,985
REGION % Square Feet(2)........ 3.5% 11.7% 13.7% 17.7% 7.9%
TOTALS Annualized Rent(3)...... 8,464,674 26,062,219 28,619,822 36,730,190 20,696,178
Number of Leases........ 90 115 112 115 74
Rent Per Square Foot.... $ 24.88 $ 23.03 $ 21.52 $ 21.45 $ 26.84
PORTFOLIO Square Feet(1).......... 4,215,931 6,401,132 8,381,693 9,429,228 7,837,137
TOTALS % Square Feet(2)........ 6.3% 9.6% 12.6% 14.2% 11.8%
Annualized Rent(3)...... 89,004,474 136,547,816 182,947,012 212,043,981 183,784,411
Number of Leases........ 1,006 950 984 864 762
Rent Per Square Foot.... $ 21.11 $ 21.33 $ 21.83 $ 22.49 $ 23.45
2008 AND
2003 2004 2005 2006 2007 BEYOND TOTALS
------------ ----------- ----------- ----------- ----------- ------------ --------------
CENTRAL 1,285,439 950,883 1,091,564 677,528 490,779 2,695,479 12,418,755
REGION 9.6% 7.1% 8.2% 5.1% 3.7% 20.2% 93.1%
TOTALS 37,223,556 23,437,564 22,324,091 14,397,329 9,860,531 52,211,156 287,506,184
81 83 52 45 34 46 1,171
$ 28.96 $ 24.65 $ 20.45 $ 21.25 $ 20.09 $ 19.37 $ 23.15
NORTHEAST 1,415,681 1,181,330 1,031,602 1,060,091 944,046 1,953,642 18,024,488
REGION 7.5% 6.2% 5.4% 5.6% 5.0% 10.3% 95.0%
TOTALS 36,139,150 29,180,471 27,066,306 23,081,229 22,942,420 57,208,736 473,239,542
116 66 52 48 32 44 1,445
$ 25.53 $ 24.70 $ 26.24 $ 21.77 $ 24.30 $ 29.28 $ 26.26
SOUTHEAST 330,276 354,743 440,007 594,621 33,750 1,091,326 8,399,969
REGION 3.8% 4.1% 5.1% 6.8% 0.4% 12.6% 96.7%
TOTALS 7,352,130 5,389,996 6,368,597 13,663,341 545,976 20,963,612 157,258,880
21 18 9 8 5 10 698
$ 22.26 $ 15.19 $ 14.47 $ 22.98 $ 16.18 $ 19.21 $ 18.72
SOUTHWEST 565,885 539,351 74,924 522,951 171,843 183,159 6,595,643
REGION 7.9% 7.6% 1.1% 7.3% 2.4% 2.6% 92.6%
TOTALS 9,713,299 9,497,736 1,367,499 8,598,631 3,017,761 887,062 109,901,001
44 19 5 9 2 3 676
$ 17.16 $ 17.61 $ 18.25 $ 16.44 $ 17.56 $ 4.84 $ 16.66
WEST 1,095,685 1,007,586 282,593 352,302 216,330 195,508 8,371,902
REGION 12.5% 11.5% 3.2% 4.0% 2.5% 2.2% 95.2%
TOTALS 23,268,345 14,899,123 5,669,678 7,464,701 6,193,196 2,468,508 158,250,735
72 24 12 10 7 4 1,051
$ 21.24 $ 14.79 $ 20.06 $ 21.19 $ 28.63 $ 12.63 $ 18.90
PACIFIC 538,589 376,523 814,607 513,045 794,965 773,305 9,096,302
REGION 5.6% 3.9% 8.4% 5.3% 8.2% 8.0% 93.8%
TOTALS 13,762,478 9,581,781 17,094,691 14,236,129 24,405,886 12,780,746 212,434,793
49 23 29 20 16 21 664
$ 25.55 $ 25.45 $ 20.99 $ 27.75 $ 30.70 $ 16.53 $ 23.35
PORTFOLIO 5,231,555 4,410,416 3,735,297 3,720,538 2,651,713 6,892,419 62,907,059
TOTALS 7.9% 6.6% 5.6% 5.6% 4.0% 10.3% 94.4%
127,458,959 91,986,671 79,890,861 81,441,360 66,965,770 146,519,819 1,398,591,135
383 233 159 140 96 128 5,705
$ 24.36 $ 20.86 $ 21.39 $ 21.89 $ 25.25 $ 21.26 $ 22.23
- ---------------
(1) Total net rentable square feet represented by expiring leases.
(2) Percentage of total net rentable feet represented by expiring leases.
(3) Annualized Rent is the monthly contractual rent under existing leases as of
March 31, 1998 multiplied by 12. This amount reflects total base rent before
any rent abatements, but includes expense reimbursements. Total rent
abatements for leases in effect as of March 31, 1998 for the 12 months
ending March 31, 1998 are approximately $9.3 million.
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LEASE EXPIRATIONS -- TOTAL PORTFOLIO
The following table sets forth a summary schedule of the lease expirations
for the Office Properties for leases in place as of March 31, 1998, assuming
that none of the tenants exercise renewal options or termination rights, if any,
at or prior to the scheduled expirations:
ANNUALIZED PERCENTAGE OF
SQUARE PERCENTAGE RENT OF ANNUALIZED
NUMBER OF FOOTAGE OF OF TOTAL ANNUALIZED RENT EXPIRING RENT OF
YEAR OF LEASE LEASES EXPIRING OCCUPIED OF EXPIRING LEASES PER EXPIRING
EXPIRATION EXPIRING LEASES SQUARE FEET LEASES SQUARE FOOT LEASES(1)
------------- --------- ---------- ----------- --------------- ----------- -------------
1998(2)................. 1,006 4,215,931 6.8% $ 89,004,475 $21.11 6.4%
1999.................... 950 6,401,132 10.3 136,547,816 21.33 9.8
2000.................... 984 8,381,693 13.5 182,947,012 21.83 13.1
2001.................... 864 9,429,228 15.1 212,043,981 22.49 15.1
2002.................... 762 7,837,137 12.6 183,784,411 23.45 13.1
2003.................... 383 5,231,555 8.4 127,458,959 24.36 9.1
2004.................... 233 4,410,416 7.1 91,986,671 20.86 6.6
2005.................... 159 3,735,297 6.0 79,890,861 21.39 5.7
2006.................... 140 3,720,538 6.0 81,441,360 21.89 5.8
2007.................... 96 2,651,713 4.3 66,965,770 25.25 4.8
2008.................... 58 2,252,516 3.6 55,453,467 24.62 4.0
2009.................... 24 790,533 1.3 19,744,576 24.98 1.4
2010 and beyond......... 46 3,131,059 5.0 71,321,776 22.78 5.1
----- ---------- ----- -------------- -----
Total/Weighted
Average............... 5,705 62,188,748 100.0%(3) $1,398,591,135 $22.23 100.0%
===== ========== ===== ============== =====
- ---------------
(1) Based on currently payable rent.
(2) Represents lease expirations from April 1, 1998 to December 31, 1998 and
month-to-month leases.
(3) Reconciliation of total net rentable square footage is as follows:
SQUARE PERCENTAGE
FOOTAGE OF TOTAL
------- ----------
Square footage occupied by tenants...................... 62,188,748 93.36%
Square footage used for management offices and building
use, and remeasurement adjustments.................... 718,311 1.08%
---------- -----
Total occupied square footage........................... 62,907,059 94.44%
Square footage vacant................................... 3,703,391 5.56%
---------- -----
Total net rentable square footage....................... 66,610,450 100.0%
========== =====
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LEASE DISTRIBUTIONS
The following table sets forth information relating to the distribution of
the Office Property leases, based on rentable square feet under lease, as of
March 31, 1998:
PERCENTAGE PERCENTAGE
OF AGGREGATE ANNUALIZED OF AGGREGATE
NUMBER PERCENT TOTAL PORTFOLIO RENT PER PORTFOLIO
SQUARE FEET OF OF ALL OCCUPIED OCCUPIED ANNUALIZED SQUARE ANNUALIZED
UNDER LEASE LEASES LEASES SQUARE FEET SQUARE FEET RENT FOOT RENT
----------- ------ ------- ----------- ------------ ---------- ---------- ------------
2,500 or Less............ 2,101 36.8% 2,608,527 4.2% $ 53,033,799 $20.33 3.8%
2,501-5,000.............. 1,231 21.6 4,408,417 7.1 93,233,621 21.15 6.7
5,001-7,500.............. 662 11.6 4,051,615 6.5 85,902,110 21.20 6.1
7,501-10,000............. 341 6.0 2,949,556 4.8 63,822,566 21.64 4.6
10,001-20,000............ 693 12.1 9,756,440 15.7 211,689,949 21.70 15.1
20,001-40,000............ 374 6.6 10,217,776 16.4 232,610,246 22.77 16.6
40,001-60,000............ 132 2.3 6,411,864 10.3 144,903,115 22.60 10.4
60,001-100,000........... 94 1.6 7,039,652 11.3 174,382,138 24.77 12.5
100,001 or Greater....... 77 1.4 14,744,901 23.7 339,013,591 22.99 24.2
----- ----- ---------- ----- -------------- -----
Total/Weighted Average... 5,705 100.0% 62,188,748 100.0% $1,398,591,135 $22.23 100.0%
===== ===== ========== ===== ============== =====
OCCUPANCY
The table below sets forth weighted average occupancy rates, based on
square feet occupied, of the Office Properties owned by the Company at the
indicated dates:
PERCENTAGE OF
AGGREGATE RENTABLE
RENTABLE SQUARE FEET
DATE SQUARE FEET OCCUPIED
---- ----------- -------------
December 31, 1992..................................... 9,095,684 73%
December 31, 1993..................................... 13,550,553 80
December 31, 1994..................................... 18,505,591 88
December 31, 1995..................................... 23,097,222 86
December 31, 1996..................................... 29,127,289 90
December 31, 1997..................................... 65,291,790 94
March 31, 1998........................................ 66,610,450 94
LEGAL PROCEEDINGS
Neither the Company nor any of the Properties is presently subject to any
material litigation nor, to the Company's knowledge, is any litigation
threatened against the Company or any of the Properties, other than actions
which the Company does not believe to be material or routine actions for
negligence and other claims and administrative proceedings arising in the
ordinary course of business, some of which are expected to be covered by
liability insurance and all of which collectively are not expected to have a
material adverse effect on the liquidity, business, results of operations or
financial condition of the Company.
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MANAGEMENT
TRUSTEES AND EXECUTIVE AND SENIOR OFFICERS
The Board of Trustees of the Company currently consists of eleven trustees,
eight of whom are not employees or affiliates of the Company, the Operating
Partnership or the Equity Group. The Board of Trustees is divided into three
classes of trustees. The initial terms of the first, second and third classes
will expire in 1998, 1999 and 2000, respectively. Beginning in 1998, trustees of
each class will be chosen for three-year terms upon the expiration of their
current terms, and each year, one class of trustees will be elected by the
shareholders. The Company believes that classification of the Board of Trustees
will help to assure the continuity and stability of the Company's business
strategies and policies as determined by the Board of Trustees.
Information concerning the trustees and executive and senior officers of
the Company is set forth below.
NAME AGE OFFICES HELD
- ---- --- ------------
Samuel Zell.................... 56 Chairman of the Board, Trustee (term expires in 1998)
Timothy H. Callahan............ 47 President, Chief Executive Officer, Trustee (term expires in
1999)
Michael A. Steele.............. 51 Chief Operating Officer and Executive Vice President -- Real
Estate Operations
Richard D. Kincaid............. 36 Executive Vice President, Chief Financial Officer
Stanley M. Stevens............. 49 Executive Vice President, Chief Legal Counsel and Secretary
Gary A. Beller................. 51 Executive Vice President -- Parking Facilities
Jeffrey L. Johnson............. 38 Chief Investment Officer and Senior Vice President --
Investments
David H. Crawford.............. 41 Senior Vice President -- Administration and General Counsel
for Property Operations
Sybil J. Ellis................. 44 Senior Vice President -- Acquisitions
Frank Frankini................. 43 Senior Vice President -- Design & Construction
Frances P. Lewis............... 44 Senior Vice President -- Corporate Communications
Diane M. Morefield............. 39 Senior Vice President -- Finance/Capital Markets
David H. Naus.................. 43 Senior Vice President -- Acquisitions
Michael E. Sheinkop............ 35 Senior Vice President -- Portfolio Management
Peter D. Johnson............... 40 Senior Vice President -- Southwest Region
Peter H. Adams................. 51 Senior Vice President -- Pacific Region
Kim J. Koehn................... 42 Senior Vice President -- West Region
Christopher P. Mundy........... 36 Senior Vice President -- Northwest Region
Arvid J. Povilaitis............ 38 Senior Vice President -- Central Region
Mark E. Scully................. 40 Senior Vice President -- Southeast Region
Sheli Z. Rosenberg............. 56 Trustee (term expires in 2000)
Thomas E. Dobrowski............ 54 Trustee (term expires in 1998)
James D. Harper, Jr. .......... 64 Trustee (term expires in 1999)
Peter Linneman................. 47 Trustee (term expires in 2000)
Jerry M. Reinsdorf............. 62 Trustee (term expires in 1998)
William M. Goodyear............ 50 Trustee (term expires in 1999)
David K. McKown................ 60 Trustee (term expires in 2000)
H. Jon Runstad................. 56 Trustee (term expires in 1998)
Edwin N. Sidman................ 55 Trustee (term expires in 1998)
Samuel Zell has been a trustee and Chairman of the Board of the Company
since October 1996. For more than five years, Mr. Zell has served as Chairman of
the Board of Directors of Equity Group Investments, L.L.C. an owner, manager and
financier of real estate and corporations ("EGI"). For more than five years, Mr.
Zell has served as Chairman of the Boards of Directors of Anixter International
Inc., a provider of integrated network and cabling solutions ("Anixter"),
American Classic Voyages Co., an owner and operator of cruise lines ("ACV"), and
Manufactured Home Communities, Inc., a real estate investment trust specializing
in the ownership and management of manufactured home communities ("MHC"). Since
March 1993, Mr. Zell has served as Chairman of the Board of Equity Residential
Properties Trust, an owner and operator of multifamily residential properties
("EQR"). Since January 1995, Mr. Zell has served as a
51
56
director of TeleTech Holdings, Inc., a provider of telephone and computer based
customer care solutions. Since April 1996, Mr. Zell has served as a director of
Ramco Energy plc, an independent oil company based in the United Kingdom. Since
March 1997, Mr. Zell has served as a director of Chart House Enterprises, Inc.,
an owner and operator of restaurants. Since April 1997, Mr. Zell has served as
the Chairman of the Board of Directors of Jacor Communications, Inc., an owner
of radio stations ("Jacor"). Since March 1998, Mr. Zell has served as a director
of Fred Meyer, Inc., a large domestic food retailer and operator of
multi-department stores.
Timothy H. Callahan has been a trustee and Chief Executive Officer and
President of the Company since October 1996. Mr. Callahan has served on the
Board of Managers and has been the Chief Executive Officer of EOH and Equity
Office Properties, L.L.C., a property manager of office buildings ("EOP LLC"),
from August 1996 until October 1997. Mr. Callahan was Executive Vice President
and Chief Financial Officer of EGI from January 1995 until August 1996, was
Executive Vice President of EGI from November 1994 through January 1995 and was
Senior Vice President of EGI from July 1992 until November 1994. Mr. Callahan
was a Director of MHC from May 1996 until October 1997. Mr. Callahan was Vice
President -- Finance of the Edward J. DeBartolo Corporation, a developer, owner
and operator of shopping centers, in Youngstown, Ohio, from July 1988 until July
1992. Mr. Callahan was employed by Chemical Bank, a commercial bank located in
New York, New York, from July 1973 until March 1987.
Michael A. Steele has been Chief Operating Officer and Executive Vice
President -- Real Estate Operations for the Company since February 1998 and was
Executive Vice President -- Real Estate Operations for the Company from October
1996 until February 1998. Mr. Steele was President and Chief Operating Officer
of EOP LLC from July 1995 until October 1997. Mr. Steele was Executive Vice
President of EOH from July 1995 until October 1997. Mr. Steele was President and
Chief Operating Officer of Equity Office Properties, Inc., a subsidiary of EGI
which provided real estate property management services ("EOP, Inc."), from
November 1993 through October 1995. Mr. Steele was President and Chief Executive
Officer of First Office Management, a former division of Equity Property
Management, Inc., that provided real estate property management services
("FOM"), from June 1992 until October 1993. Mr. Steele was Senior Vice President
and regional director for Rubloff, Inc., a full service real estate company in
Chicago, Illinois, from April 1987 until June 1992.
Richard D. Kincaid has been Executive Vice President and Chief Financial
Officer of the Company since March 1997 and was Senior Vice President and Chief
Financial Officer of the Company from October 1996 until March 1997. Mr. Kincaid
was Senior Vice President and Chief Financial Officer of EOH from July 1995
until October 1997. Mr. Kincaid was Senior Vice President of EGI from February
1995 until July 1995. Mr. Kincaid was Senior Vice President of the Yarmouth
Group, a real estate investment company in New York, New York, from August 1994
until February 1995. Mr. Kincaid was Senior Vice President -- Finance for EGI
from December 1993 until July 1994. Mr. Kincaid was Vice President -- Finance
for EGI from August 1990 until December 1993. Mr. Kincaid was Vice President for
Barclays Bank PLC, a commercial bank located in Chicago, Illinois, from August
1987 until August 1990.
Stanley M. Stevens has been Executive Vice President, Chief Legal Counsel
and Secretary of the Company since October 1996. Mr. Stevens was Executive Vice
President and General Counsel of EOH from September 1996 until October 1997. Mr.
Stevens was a vice president of Rosenberg & Liebentritt, P.C., a law firm in
Chicago, Illinois, from December 1993 until September 1996. Mr. Stevens was a
partner at Rudnick & Wolfe, a national law firm based in Chicago, Illinois, from
October 1987 until December 1993.
Gary A. Beller has been Executive Vice President of the Company since March
1997. Mr. Beller has been President of Equity Capital Holdings L.L.C., the
general partner of Equity Capital Holdings, L.P., an asset manager of parking
facilities, since August 1997. Mr. Beller was Senior Vice President --
Redevelopment of Equity Assets Management, Inc., a former subsidiary of EGI
which provided real estate asset management services ("EAM") from October 1987
until March 1997.
Jeffrey L. Johnson has been Chief Investment Officer and Senior Vice
President -- Investments for the Company since February 1998 and was Senior Vice
President -- Investments for the Company from October 1996 until February 1998.
Mr. Johnson was Senior Vice President -- Asset Management for EOH from
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57
July 1996 until October 1997. Mr. Johnson was Senior Vice President --
Acquisitions for EOH from July 1995 until July 1996. Mr. Johnson was Senior Vice
President -- Acquisitions of EOP, Inc. from December 1994 until July 1995 and
was Vice President -- Acquisitions of EOP, Inc. from November 1993 until
December 1994. Mr. Johnson was Vice President -- Acquisitions of EAM from
September 1990 until October 1993. Mr. Johnson was an Investor and Asset Manager
for Aldrich Eastman Waltch, Inc., a real estate advisor in Boston,
Massachusetts, from August 1987 until August 1990. Mr. Johnson was Senior
Project Manager in the real estate investment group for First Wachovia, Inc., a
commercial bank in Winston-Salem, North Carolina, from July 1983 until August
1987.
David H. Crawford has been Senior Vice President -- Administration and
General Counsel for Property Operations of the Company since March 1997. Mr.
Crawford was Senior Vice President and Associate General Counsel of EOH from
September 1996 until October 1997. Mr. Crawford was Senior Vice President and
General Counsel of EOH from July 1995 until September 1996 and of EOP LLC from
September 1996 until July 1997. Mr. Crawford was Of Counsel to Rosenberg &
Liebentritt, P.C. from February 1991 until December 1996. Mr. Crawford was
Senior Vice President and General Counsel of EOP, Inc. from November 1993 until
July 1995. Mr. Crawford was Vice President and General Counsel of FOM from
February 1991 until November 1993. Mr. Crawford was an associate at Kirkland &
Ellis, a national law firm based in Chicago, Illinois, from June 1988 until
February 1991.
Sybil J. Ellis has been Senior Vice President -- Acquisitions of the
Company since March 1997. Ms. Ellis was Senior Vice President -- Acquisitions of
EOH from July 1995 until October 1997. Ms. Ellis was Senior Vice President --
Acquisitions of EOP, Inc. from July 1994 through July 1995 and was Vice
President -- Acquisitions of EOP, Inc. from November 1993 until July 1994. Ms.
Ellis was Vice President -- Acquisitions of EAM from March 1990 until October
1993.
Frank Frankini has been Senior Vice President -- Design and Construction of
the Company since March 1997. Mr. Frankini was Senior Vice President -- Design
and Construction of EOP LLC from July 1995 until October 1997. Mr. Frankini was
Senior Vice President -- Engineering and Operations of EOP, Inc. from November
1993 until July 1995. Mr. Frankini was Senior Vice President -- Engineering and
Operations of FOM from October 1990 until October 1993. Mr. Frankini was
National Director of Engineering and Operations for Rubloff, Inc., a full
service real estate company in Chicago, Illinois, from October 1984 until
October 1990.
Frances P. Lewis has been Senior Vice President -- Corporate Communications
for the Company since April 1997. Ms. Lewis was Vice President -- Corporate
Communications of EGI from November 1994 until April 1997. Ms. Lewis was Vice
President -- Publications of EGI from September 1988 until October 1994.
Diane M. Morefield has been Senior Vice President -- Finance/Capital
Markets of the Company since July 1997. Ms. Morefield was Senior Manager in the
Corporate Finance practice of Deloitte & Touche, a public accounting and
consulting firm, from November 1994 until July 1997. Ms. Morefield was Executive
Vice President of the Fordham Company, a real estate development company located
in Chicago, Illinois, from November 1993 until November 1994. Ms. Morefield was
Team Leader for the Real Estate Group division, in the Midwest, of Barclays
Bank, a commercial bank located in Chicago, Illinois, from 1982 until November
1993.
David H. Naus has been Senior Vice President -- Acquisitions of the Company
since March 1997. Mr. Naus was Senior Vice President -- Acquisitions for EOH
from December 1995 until October 1997. Mr. Naus was Vice President --
Acquisitions of EOH from July 1995 until December 1995. Mr. Naus was Vice
President -- Acquisitions of EOP, Inc. from November 1993 until July 1995. Mr.
Naus was Vice President -- Acquisitions of EAM from November 1992 until November
1993. Mr. Naus was Vice President of EAM from October 1988 until November 1992.
Michael E. Sheinkop has been Senior Vice President -- Portfolio Management
for the Company since November 1997. Mr. Sheinkop was Senior Vice President --
Divisional Manager of EOH from March 1997 until October 1997 and for the Company
from March 1997 through December 1997. Mr. Sheinkop was Senior Vice President --
Asset Management of EOH from December 1995 until February 1997. Mr. Sheinkop was
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Vice President -- Asset Management of EOH from July 1995 until December 1995.
Mr. Sheinkop was Vice President -- Asset Management of EOP, Inc. from November
1993 until July 1995. Mr. Sheinkop was Vice President of EAM from March 1990
until November 1993.
Peter H. Adams has been Senior Vice President -- Pacific Region of the
Company since March 1998 and was Regional Vice President -- Pacific Region of
the Company from March 1997 until February 1998. Mr. Adams was Vice President --
Group Manager of EOH from July 1994 until March 1997. Mr. Adams was President of
Adams Equities, a private real estate consulting firm, from 1990 to 1994.
Peter D. Johnson has been Senior Vice President -- Southwest Region of the
Company since March 1998 and was Regional Vice President -- Southwest Region
from January 1998 until February 1998. Mr. Johnson was Senior Vice President --
National Accounts from April 1993 until February 1998.
Kim J. Koehn has been Senior Vice President -- West Region of the Company
since March 1998 and was Regional Vice President -- West Region from March 1997
until February 1998 and was also Regional Vice President -- Southwest Region
from March 1997 until December 1997. Mr. Koehn was Senior Vice President --
Asset Management of EOH from December 1995 to February 1997. Mr. Koehn was a
Vice President of EOH from June 1993 until December 1995.
Christopher P. Mundy has been Senior Vice President -- Northeast Region of
the Company since March 1998, and was Regional Vice President -- Northeast
Region from July 1997 until February 1998. Mr. Mundy was Regional Director --
Leasing of EOH from November 1991 until July 1997.
Arvid A. Povilaitis has been Senior Vice President -- Central Region of the
Company since March 1998 and was Regional Vice President -- Central Region from
March 1997 until February 1998. Mr. Povilaitis was Vice President -- Asset
Management of EOH from August 1994 until February 1997. Mr. Povilaitis was Vice
President -- Investment Properties of Strategic Realty Advisors, Inc., a real
estate and advisory company, from January 1994 until August 1994. Mr. Povilaitis
was employed at VMS Realty Partners, a sponsor of public and private real estate
limited partnerships, from January 1983 until January 1994, most recently
serving as Second Vice President.
Mark E. Scully has been Senior Vice President -- Southeast Region of the
Company since March 1998 and was Regional Vice President for the Southeast
Region from March 1997 until February 1998. Mr. Scully was Vice President --
Regional Leasing Director of EOH from January 1995 until February 1997. Mr.
Scully was Regional Leasing Director of EOH from September 1991 until December
1994.
Sheli Z. Rosenberg has been a trustee of the Company since March 1997.
Since November 1994, Ms. Rosenberg has been Chief Executive Officer and
President of EGI. From 1980 until 1997, Ms. Rosenberg was a principal of the law
firm of Rosenberg & Liebentritt, P.C. and is now of counsel to the firm. For
more than five years, Ms. Rosenberg has served on the Board of Directors of each
of the following companies: EGI, AVC, and Anixter. Since March 1993, Ms.
Rosenberg has been a trustee of EQR. Since 1994, Ms. Rosenberg has been a
director of Jacor and since April 1997, has served as the Vice Chairman of the
Board of Directors of Jacor. Ms. Rosenberg was a vice president of First Capital
Benefit Administrators, Inc., a wholly owned indirect subsidiary of Great
American Management and Investment, Inc., ("FCBA") which filed a Chapter 7
Bankruptcy petition on January 3, 1995, resulting in FCBA's liquidation. On
November 15, 1995, an order closing the FCBA bankruptcy case was entered by the
Bankruptcy Court for the Central District of California. Since August 1986, Ms.
Rosenberg has been a director of MHC. Since April 1997, Ms. Rosenberg has been a
director of Illinois Power Co., a supplier of electricity and natural gas in
Illinois, the holding company of which is Illinova Corp., of which Ms. Rosenberg
is also a director. Since May 1997, Ms. Rosenberg has been a director of CVS
Corporation, a drugstore chain.
Thomas E. Dobrowski has been a trustee of the Company since July 1997.
Since December 1994, Mr. Dobrowski has been the managing director of real estate
and alternative investments of General Motors Investment Management Corporation
("GMIMCO"), an investment advisor to several pension funds of General Motors
Corporation ("GM") and its subsidiaries and to several other clients also
controlled by GM. Since March 1993, Mr. Dobrowski has been a director of MHC.
Since April 1994, Mr. Dobrowski has been a
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director of Red Roof Inns, Inc., an owner and operator of hotels. Since May
1997, Mr. Dobrowski has been a director of Taubman Centers Inc., an equity REIT
focused on regional shopping centers.
James D. Harper, Jr. has been a trustee of the Company since July 1997.
Since 1982, Mr. Harper has been president of JDH Realty Co., a real estate
development and investment company. Since 1988, he has been a co-managing
partner in AH Development, S.E. and AH HA Investments, S.E., special limited
partnerships formed to develop over 400 acres of land in Puerto Rico. Since May
1993, Mr. Harper has been a trustee of EQR. Since 1993, Mr. Harper has been a
trustee of Urban Land Institute. Since 1997, Mr. Harper has been a director of
Burnham Pacific Properties Inc., a REIT that owns, develops and manages
commercial real estate properties in California. Since June 1997, Mr. Harper has
been a director of American Health Properties, Inc., a REIT specializing in
health care facilities.
Peter Linneman has been a trustee of the Company since July 1997. Dr.
Linneman has been a Professor of Finance and Public Policy at the Wharton School
of the University of Pennsylvania since 1979, the Albert Sussman Professor of
Real Estate at the Wharton School since 1989 and a director of the Wharton Real
Estate Center since 1986. In addition, he is an Urban Land Institute Research
Fellow and a member of the National Association of Real Estate Investment
Trusts. Since 1986, Dr. Linneman has been a trustee of Universal Health Realty
Trust, a REIT that invests in health care and human service related facilities.
Since 1992, Dr. Linneman has been a trustee of Kranzco Realty Trust, a REIT that
owns, develops, operates, leases, manages, and invests in neighborhood and
community shopping centers and free-standing properties. Since 1993, Dr.
Linneman has been a trustee of Gables Residential Properties Trust, a
self-administered, self-managed residential property REIT. Since 1996, Dr.
Linneman has served as a director of Nevada Investment Holdings, a full service
real estate company which focuses on community shopping centers. From 1993 until
1996, Dr. Linneman was Chairman of the Board of Directors of Rockefeller Center
Properties, Inc., a REIT which previously held the first mortgage loan relating
to Rockefeller Center in New York City.
Jerry M. Reinsdorf has been a trustee of the Company since July 1997. For
more than five years, Mr. Reinsdorf has been the Chairman of the Chicago White
Sox baseball team, the Chairman of the Chicago Bulls basketball team, and a
partner of Bojer Financial Ltd., a real estate investment company located in
Northbrook, Illinois. Since 1996, Mr. Reinsdorf has served as a director of
LaSalle National Bank, N.A., a commercial bank in Chicago, Illinois, the holding
company of which is LaSalle National Corporation, of which Mr. Reinsdorf is also
a director. Since 1993, Mr. Reinsdorf has been a trustee of Northwestern
University in Evanston, Illinois. Mr. Reinsdorf is a stockholder, officer and
director of Jerbo Holdings I, Inc. ("Jerbo") which is the corporate general
partner of a limited partnership which is the general partner of Bojer Realty
Limited Partnership-I ("Bojer Realty"). Bojer Realty was a limited partner of
Smith Dairy Partnership, Ltd. ("Smith Dairy") and a stockholder of the corporate
general partner of Smith Dairy which filed a voluntary petition for relief under
Chapter 11 Bankruptcy on January 24, 1994. On February 14, 1995, an order
dismissing the Smith Dairy bankruptcy case was entered by the Bankruptcy Court
for the Southern District of Florida.
William M. Goodyear has been a trustee of the Company since July 1997.
Since July 1997, Mr. Goodyear has been Chairman of Bank of America, Illinois,
the Midwest business development unit of BankAmerica Corporation, a commercial
bank. Mr. Goodyear was Chairman and Chief Executive Officer of Bank of America
Illinois, a subsidiary of BankAmerica Corporation, from September 1994 until
June 1997, at which time it merged with Bank of America NT & SA, a subsidiary of
BankAmerica Corporation. For more than two years prior to September 1994, Mr.
Goodyear was a Vice Chairman and a member of the Board of Directors of
Continental Bank Corporation, the parent company of Continental Bank, N.A., a
commercial bank which merged into Bank of America Illinois in September 1994.
Since June 1992, Mr. Goodyear has been a member of the Board of Trustees of the
Museum of Science and Industry in Chicago, Illinois. Mr. Goodyear has been a
member of the Board of Trustees of the University of Notre Dame since May 1996
and of Rush-Presbyterian St. Lukes Medical Center in Chicago, Illinois, since
June 1996. Mr. Goodyear has been a member of the Advisory Council for the
University of Chicago Graduate School of Business since September 1995.
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60
David K. McKown has been a trustee of the Company since July 1997. Since
1993, Mr. McKown has been Group Executive of the Diversified Finance and Real
Estate Operating Partnership Unit of BankBoston, N.A., a commercial bank. Mr.
McKown was director of Loan Review for BankBoston, N.A. from 1990 until 1993.
Mr. McKown serves as a Director of Electrolux Corporation.
H. Jon Runstad was appointed a trustee of the Company effective January 1,
1998, pursuant to a Right to Purchase Agreement dated as of December 16, 1997,
executed in connection with the Wright Runstad Acquisition. Since 1971, Mr.
Runstad has been President and Chief Executive Officer of Wright Runstad &
Company, a Seattle, Washington based owner, manager and developer of office
buildings in the western United States, primarily in the Pacific Northwest.
Since 1987, Mr. Runstad has served as a member of the Board of Regents for the
University of Washington. Since July 1975, Mr. Runstad has served as a trustee
for the Downtown Seattle Association.
Edwin N. Sidman was appointed a trustee of the Company effective March 1,
1998, pursuant to the Merger Agreement. Mr. Sidman served as Chairman of the
Board and a director of Beacon from 1994 until the consummation of the Beacon
Merger in December 1997. He is currently the managing partner of The Beacon
Companies, a private company involved in real estate investment, development and
management. Prior to joining Beacon in 1971, Mr. Sidman practiced law with the
predecessor to the firm of Rubin and Rudman in Boston. Mr. Sidman's professional
affiliations include service as Senior Vice Chairman of the National Realty
Committee. Mr. Sidman is a member of the Board of Trustees of Duke University
and a member of the Board of Directors and Executive Committee for the United
Way of Massachusetts Bay.
COMPENSATION OF THE BOARD OF TRUSTEES; PAYMENT IN COMMON SHARES
The Company paid each of its non-employee trustees a pro rated fee in 1997
of $20,000. For the full year of 1998, the Company expects to pay each of its
non-employee trustees an annual fee of $40,000. In addition, non-employee
trustees who serve on the Executive Committee, Compensation Committee or Audit
Committee receive an additional $1,000 per annum for each committee on which
they serve. Committee chairs receive an additional $500 per annum. These fees
have been and generally are expected to be paid in Common Shares. Trustees who
are employees of the Company are not paid any trustees' or committee fees. The
Company reimburses its trustees for travel expenses incurred in connection with
their activities on behalf of the Company.
Upon the effective date of the IPO, Mr. Zell and Ms. Rosenberg received
grants of options to purchase 200,000 and 50,000 Common Shares, respectively, at
$21.00 per share, which options will vest in three equal annual installments
(rounded to the nearest whole Common Share) over three years. After the IPO,
each trustee (other than Messrs. Zell and Callahan and Ms. Rosenberg) received a
grant of options to purchase 10,000 Common Shares at the IPO price. In addition,
upon joining the Board of Trustees, Mr. Runstad received options to purchase
3,700 Common Shares at a price of $31.50 per share and Mr. Sidman received
options to purchase 2,100 Common Shares at a price of $29.50 per share, each
representing a pro rated portion of the options granted to Trustees after the
IPO. Under the Company's 1997 Amended and Restated Employee Share Option and
Share Award Plan (the "Employee Plan"), each trustee then in office (including
Messrs. Zell and Callahan and Ms. Rosenberg for the years after 1997) will
receive an annual grant of options to purchase 10,000 Common Shares at the then
current market price on the date of the meeting of the Board of Trustees held
immediately after the annual meeting of the Company's shareholders. These grants
of options to purchase 10,000 Common Shares will vest as follows: options for
3,333 Common Shares will vest six months after the grant date, options for an
additional 3,333 Common Shares will vest on the first anniversary of the grant
date, and options for the remaining 3,334 Common Shares will vest on the second
anniversary of the grant date. Trustees who perform other functions for the
Company may receive additional options under the Employee Plan.
On February 17, 1998, the Compensation Committee granted fully vested
options to purchase 500,000 Common Shares to Mr. Zell, 94,500 Common Shares to
each of Ms. Rosenberg and Mr. Harper and 47,250 Common Shares to each of Messrs.
Dobrowski, Linneman, Reinsdorf, Goodyear and McKown, at an exercise price of
$29.50 per share.
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EXECUTIVE COMPENSATION
The following tables show information with respect to the annual
compensation (including option grants) for services rendered to the Company for
the fiscal year ended December 31, 1997, by the chief executive officer and
those persons who were, at December 31, 1997, the other four most highly
compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------- -----------------------------------
AWARDS PAYOUTS
----------------------- ---------
SECURITIES
RESTRICTED UNDERLYING LONG-TERM
SHARE OPTIONS INCENTIVE ALL OTHER
SALARY BONUS AWARD(S) GRANTED PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($)(3) (#)(4) ($) ($)(5)
--------------------------- ---- -------- ---------- ---------- ---------- --------- ------------
Timothy H. Callahan,......... 1997 $600,000 $1,050,000 $4,976,875 450,000 0 $9,600
President and Chief Executive
Officer
Michael A. Steele,........... 1997 265,000 525,000 1,523,375 250,000 0 9,600
Chief Operating Officer and
Executive Vice President --
Real Estate Operations
Richard D. Kincaid,.......... 1997 235,000 465,000 1,523,375 250,000 0 9,600
Executive Vice President and
Chief Financial Officer
Stanley M. Stevens,.......... 1997 325,000 375,000 627,000 225,000 0 9,600
Executive Vice President and
Chief Legal Counsel
Jeffrey L. Johnson,.......... 1997 225,000 275,000 330,000 183,500 0 9,600
Senior Vice President and
Chief Investment Officer
- ---------------
(1) Amounts shown include cash compensation earned and received by executive
officers as well as amounts earned but deferred at the election of these
officers.
(2) Cash bonuses are reported in the year earned, even if paid in a subsequent
year.
(3) On September 22, 1997 and December 16, 1997, the Compensation Committee of
the Board of Trustees granted restricted shares to certain of the Company's
executive officers pursuant to the Employee Plan. Mr. Callahan was granted
awards of 85,000 and 70,000 Common Shares, respectively, and Mr. Steele and
Mr. Kincaid were each granted awards of 17,000 and 30,000 Common Shares,
respectively. In addition, on December 16, 1997, the Compensation Committee
of the Board of Trustees granted Mr. Stevens an award of 19,000 Common
Shares and Mr. Johnson an award of 10,000 Common Shares. These awards will
vest over a five-year period after being granted (50% after year three, 25%
after year four, and 25% after year five). The dollar value shown in the
table for the restricted Common Shares is based on the closing prices of the
Common Shares on September 22, 1997 and December 16, 1997, the dates of
grant. This valuation does not take into account the diminution in value
attributable to the restrictions applicable to the Common Shares. The total
number of restricted Common Shares held by each named executive officer and
the value of such restricted shares at December 31, 1997, the last trading
day of the year, was as follows:
NUMBER OF VALUE AT
RESTRICTED DECEMBER 31,
NAME COMMON SHARES 1997 ($)
---- ------------- ------------
Timothy H. Callahan......................................... 155,000 $4,892,188
Michael A. Steele........................................... 47,000 1,483,438
Richard D. Kincaid.......................................... 47,000 1,483,438
Stanley M. Stevens.......................................... 19,000 599,688
Jeffrey L. Johnson.......................................... 10,000 315,625
Distributions are paid on all restricted Common Shares at the same rate as
on unrestricted Common Shares.
(4) Securities underlying options are reported in the year granted.
(5) Includes employer matching and profit-sharing contributions to the Company's
401(k) Retirement Savings Plan.
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OPTION GRANTS IN FISCAL YEAR 1997
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS COMMON SHARE PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES AND EXERCISE PRICE OPTION TERM(1)
OPTIONS TRUSTEES IN PER COMMON EXPIRATION -------------------------
NAME GRANTED(2) FISCAL YEAR SHARE(3) DATE 5%(4) 10%(5)
---- ---------- ---------------- -------------- ----------------- ---------- -----------
Timothy H. Callahan....... 200,000 9.6% $21.00 July 7, 2007 $2,642,000 $ 6,694,000
250,000 33.00 December 16, 2007 5,187,500 13,147,500
Michael A. Steele......... 150,000 5.3 21.00 July 7, 2007 1,981,500 5,020,500
100,000 33.00 December 16, 2007 2,075,000 5,259,000
Richard D. Kincaid........ 150,000 5.3 21.00 July 7, 2007 1,981,500 5,020,500
100,000 33.00 December 16, 2007 2,075,000 5,259,000
Stanley M. Stevens........ 150,000 4.8 21.00 July 7, 2007 1,981,500 5,020,500
75,000 33.00 December 16, 2007 1,556,250 3,944,250
Jeffrey L. Johnson........ 125,000 3.9 21.00 July 7, 2007 1,651,250 4,183,750
58,500 33.00 December 16, 2007 1,213,875 3,076,515
- ---------------
(1) In accordance with the rules of the Commission, these amounts are the
hypothetical gains or "option spreads" that would exist for the respective
options based on assumed rates of annual compound share price appreciation
of 5% and 10% from the date the options were granted over the full option
term. No gain to the optionee is possible without an increase in the price
of Common Shares, which would benefit all shareholders.
(2) All options are granted at the fair market value of the Common Shares at the
date of grant. Options granted are for a term of not more than ten years
from the date of grant and vest in three equal annual installments (rounded
to the nearest whole Common Share) over three years.
(3) The exercise price for the initial grant of options on July 7, 1997 was
based on the IPO price. The exercise price for the grant of options on
December 16, 1997 was the closing price of the Common Shares on the date of
grant.
(4) An annual compound share price appreciation of 5% from the IPO price of
$21.00 and the December 16, 1997 closing price of $33.00 per Common Share
yields a price of $34.21 and $53.75 per Common Share, respectively.
(5) An annual compound share price appreciation of 10% from the IPO price of
$21.00 and the December 16, 1997 closing price of $33.00 per Common Share
yields a price of $54.47 and $85.59 per Common Share, respectively.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END(#) FISCAL YEAR-END($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- ----------------------------- ----------------------------
Timothy H. Callahan........................... 0/450,000 0/2,112,500
Michael A. Steele............................. 0/250,000 0/1,584,375
Richard D. Kincaid............................ 0/250,000 0/1,584,375
Stanley M. Stevens............................ 0/225,000 0/1,584,375
Jeffrey L. Johnson............................ 0/183,500 0/1,320,313
- ---------------
(1) Represents the market value of a Common Share at December 31, 1997
($31.5625) less the exercise price of in-the-money options.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee members are Messrs. Harper and McKown and Ms.
Rosenberg.
Mr. Zell and Ms. Rosenberg serve as members of the board of directors of
EGI, as well as numerous other non-public companies owned in whole or in part by
Mr. Zell or his affiliates (the "Equity Group Companies"), which companies do
not have compensation committees. Ms. Rosenberg is the President and Chief
Executive Officer of EGI and, with respect to the Equity Group Companies, the
directors and executive officers of those companies include Mr. Zell and Ms.
Rosenberg.
For a description of certain transactions with members of the Board of
Trustees or their affiliates, see "Certain Relationships and Related
Transactions."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Title 8 of the Corporations and Associations Article of the Annotated Code
of Maryland, as amended from time to time (the "Maryland REIT Law"), permits a
Maryland REIT to include in its declaration of trust a provision limiting the
liability of its trustees and officers to the trust and its shareholders for
money damages except for liability resulting from (a) actual receipt of an
improper benefit or profit in money, property or services or (b) active and
deliberate dishonesty established by a final judgment as being material to the
cause of action. The Company's declaration of trust, as amended from time to
time, and as filed with the State Department of Assessments and Taxation of
Maryland (the "Declaration of Trust"), contains such a provision which
eliminates such liability to the maximum extent permitted by the Maryland REIT
Law.
The Declaration of Trust authorizes the Company, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former trustee or officer or (b) any individual who, while a
trustee of the Company and at the request of the Company, serves or has served
as a director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise from and against any claim or liability to which such person
may become subject or which such person may incur by reason of his or her status
as a present or former trustee or officer of the Company. The Bylaws obligate
the Company, to the maximum extent permitted by Maryland law, to indemnify and
to pay or reimburse reasonable expenses in advance of final disposition of a
proceeding to (a) any present or former trustee or officer who is made party to
the proceeding by reason of his service in that capacity or (b) any individual
who, while a trustee or officer of the Company and at the request of the
Company, serves or has served another corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity, against any claim or
liability to which he may become subject by reason of such status. The
Declaration of Trust and Bylaws also permit the Company to indemnify and advance
expenses to any person who served a predecessor of the Company in any of the
capacities described above and to any employee or agent of the Company or a
predecessor of the Company. The Bylaws require the Company to indemnify a
trustee or officer (or any former trustee or officer) who has been successful,
on the merits or otherwise, in the defense of any proceeding to which he is made
a party by reason of his service in that capacity against reasonable expenses
incurred in connection with the proceeding.
The Maryland REIT Law permits a Maryland REIT to indemnify and advance
expenses to its trustees, officers, employees and agents to the same extent as
permitted by the Maryland General Corporation Law, as amended from time to time
(the "MGCL"), for directors and officers of Maryland corporations. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
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64
or omission was unlawful. The foregoing limitations on indemnification are
expressly set forth in the Bylaws. However, under the MGCL, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that a
personal benefit was improperly received, unless, in either case, a court orders
indemnification and then only for expenses. Under the MGCL, as a condition to
advancing expenses, as required by the Bylaws, the Company must first receive
(a) a written affirmation by the trustee or officer of his good faith belief
that he has met the standard of conduct necessary for indemnification by the
Company and (b) a written undertaking by or on his behalf to repay the amount
paid or reimbursed by the Company if it shall ultimately be determined that the
standard of conduct was not met. In addition, Mr. Dobrowski will be indemnified
by GMIMCO and will be covered by an insurance policy maintained by GM, of which
GMIMCO is a subsidiary, in connection with serving on the Board.
The limited partnership agreement of the Operating Partnership (the
"Partnership Agreement") also provides for indemnification of the Company and
its officers and trustees to the same extent that indemnification is provided to
officers and trustees of the Company in its Declaration of Trust, and limits the
liability of the Company and its officers and trustees to the Operating
Partnership and its respective partners to the same extent that the Declaration
of Trust limits the liability of the officers and trustees of the Company to the
Company and its shareholders.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to trustees, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FORMATION TRANSACTIONS
BACKGROUND. The Company was formed pursuant to the consolidation (the
"Consolidation") in July 1997 of the ownership of the Properties owned by the
four Zell/Merrill Lynch institutional real estate investment funds (each a "ZML
Fund" and collectively, the "ZML Funds") and the office property management
business of EOH and the office property asset management business and the
parking asset management business of EGI and EOH relating to the Properties that
were contributed to the Company in the Consolidation (the "Management Business")
owned by the Equity Group. The ZML Funds were formed during the period from 1988
to 1996 to acquire, improve, own, manage, operate and dispose of primarily
office properties.
Each ZML Fund consisted of (i) a limited partnership organized under the
laws of the State of Illinois (each a "ZML Opportunity Partnership"), (ii) a
general partner of such ZML Opportunity Partnership (each a "ZML Partner") which
was controlled by Mr. Zell and in which Merrill Lynch & Co. ("Merrill Lynch")
was a limited partner and (iii) a Delaware corporation or Maryland real estate
investment trust (each a "ZML REIT"), as the case may be, that served as the
majority limited partner in ZML Opportunity Partnerships I and II and the sole
limited partner in ZML Opportunity Partnerships III and IV. There were several
institutional investor limited partners in ZML Opportunity Partnerships I and II
(collectively, "Investor Limited Partners") in addition to ZML REITs I and II.
All of the Investor Limited Partners were given an opportunity to convert their
interest into an interest in the corresponding ZML REIT in connection with the
Consolidation (which interests were subsequently converted into Common Shares as
described below), and all but one Investor Limited Partner (in ZML Opportunity
Partnership II) elected to do so.
CONSOLIDATION. In advance of or simultaneous with the IPO, the Company
engaged in the transactions described below, which were designed to consolidate
the ownership of the Office Properties, the Parking Facilities and the
Management Business, to facilitate the IPO and to enable the Company to qualify
as a REIT for federal income tax purposes commencing with the taxable year
ending December 31, 1997.
- The ZML Opportunity Partnerships, the predecessor owners of the Office
Properties and Parking Facilities that comprised the Company's initial
portfolio, contributed to the Operating Partnership all of their
interests in such Office Properties and Parking Facilities.
- The ZML REITs (each a majority or sole limited partner of a ZML
Opportunity Partnership) merged into the Company, with the Company
succeeding to their interest in, and also becoming the managing general
partner of, the ZML Opportunity Partnerships.
- Certain entities (collectively, the "Equity Group") owned directly or
indirectly by certain trusts (together with certain partnerships
comprised of such trusts, the "Equity Group Owners") established for the
benefit of the families of Mr. Zell and of Mr. Robert Lurie, the deceased
former partner of Mr. Zell, contributed to the Operating Partnership
substantially all of the interests in the Management Business.
- Shareholders in the ZML REITs received Common Shares in exchange for
their interests in the ZML REITs.
- Partners in the ZML Opportunity Partnerships (including the Company as
the successor to the ZML REITs) received Units (to be distributed over
the two-year period ending July 11, 1999). Such Units are intended to
correspond in value to, and be exchangeable commencing two years
following the closing of the IPO for, Common Shares or, at the Company's
option, cash equal to the fair market value of such Common Shares.
- Units in the Operating Partnership were issued to the Equity Group in
exchange for the Management Business, which Units will be exchangeable
for Common Shares, or, at the Company's option, the cash equivalent
thereof, commencing one year following the closing of the IPO.
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- The Management Business made a distribution to the Equity Group Owners of
cash on hand from pre-closing operations, which funds were not acquired
by the Company pursuant to the Consolidation. Affiliates of Mr. Zell
received approximately $11.4 million of such distribution.
- The Operating Partnership and EOH transferred the Managed Property
Business to EOP Management Company, in which the Operating Partnership
now owns nonvoting stock representing 95% of the equity interest and EOH
owns all of the voting stock, representing 5% of the equity interest.
LEASES AND PARKING OPERATIONS
The Company leases office space owned by Two North Riverside Plaza Joint
Venture, a partnership comprised of trusts established for the benefit of the
families of Mr. Zell and Mr. Lurie, at Two North Riverside Plaza, Chicago,
Illinois 60606. In addition, EGI, an entity owned by the Equity Group Owners,
and its affiliates have in the past provided the Company and its predecessors
with certain administrative, office facility services and other services with
respect to certain aspects of the Company's business, including, but not limited
to, financial and accounting services, tax services, investor relations, and
other services. The Company paid approximately $5,272,100, $12,684,700 and
$12,786,000 during the three months ended March 31, 1998 and the years ended
December 31, 1997 and 1996, respectively, to EGI and its affiliates for such
office space and services, which amounts were calculated to approximate a market
rental rate for the office space and the actual cost of providing these
services. See Note 9 of the Notes to the 1996 Combined Financial Statements of
Equity Office Predecessors included elsewhere in this Prospectus. The
independent members of the Board of Trustees annually review and approve the
rates charged by EGI for services rendered to the Company.
EQR and certain other affiliates of the Company and the Operating
Partnership lease space in certain of the Office Properties. The terms of the
leases are consistent with terms of unaffiliated tenants' leases. Total rents
and other amounts paid by affiliates under their respective leases were
approximately $69,700, $2,959,600, $3,471,500 and $2,657,500 for the three
months ended March 31, 1998 and the years ended December 31, 1997, 1996 and
1995, respectively.
SZ Parking Limited Partnership, an affiliate of the Equity Group Owners,
has an indirect 10% limited partnership interest in Standard Parking Limited
Partnership ("SPLP") which manages the parking operations of certain Office
Properties. Management believes amounts paid to SPLP are equivalent to market
rates for such services.
The Company entered into various lease agreements with SPLP or affiliates
of SPLP whereby SPLP or its affiliates lease certain Parking Facilities from the
Company. Certain of these lease agreements provide SPLP or its affiliates with
annual successive options to extend the term of the lease through various dates.
The rent paid in the three months ended March 31, 1998 and the years ended
December 31, 1997, 1996 and 1995 under these lease agreements was approximately
$3,090,700, $11,049,000, $3,161,500 and $1,691,600, respectively. In accordance
with certain of these leases, the Company may be obligated to make an early
termination payment if agreement is not reached as to rent amounts to be paid.
EQUITY GROUP DISTRIBUTIONS AND FEES
The partners of the ZML Partners, affiliates of the Equity Group Owners,
have received distributions and fees from the Company through their ownership
interests in the ZML Partners of approximately $4,386,500, $30,322,500 and
$8,603,600 for the three months ended March 31, 1998 and the years ended
December 31, 1997 and 1996, respectively.
WRIGHT RUNSTAD ACQUISITION
In connection with the Wright Runstad Acquisition, H. Jon Runstad was
elected as a trustee of the Company effective January 1, 1998. Mr. Runstad
received, directly and indirectly, 552,968 Units in exchange for his interest in
the ten Office Properties and WRALP. Also, Thomas E. Dobrowski, a trustee of the
Company, is the managing director of real estate and alternative investments of
General Motors Investment
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Management Corporation, an investment advisor to several pension funds of GM and
its subsidiaries and to several clients also controlled by GM, including First
Plaza, which received $192.4 million in cash, 3,435,688 Common Shares and
warrants to purchase 3,350,000 Common Shares in exchange for First Plaza's
interest in the Office Properties acquired in the Wright Runstad Acquisition.
MISCELLANEOUS
In March 1997, the ZML Partners of ZML Opportunity Partnerships I and II
made certain payments to the IRS in connection with closing agreements pursuant
to which the IRS agreed that neither ZML REIT I nor ZML REIT II would be
disqualified as a REIT as a result of certain technical violations of the REIT
provisions of the Code. The amounts of such payments were $15,000 and
$5,270,000, respectively, for ZML REITs I and II.
EOP Management Company has entered into third-party management contracts,
on terms equivalent to third-party transactions, with respect to properties not
owned by the Company, but that are owned or controlled by the Equity Group. See
"Risk Factors -- Conflicts of Interest Could Result in Decisions Not in the
Company's Best Interest." Income recognized for similar services rendered for
the three months ended March 31, 1998 and the years ended December 31, 1997,
1996 and 1995, was approximately $1,161,400, $4,949,600, $5,120,000, and
$5,899,000, respectively.
Rosenberg & Liebentritt, P.C., a law firm in which Ms. Rosenberg, a
trustee, was a principal until September 11, 1997 and is now of counsel,
received legal fees from the Company of $2,215,900, $3,005,700, $3,480,500 and
$3,230,100 for the three months ended March 31, 1998 and the years ended
December 31, 1997, 1996 and 1995, respectively.
Certain services for the Company's tenants that may not be permissibly
undertaken by a REIT are conducted through Tenant Services Corp. owned entirely
by affiliates of the Equity Group Owners. The Company pays Tenant Services Corp.
a fee for such services. The Company has no control over, or ownership interest
in, Tenant Services Corp., which operates as an independent contractor. The
Company may terminate such services at any time upon 30-days' notice.
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the policies with respect to investments,
financing and certain other activities of the Company. These policies are
determined by the Board of Trustees and may be amended or revised from time to
time at the discretion of the Board without notice to or a vote of the Company's
shareholders, or the limited partners of the Operating Partnership, except that
changes in certain policies with respect to conflicts of interest must be
consistent with legal requirements.
INVESTMENT POLICIES
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE. All of the
investment activities of the Company are conducted through the Operating
Partnership. The Company's investment objectives are to increase cash flow and
the value of the Properties and to acquire established income-producing office
properties and parking facilities with cash flow growth potential. Additionally,
where prudent and possible, the Company will seek to upgrade the existing
Properties and any newly acquired office properties. The Company's business will
be focused on office properties and will include parking facilities. Where
appropriate, and subject to REIT qualification rules, the Company may sell
certain of its Properties.
The Company expects to pursue its investment objectives through the direct
and indirect ownership of properties and the ownership of interests in other
entities. The Company will focus on properties in those markets where the
Company currently has operations and in new markets targeted by management,
which may include markets outside the United States. Future investments,
however, including the activities described below, will not be limited to any
geographic area or to a specified percentage of the Company's assets.
The Company also may participate with other entities in property ownership
through joint ventures or other types of co-ownership. Equity investments may be
subject to existing mortgage financing and other indebtedness or such financing
or indebtedness may be incurred in connection with acquiring investments. Any
such financing or indebtedness will have priority over the Company's equity
interest in such property.
INVESTMENTS IN REAL ESTATE MORTGAGES. While the Company's emphasis will be
on equity real estate investments, it may, in its discretion, invest in
mortgages on office properties and other similar interests. A portion of the
Company's interest in two Office Properties, and in two Parking Facilities,
consists of ownership of the mortgage securing such properties. The Company does
not intend to invest to a significant extent in mortgages or deeds of trust but
may acquire mortgages as a strategy for acquiring ownership of a property or the
economic equivalent thereof, subject to the investment restrictions applicable
to REITs. In addition, the Company may invest in mortgage-related securities
and/or may seek to issue securities representing interests in such
mortgage-related securities as a method of raising additional funds.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES AND OTHER ISSUERS. Although the Company has no current intention of
making such an investment, the Company also may legally 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, subject to
the gross income and asset tests necessary for REIT qualification. The Company
may acquire all or substantially all of the securities or assets of other REITs
or similar entities where such investments would be consistent with the
Company's investment policies. 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, as amended.
FINANCING POLICIES
In addition to the limitations on indebtedness which are imposed on the
Company under the Credit Facilities and the Indenture, the Company intends to
maintain a Debt to Market Capitalization Ratio of approximately 50% or less.
This policy differs from conventional mortgage debt-to-equity ratios which are
asset-based ratios. The Company's Debt to Market Capitalization Ratio is equal
to the total consolidated and unconsolidated debt of the Company as a percentage
of the market value of outstanding Common Shares, Preferred Shares and Units
(not owned by the Company) plus total consolidated and unconsolidated debt, but
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excluding (i) all nonrecourse consolidated debt in excess of the Company's
proportionate share of such debt and (ii) all nonrecourse unconsolidated debt of
partnerships in which the Company is a limited partner. The Company, however,
may from time to time re-evaluate this policy and decrease or increase such
ratio in light of then current economic conditions, relative costs to the
Company and the Operating Partnership of debt and equity capital, market values
of its Properties, growth and acquisition opportunities and other factors. There
is no limit on the Debt to Market Capitalization Ratio imposed by either the
Declaration of Trust, the Bylaws or the Partnership Agreement. To the extent
that the Company determines to obtain additional capital, the Company may issue
equity securities, cause the Operating Partnership to issue additional Units or
debt securities, retain earnings (subject to provisions in the Code requiring
distributions of taxable income to maintain REIT status), or a combination of
these methods. As long as the Company is in existence, the net proceeds of all
equity capital raised by the Company will be contributed to the Operating
Partnership in exchange for additional Units, which will dilute the ownership
interest, if any, of the Equity Group and any other holders of Units.
It is the Company's policy that it will not incur indebtedness other than
short-term trade, employee compensation, distributions payable or similar
indebtedness that will be paid in the ordinary course of business, and that
indebtedness shall instead be incurred by the Operating Partnership to the
extent necessary to fund the business activities conducted by the Company and
its Subsidiaries. To the extent that the Company as managing general partner of
the Operating Partnership determines to obtain debt financing in addition to the
existing mortgage indebtedness, the Company intends to do so generally through
mortgages on its Properties, the Credit Facilities and offerings similar to the
February 1998 Notes Offering; however, the Company may cause the Operating
Partnership to issue additional indebtedness in the future. Such indebtedness
may be recourse, nonrecourse or cross-collateralized and may contain
cross-default provisions. The net proceeds of any debt securities issued
directly by the Company (rather than by the Operating Partnership) will be lent
to the Operating Partnership on substantially the same terms and conditions as
are incurred by the Company. The Company does not have a policy limiting the
number or amount of mortgages that may be placed on any particular property, but
mortgage financing instruments usually limit additional indebtedness on such
properties. In the future, the Company may seek to extend, expand, reduce or
renew the Credit Facilities, or obtain new credit facilities or lines of credit,
subject to its general policy on debt capitalization, for the purpose of making
acquisitions or capital improvements, providing working capital or meeting the
taxable income distribution requirements for REITs under the Code.
LENDING POLICIES
The Company may consider offering purchase money financing in connection
with the sale of Properties where the provision of such financing will increase
the value received by the Company for the property sold.
CONFLICT OF INTEREST POLICIES
OFFICERS AND TRUSTEES OF THE TRUST. Mr. Zell, the Chairman of the Board of
Trustees, through affiliated entities, is engaged in certain office real estate
activities, both inside and outside the markets in which the Properties are
located. Mr. Zell, therefore, may be subject to certain conflicts of interest in
fulfilling his responsibilities to the Company and the Company's shareholders.
See "Risk Factors -- Conflicts of Interest Could Result In Decisions Not in the
Company's Best Interests." Under Maryland law, contracts or other transactions
between the Company and a trustee or officer (or an entity in which a trustee or
officer has a material financial interest) may be void or voidable. However, the
MGCL provides that any such contract or transaction will not be void or voidable
if (a) it is authorized, approved or ratified, after disclosure of, or with
knowledge of, the common directorship or interest, by the affirmative vote of a
majority of disinterested directors (even if the disinterested directors
constitute less than a quorum) or by the affirmative vote of a majority of the
votes cast by disinterested shareholders or (b) it is fair and reasonable to the
corporation. While the Maryland REIT Law does not have a comparable provision
for trustees, a court may apply the principles of the MGCL to contracts or
transactions between the Company and its trustees. The Company believes that
this procedure and Mr. Zell's noncompetition agreement will help to eliminate or
minimize certain potential conflicts of interest. Pursuant to the Bylaws,
without the approval of a majority of the
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disinterested trustees, the Company and its Subsidiaries will not (i) acquire
from or sell to any trustee, officer or employee of the Company, or any entity
in which a trustee, officer or employee of the Company owns more than a 1%
interest, or acquire from or sell to any affiliate of any of the foregoing, any
assets or other property of the Company or its Subsidiaries, (ii) make any loan
to or borrow from any of the foregoing persons or (iii) engage in any other
material transaction with any of the foregoing persons. Each transaction of the
type described above will be in all respects on such terms as are, at the time
of the transaction and under the circumstances then prevailing, fair and
reasonable to the Company and its Subsidiaries. The foregoing does not apply to
the Noncontrolled Subsidiaries.
POLICIES APPLICABLE TO ALL TRUSTEES. Under Maryland law, each trustee is
obligated to offer to the Company any opportunity (with certain limited
exceptions) which comes to him or her and which the Company could reasonably be
expected to have an interest in developing or acquiring. In addition, under
Maryland law, any contract or other transaction between a corporation and any
director or any other corporation, firm or other entity in which the director is
a director or has a material financial interest may be void or voidable unless
approved as described above.
LEASED OFFICE SPACE. The Company leases office space owned by Two North
Riverside Plaza Joint Venture, a partnership comprised of trusts established for
the benefit of the families of Mr. Zell and Mr. Lurie, at Two North Riverside
Plaza, Chicago, Illinois 60606. In addition, EGI, an entity owned by the Equity
Group Owners, and its affiliates has in the past provided the Company and its
predecessors with certain administrative, office facility services and other
services with respect to certain aspects of the Company's business, including,
but not limited to, financial and accounting services, tax services, investor
relations, and other services. The Company paid approximately $12,684,700 and
$12,786,000 during the years ended December 31, 1997 and 1996, respectively, to
EGI and its affiliates for such office space and services, which amounts were
calculated to approximate a market rental rate for the office space and the
actual cost of providing these services. The independent members of the Board of
Trustees annually review and approve the rates charged by EGI for services
rendered to the Company.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company and the Operating Partnership may, but do not presently intend
to, make investments other than as previously described. All investments will be
related to the office property and parking facility business. The Company will
make investments only through the Operating Partnership or through Noncontrolled
Subsidiaries. The Company will have authority to offer Common Shares or other
equity or debt securities of the Company in exchange for property and to
repurchase or otherwise reacquire Common Shares or any other securities and may
engage in such activities in the future. Similarly, the Operating Partnership
may offer additional Units or other equity interests in the Operating
Partnership that are exchangeable into Common Shares or Preferred Shares in
exchange for property. The Company also may make loans to joint ventures in
which it may or may not participate in the future. Neither the Company nor the
Operating Partnership will engage in trading, underwriting or the agency
distribution or sale of securities of other issuers. At all times, the Company
intends to cause the Operating Partnership to make investments in such a manner
as to be consistent with the requirements of the Code to qualify as a REIT
unless, because of circumstances or changes in the Code (or the regulations
promulgated thereunder), the Board of Trustees determines that it is no longer
in the best interests of the Company to continue to qualify as a REIT. The
Company's policies with respect to such activities may be reviewed and modified
from time to time by the Board of Trustees without notice to shareholders.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Shares (or Common Shares for which Units are exchangeable)
as of March 1, 1998 by (i) each trustee of the Company, (ii) each named
executive officer of the Company, (iii) all trustees and officers of the Company
as a group and (iv) each person or entity which is the beneficial owner of 5% or
more of the outstanding Common Shares. Except as indicated below, all of such
Common Shares are owned directly, and the indicated person or entity has sole
voting and investment power. The extent to which a person will hold Common
Shares as opposed to Units is set forth in the footnotes below.
NUMBER OF PERCENTAGE
COMMON SHARES PERCENTAGE OF ALL
AND UNITS OF ALL COMMON SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED COMMON SHARES(1) AND UNITS(2)
------------------------ ------------------ ---------------- -------------
State Street Bank & Trust Co., as
trustee(3).............................. 14,480,432 5.79% 5.19%
Samuel Zell(4)(5)......................... 8,388,014 3.27 3.00
Timothy H. Callahan(4)(6)................. 514,109 * *
Michael A. Steele(4)...................... 51,886 * *
Richard D. Kincaid(4)..................... 49,702 * *
Stanley M. Stevens(4)(7).................. 350,255 * *
Jeffrey L. Johnson(4)..................... 12,995 * *
Sheli Z. Rosenberg(4)(8).................. 8,050,059 3.14 2.88
Thomas E. Dobrowski(9).................... 50,583 * *
James D. Harper(10)....................... 98,466 * *
Peter Linneman(11)........................ 53,933 * *
Jerry M. Reinsdorf(12).................... 54,209 * *
William M. Goodyear(13)................... 54,224 * *
David K. McKown(14)....................... 54,221 * *
H. Jon Runstad(15)(16).................... 4,348,945 1.71 1.56
Edwin N. Sidman(17)(18)................... 1,214,532 * *
FMR Corp.(19)............................. 14,091,933 5.64 5.05
All trustees and executive officers as a
group (15 persons)...................... 14,809,826 5.66% 5.30%
---------- ---- ----
- ---------------
* Less than 1%.
(1) Assumes Common Shares outstanding as of March 1, 1998. Assumes that all
Units and/or warrants beneficially held by the identified person (and no
other person) are redeemed and/or exchanged for Common Shares.
(2) Assumes a total of 279,190,093 Common Shares and Units outstanding as of
March 1, 1998 (250,030,403 Common Shares and 29,159,690 Units). Assumes
that all outstanding Units are redeemed for Common Shares.
(3) Includes 14,480,472 Common Shares held as trustee of three BellSouth
Corporation employee benefit plans. The business address of this
shareholder is Master Trust Dept., Solomon Willard Bldg., W5C, One
Enterprise Drive, North Quincy, Massachusetts 02171.
(4) The business address for this shareholder is Two North Riverside Plaza,
Chicago, Illinois 60606.
(5) Includes 7,886,675 Common Shares (assuming exchange of 6,048,130 Units)
held by the ZML Partners, ZFT Partnership, EGI Holdings, Inc., EGIL
Investments, Inc., Samstock/ZFT, L.L.C., Samstock/SZRT, L.L.C., and
Samstock/Alpha, L.L.C., which may be deemed to be beneficially owned by Mr.
Zell; however, Mr. Zell disclaims beneficial ownership of 3,983,493 Common
Shares, including Units exchangeable for Common Shares.
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(6) Includes 324,816 Common Shares held by the ZML Partners which may be deemed
to be beneficially owned by Mr. Callahan as he is a director and/or
executive officer of such entity; however, Mr. Callahan disclaims
beneficial ownership of 309,433 of such Common Shares.
(7) Includes 324,816 Common Shares held by the ZML Partners which may be deemed
to be beneficially owned by Mr. Stevens as he is a director and/or
executive officer of such entity; however, Mr. Stevens disclaims beneficial
ownership of 322,968 of such Common Shares, including Units exchangeable
for Common Shares.
(8) Includes 7,886,675 Common Shares (assuming exchange of 6,048,130 Units)
held by the ZML Partners, ZFT Partnership, EGI Holdings, Inc., EGIL
Investments, Inc., Samstock/ZFT, L.L.C., Samstock/SZRT, L.L.C., and
Samstock/Alpha, L.L.C., which may be deemed to be beneficially owned by Ms.
Rosenberg as she is a director and/or executive officer of such entities;
however, Ms. Rosenberg disclaims beneficial ownership of 7,886,675 of such
Common Shares, including Units exchangeable for Common Shares.
(9) The business address for this trustee is General Motors Investment
Management Corporation, 767 5th Avenue, 16th Floor, New York, New York
10153.
(10) The business address for this trustee is JDH Realty Company, 3250 Mary
Street, Suite 206, Coconut Grove, Florida 33133.
(11) The business address for this trustee is The Wharton School of The
University of Pennsylvania, 56 South 37th Street, Lauder-Fischer Hall,
Philadelphia, Pennsylvania 19104.
(12) The business address for this trustee is Chicago White Sox, 333 W. 35th
Street, Chicago, Illinois 60616.
(13) The business address for this trustee is Bank of America Illinois, 231
South LaSalle Street, Suite 1322, Chicago, Illinois 60697.
(14) The business address for this trustee is BankBoston, N.A., 100 Federal
Street, Boston, Massachusetts 02110.
(15) The business address for this trustee is Wright Runstad & Company, 1191
Second Avenue, Suite 2000, Seattle, Washington 98101.
(16) Includes 4,265,700 Common Shares (assuming exchange of 2,615,700 Units and
exercise of 1,650,000 warrants to purchase Common Shares) held by Wright
Runstad Asset Management L.P. and Wright Runstad Holdings L.P., which may
be deemed to be beneficially owned by Mr. Runstad; however, Mr. Runstad
disclaims beneficial ownership of 2,144,848 Common Shares, including Units
and 1,374,671 warrants exchangeable for Common Shares.
(17) The business address for this trustee is 50 Rowes Wharf, Boston,
Massachusetts 02110.
(18) Includes 898,605 Common Shares (assuming exchange of 652,650 Units) held by
The Leventhal Family Limited Partnership (the "Leventhal Partnership").
Paula Sidman, Mr. Sidman's spouse, is a general partner of the Leventhal
Partnership, with a one-third interest. Mrs. Sidman disclaims beneficial
ownership of the Common Shares and Units beneficially owned by the
Leventhal Partnership, except for 81,895 Common Shares and 217,550 Units in
which she has a pecuniary interest.
(19) Includes 14,091,933 Common Shares held by FMR Corp. for the benefit of its
clients by its separate accounts, externally managed accounts, registered
investment companies, subsidiaries and/or other affiliates. FMR Corp. may
have direct or indirect voting and/or investment discretion over these
Common Shares. The business address of this shareholder is 82 Devonshire
Street, Boston, Massachusetts 02109.
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SHARES OF BENEFICIAL INTEREST
The summary of the terms of the Company's shares of beneficial interest set
forth below does not purport to be complete and is subject to and qualified in
its entirety by reference to the Declaration of Trust, Articles Supplementary to
the Declaration of Trust determining the terms of each series of Preferred
Shares (the "Articles Supplementary"), and the Bylaws of the Company. Copies of
the Declaration of Trust, the Articles Supplementary for the Series A Preferred
Shares and the Series B Preferred Shares and the Bylaws have been included or
incorporated by reference as exhibits to the Registration Statement of which
this Prospectus is a part and may be obtained as described under "Available
Information."
GENERAL
The Declaration of Trust of the Company provides that the Company is
authorized to issue 750 million Common Shares and 100 million Preferred Shares.
As of March 31, 1998, 249,527,663 Common Shares and 14,000,000 Preferred Shares
(consisting of 8,000,000 Series A Preferred Shares and 6,000,000 Series B
Preferred Shares) were issued and outstanding.
Under the Maryland REIT Law, a shareholder is not liable for obligations of
the Company. The Declaration of Trust provides that no shareholder shall be
liable for any debt or obligation of the Company by reason of being a
shareholder nor shall any shareholder be subject to any personal liability in
tort, contract or otherwise to any person in connection with the property or
affairs of the Company by reason of being a shareholder. The Company's Bylaws
further provide that the Company shall indemnify each present or former
shareholder against any claim or liability to which the shareholder may become
subject by reason of being or having been a shareholder and that the Company
shall reimburse each shareholder for all reasonable expenses incurred by him in
connection with any such claim or liability. However, with respect to tort
claims, contractual claims where shareholder liability is not so negated, claims
for taxes and certain statutory liability, the shareholders may, in some
jurisdictions, be personally liable to the extent that such claims are not
satisfied by the Company. Inasmuch as the Company carries public liability
insurance which it considers adequate, any risk of personal liability to
shareholders is limited to situations in which the Company's assets plus its
insurance coverage would be insufficient to satisfy the claims against the
Company and its shareholders.
COMMON SHARES
All Common Shares outstanding are, and all Common Shares issuable upon
conversion or redemption of the Series B Preferred Shares will be, duly
authorized, fully paid and nonassessable. Subject to the preferential rights of
any other shares of beneficial interest and to the provisions of the Declaration
of Trust regarding restrictions on transfers of shares of beneficial interest,
holders of Common Shares are entitled to receive distributions if, as and when
authorized and declared by the Board of Trustees out of assets legally available
therefor and to share ratably in the assets of the Company legally available for
distribution to its shareholders in the event of its liquidation, dissolution or
winding-up after payment of, or adequate provision for, all known debts and
liabilities of the Company. The Company currently intends to continue to pay
regular quarterly distributions.
Subject to the provisions of the Declaration of Trust regarding
restrictions on transfer of shares of beneficial interest, each outstanding
Common Share entitles the holder to one vote on all matters submitted to a vote
of shareholders, including the election of trustees, and except as provided with
respect to any other class or series of shares of beneficial interest, the
holders of Common Shares will possess the exclusive voting power. There is no
cumulative voting in the election of trustees, which means that the holders of a
majority of the outstanding Common Shares can elect all of the trustees then
standing for election and the holders of the remaining shares of beneficial
interest, if any, will not be able to elect any trustees.
Holders of Common Shares have no preferences, conversion, sinking fund,
redemption rights or preemptive rights to subscribe for any securities of the
Company. Subject to the exchange provisions of the Declaration of Trust
regarding restrictions on transfer, Common Shares have equal distribution,
liquidation, voting and other rights.
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Pursuant to the Maryland REIT Law, a Maryland real estate investment trust
generally cannot dissolve, amend its declaration of trust or merge, unless
approved by the affirmative vote or written consent of shareholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the trust's declaration of trust. The Declaration
of Trust provides for an amendment to increase the number of authorized shares
and provides that a merger transaction may be approved by majority vote. Under
the Maryland REIT Law, a declaration of trust may permit the trustees by a
two-thirds vote to amend the declaration of trust from time to time to qualify
as a REIT under the Code or the Maryland REIT Law without the affirmative vote
or written consent of the shareholders. The Declaration of Trust permits such
action by the Board of Trustees.
PREFERRED SHARES GENERALLY
The Declaration of Trust authorizes the Board of Trustees to issue 100
million Preferred Shares, to classify any unissued Preferred Shares and to
reclassify any previously classified but unissued Preferred Shares of any series
from time to time, in one or more series, as authorized by the Board of
Trustees. Prior to issuance of Preferred Shares of each series, the Board of
Trustees is required by the Maryland REIT Law and the Declaration of Trust to
set, subject to the provisions of the Declaration of Trust regarding the
restriction on transfer of shares of beneficial interest, the terms,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption for each such series. Thus, the Board, without
shareholder approval, could authorize the issuance of Preferred Shares with
terms and conditions which could have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company that might
involve a premium price for holders of Preferred Shares or Common Shares or
otherwise be in their best interest.
OUTSTANDING PREFERRED SHARES
Series A Preferred Shares. The Series A Preferred Shares were issued in
connection with the Beacon Merger. The Series A Preferred Shares rank senior to
the Common Shares and on a parity with the Series B Preferred Shares with
respect to payment of distributions and distributions of assets upon
liquidation, dissolution or winding-up. Holders of the Series A Preferred Shares
are entitled to receive, when and as authorized by the Company, cumulative cash
distributions at the rate of 8.98% of the $25.00 liquidation preference per
annum (equivalent to a fixed annual amount of $2.245 per share). Such
distributions are cumulative and are payable quarterly in arrears on or before
March 15, June 15, September 15 and December 15 of each year. The Series A
Preferred Shares are not convertible or entitled to the benefit of any sinking
fund. On and after June 15, 2002, the Company, at its option, may redeem the
Series A Preferred Shares, in whole or in part, at any time or from time to
time, for cash at a redemption price of $25.00 per share, plus all accumulated
and unpaid distributions thereon to the date fixed for redemption. However, the
redemption price (other than the portion thereof consisting of accrued and
unpaid distributions) is payable solely out of the sale proceeds of other shares
of beneficial interest of the Company. Upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the Series A Preferred
Shares are entitled to a liquidation preference of $25 per share, plus accrued
and unpaid distributions to the date of payment, before any distribution of
assets is made to holders of Common Shares and any other class or series of
shares of the Company ranking junior to the Series A Preferred Shares as to
liquidation rights.
Series B Preferred Shares. The Series B Preferred Shares rank senior to the
Common Shares and on a parity with the Series A Preferred Shares with respect to
the payment of distributions and amounts upon liquidation, dissolution or
winding up. Distributions on the Series B Preferred Shares are cumulative and
are payable quarterly on or about the fifteenth day of February, May, August and
November of each year, at the rate of 5.25% of the $50.00 liquidation preference
per annum (equivalent to $2.625 per annum per share), subject to increase if the
Company fails to satisfy certain obligations to file a registration statement to
register resales of the Series B Preferred Shares and the Common Shares issuable
upon redemption or conversion of the Series B Preferred Shares and to file an
application with the NYSE to list the Series B Preferred Shares and Common
Shares issuable upon redemption or conversion of the Series B Preferred Shares
on the NYSE, in each case on or before August 10, 1998. However, the redemption
price (other than the portion thereof
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consisting of accrued and unpaid distributions) is payable solely out of the
sale proceeds of other shares of beneficial interest of the Company. Upon any
voluntary or involuntary liquidation, dissolution or winding up of the Company,
the Series B Preferred Shares are entitled to a liquidation preference of $50
per share, plus accrued and unpaid distributions to the date of payment, before
any distribution of assets is made to holders of Common Shares and any other
class or series of shares of the Company ranking junior to the Series B
Preferred Shares as to liquidation rights.
The Series B Preferred Shares are convertible at any time, at the option of
the holder, unless previously redeemed, into Common Shares at a conversion price
of $35.70 per Common Share (equivalent to a conversion rate of 1.40056 Common
Shares for each Series B Preferred Share) (the "Conversion Price"), subject to
adjustment in certain circumstances. The Series B Preferred Shares are subject
to mandatory redemption on February 15, 2008 at a price of $50.00 per Series B
Preferred Share, plus accumulated and unpaid distributions to the redemption
date. Except in certain circumstances relating to the preservation of the
Company's status as a REIT for federal income tax purposes, the Series B
Preferred Shares are not redeemable prior to February 15, 2003. On and after
February 15, 2003, the Series B Preferred Shares will be redeemable by the
Company, in whole or from time to time in part, at the option of the Company,
for such number of Common Shares as are issuable at the Conversion Price (the
"Share Redemption Rights"). The Company may exercise the Share Redemption Rights
only if for 20 trading days within any period of 30 consecutive trading days,
including the last day of such period, the closing price of the Common Shares on
the NYSE exceeds $41.055 per share, subject to adjustments in certain
circumstances. On and after February 15, 2003, the Series B Preferred Shares may
be redeemable at the option of the Company for cash (the "Cash Redemption
Right"), in whole or from time to time in part, initially at $51.1667 per Series
B Preferred Share and thereafter at prices declining to $50.00 per Series B
Preferred Share on and after February 15, 2007, plus in each case accumulated
and unpaid distributions, if any, to the redemption date. The Company will not
exercise its Cash Redemption Right unless the redemption price (other than the
portion thereof consisting of accumulated and unpaid distributions) for the
exercise of the Cash Redemption Right is paid solely out of the sale proceeds of
other shares of beneficial interest of the Company, which may include other
series of Preferred Shares, and from no other source.
POWER TO ISSUE ADDITIONAL COMMON SHARES AND PREFERRED SHARES
The Company believes that the power of the Board of Trustees to issue
additional authorized but unissued Common Shares or Preferred Shares and to
classify or reclassify unissued Common Shares or Preferred Shares and thereafter
to cause the Company to issue such classified or reclassified shares of
beneficial interest will provide the Company with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
needs which might arise. The additional classes or series, as well as the Common
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 Trustees has no
intention at the present time of doing so, it could authorize the Company to
issue a class or series that could, depending upon the terms of such class or
series, delay, defer or prevent a transaction or a change in control of the
Company that might involve a premium price for holders of Common Shares or
otherwise be in their best interest.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, no more than 50% in
value of its outstanding shares of beneficial interest may be owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year for which an election to be treated as a REIT has been made) or during a
proportionate part of a shorter taxable year. In addition, if the Company, or an
owner of 10% or more of the Company, actually or constructively owns 10% or more
of a tenant of the Company (or a tenant of any partnership in which the Company
is a partner), the rent received by the Company (either directly or through any
such partnership) from such tenant will not be qualifying income for purposes of
the REIT gross income tests of the Code. A REIT's
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shares also must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year (other than the first year for which an election to be
treated as a REIT has been made).
Because the Board of Trustees believes it is desirable for the Company to
qualify as a REIT, the Declaration of Trust, subject to certain exceptions,
provides that no holder may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 9.9% in value of the Common Shares
or of any series of the Preferred Shares. The ownership attribution rules under
the Code are complex and may cause Common Shares or any series of Preferred
Shares owned actually or constructively by a group of related individuals and/or
entities to be owned constructively by one individual or entity. As a result,
the acquisition of less than 9.9% of the Common Shares or any series of
Preferred Shares (or the acquisition of an interest in an entity that owns,
actually or constructively, Common Shares or any series of Preferred Shares) by
an individual or entity, could, nevertheless cause that individual or entity, or
another individual or entity, to own constructively in excess of 9.9% of the
outstanding Common Shares or such series of Preferred Shares, as the case may
be, and thus subject such Common Shares or such series of Preferred Shares to
the Ownership Limit. The Board of Trustees will grant an exemption from the
Ownership Limit with respect to one or more persons who would not be treated as
"individuals" for purposes of the Code if it is satisfied, based upon the advice
of counsel or a ruling from the IRS, that such ownership will not cause a person
who is an individual to be treated as owning Common Shares in excess of the
Ownership Limit, applying the applicable constructive ownership rules, and will
not otherwise jeopardize the Company's status as a REIT. As a condition of such
waiver, the Board of Trustees may require undertakings or representations from
the applicant with respect to preserving the REIT status of the Company. Under
certain circumstances, the Board of Trustees may, in its sole and absolute
discretion, grant an exemption for individuals to acquire Preferred Shares in
excess of the Ownership Limit, provided that certain conditions are met and any
representations and undertakings that may be required by the Board of Trustees
are made.
The Declaration of Trust permits the Board of Trustees to increase the
Ownership Limit with respect to any class or series of shares of beneficial
interest of the Company; provided, however, that, after giving effect to such
increase, five beneficial owners of Common Shares may not beneficially own in
the aggregate more than 49.5% of the outstanding Common Shares. In connection
with the Series B Preferred Offering, the Board of Trustees determined that the
Ownership Limit with respect to the Series B Preferred Shares shall mean the
greater of (i) 9.9% of the Series B Preferred Shares (in value or number,
whichever is more restrictive) or (ii) such number of Series B Preferred Shares
such that five Persons who are considered individuals pursuant to Section 542 of
the Code, as modified by Section 856(h)(3) of the Code (taking into account all
Excepted Holders (as defined in the Declaration of Trust), could not
Beneficially Own (as defined in the Declaration of Trust), in the aggregate,
more than 49.5% of the value of the outstanding shares of beneficial interest of
the Company.
The Declaration of Trust further prohibits (a) any person from actually or
constructively owning shares of beneficial interest of the Company that would
result in the Company being "closely held" under Section 856(h) of the Code or
otherwise cause the Company to fail to qualify as a REIT and (b) any person from
transferring shares of beneficial interest of the Company if such transfer would
result in shares of beneficial interest of the Company being owned by fewer than
100 persons.
Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of beneficial interest of the Company that will
or may violate any of the foregoing restrictions on transferability and
ownership is required to give notice immediately to the Company and provide the
Company with such other information as the Company may request in order to
determine the effect of such transfer on the Company's status as a REIT.
If any purported transfer of shares of beneficial interest of the Company
or any other event would otherwise result in any person violating the Ownership
Limit or the other restrictions in the Declaration of Trust, then any such
purported transfer will be void and of no force or effect with respect to the
purported transferee (the "Prohibited Transferee") as to that number of shares
that exceeds the Ownership Limit (referred to as "excess shares") and the
Prohibited Transferee will acquire no right or interest (or, in the case
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of any event other than a purported transfer, the person or entity holding
record title to any such shares in excess of the Ownership Limit (the
"Prohibited Owner") will cease to own any right or interest) in such excess
shares. Any such excess shares described above will be transferred
automatically, by operation of law, to a trust, the beneficiary of which will be
a qualified charitable organization selected by the Company (the "Beneficiary").
Such automatic transfer will be deemed to be effective as of the close of
business on the Business Day (as defined in the Declaration of Trust) prior to
the date of such violating transfer. Within 20 days of receiving notice from the
Company of the transfer of shares to the trust, the trustee of the trust (who
will be designated by the Company and be unaffiliated with the Company and any
Prohibited Transferee or Prohibited Owner) will be required to sell such excess
shares to a person or entity who could own such shares without violating the
Ownership Limit, and distribute to the Prohibited Transferee an amount equal to
the lesser of the price paid by the Prohibited Transferee for such excess shares
or the sales proceeds received by the trust for such excess shares. In the case
of any excess shares resulting from any event other than a transfer, or from a
transfer for no consideration (such as a gift), the trustee will be required to
sell such excess shares to a qualified person or entity and distribute to the
Prohibited Owner an amount equal to the lesser of the fair market value of such
excess shares as of the date of such event or the sales proceeds received by the
trust for such excess shares. In either case, any proceeds in excess of the
amount distributable to the Prohibited Transferee or Prohibited Owner, as
applicable, will be distributed to the Beneficiary. Prior to a sale of any such
excess shares by the trust, the trustee will be entitled to receive, in trust
for the Beneficiary, all dividends and other distributions paid by the Company
with respect to such excess shares, and also will be entitled to exercise all
voting rights with respect to such excess shares. Subject to Maryland law,
effective as of the date that such shares have been transferred to the trust,
the trustee will have the authority (at the trustee's sole discretion and
subject to applicable law) (i) to rescind as void any vote cast by a Prohibited
Transferee prior to the discovery by the Company that such shares have been
transferred to the trust and (ii) to recast such vote in accordance with the
desires of the trustee acting for the benefit of the Beneficiary. However, if
the Company has already taken irreversible corporate action, then the trustee
will not have the authority to rescind and recast such vote. Any dividend or
other distribution paid to the Prohibited Transferee or Prohibited Owner (prior
to the discovery by the Company that such shares had been automatically
transferred to a trust as described above) will be required to be repaid to the
trustee upon demand for distribution to the Beneficiary. If the transfer to the
trust as described above is not automatically effective (for any reason) to
prevent violation of the Ownership Limit, then the Declaration of Trust provides
that the transfer of the excess shares will be void.
In addition, shares of beneficial interest of the Company held in the trust
shall be deemed to have been offered for sale to the Company, or its designee,
at a price per share equal to the lesser of (i) the price per share in the
transaction that resulted in such transfer to the trust (or, in the case of a
devise or gift, the market value at the time of such devise or gift) and (ii)
the market value of such shares on the date of the Company, or its designee,
accepts such offer. The Company shall have the right to accept such offer until
the trustee has sold the shares of beneficial interest held in the Company. Upon
such a sale to the Company, the interest of the Beneficiary in the shares sold
shall terminate and the trustee shall distribute the net proceeds of the sale to
the Prohibited Owner.
The foregoing restrictions on transferability and ownership will not apply
if the Board of Trustees determines that it is no longer in the best interests
of the Company to attempt to qualify, or to continue to qualify, as a REIT.
All certificates representing shares of beneficial interest shall bear a
legend referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% (or such other percentage between 1/2 of 1% and 5% as
provided in the rules and regulations promulgated under the Code) of the lesser
of the number or value of the outstanding shares of beneficial interest of the
Company must give a written notice to the Company by January 31 of each year. In
addition, each shareholder will, upon demand, be required to disclose to the
Company in writing such information with respect to the direct, indirect and
constructive ownership of shares of beneficial interest as the Board of Trustees
deems reasonably
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necessary to comply with the provisions of the Code applicable to a REIT, to
comply with the requirements of any taxing authority or governmental agency or
to determine any such compliance.
These ownership limitations could have the effect of delaying, deferring or
preventing a takeover or other transaction in which holders of some, or a
majority, of the Company's shares of beneficial interest might receive a premium
for their shares over the then prevailing market price or which such holders
might believe to be otherwise in their best interest.
TRANSFER AGENT, REGISTRAR, CONVERSION AGENT AND DISTRIBUTION DISBURSING AGENT
The transfer agent, registrar and distribution disbursing agent for the
Common Shares is Boston EquiServe LLP, an affiliate of First National Bank of
Boston.
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CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S
DECLARATION OF TRUST AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Declaration of Trust and Bylaws of the Company does not purport to be complete
and is subject to and qualified in its entirety by reference to Maryland law and
the Declaration of Trust and Bylaws of the Company, copies of which have been
filed or incorporated by reference as exhibits to the Registration Statement of
which this Prospectus is a part and may be obtained as described under
"Available Information."
The Declaration of Trust and Bylaws contain certain provisions that could
make more difficult an acquisition or change in control of the Company by means
of a tender offer, a proxy contest or otherwise. These provisions are expected
to discourage certain types of coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire control of the Company
to negotiate first with the Board of Trustees. The Company believes that the
benefits of these provisions outweigh the potential disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals might result in an improvement of their terms. See also "Shares of
Beneficial Interest -- Restrictions on Ownership and Transfer."
CLASSIFICATION AND REMOVAL OF BOARD OF TRUSTEES; OTHER PROVISIONS
The Declaration of Trust provides for the Board of Trustees to be divided
into three classes of trustees, with each class to consist as nearly as possible
of an equal number of trustees. At each annual meeting of shareholders, the
class of trustees to be elected at such meeting will be elected for a three-year
term, and the trustees in the other two classes will continue in office. Because
shareholders will have no right to cumulative voting for the election of
trustees, at each annual meeting of shareholders the holders of a majority of
the Common Shares will be able to elect all of the successors to the class of
trustees whose term expires at that meeting.
The Declaration of Trust also provides that, except for any trustees who
may be elected by holders of a class or Series of shares of beneficial interest
other than the Common Shares, trustees may be removed only for cause and only by
the affirmative vote of shareholders holding at least a majority of all the
votes entitled to be cast for the election of trustees. Vacancies on the Board
of Trustees may be filled by the affirmative vote of the remaining trustees and,
in the case of a vacancy resulting from the removal of a trustee, by the
shareholders by a majority of the votes entitled to be cast for the election of
trustees. A vote of shareholders holding at least two-thirds of all the votes
entitled to be cast thereon is required to amend, alter, change, repeal or adopt
any provisions inconsistent with the foregoing classified board and trustee
removal provisions. These provisions may make it more difficult and
time-consuming to change majority control of the Board of Trustees of the
Company and, thus, may reduce the vulnerability of the Company to an unsolicited
proposal for the takeover of the Company or the removal of incumbent management.
Because the Board of Trustees will have the power to establish the
preferences and rights of additional series of shares of beneficial interest
without a shareholder vote, the Board of Trustees may afford the holders of any
series of senior shares of beneficial interest preferences, powers and rights,
voting or otherwise, senior to the rights of holders of Common Shares. The
issuance of any such senior shares of beneficial interest could have the effect
of delaying, deferring or preventing a change in control of the Company.
See "Management -- Limitation of Liability and Indemnification" for a
description of the limitations on liability of trustees and officers of the
Company and the provisions for indemnification of trustees and officers provided
for under applicable Maryland law and the Declaration of Trust.
CHANGES IN CONTROL PURSUANT TO MARYLAND LAW
Maryland Business Combination Law. Under the MGCL, as applicable to real
estate investment trusts, certain "business combinations" (including certain
issuances of equity securities) between a Maryland real estate investment trust
and any Interested Shareholder (as defined in the MGCL) or an affiliate of the
Interested Shareholder are prohibited for five years after the most recent date
on which the Interested
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Shareholder becomes an Interested Shareholder. Thereafter, any such business
combination must be recommended by the board of trustees of such trust and
approved by two super-majority shareholder votes unless, among other conditions,
the trust's common shareholders receive a minimum price (as defined in the MGCL)
for their shares and the consideration is received in cash or in the same form
as previously paid by the Interested Shareholder for its common shares. As
permitted by the MGCL, the Board of Trustees of the Company has opted out of the
business combination provisions of the MGCL. Consequently, the five-year
prohibition and the super-majority vote requirements will not apply to a
business combination involving the Company; however, the Company's Board of
Trustees may repeal this opt-out and cause the Company to become subject to
these provisions in the future.
Maryland Control Share Acquisition Law. In addition, also under the MGCL,
as applicable to real estate investments trusts, "control shares" acquired in a
"control share acquisition" have no voting rights except to the extent approved
by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares owned by the acquiror, by officers or by trustees who are
employees of the trust. "Control shares" are voting shares which, if aggregated
with all other such shares previously acquired by the acquiror or in respect of
which the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror to
exercise voting power in electing trustees within one of the following ranges of
voting power: (i) one-fifth or more but less than one-third, (ii) one-third or
more but less than a majority, or (iii) a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained shareholder approval. A "control
share acquisition" means the acquisition of control shares, subject to certain
exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of trustees of the trust to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the trust may itself present
the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the trust may redeem any or all
of the control shares (except those for which voting rights have previously been
approved) for fair value determined, without regard to the absence of voting
rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of shareholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a shareholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
shareholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the trust is a party to the
transaction or (b) to acquisitions approved or exempted by the declaration of
trust or bylaws of the trust. As permitted by the MGCL, the Board of Trustees of
the Company has opted out of the control share provisions of the MGCL, but may
elect to adopt these provisions in the future.
AMENDMENTS TO THE DECLARATION OF TRUST
The Declaration of Trust, including its provisions on classification of the
Board of Trustees, restrictions on transferability of Common Shares and removal
of trustees, may be amended only by the affirmative vote of the holders of not
less than two-thirds of all of the votes entitled to be cast on the matter.
However, amendments relating to changes in the number of authorized shares of
beneficial interest of the Company must receive the approval of holders of not
less than a majority of all votes entitled to be cast on the matter.
ADVANCE NOTICE OF TRUSTEE NOMINATIONS AND NEW BUSINESS
The Bylaws provide that (i) with respect to an annual meeting of
shareholders, nominations of persons for election to the Board of Trustees and
the proposal of business to be considered by shareholders may be
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made only (A) pursuant to the Company's notice of the meeting, (B) by the Board
of Trustees, or (C) by a shareholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and (ii)
with respect to special meetings of the shareholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of shareholders and nominations of persons for election to the Board of Trustees
may be made only (A) pursuant to the Company's notice of the meeting, (B) by the
Board of Trustees, or (C) provided that the Board of Trustees has determined
that trustees shall be elected at such meeting, by a shareholder who is entitled
to vote at the meeting and has complied with the advance notice provisions set
forth in the Bylaws.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
DECLARATION OF TRUST AND BYLAWS
The business combination provisions and the control share acquisition
provisions of the MGCL, in each case if they ever became applicable to the
Company, the provisions of the Declaration of Trust on classification of the
Board of Trustees and removal of trustees and the advance notice provisions of
the Bylaws could delay, defer or prevent a transaction or a change in control of
the Company that might involve a premium price for holders of Common Shares or
otherwise be in their best interests. The Declaration of Trust, as in effect,
provides that a merger, consolidation or sale of all or substantially all of the
assets of the Company must be approved by the affirmative vote of not less than
a majority of all votes entitled to be cast on the matter.
MARYLAND ASSET REQUIREMENTS
To maintain its qualification as a Maryland real estate investment trust,
the Maryland REIT Law requires that the Company hold, either directly or
indirectly, at least 75% of the value of its assets in real estate assets,
mortgages or mortgage related securities, government securities, cash and cash
equivalent items, including high-grade short-term securities and receivables.
The Maryland REIT Law also prohibits using or applying land for farming,
agricultural, horticultural or similar purposes.
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PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement, including the
descriptions of certain provisions thereof set forth elsewhere in this
Prospectus, is qualified in its entirety by reference to the Partnership
Agreement, a copy of which has been filed or incorporated by reference as an
exhibit to the Registration Statement of which this Prospectus is a part and may
be obtained as described under "Available Information."
MANAGEMENT
The Operating Partnership was formed on November 11, 1996, as a limited
partnership under the Delaware Revised Uniform Limited Partnership Act (the
"Partnership Act"). The Company is the managing general partner of the Operating
Partnership and expects at all times to own a majority interest in the Operating
Partnership. ZML Opportunity Partnership II is an additional general partner in
the Operating Partnership, but the right and power to manage the Operating
Partnership is vested exclusively in the Company, as managing general partner.
The Company, as the managing general partner of the Operating Partnership,
has the exclusive power and authority to conduct the business of the Operating
Partnership, subject to the consent of the limited partners in certain limited
circumstances. The limited partners will have no right or authority to act for
or to bind the Operating Partnership. No limited partner may take part in the
conduct or control of the business or affairs of the Operating Partnership by
virtue of being a holder of Units. In particular, the limited partners expressly
acknowledge in the Partnership Agreement that the Company, as managing general
partner, is acting on behalf of the Operating Partnership's limited partners and
the Company's shareholders collectively, and is under no obligation to consider
the tax consequences to limited partners when making decisions for the benefit
of the Operating Partnership.
SALES OF ASSETS
Under the Partnership Agreement, the Company, as managing general partner,
has the exclusive authority to determine whether, when and on what terms the
assets of the Operating Partnership (including the Properties) will be sold. A
sale of all or substantially all of the assets of the Operating Partnership (or
a merger of the Operating Partnership with another entity) generally requires an
affirmative vote of the holders of a majority of the outstanding Units
(including Units held directly or indirectly by the Company). The Company
expects to own, directly or indirectly, a majority of the Units and thus to
control the outcome of such a vote.
REMOVAL OF THE MANAGING GENERAL PARTNER; TRANSFER OF THE COMPANY'S INTERESTS
The Partnership Agreement provides that the limited partners may not remove
the Company as managing general partner of the Operating Partnership with or
without cause (unless neither the general partner nor its parent entity is a
"public company," in which case the general partner may be removed for cause).
In addition, the Company may not transfer any of its interests as general or
limited partner in the Operating Partnership, except in connection with a merger
or sale of all or substantially all of the Company's assets (subject to certain
conditions).
Although the Company cannot transfer its partnership interests except in a
transaction in which substantially all of the assets of the surviving entity
consist of Units, the Partnership Agreement does not prevent a transaction in
which another entity acquires control (or all of the outstanding Common Shares)
of the Company and that other entity owns assets and conducts businesses outside
of the Operating Partnership.
REIMBURSEMENT OF THE COMPANY; TRANSACTIONS WITH THE COMPANY AND ITS AFFILIATES
The Company will not receive any compensation for its services as general
partner of the Operating Partnership. The Company, however, as a partner in the
Operating Partnership, has the same right to allocations and distributions as
other partners of the Operating Partnership. In addition, the Operating
Partnership will reimburse the Company for all expenses it incurs relating to
its activities as general partner, its
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continued existence and qualification as a REIT and all other liabilities
incurred by the Company in connection with the pursuit of its business and
affairs (including expenses incurred by the Company in connection with the
issuance of Common Shares or other securities of the Company). Except as
expressly permitted by the Partnership Agreement, affiliates of the Company will
not engage in any transactions with the Operating Partnership except on terms
that are fair and reasonable and no less favorable to the Operating Partnership
than would be obtained from an unaffiliated third-party.
REDEMPTION OF UNITS
Subject to certain limitations in the Partnership Agreement, each holder of
Units other than the Company and certain of its affiliates generally will have
the right to require the redemption of its Units at any time or from time to
time beginning on the first anniversary of the issuance of such Units to it (or
on such date prior to the expiration of such one-year period as the Company, as
managing general partner, designates with respect to any or all Units);
provided, however, that partners of the ZML Opportunity Partnerships, including
the Investor Limited Partners, who received Units in the Consolidation will only
have the right to require the redemption of their Units at any time commencing
two years after the closing of the IPO (the "Unit Redemption Right"). Unless the
Company elects to assume and perform the Operating Partnership's obligation with
respect to the Unit Redemption Right, as described below, the limited partner
will receive cash from the Operating Partnership in an amount equal to the
market value of the Units to be redeemed. The market value of a Unit for this
purpose will be equal to the average of the closing trading price of a Common
Share on the NYSE for the ten trading days before the day on which the
redemption notice was given. In lieu of the Operating Partnership's acquiring
the Units for cash, the Company will have the right to elect to acquire the
Units directly from a limited partner exercising the Unit Redemption Right, in
exchange for either cash or Common Shares, and, upon such acquisition, the
Company will become the owner of such Units. Upon exercise of the Unit
Redemption Right, the limited partner's right to receive distributions for the
Units so redeemed or exchanged will cease. At least 1,000 Units (or all
remaining Units owned by the limited partner if less than 1,000 Units) must be
redeemed each time the Unit Redemption Right is exercised. No redemption or
exchange can occur if delivery of Common Shares would be prohibited either under
the provisions of the Declaration of Trust designed to protect the Company's
qualification as a REIT or under applicable federal or state securities laws as
long as the Common Shares are publicly traded. The Company will at all times
reserve and keep available out of its authorized but unissued Common Shares,
solely for the purpose of effecting the issuance of Common Shares pursuant to
the Unit Redemption Right, a sufficient number of Common Shares as shall from
time to time be sufficient for the redemption of all outstanding Units not owned
by the Company.
RESTRICTIONS ON TRANSFER OF UNITS BY LIMITED PARTNERS
The Partnership Agreement imposes certain restrictions on the transfer of
Units. The Partnership Agreement provides that no limited partner shall, without
the prior written consent of the Company (which may be withheld in the sole
discretion of the Company), sell, assign, distribute or otherwise transfer all
or any part of his or its interest in the Operating Partnership except by
operation of law, by gift (outright or in trust) or by sale, in each case to or
for the benefit of his spouse or descendants, except for pledges or other
collateral transfers effected by a limited partner to secure the repayment of a
loan, the redemption of Units in accordance with the Partnership Agreement, the
distribution of Units by a ZML Opportunity Partnership to any of its partners in
compliance with any applicable securities laws, and the distribution by WRAM and
WRH to one or more of the constituent partners and shareholders, members,
partners or beneficiaries of constituent partners thereof ("Wright Runstad
Investors") in compliance with applicable securities laws. See "Shares of
Beneficial Interest -- Restrictions on Ownership and Transfer."
ISSUANCE OF ADDITIONAL UNITS AND/OR PREFERENCE UNITS
The Company is authorized at any time, without the consent of the limited
partners, to cause the Operating Partnership to issue additional Units to the
Company, to the limited partners or to other persons for such consideration and
on such terms and conditions as the Company deems appropriate. If Units are
issued to the Company, then the Company must issue a corresponding number of
Common Shares and must
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contribute to the Operating Partnership the proceeds, if any, received by the
Company from such issuance. In addition, the Partnership Agreement provides that
the Operating Partnership may also issue preferred units and other partnership
interests of different classes and series (collectively, "Preference Units")
having such rights, preferences and other privileges, variations and
designations as may be determined by the Company. Any such Preference Units may
have terms, provisions and rights which are preferential to the terms,
provisions and rights of the Units. Preference Units, however, may be issued to
the Company only in connection with an offering of securities of the Company
having substantially similar rights and the contribution of the proceeds
therefrom to the Operating Partnership. No limited partner has preemptive,
preferential or similar rights with respect to capital contributions to the
Operating Partnership or the issuance or sale of any partnership interests
therein.
CAPITAL CONTRIBUTIONS
No partner of the Operating Partnership will be required to make additional
capital contributions to the Operating Partnership, except that the Company is
generally required to contribute net proceeds of the sale of Common Shares (and
other equity interests) of the Company to the Operating Partnership. No limited
or general partner will be required to pay to the Operating Partnership any
deficit or negative balance which may exist in its account, unless such limited
or general partner agrees otherwise.
DISTRIBUTIONS; ALLOCATIONS OF INCOME AND LOSS
The Partnership Agreement generally provides for the quarterly distribution
of Available Cash (as defined below), as determined in the manner provided in
the Partnership Agreement, to the partners of the Operating Partnership in
proportion to their percentage interests in the Operating Partnership (which for
any partner is determined by the number of Units it owns relative to the total
number of Units outstanding). If any Preference Units are outstanding,
distributions shall be paid to in accordance with the rights of each class of
Preference Units (and, within each such class, pro rata in proportion to the
respective percentage interest of each holder), with any remaining Available
Cash distributed in accordance with the previous sentence. "Available Cash" is
generally defined as net cash flow from operations plus any reduction in
reserves and minus interest and principal payments on debt, capital
expenditures, any additions to reserves and other adjustments. Neither the
Company nor the limited partners are entitled to any preferential or
disproportionate distributions of Available Cash with respect to the Units.
EXCULPATION AND INDEMNIFICATION OF THE COMPANY
The Partnership Agreement generally provides that the Company and ZML
Opportunity Partnership II, as general partners of the Operating Partnership,
will incur no liability to the Operating Partnership or any limited partner for
losses sustained, liabilities incurred, or benefits not derived as a result of
errors in judgment or for any mistakes of fact or law or for anything which it
(or they) may do or refrain from doing in connection with the business and
affairs of the Operating Partnership if the Company or such other general
partner carried out its duties in good faith. The Company's liability in any
event is limited to its interest in the Operating Partnership. Without limiting
the foregoing, the Company has no liability for the loss of any limited
partner's capital. In addition, the Company is not responsible for any
misconduct, negligent act or omission of any consultant, contractor, or agent of
the Operating Partnership or of the Company and has no obligation other than to
use good faith in the selection of all such contractors, consultants, and
agents.
The Partnership Agreement also requires the Operating Partnership to
indemnify the Company, its other general partners, the trustees and officers of
the Company, and such other persons as the Company may from time to time
designate against any loss or damage, including reasonable legal fees and court
costs incurred by such person by reason of anything it may do or refrain from
doing for or on behalf of the Operating Partnership or in connection with its
business or affairs unless it is established that: (i) the act or omission of
the indemnified person was material to the matter giving rise to the proceeding
and either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit in money, property, or services; or (iii) in the case of any criminal
proceeding, the
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indemnified person had reasonable cause to believe that the act or omission was
unlawful. Any such indemnification claims must be satisfied solely out of the
assets of the Operating Partnership.
AMENDMENT OF THE PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed by the Company or
by limited partners owning at least 25% of the then outstanding Units.
Generally, the Partnership Agreement may be amended with the approval of the
Company, as managing general partner, and limited partners (including the
Company) holding a majority of the Units. Certain provisions regarding, among
other things, the rights and duties of the Company as general partner (e.g.,
restrictions on the Company's power to conduct businesses other than owning
Units) or the dissolution of the Operating Partnership, may not be amended
without the approval of a majority of the Units not held by the Company. Certain
amendments that would, among other things, (i) convert a limited partner's
interest into a general partner's interest, (ii) modify the limited liability of
a limited partner, (iii) alter the interest of a partner in profits or losses,
or the rights to receive any distributions (except as permitted under the
Partnership Agreement with respect to the admission of new partners or the
issuance of additional Units), or (iv) alter the Unit Redemption Right, must be
approved by the Company and each limited partner that would be adversely
affected by such amendment.
TERM
The Operating Partnership will be dissolved and its affairs wound up upon
the earliest of (i) December 31, 2095; (ii) the withdrawal of the Company as
general partner without the permitted transfer of the Company's interest to a
successor general partner (except in certain limited circumstances); (iii) the
sale of all or substantially all of the Operating Partnership's assets and
properties; (iv) the entry of a decree of judicial dissolution of the Operating
Partnership pursuant to the provisions of the Partnership Act; (v) the entry of
a final non-appealable judgment ruling that the last remaining general partner
is bankrupt or insolvent (except that, in either such case, in certain
circumstances the limited partners (other than the Company) may vote to continue
the Operating Partnership and substitute a new general partner in place of the
Company); (vi) prior to January 1, 2046, with the consent of holders (including
the Company) of 90% of the outstanding Units; or (vii) on or after January 1,
2046, on election by the Company, in its sole and absolute discretion.
REDEMPTION OF UNITS
Subject to certain limitations described below, each limited partner other
than the Company and certain of its affiliates has the Unit Redemption Right to
require the redemption of its Units at any time or from time to time beginning
on the first anniversary (or, in the case of certain investors specified in the
Partnership Agreement, the second anniversary) of the issuance of such Units to
it or, in the case of any or all Class A Partnership Units held by it, on or
after such earlier date as the Company, as managing general partner, designates
in its sole and absolute discretion. Pursuant to the Merger Agreement, the Unit
Redemption Right for holders of Units issued in the Partnership Merger in
exchange for Beacon OP Units commenced upon closing of the Beacon Merger. In
addition, each limited partner may exercise its Unit Redemption Right,
regardless of the length of time it has held its Units, during the period
commencing on the date the Company, as managing general partner, has given the
limited partners notice of its intention to make an extraordinary distribution
of cash or property to its shareholders or effect a merger, a sale of all or
substantially all of its assets or any other similar extraordinary transaction
and ending on the record date to determine shareholders eligible to receive such
distribution or to vote upon the approval of such merger, sale or other
extraordinary transaction (or, if no such record date is applicable, at least
twenty business days before the consummation of such merger, sale or other
extraordinary transaction). A limited partner may exercise its Unit Redemption
Right by giving written notice thereof to the Operating Partnership and the
Company. The Units specified in such notice shall be redeemed on the tenth
business date following the date on which the Company, as managing general
partner, received the redemption notice or, in the case of the exercise of a
Unit Redemption Right in connection with an extraordinary transaction, the date
on which the Operating Partnership and the Company, as managing general partner,
received the redemption notice.
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Unless the Company elects to assume and perform the Operating Partnership's
obligation with respect to a Unit Redemption Right, as described below, a
limited partner which exercises its Unit Redemption Right will receive cash from
the Operating Partnership in an amount equal to the market value of the Units to
be redeemed. The market value of a Unit for this purpose will be equal to the
average of the closing trading price of one Common Share on the NYSE for the ten
trading days before the day on which the redemption notice was given. In lieu of
the Operating Partnership's acquiring the Units for cash, the Company has the
right to elect to acquire on the redemption date the Units directly from a
limited partner exercising the Unit Redemption Right, in exchange for cash in
the amount specified above or by issuance of a number of Common Shares equal to
the number of Units offered for redemption adjusted as specified in the
Partnership Agreement to take into account prior share dividends or subdivision
or combinations of Common Shares. Upon exercise of the Unit Redemption Right,
the limited partner's right to receive distributions of the Units so redeemed or
exchanged will cease. At least 1,000 Units (or all remaining Units owned by the
limited partner if less than 1,000 units) must be redeemed each time the Unit
Redemption Right is exercised. No redemption or exchange can occur if delivery
of common shares therefor would be prohibited either under the provisions of the
Company's Declaration of Trust designed to protect the Company's qualification
as a REIT or under applicable federal or state securities laws, as long as the
Common Shares are publicly traded, regardless of whether the Company, as
managing general partner, would in fact assume and satisfy the Unit Redemption
Right. The Company will at times reserve and keep available out of its
authorized but unissued Common Shares, solely for the purpose of effecting the
issuance of Common Shares pursuant to the Unit Redemption Right, a sufficient
number of Common Shares as shall from time to time be sufficient for the
redemption of all outstanding Units not owned by the Company.
TAX CONSEQUENCES OF REDEMPTION
The following discussion summarizes the material federal income tax
considerations that may be relevant to a limited partner who exercises his or
her Redemption Right.
Tax Treatment of Redemption of Units. If the Company assumes and performs
the redemption obligation, the Partnership Agreement provides that the
redemption will be treated by the Company, the Operating Partnership and the
redeeming Unit holder as a sale of Units by such Unit holder to the Company at
the time of such redemption. In that event, such sale will be fully taxable to
the redeeming Unit holder and such redeeming Unit holder will be treated as
realizing for tax purposes an amount equal to the sum of the cash or the value
of the Common Shares received in the exchange plus the amount of Operating
Partnership liabilities allocable to the redeemed Units at the time of the
redemption. The determination of the amount of gain or loss is discussed more
fully below.
If the Company does not elect to assume the obligation to redeem a Unit
holder's Units, the Operating Partnership will redeem such Units for cash. If
the Operating Partnership redeems Units for cash that the Company contributes to
the Operating Partnership to effect such redemption, the redemption likely would
be treated for tax purposes as a sale of such Units to the Company in a fully
taxable transaction, although the matter is not free from doubt. In that event,
the redeeming Unit holder would be treated as realizing an amount equal to the
sum of the cash received in the exchange plus the amount of Operating
Partnership nonrecourse liabilities allocable to the redeemed Units at the time
of the redemption. The determination of the amount of gain or loss in the event
of sale treatment is discussed more fully below.
If, instead, the Operating Partnership chooses to redeem a Unit holder's
Units for cash that is not contributed by the Company to effect the redemption,
the tax consequences would be the same as described in the previous paragraph,
except that if the Operating Partnership redeems less than all of a Unit
holder's Units, the Unit holder would not be permitted to recognize any loss
occurring on the transaction and would recognize taxable gain only to the extent
that the cash, plus the share of Operating Partnership nonrecourse liabilities
allocable to the redeemed Units, exceeded the Unit holder's adjusted basis in
all of such Unit holder's Units immediately before the redemption.
Tax Treatment of Disposition of Units by Unit Holder Generally. If a Unit
is redeemed in a manner that is treated as a sale of the Unit, or a Unit holder
otherwise disposes of a Unit, the determination of gain or loss
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from the sale or other disposition will be based on the difference between the
amount considered realized for tax purposes and the tax basis in such Unit. See
"Basis of Units" below. Upon the sale of a Unit, the "amount realized" will be
measured by the sum of the cash and fair market value of other property received
(e.g., Redemption Shares) plus the portion of the Operating Partnership's
liabilities allocable to the Unit sold. To the extent that the amount exceeds
the Unit holder's basis for the Unit disposed of, such Unit holder will
recognize gain. It is possible that the amount of gain recognized or even the
tax liability resulting from such gain could exceed the amount of cash and the
value of any other property (e.g., Redemption Shares) received upon such
disposition.
Except as described below, any gain recognized upon a sale or other
disposition of Units will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent, however, that the amount realized
upon the sale of a Unit attributable to a Unit holder's share of "unrealized
receivables" of the Operating Partnership (as defined in Section 751 of the
Code) exceeds the basis attributable to those assets, such excess will be
treated as ordinary income. Unrealized receivables include, to the extent not
previously included in Operating Partnership income, any rights to payment for
services rendered or to be rendered. Unrealized receivables also include amounts
that would be subject to recapture as ordinary income if the Operating
Partnership had sold its assets at their fair market value at the time of the
transfer of a Unit.
Pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act") and as
described more fully below in "Federal Income Tax Considerations -- Taxation of
U.S. Shareholders of the Company Generally -- 1997 Act Changes to Capital Gains
Taxation," for individuals, trusts and estates, the maximum rate of tax on the
net capital gain from a sale or exchange occurring after July 28, 1997 of a
long-term capital asset (i.e., a capital asset held for more than 18 months) has
been reduced to from 28% to 20%, and the maximum rate for mid-term capital
assets (i.e., capital assets held for more than one year but not more than 18
months) remains at 28%. The maximum rate for net capital gains attributable to
the sale of depreciable real property held for more than 18 months is 25% to the
extent of the prior deductions for "unrecaptured Section 1250 gain" (that is,
depreciation deductions not otherwise recaptured as ordinary income under the
existing depreciation recapture rules).
The 1997 Act provides the IRS with authority to issue regulations that
could, among other things, apply these rates on a look-through basis in the case
of "pass-through" entities such as the Operating Partnership. The IRS has not
yet issued such regulations, and if it does not issue such regulations in the
future, the rate of tax that would apply to the disposition of a Unit by an
individual, trust or estate would be determined based upon the period of time
over which such individual, trust or estate held such Unit, i.e., whether the
Unit is a long-term capital asset, a mid-term capital asset, or a short-term
capital asset. No assurances, however, can be provided that the IRS will not
issue regulations that would provide that the rate of tax that would apply to
the disposition of a Unit by an individual, trust or estate would be determined
based upon the nature of the assets of the Operating Partnership and the periods
of time over which the Operating Partnership held such assets. Moreover, no
assurances can be provided that such regulations would not be applied
retroactively. If such regulations were to apply to the disposition of a Unit,
any gain on such disposition likely would be treated partly as gain from the
sale of a long-term capital asset, partly as gain from the sale of a mid-term
capital asset, and partly as gain from the sale of a short-term capital asset,
and it also would be treated partly as gain from the sale of depreciable real
property.
Basis of Units. In general, a Unit holder who received Units in exchange
for contributing an interest in a partnership had an initial tax basis in such
Units ("Initial Basis") equal to his or her basis in the contributed partnership
interest. A Unit holder's Initial Basis in his or her Units generally is
increased by (a) such Unit holder's share of Operating Partnership taxable
income and (b) increases in his or her share of the liabilities of the Operating
Partnership (including any increase in his or her share of nonrecourse
liabilities). Generally, such Unit holder's basis in his or her Units is
decreased (but not below zero) by (i) his or her share of Operating Partnership
distributions, (ii) decreases in his or her share of liabilities of the
Operating Partnership, including nonrecourse liabilities, (iii) his or her share
of losses of the Operating Partnership, and (iv) his or her share of
nondeductible expenditures of the Operating Partnership that are not chargeable
to capital accounts.
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COMPARISON OF OWNERSHIP OF UNITS AND COMMON SHARES
Generally, the nature of an investment in Common Shares of the Company is
substantially equivalent economically to an investment in Units in the Operating
Partnership. A holder of a Common Share receives the same distribution that a
holder of a Unit receives and shareholders and Unit holders generally share in
the risks and rewards of ownership in the enterprise being conducted by the
Company (through the Operating Partnership). However, there are some differences
between ownership of Units and ownership of Common Shares, some of which may be
material to investors.
The information below highlights a number of the material differences
between the Operating Partnership and the Company relating to, among other
things, form of organization, permitted investments, policies and restrictions,
management structure, compensation and fees, investor rights and Federal income
taxation, and compares certain legal rights associated with the ownership of
Units and Common Shares, respectively. These comparisons are intended to assist
holders of Units in understanding how their investment will be changed if their
Units are redeemed for Common Shares. THIS DISCUSSION IS SUMMARY IN NATURE AND
DOES NOT CONSTITUTE A COMPLETE DISCUSSION OF THESE MATTERS, AND HOLDERS OF UNITS
SHOULD CAREFULLY REVIEW THE BALANCE OF THIS PROSPECTUS AND THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART FOR ADDITIONAL IMPORTANT
INFORMATION ABOUT THE COMPANY.
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OPERATING PARTNERSHIP COMPANY
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FORM OF ORGANIZATION AND ASSETS OWNED
The Operating Partnership is organized as a The Company is a Maryland real estate
Delaware limited partnership. The Operating investment trust. The Company intends to
Partnership owns interests (directly and elect to be taxed as a REIT under the Code
through one or more subsidiaries) in the and intends to continue to meet the
Properties and, through subsidiaries, requirements for qualification as a REIT. The
conducts the Company's management business. Company's only significant asset is its
See "The Company." interest in the Operating Partnership, which
gives the Company an indirect investment in
the Properties owned by the Operating
Partnership.
LENGTH OF INVESTMENT
The Operating Partnership shall continue The Company has a perpetual term and intends
until December 31, 2095, unless it is to continue its operations for an indefinite
dissolved sooner. time period.
PERMITTED INVESTMENTS
The Operating Partnership's purpose is to Under its Declaration of Trust, the Company's
conduct any business that may be lawfully purpose is to invest in and to acquire, hold,
conducted by a Limited Partnership organized manage, administer, control and dispose of
pursuant to the Act, provided that such property, including, without limitation or
business is to be conducted in a manner that obligation, engaging in business as a real
permits the Company to be qualified as a REIT estate investment trust under the Code. The
unless the Company ceases to qualify or is Company has all the powers granted to real
not qualified as a REIT for any reason or estate investment trusts by Title 8 of the
reasons not related to the business conducted Corporations and Associations Article of the
by the Operating Partnership. The Operating Annotated Code of Maryland and all other
Partnership is authorized to perform any and powers set forth in the Declaration of Trust
all acts for the furtherance of the purposes which are not inconsistent with law and are
and business of the Operating Partnership, appropriate to promote and attain the
provided that the Operating Partnership may purposes set forth in the Declaration of
not take, or refrain from taking, any action Trust. However, under the Partnership
which, in the judgment of the managing Agreement, the Company, as general partner,
general partner (i) could adversely affect may not conduct any business other than in
the ability of the general partner to connection with the ownership, acquisition
continue to qualify as a REIT, (ii) could and disposition of interests in the Operating
subject the general partner to any additional Partnership and the management of the
taxes under Section 857 or Section 4981 of business of the Partnership and such
the Code, or (iii) could violate any law or activities as are incidental thereto, and
regulation of any governmental body or agency cannot own any assets other than (i) such
having jurisdiction over any general partner bank accounts or similar instruments or
or its securities (unless such action, or accounts in its name as it deems necessary to
inaction, is specifically consented to by the carry out its responsibilities and purposes
general partner). as contemplated under the Operating
Partnership Agreement and (ii) up to a 1%
interest in any partnership or limited
liability company at least 99% of the equity
of which is owned, directly or indirectly, by
the Operating Partnership.
ADDITIONAL EQUITY
The Operating Partnership is authorized to The Board of Directors may authorize the
issue Units and other partnership interests issuance from time to time of shares of
in one or more classes, or in one or more beneficial interest of any class or series,
series of any such classes, with such or securities or rights convertible into
designations, preferences and relative shares of beneficial interest of any class or
series,
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OPERATING PARTNERSHIP COMPANY
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participating, optional or other special for such consideration as the Board of
rights, powers and duties, including rights, Trustees may deem advisable, subject to such
powers and duties senior to limited restrictions or limitations, if any, as may
partnership interests, as determined by the be set forth in the Declaration of Trust. The
Company as its managing general partner in Board of Trustees, with the approval of the
its sole discretion. The Operating shareholders of the Trust by a majority of
Partnership may issue Units and other the votes cast at a meeting of shareholders
partnership interests to the Company, as long duly called and at which a quorum is present,
as such interests are issued in connection may amend the Declaration of Trust from time
with a comparable issuance of shares of to time to increase or decrease the aggregate
Common Shares and proceeds raised in number of shares of beneficial interest or
connection with the issuance of such shares the number of shares of beneficial interest
are contributed to the Operating Partnership. of any class that the Trust has authority to
issue.
BORROWING POLICIES
The Operating Partnership has no restrictions The Company is not restricted under its
on borrowings, and the Company as managing Declaration of Trust from incurring
general partner has full power and authority borrowings. However, under the Partnership
to borrow money on behalf of the Operating Agreement, the Company, as managing general
Partnership. The Company has adopted a policy partner, may not incur any debts except for
of incurring debt, either directly or through debt the net proceeds of which it lends to
the Operating Partnership, only if upon such the Operating Partnership, provided that the
incurrence the Company's Debt to Market Company, as managing general partner, shall
Capitalization Ratio would be approximately not be obligated to lend the net proceeds of
50% or less, but this policy may be altered any such debt to the Operating Partnership in
at any time by the Board of Trustees. a manner that would be inconsistent with the
Company's ability to remain qualified as a
REIT. Therefore, it is the Company's policy
that it will not incur indebtedness other
than short-term trade, employee compensation,
dividends payable or similar indebtedness
that will be paid in the ordinary course of
business, and that indebtedness shall instead
be incurred by the Operating Partnership to
the extent necessary to fund the business
activities conducted by the Operating
Partnership and its subsidiaries.
OTHER INVESTMENT RESTRICTIONS
Other than restrictions precluding Neither the Company's Declaration of Trust
investments by the Operating Partnership that nor its Bylaws impose any restrictions upon
would adversely affect the qualification of the types of investments that may be made by
the Company as a REIT and general the Company. However, the Operating
restrictions on transactions with affiliates, Partnership Agreement provides that the
there are no restrictions upon the Operating general partners, including the Company, may
Partnership's authority to enter into certain not, directly or indirectly, cause the
transactions, including among others, making Partnership, without the written approval of
investments, lending Operating Partnership each affected limited partner of the
funds, or re-investing the Operating Operating Partnership or shareholder of the
Partnership's cash flow and net sale or Company that is subject to the Communications
refinancing proceeds. Act of 1934, as amended, to invest in any
property, otherwise take any action, or
engage in any telecommunications business
that would result in such affected limited
partner or shareholder being in violation of
law. The Bylaws of the Company also
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OPERATING PARTNERSHIP COMPANY
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contain certain restrictions on transactions
with affiliates. To maintain its
qualification as a Maryland real estate
investment trust, the Maryland REIT Law
requires that the Company hold, either
directly or indirectly, at least 75% of the
value of its assets in real estate assets,
mortgages or mortgage-related securities,
government securities, cash and cash
equivalent items, including high-grade
short-term securities and receivables. The
Maryland REIT Law also prohibits using or
applying land for farming, agricultural,
horticultural or similar purposes.
MANAGEMENT CONTROL
All management powers over the business and Subject to any express limitations contained
affairs of the Operating Partnership are in the Declaration of Trust or the Bylaws,
exclusively vested in the Company, as the business and affairs of the Company are
managing general partner of the Operating managed under the direction of the Board of
Partnership, and no limited partner of the Trustees and the Board of Trustees has full,
Operating Partnership has any right to exclusive and absolute power, control and
participate in or exercise control or authority over any and all property of the
management power over the business and Company. The Board of Trustees is divided
affairs of the Operating Partnership. The into three classes of trustees, with each
Company, as managing general partner, has class to consist as nearly as possible of an
full power and authority to do all things it equal number of trustees. The policies
deems necessary or desirable to conduct the adopted by the Board of Trustees may be
business of the Operating Partnership, altered or eliminated without a vote of the
subject to (i) the consent of certain of the shareholders. Accordingly, except for their
limited partners in connection with actions vote in the elections of trustees,
that adversely affect such limited partners, shareholders will have no control over the
(ii) the consent of the holders of a majority ordinary business policies of the Company. A
of partnership interests in connection with trustee, other than a trustee elected by the
the sale, exchange, transfer or other holders of a class or series of shares of
disposition of all assets of the Operating beneficial interest other than Common Shares
Partnership through a merger consolidation or may be removed only with cause by the
otherwise, and (iii) the consent of certain affirmative vote of shareholders holding not
affected limited partners or shareholders of less than a majority of all shares then
the Company in connection with an investment outstanding and entitled to vote generally in
in a business subject to the Communications the election of trustees.
Act of 1934, as amended. In particular, the
Company, as managing general partner, is
under no obligation to consider the tax
consequences to limited partners when making
decisions for the benefit of the Operating
Partnership. The limited partners have no
power to remove the general partners with or
without cause (unless neither the General
Partner nor its Parent Entity is a "public
company," in which case the General Partner
may be removed for cause).
FIDUCIARY DUTIES
Under Delaware law, the general partners of Under Maryland law, the trustees must perform
the Operating Partnership are accountable to their duties in good faith, in a manner that
the Operating Partnership as a fiduciary and, they reasonably believe to be in the best
consequently, are required to exercise good interests of the Company and with the care of
faith and an ordinarily prudent person in a like
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OPERATING PARTNERSHIP COMPANY
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integrity in all dealings with respect to position. Trustees of the Company who act in
partnership affairs. However, under the such a manner generally will not be liable to
Operating Partnership Agreement, the limited the Company for monetary damages arising from
partners expressly acknowledge that the their activities.
Company, as managing general partner, is
acting on behalf of the Operating
Partnership's limited partners and the
Company's shareholders collectively, and is
under no obligation to consider the tax
consequences to, or the separate interests
of, the limited partners in deciding whether
to cause the Operating Partnership to take
(or decline to take) any actions, and the
general partner is not liable for monetary
damages for losses sustained, liabilities
incurred, or benefits not derived by the
limited partners in connection with such
decisions, provided that the general partner
has acted in good faith.
MANAGEMENT LIABILITY AND INDEMNIFICATION
As a matter of Delaware law, the general The Declaration of Trust authorizes the
partners have liability for the payment of Company, to the maximum extent permitted by
the obligations and debts of the Operating Maryland law, to obligate itself to indemnify
Partnership unless limitations upon such and to pay or reimburse reasonable expenses
liability are stated in the document or in advance of final disposition of a
instrument evidencing the obligation. The proceeding to (a) any present or former
Operating Partnership Agreement generally shareholder, trustee or officer or (b) any
provides that the general partners of the individual who, while a trustee of the
Operating Partnership will incur no liability Company and at the request of the Company,
to the Operating Partnership or any limited serves or has served as a director, officer,
partner for losses sustained, liabilities partner, trustee, employee or agent of
incurred, or benefits not derived as a result another corporation, partnership, joint
of errors in judgment or for any mistakes of venture, trust, employee benefit plan or any
fact or law or for anything which it may do other enterprise from and against any claim
or refrain from doing in connection with the or liability to which such person may become
business and affairs of the Operating subject or which such person may incur by
Partnership if the Company or such other reason of his or her status as a present or
general partner carried out its duties in former trustee, officer or shareholder of the
good faith. The Company's liability in any Company. The Bylaws obligate the Company, to
event is limited to its interest in the the maximum extent permitted by Maryland law,
Operating Partnership. The Operating to indemnify (a) any trustee, officer or
Partnership Agreement requires the Operating shareholder or any former trustee, officer or
Partnership to indemnify the Company, its shareholder (including any individual who,
other general partners, the limited partners, while a trustee, officer or shareholder and
the trustees, and officers of the Company, at the express request of the Company, serves
such other persons as the Company may from or has served another corporation,
time to time designate to the fullest extent partnership, joint venture, trust, employee
provided by Delaware law from and against any benefit plan or any other enterprise as a
loss or damage, including legal fees and director, officer, shareholder, partner or
court costs incurred by such person by reason trustee of such corporation, partnership,
of anything it may do or refrain from doing joint venture, trust, employee benefit plan
for or on behalf of the Operating Partnership or other enterprise) who has been successful,
or in connection with its business or affairs on the merits or otherwise, in the defense of
unless it is established that (i) the act or a proceeding to which he was made a party by
omission of the indemnified person was reason of service in such capacity, against
material to the matter giving rise to the reasonable expenses, incurred by him in
proceeding and either was committed in bad connection with the proceeding or
faith or was the
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OPERATING PARTNERSHIP COMPANY
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result of active and deliberate dishonesty; (b) any trustee or officer or any former
(ii) such party received an improper personal trustee or officer against any claim or
benefit; or (iii) in the case of any criminal liability to which he may become subject by
proceeding, such party had reasonable cause reason of such status.
to believe the act was unlawful. The
reasonable expenses incurred by an
indemnified person may be reimbursed by the
Operating Partnership in advance of the final
disposition of the proceeding upon receipt by
the Operating Partnership of an affirmation
by the indemnified person of his, her or its
good faith belief that the standard of
conduct necessary for indemnification has
been met and an undertaking by such
Indemnitee to repay the amount if it is
determined that such standard was not met.
ANTITAKEOVER PROVISIONS
Except in limited circumstances (see "-- The Declaration of Trust and Bylaws of the
Voting Rights"), the Company, as managing Company and the Maryland General Corporation
general partner of the Operating Partnership, Law contain a number of provisions that may
has exclusive management power over the have the effect of delaying or discouraging
business and affairs of the Operating an unsolicited proposal for the acquisition
Partnership. The general partners, including of the Company or the removal of incumbent
the Company, may not be removed by the management. These provisions include, among
limited partners with or without cause. The others, (i) the staggered terms of the Board
Operating Partnership Agreement provides that of Trustees; (ii) authorized capital stock
no limited partner shall, without the prior that may be classified and issued as a
written consent of the Company (which may be variety of equity securities in the
withheld in the sole discretion of the discretion of the Board of Trustees,
Company), sell, assign, distribute or including securities having superior voting
otherwise transfer all or any part of his or rights to the Common Shares; (iii) a
its interest in the Operating Partnership requirement that directors may be removed
except by operation of law, by gift (outright only for cause and only by a vote of at least
or in trust) or by sale, in each case to or 50% of the outstanding Common Shares; and
for the benefit of his spouse or descendants, (iv) provisions designed to avoid
except for pledges or other collateral concentration of share ownership in a manner
transfers effected by a limited partner to that would jeopardize the Company's status as
secure the repayment of a loan, the a REIT under the Code. See "Shares of
redemption of Units in accordance with the Beneficial Interest." Under provisions (which
Operating Partnership Agreement, the the Company has elected to opt out of, as
distribution of Units by a ZML Opportunity described below) of the MGCL, as generally
Partnership to any of its partners in applicable to real estate investment trusts,
compliance with the applicable securities certain "business combinations" (including
laws, and the distribution by WRAM and WRH to certain issuances of equity securities)
one or more of the Wright Runstad Investors between a Maryland real estate investment
in compliance with the applicable securities trust and an Interested Shareholder, or an
laws. The Company cannot transfer its affiliate of the Interested Shareholder, are
partnership interests except in a transaction prohibited for five years after the most
in which substantially all of the assets of recent date on which the Interested
the surviving entity consist of Units; Shareholder becomes an Interested
however, the Operating Partnership Agreement Shareholder. Thereafter, any such business
does not prevent a transaction in which combination must be approved by two
another entity acquires control (or all of super-majority shareholder votes unless,
the outstanding Common Shares) of the Company among other conditions, the trust's common
and that other entity owns assets and shareholders receive a minimum price (as
conducts businesses outside the Operating defined in the MGCL) for their shares and the
Partnership. See "Partnership consideration is received in cash or in the
same
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OPERATING PARTNERSHIP COMPANY
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Agreement." form as previously paid by the Interested
Shareholder for its common shares. As
permitted by the MGCL, the Company's Board of
Trustees has elected to opt out of the
business combination provisions of the MGCL.
Consequently, the five-year prohibition and
the super-majority vote requirements will not
apply to a business combination involving the
Company; however, the Company's Board of
Trustees may repeal (except with respect to a
shareholder who becomes an Interested
Shareholder as a result of Common Shares
received in the Merger) this election and
cause the Company to become subject to these
provisions in the future.
VOTING RIGHTS
Under the Operating Partnership Agreement, The Company is managed and controlled by a
limited partners have voting rights only as Board of Trustees consisting of three classes
to the dissolution of the Operating having staggered terms of office. Each class
Partnership, the sale of all or substantially is elected by the shareholders at annual
all of the assets of the Operating meetings of the Company. Holders of Common
Partnership and amendments the Operating Shares are entitled to vote only on the
Partnership Agreement. See "-- Amendment of following matters: (i) election and removal
the Operating Partnership Agreement or the of trustees, (ii) amendment of the
Declaration of Trust." Otherwise, all Declaration of Trust, (iii) termination of
decisions relating to the operation and the Company, (iv) merger or consolidation of
management of the Operating Partnership are the Company, or the sale or disposition of
made by the Company, as managing general substantially all of the property of the
partner. See "Partnership Agreement." As of Company (v) such other matters with respect
December 31, 1997, the Company owned to which the Board of Trustees has adopted a
approximately 89.5% of the Units. As Units resolution declaring that proposed action is
are redeemed by partners, the Company's advisable and directing that the matter be
percentage ownership of the Units will submitted to the shareholders for approval or
increase. If additional Units are issued to ratification, (vi) such other matters as may
third parties, the Company's percentage be properly brought before a meeting by
ownership of the Units will decrease. shareholders pursuant to the Bylaws and (vii)
such other matters as required by applicable
law. Each holder of Common Shares is entitled
to one vote per share and to the same and
identical voting rights as other holders of
Common Shares. Holders of Common Shares do
not have cumulative voting rights. See
"Shares of Beneficial Interest."
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OPERATING PARTNERSHIP COMPANY
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AMENDMENT OF THE OPERATING PARTNERSHIP AGREEMENT OR THE DECLARATION OF TRUST
Amendments to the Operating Partnership The Declaration of Trust may be amended only
Agreement may be proposed by the Company or by the affirmative vote of the holders of (i)
by limited partners owning at least 25% of not less than a majority of all the votes
the then outstanding Units. Generally, the entitled to be cast on the matter, if such
Operating Partnership Agreement may be action is taken in connection with a
amended with the approval of the Company, as transaction, approval of which requires by
managing general partner, and limited law the affirmative vote of shareholders and
partners (including the Company) holding a pursuant to which the Company's business and
majority of the Units. Certain provisions assets will be combined with those of one or
regarding, among other things, the rights and more entities (whether by merger, sale or
duties of the Company as general partner other transfer of assets, consolidation or
(e.g., restrictions on the Company's power to share exchange (a "Business Combination")) or
conduct businesses other than owning Units) (ii) not less than two-thirds of all of the
or the dissolution of the Operating votes entitled to be cast on the matter, if
Partnership, may not be amended without the such action is not taken in connection with a
approval of a majority of the Units not held Business Combination. However, amendments
by the Company. Certain amendments that relating to changes in the number of
would, among other things, (i) convert a authorized Common Shares require the approval
limited partner's interest into a general of holders of a majority of all votes cast at
partner's interest, (ii) modify the limited a meeting of shareholders at which a quorum
liability of a limited partner, (iii) alter is present, and, in certain cases, the
the interest of a partner in profits or approval of holders of two-thirds of the
losses, or the rights to receive any Preferred Shares outstanding at the time. As
distributions (except as permitted under the permitted under the Maryland REIT Law, the
Operating Partnership Agreement with respect Declaration of Trust permits the trustees by
to the admission of new partners or the a two-thirds vote to amend the Declaration of
issuance of additional Units), or (iv) alter Trust from time to time to qualify as a REIT
the Unit Redemption Right, must be approved under the Code or the Maryland REIT Law
by the Company and each limited partner that without the affirmative vote or written
would be adversely affected by such consent of the shareholders. Also pursuant to
amendment. the Maryland REIT Law, the Declaration of
Trust authorizes the Board of Trustees to
increase or decrease the aggregate number of
Common Shares or the number of shares of any
class of beneficial interest but requires
that such action be approved by the
affirmative vote of a majority of all the
votes cast on the matter at a meeting of
shareholders at which a quorum is present,
and, in certain cases, be approved by holders
of two-thirds of the Preferred Shares
outstanding at the time.
VOTE REQUIRED TO DISSOLVE THE OPERATING PARTNERSHIP OR THE COMPANY
Through December 31, 2046, an election to Subject to the provisions of any class or
dissolve the Operating Partnership made by series of shares of beneficial interest at
the Company, as managing general partner, the time outstanding, the Company may be
requires the consent of limited partners terminated and dissolved at any meeting of
(including the Company) who hold 90% or more shareholders, by the affirmative vote of
of the outstanding Units. After December 31, sixty-six and two-thirds percent (66 2/3%) of
2046, an election to dissolve the Operating all the votes entitled to be cast on the
Partnership may be made by the Company, as matter.
managing general partner, in its sole and
absolute discretion, without the consent of
the Limited Partners.
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OPERATING PARTNERSHIP COMPANY
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VOTE REQUIRED TO SELL ASSETS
Under the Operating Partnership Agreement, Subject to the provisions of any class or
the Company, as managing general partner, has series of shares of beneficial interest at
the exclusive authority to determine whether, the time outstanding, the Company may sell,
when and on what terms the assets of the lease, exchange or otherwise transfer all or
Operating Partnership will be sold. A sale of substantially all of the property of the
all or substantially all of the assets of the Company upon approval by the Board of
Operating Partnership (or a merger of the Trustees and, after notice to all
Operating Partnership with another entity) shareholders entitled to vote on the matter,
generally requires an affirmative vote of the by the affirmative vote of not less than
holders of a majority of the outstanding sixty-six and two-thirds (66 2/3%) of all the
Unites (including Units held directly or votes entitled to be cast on the matter. No
indirectly by the Company). The Company approval of the shareholders is required for
expects to own, directly or indirectly, a the sale of less than all or substantially
majority of the Units and thus to control the all of the Company's assets.
outcome of such a vote.
VOTE REQUIRED TO MERGE
Under the Operating Partnership Agreement, a Any Business Combination must be approved by
merger of the Operating Partnership with the affirmative vote of holders of not less
another entity generally requires an than a majority of the Common Shares then
affirmative vote of the holders of a majority outstanding and entitled to be cast on the
of the outstanding Units (including Units matter and, in certain cases, by the
held directly or indirectly by the Company). affirmative vote of holders of not less than
The Company expects to own, directly or two-thirds of the Preferred Shares then
indirectly, a majority of the Units and thus outstanding.
to control the outcome of such a vote.
COMPENSATION, FEES AND DISTRIBUTIONS
The Company will not receive any compensation The trustees and officers of the Company
for its services as general partner of the receive compensation for their services. See
Operating Partnership. The Company, however, "Management."
as a partner in the Operating Partnership,
has the same right to allocations and
distributions as other partners of the
Operating Partnership. In addition, the
Operating Partnership will reimburse the
Company for all expenses it incurs relating
to its activities as a general partner, its
continued existence and qualification as a
REIT and all other liabilities incurred by
the Company in connection with the pursuit of
its business and affairs (including expenses
incurred in connection with the issuance of
Common Shares or other securities of the
Company).
LIABILITY OF INVESTORS
No partner of the Operating Partnership will Under Maryland law, shareholders are not
be required to make additional capital personally liable for the debts or
contributions to the Operating Partnership, obligations of the Company. All outstanding
except that the Company is generally required Common Shares are, and all Common Shares to
to contribute net proceeds of the sale of be issued pursuant to the Unit Redemption
Common Shares (and other equity interests) of Right, upon issuance, will be fully paid and
the Company to the Operating Partnership. No nonassessable.
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OPERATING PARTNERSHIP COMPANY
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limited or general partner will be required
to pay to the Operating Partnership any
deficit or negative balance which may exist
in its account unless such limited or general
partner agrees otherwise.
REVIEW OF INVESTOR LISTS
Under the Operating Partnership Agreement, Under Maryland corporate law applicable to
Limited Partners, upon written demand with a Maryland real estate investment trusts, a
statement of the purpose of such demand and shareholder holding at least 5% of the
at the limited partner's expense, are outstanding Common Shares of the Company may
entitled to obtain a current list of the name upon written request inspect and copy during
and last known business, residence or mailing usual business hours the list of the
address of each partner of the Operating shareholders.
Partnership.
The following compares certain of the investment attributes and legal
rights associated with the ownership of Units and Shares.
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UNITS SHARES
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NATURE OF INVESTMENT
The Units constitute equity interests Common Shares constitute equity interests in
entitling each limited partner to his pro the Company. The Company is entitled to
rata share of cash distributions made to the receive its pro rata share of distributions
limited partners of the Operating made by the Operating Partnership with
Partnership. respect to the Units, and each shareholder is
entitled to his pro rata share of any
dividends or distributions paid with respect
to the Common Shares. The dividends payable
to the shareholders are not fixed in amount
and are only paid if, when and as declared by
the Board of Directors. In order to qualify
as a REIT, the Company must distribute at
least 95% of its taxable income (excluding
capital gains), and any taxable income
(including capital gains) not distributed
will be subject to corporate income tax.
POTENTIAL DILUTION OF RIGHTS
The Company, as managing general partner of The Board of Directors may issue, in its
the Operating Partnership, is authorized to discretion, additional Common Shares and
cause the Operating Partnership from time to Preferred Shares and has the authority to
time to issue to partners of the Operating issue from the authorized capital stock a
Partnership (including the Company and its variety of other equity securities of the
affiliates) or other persons or entities, Company with such powers, preferences and
Units or other partnership interests of the rights as the Board of Directors may
Operating Partnership in one or more classes, designate at the time. The issuance of
or in one or more series of any of such additional Common Shares, Preferred Shares or
classes, with such designations, preferences other similar equity securities may result in
and relative, participating, optional or the dilution of the interests of the
other special rights, powers and duties shareholders.
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UNITS SHARES
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(which may be senior to those of the Units),
as shall be determined by the Company in its
sole and absolute discretion, provided that,
no such Units or other partnership interests
shall be issued to the Company, as managing
general partner, unless (i) such interests
are issued in connection with a comparable
issuance of shares of beneficial interest of
the Company and proceeds raised in connection
with the issuance of such shares are
contributed to the Operating Partnership or
(ii) the additional Units or other
partnership interests are issued to all
partners of the Operating Partnership in
proportion to their respective interest in
the Operating Partnership.
LIQUIDITY
No limited partner shall, without the prior The Common Shares are freely transferable,
written consent of the Company (which may be subject to the Ownership Limit. The Common
withheld in the sole discretion of the Shares are listed on the NYSE, and a public
Company), sell, assign, distribute or market for the Common Shares exists. The
otherwise transfer all or any part of his or breadth and strength of this secondary market
its interest in the Operating Partnership will depend, among other things, upon the
except by operation of law, by gift (outright number of shares outstanding and the number
or in trust) or by sale, in each case to or of shares available for future sale, the
for the benefit of his spouse or descendants, extent of institutional investor interest in
except for pledges or other collateral the Company, the reputation of REIT's and
transfers effected by a limited partner to office REIT's generally and the
secure the repayment of a loan, the attractiveness of their equity securities in
redemption of Units in accordance with the comparison to other equity securities
Operating Partnership Agreement, the (including securities issued by other real
distribution of Units by a ZML Opportunity estate-based companies), the Company's
Partnership to any of its partners in financial performance, and general stock and
compliance with the applicable securities bond market conditions.
laws, and the distribution by WRAM and WRH to
one or more of the Wright Runstad Investors
in compliance with the applicable securities
laws. Subject to certain conditions, each
limited partner has the right to elect to
have his Units redeemed by the Operating
Partnership. Upon redemption, such Limited
Partner will receive, at the election of the
managing general partner, either cash or
Common Shares in exchange for such Units.
TAXATION
The Operating Partnership is not subject to The Company intends to elect to be taxed as a
federal income taxes. Instead, each holder of REIT. So long as it qualifies as a REIT, the
Units includes his allocable share of the Company will be permitted to deduct
Operating Partnership's taxable income or distributions paid to its shareholders, which
loss in determining his individual federal effectively will reduce the "double taxation"
income tax liability. The maximum effective that typically results when a corporation
federal tax rate for individuals under earns income and distributes that income to
current law is 39.6%. its shareholders in the form of dividends.
The Noncontrolled Subsidiaries, however, do
Income and loss from the Operating not qualify as REITs and thus they are
Partnership subject to federal income
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UNITS SHARES
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generally are subject to the "passive tax on their net income at normal corporate
activity" limitations. Under the "passive rates. The maximum effective tax rate for
activity" rules, income and loss from the corporations under current law is 35%.
Operating Partnership that is considered
"passive income" generally can be offset Dividends paid by the Company are treated as
against income and loss from other "portfolio" income and cannot be offset with
investments that constitute "passive losses from "passive activities."
activities" (unless the Operating Partnership
is considered a "publicly traded Distributions made by the Company to its
partnership," in which case income and loss taxable domestic shareholders out of current
from the Operating Partnership can be offset or accumulated earnings and profits are taken
only against other income and loss from the into account by them as ordinary income.
Operating Partnership). Distributions in excess of current or
accumulated earnings and profits that are not
Cash distributions from the Operating designated as capital gain dividends are
Partnership are not taxable to a holder of treated as a non-taxable return of basis to
Units except to the extent they exceed such the extent of a shareholder's adjusted basis
holder's basis in his interest in the in its Common Shares, with the excess taxed
Operating Partnership (which includes such as capital gain. Distributions that are
holder's allocable share of the Operating designated as capital gain dividends
Partnership's debt). generally are taxed as gains from the sale or
exchange of a capital asset held for more
Each year, holders of Units will receive a than one year (to the extent they do not
Schedule K-1 tax form containing detailed tax exceed the Company's actual net capital gain
information for inclusion in preparing their for the taxable year). See "Federal Income
federal income tax returns. Tax Consequences -- Taxation of Taxable U.S.
Shareholders of the Company Generally --
Holders of Units are required, in some cases, Distributions by the Company." For the
to file state income tax returns and/or pay Company's taxable years commencing on or
state income taxes in the states in which the after January 1, 1998, the Company may elect
Operating Partnership owns property, even if to require its shareholders to include the
they are not residents of those states. Company's undistributed net capital gains in
their income. If the Company so elects,
shareholders would include their
proportionate share of such gains in their
income and be deemed to have paid their share
of the tax paid by the Company on such gains.
Each year, Shareholders will receive Form
1099 used by corporations to report dividends
paid to their shareholders.
Shareholders who are individuals generally
are not required to file state income tax
returns and/or pay state income taxes outside
of their state of residence with respect to
the Company's operations and distributions.
The Company may be required to pay state
income taxes in certain states.
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain federal income tax
considerations relating to the Company and to the acquisition, ownership and
disposition of the Common Shares. The following description is for general
information only, is not exhaustive of all possible tax considerations, and is
not intended to be and should not be construed as tax advice. For example, this
summary does not give a detailed discussion of any state, local or foreign tax
consequences. In addition, this discussion is intended to address only those
federal income tax considerations that are generally applicable for all
shareholders in the Company. It does not discuss all aspects of federal income
taxation that might be relevant to a specific shareholder in light of its
particular investment or tax circumstances. The description does not purport to
deal with aspects of taxation that may be relevant to shareholders subject to
special treatment under the federal income tax laws, including, without
limitation, insurance companies, financial institutions or broker-dealers,
tax-exempt organizations (except to the extent discussed under the subheading
"-- Taxation of Tax-Exempt Shareholders of the Company") or foreign corporations
and persons who are not citizens or residents of the United States (except to
the extent discussed under the subheading "-- Taxation of Non-U.S. Shareholders
of the Company").
The information in this section is based on the Code, current, temporary
and proposed Treasury Regulations thereunder, the legislative history of the
Code, current administrative interpretations and practices of the IRS (including
its practices and policies as endorsed in private letter rulings, which are not
binding on the IRS except with respect to the taxpayer that receives such a
ruling), and court decisions, all as of the date hereof. No assurance can be
given that future legislation, Treasury Regulations, administrative
interpretations and court decisions will not significantly change current law or
adversely affect existing interpretations of current law. Any such change could
apply retroactively to transactions preceding the date of the change. Except as
described below in "-- Requirements for Qualification as a REIT -- Income Tests
Applicable to REITs," the Company has not requested and does not plan to request
any rulings from the IRS concerning the tax treatment of the Company or the
Operating Partnership. Thus no assurance can be provided that the statements set
forth herein (which do not bind the IRS or the courts) will not be challenged by
the IRS or will be sustained by a court if so challenged.
As used in this section, the term "the Company" refers solely to Equity
Office Properties Trust.
EACH PROSPECTIVE SHAREHOLDER IS URGED TO CONSULT WITH ITS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE ACQUISITION, OWNERSHIP AND
SALE OF PIERS IN LIGHT OF ITS SPECIFIC TAX AND INVESTMENT SITUATIONS AND THE
SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS APPLICABLE TO IT.
TAXATION OF THE COMPANY AS A REIT -- GENERAL
The Company plans to make an election to be taxed as a REIT under Sections
856 through 860 of the Code, commencing with its taxable year ended December 31,
1997, when it files its federal income tax return for 1997. The Company believes
that, commencing with its formation on July 11, 1997, it has been organized and
has operated in such a manner so as to qualify for taxation as a REIT under the
Code.
Hogan & Hartson L.L.P., special tax counsel to the Company in connection
with the Offering, will deliver an opinion to the effect that the Company is
organized in conformity with the requirements for qualification and taxation as
a REIT under the Code, and that the Company's proposed method of operation will
enable it to continue to meet the requirements for qualification and taxation as
a REIT. This opinion will be conditioned upon certain representations made by
the Company as to factual matters relating to the organization and operation of
the Company, the Operating Partnership, the ZML Opportunity Partnerships (and
the previous organization and operation of the ZML REITs, which were combined to
form the Company, and Beacon, which was merged into the Company) and the various
entities (corporations, partnerships and limited liability companies) in which
the Company owns a direct or indirect interest, as well as Tenant Services Corp.
In addition, this opinion will be based upon the factual representations of the
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101
Company concerning its business and properties as set forth in this Offering
Memorandum and the timely completion of all actions described in this Offering
Memorandum (including the Company making an election to be taxed as a REIT with
its federal income tax return for the year ended December 31, 1997). The Company
intends to continue to operate in a manner so as to qualify as a REIT in the
future, but no assurance can be given that the Company will qualify or remain
qualified as a REIT. Moreover, such qualification and taxation as a REIT depends
upon the Company's ability to meet on a ongoing basis (through actual annual
operating results, distribution levels and diversity of share ownership) the
various qualification tests imposed under the Code discussed below, the results
of which will not be reviewed by Hogan & Hartson L.L.P.. Accordingly, no
assurance can be given that the actual results of the Company's operations for
any particular taxable year will satisfy such requirements. See "-- Requirements
for Qualification as a REIT -- Failure of the Company to Qualify as a REIT."
The sections of the Code and the corresponding Treasury Regulations
relating to qualification and operation as a REIT are highly technical and
complex. The following discussion sets forth certain material aspects of the
rules that govern the federal income tax treatment of a REIT and its
shareholders. The discussion is qualified in its entirety by the applicable Code
provisions, Treasury Regulations and administrative and judicial interpretations
thereof, all of which are subject to change prospectively or retroactively.
So long as the Company qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on its net income that is
distributed currently to shareholders. This treatment substantially eliminates
the "double taxation" (i.e., taxation at both the corporate and shareholder
levels) that generally results from investment in a regular corporation. The
Company will, however, be subject to federal income tax in the following
circumstances. First, the Company will be taxed at regular corporate rates on
any undistributed REIT taxable income, including undistributed net capital
gains. Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on any items of tax preference. Third, if the Company
has (i) net income from the sale or other disposition of certain "foreclosure
property" that is held primarily for sale to customers in the ordinary course of
business or (ii) other nonqualifying income from foreclosure property, it will
be subject to tax at the highest corporate rate on such income. Fourth, if the
Company has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property (other than foreclosure
property) held primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax. Fifth, if the Company
should fail to satisfy the 75% gross income test or the 95% gross income test
(discussed below), and nonetheless should maintain its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of either the amount by which
it fails the 75% gross income test or the amount by which it fails the 95% gross
income test. Sixth, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, it would be subject to a 4%
excise tax on the excess of such required distribution over the amounts actually
distributed. Seventh, if the Company acquires or has acquired any asset from a C
corporation (i.e., a corporation generally subject to full corporate-level tax)
in a transaction in which the basis of the asset in the acquiror's hands is
determined by reference to the basis of the asset (or any other asset) in the
hands of the C corporation and the acquiror recognizes gain on the disposition
of such asset during the 10 year period beginning on the date on which such
asset was acquired by it, then to the extent of such asset's "Built-In Gain"
(i.e., the excess of (a) the fair market value of such asset at the time of the
acquisition by the Company over (b) the adjusted basis in such asset, determined
as of the time of such acquisition), such gain will be subject to tax at the
highest regular corporate rate applicable, pursuant to anticipated Treasury
Regulations that have not yet been promulgated.
The results described above with respect to the recognition of Built-In
Gain assume that the Company will make an election pursuant to IRS Notice 88-19
with respect to any such acquisition. In this regard, the Built-In Gain rules
would apply with respect to any assets acquired by the Company from a ZML REIT
or Beacon if either a ZML REIT or Beacon had failed to qualify, for any reason,
as a REIT throughout the duration of its existence. If the Company were not to
make an election pursuant to IRS Notice 88-19 (or that election no longer were
available because of a change in applicable law) and a ZML REIT or Beacon failed
to
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qualify as a REIT at the time of its merger with the Company, the entity that
failed to so qualify would recognize taxable gain on such merger under the
Built-In Gain rules (and the Company would be liable for the tax thereon),
notwithstanding that such merger otherwise qualified as a "tax-free
reorganization." The Company believes that each of the ZML REITs and Beacon
qualified as a REIT at the time of its merger into the Company, but the Company
intends to make a protective election under Notice 88-19 with respect to the
merger of each of the ZML REITs and Beacon in order to avoid the adverse
consequences that otherwise could result.
REQUIREMENTS FOR QUALIFICATION AS A REIT
GENERAL. The Code defines a REIT as a corporation, trust or association (i)
that is managed by one or more trustees or directors; (ii) the beneficial
ownership of which is evidenced by transferable shares, or by transferable
certificates of beneficial interest; (iii) that would be taxable as a domestic
corporation, but for Sections 856 through 860 of the Code; (iv) that is neither
a financial institution nor an insurance company subject to certain provisions
of the Code; (v) the beneficial ownership of which is held by 100 or more
persons; (vi) not more than 50% in value of the outstanding shares of which is
owned directly or indirectly by five or fewer individuals (as defined in the
Code to include certain entities) during the last half of each taxable year (the
"5/50 Rule"); (vii) that makes an election to be a REIT (or has made such
election for a previous taxable year which has not been revoked or terminated)
and satisfies all relevant filing and other administrative requirements
established by the IRS that must be met in order to elect and maintain REIT
status; (viii) that uses a calendar year for federal income tax purposes and
complies with the recordkeeping requirements of the Code and Treasury
Regulations promulgated thereunder; and (ix) that meets certain other tests,
described below, regarding the nature of its income and assets. The Code
provides that conditions (i) to (iv) inclusive, must be met during the entire
taxable year and that condition (v) must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a taxable year of
less than 12 months. For purposes of determining stock ownership under the 5/50
Rule, a supplemental unemployment compensation benefits plan, a private
foundation or a portion of a trust permanently set aside or used exclusively for
charitable purposes generally is considered an individual. However, a trust that
is a qualified trust under Code Section 401(a) generally is not considered an
individual and beneficiaries of such trust are treated as holding shares of a
REIT in proportion to their actuarial interests in such trust for purposes of
the 5/50 Rule.
The Company believes that it has issued sufficient Common Shares with
sufficient diversity of ownership to allow it to satisfy the conditions
described in clauses (v) and (vi) above. In addition, the Declaration of Trust
contains restrictions regarding the transfer of Common Shares and Preferred
Shares that are intended to assist the Company in continuing to satisfy the
share ownership requirements described in clauses (v) and (vi) above. Such
ownership and transfer restrictions are described in "Shares of Beneficial
Interest -- Restrictions on Ownership and Transfer." These restrictions,
however, may not ensure that the Company will, in all cases, be able to satisfy
the share ownership requirements described above. If the Company fails to
satisfy such share ownership requirements, the Company's status as a REIT will
terminate. See "--Requirements for Qualification as a REIT."
In connection with the 5/50 Rule, a REIT is required to send annual letters
to its shareholders requesting information regarding the actual ownership of its
shares. Pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act"), for the
Company's taxable years beginning on or after January 1, 1998, if the Company
complies with the annual letters requirement and it does not know or, exercising
reasonable diligence, would not have known of its failure to meet the 5/50 Rule,
then it will be treated as having met the 5/50 Rule.
In order to qualify as a REIT, the Company cannot have at the end of any
taxable year any undistributed "earnings and profits" that are attributable to a
"C corporation" taxable year. The Company itself was a newly formed entity in
1997 and will make a REIT election for its first taxable year ended December 31,
1997. Hence, the Company itself will not have any undistributed "C corporation
earnings and profits." However, the Company succeeded to various tax attributes
of the ZML REITs and Beacon, including any undistributed "earnings and profits."
If each ZML REIT and Beacon qualified as a REIT throughout the duration of its
existence, then any undistributed "earnings and profits" to which the Company
succeeded will not be
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"C corporation earnings and profits" and the Company will satisfy this
requirement. If, however, one or more of the ZML REITs or Beacon failed to
qualify as a REIT throughout the duration of its existence, then it might have
had undistributed "C corporation earnings and profits" that, if not distributed
by the Company prior to the end of its first taxable year, could prevent the
Company from qualifying as a REIT. The Company believes that each ZML REIT and
Beacon qualified as a REIT throughout the duration of its existence and that, in
any event, neither a ZML REIT nor Beacon should be considered to have had any
undistributed "C corporation earnings and profits" at the time of its merger
into the Company. There can be no assurance, however, that the IRS would not
contend otherwise on a subsequent audit of one or more of the ZML REITs or
Beacon. Recently finalized Treasury Regulations provide for certain "deficiency
distribution" procedures. Although the application of these Treasury Regulations
is not entirely clear, it appears that the Company may be able to use such
"deficiency distribution" procedures to distribute any "C corporation earnings
and profits" deemed to have been acquired from a ZML REIT or Beacon. In order to
use this procedure, the Company would have to make an additional distribution to
shareholders (in addition to distributions made for purposes of satisfying the
normal REIT distribution requirements), within 90 days of the IRS determination.
In addition, the Company would have to pay to the IRS an interest charge on 50%
of the acquired "C corporation earnings and profits" that were not distributed
prior to the end of the Company's taxable year ended December 31, 1997. There
can be no assurance, however, that the IRS would not take the position either
that the procedure is not available at all (in which case the Company would fail
to qualify as a REIT) or, alternatively, that even if the procedure is
available, the Company cannot qualify as a REIT for its taxable year ended
December 31, 1997, but it could qualify as a REIT for subsequent years.
Finally, if the Company were considered a "successor" to any ZML REIT and
such ZML REIT were determined not to have qualified as a REIT, the Company would
not be eligible to elect REIT status for up to four years after the year in
which such ZML REIT first failed to qualify as a REIT. The Company would be
considered a "successor" for these purposes, however, only if (i) persons who
own more than 50% of the Common Shares at any time during the Company's taxable
year ended December 31, 1997, owned, directly or indirectly, 50% or more in
value of the shares of such ZML REIT during the first year in which it ceased to
qualify as a REIT and (ii) a significant portion of the Company's assets were
assets owned by such ZML REIT. Hogan & Hartson L.L.P.'s opinion as to the
qualification of the Company as a REIT under the Code is not based upon, or
limited by, an assumption or representation that the ZML REITs have qualified as
REITs for federal income tax purposes.
CLOSING AGREEMENTS WITH THE IRS WITH RESPECT TO ZML REITS I AND II. In
December 1996, the IRS was advised that ZML REIT I and ZML REIT II each had
failed to comply with a technical requirement of a provision of the Code which
must be satisfied for a company to qualify as a REIT for federal income tax
purposes. More specifically, in connection with structuring certain real estate
investments made by ZML Opportunity Partnership I and ZML Opportunity
Partnership II during the period 1991-1993, all of the voting stock of certain
corporations formed to serve as general partners of limited partnership
subsidiaries of such ZML Opportunity Partnerships was issued to such ZML
Opportunity Partnerships. Based upon a Treasury Regulation interpreting the
statutory provision limiting permitted REIT investments, a portion of such ZML
Opportunity Partnerships' ownership of corporate voting stock would be imputed
to ZML REIT I and ZML REIT II and, in so doing, would cause ZML REIT I and ZML
REIT II to violate the prohibition on a REIT owning more than 10% of the voting
stock of a corporation other than a qualified REIT subsidiary.
Pursuant to closing agreements, the IRS agreed that neither ZML REIT I nor
ZML REIT II would be disqualified as a REIT as a result of the technical
violations disclosed to the IRS. In connection with the agreements, the ZML
Partners of ZML Opportunity Partnership I and ZML Opportunity Partnership II
made certain payments to the IRS. As a result of the closing agreements, the
technical violations discussed above have caused no adverse impact on either the
REIT status of ZML REIT I and ZML REIT II for the tax years at issue, or the
Company's subsequent ability to qualify as a REIT.
QUALIFIED REIT SUBSIDIARIES. Section 856(i) of the Code provides that a
corporation that is a "qualified REIT subsidiary" shall not be treated as a
separate corporation, and all assets, liabilities and items of income, deduction
and credit of a "qualified REIT subsidiary" shall be treated as assets,
liabilities and items of income, deduction and credit of the REIT. Pursuant to
the 1997 Act, for the Company's taxable years
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beginning on or after January 1, 1998, a "qualified REIT subsidiary" is a
corporation all of the capital stock of which is owned by the REIT. Accordingly,
the Company will have the ability, if it so chooses, to acquire an existing
corporation that will qualify as a "qualified REIT subsidiary," as opposed to
having to form such a subsidiary. The Company currently has one "qualified REIT
subsidiary." The Company may form or acquire additional "qualified REIT
subsidiaries" in the future. In applying the income and asset tests described
below, a "qualified REIT subsidiary" will be ignored and all assets, liabilities
and items of income, deduction and credit of such "qualified REIT subsidiary"
will be treated as assets, liabilities and items of income, deduction and credit
of the Company. A "qualified REIT subsidiary" of the Company will not be subject
to federal corporate income taxation, although it may be subject to state and
local taxation in certain states.
OWNERSHIP OF PARTNERSHIP INTERESTS BY A REIT. In the case of a REIT which
is a partner in a partnership, Treasury Regulations provide that the REIT will
be deemed to own its proportionate share of the assets of the partnership and
will be deemed to be entitled to the income of the partnership attributable to
such share. In addition, the character of the assets and gross income of the
partnership retain the same character in the hands of the REIT for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
asset tests. Thus, the Company's proportionate share of the assets and items of
income of the Operating Partnership (including the Operating Partnership's share
of such items of any subsidiaries of the Operating Partnership that are
partnerships or LLCs) will be treated as assets and items of income of the
Company for purposes of applying the requirements described herein. The Company
has direct control of the Operating Partnership, each of the ZML Opportunity
Partnerships, and each partnership or LLC subsidiary of the Operating
Partnership and intends to operate them in a manner that is consistent with the
requirements for qualification of the Company as a REIT.
INCOME TESTS APPLICABLE TO REITS. In order to qualify as a REIT, the
Company must satisfy two gross income tests. First, at least 75% of the
Company's gross income (excluding gross income from prohibited transactions) for
such taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property," gains on the disposition of real estate, dividends paid by
another REIT and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from "prohibited transactions") for such taxable year
must be derived from such real property investments, dividends, interest,
certain payments under hedging instruments and gain from the sale or disposition
of stock, securities and certain hedging instruments (or from any combination of
the foregoing).
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the REIT, or
an actual or constructive owner of 10% or more of the REIT, actually or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property."
Generally, in order for rents received by the REIT qualify as rents "from
real property" for the purpose of satisfying the gross income tests, the REIT
may not operate or manage the property or furnish or render services to the
tenants of such property other than through an independent contractor from whom
the REIT derives no revenue. However, a REIT may provide de minimis services
directly to the tenants of a property, provided, however, that if (i) the REIT
operates or manages a property or furnishes or renders services to the tenants
at the property other than through an independent contractor from whom the REIT
derives no revenue (not including services "usually or customarily rendered" in
connection with the rental of real property and not otherwise considered
"rendered to the occupant"), and (ii) the amount received for so doing (the
"Impermissible Tenant Service Income") exceeds one percent of the total amount
received by the REIT with respect to the property, then no amount received by
the REIT with respect to the property will qualify as "rents from real
property." If the Impermissible Tenant Service Income is one percent or less of
the total
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amount received by the REIT with respect to the property, then only the
Impermissible Tenant Service Income will not qualify as "rents from real
property." A REIT's Impermissible Tenant Service Income will not be less than
150% of the REIT's direct cost in generating such income. To the extent that
services (other than those customarily furnished or rendered in connection with
the rental of real property) are rendered to the tenants of the property by an
independent contractor, the cost of the services must be borne by the
independent contractor. In this regard the Company has engaged Tenant Services
Corp. (owned by affiliates of the Equity Group Owners), which has been
structured to qualify as an independent contractor, to perform certain services
that the Company believes are customarily offered in institutional quality
office properties that might not be permissible for a REIT to perform directly.
In any event, for all taxable years, the REIT may directly perform services
that are "usually or customarily rendered" in connection with the rental of
space for occupancy only and are not otherwise considered "rendered to the
occupant" of the property. The Company, through the Operating Partnership, will
provide certain services to the Properties. Based upon the Company's experience
in the office rental markets in which the Properties are located, the Company
believes that all services provided to tenants by the Company either (i) are
"usually or customarily rendered" in connection with the rental of office space
for occupancy or (ii) will not result in Impermissible Tenant Service Income in
excess of the de minimus threshold described above, although there can be no
assurance that the IRS will not contend otherwise with respect to either of
these positions.
The Company does not and will not (i) charge rent for any property that is
based in whole or in part on the income or profits of any person (except by
reason of being based on a percentage of receipts or sales, as described above,
or unless the Company's Board of Trustees determines, in its discretion, that
the rent received from a particular tenant under such an arrangement is not
material and will not jeopardize the Company's status as a REIT), (ii) rent any
property to a Related Party Tenant (unless the Board determines, in its
discretion, that the rent received from such Related Party Tenant is not
material and will not jeopardize the Company's status as a REIT), (iii) derive
rental income attributable to personal property (other than personal property
leased in connection with the lease of real property, the amount of which is
less than 15% of the total rent received under the lease), or (iv) perform
services considered to be rendered to the occupant of the property, other than
through an independent contractor from whom the Company derives no revenue
(except to the extent that the Impermissible Tenant Service Income would not
exceed the 1% threshold described above or the Board of Trustees otherwise
determines, in its discretion, that the nonqualifying income resulting therefrom
is not material and will not jeopardize the Company's status as a REIT).
The Company has requested a ruling from the IRS to the effect that if the
Operating Partnership enters into agreements with third-party service companies
(the "Service Companies") to operate attached parking facilities, under which
agreements the Operating Partnership will bear the expenses incurred in
operating the parking facilities, such agreements will not affect the Company's
ability to satisfy the 95% and 75% gross income tests. Parking garages that are
located within a building, or are adjacent to, or are part of the same complex
as, a building generally are operated by Service Companies pursuant to parking
management agreements under which the Service Companies receive a management fee
which may be a fixed dollar amount, or a percentage of gross or net revenues.
The Company believes that the income received pursuant to such agreements should
qualify as "rents from real property" for the purposes of the 95% and 75% gross
income tests and, in this regard, the Company has been advised informally by the
IRS that its request for a ruling to this effect will be granted.
All but one of the stand-alone garages held by the Operating Partnership
are operated by third-party Service Companies under lease agreements whereby the
Operating Partnership and the Service Company share the gross receipts from the
parking operation or the Operating Partnership receives fixed rental payments
from the Service Company and bears none of the operational expenses. The income
received by the Operating Partnership from the stand-alone garages under such
agreements should qualify as "rents from real properties" for the purpose of the
95% and 75% gross income tests. One stand-alone garage agreement provides for
the receipt of a percentage of net receipts by the Operating Partnership and,
therefore, results in an insignificant amount of non-qualifying gross income
relative to the total gross income of the Company. The Company
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believes that this income received under this agreement should not affect its
ability to satisfy the 95% and 75% gross income tests in future taxable years.
"Interest" generally will not qualify under the 75% or 95% gross income
tests if it depends in whole or in part on the income or profits of any person.
However, interest will not fail to so qualify solely by reason of being based on
a fixed percentage or percentages of receipts or sales. The Company does not
expect to derive significant amounts of interest that will not qualify under the
75% and 95% gross income tests. In this regard, the Company currently holds,
through Beacon Management Company and Beacon Construction Company, options to
acquire loans secured by the Rowes Wharf property. Such loans provide for
payments of interest based upon cash flow. These loans could not be held
directly by the Company without jeopardizing their qualification as a REIT and
will continue to be held in a taxable "C" corporation.
EOP Management Company and Beacon Management Company conduct third-party
management services with respect to properties not wholly owned by the Operating
Partnership; Beacon Design Company provides interior space design services with
respect to properties not wholly owned by the Operating Partnership; and EOP
Office Company, through its interest in WRALP, provides development services
with respect to properties that are not wholly owned by the Operating
Partnership (collectively, together with Beacon Construction Company (which is
expected to cease operations upon completion of its existing contracts), the
"Noncontrolled Subsidiaries"). The Operating Partnership owns 100% of the
non-voting stock of each of the Noncontrolled Subsidiaries but none of the
voting stock of any of the Noncontrolled Subsidiaries. Each of the Noncontrolled
Subsidiaries is taxable as a regular "C" corporation. The Company's share of any
dividends received from the Noncontrolled Subsidiaries should qualify for the
purposes of the 95% gross income test, but not for purposes of the 75% gross
income test. The Company does not anticipate that it will receive sufficient
dividends from the Noncontrolled Subsidiaries to cause it to exceed the limit on
non-qualifying income under the 75% gross income test.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if (i) the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect and (ii) the
Company attaches a schedule of the sources of its income to its federal income
tax return and any incorrect information on such schedule is not due to fraud
with intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. For example, if the Company fails to satisfy the gross income tests
because non-qualifying income that the Company intentionally incurs exceeds the
limits on such income, the IRS could conclude that the Company's failure to
satisfy the tests was not due to reasonable cause. If these relief provisions
are inapplicable to a particular set of circumstances involving the Company, the
Company will fail to qualify as a REIT. As discussed above in "-- Taxation of
the Company as a REIT -- General," even if these relief provisions apply, a tax
would be imposed with respect to the excess net income. No similar relief
provision is available if the Company failed the 30% income test for its taxable
year ended December 31, 1997, pursuant to which, for the taxable year ended
December 31, 1997, short-term gain from the sale or other disposition of stock
or securities, gain from prohibited transactions and gain on the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from "prohibited
transactions"). Accordingly, if the 30% gross income test was not met for such
taxable year, the Company will fail to qualify as a REIT. The 30% gross income
test was repealed by the 1997 Act for taxable years beginning on or after
January 1, 1998. The Company believes and has represented that the 30% gross
income test was met for its taxable year ended December 31, 1997.
Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the ordinary
course of business (including the Company's share of any such gain realized by
the Operating Partnership) will be treated as income from a "prohibited
transaction" that is subject to a 100% penalty tax. Under existing law, whether
property is held as inventory or primarily for sale to customers in the ordinary
course of a trade or business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction. The
Operating Partnership intends to hold the Properties for investment with a view
to long-term appreciation, to engage in the business of acquiring,
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developing, owning, and operating the Properties (and other properties) and to
make such occasional sales of the Properties as are consistent with the
Operating Partnership's investment objectives. There can be no assurance,
however, that the IRS might not contend that one or more of such sales is
subject to the 100% penalty tax.
ASSET TESTS APPLICABLE TO REITS. The Company, at the close of each quarter
of its taxable year, must also satisfy three tests relating to the nature of its
assets. First, at least 75% of the value of the Company's total assets must be
represented by real estate assets including (i) its allocable share of real
estate assets (including stock of a REIT) held by partnerships in which the
Company owns an interest (including its allocable share of the assets held
directly or indirectly through the Operating Partnership) and (ii) stock or debt
instruments held for not more than one year purchased with the proceeds of a
stock offering or long-term (at least five years) debt offering of the Company,
cash, cash items and government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in the
75% asset class. Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets, and, except for "qualified REIT
subsidiaries," the Company may not own more than 10% of any one issuer's
outstanding voting securities.
The Operating Partnership does not own any of the voting stock of any of
the Noncontrolled Subsidiaries but it does own 100% of the nonvoting stock of
each of the Noncontrolled Subsidiaries. The Operating Partnership also may own
nonvoting stock, representing substantially all of the equity, in other
corporate entities that serve as partners or members in the various entities
that hold title to the Properties. The Company has represented, however, that
the Operating Partnership does not and will not own more than 10% of the voting
securities of any entity that would be treated as a corporation for federal
income tax purposes (other than stock of REITs, which are not taken into account
for purposes of this limitation). In addition, the Company and its senior
management believe, and the Company has represented, that the Company's pro rata
share of the value of the securities of the Noncontrolled Subsidiaries does not
exceed 5% of the total value of the Company's assets. There can be no assurance,
however, that the IRS might not contend either that the value of the securities
of the Noncontrolled Subsidiaries held by the Company (through the ZML
Opportunity Partnerships and the Operating Partnership) exceeds the 5% value
limitation or that nonvoting stock of the Noncontrolled Subsidiaries or another
corporate entity owned by the Operating Partnership should be considered "voting
stock" for this purpose.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter (including, for example, as a
result of the Company increasing its interest in the Operating Partnership as a
result of a merger, the exercise of Unit Redemption Rights or an additional
capital contribution of proceeds of an offering of shares of beneficial interest
by the Company), the failure can be cured by disposition of sufficient
nonqualifying assets within 30 days after the close of that quarter. The Company
intends to maintain adequate records of the value of its assets to ensure
compliance with the asset tests and to take such other actions within 30 days
after the close of any quarter as may be required to cure any noncompliance. If
the Company fails to cure noncompliance with the asset tests within such time
period, the Company would cease to qualify as a REIT.
ADMINISTRATION'S PROPOSED CHANGES TO REIT ASSET TEST. The Administration's
budget proposal which was announced on February 2, 1998 includes a proposal to
amend the 10% voting securities test. The proposal would require a REIT to own
no more than 10% of the vote or value of all classes of stock of any corporation
(except for qualified REIT subsidiaries or corporations that qualify as REITs).
Corporations (referred to herein as "subsidiary corporations") existing prior to
the effective date of the proposal generally would be "grandfathered"; i.e., the
REIT would be subject to the existing 10% voting securities test (described
above) with respect to grandfathered subsidiary corporations. However, such
grandfathered status would terminate with respect to a subsidiary corporation if
the subsidiary corporation engaged in a new trade or business or acquired
substantial new assets.
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Because the Company owns 100% of the nonvoting stock of the Noncontrolled
Subsidiaries, the Company would not satisfy the proposed 10% value limitation
with respect to those subsidiary corporations. However, the Noncontrolled
Subsidiaries should qualify as grandfathered subsidiary corporations as the
proposal is currently drafted. If the Noncontrolled Subsidiaries were to engage
in new trades or businesses or were to acquire substantial new assets, or if the
Company were to make capital contributions to any of those corporations, then
their grandfathered status would be terminated and the Company would fail to
qualify as a REIT. Moreover, the Company would not be able to own more than 10%
of the vote or value of any subsidiary corporation formed or acquired after the
effective date of the proposal. Thus, the proposal, if enacted, would materially
impede the ability of the Company to engage in new third-party management or
similar activities.
A second proposed provision would tax immediately the built-in gains of C
corporations merging into REITs in tax-free reorganizations. Under current law,
C corporations can defer a portion of this tax. Accordingly, if enacted as
currently drafted, this provision could impede the Company's ability to acquire
additional properties through mergers with C corporations.
ANNUAL DISTRIBUTION REQUIREMENTS APPLICABLE TO REITS. The Company, in order
to qualify as a REIT, is required to distribute dividends (other than capital
gain dividends) to its shareholders in an amount at least equal to (i) the sum
of (a) 95% of the Company's "REIT taxable income" (computed without regard to
the dividends paid deduction and the Company's net capital gain) and (b) 95% of
the net income (after tax), if any, from foreclosure property, minus (ii) the
sum of certain items of noncash income. In addition, if the Company disposes of
any Built-In Gain Asset during its Recognition Period, the Company will be
required, pursuant to Treasury Regulations which have not yet been promulgated,
to distribute at least 95% of the Built-In Gain (after tax), if any, recognized
on the disposition of such asset. See "-- General" above for a discussion of
"Built-In Gain Assets." Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular dividend payment date after such declaration.
To the extent that the Company does not distribute all of its net capital
gain or distributes at least 95%, but less than 100%, of its "REIT taxable
income," as adjusted, it will be subject to tax thereon at regular ordinary and
capital gain corporate tax rates. The Company may elect to require the
shareholders to include the Company's undistributed net capital gains in their
income by designating, in a written notice to shareholders, those amounts as
undistributed capital gains in respect of its shareholders' shares. If the
Company makes such an election, the shareholders will (i) include in their
income as capital gains their proportionate share of such undistributed capital
gains and (ii) be deemed to have paid their proportionate share of the tax paid
by the Company on such undistributed capital gains and thereby receive a credit
or refund for such amount. A shareholder will increase the basis in its Common
Shares by the difference between the amount of capital gain included in its
income and the amount of the tax that the Company is deemed to have paid on the
shareholder's behalf. The earnings and profits of the Company will be adjusted
appropriately. For a more detailed description of the tax consequences to a
shareholder of such a designation, see "-- Taxation of Taxable U.S. Shareholders
of the Company Generally."
In addition, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a 4% excise
tax on the excess of such required distribution over the sum of amounts actually
distributed during the calendar year by the REIT and the amount, if any, on
which the REIT paid income tax for such year.
The Company intends to make timely distributions sufficient to satisfy its
annual distribution requirements. In this regard, the Operating Partnership
Agreement authorizes the Company, as managing general partner, to take such
steps as may be necessary to cause the Operating Partnership to distribute to
its partners an amount sufficient to permit the Company to meet these
distribution requirements. It is expected that the Company's REIT taxable income
will be less than its cash flow due to the allowance of depreciation and other
noncash charges in computing REIT taxable income. Accordingly, the Company
anticipates that it will generally have sufficient cash or liquid assets to
enable it to satisfy the distribution requirements described above. It is
possible, however, that the Company, from time to time, may not have sufficient
cash or other
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liquid assets to meet these distribution requirements due to timing differences
between (i) the actual receipt of income and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of such expenses in
arriving at taxable income of the Company. If such timing differences occur, in
order to meet the distribution requirements, the Company may find it necessary
to arrange for short-term, or possibly long-term, borrowings or to pay dividends
in the form of taxable stock dividends.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Company will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
RECORDKEEPING REQUIREMENTS. Pursuant to applicable Treasury Regulations,
the Company must comply with certain recordkeeping requirements in order to
qualify for taxation as a REIT.
FAILURE OF THE COMPANY TO QUALIFY AS A REIT. If the Company fails to
qualify for taxation as a REIT in any taxable year, and if the relief provisions
do not apply, the Company will be subject to tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates.
Distributions to shareholders in any year in which the Company fails to qualify
will not be deductible by the Company nor will they be required to be made. As a
result, the Company's failure to qualify as a REIT would significantly reduce
the cash available for distribution by the Company to its shareholders. In
addition, if the Company fails to qualify as a REIT, all distributions to
shareholders will be taxable as ordinary income, to the extent of the Company's
current and accumulated earnings and profits, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company also will be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS OF THE COMPANY GENERALLY
As used herein, the term "U.S. Shareholder" means a holder of Common Shares
or Preferred Shares who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity treated as a corporation or partnership for federal income tax
purposes created or organized in or under the laws of the United States or of
any political subdivision thereof, (iii) is an estate the income of which is
subject to United States federal income taxation regardless of its source or
(iv) a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust.
DISTRIBUTIONS BY THE COMPANY. As long as the Company qualifies as a REIT,
distributions made by the Company out of its current or accumulated earnings and
profits (and not designated as capital gain dividends) will constitute dividends
taxable to its taxable U.S. Shareholders as ordinary income. Such distributions
will not be eligible for the dividends received deduction in the case of U.S.
Shareholders that are corporations. To the extent that the Company makes
distributions (not designated as capital gain dividends) in excess of its
current and accumulated earnings and profits, such distributions will be treated
first as a tax-free return of capital to each U.S. Shareholder, reducing the
adjusted basis which such U.S. Shareholder has in its shares for tax purposes by
the amount of such distribution (but not below zero), with distributions in
excess of a U.S. Shareholder's adjusted basis in its shares taxable as capital
gains (provided that the shares have been held as a capital asset). Dividends
declared by the Company in October, November, or December of any year and
payable to an shareholder of record on a specified date in any such month shall
be treated as both paid by the Company and received by the shareholder on
December 31 of such year, provided that the dividend is actually paid by the
Company on or before January 31 of the following calendar year.
Distributions made by the Company that are properly designated by the
Company as capital gain dividends will be taxable to taxable U.S. Shareholders,
who are individuals, estates or trusts, as gain from the sale or exchange of a
capital asset held for more than one year (to the extent that they do not exceed
the Company's actual net capital gain for the taxable year) without regard to
the period for which a U.S.
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Shareholder has held its shares. In the event that the Company designates any
portion of a dividend as a "capital gain dividend," a U.S. Shareholder's share
of such capital gain dividend would be an amount which bears the same ratio to
the total amount of dividends paid to such U.S. Shareholder for the year as the
aggregate amount designated as a capital gain dividend bears to the aggregate
amount of all dividends paid on all classes of shares for the year.
On November 10, 1997, the IRS issued IRS Notice 97-64, which provides
generally that the Company may classify portions of its designated capital gain
dividend as (i) a 20% rate gain distribution (which would be taxed as long-term
capital gain in the 20% group), (ii) an unrecaptured Section 1250 gain
distribution (which would be taxed as long-term capital gain in the 25% group),
or (iii) a 28% rate gain distribution (which would be taxed as long-term capital
gain in the 28% group). (If no designation is made, the entire designated
capital gain divided will be treated as a 28% rate gain distribution. For a
discussion of the 20%, 25% and 28% tax rates applicable to individuals, see
"-- 1997 Act Changes to Capital Gain Taxation" below.) IRS Notice 97-64 provides
that a REIT must determine the maximum amounts that it may designate as 20% and
25% rate capital gain dividends by performing the computation required by the
Code as if the REIT were an individual whose ordinary income were subject to a
marginal tax rate of at least 28%. The Notice further provides that designations
made by the REIT only will be effective to the extent that they comply with
Revenue Ruling 89-91, which requires that distributions made to different
classes of shares be composed proportionately of dividends of a particular type.
Distributions that are properly designated by the Company as capital gain
dividends will be taxable to taxable corporate U.S. Shareholders as long-term
capital gain (to the extent that capital gains dividends do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which such corporate U.S. Shareholder has held its shares. Such
corporate U.S. Shareholders may, however, be required to treat up to 20% of
certain capital gain dividends as ordinary income.
U.S. Shareholders may not include in their individual income tax returns
any net operating losses or capital losses of the Company. Instead, such losses
would be carried over by the Company for potential offset against future income
(subject to certain limitations). Distributions made by the Company and gain
arising from the sale or exchange by a U.S. Shareholder of shares will not be
treated as passive activity income, and, as a result, U.S. Shareholders
generally will not be able to apply any "passive losses" against such income or
gain. In addition, taxable distributions from the Company generally will be
treated as investment income for purposes of the investment interest
limitations. Capital gain dividends and capital gains from the disposition of
shares (including distributions treated as such), however, will be treated as
investment income only if the U.S. Shareholder so elects, in which case such
capital gains will be taxed at ordinary income rates. The Company will notify
shareholders after the close of the Company's taxable year as to the portions
distributions attributable to that year that constitute ordinary income, return
of capital and capital gain.
The Company may designate (by written notice to shareholders) its retained
net capital gain (i.e., net capital gain that is not actually distributed as
capital gain dividends, as described above) as undistributed capital gains in
respect of shareholders' shares. Pursuant to such a designation by the Company
with respect to retained net capital gains, a U.S. Shareholder would include its
proportionate share of such gain in income as capital gain, and would be treated
as having paid its proportionate share of the tax paid by the REIT with respect
to the gain. The U.S. Shareholder's basis in its shares would be increased by
its share of such gain and decreased by its share of such tax. With respect to
such capital gain of a U.S. Shareholder that is an individual or an estate or
trust, the IRS, as described below in this section, has authority to issue
regulations that could apply the special tax rate applicable generally to the
portion of the long-term capital gains of an individual or an estate or trust
attributable to deductions for depreciation taken with respect to depreciable
real property.
SALES OF SHARES. Upon any sale or other disposition of shares, a U.S.
Shareholder will recognize gain or loss for federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and (ii)
the holder's adjusted basis in such shares for tax purposes. Such gain or loss
will be capital gain or loss if the shares have been held by the U.S.
Shareholder as a capital asset. In the case of a U.S. Shareholder who is an
individual or an estate or trust, such gain or loss will be long-term capital
gain or loss, subject to a 28% tax rate, if such shares have
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been held for more than one year but not more than 18 months, and long-term
capital gain or loss, subject to a 20% tax rate, if such shares have been held
for more than 18 months. In the case of a U.S. Shareholder that is a
corporation, such gain or loss will be long-term capital gain or loss if such
shares have been held for more than one year. In general, any loss recognized by
an U.S. Shareholder upon the sale or other disposition of shares that have been
held for six months or less (after applying certain holding period rules) will
be treated as a long-term capital loss, to the extent of distributions received
by such U.S. Shareholder from the Company that were required to be treated as
long-term capital gains. For a U.S. Shareholder that is an individual, trust or
estate, the long-term capital loss would be apportioned among the applicable
long-term capital gain groups to the extent it appears that distributions
received by such U.S. Shareholder were previously so treated.
1997 ACT CHANGES TO CAPITAL GAIN TAXATION. The 1997 Act altered the
taxation of capital gain income. Under the 1997 Act, individuals, trusts and
estates that hold certain investments for more than 18 months may be taxed at a
maximum long-term capital gain rate of 20% on the sale or exchange of those
investments. Individuals, trusts and estates that hold certain assets for more
than one year but not more than 18 months may be taxed at a maximum long-term
capital gain rate of 28% on the sale or exchange of those investments. The 1997
Act also provides a maximum rate of 25% for "unrecaptured section 1250 gain" for
individuals, trusts and estates, special rules for "qualified 5-year gain," and
other changes to prior law. The 1997 Act allows the IRS to prescribe regulations
on how the 1997 Act's new capital gain rates will apply to sales of capital
assets by "pass-through entities," which include REITs, such as the Company, and
to sales of interests in "pass-through entities." For a discussion of new rules
under the 1997 Act that apply to the taxation of distributions by the Company to
its shareholders that are designated by the Company as "capital gain dividends,"
see "-- Distributions by the Company" above. Shareholders are urged to consult
with their own tax advisors with respect to the new rules contained in the 1997
Act.
BACKUP WITHHOLDING FOR THE COMPANY DISTRIBUTIONS
The Company will report to its U.S. Shareholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. Shareholder that does not provide the Company with his correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the shareholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions to any shareholders who fail to certify
their nonforeign status to the Company. See "-- Taxation of Non-U.S.
Shareholders of the Company."
TAXATION OF TAX-EXEMPT SHAREHOLDERS OF THE COMPANY
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling, provided that a tax-exempt shareholder
(except certain tax-exempt shareholders described below) has not held its shares
as "debt financed property" within the meaning of the Code and such shares are
not otherwise used in a trade or business, the dividend income from the Company
will not be UBTI to a tax-exempt shareholder. Similarly, income from the sale of
shares will not constitute UBTI unless such tax-exempt shareholder has held such
shares as "debt financed property" within the meaning of the Code or has used
the shares in a trade or business.
For tax-exempt shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501 (c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company.
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Such prospective shareholders should consult their own tax advisors concerning
these "set aside" and reserve requirements.
Notwithstanding the above, however, the Code provides that a portion of the
dividends paid by a "pension held REIT" shall be treated as UBTI as to any trust
which (i) is described in Section 401(a) of the Code, (ii) is tax-exempt under
Section 501(a) of the Code, and (iii) holds more than 10% (by value) of the
interests in the REIT. Tax-exempt pension funds that are described in Section
401(a) of the Code are referred to below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a
REIT but for the fact that Section 856(h)(3) of the Code provides that stock
owned by qualified trusts shall be treated, for purposes of the "not closely
held" requirement, as owned by the beneficiaries of the trust (rather than by
the trust itself), and (ii) either (a) at least one such qualified trust holds
more than 25% (by value) of the interests in the REIT, or (b) one or more such
qualified trusts, each of which owns more than 10% (by value) of the interests
in the REIT, hold in the aggregate more than 50% (by value) of the interests in
the REIT. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (i) the UBTI earned by the REIT (treating the REIT as if it were a
qualified trust and therefore subject to tax on UBTI) to (ii) the total gross
income of the REIT. A de minimis exception applies where the percentage is less
than 5% for any year. The provisions requiring qualified trusts to treat a
portion of REIT distributions as UBTI will not apply if the REIT is able to
satisfy the "not closely held" requirement without relying upon the
"look-through" exception with respect to qualified trusts. Based on both the
current ownership of shares and the limitations on transfer and ownership of
shares contained in the Declaration of Trust, the Company does not expect to be
classified as a "pension held REIT."
TAXATION OF NON-U.S. SHAREHOLDERS OF THE COMPANY
The rules governing United States federal income taxation of the ownership
and disposition of Common or Preferred Shares by persons that are, for purposes
of such taxation, nonresident alien individuals, foreign corporations, foreign
partnerships or foreign estates or trusts (collectively, "Non-U.S.
Shareholders") are complex, and no attempt is made herein to provide more than a
brief summary of such rules. Accordingly, the discussion does not address all
aspects of United States federal income tax and does not address state, local or
foreign tax consequences that may be relevant to a Non-U.S. Shareholder in light
of its particular circumstances. In addition, this discussion is based on
current law, which is subject to change, and assumes that the Company qualifies
for taxation as a REIT. Prospective Non-U.S. Shareholders should consult with
their own tax advisers to determine the impact of federal, state, local and
foreign income tax laws with regard to an investment in Common or Preferred
Shares, including any reporting requirements.
DISTRIBUTIONS BY THE COMPANY. Distributions by the Company to a Non-U.S.
Shareholder that are neither attributable to gain from sales or exchanges by the
Company of United States real property interests nor designated by the Company
as capital gains dividends will be treated as dividends of ordinary income to
the extent that they are made out of current or accumulated earnings and profits
of the Company. Such distributions ordinarily will be subject to withholding of
United States federal income tax on a gross basis (that is, without allowance of
deductions) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are treated as effectively
connected with the conduct by the Non-U.S. Shareholder of a United States trade
or business. Dividends that are effectively connected with such a trade or
business will be subject to tax on a net basis (that is, after allowance of
deductions) at graduated rates, in the same manner as domestic shareholders are
taxed with respect to such dividends, and are generally not subject to
withholding. Any such dividends received by a Non-U.S. Shareholder that is a
corporation may also be subject to an additional branch profits tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
The Company expects to withhold United States income tax at the rate of 30% on
the gross amount of any such distributions made to a Non-U.S. Shareholder unless
(i) a lower treaty rate applies and any required form or certification
evidencing eligibility for that reduced rate is filed with the Company or (ii)
the Non-U.S. Shareholder files an IRS Form 4224 with the Company claiming that
the distribution is effectively connected income.
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Distributions in excess of current or accumulated earnings and profits of
the Company will not be taxable to a Non-U.S. Shareholder to the extent that
they do not exceed the adjusted basis of the shareholder's Common or Preferred
Shares, but rather will reduce the adjusted basis of such Common or Preferred
Shares. To the extent that such distributions exceed the adjusted basis of a
Non-U.S. Shareholder's Common or Preferred Shares, they will give rise to gain
from the sale or exchange of its Common or Preferred Shares, the tax treatment
of which is described below. As a result of a legislative change made by the
Small Business Job Protection Act of 1996, it appears that the Company will be
required to withhold 10% of any distribution in excess of the Company's current
and accumulated earnings and profits. Consequently, although the Company intends
to withhold at a rate of 30% on the entire amount of any distribution (or a
lower applicable treaty rate), to the extent that the Company does not do so,
any portion of a distribution not subject to withholding at a rate of 30% (or a
lower applicable treaty rate) will be subject to withholding at a rate of 10%.
However, the Non-U.S. Shareholder may seek a refund of such amounts from the IRS
if it subsequently determined that such distribution was, in fact, in excess of
current or accumulated earnings and profits of the Company, and the amount
withheld exceeded the Non-U.S. Shareholder's United States tax liability, if
any, with respect to the distribution.
Distributions to a Non-U.S. Shareholder that are designated by the Company
at the time of distribution as capital gains dividends (other than those arising
from the disposition of a United States real property interest) generally will
not be subject to United States federal income taxation, unless (i) the
investment in the Common or Preferred Shares is effectively connected with the
Non-U.S. Shareholder's United States trade or business, in which case the
Non-U.S. Shareholder will be subject to the same treatment as domestic
shareholders with respect to such gain (except that a shareholder that is a
foreign corporation may also be subject to the 30% branch profits tax, as
discussed above), or (ii) the Non-U.S. Shareholder is a nonresident alien
individual who is present in the United States for 183 days or more during the
taxable year and has a "tax home" in the United States, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains.
Under the Foreign Investment in Real Property Tax Act ("FIRPTA"),
distributions to a Non-U.S. Shareholder that are attributable to gain from sales
or exchanges by the Company of United States real property interests (whether or
not designated as a capital gain dividend) will cause the Non-U.S. Shareholder
to be treated as recognizing such gain as income effectively connected with a
United States trade or business. Non-U.S. Shareholders would thus generally be
taxed at the same rates applicable to domestic shareholders (subject to a
special alternative minimum tax in the case of nonresident alien individuals).
Also, such gain may be subject to a 30% branch profits tax in the hands of a
Non-U.S. Shareholder that is a corporation, as discussed above. The Company is
required to withhold 35% of any such distribution. That amount is creditable
against the Non-U.S. Shareholder's United States federal income tax liability.
Although the law is not entirely clear on the matter, it appears that
amounts designated by the Company pursuant to the 1997 Act as undistributed
capital gains in respect of shareholders' shares (see "--Requirements for
Qualification as a REIT -- Annual Distribution Requirements Applicable to REITs"
above) would be treated with respect to Non-U.S. Shareholders in the manner
outlined in the preceding two paragraphs for actual distributions by the Company
of capital gain dividends. Under that approach, the Non-U.S. Shareholders would
be able to offset as a credit against their United States federal income tax
liability resulting therefrom their proportionate share of the tax paid by the
Company on such undistributed capital gains (and to receive from the IRS a
refund to the extent their proportionate share of such tax paid by the Company
were to exceed their actual United States federal income tax liability).
SALE OF COMMON OR PREFERRED SHARES. Gain recognized by a Non-U.S.
Shareholder upon the sale or exchange of Common or Preferred Shares (including a
redemption of Preferred Shares that is not treated as a dividend) generally will
not be subject to United States taxation unless such shares constitute a "United
States real property interest" within the meaning of FIRPTA. The Common or
Preferred Shares will not constitute a "United States real property interest" so
long as the Company is a "domestically controlled REIT." A "domestically
controlled REIT" is a REIT in which at all times during a specified testing
period less than 50% in value of its stock is held directly or indirectly by
Non-U.S. Shareholders. Notwithstanding the foregoing, gain from the sale or
exchange of Common or Preferred Shares not otherwise subject to
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FIRPTA will be taxable to a Non-U.S. Shareholder if the Non-U.S. Shareholder is
a nonresident alien individual who is present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States. In
such case, the nonresident alien individual will be subject to a 30% United
States withholding tax on the amount of such individual's gain.
The Company believes that it will continue to be a "domestically controlled
REIT," and therefore that the sale of Common or Preferred Shares will not be
subject to taxation under FIRPTA. However, because the Common or Preferred
Shares are publicly traded, no assurance can be given that the Company will
continue to be a "domestically controlled REIT." If the Company fails to qualify
as a "domestically controlled REIT," gain arising from the sale or exchange by a
Non-U.S. Shareholder of Common or Preferred Shares still would not be subject to
United States taxation under FIRPTA as a sale of a "United States real property
interest," if (i) the Common or Preferred Shares (as applicable) are "regularly
traded" (as defined by applicable Treasury Regulations) on an established
securities market (e.g., the New York Stock Exchange) and (ii) the selling
Non-U.S. Shareholder held 5% or less of the value of the outstanding class or
series of shares being sold at all times during a specified testing period. If
gain on the sale or exchange of Common or Preferred Shares were subject to
taxation under FIRPTA, the Non-U.S. Shareholder would be subject to regular
United States income tax with respect to such gain in the same manner as a U.S.
Shareholder (subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations), and the purchaser of the Common or Preferred Shares would be
required to withhold and remit to the IRS 10% of the purchase price.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Shareholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by the
Company of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common or Preferred Shares by or through a foreign office
of a foreign broker. Information reporting (but not backup withholding) will
apply, however, to a payment of the proceeds of a sale of Common or Preferred
Shares by a foreign office of a broker that (a) is a United States person, (b)
derives 50% or more of its gross income for certain periods from the conduct of
a trade or business in the United States or (c) is a "controlled foreign
corporation" (generally, a foreign corporation controlled by United States
shareholders) for United States tax purposes, unless the broker has documentary
evidence in its records that the holder is a Non-U.S. Shareholder and certain
other conditions are met, or the shareholder otherwise establishes an exemption.
Payment to or through a United States office of a broker of the proceeds of a
sale of Common or Preferred Shares is subject to both backup withholding and
information reporting unless the shareholder certifies under penalty of perjury
that the shareholder is a Non-U.S. Shareholder, or otherwise establishes an
exemption. A Non-U.S. Shareholder may obtain a refund of any amounts withheld
under the backup withholding rules by filing the appropriate claim for refund
with the IRS.
The United States Treasury Department has recently finalized regulations
regarding the withholding and information reporting rules discussed above. In
general, these regulations do not alter the substantive withholding and
information reporting requirements but unify certification procedures and forms
and clarify and modify reliance standards. These regulations generally are
effective for payments made after December 31, 1998, subject to certain
transition rules. Valid withholding certificates that are held on December 31,
1998, will remain valid until the earlier of December 31, 1999 or the date of
expiration of the certificate under rules currently in effect (unless otherwise
invalidated due to changes in the circumstances of the person whose name is on
such certificate). A Non-U.S. Shareholder should consult its own advisor
regarding the effect of the new Treasury Regulations.
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TAX ASPECTS OF THE COMPANY'S OWNERSHIP OF INTERESTS IN THE ZML OPPORTUNITY
PARTNERSHIPS, THE OPERATING PARTNERSHIP AND THE SUBSIDIARY PARTNERSHIPS
GENERAL. Substantially all of the Company's investments are held indirectly
through the ZML Opportunity Partnerships and the Operating Partnership. In
general, partnerships are "pass-through" entities which are not subject to
federal income tax. Rather, partners are allocated their proportionate shares of
the items of income, gain, loss, deduction and credit of a partnership, and are
potentially subject to tax thereon, without regard to whether the partners
receive a distribution from the partnership. The Company will include in its
income its proportionate share of the foregoing partnership items for purposes
of the various REIT income tests and in the computation of its REIT taxable
income. Moreover, for purposes of the REIT asset tests, the Company will include
its proportionate share of assets held through the ZML Opportunity Partnerships
and the Operating Partnership. See "-- Requirements for Qualification as a REIT
- -- Ownership of Partnership Interests by a REIT."
ENTITY CLASSIFICATION. If any of the ZML Opportunity Partnerships, the
Operating Partnership, or the Subsidiary Partnerships were treated as an
association, the entity would be taxable as a corporation and therefore would be
subject to an entity level tax on its income. In such a situation, the character
of the Company's assets and items of gross income would change and would
preclude the Company from qualifying as a REIT (see "-- Requirements for
Qualification as a REIT--Asset Tests Applicable to REITs" and "-- Income Tests
Applicable to REITs"). The same result could occur if any LLC failed to qualify
for treatment as a partnership (or were not disregarded for federal income tax
purposes).
Prior to January 1, 1997, an organization formed as a partnership or a
limited liability company was treated as a partnership for federal income tax
purposes rather than as a corporation only if it had no more than two of the
four corporate characteristics that the Treasury Regulations in effect at that
time used to distinguish a partnership from a corporation for tax purposes.
These four characteristics were (i) continuity of life, (ii) centralization of
management, (iii) limited liability and (iv) free transferability of interests.
Under final Treasury Regulations which became effective January 1, 1997, the
four factor test has been eliminated and an entity formed as a partnership or as
a limited liability company will be taxed as a partnership for federal income
tax purposes, unless it specifically elects otherwise. The Treasury Regulations
provide that the IRS will not challenge the classification of an existing
partnership or limited liability company for tax periods prior to January 1,
1997, so long as (1) the entity had a reasonable basis for its claimed
classification, (2) the entity and all its members recognized the federal income
tax consequences of any changes in the entity's classification within the 60
months prior to January 1, 1997, and (3) neither the entity nor any member of
the entity had been notified in writing on or before May 8, 1996, that the
classification of the entity was under examination by the IRS.
Hogan & Hartson L.L.P., special tax counsel to the Company, is of the
opinion, based upon certain factual assumptions and representations described in
the opinion, that each of the ZML Opportunity Partnerships and the Operating
Partnership will be treated as a partnership for federal income tax purposes
(and not as an association taxable as a corporation).
PARTNERSHIP ALLOCATIONS. Although a partnership agreement will generally
determine the allocation of income and loss among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic arrangement
of the partners.
If an allocation is not recognized for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The allocations of taxable income and
loss provided for in the ZML Opportunity Partnership and the Operating
Partnership agreements are intended to comply with the requirements of Section
704(b) of the Code and the Treasury Regulations promulgated thereunder.
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TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Pursuant to Section 704(c)
of the Code, income, gain, loss and deduction attributable to appreciated or
depreciated property that is contributed to a partnership in exchange for an
interest in the partnership must be allocated in a manner such that the
contributing partner is charged with, or benefits from, respectively, the
unrealized gain or unrealized loss associated with the property at the time of
the contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of contributed
property at the time of contribution and the adjusted tax basis of such property
at such time (a "Book-Tax Difference"). Such allocations are solely for federal
income tax purposes and do not affect the book capital accounts or other
economic or legal arrangements among the partners. Under Treasury Regulations
promulgated under Section 704 of the Code, similar rules apply when a
partnership elects to "revalue" its assets in certain situations, such as when a
contribution of property is made to a partnership by a new partner.
Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for Book-Tax Differences,
including retention of the "traditional method" or the election of certain
alternative methods which would permit any distortions caused by a Book-Tax
Difference to be entirely rectified on an annual basis or with respect to a
specific taxable transaction such as a sale. The Operating Partnership and the
Company have determined to use the "traditional method" of accounting for
Book-Tax Differences with respect to the properties initially contributed to the
Operating Partnership in connection with its formation or subsequently acquired
by merger or contribution.
Based on the foregoing, in general, if any asset contributed to or revalued
by the Operating Partnership is determined to have a fair market value which is
greater than its adjusted tax basis, certain partners of the Operating
Partnership (including, as to certain Properties, the Company) will be allocated
lower amounts of depreciation deductions for tax purposes by the Operating
Partnership and increased taxable income and gain on sale. Such allocations will
tend to eliminate the Book-Tax Difference over the life of the Operating
Partnership. However, the special allocation rules of Section 704(c) of the Code
do not always entirely rectify the Book-Tax Difference on an annual basis or
with respect to a specific transaction such as a sale. Thus, the Company may be
allocated lower depreciation and other deductions, and possibly greater amounts
of taxable income in the event of a sale of contributed assets, and such amounts
may be in excess of the economic or book income allocated to it as a result of
such sale. Such an allocation might cause the Company to recognize taxable
income in excess of cash proceeds, which might adversely affect the Company's
ability to comply with the REIT distribution requirements. See "-- Requirements
for Qualification as a REIT -- Annual Distribution Requirements Applicable to
REITs."
OTHER TAX CONSEQUENCES FOR THE COMPANY, ITS SHAREHOLDERS AND THE NONCONTROLLED
SUBSIDIARIES
The Company and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective shareholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
A portion of the cash to be used by the Company to fund distributions is
expected to come from the Noncontrolled Subsidiaries through payments of
dividends on the shares of such Corporations held by the Operating Partnership.
The Noncontrolled Subsidiaries pay federal and state income tax at the full
applicable corporate rates. To the extent that the Noncontrolled Subsidiaries
are required to pay federal, state or local taxes, the cash otherwise available
for distribution by the Company to Shareholders will be reduced accordingly.
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ERISA CONSIDERATIONS
EMPLOYMENT BENEFIT PLANS, TAX-QUALIFIED PENSION, PROFIT SHARING OR STOCK BONUS
PLANS AND IRS
Each fiduciary of an employee benefit plan subject to ERISA (an "ERISA
Plan") should carefully consider whether an investment in the Common Shares is
consistent with its fiduciary responsibilities under ERISA. The fiduciary of an
ERISA Plan, or of an IRA or a qualified pension, profit sharing or stock bonus
plan, or medical savings account, or other plan or investment vehicle which is
not subject to ERISA (a "Non-ERISA Plan") but is subject to Section 4975 of the
Code ("Other Plans"), also should ensure that the purchase of the Common Shares
will not constitute a prohibited transaction under ERISA or the Code, or if such
transaction otherwise were a prohibited transaction, that such transaction were
subject to one or more statutory or administrative exemptions, the latter issued
by the U.S. Department of Labor ("DOL").
STATUS OF THE COMPANY AND THE OPERATING PARTNERSHIP UNDER ERISA
The following section discusses certain principles that apply in
determining whether the fiduciary requirements of ERISA and the prohibited
transaction provisions of ERISA and the Code apply to an entity because one or
more investors in the entity's equity interests is an ERISA Plan or Other Plan.
If the underlying assets of the Company are deemed to be assets of an ERISA
Plan ("Plan Assets"), (i) the prudence standards and other provisions of Part 4
of Title I of ERISA and the prohibited transaction provisions of ERISA and the
Code would be applicable to any transactions involving the Company's assets and
(ii) persons who exercise any authority or control over the Company's assets, or
who provide investment advice for a fee or other compensation to the Company,
would be (for purposes of ERISA and the Code) fiduciaries of ERISA Plans and
Other Plans that acquire Common Shares. The DOL, which has certain
administrative responsibility over ERISA Plans and Other Plans, has issued a
regulation defining plan assets for certain purposes (the "DOL Regulation"). The
DOL Regulation generally provides that when an ERISA Plan or Other Plan acquires
a security that is an equity interest in an entity and that security is neither
a "publicly-offered security" nor a security issued by an investment company
registered under the 1940 Act, the assets of the ERISA Plan or Other Plan
include both the equity interest and an undivided interest in each of the
underlying assets of the entity, unless it is established either that the entity
is an "operating company" or that equity participation in the entity by "benefit
plan investors" is not significant.
The DOL Regulation defines a "publicly-offered security" as a security that
is "widely held," "freely transferable" and either part of a class of securities
registered under the Exchange Act, or sold pursuant to an effective registration
statement under the Securities Act (provided the securities are registered under
the Exchange Act within 120 days, or such later time as may be allowed by the
Commission (the "registration period"), after the end of the fiscal year of the
issuer during which the offering occurred).
The DOL Regulation provides that a security is "widely-held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control.
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulation further provides that where
a security is part of an offering in which the minimum investment is $10,000 or
less, certain restrictions ordinarily will not, alone or in combination, affect
a finding that such securities are "freely transferable." The restrictions on
transfer enumerated in the DOL Regulation as ordinarily not affecting a finding
that the securities are "freely transferable" include: (i) any restriction on or
prohibition against any transfer or assignment that would result in a
termination or reclassification of the Company for federal or state tax
purposes, or that would otherwise violate any state or Federal law or court
order, (ii) any requirement that advance notice of a transfer or assignment be
given to the Company, (iii) any requirement that either the transferor or
transferee, or both, execute documentation setting forth representations as to
compliance with any restrictions on transfer that are among those enumerated in
the DOL Regulation as not affecting free transferability, (iv) any
administrative procedure that established an effective date, or an event (such
as
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completion of the Offering) prior to which a transfer or assignment will not be
effective, (v) any prohibition against transfer or assignment to an ineligible
or unsuitable investor, and (vi) any limitation or restriction on transfer or
assignment that is not imposed by the issuer or a person acting for or on behalf
of the issuer. The Company believes that the restrictions imposed under the
Declaration of Trust on the transfer of Common Shares are of the type of
restrictions on transfer generally permitted under the DOL Regulation and should
not result in the failure of the Common Shares to be "freely transferable"
within the meaning of the DOL Regulation. See "Shares of Beneficial Interest --
Restrictions on Ownership and Transfer." The Company also believes that certain
restrictions on transfer that derive from the securities laws, and may derive
from the securities laws, should not result in the failure of the Common Shares
to be "freely transferable." Furthermore, the Company is not aware of any other
facts or circumstances limiting the transferability of the Common Shares that
are not included among those referenced as not affecting free transferability
under the DOL Regulation, and the Company does not expect to impose in the
future (or to permit any person to impose on its behalf) any other limitations
or restrictions on transfer that would not be among the enumerated permissible
limitations or restrictions.
Assuming that once the Common Shares are registered and listed, and (i) the
Common Shares are "widely held" within the meaning of the DOL Regulation and
(ii) that no facts and circumstances other than those referred to in the
preceding paragraph exist that restrict transferability of the Common Shares,
the Company believes that, under the DOL Regulation, the Common Shares should
then be considered "publicly-offered securities."
EXPERTS
The consolidated financial statements of Equity Office Properties Trust as
of December 31, 1997 and for the period July 11, 1997 to December 31, 1997, the
combined financial statements of the Equity Office Predecessors as of December
31, 1996 and for the period January 1, 1997 to July 10, 1997 and the years ended
December 31, 1996 and 1995, the statements of revenue and certain expenses for
177 Broad Street, Preston Commons, Oakbrook Terrace Tower, One Maritime Plaza,
201 Mission Street, 30 N. LaSalle, Columbus America Properties, Prudential
Properties, 550 South Hope Street, Acorn Properties, 10 & 30 South Wacker Drive,
One Lafayette Centre, PPM Properties and Wright Runstad Properties, all
appearing in this Prospectus and Registration Statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
The consolidated balance sheets of Beacon Properties Corporation as of
December 31, 1996 and 1995 and the related statements of operations, owners'
equity and cash flows for the years ended December 31, 1996 and 1995 and the
period May 26, 1994 to December 31, 1994, the combined statement of operations,
owners' equity and cash flows of the Predecessor for the period January 1, 1994
to May 25, 1994 and the related financial statement schedules of Beacon
Properties Corporation as of December 31, 1996 included herein have been so
included in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
LEGAL MATTERS
The legality of the Common Shares will be passed upon for the Company by
Hogan & Hartson L.L.P., Washington, D.C. Certain tax matters will be passed upon
by Hogan & Hartson L.L.P., Washington, D.C., special tax counsel to the Company.
AVAILABLE INFORMATION
The Company and the Operating Partnership are subject to the informational
requirements of the Exchange Act, and, in accordance therewith, are required to
file reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information can be inspected and copied at
the Public Reference Section of the Commission at Room 1024, 450 Fifth Street,
N.W.,
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Washington, D.C. 20549, and at the Commission's regional offices at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of the reports, proxy
statements and other information can be obtained form the Public Reference
Section of the Commission, Washington, D.C. 20549, upon payment of prescribed
rates, or in certain cases by accessing the Commission's World Wide Web site at
http://www.sec.gov. The Common Shares are listed on the NYSE under the symbol
"EOP." The Series A Preferred Shares and Series B Preferred Shares are listed on
the NYSE under the symbol "EOPpfA." Such reports, proxy statements and other
information concerning the Company and the Operating Partnership can be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York,
10005.
The Company has filed with the Commission a post-effective amendment on
Form S-11 to the registration statement on Form S-4 (the "Registration
Statement"), of which this Prospectus is a part, under the Securities Act, with
respect to the Common Shares offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain portions
of which have been omitted as permitted by the rules and regulations of the
Commission. Statements contained in this Prospectus as to the contents of any
contract or other documents are not necessarily complete, and in each instance,
reference is made to the copy of such contract or documents filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference and the exhibits and schedules thereto. For further
information regarding the Company and the Common Shares, reference is hereby
made to the Registration Statement and such exhibits and schedules which may be
obtained from the Commission at its principal office in Washington, D.C. upon
payment of the fees prescribed by the Commission. The Commission maintains a
'web site' that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Commission. The
address of such site is "http://www.sec.gov."
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GLOSSARY
For purposes of this Offering Memorandum, the following capitalized terms
shall have the meanings set forth below:
"Articles Supplementary" means Articles Supplementary to the Declaration of
Trust determining the terms of the PIERS.
"Available Cash" means net cash flow from operations plus any reduction in
reserves and minus interest and principal payment on debt, capital expenditures,
any additions to reserves and other adjustments
"Beacon" means Beacon Properties Corporation, a Maryland corporation.
"Beacon Common Shares" means the shares of common stock, $0.01 par value
per share, of Beacon.
"Beacon Construction Company" means Beacon Construction Company, Inc., a
Massachusetts corporation.
"Beacon Design Company" means Beacon Design Corporation, a Massachusetts
corporation.
"Beacon Management Company" means Beacon Property Management Corporation, a
Delaware corporation.
"Beacon Merger" means the merger of Beacon with and into the Company and
the merger of Beacon Partnership with and into the Operating Partnership.
"Beacon OP Unit" means a common partnership unit of Beacon Partnership.
"Beacon Partnership" means Beacon Properties, L.P., a Delaware limited
partnership.
"Beacon Preferred Shares" means the 8.98% Series A Cumulative Redeemable
Preferred Stock, liquidation preference $25.00 per share, of Beacon.
"Beacon Properties" means the office properties the Company acquired
pursuant to the Beacon Merger.
"Beneficiary" means a trust, the beneficiary of which will be a qualified
charitable organization selected by the Company, to which excess shares of a
Prohibited Owner will be transferred automatically, by operation of law.
"Book-Tax Difference" means the difference between the fair market value of
contributed property at the time of contribution and the adjusted tax basis of
such property at any specific time.
"BPMLP" means Beacon Property Management, L.P., a Delaware limited
partnership.
"Business Day" means any day, other than a Saturday or Sunday, on which
banking institutions in New York, New York and Boston, Massachusetts are open
for business.
"Bylaws" means the bylaws adopted by the Board of Trustees of the Company,
as amended from time to time.
"Cash Redemption Right" means the right of the Company to redeem Series B
Preferred Shares on and after February 15, 2003, in whole or from time to time
in part, at the cash redemption prices applicable thereto.
"CBDs" means central business districts.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the U.S. Securities and Exchange Commission.
"Common Shares" means the common shares of beneficial interest, $0.01 par
value per share, of the Company.
"Company" means Equity Office Properties Trust, a Maryland real estate
investment trust, and one or more of its subsidiaries (including the Operating
Partnership), and the predecessors thereof, or as the context
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may require, Equity Office Properties Trust only or the Operating Partnership
only. All references to the historical activities of the Company prior to July
11, 1997 refer to the activities of the Equity Office Predecessors.
"Consolidation" means all of the transactions described under "Certain
Relationships and Related Transactions -- Formation Transactions."
"Contribution Agreement" means the agreement pursuant to which the ZML
Funds and the Company agreed to consolidate.
"Conversion Price" means the initial conversion price of $35.70 per Common
Share (equivalent to a conversion rate of 1.40056 Common Shares for each Series
B Preferred Share), as may be adjusted under certain circumstances described
under "Shares of Beneficial Interest -- Outstanding Preferred Shares -- Series B
Preferred Shares."
"Core Portfolio" means the properties that were held by the EOP
Predecessors or the Company, as the case may be, during the entire period for
both periods being compared.
"Credit Facilities" means both the $600 Million Credit Facility and the
$1.5 Billion Credit Facility.
"Debt to Market Capitalization Ratio" means the total consolidated and
unconsolidated debt of the Company as a percentage of the market value of
outstanding Common Shares and Units plus total consolidated and unconsolidated
debt, but excluding (i) all nonrecourse consolidated debt in excess of the
Company's proportionate share of such debt and (ii) all nonrecourse
unconsolidated debt of partnerships in which the Company is a partner in excess
of the Company's proportionate share of such debt.
"Declaration of Trust" means the Company's declaration of trust, as amended
from time to time, and as filed with the State Department of Assessments and
Taxation of Maryland.
"DOL" means the U.S. Department of Labor.
"DOL Regulation" means a regulation issued by the DOL defining plan assets
for certain purposes.
"EGI" means Equity Group Investments, Inc., an owner, manager and financier
of real estate and corporations.
"Employee Plan" means the Company's 1997 Employee Share Option and Share
Award Plan.
"EOH" means Equity Office Holdings, L.L.C., a Delaware limited liability
company.
"EOP Management Company" means Equity Office Properties Management Corp., a
Delaware corporation.
"EOP Office Company" means EOP Office Company, a Delaware corporation.
"ERISA Plan" means an employee benefit plan subject to ERISA.
"EQR" means Equity Residential Properties Trust, a Maryland real estate
investment trust, which is an equity REIT focused solely on multifamily
properties and is affiliated with Mr. Zell.
"Equity Group" means one or both of EGI and EOH.
"Equity Group Companies" means numerous non-public companies owned in whole
or in part by Mr. Zell or his affiliates.
"Equity Group Owners" means certain trusts established for the benefit of
the families of Mr. Zell and of Mr. Robert Lurie, the deceased former partner of
Mr. Zell, and the partnerships comprised of such trusts.
"Equity Office Predecessors" means, on a combined basis, the Office
Properties and Parking Facilities of the ZML Funds and the Management Business
of the Equity Group that were combined into the Company pursuant to the
Consolidation.
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"Event" means an amendment, alteration or repeal of the provisions of the
Declaration of Trust or the Articles Supplementary for the Series B Preferred
Shares, resulting from a merger or consolidation.
"excess shares" means that number of shares that exceeds the Ownership
Limit.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"February 1998 Notes Offering" means the Notes Offering and the MOPPRS
Offering.
"First Plaza" means First Plaza Group Trust.
"FIRPTA" means the Foreign Investment in Real Property Tax Act.
"Formation Transactions" means the transactions pursuant to which the
Company and the Operating Partnership were formed.
"Funds from Operations" means net income (loss) computed in accordance with
GAAP, excluding gains (or losses) from debt restructuring and sales of property,
plus real estate related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. Management believes that Funds
from Operations is helpful to investors as a measure of the performance of an
equity REIT because, along with cash flow from operating activities, financing
activities and investing activities, it provides investors with an indication of
the ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. The Company computes Funds from
Operations in accordance with standards established by the White Paper on Funds
from Operations approved by the Board of Governors of NAREIT in March 1995 which
may differ from the methodology for calculating Funds from Operations utilized
by other equity REITs and, accordingly, may not be comparable to such other
REITs. Funds from Operations should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indicator of the Company's
financial performance or to cash flow from operating activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including its
ability to make distributions.
"GAAP" means generally accepted accounting principles in the United States.
"GM" means General Motors Corporation.
"GMIMCO" means General Motors Investment Management Corporation, an
investment advisor to several pension funds of GM.
"Impermissable Tenant Service Income" means the amount received when a REIT
operates or manages a property or furnishes or renders services to the tenants
at the property other than through an independent contractor from whom the REIT
derives no revenue.
"Interested Shareholder" means any person who beneficially owns ten percent
or more of the voting power of a trust's then outstanding shares or an affiliate
of such trust who, at any time within the two-year period prior to the date in
question, was the beneficial owner of ten percent or more of the voting power of
the then outstanding voting shares of beneficial interest of such trust.
"Investor Limited Partners" means the several institutional investor
limited partners in ZML Opportunity Partnerships I and II.
"IPO" means the Company's July 1997 initial public offering of 28,750,000
Common Shares.
"IRS" means the United States Internal Revenue Service.
"Joint Venture Properties" means the Properties which are held in
partnerships or subject to participation agreements with unaffiliated third
parties.
"leased" means all space for which leases have been executed, whether or
not the lease term has commenced.
"Leventhal Partnership" means the Leventhal Family Limited Partnership.
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"LIBOR" means the London Interbank Offering Rate.
"Managed Properties" means the properties managed by the Management
Companies.
"Managed Property Business" means that portion of the Management Business
that relates to property management of the Managed Properties and the Joint
Venture Properties that were contributed to the Company in the Consolidation,
which business is owned and conducted by EOP Management Company.
"Management Business" means the office property management business of EOH
and the office property asset management business and the parking asset
management business of EGI and EOH relating to the Properties that were
contributed to the Company in the Consolidation.
"Management Companies" means EOP Management Company and Beacon Management
Company.
"Maryland REIT Law" means Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland, as amended from time to time.
"Merger Agreement" means the Agreement and Plan of Merger dated September
15, 1997, as amended, among the Company, the Operating Partnership, Beacon and
Beacon Partnership.
"Merrill Lynch" means Merrill Lynch & Co.
"MGCL" means the Maryland General Corporation Law, as amended from time to
time.
"MOPPRS" means the $250 million of 6.376% MandatOry Par Put Remarketing
Securities which the Company has agreed to sell in the MOPPRS Offering.
"NAREIT" means the National Association of Real Estate Investment Trusts,
Inc.
"1997 Act" means the federal Taxpayer Relief Act of 1997.
"Noncontrolled Subsidiaries" means the Management Companies, EOP Office
Company, Beacon Design Company and Beacon Construction Company.
"Non-ERISA Plan" means an IRA or a qualified pension, profit sharing or
stock bonus plan, medical savings account, or other plan or investment vehicle
which is not subject to ERISA.
Non-U.S. Shareholders" means, collectively, persons that are, for purposes
of federal income taxation, nonresident alien individuals, foreign corporations,
foreign partnerships or foreign estates or trusts.
"NYSE" means the New York Stock Exchange.
"occupied" means all space which is leased and for which the lease term has
commenced.
"Office Properties" means the office properties and pertinent corporate
facilities owned by the Company or in which the Company has an interest.
"$1.25 Billion Notes Offering" means the Company's private placement of
$1.25 billion of senior unsecured notes.
"$1.5 Billion Credit Facility" means the Company's $1.5 billion unsecured
term loan facility entered into on October 2, 1997, with Morgan Guaranty Trust
Company of New York.
"$180 Million Notes Offering" means the $180 million aggregate principal
amount of debt securities of the Company issued in the Private Debt Offering.
"Operating Partnership" means EOP Operating Limited Partnership, a Delaware
limited partnership, alone as an entity, or, as the context may require, the
combined enterprise consisting of EOP Operating Limited Partnership and its
subsidiaries.
"Other Acquisitions" means the acquisition transactions described in this
Prospectus under "Recent Developments -- Other Recent Acquisitions."
"Parking Facilities" means the stand-alone parking facilities owned by the
Company.
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"Partnership Act" means the Delaware Revised Uniform Limited Partnership
Act.
"Partnership Agreement" means the limited partnership agreement of the
Operating Partnership.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, joint-stock company, trust, unincorporated organization,
real estate investment trust, or government or any agency or political
subdivision thereof.
"Plan Assets" means underlying assets of the Company that are deemed to be
assets of an ERISA Plan.
"Preference Units" means preferred units of partnership interest and
partnership interests of different classes and series having such rights,
preferences and other privileges, variations and designations as may be
determined by the Company.
"Preferred Shares" means any series of preferred shares of beneficial
interest of the Company having such rights, preferences and other privileges,
variations and designations as may be determined by the Company.
"Private Debt Offering" means the Company's private placement to an
institutional investor of the $180 Million Notes in September 1997.
"Probable Acquisitions" means the twelve additional office properties which
the Company has, as of April 30, 1998, entered into agreements to acquire.
"Pro Forma Basis" means giving effect to the following transactions which
occurred subsequent to December 31, 1997: (a) the acquisition of 21 Office
Properties and one parking facility; (b) the February 1998 Notes Offering; (c)
the Series B Preferred Offering and (d) the UIT Offering.
"Prohibited Owner" means any person or entity holding record title to
shares in excess of the Ownership Limit.
"Prohibited Transferee" means the purported transferee of any purported
transfer of shares of beneficial interest of the Company or any other event
which would otherwise result in any person violating the Ownership Limit or the
other restrictions in the Declaration of Trust.
"Properties" means both the Office Properties and the Parking Facilities.
"Property Operating Expenses" means real estate taxes and insurance,
repairs and maintenance and property operating expenses.
"Property Revenues" means rental revenues, tenant reimbursements, parking
income and other income.
"Redemption Right" means a Limited Partner's right to require the
redemption of units.
"Redemption Shares" means the 8,413,308 Common Shares being registered
hereby and issuable by the Company upon redemption of Units.
"Registration Default" means any of the following events: (a) the Company
fails to file the Registration Statement on or before August 10, 1998, (b) the
Registration Statement is not declared effective by the Commission on or prior
to the date that is 90 days after the Eligibility Date, (c) the Registration
Statement is declared effective but, subject to certain exceptions, thereafter
ceases to be effective or the related prospectus ceases to be usable in
connection with resales of the Series B Preferred Shares or the Common Shares
issuable upon conversion or redemption of the Series B Preferred Shares or (d)
the Series B Preferred Shares or the Common Shares issuable upon conversion or
redemption of the Series B Preferred Shares are not approved for listing on the
NYSE on or prior to the date that is 90 days after the Eligibility Date.
"Registration Rights Agreement" means the registration rights agreement
between the Company and the Initial Purchaser relating to the Series B Preferred
Shares.
"Registration Statement" means the registration statement filed with the
Commission pursuant to the Registration Rights Agreement.
120
125
"REIT" means a real estate investment trust as defined under Sections 856
through 860 of the Code and applicable Treasury regulations.
"Restricted Common Shares" means Common Shares issued in transactions not
registered under the Securities Act.
"Rule 144" means
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Shares" means the 8.98% Series A Cumulative Redeemable
Preferred Shares, liquidation preference $25.00 per share, of the Company.
"Series A Preferred Units" means the 8.98% Series A Cumulative Redeemable
Preferred Units of partnership interest in the Operating Partnership.
"Series B Preferred Shares" means the 5.25% Series B Convertible,
Cumulative Redeemable Preferred Shares, liquidation preference of $50.00 per
share.
"Series B Preferred Units" means the 5.25% Convertible, Cumulative Series B
Preferred Units of partnership interest in the Operating Partnership.
"Series B Preferred Offering" means the private placement of the Series B
Preferred Shares.
"Service Companies" means the third-party parking garage service companies
that the Parking Facilities are leased to and operated by.
"Share Redemption Right" means the right of the Company to redeem Series B
Preferred Shares on and after February 15, 2003, in whole or in part, for such
number of Common Shares as are issuable at the Conversion Price.
"$600 Million Credit Facility" means the Company's $600 million unsecured
revolving line of credit.
"SPLP" means Standard Parking Limited Partnership.
"Tenant Services Corp." means Tenant Services Corp., a Delaware corporation
owned entirely by affiliates of the Equity Group Owners.
"Total Portfolio" means the 258 Office Properties and the 17 stand-alone
Parking Facilities which the Company owned or had an interest in as of December
31, 1997.
"$250 Million MOPPRS Offering" means the Company's offering of the MOPPRS.
"UBTI" means unrelated business taxable income.
"UIT" means Equity Investor Fund Cohen & Steers Realty Majors Portfolio (A
Unit Investment Trust).
"UIT Offering" means the Company's private placement of $44 million of
Restricted Common Shares in April 1998.
"Unit Redemption Right" means the right of each holder of Units other than
the Company and certain of its affiliates to require the redemption of its Units
at any time or from time to time, subject to the terms and conditions set forth
in the Partnership Agreement.
"Units" means the common units of partnership interest in the Operating
Partnership.
"WRALP" means Wright Runstad Asset Limited Partnership.
"WRAM" means Wright Runstad Asset Management, L.P.
"WRH" means Wright Runstad Holdings, L.P.
"Wright Runstad Acquisition" means the acquisition transaction described in
this Offering Memorandum under "Recent Developments -- Wright Runstad
Acquisition."
121
126
"Wright Runstad Investors" means one or more of the constituent partners
and shareholders, members, partners or beneficiaries of the constituent partners
of WRH and/or WRAM.
"ZML Fund I" means Opportunity Partnership I and its general and limited
partners, including ZML REIT I.
"ZML Fund II" means Opportunity Partnership II and its general and limited
partners, including ZML REIT II.
"ZML Fund III" means Opportunity Partnership III and its general and
limited partners, including ZML REIT III.
"ZML Fund IV" means Opportunity Partnership IV and its general and limited
partners, including ZML REIT IV.
"ZML Funds" means, collectively, the ZML Opportunity Partnerships, together
with their limited and general partners, including the ZML REITs.
"ZML Opportunity Partnership I" means Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership.
"ZML Opportunity Partnership II" means Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership II.
"ZML Opportunity Partnership III" means Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership III.
"ZML Opportunity Partnership IV" means Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership IV.
"ZML Opportunity Partnerships" means, collectively, ZML Opportunity
Partnership I, ZML Opportunity Partnership II, ZML Opportunity Partnership III
and ZML Opportunity Partnership IV, each of which is a limited partnership
organized under the laws of the State of Illinois.
"ZML Partner(s)" means ZML Partners Limited Partnership, ZML Partners
Limited Partnership II, ZML Partners Limited Partnership III and/or ZML Partners
Limited Partnership IV, as applicable, each of which is the current general
partner of, respectively, ZML Opportunity Partnership I, ZML Opportunity
Partnership II, ZML Opportunity Partnership III and ZML Opportunity Partnership
IV.
"ZML REIT I" means ZML Investors, Inc., a Delaware corporation.
"ZML REIT II" means ZML Investors II, Inc., a Delaware corporation.
"ZML REIT III" means Zell/Merrill Lynch Real Estate Opportunity Partners
III Trust, a Maryland real estate investment trust.
"ZML REIT IV" means Zell/Merrill Lynch Real Estate Opportunity Partners IV
Trust, a Maryland real estate investment trust.
"ZML REITs" means, collectively, ZML REIT I, ZML REIT II, ZML REIT III and
ZML REIT IV.
122
127
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
Basis of Presentation.....................................
Pro Forma Condensed Combined Balance Sheet as of December
31, 1997...............................................
Pro Forma Condensed Combined Statement of Operations for
the year ended December 31, 1997.......................
Notes to the Pro Forma Condensed Combined Financial
Statements.............................................
HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(AUDITED)
Report of Independent Auditors............................ F-4
Consolidated and Combined Balance Sheets of Equity Office
Properties Trust and Equity Office Predecessors as of
December 31, 1997 and 1996............................. F-5
Consolidated Statement of Operations of Equity Office
Properties Trust for the period from July 11, 1997 to
December 31, 1997, and the Combined Statements of
Operations of Equity Office Predecessors for the period
from January 1, 1997 to July 10, 1997 and the years
ended December 31, 1996 and 1995....................... F-6
Consolidated Statement of Shareholders' Equity of Equity
Office Properties Trust for the period from July 11,
1997 to December 31, 1997 and the Combined Statements
of Owners' Equity of Equity Office Predecessors for the
period from January 1, 1997 to July 10, 1997 and the
years ended December 31, 1996 and 1995................. F-8
Consolidated Statement of Cash Flows of Equity Office
Properties Trust for the period from July 11, 1997 to
December 31, 1997, and the Combined Statements of Cash
Flows of Equity Office Predecessors for the period from
January 1, 1997 to July 10, 1997 and the years ended
December 31, 1996 and 1995............................. F-9
Notes to Consolidated and Combined Financial Statements... F-10
SCHEDULES
Schedule III -- Real Estate and Accumulated
Depreciation........................................... F-42
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have
been omitted.
177 BROAD STREET
Report of Independent Auditors............................ F-47
Statement of Revenue and Certain Expenses for the year
ended December 31, 1996................................ F-48
Notes to Statement of Revenue and Certain Expenses........ F-49
PRESTON COMMONS
Report of Independent Auditors............................ F-50
Statement of Revenue and Certain Expenses for the year
ended December 31, 1996................................ F-51
Notes to Statement of Revenue and Certain Expenses........ F-52
OAKBROOK TERRACE TOWER
Report of Independent Auditors............................ F-53
Statements of Revenue and Certain Expenses for the three
months ended March 31, 1997 and the year ended December
31, 1996............................................... F-54
Notes to Statements of Revenue and Certain Expenses....... F-55
F-1
128
PAGE
-----
ONE MARITIME PLAZA
Report of Independent Auditors............................ F-56
Statements of Revenue and Certain Expenses for the three
months ended March 31, 1997 and the year ended December
31, 1996............................................... F-57
Notes to Statements of Revenue and Certain Expenses....... F-58
201 MISSION STREET
Report of Independent Auditors............................ F-59
Statements of Revenue and Certain Expenses for the three
months ended March 31, 1997 and the year ended December
31, 1996............................................... F-60
Notes to Statements of Revenue and Certain Expenses....... F-61
30 N. LASALLE
Report of Independent Auditors............................ F-62
Statements of Revenue and Certain Expenses for the three
months ended March 31, 1997 and the year ended December
31, 1996............................................... F-63
Notes to Statements of Revenue and Certain Expenses....... F-64
COLUMBUS AMERICA PROPERTIES
Report of Independent Auditors............................ F-65
Combined Statements of Revenue and Certain Expenses for
the period from January 1, 1997 to July 31, 1997 and
the year ended December 31, 1996....................... F-66
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-67
PRUDENTIAL PROPERTIES
Report of Independent Auditors............................ F-69
Combined Statements of Revenue and Certain Expenses for
the period from January 1, 1997 to August 31, 1997 and
the year ended December 31, 1996....................... F-70
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-71
550 SOUTH HOPE STREET
Report of Independent Auditors............................ F-72
Statements of Revenue and Certain Expenses for the period
from April 1, 1997 to July 31, 1997 and the year ended
March 31, 1997......................................... F-73
Notes to Statements of Revenue and Certain Expenses....... F-74
ACORN PROPERTIES
Report of Independent Auditors............................ F-75
Combined Statements of Revenue and Certain Expenses for
the period from January 1, 1997 to July 31, 1997 and
the year ended December 31, 1996....................... F-76
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-77
10 & 30 SOUTH WACKER DRIVE
Report of Independent Auditors............................ F-79
Combined Statements of Revenue and Certain Expenses for
the period from January 1, 1997 to July 31, 1997 and
the year ended December 31, 1996....................... F-80
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-81
ONE LAFAYETTE CENTRE
Report of Independent Auditors............................ F-82
Statements of Revenue and Certain Expenses for the period
from January 1, 1997 to July 31, 1997 and the year
ended December 31, 1996................................ F-83
Notes to Statements of Revenue and Certain Expenses....... F-84
F-2
129
PAGE
-----
PPM PROPERTIES
Report of Independent Auditors............................ F-85
Combined Statements of Revenue and Certain Expenses for
the period from January 1, 1997 to August 31, 1997 and
the year ended December 31, 1996....................... F-86
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-87
WRIGHT RUNSTAD PROPERTIES
Report of Independent Auditors............................ F-88
Combined Statements of Revenue and Certain Expenses for
the period from October 1, 1996 to August 31, 1997 and
the year ended September 30, 1996...................... F-89
Notes to Combined Statements of Revenue and Certain
Expenses............................................... F-90
BEACON PROPERTIES CORPORATION
Report of Independent Accountants......................... F-92
Consolidated Balance Sheets as of December 31, 1996 and
1995................................................... F-93
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 and for the periods May 26,
1994 to December 31, 1994 and January 1, 1994 to May
25, 1994............................................... F-94
Consolidated Statements of Stockholders' Equity for the
period January 1, 1994 to December 31, 1996............ F-95
Consolidated Statements of Cash Flows for the period
January 1, 1994 to December 31, 1996................... F-96
Notes to Consolidated Financial Statements................ F-97
Report of Independent Accountants on Financial Statement
Schedules.............................................. F-113
Schedule III -- Real Estate and Accumulated Depreciation
as of December 31, 1996................................
Schedule IV -- Mortgage Loans on Real Estate as of
December 31, 1996......................................
F-3
130
EQUITY OFFICE PROPERTIES TRUST
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
AS OF AND FOR THE TWELVE MONTHS ENDED DECEMBER, 1997
(UNAUDITED)
The accompanying unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 1997 reflects the following transactions which all occurred
subsequent to December 31, 1997: (a) the acquisition or probable acquisition of
21 office properties and one parking facility; (b) the $1.25 Billion Notes
Offering and the $250 million MOPPRS offering (collectively the "February 1998
Notes Offering"); (c) the Series B Preferred Offering; and (d) the UIT Offering.
The accompanying unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1997 reflects the following
transactions as if they had occurred on January 1, 1997: (a) the acquisition of
66 office properties, including 20 office properties acquired by Beacon prior to
the Beacon Merger, and seven parking facilities, including an interest in four
parking facilities, acquired during the year ended December 31, 1997; (b) the
disposition of three office properties; (c) the $180 million private debt
offering (the "$180 Million Notes Offering") which occurred on September 3,
1997; (d) the transactions that occurred in connection with the consolidation of
the entities which comprise the predecessors ("Equity Office Predecessors") of
the Company (the "Consolidation") and the initial public offering (the "IPO"),
which closed on July 11, 1997, and the decrease in interest expense resulting
from the use of the net proceeds for the repayment of mortgage debt; (e) the net
change in interest expense from draws on the $1.5 Billion Credit Facility used
to refinance existing mortgage debt; (f) the Beacon Merger; (g) the acquisition
of 10 properties, acquired between January 1, 1998 and April 30, 1998; (h) the
probable acquisition of 12 office properties; (i) the February 1998 Notes
Offering; (j) the Series B Preferred Offering; and (k) the UIT Offering.
The accompanying unaudited pro forma condensed combined financial
statements have been prepared by management of the Company and do not purport to
be indicative of the results which would actually have been obtained had the
transactions described above been completed on the dates indicated or which may
be obtained in the future. The pro forma condensed combined financial statements
should be read in conjunction with the accompanying notes to the pro forma
condensed combined financial statements as of and for the year ended December
31, 1997, included elsewhere herein.
F-4
131
EQUITY OFFICE PROPERTIES TRUST
PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
1998 ACQUIRED
EQUITY OFFICE PROPERTIES AND
PROPERTIES TRUST PROBABLE FEBRUARY 1998 SERIES B PREFERRED UIT
HISTORICAL ACQUISITIONS NOTES OFFERING OFFERING OFFERING
---------------- -------------- -------------- ------------------ --------
(A) (E) (I)
ASSETS
Investment in real estate, net..... $10,976,319 $ 946,690 $ -- $ -- $ --
Cash and cash equivalents.......... 228,853 (222,950) -- -- --
Rents and other receivables........ 52,581 -- -- -- --
Escrow deposits and restricted
cash............................. 25,772 -- -- -- --
Investment in unconsolidated joint
ventures......................... 387,332 -- -- -- --
Other assets....................... 80,815 -- 43,371(B) -- --
----------- --------- ----------- --------- --------
TOTAL ASSETS.................. $11,751,672 $ 723,740 $ 43,371 $ -- $ --
=========== ========= =========== ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Mortgage debt...................... $ 2,063,017 $ 48,109 $ -- $ -- $ --
Unsecured notes.................... 180,000 63,430 1,504,452(C) -- --
Lines of credit.................... 2,041,300 612,101 (1,461,081)(D) (289,500)(F) (44,059)
Distribution payable............... 1,191 -- -- --
Other liabilities.................. 306,189 -- -- --
----------- --------- ----------- --------- --------
TOTAL LIABILITIES............. 4,591,697 723,640 43,371 (289,500) (44,059)
Minority interests:
Operating Partnership............ 725,206 100 -- -- --
Partially owned properties....... 29,612 -- -- -- --
Preferred Shares (100,000
authorized and 14,000 issued).... 200,000 -- -- 300,000(G) --
Common Shares...................... 2,497 -- -- -- 16
Additional paid in capital......... 6,202,660 -- -- (10,500)(H) 44,043
----------- --------- ----------- --------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........ $11,751,672 $ 723,740 $ 43,371 $ -- $ --
=========== ========= =========== ========= ========
EQUITY OFFICE
PROPERTIES TRUST
PRO FORMA
----------------
ASSETS
Investment in real estate, net..... $11,923,009
Cash and cash equivalents.......... 5,903
Rents and other receivables........ 52,581
Escrow deposits and restricted
cash............................. 25,772
Investment in unconsolidated joint
ventures......................... 387,332
Other assets....................... 124,186
-----------
TOTAL ASSETS.................. $12,518,783
===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Mortgage debt...................... $ 2,111,126(J)
Unsecured notes.................... 1,747,882(J)
Lines of credit.................... 858,761(J)
Distribution payable............... 1,191
Other liabilities.................. 306,189
-----------
TOTAL LIABILITIES............. 5,025,149
Minority interests:
Operating Partnership............ 725,306
Partially owned properties....... 29,612
Preferred Shares (100,000
authorized and 14,000 issued).... 500,000
Common Shares...................... 2,513
Additional paid in capital......... 6,236,203
-----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........ $12,518,783
===========
F-5
132
EQUITY OFFICE PROPERTIES TRUST
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
EQUITY OFFICE CONSOLIDATION
PROPERTIES TRUST 1997 ACQUIRED FINANCING AND IPO
HISTORICAL PROPERTIES DISPOSITIONS ACTIVITY ADJUSTMENTS
---------------- ------------- ------------ --------- -------------
(K) (L) (M)
REVENUES:
Rental........................... $570,379 $245,032 $(5,645) $ -- $ 8,983(O)
Tenant reimbursements............ 106,437 54,560 (62) -- --
Parking.......................... 47,051 17,229 (573) -- --
Other............................ 9,863 4,307 (431) -- --
Fees from noncombined
affiliates..................... 4,950 -- -- -- --
Interest......................... 13,392 69 -- -- --
-------- -------- ------- -------- --------
752,072 321,197 (6,711) -- 8,983
======== ======== ======= ======== ========
EXPENSES:
Property operating............... 282,964 124,069 (2,710) -- --
Interest......................... 164,105 94,782 (36) 16,606(N) (27,042)(P)
Depreciation..................... 122,074 56,550 (2,071) -- 2,737(Q)
Amortization..................... 7,357 -- (54) -- --
General and administrative....... 34,891 2,185 (283) -- 1,800(R)
-------- -------- ------- -------- --------
611,391 277,586 (5,154) 16,606 (22,505)
-------- -------- ------- -------- --------
Income before allocation to
minority interests, income from
investment in unconsolidated
joint ventures................... 140,681 43,611 (1,557) (16,606) 31,488
Minority interests:
Operating Partnership............ (7,010) -- -- -- (13,166)
Partially owned properties....... (1,701) -- -- -- (43)
Income from investment in
unconsolidated joint ventures.... 5,155 1,581 -- -- --
-------- -------- ------- -------- --------
Net income from continuing
operations....................... 137,125 45,192 (1,557) (16,606) 18,279
Preferred dividends................ (649) (7,962) -- -- --
-------- -------- ------- -------- --------
Net income available for Common
Shares........................... $136,476 $ 37,230 $(1,557) $(16,606) $ 18,279
======== ======== ======= ======== ========
Net income available per Common
Share (Basic)....................
Weighted Average Common Shares
Outstanding (Basic)..............
Net income available per Common
Share (Diluted)..................
Weighted Average Common Shares
Outstanding (Diluted)............
BEACON PROPERTIES BEACON MERGER
CORPORATION AND HISTORICAL
HISTORICAL ADJUSTMENTS
----------------- --------------
(S)
REVENUES:
Rental........................... $299,196 $ 5,834(T)
Tenant reimbursements............ 39,856 --
Parking.......................... -- --
Other............................ 11,907 --
Fees from noncombined
affiliates..................... 3,090 --
Interest......................... 10,067 --
-------- --------
364,116 5,834
======== ========
EXPENSES:
Property operating............... 107,905 --
Interest......................... 52,344 943(U)
Depreciation..................... 65,034 5,374(V)
Amortization..................... 4,209 --
General and administrative....... 37,455 (20,000)(W)
-------- --------
266,947 (13,683)
-------- --------
Income before allocation to
minority interests, income from
investment in unconsolidated
joint ventures................... 97,169 19,517
Minority interests:
Operating Partnership............ (12,021) 225
Partially owned properties....... -- --
Income from investment in
unconsolidated joint ventures.... 6,087 --
-------- --------
Net income from continuing
operations....................... 91,235 19,742
Preferred dividends................ (9,349) --
-------- --------
Net income available for Common
Shares........................... $ 81,886 $ 19,742
======== ========
Net income available per Common
Share (Basic)....................
Weighted Average Common Shares
Outstanding (Basic)..............
Net income available per Common
Share (Diluted)..................
Weighted Average Common Shares
Outstanding (Diluted)............
F-6
133
EQUITY OFFICE PROPERTIES TRUST
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
1998 ACQUIRED
PROPERTIES AND FEBRUARY 1998 EQUITY OFFICE
PROBABLE NOTES SERIES B PREFERRED UIT PROPERTIES TRUST
ACQUISITIONS OFFERING OFFERING OFFERING PRO FORMA
-------------- ------------- ------------------ -------- ----------------
(X)
Revenues:
Rental................................ $ 84,229 $ -- $ -- $ -- $1,208,008
Tenant reimbursements................. 11,241 -- -- -- 212,032
Parking............................... 4,089 -- -- -- 67,796
Other................................. 1,916 -- -- -- 27,562
Fees from noncombined affiliates...... -- -- -- 8,040
Interest.............................. -- -- -- 23,528
-------- ------- -------- ------- ----------
Total revenues...................... 101,475 -- -- -- 1,546,966
-------- ------- -------- ------- ----------
Expenses:
Property operating.................... 44,273 -- -- -- 556,501
Interest.............................. 42,273 3,735(Y) (19,976)(Z) (3,040)(AB) 324,694
Depreciation.......................... 18,970 -- -- -- 268,668
Amortization.......................... -- -- -- 11,512
General and administrative............ -- -- -- -- 56,048
-------- ------- -------- ------- ----------
105,516 3,735 (19,976) (3,040) 1,217,423
-------- ------- -------- ------- ----------
Income before allocation to minority
interests, income from investment in
unconsolidated joint ventures......... (4,041) (3,735) 19,976 3,040 329,543
Minority interests:
Operating Partnership................. 420 388 (440) (316) (31,920)(AC)
Partially owned properties............ -- -- -- -- (1,744)
Income from investment in unconsolidated
joint ventures........................ -- -- -- -- 12,823
-------- ------- -------- ------- ----------
Net income from continuing operations... (3,621) (3,347) 19,536 2,724 308,702
Preferred dividends..................... -- -- (15,750)(AA) -- (33,710)
-------- ------- -------- ------- ----------
Net income available for Common
Shares................................ $ (3,621) $(3,347) $ 3,786 $ 2,724 $ 274,992
======== ======= ======== ======= ==========
Net income available per Common Share
(Basic)............................... $ 1.09
==========
Weighted Average Common Shares
Outstanding (Basic)................... 251,156
==========
Net income available per Common Share
(Diluted)............................. $ 1.08
==========
Weighted Average Common Shares
Outstanding (Diluted)................. 285,344
==========
F-7
134
EQUITY OFFICE PROPERTIES TRUST
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
A. To reflect the following acquisitions during the period from January 1, 1998
to April 30, 1998 and the Probable Acquisitions:
VALUE OF
LIABILITIES COMMON
ASSUMED SHARES/
PROPERTY DATE ACQUIRED PURCHASE COST CASH PAID OR ISSUED UNITS ISSUED
-------- ---------------- ------------- --------- ----------- ------------
BP Garage(1)..................... January 28, 1998 10,200 $ 10,200 $ -- $ --
100 Summer Street................ March 18, 1998 222,500 222,500 -- --
The Tower at New England......... March 31, 1998 27,875 27,875 -- --
Denver Post...................... April 28, 1998 53,100 53,000 -- 100
Miller Global Portfolio.......... (2) 393,015 281,476 111,539
301 Howard and 215 Fremont....... April 29, 1998 90,000 90,000 -- --
Colonnade........................ (3) 150,000 150,000 -- --
-------- -------- -------- --------
Totals........................... $946,690 $835,051 $111,539 $ 100
======== ======== ======== ========
- -------------------------
(1) The Company acquired leasehold interests in the parking facility
adjacent to BP Tower, an existing Office Property.
(2) This portfolio consists of 13 office properties. The Company acquired
four properties on April 30, 1998 and expects to acquire one property
on May 15, 1998 and the remaining eight properties on July 15, 1998. In
connection with this acquisition, the Company issued $63.4 million of
unsecured notes which are payable within 120 days of closing in either
cash or Common Shares.
(3) Probable acquisition.
B. To reflect the following costs incurred in connection with the February 1998
Notes Offering:
Termination of interest rate swaps.......................... $32,558
Underwriting fees........................................... 9,813
Offering costs.............................................. 1,000
-------
Total.................................................. $43,371
=======
C. To reflect the February 1998 Notes Offering, including an premium of $6,450
received on the $250 million MOPPRS Offering and net of an $1,998 discount
recorded on the $1.25 Billion Notes Offering.
D. To reflect the use of the net proceeds of the February 1998 Notes Offering:
Gross proceeds of February 1998 Notes Offering.............. $ 1,504,452
Costs incurred in connection with the February 1998 Notes
Offering (see Note B)..................................... (43,371)
-----------
Net proceeds........................................... $ 1,461,081
===========
Paydown of $1.5 Billion Credit Facility..................... $(1,056,062)
Paydown of revolving credit facility........................ (405,019)
-----------
Total.................................................. $(1,461,081)
===========
E. Represents adjustments to reflect the Series B Preferred Offering of $300
million consisting of six million shares of 5.25% Series B Cumulative
Convertible Redeemable Preferred Stock, liquidation preference of $50.00 per
share.
F-8
135
EQUITY OFFICE PROPERTIES TRUST
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
F. To reflect the paydown of the $1.5 Billion Credit Facility with the net
proceeds of the Series B Preferred Offering as follows:
Gross proceeds.............................................. $ 300,000
Less: Underwriting and other costs (see Note H)............. (10,500)
-----------
Net proceeds........................................... $ 289,500
===========
G. To reflect the Series B Preferred Offering.
H. To reflect the underwriting and other costs incurred in connection with the
Series B Preferred Offering.
I. To reflect the UIT Offering and paydown of the Credit Facilities with the
proceeds as follows:
Par value of Common Shares issued........................... $ 16
Additional paid in capital.................................. 44,043
--------
Proceeds used to paydown Credit Facilities.................. $ 44,059
========
J. Scheduled payments of principal on total indebtedness for each of the next
five years and thereafter, on a pro forma basis are as follows:
1998........................................................ $ 501,331
1999........................................................ 52,908
2000........................................................ 703,997
2001........................................................ 432,962
2002........................................................ 319,584
Thereafter.................................................. 2,701,378
----------
Subtotal............................................... 4,712,160
Net premium (net of accumulated amortization of $2.1
million).................................................. 5,609
----------
Total.................................................. $4,717,769
==========
F-9
136
EQUITY OFFICE PROPERTIES TRUST
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
K. Represents the combined historical statements of operations of the Company
for the period from July 11, 1997 to December 31, 1997 and Equity Office
Predecessors for the period from January 1, 1997 to July 10, 1997, and the
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1997.
L. To reflect the operations and the depreciation expense for properties
acquired in 1997 for the period from January 1, 1997 through the date of
acquisition. Interest expense was also adjusted, where applicable, to a full
year, for the year ended December 31, 1997.
PROPERTY DATE ACQUIRED NOTE REFERENCE
---------------------------------------------------- ----------------- --------------
177 Broad Street.................................... January 29, 1997
Biltmore Apartments................................. January 29, 1997
Preston Commons..................................... March 21, 1997
Oakbrook Terrace Tower.............................. April 16, 1997
50% Interest in Civic Parking, L.L.C................ April 16, 1997
One Maritime Plaza.................................. April 21, 1997
10880 Wilshire Boulevard............................ April 23, 1997 (1)
Smith Barney Tower.................................. April 29, 1997
201 Mission Street.................................. April 30, 1997
Centerpointe I and II............................... April 30, 1997 (1)
Westbrook Corporate Center.......................... May 23, 1997 (1)
225 Franklin Street................................. June 4, 1997 (1)
30 N. LaSalle....................................... June 13, 1997
Sunnyvale Business Center........................... July 1, 1997 (1)
Adams -- Wabash Parking Facility.................... August 11, 1997
Columbus America Properties......................... September 3, 1997
Civic Opera Building................................ October 1, 1997 (1)
Prudential Properties............................... October 1, 1997
550 South Hope Street............................... October 6, 1997
10 & 30 South Wacker Drive.......................... October 7, 1997
Acorn Properties.................................... October 7, 1997
200 West Adams...................................... October 8, 1997 (1)
One Lafayette Centre................................ October 17, 1997
Lakeside Office Park................................ October 20, 1997 (1)
Acorn Properties.................................... November 21, 1997
PPM Properties...................................... November 24, 1997
LaSalle Office Plaza................................ November 25, 1997
Stanwix Parking Facility............................ November 25, 1997
101 North Wacker.................................... December 11, 1997 (1)
Wright Runstad Properties........................... December 17, 1997
Wright Runstad Associates Limited Partnership....... December 17, 1997
- -------------------------
(1) Represents properties acquired during 1997 by Beacon prior to the
Beacon Merger.
F-10
137
EQUITY OFFICE PROPERTIES TRUST
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The depreciation adjustment of $56.6 million in the "1997 Acquired
Properties" column in the statement of operations for the year ended
December 31, 1997, is based on the cost to acquire the above listed
properties, assuming that 10% of the purchase price is allocated to land
and the depreciable lives are 40 years. Depreciation is computed using the
straight-line method.
M.To eliminate the operations of Barton Oaks Plaza II, Westlakes Office Park and
8383 Wilshire for the year ended December 31, 1997. Barton Oaks Plaza II was
sold in January and Westlakes Office Park and 8383 Wilshire were sold in May
1997.
N. To reflect the additional interest expense on debt obtained in the year ended
December 31, 1997 on properties acquired before 1997 and to reflect the $180
Million Notes Offering which occurred on September 3, 1997, and the resulting
paydown of the revolving credit facility, and to reflect the $235.3 million
of mortgage indebtedness repaid from draws on the $1.5 Billion Credit
Facility and the repayment of the revolving credit facility balance. The
adjustment also eliminates amortization expense recorded on the
mark-to-market adjustment on debt repaid from draws on the $1.5 Billion
Credit Facility and reflects amortization related to the fees associated with
the $1.5 Billion Credit Facility for the year ended December 31, 1997, as
follows:
Additional interest from debt obtained during 1997 on
properties acquired before 1997........................... $ 1,042
Additional interest on $180 Million Notes Offering.......... 9,218
Additional interest on $1.5 Billion Credit Facility......... 24,126
Decrease in interest from repayment of mortgage
indebtedness.............................................. (13,263)
Decrease in interest from repayment of the revolving credit
facility.................................................. (8,052)
Amortization of fees associated with the $1.5 Billion Credit
Facility.................................................. 5,018
Eliminate amortization expense recorded on mark to market
adjustment on debt repaid with the $1.5 Billion Credit
Facility.................................................. (1,483)
---------
Total.................................................. $ 16,606
=========
O. To reflect the adjustment for the straight-line effect of scheduled rent
increases, assuming the Consolidation and the IPO closed on January 1, 1997.
P. To reflect the net decrease in interest expense associated with the $15.0
million of mortgage debt on Denver Corporate Center Towers II and III repaid
in May 1997 and the $598.4 million repaid with the net proceeds of the IPO
and cash held by Equity Office Predecessors. In addition, to eliminate the
$5.9 million of amortization historically recognized as a result of the
write-off of deferred loan costs, net of the $4.1 million amortization of the
discount required to record the mortgage debt at fair value recorded in
connection with the Consolidation and the IPO.
Q. To reflect depreciation expense related to the adjustment to record the net
equity value of the investment in real estate for the year ended December 31,
1997, on a straight-line basis, as follows:
Historical investment in real estate before accumulated
depreciation at time of IPO............................... $5,022,946
Less: Portion allocated to land estimated to be 10%......... (502,295)
----------
Depreciable basis........................................... $4,520,651
==========
Depreciation expense based on an estimated useful life of 40
years..................................................... $ 113,016
Less: Historical depreciation expense related to properties
contributed at the Consolidation and IPO.................. (106,888)
Less: Pro forma depreciation expense on properties acquired
in 1997 prior to the Consolidation and the IPO............ (3,391)
----------
Depreciation expense adjustment............................. $ 2,737
==========
F-11
138
EQUITY OFFICE PROPERTIES TRUST
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
R. To reflect additional general and administrative expenses expected to be
incurred as a result of reporting as a public entity as follows:
Trustees' and officers' insurance........................... $ 375
Printing and mailing........................................ 375
Trustees' fees.............................................. 225
Investor relations.......................................... 225
Other....................................................... 600
------
Total..................................................... $1,800
======
S. Represents Beacon's historical statement of operations prior to the Beacon
Merger for the period from January 1, 1997 to December 18, 1997.
T. To reflect the adjustment for the straight-line effect of scheduled rent
increases, assuming the Beacon Merger closed on January 1, 1997.
U. To reflect amortization of mark-to-market adjustment of Beacon's mortgage
debt.
V. To reflect the depreciation expense related to the adjustment to record the
net equity value of the investment in real estate and investment in joint
ventures on a straight-line basis for the year ended December 31, 1997
associated with the Beacon Merger, as follows:
Investment in real estate for Beacon Properties............. $4,204,502
Less: Portion allocated to land............................. (515,022)
----------
Pro Forma depreciable basis of Beacon's investment in real
estate, net............................................... $3,689,480
==========
Depreciation expense based on an estimated useful life of 40
years..................................................... $ 92,237
Less: Historical expense related to the Beacon Properties,
including the period from December 19, 1997 to December
31, 1997 after the Beacon Merger.......................... (73,393)
Less: Pro Forma depreciation expense on Beacon's 1997
acquired properties....................................... (13,470)
----------
Adjustment to depreciation expense.......................... $ 5,374
==========
W.To reflect the reduction of general and administrative expenses as a result of
the Beacon Merger.
Salaries and benefits....................................... $14,500
Rent........................................................ 1,200
Office and computer expenses................................ 1,600
Investor relations.......................................... 1,600
Other....................................................... 1,100
-------
Total..................................................... $20,000
=======
X. To reflect the operations and the depreciation expense for the properties
acquired in 1998 (see Note A). Interest expense was also adjusted, where
applicable, to a full year, for the year ended December 31, 1997.
The depreciation adjustment of $18.9 million is based on the cost to acquire
the 1998 Acquired Properties and Probable Properties assuming that 10% of the
purchase price is allocated to land and the depreciable lives are 40 years.
Depreciation is computed using the straight-line method.
Y. To reflect the net increase in interest expense in connection with the
February 1998 Notes Offering and the paydown of the revolving credit facility
and the $1.5 Billion Credit Facility with the net proceeds of the February
1998 Notes Offering (see Note D) and to reflect amortization of the financing
costs incurred in connection with the February 1998 Notes Offering (see Note
B).
F-12
139
EQUITY OFFICE PROPERTIES TRUST
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Z.To reflect the decrease in interest expense in connection with the paydown of
the Credit Facilities with the net proceeds of the Series B Preferred Offering
(see Note F).
AA.To reflect preferred dividends in connection with the Series B Preferred
Offering of 5.25% per annum.
AB.To reflect the decrease in interest in connection with the paydown of the
Credit Facilities with the net proceeds of the UIT Offering (see Note I).
AC.To reflect the 10.5% minority interests ownership in the Company and to
reflect the 5% economic interest that the Company does not own in Equity
Office Properties Management Corp. (the "EOP Management Company"):
Historical allocation of income to minority interests....... $ 7,010
Beacon minority interests allocation........................ 12,021
Minority interests allocation of income after pro forma
adjustments............................................... 12,889
-------
Net income allocated to minority interests ownership in
the Company............................................... $31,920
=======
Historical ownership interest in partially owned
properties................................................ 1,701
-------
Fees from noncombined affiliates............................ 4,950
Less: EOP Management Company expenses....................... 4,100
-------
EOP Management Company net income........................... 850
-------
Economic interest of 5% in the EOP Management Company....... 43
-------
Net income allocated to minority interests ownership in
partially owned properties................................ $ 1,744
=======
F-13
140
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of
Equity Office Properties Trust
We have audited the accompanying consolidated balance sheet of Equity
Office Properties Trust (the "Company") and the combined balance sheet of the
Equity Office Predecessors, as defined in Note 1, as of December 31, 1997 and
1996, respectively, and the related consolidated statements of operations,
shareholders' equity and cash flows of the Company for the period from July 11,
1997 to December 31, 1997, and the related combined statements of operations,
owners' equity and cash flows of the Equity Office Predecessors, as defined in
Note 1, for the period from January 1, 1997 to July 10, 1997, and for the years
ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Equity Office
Properties Trust and the combined financial position of the Equity Office
Predecessors, as defined in Note 1, at December 31, 1997 and 1996, respectively,
and the consolidated results of Equity Office Properties Trust's operations and
cash flows for the period from July 11, 1997 to December 31, 1997, and the
combined results of the Equity Office Predecessors', as defined in Note 1,
operations and cash flows for the period from January 1, 1997 to July 10, 1997
and for the years ended December 31, 1996 and 1995 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
February 23, 1998, except for Note 25,
as to which the date is March 18, 1998
F-14
141
EQUITY OFFICE PROPERTIES TRUST
CONSOLIDATED BALANCE SHEET
AND
EQUITY OFFICE PREDECESSORS
COMBINED BALANCE SHEET
EQUITY OFFICE EQUITY OFFICE
PROPERTIES TRUST PREDECESSORS
DECEMBER 31, DECEMBER 31,
1997 1996
---------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS:
Investment in real estate................................... $11,041,014 $3,549,708
Accumulated depreciation.................................... (64,695) (257,893)
----------- ----------
10,976,319 3,291,815
Cash and cash equivalents................................... 228,853 410,420
Tenant and other receivables (net of allowance for doubtful
accounts of $675 and $55, respectively)................... 32,531 8,675
Deferred rent receivable.................................... 20,050 49,986
Escrow deposits and restricted cash......................... 25,772 32,593
Investment in unconsolidated joint ventures................. 387,332 26,910
Deferred financing costs (net of accumulated amortization of
$1,855 and $3,351, respectively).......................... 5,090 8,372
Deferred leasing costs (net of accumulated amortization of
$1,473 and $18,455, respectively)......................... 26,994 62,593
Prepaid expenses and other assets........................... 48,731 21,201
----------- ----------
Total Assets........................................... $11,751,672 $3,912,565
=========== ==========
LIABILITIES AND SHAREHOLDERS'/OWNERS' EQUITY:
Mortgage debt (including a net premium of $1,157 and $0,
respectively)............................................. $ 2,063,017 $1,837,767
Unsecured notes............................................. 180,000 --
Lines of credit............................................. 2,041,300 127,125
Accounts payable and accrued expenses....................... 260,401 81,995
Due to affiliates........................................... 733 2,074
Distribution payable........................................ 1,191 96,500
Other liabilities........................................... 45,055 29,022
----------- ----------
Total Liabilities...................................... 4,591,697 2,174,483
----------- ----------
Commitments and contingencies (Note 24)
Minority interests:
Operating Partnership..................................... 725,206 --
Partially owned properties................................ 29,612 11,080
----------- ----------
Total Minority Interests............................... 754,818 11,080
----------- ----------
Owners' equity.............................................. -- 1,727,002
Shareholders' equity:
8.98% Series A Cumulative Redeemable Preferred Shares,
liquidation preference $25.00 per share; 100,000,000
shares authorized, and 8,000,000 issued and
outstanding............................................ 200,000 --
Common Shares, $0.01 par value; 750,000,000 shares
authorized, 250,030,403 issued and 249,527,663
outstanding............................................ 2,495 --
Additional paid in capital................................ 6,219,511 --
Dividends in excess of accumulated earnings............... (16,849) --
----------- ----------
Total Shareholders'/Owners' Equity.......................... 6,405,157 1,727,002
----------- ----------
Total Liabilities and Shareholders'/Owners' Equity.......... $11,751,672 $3,912,565
=========== ==========
See accompanying notes.
F-15
142
EQUITY OFFICE PROPERTIES TRUST
CONSOLIDATED STATEMENT OF OPERATIONS
AND
EQUITY OFFICE PREDECESSORS
COMBINED STATEMENTS OF OPERATIONS
EQUITY OFFICE PREDECESSORS
EQUITY OFFICE, -----------------------------------------
PROPERTIES TRUST FOR THE
FOR THE PERIOD FROM
PERIOD FROM JANUARY 1, FOR THE FOR THE YEAR
JULY 11, 1997 TO 1997 TO YEAR ENDED ENDED
DECEMBER 31, JULY 10, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
---------------- ----------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
REVENUES:
Rental........................................ $ 314,233 $256,146 $386,481 $289,320
Tenant reimbursements......................... 63,196 43,241 62,036 41,935
Parking....................................... 25,960 21,091 27,253 15,390
Other......................................... 3,324 6,539 17,626 10,314
Fees from noncombined affiliates.............. 2,440 2,510 5,120 5,899
Interest...................................... 3,815 9,577 9,608 8,599
------------ -------- -------- --------
Total revenues........................... 412,968 339,104 508,124 371,457
------------ -------- -------- --------
EXPENSES:
Interest:
Expense incurred............................ 76,675 80,481 119,595 100,566
Amortization of deferred financing costs.... 4,178 2,771 4,275 2,025
Depreciation.................................. 64,695 57,379 82,905 64,716
Amortization.................................. 1,473 5,884 9,057 7,415
Real estate taxes............................. 47,579 34,000 52,182 37,978
Insurance..................................... 3,196 3,060 4,863 3,352
Repairs and maintenance....................... 50,285 45,540 71,156 53,618
Property operating............................ 54,619 44,685 72,866 56,540
General and administrative.................... 17,690 17,201 23,145 21,987
Provision for value impairment................ -- -- -- 20,248
------------ -------- -------- --------
Total expenses........................... 320,390 291,001 440,044 368,445
------------ -------- -------- --------
F-16
143
EQUITY OFFICE PREDECESSORS
EQUITY OFFICE, -----------------------------------------
PROPERTIES TRUST FOR THE
FOR THE PERIOD FROM
PERIOD FROM JANUARY 1, FOR THE FOR THE YEAR
JULY 11, 1997 TO 1997 TO YEAR ENDED ENDED
DECEMBER 31, JULY 10, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
---------------- ----------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Income before allocation to minority
interests,
income from investment in unconsolidated
joint ventures, gain on sales of real estate
and
extraordinary items......................... 92,578 48,103 68,080 3,012
Minority interests:
Operating Partnership....................... (7,010) -- -- --
Partially owned properties, net of
extraordinary gain of $20,035 in 1995.... (789) (912) (2,086) (2,129)
Income from unconsolidated joint ventures..... 3,173 1,982 2,093 2,305
Gain on sales of real estate.................. 126 12,510 5,338
------------ -------- -------- --------
Income before extraordinary items............. 88,078 61,683 73,425 3,188
Extraordinary items........................... (16,366) (274) -- 31,271
------------ -------- -------- --------
Net income.................................... 71,712 61,409 73,425 34,459
Preferred dividends........................... (649) -- -- --
------------ -------- -------- --------
Net income available for Common Shares........ $ 71,063 $ 61,409 $ 73,425 $ 34,459
============ ======== ======== ========
Net income available per weighted average
Common Share outstanding - Basic............ $ 0.44
============
Weighted average Common Shares outstanding -
Basic....................................... 162,591,477
============
Net income available per weighted average
Common Share outstanding - Diluted.......... $ 0.43
============
Weighted average Common Shares outstanding -
Diluted..................................... 180,014,027
============
See accompanying notes.
F-17
144
EQUITY OFFICE PROPERTIES TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
AND
EQUITY OFFICE PREDECESSORS
COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY
EQUITY OFFICE
PROPERTIES TRUST EQUITY OFFICE PREDECESSORS
FOR THE PERIOD ------------------------------------------------
JULY 11, 1997 FOR THE PERIOD FROM
DECEMBER 31, JANUARY 1, 1997 TO YEARS ENDED DECEMBER 31,
1997 JULY 10, 1997 1996 1995
---------------- ------------------- ----------- ----------
(DOLLARS IN THOUSANDS)
PREFERRED SHARES:
Balance, beginning of period........................... $ -- $ -- $ -- $ --
8.98% Series A Cumulative Redeemable................. 200,000 -- -- --
---------- ---------- ----------- ----------
Balance, end of period................................. $ 200,000 $ -- $ -- $ --
========== ========== =========== ==========
COMMON SHARES, $.01 PAR VALUE:
Balance, beginning of period........................... $ -- $ -- $ -- $ --
Issuance of Common Shares for IPO.................... 287 -- -- --
Contribution of net assets from Consolidation at fair
value in exchange for Common Shares................ 1,230 -- -- --
Issuance of Common Shares for acquisitions........... 34 -- -- --
Sale of Common Shares, net........................... 97 -- -- --
Issuance of Common Shares for Beacon Merger.......... 844 -- -- --
Common Shares issued for restricted shares and trustee
fees................................................. 3 -- -- --
---------- ---------- ----------- ----------
Balance, end of period................................. $ 2,495 $ -- $ -- $ --
========== ========== =========== ==========
ADDITIONAL PAID IN CAPITAL:
Balance, beginning of period........................... $ -- $ -- $ -- $ --
Net proceeds from IPO................................ 564,219 -- -- --
Contribution of net assets from Consolidation at fair
value in exchange for Common Shares................ 2,580,259 -- -- --
Issuance of Common Shares and Warrants for
acquisitions......................................... 114,966 -- -- --
Sale of Common Shares, net........................... 273,853 -- -- --
Issuance of Common Shares for Beacon Merger............ 2,652,726 -- -- --
Common Shares issued for restricted shares and trustee
fees................................................. 162 -- -- --
Adjustment for minority interests ownership in
Operating Partnership.............................. 33,326 -- -- --
---------- ---------- ----------- ----------
Balance, end of period................................. $6,219,511 $ -- $ -- $ --
========== ========== =========== ==========
DISTRIBUTIONS IN EXCESS OF ACCUMULATED EARNINGS:
Balance, beginning of period........................... $ -- $ -- $ -- $ --
Net income available for Common Shares............... 71,063 -- -- --
Dividends to Common Shares........................... (87,912) -- -- --
---------- ---------- ----------- ----------
Balance, end of period................................. $ (16,849) $ -- $ -- $ --
========== ========== =========== ==========
OWNERS' EQUITY:
Balance, beginning of period/year...................... $ -- $1,727,002 $ 1,089,969 $ 731,098
Contributions........................................ -- 285,542 661,265 337,048
Offering expenses.................................... -- -- (1,157) (128)
Distributions........................................ -- (189,752) (96,500) (12,508)
Net income........................................... -- 61,409 73,425 34,459
Contribution of Owners' Equity to the Company in
connection with the Consolidation.................. -- (1,884,201) -- --
---------- ---------- ----------- ----------
Balance, end of period/year............................ $ -- $ -- $ 1,727,002 $1,089,969
========== ========== =========== ==========
See accompanying notes.
F-18
145
EQUITY OFFICE PROPERTIES TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
AND
EQUITY OFFICE PREDECESSORS
COMBINED STATEMENTS OF CASH FLOWS
EQUITY OFFICE PREDECESSORS
---------------------------------------------
EQUITY OFFICE FOR THE PERIOD
PROPERTIES TRUST FROM FOR THE YEAR FOR THE YEAR
FOR THE PERIOD FROM JANUARY 1, 1997 ENDED ENDED
JULY 11, 1997 TO TO JULY 10, DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1997 1997 1996 1995
------------------- --------------- ------------ ------------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income before preferred dividends............... $ 71,712 $ 61,409 $ 73,425 $ 34,459
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 70,346 66,034 96,237 74,156
(Income) from unconsolidated joint ventures....... (3,173) (1,982) (2,093) (2,305)
(Gain) on sales of real estate.................... (126) (12,510) (5,338) --
Provision for value impairment.................... -- -- -- 20,248
Extraordinary loss from early extinguishments of
debt............................................ 16,366 274 -- --
Extraordinary (gain) on repurchase of debt........ -- -- -- (31,271)
Provision for doubtful accounts................... 1,686 1,175 2,284 2,096
Allocation to minority interests.................. 7,799 912 2,086 2,129
Changes in assets and liabilities:
Decrease (increase) in rents receivable......... 2,064 2,664 (1,550) (2,998)
(Increase) in deferred rent receivables......... (21,421) (8,061) (20,421) (14,413)
(Increase) decrease in other assets............. (29,551) (8,839) (9,747) 1,374
Increase in accounts payable and accrued
expenses...................................... 54,076 2,916 19,241 6,931
(Decrease) increase in due to affiliates........ (898) (722) 1,235 (89)
Increase (decrease) in other liabilities........ 21,874 (7,310) 10,616 3,561
----------- --------- ---------- ---------
Net cash provided by operating activities..... 190,754 95,960 165,975 93,878
----------- --------- ---------- ---------
INVESTING ACTIVITIES:
Cash received from Beacon Merger.................... 79,786 -- -- --
Property acquisitions............................... (1,508,928) (531,968) (768,906) (317,669)
Payments for capital and tenant improvements........ (99,586) (59,511) (129,485) (76,985)
Payment of Beacon Merger costs...................... (62,069) -- -- --
Proceeds from sales of real estate.................. -- 72,078 14,502 --
Distributions from (investments in) unconsolidated
joint ventures.................................... 4,571 (44,260) 1,688 2,300
Payments of lease acquisition costs................. (15,043) (9,260) (29,793) (16,106)
Decrease (increase) in escrow deposits and
restricted cash................................... 8,997 1,853 (12,233) 27,845
----------- --------- ---------- ---------
Net cash (used for) investing activities...... (1,592,272) (571,068) (924,227) (380,615)
----------- --------- ---------- ---------
FINANCING ACTIVITIES:
Net proceeds from sale of Common Shares............. 838,456 -- -- --
Proceeds from exercise of Beacon options............ 68,191 -- -- --
Dividends/distributions to Common Shares and
Units............................................. (95,569) -- -- --
Capital contributions............................... -- 287,949 661,265 337,048
Capital distributions............................... -- (288,652) (12,508) (17,800)
Payments for offering expenses...................... -- -- (1,157) (128)
(Distributions to) contributions from minority
interests -- partially owned properties........... (371) (3,401) (22,593) 141
Cash contributed by Equity Office Predecessors in
connection with Consolidation..................... 181,138 -- -- --
Proceeds from mortgage debt......................... 84,466 154,090 640,953 271,482
Proceeds from unsecured notes....................... 180,000 -- -- --
Proceeds from lines of credit....................... 2,530,425 218,000 216,943 288,000
Repurchase of debt.................................. -- -- -- (40,078)
Principal payments on mortgage debt................. (838,354) (47,472) (254,104) (182,244)
Principal payments on lines of credit............... (1,294,750) (72,500) (165,818) (378,000)
Payments of loan costs.............................. (7,039) (1,889) (5,430) (1,908)
Prepayment penalties on early extinguishments of
debt.............................................. (16,247) (274) -- --
----------- --------- ---------- ---------
Net cash provided by financing activities..... 1,630,346 245,851 1,057,551 276,513
----------- --------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... 228,828 (229,257) 299,299 (10,224)
Cash and cash equivalents at the beginning of the
period.............................................. 25 410,420 111,121 121,345
----------- --------- ---------- ---------
Cash and cash equivalents at the end of the period.... $ 228,853 $ 181,163 $ 410,420 $ 111,121
=========== ========= ========== =========
SUPPLEMENTAL INFORMATION:
Interest paid during the period, including
capitalized interest of $1,890, $3,669, $4,640 and
$1,682, respectively.............................. $ 70,658 $ 82,969 $ 121,813 $ 100,700
=========== ========= ========== =========
See accompanying notes.
F-19
146
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND FORMATION OF COMPANY
As used herein, "Company" means Equity Office Properties Trust, a Maryland
real estate investment trust, together with its subsidiaries including EOP
Operating Limited Partnership, a Delaware limited partnership (the "Operating
Partnership"), and the predecessors thereof ("Equity Office Predecessors"). The
Company was formed on October 9, 1996 to continue and expand the national office
property business organized by Mr. Samuel Zell, Chairman of the Board of
Trustees of the Company and to complete the consolidation of the Equity Office
Predecessors (the "Consolidation") and its initial public offering (the "IPO")
on July 11, 1997. The Company is a fully integrated, self-administered and
self-managed real estate company engaged in acquiring, owning, managing, leasing
and renovating office properties and parking facilities. The Company expects to
qualify as a real estate investment trust ("REIT") for federal income tax
purposes and generally will not be subject to federal income tax if it
distributes 95% of its taxable income and complies with a number of
organizational and operational requirements (see Note 2). As of December 31,
1997, the Company owned or had an interest in 258 office properties (the "Office
Properties") containing approximately 65.3 million rentable square feet of
office space and owned 17 stand-alone parking facilities containing
approximately 16,749 parking spaces (the "Parking Facilities" and, together with
the Office Properties, the "Properties"). The Office Properties are located in
78 submarkets in 39 markets in 24 states and the District of Columbia. The
Office Properties, by rentable square feet, are located approximately 50% in
central business districts ("CBDs") and 50% in suburban markets.
On July 11, 1997, the Company consummated the IPO having sold 28,750,000 of
its common shares of beneficial interest, $0.01 par value per share ("Common
Shares") (including 3,750,000 Common Shares relating to the underwriters
overallotment option) at $21 per Common Share generating proceeds of
approximately $603.8 million. The Company contributed net proceeds from the IPO
(after deducting the underwriting discount of approximately $39.2 million) of
approximately $564.5 million to the Operating Partnership in exchange for
28,750,000 units of partnership interest in the Operating Partnership ("Units").
The Company used the net proceeds of the IPO and available cash reserves to
repay debt of approximately $678.4 million, of which $598.4 million was mortgage
debt and $80 million was a revolving line of credit.
Concurrent with the IPO, the Company also completed the following formation
transactions which resulted in the Consolidation of the Equity Office
Predecessors into the Company:
-- Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership,
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership
II, Zell/Merrill Lynch Real Estate Opportunity Partners Partnership
Limited III and Zell/Merrill Lynch Real Estate Opportunity Partners
Limited Partners IV (collectively the "ZML Opportunity Partnerships"),
the predecessor owner of the Properties, contributed their interests in
the Properties to the Operating Partnership in exchange for 126,419,397
Units.
-- ZML Investors Inc., ZML Investors II, Inc., Zell/Merrill Lynch Real
Estate Opportunity Partners III Trust and Zell/Merrill Lynch Real Estate
Opportunity Partners IV Trust (collectively "ZML REITs") merged into the
Company, with the Company succeeding to their interests in, and becoming
the managing general partners of each of the ZML Opportunity
Partnerships. Shareholders of the ZML REITs received 122,900,572 Common
Shares of the Company in exchange for their interests in the ZML REITs.
-- Equity Group Investments, Inc. an Illinois corporation ("EGI"), and
Equity Office Holdings, L.L.C., a Delaware limited liability company
("EOH" and together with EGI, the "Equity Group") contributed
substantially all of their interests in their office property and asset
management business and parking facilities management business
(collectively the "Management Business") to the Operating Partnership in
exchange for 8,358,822 Units.
F-20
147
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
-- The Operating Partnership transferred a portion of the office property
management business of EOH, the office property asset management business
and the parking asset management business of the Equity Group that
relates to the property management of the properties owned by the Equity
Group, together with the 18 Properties held in partnerships or subject to
participation agreements with unaffiliated parties (the "Joint Venture
Properties") (collectively, the "Managed Property Business") to Equity
Office Properties Management Corp., a Delaware corporation (the "EOP
Management Company"), in exchange for non-voting stock representing 95%
of the economic value in the EOP Management Company and EOH contributed
$150,000 to the EOP Management Company in exchange for voting stock
representing 5% of the economic value of the EOP Management Company.
-- ZML Partners Limited Partnership, ZML Partners Limited Partnership II,
ZML Partners Limited Partnership III and ZML Partners Limited Partnership
IV (the "ZML Partners"), each of which is the general partner of one of
the ZML Opportunity Partnerships, each transferred their 5% interest in
certain corporations which owned a 1% general partnership interest in
certain of the property title holding entities to a newly formed
qualified REIT subsidiary in exchange for 26,458 Common Shares.
-- The Operating Partnership transferred its 95% interest in certain
corporations which owned a 1% general partner interest in certain of the
property title holding entities to a subsidiary of the Company in
exchange for 502,740 Common Shares. Such Common Shares have been treated
as treasury stock in the accompanying financial statements.
The table below summarizes the ownership of the Company and the Operating
Partnership upon the completion of the transactions described above:
OWNERSHIP OF EQUITY OFFICE PROPERTIES TRUST (AS OF IPO DATE):
NUMBER OF
COMMON SHARES PERCENTAGE
------------- ----------
Original capitalization (by Mr. Samuel Zell)................ 1,000 --
Common Shares sold in the IPO............................... 28,750,000 18.9%
Common Shares issued to shareholders of ZML REITs........... 122,900,572 80.8%
Common Shares issued to the ZML Partners.................... 26,458 --
Common Shares issued to the Operating Partnership........... 502,740 0.3%
----------- -----
Total (see Note 12).................................... 152,180,770 100.0%
=========== =====
(Assuming all Units are converted to Common Shares):
Common Shares sold in the IPO............................... 28,750,000 17.6%
Common Shares issued to shareholders of ZML REITs, including
Mr. Zell.................................................. 122,928,030 75.2%
Units convertible to Common Shares (see Note 12)............ 11,877,647 7.2%
----------- -----
Total.................................................. 163,555,677 100.0%
=========== =====
F-21
148
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
OWNERSHIP OF EOP OPERATING LIMITED PARTNERSHIP (AS OF IPO DATE):
NUMBER OF UNITS PERCENTAGE
--------------- ----------
Equity Office Properties Trust (held directly).............. 28,777,458 17.6%
Equity Office Properties Trust (held through its interests
in the
ZML Opportunity Partnerships)............................. 122,900,572 75.1%
Equity Office Properties Trust subtotal..................... 151,678,030 92.7%
ZML Partners (held through its interest in ZML Opportunity
Partnerships)............................................. 3,229,001 2.0%
Other limited partner (held through its interest in ZML
Opportunity Partnership II)............................... 289,824 0.2%
Equity Group Investments, Inc............................... 3,737,438 2.3%
Equity Office Holdings, L.L.C............................... 4,621,384 2.8%
----------- -----
Total.................................................. 163,555,677 100.0%
=========== =====
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidation was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16. Accordingly, the fair value of the
consideration given by the Company was used as the valuation basis for the
transactions. The assets acquired and liabilities assumed by the Company were
recorded at their fair value as of July 11, 1997 and the excess of the purchase
price over the related historical basis of the net assets acquired was allocated
primarily to investment in real estate.
The Company's assets, which include investments in joint ventures, are
primarily owned by, and its operations are substantially conducted through, the
Operating Partnership. The Company is the managing general partner of the
Operating Partnership. Due to the Company's ability as general partner to
control either through ownership or by contract the Operating Partnership and
various other subsidiaries, each such entity has been consolidated with the
Company for financial reporting purposes. In regard to EOP Management Company,
the Company owns a non-voting 95% interest but does not have legal control;
however, EOP Management Company is consolidated for financial reporting
purposes, the effect of which is immaterial. The remaining 5% equity and the
controlling voting interest is owned by an affiliate of the Company.
The Beacon Merger (as defined in Note 4) was accounted for using the
purchase method in accordance with Accounting Principles Board Opinion No. 16.
The fair value of the consideration given by the Company in the Beacon Merger
was used as the valuation basis of the combination. The assets acquired and the
liabilities assumed of Beacon were recorded at their relative fair values as of
December 19, 1997 (the "Beacon Closing Date"). The results of operations of the
Beacon properties for the period from the Beacon Closing Date through December
31, 1997 are included in the Company's consolidated statements of operations and
cash flows. In connection with the Beacon Merger, the Company also acquired a
99% equity interest in (but not voting-control of) Beacon Property Management
Corporation ("Beacon Management Company"), which manages third-party and joint
venture office and commercial space, Beacon Design Company, which provided
third-party tenant design services prior to ceasing such operations upon the
sale of its design service assets in 1998, and Beacon Construction Company,
which provides third-party construction services and is expected to cease such
operations upon completion of its existing contracts. Although the Company does
not have voting control of Beacon Management Company, Beacon Design Company and
Beacon Construction Company, they are consolidated for financial reporting
purposes, the effect of which is immaterial. The remaining 1% equity and the
controlling voting interest is owned by an affiliate of the Company.
F-22
149
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The combined financial statements of Equity Office Predecessors prior to
the Consolidation and the IPO included interests in the Properties of the ZML
Opportunity Partnerships together with their limited and general partners
(collectively, the "ZML Funds" which includes ZML Fund I, ZML Fund II, ZML Fund
III and ZML Fund IV) and the Management Business. The financial statements of
Equity Office Predecessors are presented on a combined basis, at historical
cost, because the ZML Funds and the Management Business were under common
control. Minority interests have been recorded for those entities that were not
wholly owned by the ZML Funds. Where controlling interests were not held by the
ZML Funds, the entities were accounted for as investments in unconsolidated
joint ventures utilizing equity accounting. All intercompany transactions and
balances have been eliminated in combination.
INVESTMENT IN REAL ESTATE
Subsequent to the Consolidation, rental property and improvements,
including costs capitalized during construction and other costs incurred, are
included in investment in real estate and are stated at cost. Expenditures for
ordinary maintenance and repairs are expensed to operations as they are
incurred. Significant renovations and improvements which improve or extend the
useful life of the assets are capitalized. Except for amounts attributed to
land, rental property and improvements are depreciated over their estimated
useful lives using the straight-line method. The estimated useful lives by asset
category are:
ASSET CATEGORY ESTIMATED USEFUL LIFE
-------------- ---------------------
Building........................................ 40 years
Building improvements........................... 4-40 years
Tenant improvements............................. Term of lease
Furniture and fixtures.......................... 3-12 years
During 1995, the Financial Accounting Standards Board issued Statement No.
121 "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of"
("Statement No. 121") which established accounting standards for the evaluation
of the potential impairment of such assets. Statement No. 121 was adopted by
Equity Office Predecessors as of January 1, 1995. Rental properties are
individually evaluated for impairment when conditions exist which may indicate
that it is probable that the sum of expected future cash flows (on an
undiscounted basis) from a rental property are less than its historical net cost
basis. Upon determination that a permanent impairment has occurred, rental
properties are reduced to their fair value. During the year ended December 31,
1995, Equity Office Predecessors recorded a provision for value impairment of
approximately $20.2 million, of which $17.5 million related to the adjustment of
investment in real estate and approximately $2.7 million related to unamortized
lease acquisition cost.
For properties to be disposed of, an impairment loss is recognized when the
fair value of the property, less the estimated cost to sell, is less than the
carrying amount of the property measured at the time the Company has a
commitment to sell the property and/or is actively marketing the property for
sale. Property to be disposed of is reported at the lower of its carrying amount
or its estimated fair value, less its cost to sell. Subsequent to the date that
a property is held for disposition, depreciation expense is not provided for in
the statement of operations.
DEFERRED LEASING AND FINANCING COSTS
Deferred leasing and financing costs are recorded at cost. The deferred
leasing costs are amortized over the terms of the respective leases and the
deferred financing costs are amortized over the terms of the respective
financings on a straight-line basis, which approximates the effective yield
method.
F-23
150
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
RENTAL INCOME
Certain leases of Office Properties provide for tenant occupancy during
periods for which no rent is due or where minimum rent payments increase during
the term of the lease. The Company records rental income for the full term of
each lease on a straight-line basis. Accordingly, the Company records a
receivable from tenants, net of reserves, which the Company expects to collect
over the remaining term of these leases rather than currently ("Deferred Rent
Receivable"). For existing leases at acquired properties, the term of the lease
is considered to commence as of the acquisition date for purposes of this
calculation. The amounts included in rental income for the periods July 11, 1997
to December 31, 1997 and January 1, 1997 to July 10, 1997 and the years ended
December 31, 1996 and 1995, which were not currently collectible as of such
dates, were approximately $20.0 million, $7.7 million, $18.4 million and $12.7
million, respectively. Deferred Rent Receivable is not recognized for income tax
purposes.
CASH EQUIVALENTS
The Company considers cash equivalents to be all highly liquid investments
purchased with a maturity of three months or less at the date of purchase. As of
December 31, 1996 cash equivalents included deposits made to a commingled bank
account which was held in an affiliate's name. Such affiliate provided
centralized cash management services to Equity Office Predecessors.
ESCROW DEPOSITS AND RESTRICTED CASH
Escrow deposits primarily consist of amounts held by lenders to provide for
future real estate tax expenditures, tenant improvements and earnest money
deposits on acquisitions. Restricted cash represents amounts committed for
various utility deposits and security deposits. Certain of these amounts may be
reduced upon the fulfillment of certain obligations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes that the carrying basis of the Company's long-term
debt, consisting of mortgage loans, revolving bank loans and various interest
rate protection agreements, approximate their respective fair market values as
of December 31, 1997 and 1996, respectively. The current value of debt was
computed by discounting the projected debt service payments for each loan based
on the spread between the market rate and the effective rate, including the
amortization of loan origination costs, for each year. In addition, the carrying
values of cash and cash equivalents, restricted cash, escrow deposits, tenant
and other rents receivable, accounts payable and accrued expenses are reasonable
estimates of their fair value.
INTEREST RATE PROTECTION AGREEMENTS
The Company periodically enters into certain interest rate protection
agreements to effectively convert or cap floating rate debt to a fixed rate
basis, as well as to hedge anticipated finance transactions. Net amounts paid or
received under these agreements are recognized as an adjustment to interest
expense when such amounts are incurred or earned. Settlement amounts paid or
received in connection with terminated interest rate protection agreements are
deferred and amortized as an adjustment to interest expense over the term of the
related financing transaction on the straight-line method, which approximates
the effective yield amount.
INCOME TAXES
The Office Properties, Parking Facilities and the Management Business are
primarily owned in limited partnerships or limited liability companies, which
are substantially pass-through entities. Some of these pass-through entities
have corporate general partners or members, which are subject to federal and
state income and franchise taxes. The Company incurred federal and state income
and franchise taxes of approximately
F-24
151
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
$0.2 million, $0.9 million, $1.4 million and $1.6 million for the periods July
11, 1997 to December 31, 1997 and January 1, 1997 to July 10, 1997 and the years
ended December 31, 1996 and 1995, respectively, which are included in general
and administrative expenses.
Commencing with the year ended December 31, 1997, the Company intends to
make an election to be taxed as a REIT, under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company
generally will not be subject to federal income tax if it distributes at least
95% of its taxable income for each tax year to its shareholders. REITs are
subject to a number of organizational and operational requirements. If the
Company fails to qualify as a REIT in any taxable year, the Company will be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate tax rates. Even if the Company
qualifies for taxation as a REIT, the Company may be subject to state and local
income taxes and to federal income tax and excise tax on its undistributed
income. The aggregate cost of land and depreciable property for federal income
tax purposes as of December 31, 1997 was approximately $7.5 billion.
INCOME PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share ("Statement No. 128"). Statement No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All net income per weighted average
Common Share and net income per weighted average Common Share -- assuming
dilution amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement No. 128 requirements. The effect of a
conversion of a Unit to a Common Share has been excluded from basic earnings per
Common Share, due to certain restrictions.
MINORITY INTERESTS
OPERATING PARTNERSHIP:
Net income is allocated to minority interests based on their respective
ownership percentage of the Operating Partnership. The ownership percentage is
calculated by dividing the number of Units held by the minority interests by the
total Units held by both the minority interests and the Company. Issuance of
additional Common Shares or Units changes the ownership interests of both the
minority interests and the Company. Such transactions and the proceeds therefrom
are treated as capital transactions.
PARTIALLY OWNED PROPERTIES:
The Company reflects minority interests on the balance sheet for the
portion of properties, which are consolidated by the Company, that are not
wholly owned by the Company. The earnings or losses therefrom have been
reflected as minority interest in the Company's statements of operations.
RECLASSIFICATION
Certain reclassifications have been made to the previously reported 1996
and 1995 statements in order to provide comparability with the 1997 statements
report herein. These reclassifications have not changed the 1996 and 1995
results or owners' equity.
USE OF ESTIMATES
The preparation of the consolidated financial statements of the Company and
the combined financial statements of Equity Office Predecessors in conformity
with generally accepted accounting principles requires
F-25
152
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 periods. Actual results could differ from those
estimates.
NOTE 3 -- INVESTMENT IN REAL ESTATE
Investment in real estate, including Office Properties and Parking
Facilities, was as follows:
EQUITY OFFICE EQUITY OFFICE
PROPERTIES TRUST PREDECESSORS
DECEMBER 31, DECEMBER 31,
1997 1996
---------------- -------------
(DOLLARS IN THOUSANDS)
Land........................................................ $ 1,185,411 $ 314,370
Building.................................................... 9,706,956 2,871,690
Building improvements....................................... 55,278 161,497
Tenant improvements......................................... 89,455 196,093
Furniture and fixtures...................................... 3,914 6,058
----------- ----------
Gross investment in real estate........................ 11,041,014 3,549,708
Accumulated depreciation.................................... (64,695) (257,893)
----------- ----------
Net investment in real estate.......................... $10,976,319 $3,291,815
=========== ==========
In connection with the initial rental operations of the 28 State Street
property in Boston, the Company incurred and capitalized approximately $5.6
million and $4.7 million of interest costs in the years ended December 31, 1997
and 1996, respectively.
F-26
153
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended December 31, 1997, the Company acquired the
Properties listed below. Each Property was purchased from an unaffiliated party.
The cash portions of the acquisitions were funded from the Company's lines of
credit or working capital. In connection with certain of the acquisitions listed
below, the Company assumed indebtedness of approximately $1.4 billion and issued
Common Shares, Units, preferred shares and warrants with a value of $3.4
billion.
TOTAL
ACQUISITION
RENTABLE COST
DATE ACQUIRED OFFICE PROPERTY/PORTFOLIO LOCATION SQUARE FEET (IN THOUSANDS)
------------- ------------------------- -------- ----------- --------------
1/29/97.............. 177 Broad Street(1) Stamford, CT 187,573 $ 36,254(2)
3/21/97.............. Preston Commons(1) Dallas, TX 418,604 55,174
4/16/97.............. Oakbrook Terrace Tower(1) Oakbrook Terrace, IL 772,928 130,108
4/21/97.............. One Maritime Plaza(1) San Francisco, CA 523,929 99,389
4/28/97.............. Smith Barney Tower(1) San Diego, CA 187,999 35,148
4/30/97.............. 201 Mission Street(1) San Francisco, CA 483,289 74,634
6/13/97.............. 30 North LaSalle(1) Chicago, IL 925,950 100,707
9/3/97............... LL&E Tower New Orleans, LA 545,157 61,819
9/3/97............... Texaco Center New Orleans, LA 619,714 66,819
10/1/97.............. Prudential Properties Houston, TX; Dallas, TX; 2,481,441 284,199
Philadelphia, PA
10/6/97.............. 550 South Hope Los Angeles, CA 566,434 100,135
10/7/97.............. 10 & 30 South Wacker Drive Chicago, IL 2,003,288 484,772(3)
10/7/97.............. Acorn Properties Philadelphia, PA 849,867 130,088
10/17/97............. One Lafayette Centre Washington, DC 314,634 82,546
11/21/97............. Acorn Properties Philadelphia, PA 154,894 17,285
11/24/97............. Lakeside Square Dallas, TX 392,537 55,524
11/24/97............. Fair Oaks Plaza Fairfax, VA 177,917 24,077
11/24/97............. 1600 Duke Street Alexandria, VA 68,770 11,038
11/25/97............. LaSalle Plaza Minneapolis, MN 589,432 96,704
12/17/97............. Wright Runstad Properties Anchorage, AK; Portland, 3,340,055 640,000(4)
OR; Seattle, WA
12/19/97............. Beacon Properties Boston, Atlanta, Chicago, 20,900,000 4,016,546
Los Angeles, San Jose and
Washington, DC
---------- ----------
36,504,412 $6,602,966
========== ==========
TOTAL
ACQUISITION
COST
DATE ACQUIRED PARKING FACILITY LOCATION PARKING SPACES (IN THOUSANDS)
------------- ---------------- -------- -------------- --------------
8/11/97.............. Adams Wabash Facility Chicago, IL 670 $25,212
9/3/97............... 601 Tchoupitoulas Garage New Orleans, LA 759 11,757
11/25/97............. Stanwix Parking Pittsburgh, PA 712 17,909
----- -------
2,141 $54,878
===== =======
- ---------------
(1) These Properties were acquired by Equity Office Predecessors. The total
acquisition cost reflected above represents the cost paid by Equity Office
Predecessors to acquire each respective Property. The acquisition of the
Properties, or the interest therein, by the Company from Equity Office
Predecessors in
F-27
154
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
connection with the Consolidation, was recorded as a purchase. Accordingly,
the assets were recorded by the Company at their fair value.
(2) The total acquisition cost also included 161 residential units.
(3) The total acquisition cost includes $19.3 million related to real estate tax
liabilities assumed at closing.
(4) The Wright Runstad Properties acquisition cost includes $15.0 million
relating to 5,000,000 warrants which expire in December 2002, to purchase
Common Shares at $39.375 per Common Share (see Note 12).
NOTE 4 -- BEACON MERGER
On December 19, 1997, the Company, the Operating Partnership, Beacon
Properties Corporation, a Maryland corporation ("Beacon") and Beacon Partnership
L.P. ("Beacon Partnership") consummated the merger of Beacon with and into the
Company and Beacon Partnership with and into the Operating Partnership (the
"Beacon Merger") at a cost of approximately $4.3 billion. In the Beacon Merger,
(i) the Company issued 80,596,117 Common Shares in exchange for all of the
outstanding Beacon common shares, (ii) the Company issued 8,000,000 Series A
Preferred Shares in exchange for all of the outstanding Beacon preferred shares,
(iii) the Operating Partnership issued 8,570,886 Units in exchange for the
outstanding common partnership units of Beacon Partnership exclusive of those
held by Beacon, and (iv) the Operating Partnership issued to the Company
80,596,117 Units underlying the Common Shares issued in exchange for the Beacon
common shares and 8,000,000 Series A preferred units underlying the Series A
Cumulative Redeemable Preferred Shares issued in exchange for the Beacon
preferred shares. In addition, the Company assumed the obligation to issue
4,732,822 Common Shares, of which 3,829,739 had been issued as of December 31,
1997 upon the exercise of certain outstanding Beacon employee stock options. The
$4.3 billion purchase price is comprised of the following: (1) based on a share
price of $31.30, the Common Shares, including Common Shares issued for stock
options, and Units were valued at approximately $2.853 billion (which is net of
a reduction for cash received or to be received upon exercise of the stock
options of $86 million); (2) the issuance of 8,000,000 Series A Cumulative
Redeemable Preferred Shares valued at their liquidation value of $200 million;
(3) the assumption of approximately $627 million of secured debt and $533
million of unsecured debt; (4) merger costs of approximately $85 million and;
(5) net of the receipt of approximately $8 million of net assets.
As a result of the Beacon Merger, the Company acquired an interest in 130
Beacon properties containing approximately 20.9 million rentable square feet of
office space. The Beacon properties are located in 22 submarkets in six markets:
Boston, Atlanta, Chicago, Los Angeles, San Jose and Washington, D.C. The Beacon
properties, by rentable square feet, are located 65% in suburban markets and 35%
in CBDs, primarily Boston. As of December 31, 1997, the Beacon properties were
on a weighted average basis approximately 95% leased by a total of approximately
1,694 tenants.
In connection with the Beacon Merger, the Company also acquired a 99%
equity interest in Beacon Management Company, which manages third-party office
and commercial space, Beacon Design Company, which provided third-party and
joint venture tenant design services prior to ceasing such operations upon the
sale of its design service assets in 1998, and Beacon Construction Company,
which provides third-party construction services and is expected to cease such
operations upon completion of its existing contracts.
NOTE 5 -- DISPOSITIONS
In May 1997, Equity Office Predecessors sold 8383 Wilshire, an Office
Property located in Beverly Hills, California for approximately $59 million. The
gain for financial reporting purposes was approximately $6.7 million.
F-28
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EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1997, Equity Office Predecessors sold Barton Oaks Plaza II for
approximately $13.5 million. The gain for financial reporting purposes was
approximately $5.9 million.
Three Lakeway is a mixed-use property, that included a 210-room hotel and
an 18-story office complex. In January 1996, Equity Office Predecessors sold the
condominium portion of the property which comprised the hotel. The gross sale
price attributable to the land and building was approximately $14.8 million and
the gain realized was approximately $5.3 million.
NOTE 6 -- INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
Equity Office Predecessors acquired a mortgage receivable secured by the
500 Orange Tower Office Property ("500 Orange") and purchased land underlying
and adjacent to 500 Orange in July 1994, and acquired a 50% limited partnership
interest in Civic Parking, L.L.C. in April 1997. On December 17, 1997, the
Company acquired a 30% noncontrolling interest in Wright Runstad Asset Limited
Partnership ("WRALP") for $20.0 million and agreed to provide up to $20.0
million in additional financing or credit support for future development
activities of WRALP. In connection with the Beacon Merger on December 19, 1997,
the Company acquired interests in four unconsolidated joint ventures (the
"Beacon Joint Ventures"). The Company's ownership in the Beacon Joint Ventures
is as follows:
COMPANY'S OWNERSHIP
AS OF DECEMBER 31,
PROPERTY 1997
-------- -------------------
Polk & Taylor(A).............................. 10%
One Post Office(B)............................ 50%
75-101 Federal Street(C)...................... 52%
Rowes Wharf(D)................................ 50%
- ---------------
(A) The Company owns a 1% general partner interest and a 9% limited partner
interest.
(B) The Company is a general partner in the joint venture.
(C) The Company is a shareholder in the corporation (a private REIT) which owns
the property.
(D) The Company owns a 50% interest in the first mortgage.
These investments are accounted for utilizing the equity method of
accounting. Under this method of accounting the net equity investment of the
Company is reflected on the consolidated and combined balance sheets, and the
consolidated and combined statements of operations include the Company's share
of net income or loss from the unconsolidated joint ventures. As a result of
purchase method accounting for the Beacon Merger and the Consolidation, any
difference between the carrying amount of these investments on the balance sheet
of the Company and the underlying equity in net assets is amortized as an
adjustment to income from unconsolidated joint ventures over 40 years.
F-29
156
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Combined summarized financial information of the unconsolidated joint
ventures is as follows:
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
BALANCE SHEETS:
Real estate, net.......................................... $523,670 $26,555
Other assets.............................................. 73,450 1,017
-------- -------
Total Assets........................................... $597,120 $27,572
======== =======
Mortgage notes and loans payable.......................... $344,427 $ --
Other liabilities......................................... 15,271 662
Partners' and shareholders' equity........................ 237,422 26,910
-------- -------
Total Liabilities and Partners' and Shareholders'
Equity................................................ $597,120 $27,572
======== =======
Company's share of equity................................. $155,522 $26,910
Excess of cost of investments over the net book value of
underlying net assets, net of accumulated depreciation
of $99................................................. 231,810 --
-------- -------
Carrying value of investments in unconsolidated joint
ventures and corporation............................... $387,332 $26,910
======== =======
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
STATEMENTS OF OPERATIONS:
Revenues.................................................... $16,687 $ 4,775 $ 5,002
Operating expenses.......................................... 4,638 1,852 1,995
Interest expense............................................ 793 -- --
Depreciation and amortization............................... 2,752 830 702
------- ------- -------
Net income............................................. $ 8,504 $ 2,093 $ 2,305
======= ======= =======
Company's share of net income............................... $ 5,155 $ 2,093 $ 2,305
======= ======= =======
Company's share of depreciation and amortization
(real estate related)..................................... $ 1,524 $ 830 $ 702
======= ======= =======
NOTE 7 -- MORTGAGE DEBT
The Company had outstanding mortgage indebtedness of approximately $2.1
billion and $1.8 billion as of December 31, 1997 and 1996, respectively. The
historical cost, net of accumulated depreciation, of encumbered properties at
December 31, 1997 and 1996 were approximately $4.3 billion and $2.0 billion,
respectively. During the years ended December 31, 1997 and 1996, the Company (a)
repaid approximately $885.8 million and $254.1 million, respectively, of
mortgage debt with proceeds from the IPO, the credit facilities and available
cash reserves; (b) assumed approximately $890.5 million and $92.1 million,
respectively, of mortgage debt in connection with the acquisition of certain
properties; and (c) obtained proceeds from the financing of certain properties
and draws on existing mortgages totaling approximately $238.6 million and $641.0
million, respectively.
A summary of the Company's fixed and variable rate mortgage debt is as
follows:
F-30
157
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FIXED RATE MORTGAGE DEBT
As of December 31, 1997 and 1996, the Company had outstanding fixed rate
mortgage indebtedness of approximately $2.0 billion and $1.3 billion,
respectively. Payments on fixed rate mortgage debt are generally due in monthly
installations of principal and interest or interest only. As of December 31,
1997 and 1996, fixed interest rates ranged from 6.67% to 8.63% and 6.88% to 10%,
respectively. The weighted average fixed interest rate was approximately 7.53%
and 7.89% as of December 31, 1997 and 1996, respectively.
VARIABLE RATE MORTGAGE DEBT
As of December 31, 1997 and 1996, the Company had outstanding variable rate
mortgage indebtedness of approximately $23.5 million and $533.7 million,
respectively. Payments on variable rate mortgage debt are generally due in
monthly installments of principal and interest or interest only. As of December
31, 1997 the variable interest rate was 6.94% (LIBOR + 1%). As of December 31,
1996, variable interest rates ranged from 6.56% (LIBOR + 1%) to 7.83% (LIBOR +
2.25%). The weighted average variable interest rate was approximately 6.94% and
7.35% as of December 31, 1997 and 1996, respectively.
DRAW FACILITIES
As stated in the respective loan agreements, the Company has the ability to
draw additional proceeds on certain of its mortgages for operating deficits,
capital and tenant improvements, and lease acquisition costs. As of December 31,
1997 and 1996, amounts available to draw under these mortgage notes were
approximately $19.0 million and $92.6 million, respectively.
REPAYMENT SCHEDULE
Scheduled payments of principal on mortgage debt for each of the next five
years and thereafter, as of December 31, 1997, are as follows:
(DOLLARS IN THOUSANDS)
1998........................................................ $ 83,792
1999........................................................ 52,908
2000........................................................ 151,236
2001........................................................ 432,962
2002........................................................ 69,584
Thereafter.................................................. 1,271,378
----------
Subtotal............................................... 2,061,860
Net premium (net of accumulated amortization of $2.1
million).................................................. 1,157
----------
Total.................................................. $2,063,017
==========
NOTE 8 -- LINES OF CREDIT
A $200 million line of credit (the "$200 Million Line") was obtained in
October 1994 and canceled in September 1996. Interest was payable monthly based
on the LIBOR + .625%. The $200 Million Line was secured by the capital
commitments of certain investors and was used to finance acquisitions.
A $275 million acquisition and term loan facility (the "$275 Million Line")
was obtained in September 1996 with a maturity in September 1999 for the purpose
of providing financing for acquisitions. Interest only was payable monthly with
the interest based on various LIBOR options plus various spreads ranging from
1.375% to 1.625% or the prime rate. As of December 31, 1996, the Company had an
outstanding balance under the $275 Million Line of approximately $127.1 million.
F-31
158
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1997, the Company amended and restated the $275 Million Line to a
$475 million unsecured revolving credit facility (the "$475 Million Line").
Under the $475 Million Line, the Company could draw amounts equal to the lesser
of a) 65% or 50% of the purchase price of certain office buildings or parking
facilities, respectively, or b) an amount based on net operating income for such
property. The $475 Million Line had a maturity of October 21, 1997 but was
terminated on July 15, 1997. Interest only was payable monthly with the interest
based on various LIBOR options plus 1.625% or the prime rate. The Company chose
the LIBOR option.
On July 15, 1997, the Company obtained a $600 million credit facility (the
"$600 Million Credit Facility") to be used for acquisitions and other general
corporate purposes. Amounts were drawn on the $600 Million Credit Facility to
repay the balance outstanding on the $475 Million Line which was terminated when
the $600 Million Credit Facility was obtained. The $600 Million Credit Facility
matures on July 15, 2000. The Company paid a commitment fee of approximately
$1.0 million at the closing of the $600 Million Credit Facility. Prior to the
Company obtaining an investment grade credit rating on its unsecured debt of
BBB- or Baa3 or better from two or more credit rating agencies, the $600 Million
Credit Facility initially bore interest at LIBOR plus 110 basis points, and
required payment of a quarterly unused commitment fee between .15% and .25% of
the unused portion of the $600 Million Credit Facility, depending on the average
unfunded balance during the quarter. In November 1997, the $600 Million Credit
Facility was amended and the interest rate was reduced to LIBOR plus 100 basis
points. In December 1997, the Company received an investment grade credit rating
on its senior unsecured debt from Moody's (Baa1), Duff & Phelps (BBB+) and
Standard & Poor's (BBB). Per the terms of the $600 Million Credit Facility,
these credit ratings resulted in the interest rate being reduced from LIBOR plus
100 basis points to LIBOR plus 60 basis points, and the unused commitment fee
was replaced with a facility fee equal to .20% per annum. In addition, a
competitive bid option, whereby the lenders participating in the $600 Million
Credit Facility bid on the interest rate to be charged, became available for up
to $250 million. As of December 31, 1997, the balance of the $600 Million Credit
Facility was approximately $559 million.
The Company assumed $533 million in unsecured debt in connection with the
Beacon Merger. The Company repaid $95 million prior to December 31, 1997 and
repaid the remaining balance in February 1998 with the proceeds from the $1.25
Billion Notes Offering, the $250 Million MOPPRS Offering and the $300 Million
PIERS Offering as described in Note 25, at which time the lines were terminated.
TERM LOAN FACILITY
In October 1997, the Company obtained a $1.5 billion unsecured credit
facility (the "$1.5 Billion Credit Facility"). The $1.5 Billion Credit Facility
is available for the acquisition of properties and general corporate purposes.
The $1.5 Billion Credit Facility carries an interest rate equal to LIBOR plus
100 basis points and may be increased or decreased upon receipt of an investment
grade unsecured debt rating. As mentioned above, the Company received an
investment grade rating in December 1997 resulting in a reduction in the
interest rate to LIBOR plus 80 basis points. The $1.5 Billion Credit Facility
matures July 1, 1998, and may be extended to October 1, 1998. The Company paid
an underwriting fee on the $1.5 Billion Credit Facility at closing of
approximately $4.9 million. In addition, an unused commitment fee is payable
quarterly in arrears based upon the unused amount of the $1.5 Billion Credit
Facility as follows: .15% per annum if the unused amount is between 0% to 33%;
.20% per annum if the unused amount is more than 33% but less than 66%; .25% per
annum if the unused amount is greater than 66%. In October 1997, the Company
used approximately $236 million of proceeds from the $1.5 Billion Credit
Facility to repay the majority of the variable rate property mortgage
indebtedness outstanding as of September 30, 1997. The Company repaid $150
million on the $1.5 Billion Credit Facility with the proceeds from the $200
million private placement of Common Shares in October 1997. Under the terms of
the $1.5 Billion Credit Facility agreement, any amounts repaid cannot be
re-drawn. In addition, amounts were drawn from the $1.5 Billion Credit Facility
for property acquisitions and general corporate purposes. As of December 31,
1997, the outstanding balance on the $1.5 Billion Credit
F-32
159
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Facility was approximately $1.044 billion. The amount available to draw under
the $1.5 Billion Credit Facility was approximately $306 million as of December
31, 1997.
NOTE 9 -- UNSECURED NOTES
On September 3, 1997, the Company completed a private debt offering of $180
million (the "$180 Million Notes Offering") with an unaffiliated party. The
terms of the $180 Million Notes Offering consist of four tranches with
maturities from seven to 10 years which were priced at an interest rate spread
over the corresponding U.S. Treasury rate. The Company used the proceeds of the
$180 Million Notes Offering to repay a portion of the $600 Million Credit
Facility. In addition, in connection with the $180 Million Notes Offering, the
Company terminated $150 million of hedge agreements at a cost of approximately
$3.9 million (see Note 10). A summary of the terms of the $180 Million Notes
Offering follows:
STATED EFFECTIVE
TRANCHE AMOUNT RATE RATE(A)
------- ------------ ------ ---------
7 Year Senior Notes due 2004................................ $ 30,000,000 7.24% 7.24%
8 Year Senior Notes due 2005................................ 50,000,000 7.36% 7.67%
9 Year Senior Notes due 2006................................ 50,000,000 7.44% 7.73%
10 Year Senior Notes due 2007............................... 50,000,000 7.42% 7.69%
------------ ---- ----
$180,000,000 7.38% 7.62%
============ ==== ====
- ---------------
(A) Includes the cost of the terminated interest rate protection agreements.
NOTE 10 -- INTEREST RATE PROTECTION AGREEMENTS
In order to limit the market risk associated with variable rate debt, the
Company entered into several interest rate protection agreements. These
agreements effectively convert floating rate debt to a fixed rate basis, as well
as hedge anticipated financing transactions. A summary of the various interest
rate hedge agreements as of December 31, 1997 is as follows: (1) On June 4,
1997, the Company entered into interest rate protection agreements with major
U.S. financial institutions for $700 million of indebtedness. As a result of
this agreement, the Company essentially "locked into" U.S. Treasury rates in
effect as of June 4, 1997, for $700 million in indebtedness. In August 1997, the
Company terminated $150 million of the $700 million of hedge agreements at a
cost of approximately $3.9 million related to the $180 Million Notes Offering
(see Note 9). The portion of the $180 Million Notes Offering protected by these
agreements consisted of three tranches with maturities of eight, nine and ten
years, respectively. The cost of the terminated hedge agreements is amortized to
interest expense over the respective terms of each tranche. (2) On October 6,
1997, the Company entered into an additional $450 million of interest rate
protection agreements based on the U.S. Treasury rates in effect at that date.
The Company has terminated $700 million of hedge agreements in connection with
the February 1998 notes offering (see Note 25) at a cost of approximately $32.6
million. The cost of these terminated hedge agreements will be amortized to
interest expense over the terms of the respective notes offering. The Company
terminated the remaining $300 million of hedge agreements in 1998 at a cost of
approximately $7.4 million which will be reflected as an extraordinary loss. (3)
Equity Office Predecessors entered into an interest rate swap agreement on
October 1995, which effectively fixed the interest rate on a $93.6 million
mortgage loan at 6.94% through the maturity of the loan on June 30, 2000.
Equity Office Predecessors sold several interest rate protection agreements
(aggregating $173 million of LIBOR-based agreements) in June 1997 at a cost of
approximately $1.1 million.
F-33
160
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- MINORITY INTERESTS IN PARTIALLY OWNED PROPERTIES
The following properties are controlled and partially owned by the Company
but have partners with minority interests. The Company has included 100% of the
financial condition and results of operations of these properties in the
consolidated financial statements of the Company and the combined financial
statements of Equity Office Predecessors. The equity interests of the
unaffiliated partners are reflected as minority interests.
COMPANY'S OWNERSHIP
AS OF DECEMBER 31,
PROPERTY 1997
-------- -------------------
CIGNA Center................................................ 95%(1)
Plaza at La Jolla Village................................... 66.67%(1)
San Felipe Plaza............................................ 35%(2)
Capitol Commons Garage...................................... 50%(3)
Acorn Properties............................................ 89%(4)
- ---------------
(1) The Company owns a controlling interest and is the managing general partner.
(2) The Company is the managing general partner and receives preferential
allocations which result in the Company receiving 100% of the economic
benefits. Prior to the IPO, an affiliate of the Company was the managing
general partner.
(3) The Company owns a controlling interest and receives preferential
allocations. The unaffiliated partner is entitled to receive 50% of the
remaining cash flow after the Company receives its preferential allocations.
(4) The Company has an 89% managing general partner interest in 11 properties
and receives preferential allocations which entitles it to 99% of the
economic benefits. The Company has the option of purchasing the remaining
interest in all 11 properties, exercisable for a designated period
commencing three (3) years after the respective closing dates on the initial
purchases, for additional consideration in the amount of approximately $2.1
million, all payable in Units valued at $28.775 per Unit.
The Company purchased the unaffiliated joint ventures partners' 3% interest
in First Union Center for approximately $775,000 in 1997. The Company now
effectively owns 100% of First Union Center.
F-34
161
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- SHAREHOLDERS'/OWNERS' EQUITY AND MINORITY INTERESTS OF
OPERATING PARTNERSHIP
COMMON SHARES AND UNITS
In addition to the Common Shares and Units issued in connection with the
formation transactions described in Note 1 -- Business and Formation of Company,
the Company also issued Common Shares and/or Units in connection with the
following transactions:
TRANSACTION COMMON SHARES UNITS
----------- ------------- ----------
Outstanding upon completion of the Consolidation and the IPO
(see Note 1).............................................. 152,180,770 11,877,647
Common Shares/Units issued in exchange for Properties(1).... 3,435,688 8,711,157
Restricted Shares awarded to Officers (see Note 21)......... 298,000 --
Common Shares issued as Trustee compensation................ 5,055 --
Sale of Common Shares(2).................................... 9,685,034 --
Issuance of Common Shares for Beacon Merger (including
3,829,739 of Beacon options exercised) (see Note 4)....... 84,425,856 8,570,886
Less Common Shares held as treasury stock (see Note 1)...... (502,740) --
----------- ----------
Total as of December 31, 1997.......................... 249,527,663 29,159,690
=========== ==========
- ---------------
(1) In September 1997, the Company purchased two Office Properties and a Parking
Facility from an unaffiliated third party located in New Orleans, Louisiana
for a purchase price of approximately $140 million. Of this amount, the
Company issued 1,692,546 Units at a price of $29 per Unit for a total of
approximately $49.1 million.
In October 1997, the Company purchased four Office Properties from an
unaffiliated party located in Houston, Texas, Dallas, Texas and
Philadelphia, Pennsylvania for a purchase price of $289 million. Of this
amount, the Company issued 2,900,000 Units at a price of $24.50 per Unit
for a total of approximately $71.1 million.
In October 1997, the Company purchased from an unaffiliated party an
interest in nine Office Properties located in suburban Philadelphia for a
purchase price of approximately $127.5 million. Of this amount, the Company
issued 499,977 Units at a price of $28.775 per Unit for a total of
approximately $14.4 million. In November 1997, two additional properties
were purchased from the same party for a purchase price of approximately
$17.2 million. Of this amount, the Company issued 124,348 Units at a price
of $28.775 per Unit for a total of approximately $3.6 million.
Also, in October 1997, the Company purchased an Office Property from an
unaffiliated party located in Washington, D.C. for a purchase price of
approximately $81.7 million. Of this amount, the Company issued 741,159
Units at a price of $32.975 per Unit for a total of approximately $24.4
million.
In December 1997, the Company purchased 10 Office Properties from an
unaffiliated party located in Seattle and Bellevue, Washington, Portland,
Oregon and Anchorage, Alaska for a purchase price of $640 million. Of this
amount, the Company issued 2,615,700 Units at a price of $29.11 per Unit
for a total of approximately $76.1 million. Furthermore, the Company issued
3,435,688 Common Shares at a price of $29.11 per Common Share for a total
of approximately $100 million. In addition, the Company acquired a
non-controlling interest in the management company of the seller for
approximately $20 million. Of this amount, the Company issued 137,427 Units
at a price of $29.11 per Unit for a total of approximately $4.0 million.
(2) In October 1997, the Company completed two private placements for a total of
9,685,034 restricted Common Shares for a total value of approximately
$273.9 million.
F-35
162
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
OWNERSHIP OF OPERATING PARTNERSHIP
The Company's ownership interest in the Operating Partnership as of
December 31, 1997 was approximately 89.5%.
WARRANTS
In connection with the December 1997 purchase of 10 office properties, the
Company issued warrants that expire in December 2002 to purchase an aggregate of
5,000,000 Common Shares at an exercise price of $39.375 per Common Share. The
warrants were valued at $3 per warrant utilizing the Black-Scholes valuation
model at the time of issuance and are reflected as a component of additional
paid in capital.
PREFERRED SHARES
On December 19, 1997, the Company issued 8,000,000 8.98% Series A
Cumulative Redeemable Preferred Shares, liquidation preference of $25.00 per
share in connection with the Beacon Merger (see Note 4). Holders of the shares
are entitled to receive, when and as authorized by the Company, cumulative
preferential cash distributions at the rate of 8.98% of the $25.00 liquidation
preference per annum (equivalent to a fixed annual amount of $2.245 per share).
Such distributions are cumulative from December 19, 1997 and are payable
quarterly in arrears on or before March 15, June 15, September 15 and December
15 of each year. Holders of the shares have no other voting rights except as
provided by law and have no preemptive rights. The shares are not convertible,
redeemable or entitled to the benefit of any sinking fund. On and after June 15,
2002, the Company, at its option and upon not less than 30 nor more the 60 days'
written notice, may redeem the shares, in whole or in part, at any time or from
time to time, for cash at a redemption price of $25.00 per share, plus all
accrued and unpaid distributions thereon to the date fixed for redemption.
DIVIDENDS/DISTRIBUTIONS
On September 26, 1997, the Company declared a dividend/distribution of
$0.26 per Common Share/Unit outstanding representing a pro rata
dividend/distribution since the closing of the IPO on July 11, 1997, based upon
a full quarterly dividend/distribution of $0.30 per Common Share/Unit and an
annual dividend/distribution of $1.20 per Common Share/Unit, totaling
approximately $43.0 million. The dividend/ distribution was paid on October 9,
1997 to shareholders and unitholders of record on September 29, 1997.
On November 14, 1997, the Company declared a dividend/distribution of $0.30
per Common Share/Unit outstanding, totaling approximately $53.8 million. The
dividend/distribution was paid on December 19, 1997 to the common
shareholders/unitholders of record at the close of business on December 10,
1997. For federal income tax purposes, 19.03% (unaudited) of the dividends paid
in 1997 represented a non-taxable return of capital and the remaining 80.97%
(unaudited) represented ordinary income.
EQUITY OFFICE PREDECESSORS CAPITAL CONTRIBUTIONS/DISTRIBUTIONS
As of July 10, 1997, the capital partners of Equity Office Predecessors
previously committed to contribute approximately $2.114 billion, of which
approximately $2.031 billion had been cumulatively contributed by capital
partners and approximately $83 million of the commitment had been canceled.
As of July 10, 1997, the Equity Office Predecessors had cumulatively
distributed approximately $305.9 million to their capital partners.
As of December 31, 1996, the net book value of the 14 apartment buildings
and two shopping centers owned by the ZML Funds (the "Non-Office Properties"),
which were not included in the Equity Office Predecessors combined financial
statements, was approximately $285.9 million. All cash deficits incurred by
F-36
163
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the Non-Office Properties were reflected as distributions and all excess cash
flow generated by the Non-Office Properties, including net proceeds from the
sale of these properties, are reflected as contributions to Equity Office
Predecessors. The net contributions for the period January 1, 1997 through July
10, 1997 and the years ended December 31, 1996 and 1995 related to the
Non-Office Properties were approximately $98.7 million, $98.8 million and $0.9
million, respectively.
During 1997, 13 Non-Office Properties were sold to an affiliated party and
two Non-Office Properties were sold to unaffiliated parties which generated net
proceeds of approximately $100.7 million which is included in the $98.7 million
net contributions from the Non-Office Properties for the period from January 1,
1997 to July 10, 1997. The ZML Fund I distributed its interest in the remaining
Non-Office Property to its capital partners prior to the Consolidation.
During 1996, two Non-Office Properties were sold to unaffiliated parties
which generated net proceeds of approximately $96.7 million which was included
in the $98.8 million net contributions from Non-Office Properties for the year
ended December 31, 1996.
NOTE 13 - FUTURE MINIMUM RENTS
Future minimum rental receipts due on noncancelable operating leases at the
Office Properties and Parking Facilities as of December 31, 1997 were as
follows:
(DOLLARS IN THOUSANDS)
1998.......................................... $1,049,857
1999.......................................... 990,423
2000.......................................... 865,410
2001.......................................... 731,171
2002.......................................... 587,791
Thereafter.................................... 1,982,691
----------
$6,207,343
==========
The Company is subject to the usual business risks associated with the
collection of the above scheduled rents. The future minimum rents from the
Company's investment in unconsolidated joint ventures which are accounted for
utilizing the equity method, have not been included in the above schedule.
F-37
164
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- FUTURE MINIMUM LEASE PAYMENTS
As of December 31, 1997, the Company's ownership of 13 Office Properties
and one of its Parking Facilities are subject to ground leases. Certain of these
leases are subject to rental increases based upon the appraised value of the
property at specified dates or certain financial calculations of the respective
property. As disclosed in Note 19, the Company leases its office space from an
affiliate. In addition, the Company has assumed lease obligations of certain
tenants at their former locations. Future minimum lease obligations under these
noncancelable leases, net of sublease rental income, as of December 31, 1997
were as follows:
(DOLLARS IN THOUSANDS)
1998.......................................... $ 6,099
1999.......................................... 5,481
2000.......................................... 5,531
2001.......................................... 5,567
2002.......................................... 4,604
Thereafter.................................... 456,289
----------
$ 483,571
==========
Rental expense for the years ended December 31, 1997, 1996 and 1995, was
approximately $7.2 million, $4.5 million and $2.4 million, respectively.
NOTE 15 -- EXTRAORDINARY ITEMS AND PROVISIONS FOR VALUE IMPAIRMENT
As reflected in the consolidated statement of operations for the period
from July 11, 1997 through December 31, 1997, and the combined statement of
operations for the period from January 1, 1997 through July 10, 1997, the
Company and Equity Office Predecessors reported an extraordinary loss of
approximately $16.4 million and $0.3 million, respectively, related to
pre-payment penalties on debt retired prior to maturity during the respective
periods with net proceeds from the IPO and available cash reserves.
As reflected in the combined statement of operations for the year ended
December 31, 1995, Equity Office Predecessors reported an extraordinary gain of
approximately $31.3 million on the repurchase of debt, which is net of the $20.0
million minority partners' share, and a provision for value impairment of
approximately $20.2 million related to Equity Office Predecessors' investment in
San Felipe Plaza Ltd.
F-38
165
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per Common Share:
FOR THE PERIOD FROM
JULY 11, 1997 THROUGH
DECEMBER 31, 1997
---------------------
NUMERATOR:
Net income available to Common Shares before extraordinary
items and gain on sales of real estate.................... $ 87,303,000
Gain on sales of real estate................................ 126,000
Extraordinary items......................................... (16,366,000)
------------
Numerator for basic earnings per share -- income available
to Common Shares.......................................... 71,063,000
Minority interest in Operating Partnership.................. 7,010,000
Numerator for diluted earnings per share -- income available
to Common Shares.......................................... $ 78,073,000
============
DENOMINATOR:
Denominator for basic earnings per share -- weighted average
Common Shares............................................. 162,591,477
------------
Effect of dilutive securities:
Conversion of Units to Common Shares...................... 16,056,085
Stock options............................................. 1,366,465
------------
Dilutive potential Common Shares............................ 17,422,550
Denominator for diluted earnings per share -- adjusted
weighted average shares and assumed conversions........... 180,014,027
============
BASIC EARNINGS AVAILABLE TO COMMON SHARES PER WEIGHTED
AVERAGE COMMON SHARE:
Net income before extraordinary items and gain on sales of
real estate............................................... $ .54
Gain on sales of real estate................................ --
Extraordinary items......................................... (.10)
------------
Net income per Common Share................................. $ .44
============
DILUTED EARNINGS AVAILABLE TO COMMON SHARES PER WEIGHTED
AVERAGE COMMON SHARE:
Net income before extraordinary items and gain on sales of
real estate............................................... $ .52
Gain on sales of real estate................................ --
Extraordinary items......................................... (.09)
------------
Net income per Common Share................................. $ .43
============
For additional disclosures regarding the employee stock options and the
restricted shares see Note 21.
Options to purchase 726,500 Common Shares at a weighted average exercise
price of $32.93 per Common Share and warrants to purchase 5,000,000 Common
Shares at an exercise price of $39.375 per Common Share were outstanding during
1997 but were not included in the computation of diluted earnings per share
because the respective exercise prices were greater than the average market
price of the Common Shares and, therefore, the effect would be antidilutive.
On February 13, 1998, the Company issued 6,000,000 Preferred Income Equity
Redeemable Shares ("PIERS") and the net proceeds of $290.3 million were used to
repay debt (see Note 25). The PIERS are convertible at any time, at the option
of the holder, unless previously redeemed, into Common Shares at a
F-39
166
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
conversion price of $35.70 per Common Share. In addition, on February 17, 1998,
the Company issued 2 million Options at an exercise price of $29.50 per Common
Share under the Employee Plan.
NOTE 17 -- PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
The pro forma data presented below is included to illustrate the effect on
the Company's operations as a result of the transactions described below.
The pro forma condensed combined statement of operations for the year ended
December 31, 1997 reflects the following transactions as if they had occurred on
January 1, 1997: (a) the acquisition of 46 Office Properties and seven Parking
Facilities, including an interest in four parking facilities, acquired between
January 1, 1997 and December 17, 1997, and the disposition of two Office
Properties; (b) the $180 Million Notes Offering; (c) the Consolidation and the
IPO, and the decrease in interest expense resulting from the use of the net
proceeds for the repayment of mortgage debt; (d) the net change in interest
expense from draws on the various credit facilities (see Note 8) used to
refinance existing mortgage debt; (e) interest income from an interest in a
mortgage note; (f) the Beacon Merger (see Note 4); (g) the $1.25 Billion Notes
Offering and the $250 Million MOPPRS Offering (see Note 25); (h) the $300
Million PIERS Offering (see Note 25); and (i) the financing of certain
properties.
The pro forma condensed combined statement of operations for the year ended
December 31, 1996 reflects the following transactions as if they had occurred on
January 1, 1996: (a) the acquisition of 57 Office Properties and 14 Parking
Facilities, including an interest in four Parking Facilities, acquired between
January 1, 1996 and December 17, 1997, and the disposition of two Office
Properties; (b) the $180 Million Notes Offering; (c) the Consolidation and the
IPO, and the decrease in interest expense resulting from the use of the net
proceeds for the repayment of mortgage debt; (d) the net change in interest
expense from draws on the various credit facilities (see Note 8) used to
refinance existing mortgage debt; (e) interest income from an interest in a
mortgage note; (f) the Beacon Merger (see Note 4); (g) the $1.25 Billion Notes
Offering and the $250 Million MOPPRS Offering (see Note 25); (h) the $300
Million PIERS Offering (see Note 25); and (i) the financing of certain
properties.
F-40
167
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The accompanying pro forma combined statements of operations have been
prepared by management of the Company and do not purport to be indicative of the
results which would actually have been obtained had the transactions described
above been completed on the dates indicated or which may be obtained in the
future.
FOR THE YEARS ENDED
DECEMBER 31,
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS
EXCEPT SHARE DATA)
REVENUES:
Rental.................................................... $ 1,126,729 $ 1,023,596
Tenant reimbursements..................................... 201,678 170,096
Parking................................................... 63,707 60,209
Other..................................................... 27,648 43,526
Fees from noncombined affiliates.......................... 8,210 8,125
Interest.................................................. 23,140 21,143
------------ ------------
Total revenues......................................... 1,451,112 1,326,695
------------ ------------
EXPENSES:
Property operating........................................ 516,555 484,882
Interest.................................................. 274,940 269,998
Depreciation.............................................. 252,631 251,723
Amortization.............................................. 12,214 8,782
General and administrative................................ 56,966 32,644
------------ ------------
Total expenses......................................... 1,113,306 1,048,029
------------ ------------
Income before allocation to minority interests, income from
investment in unconsolidated joint ventures, gain on sales
of real estate and extraordinary items.................... 337,806 278,666
DISCONTINUED OPERATIONS:
Loss from operations -- Construction Company.............. (2,263) (2,609)
Loss on sale -- Construction Company...................... -- (249)
MINORITY INTERESTS:
Operating Partnership..................................... (30,939) (28,333)
Partially owned properties................................ (1,757) (2,142)
Income from investment in unconsolidated joint ventures..... 12,920 9,850
Gain on sales of real estate................................ -- 21,843
Preferred dividends......................................... (33,710) (33,710)
------------ ------------
Income before extraordinary items........................... 282,057 243,316
Extraordinary items......................................... (16,365) --
------------ ------------
Net income.................................................. $ 265,692 $ 243,316
============ ============
Basic earnings per weighted average Common Share............ $ 1.06 $ .98
============ ============
Weighted average Common Shares outstanding -- Basic......... 249,527,663 249,527,663
============ ============
Diluted earnings per weighted average Common Share.......... $ 1.05 $ .96
============ ============
Weighted average Common Shares outstanding -- Diluted....... 282,872,353 282,872,353
============ ============
F-41
168
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18 -- QUARTERLY DATA (UNAUDITED)
The quarterly data is as follows:
4Q 3Q 2Q 1Q
12/31/97 9/30/97(A) 6/30/97 3/31/97
------------ ------------ -------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Total revenues.............................. $ 248,400 $ 183,886 $165,219 $154,567
============ ============ ======== ========
Income before allocation to minority
interests................................. $ 46,704 $ 45,736 $ 23,331 $ 24,910
============ ============ ======== ========
Net income.................................. $ 40,208 $ 31,290 $ 30,853 $ 30,769
============ ============ ======== ========
Net income available to Common Shares....... $ 39,559 $ 31,290 $ 30,853 $ 30,769
============ ============ ======== ========
Weighted average Common Shares
outstanding............................... 172,307,010 151,691,121 -- --
============ ============ ======== ========
Basic earnings per weighted average Common
Shares.................................... $ 0.23 $ 0.21 $ -- $ --
============ ============ ======== ========
Diluted earnings per weighted average Common
Shares.................................... $ 0.22 $ 0.21 $ -- $ --
============ ============ ======== ========
4Q 3Q 2Q 1Q
12/31/96 9/30/96 6/30/96 3/31/96
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Total revenues.................................... $154,887 $126,117 $116,970 $110,150
======== ======== ======== ========
Income before allocation to minority interests.... $ 29,688 $ 11,015 $ 14,543 $ 12,834
======== ======== ======== ========
Net income........................................ $ 30,383 $ 11,024 $ 14,040 $ 17,978
======== ======== ======== ========
- ---------------
(A) This column includes the operations of Equity Office Predecessors from July
1, 1997 through July 10, 1997 and the operations of the Company from July
11, 1997 through September 30, 1997. The earnings per share disclosures
pertain only to the operations of the Company from July 11, 1997 through
September 30, 1997.
F-42
169
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19 -- RELATED PARTY TRANSACTIONS
Affiliates provide various services to the Company. Fees and reimbursements
paid by the Company to affiliates for the years ended December 31, 1997, 1996
and 1995 were as follows:
PAYABLE AS OF
PAID YEARS ENDED DECEMBER 31, DECEMBER 31,
------------------------------ -------------
1997 1996 1995 1997 1996
-------- -------- -------- ---- ------
(DOLLARS IN THOUSANDS)
Acquisition fees(A)............................. $ 777 $ 3,068 $ 1,097 $ -- $ 587
Accounting and tax related services............. 68 797 554 -- 61
Legal fees and expenses(B)...................... 3,006 3,481 3,230 550 1,295
Office rent(C).................................. 1,068 777 668 79 --
Disposition fees................................ -- 124 -- -- --
Development fees(D)............................. 434 702 438 -- --
Reimbursement of property insurance premiums.... 6,790 5,032 3,735 32 --
Organizational and offering expenses(E)......... 106 778 180 -- 106
Administrative services(F)...................... 473 822 609 71 20
Consulting...................................... 832 274 410 1 5
------- ------- ------- ---- ------
$13,554 $15,855 $10,921 $733 $2,074
======= ======= ======= ==== ======
- ---------------
(A) Represents amounts paid by Equity Office Predecessors to Merrill Lynch, a
limited partner of the general partner of the ZML Funds.
(B) Represents amounts primarily paid to Rosenberg & Liebentritt, P.C., a law
firm, for legal fees and expenses in connection with acquisition, corporate
and leasing activity. A trustee of the Company was a principal of this law
firm until September 1, 1997 and is now of counsel.
(C) The Company leases its corporate office space from an affiliate of the
Equity Group.
(D) The renovation project at the 28 State Street Office Building was being
managed by an affiliate of the Equity Group. In consideration for their
services, the development managers were paid fees which management believes
are equal to or less than market for such services.
(E) Affiliates of the Equity Group were reimbursed for reasonable costs incurred
in connection with the organization and the offering of units in the ZML
Funds, including legal and accounting fees and expenses, printing costs and
filing fees.
(F) Administrative services include fees paid to EGI for centralized services
such as payroll processing, employee benefits, telecommunications,
publications and consulting services such as economic and demographics
research for possible acquisitions.
An affiliate of the Equity Group has an indirect minority interest in
Standard Parking Limited Partnership ("SPLP") which manages the parking
operations at certain Properties that are owned by the Company. Management
believes amounts paid to SPLP are equal to market for such services.
AMOUNTS RECEIVED AND DUE FROM AFFILIATES
Affiliates of the Company lease space in certain of the Office Properties
owned by the Company. The provisions of the leases are consistent with terms of
unaffiliated tenants' leases. Total rents and other amounts paid by affiliates
under the terms of their respective leases were approximately $3.0 million and
$3.5 million for the years ended December 31, 1997 and 1996, respectively.
F-43
170
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company provides asset and property management services to certain
noncombined office and garage properties owned by affiliates of the Equity
Group. Amounts due for these services as of December 31, 1997 and 1996 were
approximately $0.2 million and $0.8 million, respectively.
The Company entered into various lease agreements with SPLP whereby SPLP
leased certain of the Company's stand-alone Parking Facilities. Certain of these
lease agreements provide SPLP with annual successive options to extend the term
of the lease through various dates. The rent paid in the years ended December
31, 1997 and 1996 under these lease agreements was approximately $11.0 million
and $3.2 million, respectively. In addition, the Company may receive additional
rent based upon actual gross revenues generated by these Parking Facilities. In
accordance with certain of these leases, the Company may be obligated to make an
early termination payment if agreement is not reached as to rent amounts to be
paid.
NOTE 20 -- NON-CASH INVESTING AND FINANCING ACTIVITIES
Additional supplemental disclosures of non-cash investing and financing
activities are as follows:
EQUITY OFFICE
PROPERTIES TRUST
FOR THE PERIOD FROM
JULY 11, 1997 THROUGH
DECEMBER 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
Mortgage loans and lines of credit assumed through Beacon
Merger.................................................... $1,160,451
==========
Net liabilities assumed through Beacon Merger............... $ 72,034
==========
Common Shares and Units issued through Beacon Merger
(assuming exercise of 4,732,822 Options).................. $2,853,266
==========
8.98% Series A Cumulative Redeemable Preferred Shares issued
through Beacon Merger..................................... $ 200,000
==========
Common Shares and Units issued through property acquisitions
(including warrants valued at $15.0 million).............. $ 357,672
==========
Mortgage loans assumed through property acquisitions........ $ 263,048
==========
Mortgage loans and line of credit assumed in the
Consolidation............................................. $2,196,708
==========
Net liabilities assumed in the Consolidation................ $ 62,706
==========
Common Shares and Units issued in the Consolidation......... $2,830,918
==========
In addition, Equity Office Predecessors assumed mortgage loans through
property acquisitions of approximately $92.1 million and $265.8 million for the
years ended December 31, 1996 and 1995, respectively.
NOTE 21 -- SHARE OPTION PLAN AND RESTRICTED SHARE PLAN
In July 1997, the Company adopted the 1997 Share Option and Share Award
Plan (the "Employee Plan"). The purpose of the Employee Plan is to attract and
retain highly qualified executive officers, trustees, employees and consultants.
Through the Employee Plan, certain officers, trustees, key employees and
consultants of the Company were offered the opportunity to acquire Common Shares
pursuant to grants of options to purchase Common Shares ("Options"), and to
receive dividend equivalent rights with respect to Common Shares ("Dividend
Equivalents") and to receive Restricted Shares. The Compensation Committee
determines the vesting schedule, if any, of each Option and the term, which term
shall not exceed 10 years from the date of grant. As to the Options that have
been granted through December 31, 1997, generally, one-
F-44
171
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
third are exercisable one year after the initial grant, one-third are
exercisable two years following the date such Options were granted and the
remaining one-third are exercisable three years following the date such Options
were granted. With respect to the Restricted Shares granted through December 31,
1997, generally, one-half vest three years after the initial grant, one-fourth
vest four years following the date such Restricted Shares were granted and the
remaining one-fourth vest five years following the date such Restricted Shares
were granted. The Common Shares subject to Options under the Employee Plan were
limited to 11,121,786. In connection with the establishment of the Employee
Plan, the Company granted Options to purchase Common Shares to certain officers,
trustees, employees and consultants of the Company at the IPO price. In
addition, the Employee Plan permits the Company to issue Restricted Common
Shares to executive or other key employees upon such terms and conditions as
shall be determined by the Compensation Committee in its sole discretion.
The exercise price for all Options under the Employee Plan shall not be
less than the fair market value of the underlying Common Shares at the time the
Option is granted. The Share Option Plan will terminate at such time as no
further Common Shares are available for issuance upon the exercise of Options
and all outstanding Options have expired or been exercised. The Board of
Trustees may at any time amend or terminate the Employee Plan, but termination
will not affect Options previously granted. Any Options which had vested prior
to such termination would remain exercisable by the holder thereof.
The Employee Plan is administered by the Compensation Committee which is
appointed by the Board of Trustees. The Compensation Committee determines those
officers, key employees and consultants to whom, and the time or times at which,
grants of Options will be made. The Compensation Committee interprets the
Employee Plan, adopts rules relating thereto and determines the terms and
provisions of Options.
The Company has elected to apply the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25")
in the computation of compensation expense. Under APB No. 25's intrinsic value
method, compensation expense is determined by computing the excess of the market
price of the shares over the exercise price on the measurement date. For the
Company's Options, the intrinsic value on the measurement date (or grant date)
is zero, and no compensation expense is recognized. Financial Accounting
Standards Board No. 123 ("FASB No. 123") requires the Company to disclose pro
forma net income and income per share as if a fair value based accounting method
had been used in the computation of compensation expense. The fair value of the
Options computed under FASB No. 123 would be recognized over the vesting period
of the Options. The fair value for the Company's Options granted in 1997 was
estimated at the time the Options were granted using the Black-Scholes option
pricing model with the following weighted average assumptions: risk-free
interest rate of 5.59%; dividend yields of 4%; volatility factors of the
expected market price of the Company's Common Shares of .24; and a weighted
average expected life of the Options and the Restricted Shares of five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's Options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its Options.
F-45
172
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
Options is amortized to expense over the Options' vesting period. The following
is the unaudited pro forma information for the period from July 11, 1997 through
December 31, 1997:
FOR THE PERIOD FROM
JULY 11, 1997 THROUGH
DECEMBER 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
Pro forma net income before extraordinary items............. $ 85,654
Extraordinary items......................................... (16,240)
--------
Pro forma net income available to Common Shares............. $ 69,414
========
BASIC DILUTED
EARNINGS PER EARNINGS PER
COMMON SHARE COMMON SHARE
------------ ------------
Pro forma income before extraordinary items................. $.53 $.51
Extraordinary items......................................... (.10) (.09)
---- ----
Pro forma net income........................................ $.43 $.42
==== ====
As of December 31, 1997, there were no Options issued under the Employee
Plan that were exercisable or Restricted Shares that were vested. Exercise
prices for the 4,911,500 Options outstanding as of December 31, 1997 ranged from
$21.00 to $33.00, with a weighted average exercise price of $22.80. Expiration
dates ranged from July 11, 2007 to December 19, 2007. The remaining weighted
average contractual life of Options was 9.65 years. The weighted average grant
date fair value of Options granted during 1997 was $4.44. In addition, there
were 298,000 Restricted Shares issued during 1997.
NOTE 22 -- EMPLOYEE SHARE PURCHASE PLAN
In July 1997, the Company adopted its 1997 Non-Qualified Employee Share
Purchase Plan (the "Purchase Plan") for the purpose of attracting highly
qualified executive officers, trustees and employees. The Company has reserved 2
million Common Shares (subject to adjustment for share splits, share
distributions, recapitalizations, or other corporate restructurings) for
issuance pursuant to the Purchase Plan.
The Purchase Plan is administered by the Compensation Committee and allows
eligible employees and trustees to acquire an interest in the Company through
the purchase of Common Shares from the Company at a price equal to 85% of the
lesser of (i) the closing price of the Common Shares on the New York Stock
Exchange ("NYSE") on the day prior to the purchase or (ii) the average closing
price of Common Shares on the NYSE for the six-month period prior to the
purchase.
Common Shares will be offered under the Purchase Plan in semi-annual
offering periods. No such Common Shares were offered as of December 31, 1997.
Eligible employees and trustees who elect to participate in the Purchase Plan
will be able to use funds accumulated through cash contributions or payroll
deductions to purchase Common Shares at a price less than the fair market value
of the Common Shares on the date of purchase.
NOTE 23 -- 401(K) PLAN
The Company has established the Equity Office Properties Trust Section
401(k) Savings/Retirement Plan (the "401(k) Plan") to cover eligible employees
of the Company and any designated affiliate (including the Operating
Partnership).
F-46
173
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The 401(k) Plan permits eligible employees of the Company to defer up to
16% of their annual compensation, subject to certain limitations imposed by the
Internal Revenue Code. The employees' elective deferrals are immediately vested
and nonforfeitable upon contribution to the 401(k) Plan. The Company matches
dollar for dollar employee contributions to the 401(k) Plan up to 4% of the
employee's annual salary. In addition, the Company may elect to make a
discretionary profit sharing contribution.
NOTE 24 -- COMMITMENTS AND CONTINGENCIES
CONCENTRATION OF CREDIT RISK
The Company maintains its cash and cash equivalents at financial
institutions. The combined account balances at each institution periodically
exceeds FDIC insurance coverage, and, as a result, there is a concentration of
credit risk related to amounts on deposit in excess of FDIC insurance coverage.
Management of the Company believes that the risk is not significant. In
addition, the Company has entered into certain interest rate protection
agreements (see Note 10) and believes it has limited exposure to the extent of
non-performance by the swap counterparties since each counterparty is a major
U.S. financial institution, and management does not anticipate their
non-performance.
ENVIRONMENTAL
The Company, as an owner of real estate, is subject to various
environmental laws of federal and local governments. Compliance by the Company
with existing laws has not had a material adverse effect on the Company's
financial condition and results of operations, and management does not believe
it will have such an impact in the future. However, the Company cannot predict
the impact of new or changed laws or regulations on its current properties or on
properties that it may acquire in the future.
LITIGATION
The Company has become a party to various legal actions resulting from the
operational activities transferred to the Operating Partnership in connection
with the Consolidation and the Beacon Merger. These actions are incidental to
the transferred business and management does not believe that these actions will
have a material adverse effect on the Company.
The Company is involved in continuing discussions with its joint venture
partner in One Post Office Square and Rowes Wharf, which was acquired in
connection with the Beacon Merger, with respect to the Company's control over
property management of such Properties. Such joint venture partner did not
consent to the transfer to the Company of Beacon's joint venture interest in
these Properties. Although the Company believes that such consent was not
required, unless the Company is able to reach an agreement with respect to
day-to-day management of such Properties, it is possible that the joint venture
partner could challenge the transfer of such Properties in the Beacon Merger, or
seek to trigger the buy-sell remedy found in the joint venture documents.
Except as described above, management of the Company does not believe there
is any litigation threatened against the Company other than routine litigation
arising out of the ordinary course of business, some of which is expected to be
covered by liability insurance, and none of which is expected to have a material
adverse effect on the consolidated and combined financial statements of the
Company.
NOTE 22 -- EMPLOYEE SHARE PURCHASE PLAN
In July 1997, the Company adopted its 1997 Non-Qualified Employee Share
Purchase Plan (the "Purchase Plan") for the purpose of attracting highly
qualified executive officers, trustees and employees. The Company has reserved 2
million Common Shares (subject to adjustment for share splits, share
distributions, recapitalizations, or other corporate restructurings) for
issuance pursuant to the Purchase Plan.
F-47
174
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Purchase Plan is administered by the Compensation Committee and allows
eligible employees and trustees to acquire an interest in the Company through
the purchase of Common Shares from the Company at a price equal to 85% of the
lesser of (i) the closing price of the Common Shares on the New York Stock
Exchange ("NYSE") on the day prior to the purchase or (ii) the average closing
price of Common Shares on the NYSE for the six-month period prior to the
purchase.
Common Shares will be offered under the Purchase Plan in semi-annual
offering periods. No such Common Shares were offered as of December 31, 1997.
Eligible employees and trustees who elect to participate in the Purchase Plan
will be able to use funds accumulated through cash contributions or payroll
deductions to purchase Common Shares at a price less than the fair market value
of the Common Shares on the date of purchase.
NOTE 23 -- 401(K) PLAN
The Company has established the Equity Office Properties Trust Section
401(k) Savings/Retirement Plan (the "401(k) Plan") to cover eligible employees
of the Company and any designated affiliate (including the Operating
Partnership).
The 401(k) Plan permits eligible employees of the Company to defer up to
16% of their annual compensation, subject to certain limitations imposed by the
Internal Revenue Code. The employees' elective deferrals are immediately vested
and nonforfeitable upon contribution to the 401(k) Plan. The Company matches
dollar for dollar employee contributions to the 401(k) Plan up to 4% of the
employee's annual salary. In addition, the Company may elect to make a
discretionary profit sharing contribution.
NOTE 24 -- COMMITMENTS AND CONTINGENCIES
CONCENTRATION OF CREDIT RISK
The Company maintains its cash and cash equivalents at financial
institutions. The combined account balances at each institution periodically
exceeds FDIC insurance coverage, and, as a result, there is a concentration of
credit risk related to amounts on deposit in excess of FDIC insurance coverage.
Management of the Company believes that the risk is not significant. In
addition, the Company has entered into certain interest rate protection
agreements (see Note 10) and believes it has limited exposure to the extent of
non-performance by the swap counterparties since each counterparty is a major
U.S. financial institution, and management does not anticipate their
non-performance.
ENVIRONMENTAL
The Company, as an owner of real estate, is subject to various
environmental laws of federal and local governments. Compliance by the Company
with existing laws has not had a material adverse effect on the Company's
financial condition and results of operations, and management does not believe
it will have such an impact in the future. However, the Company cannot predict
the impact of new or changed laws or regulations on its current properties or on
properties that it may acquire in the future.
LITIGATION
The Company has become a party to various legal actions resulting from the
operational activities transferred to the Operating Partnership in connection
with the Consolidation and the Beacon Merger. These actions are incidental to
the transferred business and management does not believe that these actions will
have a material adverse effect on the Company.
The Company is involved in continuing discussions with its joint venture
partner in One Post Office Square and Rowes Wharf, which was acquired in
connection with the Beacon Merger, with respect to the
F-48
175
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Company's control over property management of such Properties. Such joint
venture partner did not consent to the transfer to the Company of Beacon's joint
venture interest in these Properties. Although the Company believes that such
consent was not required, unless the Company is able to reach an agreement with
respect to day-to-day management of such Properties, it is possible that the
joint venture partner could challenge the transfer of such Properties in the
Beacon Merger, or seek to trigger the buy-sell remedy found in the joint venture
documents.
Except as described above, management of the Company does not believe there
is any litigation threatened against the Company other than routine litigation
arising out of the ordinary course of business, some of which is expected to be
covered by liability insurance, and none of which is expected to have a material
adverse effect on the consolidated and combined financial statements of the
Company.
GEOGRAPHICAL RISK
The Company carries earthquake insurance on all of the Properties,
including those located in California, subject to coverage limitations which the
Company believes are commercially reasonable. In light of the California
earthquake risk, California building codes since the early 1970s have
established construction standards for all new buildings. The current and
strictest construction standards were adopted in 1987. Of the 43 Properties
located in California, 12 have been built since January 1, 1988 and the Company
believes that all of the Properties were constructed in full compliance with the
applicable standards existing at the time of construction. No assurance can be
given that material losses in excess of insurance proceeds will not occur in the
future.
NOTE 25 -- SUBSEQUENT EVENTS
The following significant transactions relating to the Company occurred
during the period from January 1, 1998 to March 18, 1998:
1) In January 1998, the Company acquired BP Garage, located in Cleveland,
Ohio, from an unaffiliated third party for a purchase price of
approximately $10.2 million in cash.
2) In February 1998, the Company completed the private placement of
6,000,000 of its 5.25% Equity Redeemable Shares (PIERS), $50 liquidation
per share. This offering generated net proceeds of approximately $290.3
million after offering costs of $9.7 million and was priced with a 20%
conversion premium. The PIERS are convertible at any time by the holder
into Common Shares at a conversion price of $35.70 per Common Share,
equivalent to a conversion ratio of 1.40056 Common Shares for each
PIERS. Proceeds from this sale have been used to pay down borrowings
under the Company's credit facilities. The PIERS are non-callable for
five years with a mandatory call in year 10. The annual dividend of
$2.625 per PIERS will be paid quarterly.
3) In February 1998, the Company completed the private placement of $1.25
billion of senior unsecured notes (the "$1.25 Billion Notes Offering").
The notes consist of four tranches with maturities of five to 20 years
which were priced at an interest rate spread over the corresponding
Treasury rate.
Additionally, the Company privately placed $250 million of 6.376%
Mandatory Par Put Remarketed Securities ("$250 Million MOPPRS Offering")
due February 15, 2012, which are subject to mandatory tender on February
15, 2002. The MOPPRS are senior unsecured obligations of the Company.
The proceeds to the Company from the issuance of the $1.25 Billion Notes
Offering and $250 Million MOPPRS Offering, net of offering costs, were
approximately $1.49 billion. The Company has terminated $700 million of
hedge agreements in connection with the $1.25 Billion
F-49
176
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Notes Offering and the $250 Million MOPPRS Offering at a cost of
approximately $32.6 million which will be amortized as an adjustment to
interest expense. The Company terminated the remaining $300 million of
hedge agreements at a cost of approximately $7.4 million in connection
with the PIERS which will be reflected as an extraordinary loss in 1998
(see Note 10). The weighted average interest cost of the notes and
MOPPRS, including the amortization of the offering and transaction costs
and the costs incurred in connection with the termination of hedge
agreements is approximately 6.97%.
A summary of the terms of the $1.25 Billion Notes Offering and $250 Million
MOPPRS Offering are as follows:
STATED EFFECTIVE
TRANCHE AMOUNT RATE RATE(A)
------- -------------- ------ ---------
4 Year MOPPRS due 2002............................ $ 250,000,000 6.38% 6.42%
5 Year Notes due 2003............................. 300,000,000 6.38% 6.77%
7 Year Notes due 2005............................. 400,000,000 6.63% 7.06%
10 Year Notes due 2008............................ 300,000,000 6.75% 7.03%
20 Year Notes due 2018............................ 250,000,000 7.25% 7.56%
-------------- ---- ----
$1,500,000,000 6.66% 6.97%
============== ==== ====
-----------------------
(A) Includes the cost of the terminated interest rate protection
agreements and offering and transaction costs.
On March 5, 1998, the Company filed a registration statement relating to
a registered offer to exchange the $180 Million Notes Offering, the
$1.25 Billion Notes Offering and the $250 Million MOPPRS Offering for
registered securities of the Company with terms identical in all
material respects to the terms of the existing notes.
4) In February 1998, the Company entered into a contract to purchase the
Rand Tower Garage in Minneapolis, Minnesota, upon completion of the
parking structure. The purchase price for Rand Tower Garage, which is
comprised of 589 parking spaces in Minneapolis' Central Business
District, will be approximately $19 million. Although the project is
slated for completion in January 1999, this transaction is contingent
upon certain terms and conditions as set forth in the purchase
agreement. There can be no assurance that this transaction will be
consummated as described above.
5) In February 1998, the Company issued 2 million Options at an exercise
price of $29.50 per Common Share under the Employee Plan.
6) In February 1998, the Company obtained financing of $60 million
collateralized by the St. Louis Parking Garages. The Company has a 50%
ownership interest in this Parking Facility and, accordingly, received
$30 million of the financing proceeds. This loan has a 6.85% fixed
interest rate and a six year term.
7) In March 1998, the Company's Board of Trustees declared a first quarter
dividend for the 8.98% Series A Cumulative Redeemable Preferred Shares.
A dividend of $0.56125 per share will be paid on March 15, 1998 to
shareholders of record as of March 9, 1998. In addition, the Company's
Board of Trustees declared a first quarter dividend/distribution in the
amount of $0.32 per Common Share/Unit payable on April 10, 1998, to the
common shareholders/unit holders of record at the close of business on
March 31, 1998.
8) In March 1998, the Company's Board of Trustees approved the purchase of
Prominence in Buckhead, an office building development in Atlanta,
Georgia. The property, which will consist of a
F-50
177
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
430,000 square foot building and 1,350 parking spaces, will be acquired
upon its completion in mid 1999. The purchase will also include an
11.88-acre site that may be used to develop Phase II to Prominence. The
purchase price for the described assets will be approximately $70
million. This transaction is contingent upon certain terms and
conditions as set forth in the purchase agreement. There can be no
assurance that this transaction will be consummated as described above.
9) In March 1998, the Company purchased from an unaffiliated party 100
Summer Street, which consists of approximately 1.0 million total square
feet and is located in Boston, Massachusetts. The purchase price was
approximately $222 million in cash.
F-51
178
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31,
1997(14)
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
---------------------------- --------------
BUILDINGS
DECEMBER 31, 1997 AND
DESCRIPTION LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND
----------- -------- ----------------- ---- ------------ ----
Office Properties:
1 60 Spear Street Building...... (3) San Francisco, CA $ 0 $ 2,125,200 $ 19,126,500 $0
2 San Felipe Plaza.............. (3) Houston, TX 53,087,500 13,471,300 117,984,100 0
3 Summit Office Park............ (3) Ft. Worth, TX 0 1,421,000 12,789,700 0
4 5100 Brookline................ (3) Oklahoma City, OK 0 570,700 4,236,500 0
5 Tampa Commons................. (3) Tampa, FL 0 2,783,900 25,054,600 0
6 Intercontinental Center....... (3) Houston, TX 0 1,750,700 14,406,300 0
7 First Union Center............ (3) Ft. Lauderdale, FL 0 3,954,000 35,585,900 0
8 Four Forest................... (3) Dallas, TX 0 4,767,900 42,911,400 0
9 Dominion Tower................ (3) Norfolk, VA 0 4,643,700 41,091,200 0
10 Northborough Tower............ (3) Houston, TX 0 1,704,000 12,185,800 0
11 500 Marquette Building........ (3) Albuquerque, NM 0 2,219,900 19,978,500 0
12 Atrium Towers................. (3) Oklahoma City, OK 0 749,000 6,741,600 0
13 One Clearlake Centre.......... (3) W. Palm Beach, FL 0 4,585,700 18,771,300 0
14 Community Corporate Center.... (3) Columbus, OH 16,719,900 3,018,900 27,169,800 0
15 Sarasota City Center.......... (3) Sarasota, FL 0 2,239,600 20,156,700 0
16 Denver Corporate Center II and
III........................... (3) Denver, CO 0 6,059,400 36,534,300 0
17 University Tower.............. (3) Durham, NC 0 2,085,100 18,766,200 0
18 Shelton Pointe................ (3) Shelton, CT 0 1,513,900 13,625,200 0
19 San Jacinto Center............ (3) Austin, TX 0 5,074,500 45,670,600 0
20 1111 19th Street.............. (3) Washington D.C. 0 5,024,000 45,216,000 0
21 Bank One Center/Tower......... (3) Indianapolis, IN 0 14,608,200 131,473,600 0
22 North Central Plaza Three..... (3) Dallas, TX 0 3,632,100 32,689,300 0
23 The Quadrant.................. (3) Englewood, CO 0 4,357,200 39,215,300 0
24 Canterbury Green.............. (3)(4) Stamford, CT 19,034,200 0 41,987,100 0
25 Three Stamford Plaza.......... (3) Stamford, CT 16,562,800 3,956,600 35,609,700 0
26 Union Square.................. (3) San Antonio, TX 0 2,368,500 14,236,000 0
27 One North Franklin............ (3) Chicago, IL 0 9,830,500 88,474,400 0
28 1620 L Street................. (3) Washington, DC 0 2,708,200 24,374,100 0
29 One & Two Stamford Plaza...... (3) Stamford, CT 0 8,267,700 74,409,300 0
30 300 Atlantic Street........... (3) Stamford, CT 0 4,632,300 41,690,900 0
31 Sterling Plaza................ (3) Dallas, TX 0 3,810,600 34,295,500 0
32 1700 Higgins.................. (3) Des Plaines, IL 3,379,700(5) 1,323,100 11,907,900 0
33 Franklin Plaza................ (3) Austin, TX 34,087,800(5) 6,502,400 58,521,300 0
34 Northwest Center.............. (3) San Antonio, TX 6,465,100(5) 1,947,900 17,531,900 0
35 One Columbus Building......... (3) Columbus, OH 29,386,100(5) 4,956,300 44,606,300 0
36 One Crosswoods Center......... (3) Columbus, OH 3,449,200(5) 1,058,900 9,529,700 0
37 One Lakeway................... (3) Metairie, LA 9,697,600(5) 2,803,900 25,235,400 0
38 Three Lakeway................. (3) Metairie, LA 17,018,700(5) 4,695,000 43,517,200 0
39 Two Lakeway................... (3) Metairie, LA 14,692,600(5) 4,643,500 41,791,800 0
40 Westshore Center.............. (3) Tampa, FL 7,052,600(5) 1,978,800 17,808,700 0
COSTS CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT CARRIED AT
ACQUISITION CLOSE OF PERIOD 12/31/97
---------------- -------------------------------
BUILDINGS BUILDINGS
AND AND ACCUMULATED DATE DATE DEPRECIABLE
IMPROVEMENTS LAND IMPROVEMENTS TOTAL(1) DEPRECIATION CONSTRUCTED ACQUIRED LIVES(2)
------------ ---- ------------ -------- ------------ ----------- -------- -----------
1 $ 0 $ 2,125,200 $ 19,126,500 $ 21,251,700 $ (218,700) 1967 9/29/87 40
2 2,131,400 13,471,300 120,115,500 133,586,800 (1,487,800) 1984 9/29/87 40
3 311,400 1,421,000 13,101,100 14,522,100 (163,300) 1974 3/01/89 40
4 120,100 570,700 4,356,600 4,927,300 (53,100) 1974 3/01/89 40
5 19,200 2,783,900 25,073,800 27,857,700 (286,400) 1985 4/25/89 40
6 43,500 1,750,700 14,449,800 16,200,500 (165,500) 1983 6/28/89 40
7 74,400 3,954,000 35,660,300 39,614,300 (407,900) 1991 6/28/89 40
8 590,100 4,767,900 43,501,500 48,269,400 (523,900) 1985 6/29/89 40
9 238,800 4,643,700 41,330,000 45,973,700 (482,100) 1987 7/25/89 40
10 292,300 1,704,000 12,478,100 14,182,100 (149,600) 1983 8/03/89 40
11 370,200 2,219,900 20,348,700 22,568,600 (255,000) 1985 8/15/89 40
12 374,300 749,000 7,115,900 7,864,900 (94,600) 1980 12/15/89 40
13 562,000 4,585,700 19,333,300 23,919,000 (239,900) 1987 12/29/89 40
14 200,900 3,018,900 27,370,700 30,389,600 (327,100) 1987 6/14/90 40
15 72,500 2,239,600 20,229,200 22,468,800 (236,800) 1989 9/28/90 40
16 603,300 6,059,400 37,137,600 43,197,000 (427,200) 1981-82 12/20/90 40
17 146,800 2,085,100 18,913,000 20,998,100 (226,100) 1987 10/16/91 40
18 245,700 1,513,900 13,870,900 15,384,800 (160,300) 1985 11/26/91 40
19 877,900 5,074,500 46,548,500 51,623,000 (555,400) 1987 12/13/91 40
20 154,700 5,024,000 45,370,700 50,394,700 (527,900) 1979 12/18/91 40
21 1,206,700 14,608,200 132,680,300 147,288,500 (1,543,200) 1990 3/24/92 40
22 273,700 3,632,100 32,963,000 36,595,100 (472,100) 1986 4/21/92 40
23 634,100 4,357,200 39,849,400 44,206,600 (464,200) 1985 12/01/92 40
24 370,500 0 42,357,600 42,357,600 (482,800) 1987 12/15/92 40
25 163,100 3,956,600 35,772,800 39,729,400 (419,800) 1980 12/15/92 40
26 289,100 2,368,500 14,525,100 16,893,600 (179,100) 1986 12/23/92 40
27 378,800 9,830,500 88,853,200 98,683,700 (1,026,800) 1991 12/31/92 40
28 662,500 2,708,200 25,036,600 27,744,800 (329,400) 1989 2/05/93 40
29 796,400 8,267,700 75,205,700 83,473,400 (899,100) 1986 3/30/93 40
30 522,000 4,632,300 42,212,900 46,845,200 (501,200) 1987 3/30/93 40
31 367,800 3,810,600 34,663,300 38,473,900 (409,100) 1984 6/25/93 40
32 29,400 1,323,100 11,937,300 13,260,400 (138,900) 1986 11/12/93 40
33 1,269,800 6,502,400 59,791,100 66,293,500 (741,000) 1987 11/12/93 40
34 132,600 1,947,900 17,664,500 19,612,400 (206,300) 1984 11/12/93 40
35 316,200 4,956,300 44,922,500 49,878,800 (515,000) 1987 11/12/93 40
36 188,100 1,058,900 9,717,800 10,776,700 (119,100) 1984 11/12/93 40
37 327,000 2,803,900 25,562,400 28,366,300 (305,400) 1981 11/12/93 40
38 1,097,300 4,695,000 44,614,500 49,309,500 (557,500) 1987 11/12/93 40
39 523,700 4,643,500 42,315,500 46,959,000 (505,200) 1984 11/12/93 40
40 150,300 1,978,800 17,959,000 19,937,800 (217,200) 1984 11/12/93 40
F-52
179
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
----------------------------- -------------
BUILDINGS
DECEMBER 31, 1997 AND
DESCRIPTION LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND
----------- -------- ----------------- ---- ------------ ----
41 NationsBank Plaza............. (3) Nashville, TN 0 3,049,200 27,443,100 0
42 The Plaza at La Jolla
Village....................... (3) San Diego, CA 57,943,100 11,839,400 98,247,900 0
43 Interco Corporate Tower....... (3) Clayton, MO 22,038,100 4,688,400 42,195,200 0
44 9400 NCX...................... (3) Dallas, TX 0 3,570,000 32,129,700 0
45 Four Stamford Plaza........... (3) Stamford, CT 15,825,200 4,470,900 40,237,900 0
46 1920 Main Plaza............... (3) Irvine, CA 0 5,480,700 47,525,800 0
47 Paces West.................... (3) Atlanta, GA 0 12,833,700 75,024,500 0
48 One Market.................... (3) San Francisco, CA 151,265,200 34,814,400 313,329,700 0
49 2010 Main Plaza............... (3) Irvine, CA 0 5,197,100 46,773,700 0
50 1100 Executive Tower.......... (3) Orange, CA 0 10,112,000 41,600,900 0
51 28 State Street............... (3)(6) Boston, MA 0 9,512,600 85,613,100 0
52 850 Third Avenue.............. (3) New York, NY 0 9,605,900 86,453,200 0
53 161 North Clark............... (3) Chicago, IL 111,883,100 15,881,700 142,936,100 0
54 Wachovia Center............... (3) Charlotte, NC 26,307,200 5,061,000 45,548,900 0
55 Central Park.................. (3) Atlanta, GA 55,033,500 9,162,600 82,463,100 0
56 One American Center........... (3) Austin, TX 0 0 70,811,500 0
57 Pasadena Towers............... (3) Pasadena, CA 47,474,100 7,087,500 63,787,500 0
58 580 California................ (3) San Francisco, CA 29,884,400 7,489,000 67,401,300 0
59 1601 Market Street............ (3) Philadelphia, PA 0 5,780,800 52,027,500 0
60 Promenade II.................. (3) Atlanta, GA 95,906,900 14,850,000 133,650,200 0
61 Two California Plaza.......... (3) Los Angeles, CA 0 0 156,197,000 0
62 BP Tower...................... (3) Cleveland, OH 84,587,300 16,450,700 148,056,200 0
63 Sun Trust Center.............. (3) Orlando, FL 0 11,023,600 99,212,300 0
64 Reston Town Center............ (3) Reston, VA 91,361,300 23,425,200 154,576,300 0
65 49 East Thomas Road........... (3) Phoenix, AZ 0 65,300 587,800 0
66 Colonnade I................... (3) San Antonio, TX 0 1,413,700 12,722,800 0
67 One Phoenix Plaza............. (3) Phoenix, AZ 0 6,191,900 55,726,900 0
68 177 Broad Street.............. (3)(7) Stamford, CT 0 3,941,200 35,470,900 0
69 Preston Commons............... (3) Dallas, TX 0 5,737,200 51,589,100 0
70 Oakbrook Terrace Tower........ (3) Oakbrook Terrace, IL 0 11,950,100 107,550,900 0
71 One Maritime Plaza............ (3) San Francisco, CA 0 11,532,700 103,793,800 0
72 Smith Barney Tower............ (3) San Diego, CA 0 2,657,700 23,919,400 0
73 201 Mission Street............ (3) San Francisco, CA 0 8,870,800 79,836,600 0
74 30 N. LaSalle Street.......... (3) Chicago, IL 0 12,489,000 112,400,700 0
75 LL&E Tower.................... New Orleans, LA 37,500,000(8) 6,185,800 55,672,200 0
76 Texaco Center................. New Orleans, LA 42,500,000(8) 6,686,300 60,177,000 0
77 Prudential Portfolio.......... (9) Various 0 28,456,300 256,106,600 0
78 550 South Hope Street......... Los Angeles, CA 0 10,017,500 90,157,600 0
79 10 & 30 South Wacker.......... Chicago, IL 0 48,502,500 436,522,400 0
80 Four Falls Corporate Center... Conshohocken, PA 0 4,929,500 44,365,700 0
81 Four and Five Valley Square... Blue Bell, PA 0 864,500 7,781,200 0
82 Oak Hill Plaza................ King of Prussia, PA 0 2,205,200 19,847,100 0
83 One Devon Square.............. Wayne, PA 0 1,023,500 9,211,000 0
84 Three Devon Square............ Wayne, PA 0 411,400 3,702,800 0
COSTS CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT CARRIED AT
ACQUISITION CLOSE OF PERIOD 12/31/97
---------------- -------------------------------
BUILDINGS BUILDINGS
AND AND ACCUMULATED DATE DATE DEPRECIABLE
IMPROVEMENTS LAND IMPROVEMENTS TOTAL(1) DEPRECIATION CONSTRUCTED ACQUIRED LIVES(2)
------------ ---- ------------ -------- ------------ ----------- -------- -----------
41 229,900 3,049,200 27,673,000 30,722,200 (317,800) 1977 12/01/93 40
42 351,200 11,839,400 98,599,100 110,438,500 (1,134,200) 1987-1990 3/10/94 40
43 338,100 4,688,400 42,533,300 47,221,700 (486,200) 1986 5/27/94 40
44 1,895,200 3,570,000 34,024,900 37,594,900 (454,700) 1981 6/24/94 40
45 94,300 4,470,900 40,332,200 44,803,100 (460,400) 1979 8/31/94 40
46 690,100 5,480,700 48,215,900 53,696,600 (654,600) 1988 9/29/94 40
47 1,425,000 12,833,700 76,449,500 89,283,200 (948,800) 1987 10/31/94 40
48 18,864,800 34,814,400 332,194,500 367,008,900 (4,391,600) 1976 11/22/94 40
49 259,700 5,197,100 47,033,400 52,230,500 (559,400) 1988 12/13/94 40
50 377,500 10,112,000 41,978,400 52,090,400 (503,200) 1987 12/15/94 40
51 27,919,400 9,512,600 113,532,500 123,045,100 (387,300) 1968 1/23/95 40
52 2,243,100 9,605,900 88,696,300 98,302,200 (1,075,900) 1960 3/20/95 40
53 11,149,300 15,881,700 154,085,400 169,967,100 (1,864,800) 1992 7/26/95 40
54 481,600 5,061,000 46,030,500 51,091,500 (524,900) 1972 9/01/95 40
55 556,000 9,162,600 83,019,100 92,181,700 (975,500) 1986 10/17/95 40
56 552,200 0 71,363,700 71,363,700 (815,200) 1984 11/01/95 40
57 1,383,200 7,087,500 65,170,700 72,258,200 (768,000) 1990-1991 12/14/95 40
58 1,741,600 7,489,000 69,142,900 76,631,900 (888,700) 1984 12/21/95 40
59 760,500 5,780,800 52,788,000 58,568,800 (661,700) 1970 1/18/96 40
60 3,482,500 14,850,000 137,132,700 151,982,700 (1,632,200) 1990 6/14/96 40
61 14,041,300 0 170,238,300 170,238,300 (2,954,000) 1992 8/23/96 40
62 312,300 16,450,700 148,368,500 164,819,200 (1,702,200) 1985 9/04/96 40
63 1,065,600 11,023,600 100,277,900 111,301,500 (1,172,300) 1988 9/18/96 40
64 428,000 23,425,200 155,004,300 178,429,500 (1,779,500) 1990 10/22/96 40
65 0 65,300 587,800 653,100 (6,600) 1974 12/11/96 40
66 360,900 1,413,700 13,083,700 14,497,400 (170,200) 1983 12/04/96 40
67 0 6,191,900 55,726,900 61,918,800 (636,400) 1989 12/04/96 40
68 375,200 3,941,200 35,846,100 39,787,300 (413,900) 1989 1/29/97 40
69 956,100 5,737,200 52,545,200 58,282,400 (631,400) 1986 3/21/97 40
70 392,200 11,950,100 107,943,100 119,893,200 (1,237,600) 1988 4/16/97 40
71 1,682,200 11,532,700 105,476,000 117,008,700 (1,209,000) 1967 4/21/97 40
72 1,179,100 2,657,700 25,098,500 27,756,200 (379,000) 1987 4/28/97 40
73 258,000 8,870,800 80,094,600 88,965,400 (915,000) 1981 4/30/97 40
74 569,600 12,489,000 112,970,300 125,459,300 (1,293,600) 1974 6/13/97 40
75 127,300 6,185,800 55,799,500 61,985,300 (411,300) 1987 9/3/97 40
76 393,000 6,686,300 60,570,000 67,256,300 (454,100) 1984 9/3/97 40
77 5,343,900 28,456,300 261,450,500 289,906,800 (1,443,400) Various 10/1/97 40
78 0 10,017,500 90,157,600 100,175,100 (469,400) 1991 10/6/97 40
79 54,100 48,502,500 436,576,500 485,079,000 (2,277,300) 1983 10/7/97 40
80 132,000 4,929,500 44,497,700 49,427,200 (238,900) 1988 10/7/97 40
81 15,000 864,500 7,796,200 8,660,700 (40,500) 1988 10/7/97 40
82 2,800 2,205,200 19,849,900 22,055,100 (103,300) 1982 10/7/97 40
83 1,200 1,023,500 9,212,200 10,235,700 (47,900) 1984 10/7/97 40
84 0 411,400 3,702,800 4,114,200 (19,300) 1985 10/7/97 40
F-53
180
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
---------------------------- --------------
BUILDINGS
DECEMBER 31, 1997 AND
DESCRIPTION LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND
----------- -------- ----------------- ---- ------------ ----
85 Two Devon Square.............. Wayne, PA 0 658,500 5,926,800 0
86 Two Valley Square............. Blue Bell, PA 0 878,000 7,901,400 0
87 Walnut Hill Plaza............. King of Prussia, PA 14,713,700 2,046,300 18,416,800 0
88 One Lafayette Centre.......... Washington, D.C. 0 8,257,000 74,312,800 0
89 One Valley Square............. Blue Bell, PA 0 717,600 6,457,600 0
90 Three Valley Square........... Blue Bell, PA 0 1,012,400 9,111,600 0
91 1600 Duke Street.............. Alexandria, VA 0 1,105,300 9,948,500 0
92 Fair Oaks Plaza............... Fairfax, VA 0 2,411,600 21,704,200 0
93 Lakeside Square............... Dallas, TX 0 8,261,000 47,349,300 0
94 LaSalle Plaza................. Minneapolis, MN 0 9,679,000 87,111,400 0
95 1001 Fifth Avenue............. Portland, OR 20,691,500(10) 5,381,200 48,615,200 0
96 1111 Third Avenue............. Seattle, WA 30,830,400(10) 9,895,500 89,530,100 0
97 Calais Office Center.......... Anchorage, AK 8,587,000(10) 0 16,625,800 0
98 First Interstate.............. Seattle, WA 83,800,700(10) 21,352,000 193,449,600 0
99 Nordstrom Medical Tower....... Seattle, WA 10,035,400(10) 1,762,500 16,016,400 0
100 One Bellevue Center........... Bellevue, WA 23,691,800(10) 0 56,199,700 0
101 Rainer Plaza.................. Bellevue, WA 29,795,800(10) 0 79,896,000 0
102 Second and Seneca............. Seattle, WA 40,865,800(10) 10,917,900 98,885,800 0
103 101 N. Wacker................. Chicago, IL 0 10,067,600 90,608,800 0
104 10880 Wilshire Boulevard...... Los Angeles, CA 0 0 149,841,200 0
105 10960 Wilshire Boulevard...... Los Angeles, CA 0 16,841,300 151,573,900 0
106 1300 N. 17th Street........... Rosslyn, VA 0 9,810,600 88,295,900 0
107 1333 H Street................. Washington D.C. 0 6,715,400 60,438,200 0
108 150 California................ (11) San Francisco, CA 0 12,566,800 0 0
109 150 Federal Street............ Boston, MA 56,270,200 14,131,300 127,182,200 0
110 1616 N. Fort Myer Drive....... Rosslyn, VA 0 6,960,700 62,646,400 0
111 175 Federal Street............ Boston, MA 12,729,300 4,893,900 44,045,200 0
112 175 Wyman Street.............. (11) Walthan, MA 0 24,000,000 0 0
113 2 Oliver Street-147 Milk
Street........................ Boston, MA 0 5,017,400 45,157,000 0
114 200 West Adams................ Chicago, IL 0 11,723,300 105,509,500 0
115 225 Franklin Street........... Boston, MA 0 34,607,900 311,470,600 0
116 AT&T Plaza.................... Oak Brook, IL 0 4,834,200 43,507,900 0
117 Center Plaza.................. Boston, MA 59,898,000 18,942,300 170,480,400 0
118 Center Pointe III............. (11) Fairfax, VA 0 9,600,000 0 0
119 Centerpointe I and II......... Fairfax, VA 30,146,000 8,837,800 79,540,200 0
120 Civic Opera House............. Chicago, IL 31,785,400 12,771,400 114,941,900 0
121 Crosby Corporate Center....... Bedford, MA 0 5,957,800 53,620,400 0
122 Crosby Corporate Center II.... (11) Bedford, MA 0 9,384,600 0 0
123 EJ Randolph................... McLean, VA 16,057,000 3,936,500 35,429,100 0
124 EJ Randolph II................ (11) McLean, Va 0 3,324,000 0 0
125 John Marshall I and II........ McLean, VA 21,182,900 5,216,400 46,947,600 0
126 John Marshall III............. (11) McLean, VA 0 8,700,000 0 0
127 Lake Marriott Business Park... Santa Clara, CA 0 6,952,100 62,568,900 0
128 Lakeside Office Park.......... Atlanta, GA 0 4,792,500 43,132,300 0
COSTS CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT CARRIED AT
ACQUISITION CLOSE OF PERIOD 12/31/97
---------------- -------------------------------
BUILDINGS BUILDINGS
AND AND ACCUMULATED DATE DATE DEPRECIABLE
IMPROVEMENTS LAND IMPROVEMENTS TOTAL(1) DEPRECIATION CONSTRUCTED ACQUIRED LIVES(2)
------------ ---- ------------ -------- ------------ ----------- -------- -----------
85 104,700 658,500 6,031,500 6,690,000 (34,500) 1985 10/7/97 40
86 1,200 878,000 7,902,600 8,780,600 (41,100) 1990 10/7/97 40
87 2,600 2,046,300 18,419,400 20,465,700 (95,900) 1985 10/7/97 40
88 1,400 8,257,000 74,314,200 82,571,200 (386,900) 1980 10/17/97 40
89 1,200 717,600 6,458,800 7,176,400 (20,200) 1982 11/21/97 40
90 1,400 1,012,400 9,113,000 10,125,400 (28,500) 1984 11/21/97 40
91 0 1,105,300 9,948,500 11,053,800 (31,000) 1985 11/24/97 40
92 0 2,411,600 21,704,200 24,115,800 (67,700) 1986 11/24/97 40
93 587,900 8,261,000 47,937,200 56,198,200 (149,800) 1987 11/24/97 40
94 32,300 9,679,000 87,143,700 96,822,700 (275,200) 1991 11/25/97 40
95 700 5,381,200 48,615,900 53,997,100 (49,900) 1980 12/17/97 40
96 305,700 9,895,500 89,835,800 99,731,300 (103,700) 1980 12/17/97 40
97 444,300 0 17,070,100 17,070,100 (18,900) 1975 12/17/97 40
98 20,400 21,352,000 193,470,000 214,822,000 (198,600) 1983 12/17/97 40
99 300 1,762,500 16,016,700 17,779,200 (16,300) 1986 12/17/97 40
100 392,900 0 56,592,600 56,592,600 (60,900) 1983 12/17/97 40
101 3,200 0 79,899,200 79,899,200 (82,100) 1986 12/17/97 40
102 111,800 10,917,900 98,997,600 109,915,500 (101,600) 1991 12/17/97 40
103 0 10,067,600 90,608,800 100,676,400 (94,400) 1980 12/19/97 40
104 0 0 149,841,200 149,841,200 (156,100) 1970 12/19/97 40
105 0 16,841,300 151,573,900 168,415,200 (157,900) 1971 12/19/97 40
106 0 9,810,600 88,295,900 98,106,500 (92,000) 1980 12/19/97 40
107 0 6,715,400 60,438,200 67,153,600 (63,000) 1982 12/19/97 40
108 0 12,566,800 0 12,566,800 0 12/19/97
109 0 14,131,300 127,182,200 141,313,500 (132,500) 1988 12/19/97 40
110 0 6,960,700 62,646,400 69,607,100 (65,300) 1974 12/19/97 40
111 0 4,893,900 44,045,200 48,939,100 (45,900) 1977 12/19/97 40
112 0 24,000,000 0 24,000,000 0 12/19/97
113 0 5,017,400 45,157,000 50,174,400 (47,000) 1988 12/19/97 40
114 0 11,723,300 105,509,500 117,232,800 (109,900) 1985 12/19/97 40
115 0 34,607,900 311,470,600 346,078,500 (324,500) 1966 12/19/97 40
116 0 4,834,200 43,507,900 48,342,100 (45,300) 1984 12/19/97 40
117 0 18,942,300 170,480,400 189,422,700 (177,600) 1969 12/19/97 40
118 0 9,600,000 0 9,600,000 0 12/19/97
119 0 8,837,800 79,540,200 88,378,000 (82,900) 1988/1990 12/19/97 40
120 0 12,771,400 114,941,900 127,713,300 (119,700) 1929 12/19/97 40
121 0 5,957,800 53,620,400 59,578,200 (55,900) 1996 12/19/97 40
122 22,447,300 9,384,600 22,447,300 31,831,900 0 12/19/97
123 0 3,936,500 35,429,100 39,365,600 (36,900) 1983 12/19/97 40
124 0 3,324,000 0 3,324,000 0 12/19/97
125 0 5,216,400 46,947,600 52,164,000 (48,900) 1981 12/19/97 40
126 0 8,700,000 0 8,700,000 0 12/19/97
127 0 6,952,100 62,568,900 69,521,000 (65,200) 1981 12/19/97 40
128 0 4,792,500 43,132,300 47,924,800 (44,900) 1972 12/19/97 40
F-54
181
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO COMPANY ACQUISITION
------------------------------- ------------
BUILDINGS
DECEMBER 31, 1997 AND
DESCRIPTION LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND
----------- -------- ----------------- ---- ------------ ----
129 Media Center.................. (11) Burbank, CA 0 20,000,000 0 0
130 New England Executive Park.... Burlington, MA 0 13,106,000 117,953,900 0
131 Northridge I.................. Herndon, VA 14,558,000 3,224,900 29,024,400 0
132 One Canal Park................ Cambridge, MA 0 2,006,000 18,054,000 0
133 Perimeter Center.............. Atlanta, GA 217,871,000 68,306,100 429,131,900 0
134 Presidents Plaza.............. Chicago, IL 0 13,435,500 120,919,200 0
135 Riverside Center.............. (11) Newton, MA 0 30,000,000 0 0
136 Riverview I and II............ Cambridge, MA 0 5,937,600 53,438,100 0
137 Russia Wharf.................. Boston, MA 0 5,918,200 53,263,400 0
138 Shoreline Technology Park..... Mountain View, CA 0 30,194,800 178,471,200 0
139 South Station................. Boston, MA 0 0 31,073,800 0
140 Sunnyvale Business Center..... Sunnyvale, CA 0 4,890,000 44,010,000 0
141 Ten Canal Park................ Cambridge, MA 0 2,383,100 21,447,900 0
142 Tri-State International....... Lincolnshire, IL 0 10,925,300 98,327,300 0
143 Wellesley Office Park......... Wellesley, MA 55,256,000 16,492,700 148,434,200 0
144 Westbrook Corporate Center.... Westchester, IL 111,497,800 24,896,800 224,071,100 0
145 Westwood Business Center...... Wellesley, MA 0 2,719,600 24,476,300 0
-------------- -------------- -------------- --
Subtotal Office Properties.... $1,990,406,900 $1,162,720,800 $9,493,786,000 $0
-------------- -------------- -------------- --
Parking Facilities:
1 North Loop Transportation
Center........................ (3) Chicago, IL $ 32,864,000(12) $ 3,784,600 $ 34,061,500 $0
2 Theatre District Garage....... (3) Chicago, IL 0 3,372,300 30,350,700 0
3 Capitol Commons Garage........ (3)(5) Indianapolis, IN 4,400,700 0 14,449,700 0
4 Boston Harbor Garage.......... (3) Boston, MA 35,345,500 6,087,000 54,783,300 0
5 Milwaukee Center.............. (3) Milwaukee, WI 0 0 7,798,500 0
6 1111 Sansom Street Garage..... (3) Philadelphia, PA 0 1,476,500 0 0
7 15th & Sansom Streets
Garage........................ (3) Philadelphia, PA 0 726,400 6,537,600 0
8 1602-34 Chancellor Garage..... (3) Philadelphia, PA 0 735,900 6,622,700 0
9 1616 Sansom Street Garage..... (3) Philadelphia, PA 0 432,900 3,896,200 0
10 Juniper/Locust Streets
Garage........................ (3) Philadelphia, PA 0 574,400 5,169,900 0
11 Adams-Wabash Garage........... Chicago, IL 0 2,525,000 22,725,300 0
12 601 Tchoupitoulas Garage...... New Orleans, LA 0(8) 1,180,000 10,619,800 0
13 Stanwix Garage................ Pittsburgh, PA 0 1,794,900 16,154,700 0
-------------- -------------- -------------- --
Subtotal Parking Facilities... 72,610,200 22,689,900 213,169,900 0
-------------- -------------- -------------- --
Management Business........... (13) 0 0 0 0
-------------- -------------- -------------- --
Investment in Real Estate..... $2,063,017,100 $1,185,410,700 $9,706,955,900 $-
============== ============== ============== ==
COSTS CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT CARRIED AT
ACQUISITION CLOSE OF PERIOD 12/31/97
---------------- -------------------------------
BUILDINGS BUILDINGS
AND AND ACCUMULATED DATE DATE DEPRECIABLE
IMPROVEMENTS LAND IMPROVEMENTS TOTAL(1) DEPRECIATION CONSTRUCTED ACQUIRED LIVES(2)
------------ ---- ------------ -------- ------------ ----------- -------- -----------
129 0 20,000,000 0 20,000,000 0 12/19/97
130 0 13,106,000 117,953,900 131,059,900 (122,900) 1970 12/19/97 40
131 0 3,224,900 29,024,400 32,249,300 (30,200) 1988 12/19/97 40
132 0 2,006,000 18,054,000 20,060,000 (18,800) 1987 12/19/97 40
133 0 68,306,100 429,131,900 497,438,000 (822,800) 1972/1998 12/19/97 40
134 0 13,435,500 120,919,200 134,354,700 (126,000) 1980 12/19/97 40
135 0 30,000,000 0 30,000,000 0 12/19/97
136 0 5,937,600 53,438,100 59,375,700 (55,700) 1985 12/19/97 40
137 0 5,918,200 53,263,400 59,181,600 (55,500) 1978 12/19/97 40
138 0 30,194,800 178,471,200 208,666,000 (185,900) 1985 12/19/97 40
139 0 0 31,073,800 31,073,800 (32,400) 1988 12/19/97 40
140 0 4,890,000 44,010,000 48,900,000 (45,800) 1990 12/19/97 40
141 0 2,383,100 21,447,900 23,831,000 (22,300) 1987 12/19/97 40
142 0 10,925,300 98,327,300 109,252,600 (102,400) 1986 12/19/97 40
143 0 16,492,700 148,434,200 164,926,900 (154,600) 1963 12/19/97 40
144 0 24,896,800 224,071,100 248,967,900 (233,400) 1985 12/19/97 40
145 0 2,719,600 24,476,300 27,195,900 (25,500) 1985 12/19/97 40
-------------- -------------- -------------- --------------- ------------
$ 144,072,900 $1,162,720,800 $9,637,858,900 $10,800,579,700 $(62,295,000)
-------------- -------------- -------------- --------------- ------------
1 $ 450,000 $ 3,784,600 $ 34,511,500 $ 38,296,100 $ (396,500) 1985 6/9/95 40
2 56,800 3,372,300 30,407,500 33,779,800 (348,200) 1987 6/9/95 40
3 9,100 0 14,458,800 14,458,800 (165,200) 1987 6/29/95 40
4 277,700 6,087,000 55,061,000 61,148,000 (635,000) 1972 12/10/96 40
5 219,900 0 8,018,400 8,018,400 (98,700) 1988 12/18/96 40
6 6,800 1,476,500 6,800 1,483,300 0 N/A 12/27/96 N/A
7 11,300 726,400 6,548,900 7,275,300 (73,400) 1950/1954 12/27/96 40
8 9,200 735,900 6,631,900 7,367,800 (73,800) 1945/1955 12/27/96 40
9 0 432,900 3,896,200 4,329,100 (43,200) 1950 12/27/96 40
10 11,000 574,400 5,180,900 5,755,300 (58,300) 1949/1952 12/27/96 40
11 76,200 2,525,000 22,801,500 25,326,500 (212,900) 1990 8/11/97 40
12 0 1,180,000 10,619,800 11,799,800 (77,200) 1982 9/3/97 40
13 0 1,794,900 16,154,700 17,949,600 (50,400) 1969 11/25/97 40
-------------- -------------- -------------- --------------- ------------
1,128,000 22,689,900 214,297,900 236,987,800 (2,232,800)
-------------- -------------- -------------- --------------- ------------
3,446,600 0 3,446,600 3,446,600 (167,300)
-------------- -------------- -------------- --------------- ------------
$ 148,647,500 $1,185,410,700 $9,855,603,400 $11,041,014,100 $(64,695,100)
============== ============== ============== =============== ============
- -------------------------
(1) The aggregate cost for Federal Income Tax purposes as of December 31, 1997
was approximately $7.5 billion.
(2) The life to compute depreciation on building is 40 years. The life to
compute depreciation on building improvements is 4-40 years.
(3) The date acquired represents the date these Properties were acquired by
Equity Office Predecessors. The acquisition of the Properties, or the
interest therein, by the Company from Equity Office Predecessors in
connection with the Consolidation on July 11, 1997, was accounted for using
the purchase method in accordance with Accounting Principles Board Opinion
No. 16. Accordingly, the assets were recorded by the Company at their fair
values.
F-55
182
(4) This Property contains 106 residential units.
(5) These loans are subject to cross default and collateralization provisions.
(6) This building underwent a major renovation to re-tenant the entire
Property. The building is currently in a lease-up period and is expected to
be fully occupied in 1998. During the renovation period, operating costs,
real estate taxes, and interest incurred will be capitalized. As of
December 31, 1997, approximately $21.4 million of operating costs and
interest have been capitalized.
(7) This Property contains 161 residential units.
(8) These loans are subject to cross default and collateralization provisions.
(9) The Prudential Portfolio consists of six Office Buildings located in
Philadelphia, PA; Dallas, TX; and Houston, TX. These Office Buildings were
constructed between 1969 and 1984.
(10) These loans are subject to cross default and collateralization provisions.
(11) These properties are in various development stages. During the development
period all operating costs, including real estate taxes together with
interest incurred during the development stages will be capitalized.
(12) The encumbrance on the North Loop Transportation Center is also secured by
a first lien on the Theatre District Garage.
(13) This asset consists of furniture, fixtures, and equipment owned by the
Management Business.
(14) Summary of activity of investment in real estate and accumulated
depreciation is as follows:
The changes in investment in real estate for the period from July 11, 1997
to December 31, 1997, the period from January 1, 1997 to July 10, 1997, and
for the years ended December 31, 1996 and 1995 are as follows:
FOR THE PERIOD FOR THE PERIOD
JULY 11, 1997 TO JANUARY 1, 1997
DECEMBER 31, 1997 TO JULY 10, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ---------------- ----------------- -----------------
Balance, beginning of period.................... $ 0 $3,549,707,600 $2,571,851,300 $1,931,002,400
Acquisitions.................................... 10,941,428,100 531,968,000 860,995,000 583,485,200
Improvements.................................... 99,586,000 59,511,000 129,485,300 76,985,400
Properties disposed of.......................... 0 (67,193,400) (9,633,600) 0
Write down for value impairment................. 0 0 0 (17,512,000)
Write-off of fully depreciated assets which are
no longer in service........................... 0 0 (2,990,400) (2,109,700)
--------------- -------------- -------------- --------------
Balance, end of period.......................... $11,041,014,100 $4,073,993,200 $3,549,707,600 $2,571,851,300
=============== ============== ============== ==============
The changes in accumulated depreciation for the period from July 11, 1997 to
December 31, 1997, the period from January 1, 1997 to July 10, 1997, and for
the years ended December 31, 1996 and 1995 are as follows:
FOR THE PERIOD FOR THE PERIOD
JULY 11, 1997 TO JANUARY 1, 1997
DECEMBER 31, 1997 TO JULY 10, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ---------------- ----------------- -----------------
Balance, beginning of period................ $ 0 $(257,893,300) $(178,448,600) $(115,842,500)
Depreciation................................ (64,695,100) (57,379,300) (82,905,300) (64,715,800)
Properties disposed of...................... 0 8,517,200 470,200 0
Write-off of fully depreciated assets which
are no longer in service................... 0 0 2,990,400 2,109,700
------------ ------------- ------------- -------------
Balance, end of period...................... $(64,695,100) $(306,755,400) $(257,893,300) $(178,448,600)
============ ============= ============= =============
F-56
183
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of 177 Broad Street (the Property) as described in Note 1 for the year ended
December 31, 1996. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses 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 Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 2 and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 1 for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 28, 1997
F-57
184
177 BROAD STREET
STATEMENT OF REVENUE AND CERTAIN EXPENSES
YEAR ENDED
DECEMBER 31,
1996
------------
(IN
THOUSANDS)
REVENUE
Base rents................................................ $4,722
Storage and other rental income........................... 52
Tenant reimbursements..................................... 212
Parking income............................................ 322
Other income.............................................. 103
------
Total revenue..................................... 5,411
------
EXPENSES
Property operating and maintenance........................ 825
Utilities and telephone................................... 769
Repairs and maintenance................................... 313
Real estate taxes......................................... 864
Management fees........................................... 153
Insurance................................................. 46
Administrative............................................ 118
------
Total expenses.................................... 3,088
------
Revenue in excess of certain expenses....................... $2,323
======
See accompanying notes.
F-58
185
177 BROAD STREET
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Statement of Revenue and Certain Expenses relate to the
operations of 177 Broad Street located in Stamford, Connecticut (the
"Property"). The Property was acquired on January 28, 1997, by Equity Office
Predecessors, as defined elsewhere in this registration statement, from an
unrelated entity.
The Property consists of a fifteen story office complex with approximately
188,000 rentable square feet, an enclosed 540 space parking structure, and a
161-unit residential apartment building.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust. The statement is not representative of the
actual operations of the Property for the period presented nor indicative of
future operations as certain expenses, primarily depreciation, amortization and
interest expense, which may not be comparable to the expenses expected to be
incurred by Equity Office Properties Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
3. RENTALS
The Property has entered into tenant leases, in the office portion of the
Property, that provide for tenants to share in the operating expenses and real
estate taxes on a pro rata basis, as defined.
F-59
186
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of Preston Commons (the Property) as described in Note 1 for the year ended
December 31, 1996. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses 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 Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 2 and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 1 for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
April 16, 1997
F-60
187
PRESTON COMMONS
STATEMENT OF REVENUE AND CERTAIN EXPENSES
YEAR ENDED
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
REVENUE
Base rents................................................ $6,347
Tenant reimbursements..................................... 1,132
Garage and parking income................................. 216
Other income.............................................. 91
------
Total revenue..................................... 7,786
------
EXPENSES
Property operating & maintenance.......................... 2,327
Real estate taxes......................................... 742
Management fees........................................... 226
Insurance................................................. 30
------
Total expenses.................................... 3,325
------
Revenue in excess of certain expenses....................... $4,461
======
See accompanying notes.
F-61
188
PRESTON COMMONS
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Statement of Revenue and Certain Expenses relates to the
operations of the Preston Commons building, an office building with
approximately 419,000 rentable square feet, located in Dallas, Texas (the
"Property"). The Property was acquired on March 21, 1997, by Equity Office
Predecessors, as defined elsewhere in this registration statement, from an
unrelated entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust. The statement is not representative of the
actual operations of the Property for the period presented nor indicative of
future operations as certain expenses, primarily depreciation, amortization and
interest expense, which may not be comparable to the expenses expected to be
incurred by Equity Office Properties Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
3. RENTALS
The Property has entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
F-62
189
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of Oakbrook Terrace Tower (the Property) as described in Note 1 for the year
ended December 31, 1996. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses 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 Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 2 and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 1 for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
May 30, 1997
F-63
190
OAKBROOK TERRACE TOWER
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1996 1997
------------ ---------------
(UNAUDITED)
(IN THOUSANDS)
REVENUE
Base rents................................................ $11,409 $3,113
Tenant reimbursements..................................... 5,282 1,366
Garage and parking income................................. 148 37
Other income.............................................. 193 97
------- ------
Total revenue..................................... 17,032 4,613
------- ------
EXPENSES
Property operating & maintenance.......................... 4,276 1,037
Real estate taxes......................................... 1,259 353
Management fees........................................... 338 116
Insurance................................................. 111 17
------- ------
Total expenses.................................... 5,984 1,523
------- ------
Revenue in excess of certain expenses....................... $11,048 $3,090
======= ======
See accompanying notes.
F-64
191
OAKBROOK TERRACE TOWER
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Statements of Revenue and Certain Expenses relate to the
operations of the Oakbrook Terrace Tower building, an office building with
approximately 773,000 rentable square feet, located in Oakbrook Terrace,
Illinois (the "Property"). The Property was acquired on April 15, 1997, by
Equity Office Predecessors, as defined elsewhere in this registration statement,
from an unrelated entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust. The statements are not representative of the
actual operations of the Property for the periods presented nor indicative of
future operations as certain expenses, primarily depreciation, amortization and
interest expense, which may not be comparable to the expenses expected to be
incurred by Equity Office Properties Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement of revenue
and certain expenses for the three months ended March 31, 1997, reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
3. RENTALS
Property has entered into tenant leases that provide for tenants to share
in the operating expenses and real estate taxes on a pro rata basis, as defined.
4. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1996, the Property was managed by an
affiliated party to the seller. The management agreement provided for a fee of
2.5% of gross receipts, as defined.
F-65
192
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of One Maritime Plaza (the Property) as described in Note 1 for the year ended
December 31, 1996. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses 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 Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 2 and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 1 for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
June 6, 1997
F-66
193
ONE MARITIME PLAZA
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
(UNAUDITED)
(IN THOUSANDS)
REVENUE
Base rents................................................ $13,410 $3,382
Tenant reimbursements..................................... 208 125
Interest income........................................... 249 65
Other income.............................................. 428 125
------- ------
Total revenue..................................... 14,295 3,697
------- ------
EXPENSES
Property operating & maintenance............................ 4,326 887
Real estate taxes......................................... 668 250
Management fees........................................... 585 146
Insurance................................................. 447 119
------- ------
Total expenses.................................... 6,026 1,402
------- ------
Revenue in excess of certain expenses....................... $ 8,269 $2,295
======= ======
See accompanying notes.
F-67
194
ONE MARITIME PLAZA
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Statements of Revenue and Certain Expenses relate to the
operations of the One Maritime Plaza building, an office building with
approximately 524,000 rentable square feet, located in San Francisco, California
(the "Property"). The Property was acquired on April 24, 1997, by Equity Office
Predecessors, as defined elsewhere in this registration statement, from an
unrelated entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust. The statements are not representative of the
actual operations of the Property for the periods presented nor indicative of
future operations as certain expenses, primarily depreciation, amortization and
interest expense, which may not be comparable to the expenses expected to be
incurred by Equity Office Properties Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement of revenue
and certain expenses for the three months ended March 31, 1997, reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
3. RENTALS
The Property has entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
F-68
195
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of 201 Mission Street (the Property) as described in Note 1 for the year ended
December 31, 1996. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses 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 Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 2 and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 1 for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
April 30, 1997
F-69
196
201 MISSION STREET
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1996 1997
----------------- ---------------
(UNAUDITED)
(IN THOUSANDS)
REVENUE
Base rents................................................ $7,423 $2,166
Tenant reimbursements..................................... 55 9
Garage and parking income................................. 366 60
Other income.............................................. 39 11
------ ------
Total revenue..................................... 7,883 2,246
------ ------
EXPENSES
Property operating & maintenance.......................... 3,369 969
Real estate taxes......................................... 959 264
Management fees........................................... 106 27
Insurance................................................. 569 196
------ ------
Total expenses.................................... 5,003 1,456
------ ------
Revenue in excess of certain expenses....................... $2,880 $ 790
====== ======
See accompanying notes.
F-70
197
201 MISSION STREET
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Statements of Revenue and Certain Expenses relate to the
operations of the 201 Mission Street building, an office building with
approximately 483,000 rentable square feet, located in San Francisco, California
(the "Property"). The Property was acquired on April 30, 1997, by Equity Office
Predecessors, as defined elsewhere in this registration statement, from an
unrelated entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust. The statements are not representative of the
actual operations of the Property for the periods presented nor indicative of
future operations as certain expenses, primarily depreciation, amortization and
interest expense, which may not be comparable to the expenses expected to be
incurred by Equity Office Properties Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement of revenue
and certain expenses for the three months ended March 31, 1997, reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
3. RENTALS
The Property has entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
F-71
198
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of 30 N. LaSalle (the Property) as described in Note 1 for the year ended
December 31, 1996. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses 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 Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 2 and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 1 for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
June 13, 1997
F-72
199
30 N. LASALLE
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(IN THOUSANDS)
REVENUE
Base rents................................................ $ 9,317 $1,870
Tenant reimbursements..................................... 9,164 2,194
Other income.............................................. 237 55
------- ------
Total revenue..................................... 18,718 4,119
------- ------
EXPENSES
Property operating & maintenance.......................... 4,336 1,047
Real estate taxes......................................... 5,155 1,327
Management fees........................................... 374 79
Insurance................................................. 160 39
Ground rent............................................... 165 42
------- ------
Total expenses.................................... 10,190 2,534
------- ------
Revenue in excess of certain expenses....................... $ 8,528 $1,585
======= ======
See accompanying notes.
F-73
200
30 N. LASALLE
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Statements of Revenue and Certain Expenses relate to the
operations of the 30 N. LaSalle building, an office building with approximately
926,000 rentable square feet, located in Chicago, Illinois (the "Property"). The
Property was acquired on June 13, 1997, by Equity Office Predecessors, as
defined elsewhere in this registration statement, from an unrelated entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust. The statements are not representative of the
actual operations of the Property for the periods presented nor indicative of
future operations as certain expenses, primarily depreciation, amortization and
interest expense, which may not be comparable to the expenses expected to be
incurred by Equity Office Properties Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement of revenue
and certain expenses for the three months ended March 31, 1997, reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
3. RENTALS
The Property has entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
4. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1996, the Property was managed by an
affiliated party to the seller. The management agreement provided for a fee of
2% of gross receipts, as defined.
5. GROUND LEASE
The Property is subject to a ground lease on a portion of the land under
the building which expires November 30, 2067. The ground lease provides for
escalation payments in intervals of approximately 10 years, with the next
escalation scheduled for January 1, 2000. Through 1999, the minimum annual
rental payments required under the ground lease are $165,000.
F-74
201
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying combined Statement of Revenue and Certain
Expenses of the Columbus America Properties (the Properties) as described in
Note 2 for the year ended December 31, 1996. The combined Statement of Revenue
and Certain Expenses is the responsibility of the Properties' management. Our
responsibility is to express an opinion on the combined Statement of Revenue and
Certain Expenses 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 Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying combined Statement of Revenue and Certain Expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, for inclusion in a registration statement on
Form S-4 of Equity Office Properties Trust as described in Note 1, and is not
intended to be a complete presentation of the Properties' revenue and expenses.
In our opinion, the combined Statement of Revenue and Certain Expenses
referred to above presents fairly, in all material respects, the combined
revenue and certain expenses of the Properties described in Note 2 for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 3, 1997
F-75
202
COLUMBUS AMERICA PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
YEAR ENDED JANUARY 1, 1997
DECEMBER 31, THROUGH
1996 JULY 31, 1997
------------ ---------------
(UNAUDITED)
REVENUE
Base rents................................................ $15,620 $ 8,814
Tenant reimbursements..................................... 654 176
Parking income............................................ 2,356 1,460
Other income.............................................. 165 111
------- -------
Total revenue..................................... 18,795 10,561
------- -------
EXPENSES
Property operating and maintenance........................ 4,888 2,770
Real estate taxes......................................... 1,318 769
Management fee............................................ 786 403
Insurance................................................. 191 127
------- -------
Total expenses.................................... 7,183 4,069
------- -------
Revenue in excess of certain expenses....................... $11,612 $ 6,492
======= =======
See accompanying notes.
F-76
203
COLUMBUS AMERICA PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a registration statement on
Form S-4 of Equity Office Properties Trust. The accompanying financial
statements are not representative of the actual operations of the Properties, as
defined in Note 2, for the periods presented nor indicative of future operations
as certain expenses, primarily depreciation, amortization and interest expense,
which may not be comparable to the expenses expected to be incurred by Equity
Office Properties Trust in future operations of the Properties, have been
excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of the
combined revenue and expenses during the reporting periods. Actual results could
differ from these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
2. DESCRIPTION OF PROPERTIES
The accompanying combined Statements of Revenue and Certain Expenses relate
to the combined operations of the Columbus America Properties (the
"Properties"), which are all located in New Orleans, Louisiana. The Properties
have been presented on a combined basis because the Properties are under common
ownership and management. The Properties listed below were acquired on September
3, 1997 for $140 million by Equity Office Properties Trust from an unrelated
party.
PROPERTY NAME TYPE OF FACILITY RENTABLE SQUARE FEET
------------- ---------------- --------------------
LL & E Tower...................................... office building 545,157
Texaco Center..................................... office building 619,714
601 Tchoupitoulas................................. parking facility 759(A)
- ---------------
(A) Represents number of parking spaces.
The accompanying combined Statements of Revenue and Certain Expenses
include the operations of the 601 Tchoupitoulas parking facility.
3. RENTALS
LL&E Tower and Texaco Center have entered into tenant leases that provide
for tenants to share in the operating expenses and real estate taxes on a pro
rata basis, as defined.
F-77
204
COLUMBUS AMERICA PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE
AND CERTAIN EXPENSES -- (CONTINUED)
4. RELATED PARTY TRANSACTIONS
The office buildings were managed by an affiliated party to the seller. The
management agreements provided for a fee based on a percentage of gross
receipts, as defined by each of the office buildings' individual management
agreements, excluding any receipts from the parking garage.
During the year ended December 31, 1996, the parking facility was also
managed by an affiliated party to the seller. The management agreement provided
for a flat fee of $12,500 per month.
During the year ended December 31, 1996, LL&E Tower leased space to parties
affiliated with the seller. Rental income from those leases was approximately
$240,000 in 1996.
F-78
205
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying combined Statement of Revenue and Certain
Expenses of the Prudential Properties (the Properties) as described in Note 2
for the year ended December 31, 1996. The combined Statement of Revenue and
Certain Expenses is the responsibility of the Properties' management. Our
responsibility is to express an opinion on the combined Statement of Revenue and
Certain Expenses 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 Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying combined Statement of Revenue and Certain Expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a registration statement on
Form S-4 of Equity Office Properties Trust as described in Note 1, and is not
intended to be a complete presentation of the Properties' combined revenue and
expenses.
In our opinion, the combined Statement of Revenue and Certain Expenses
referred to above presents fairly, in all material respects, the combined
revenue and certain expenses of the Properties described in Note 2 for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 3, 1997
F-79
206
PRUDENTIAL PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
JANUARY 1, 1997
YEAR ENDED THROUGH
DECEMBER 31, AUGUST 31,
1996 1997
------------ ---------------
(UNAUDITED)
REVENUE
Base rents................................................ $29,743 $21,626
Tenant reimbursements..................................... 2,367 1,645
Parking income............................................ 2,013 1,561
Other income.............................................. 529 778
------- -------
Total revenue..................................... 34,652 25,610
------- -------
EXPENSES
Property operating and maintenance........................ 13,239 8,687
Real estate taxes......................................... 4,414 3,112
Management fees........................................... 719 514
Insurance................................................. 446 361
------- -------
Total expenses............................................ 18,818 12,674
------- -------
Revenue in excess of certain expenses....................... $15,834 $12,936
======= =======
See accompanying notes.
F-80
207
PRUDENTIAL PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a registration statement on
Form S-4 of Equity Office Properties Trust. The accompanying financial
statements are not representative of the actual operations of the Properties, as
defined in Note 2, for the periods presented nor indicative of future operations
as certain expenses, primarily depreciation, amortization and interest expense,
which may not be comparable to the expenses expected to be incurred by Equity
Office Properties Trust in future operations of the Properties, have been
excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of the
combined revenue and expenses during the reporting periods. Actual results could
differ from these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
2. DESCRIPTION OF PROPERTIES
The accompanying combined Statements of Revenue and Certain Expenses relate
to the combined operations of the Prudential Properties (the "Properties").
Equity Office Properties Trust expects to acquire the Properties for
approximately $289 million from an unrelated party. The Properties have been
presented on a combined basis because all of the Properties are under common
control and management. The following Properties are included in the combined
financial statements:
APPROXIMATE
RENTABLE
PROPERTY NAME LOCATION SQUARE FOOTAGE
------------- ---------------- --------------
Brookhollow Central I, II and III..................... Houston, TX 800,688
Destec Tower.......................................... Houston, TX 574,216
8080 Central.......................................... Dallas, TX 283,707
1700 Market........................................... Philadelphia, PA 825,547
---------
2,484,158
=========
3. RENTALS
The Properties have entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
4. RELATED PARTY TRANSACTIONS
The Properties were managed by an affiliated party to the seller. The
management agreements provided for fees of 1.5% to 3.0% of gross receipts, as
defined.
Insurance premiums are paid to and coverage is provided by an affiliated
party to the seller.
F-81
208
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of 550 South Hope Street (the Property) as described in Note 2 for the year
ended March 31, 1997. The Statement of Revenue and Certain Expenses are the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses 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 Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 1, and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 2 for the year ended March 31, 1997,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 24, 1997
F-82
209
550 SOUTH HOPE STREET
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
YEAR ENDED APRIL 1, 1997
MARCH 31, THROUGH JULY 31,
1997 1997
---------- ----------------
(UNAUDITED)
REVENUE
Base rents................................................ $ 7,602 $2,972
Tenant reimbursements..................................... 3,840 1,398
Parking income............................................ 1,273 423
Other income.............................................. 19 7
------- ------
Total revenue..................................... 12,734 4,800
======= ======
EXPENSES
Property operating and maintenance........................ 3,992 1,302
Real estate taxes......................................... 801 251
Management fee............................................ 140 58
Insurance................................................. 605 152
------- ------
Total expenses.................................... 5,538 1,763
------- ------
Revenue in excess of certain expenses....................... $ 7,196 $3,037
======= ======
See accompanying notes.
F-83
210
550 SOUTH HOPE STREET
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust. The accompanying statements are not
representative of the actual operations of the Property, as defined in Note 2,
for the periods presented nor indicative of future operations as certain
expenses, primarily depreciation, amortization and interest expense, which may
not be comparable to the expenses expected to be incurred by Equity Office
Properties Trust in future operations of the Property, have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of the revenue
and expenses during the reporting periods. Actual results could differ from
these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
2. DESCRIPTION OF PROPERTY
The accompanying Statements of Revenue and Certain Expenses relate to the
operations of 550 South Hope Street, an office building with approximately
566,434 rentable square feet, located in Los Angeles, California (the
"Property"). It is anticipated that Equity Office Properties Trust will acquire
the Property for $99.5 million from an unrelated party.
3. RENTALS
The Property has entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
F-84
211
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying combined Statement of Revenue and Certain
Expenses of the Acorn Properties (the Properties) as described in Note 2 for the
year ended December 31, 1996. The combined Statement of Revenue and Certain
Expenses is the responsibility of the Properties' management. Our responsibility
is to express an opinion on the combined Statement of Revenue and Certain
Expenses 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 Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying combined Statement of Revenue and Certain Expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a registration statement on
Form S-4 of Equity Office Properties Trust as described in Note 1, and is not
intended to be a complete presentation of the Properties' combined revenue and
expenses.
In our opinion, the combined Statement of Revenue and Certain Expenses
referred to above presents fairly, in all material respects, the combined
revenue and certain expenses of the Properties described in Note 2 for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 9, 1997
F-85
212
ACORN PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
YEAR ENDED JANUARY 1, 1997
DECEMBER 31, THROUGH JULY 31,
1996 1997
------------ ----------------
(UNAUDITED)
REVENUE
Base rents................................................ $16,999 $11,592
Tenant reimbursements..................................... 2,055 1,327
Other income.............................................. 202 181
------- -------
Total revenue..................................... 19,256 13,100
------- -------
EXPENSES
Property operating and maintenance........................ 4,526 2,665
Real estate taxes......................................... 1,378 853
Management fees........................................... 649 428
Insurance................................................. 160 92
------- -------
Total expenses.................................... 6,713 4,038
------- -------
Revenue in excess of certain expenses....................... $12,543 $ 9,062
======= =======
See accompanying notes.
F-86
213
ACORN PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a registration statement on
Form S-4 of Equity Office Properties Trust. The accompanying financial
statements are not representative of the actual operations of the Properties, as
defined in Note 2, for the periods presented nor indicative of future operations
as certain expenses, primarily depreciation, amortization and interest expense,
which may not be comparable to the expenses expected to be incurred by Equity
Office Properties Trust in future operations of the Properties, have been
excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of the
combined revenue and expenses during the reporting periods. Actual results could
differ from these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
2. DESCRIPTION OF PROPERTIES
The accompanying combined Statements of Revenue and Certain Expenses relate
to the combined operations of the Acorn Properties (the "Properties"). Equity
Office Properties Trust expects to acquire an 89% managing general partnership
interest in each of the partnerships that hold title to the Properties for
approximately $144.7 million, including the assumption of debt. The Acorn
Properties have been presented on a combined basis because all of the Properties
are under common control and management. The following Properties are included
in the combined financial statements:
APPROXIMATE
RENTABLE
PROPERTY NAME LOCATION SQUARE FOOTAGE
------------- --------------------------------- --------------
One Valley Square................ Plymouth Meeting, PA 70,289
Two Valley Square................ Plymouth Meeting, PA 70,622
Three Valley Square.............. Plymouth Meeting, PA 84,605
Four Valley Square............... Plymouth Meeting, PA 49,757
Five Valley Square............... Plymouth Meeting, PA 18,564
Oak Hill Plaza................... King of Prussia, PA 164,360
Walnut Hill Plaza................ King of Prussia, PA 149,716
One Devon Square................. Wayne, PA 77,267
Two Devon Square................. Wayne, PA 63,226
Three Devon Square (a)........... Wayne, PA 6,000
Four Falls Corporate Center...... Conshohocken, PA 254,355
---------
1,008,761
=========
- ---------------
(a) In addition, this property includes land leased to a third party.
F-87
214
ACORN PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE
AND CERTAIN EXPENSES -- (CONTINUED)
3. RENTALS
The Properties have entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
4. RELATED PARTY TRANSACTIONS
The Properties were managed by an affiliated party to the sellers. The
management agreements provided for a fee of 4% of gross receipts, as defined.
Janitorial services were provided by an affiliated party to the sellers.
During the year ended December 31, 1996, the Properties incurred approximately
$714,000 in janitorial fees.
F-88
215
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying combined Statement of Revenue and Certain
Expenses of 10 & 30 South Wacker Drive (the Properties) as described in Note 2
for the year ended December 31, 1996. The combined Statement of Revenue and
Certain Expenses is the responsibility of the Properties' management. Our
responsibility is to express an opinion on the combined Statement of Revenue and
Certain Expenses 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 Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying combined Statement of Revenue and Certain Expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, for inclusion in a registration statement on
Form S-4 of Equity Office Properties Trust as described in Note 1, and is not
intended to be a complete presentation of the Properties' revenue and expenses.
In our opinion, the combined Statement of Revenue and Certain Expenses
referred to above presents fairly, in all material respects, the combined
revenue and certain expenses of the Properties described in Note 2 for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 5, 1997
F-89
216
10 & 30 SOUTH WACKER DRIVE
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
YEAR ENDED JANUARY 1, 1997
DECEMBER 31, THROUGH JULY 31,
1996 1997
------------ ----------------
(UNAUDITED)
REVENUE
Base rents................................................ $38,739 $23,388
Tenant reimbursements..................................... 23,518 14,604
Parking income............................................ 1,188 786
Other income.............................................. 2,232 643
------- -------
Total revenue..................................... 65,677 39,421
------- -------
EXPENSES
Property operating and maintenance........................ 9,891 5,370
Real estate taxes......................................... 16,600 9,683
Management fee............................................ 1,233 754
Insurance................................................. 403 160
------- -------
Total expenses.................................... 28,127 15,967
------- -------
Revenue in excess of certain expenses....................... $37,550 $23,454
======= =======
See accompanying notes.
F-90
217
10 & 30 SOUTH WACKER DRIVE
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a registration statement on
Form S-4 of Equity Office Properties Trust. The accompanying combined statements
are not representative of the actual operations of the Properties, as defined in
Note 2, for the periods presented nor indicative of future operations as certain
expenses, primarily depreciation, amortization and interest expense, which may
not be comparable to the expenses expected to be incurred by Equity Office
Properties Trust in future operations of the Properties, have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of the
combined revenue and expenses during the reporting periods. Actual results could
differ from these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
2. DESCRIPTION OF PROPERTIES
The accompanying combined Statements of Revenue and Certain Expenses relate
to the combined operations of 10 & 30 South Wacker Drive, two office buildings
with approximately 2,016,023 million rentable square feet, located in Chicago,
Illinois (the "Properties"). The Properties have been presented on a combined
basis because the Properties were under common ownership and management. It is
anticipated that the Properties will be acquired for $481 million by Equity
Office Properties Trust from an unrelated party.
F-91
218
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying Statement of Revenue and Certain Expenses
of One Lafayette Centre (the Property) as described in Note 2 for the year ended
December 31, 1996. The Statement of Revenue and Certain Expenses is the
responsibility of the Property's management. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses 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 Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust as described in Note 1, and is not intended to be
a complete presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses of the Property described in Note 2 for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 5, 1997
F-92
219
ONE LAFAYETTE CENTRE
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
YEAR ENDED JANUARY 1, 1997
DECEMBER 31, THROUGH JULY 31,
1996 1997
------------ ----------------
(UNAUDITED)
REVENUE
Base rents................................................ $8,509 $5,409
Tenant reimbursements..................................... 855 582
Parking income............................................ 446 260
Other income.............................................. 158 46
------ ------
Total revenue..................................... 9,968 6,297
------ ------
EXPENSES
Property operating and maintenance........................ 2,238 1,360
Real estate taxes......................................... 1,154 625
Management fee............................................ 300 186
Insurance................................................. 57 34
------ ------
Total expenses.................................... 3,749 2,205
------ ------
Revenue in excess of certain expenses....................... $6,219 $4,092
====== ======
See accompanying notes.
F-93
220
ONE LAFAYETTE CENTRE
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in a registration statement on Form S-4 of
Equity Office Properties Trust. The accompanying statements are not
representative of the actual operations of the Property for the periods
presented nor indicative of future operations as certain expenses, primarily
depreciation, amortization and interest expense, which may not be comparable to
the expenses expected to be incurred by Equity Office Properties Trust in future
operations of the Property, have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of the revenue
and expenses during the reporting periods. Actual results could differ from
these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
2. DESCRIPTION OF PROPERTY
The accompanying Statements of Revenue and Certain Expenses relate to the
operations of One Lafayette Centre, an office building with approximately
315,000 rentable square feet, located in Washington, D.C. (the "Property"). It
is expected that the Property will be acquired for $81.7 million by Equity
Office Properties Trust from an unrelated party.
3. RENTALS
The Property has entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
F-94
221
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying combined Statement of Revenue and Certain
Expenses of the PPM Properties (the Properties) as described in Note 2 for the
year ended December 31, 1996. The combined Statement of Revenue and Certain
Expenses is the responsibility of the Properties' management. Our responsibility
is to express an opinion on the combined Statement of Revenue and Certain
Expenses 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 Statement of Revenue and Certain Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the Statement of Revenue and Certain Expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying combined Statement of Revenue and Certain Expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a registration statement on
Form S-4 of Equity Office Properties Trust as described in Note 1, and is not
intended to be a complete presentation of the Properties' combined revenue and
expenses.
In our opinion, the combined Statement of Revenue and Certain Expenses
referred to above presents fairly, in all material respects, the combined
revenue and certain expenses of the Properties described in Note 2 for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 22, 1997
F-95
222
PPM PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
JANUARY 1, 1997
YEAR ENDED THROUGH
DECEMBER 31, AUGUST 31,
1996 1997
------------ ---------------
(UNAUDITED)
REVENUE
Base rents................................................ $ 9,784 $7,038
Tenant reimbursements..................................... 344 262
Parking income............................................ 152 119
Other income.............................................. 144 56
------- ------
Total revenue..................................... 10,424 7,475
------- ------
EXPENSES
Property operating and maintenance........................ 3,062 2,122
Real estate taxes......................................... 1,170 824
Management fees........................................... 228 168
Insurance................................................. 92 76
------- ------
Total expenses.................................... 4,552 3,190
------- ------
Revenue in excess of certain expenses....................... $ 5,872 $4,285
======= ======
See accompanying notes.
F-96
223
PPM PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a registration statement on
Form S-4 of Equity Office Properties Trust. The accompanying financial
statements are not representative of the actual operations of the Properties for
the periods presented nor indicative of future operations as certain expenses,
primarily depreciation, amortization and interest expense, which may not be
comparable to the expenses expected to be incurred by Equity Office Properties
Trust in future operations of the Properties, have been excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of the
combined revenue and expenses during the reporting periods. Actual results could
differ from these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
2. DESCRIPTION OF PROPERTIES
The accompanying combined Statements of Revenue and Certain Expenses relate
to the combined operations of the PPM Properties which are to be acquired by
Equity Office Properties Trust for approximately $92 million from an unrelated
party. The PPM Properties have been presented on a combined basis because all of
the Properties are under common control and management. The following properties
are included in the combined financial statements:
APPROXIMATE
RENTABLE
PROPERTY NAME SQUARE FOOTAGE
------------- --------------
Lakeside Square............................................. 392,500
1600 Duke Street............................................ 68,800
Fair Oaks Plaza............................................. 177,900
-------
639,200
=======
3. RENTALS
The Properties have entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
4. RELATED PARTY TRANSACTIONS
The Properties were managed by an affiliated party to the seller. The
management agreements provided for fees of 2.25% of gross receipts, as defined.
F-97
224
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of
Equity Office Properties Trust
We have audited the accompanying combined Statement of Revenue and Certain
Expenses of the Wright Runstad Properties (the Properties) as described in Note
2 for the year ended September 30, 1996. The combined Statement of Revenue and
Certain Expenses is the responsibility of the Properties' management. Our
responsibility is to express an opinion on the combined Statement of Revenue and
Certain Expenses 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 Statement of Revenue and Certain Expenses is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures made in the Statement of Revenue and
Certain Expenses. An audit also includes assessing the basis of accounting used
and significant estimates made by management, as well as evaluating the overall
presentation of the Statement of Revenue and Certain Expenses. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying combined Statement of Revenue and Certain Expenses was prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission, for inclusion in a Current Report on Form 8-K of Equity
Office Properties Trust as described in Note 1 and is not intended to be a
complete presentation of the Properties' combined revenue and expenses.
In our opinion, the combined Statement of Revenue and Certain Expenses referred
to above presents fairly, in all material respects, the combined revenue and
certain expenses of the Properties described in Note 2 for the year ended
September 30, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 26, 1997
F-98
225
WRIGHT RUNSTAD PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
OCTOBER 1, 1996
YEAR ENDED THROUGH
SEPTEMBER 30, 1996 AUGUST 31, 1997
------------------ ---------------
(UNAUDITED)
REVENUE
Base rents................................................ $57,191 $54,796
Tenant reimbursements..................................... 3,294 3,293
Parking income............................................ 5,838 5,780
Other income.............................................. 1,052 446
------- -------
Total revenue............................................. 67,375 64,315
------- -------
EXPENSES
Property operating and maintenance........................ 15,427 14,890
Real estate taxes......................................... 4,881 4,616
Management fee............................................ 1,855 1,793
Insurance................................................. 468 427
Ground rent and air rights................................ 1,577 1,440
------- -------
Total expenses............................................ 24,208 23,166
------- -------
Revenue in excess of certain expenses....................... $43,167 $41,149
======= =======
See accompanying notes.
F-99
226
WRIGHT RUNSTAD PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a Current Report on Form 8-K
of Equity Office Properties Trust. The accompanying financial statements are not
representative of the actual operations of the Wright Runstad Properties (the
"Properties") for the periods presented nor indicative of future operations as
certain expenses, primarily depreciation, amortization and interest expense,
which may not be comparable to the expenses expected to be incurred by Equity
Office Properties Trust in future operations of the Properties, have been
excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
Use of Estimates
The preparation of the combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of the
combined revenue and expenses during the reporting periods. Actual results could
differ from these estimates.
Unaudited Interim Statement
In the opinion of management, the interim financial statement reflects all
adjustments necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal, recurring nature.
2. DESCRIPTION OF PROPERTIES
The accompanying combined Statements of Revenue and Certain Expenses relate
to the combined operations of the Properties which are to be acquired by Equity
Office Properties Trust for approximately $640 million from an unrelated party.
The Properties have been presented on a combined basis because all of the
Properties are under common ownership and management. The following office
properties are included in the combined financial statements:
APPROXIMATE
RENTABLE
SQUARE
PROPERTY NAME LOCATION FOOTAGE
------------- -------------------- -----------
1111 Third Avenue............................ Seattle, Washington 528,282
First Interstate Center...................... Seattle, Washington 915,883
Second & Seneca Building..................... Seattle, Washington 480,272
Nordstrom Medical Tower...................... Seattle, Washington 101,431
One Bellevue Center.......................... Bellevue, Washington 344,715
Rainier Plaza................................ Bellevue, Washington 410,855
1001 Fifth Avenue............................ Portland, Oregon 368,018
Calais Office Center......................... Anchorage, Alaska 190,599
---------
3,340,055
=========
F-100
227
WRIGHT RUNSTAD PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
3. RENTALS
The Properties have entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined.
4. RELATED PARTY TRANSACTIONS
The Properties were managed by an affiliated party to the seller, except
for Nordstrom Medical Tower, which is managed by a third party. The management
agreements provided for a fee of 3.0% of gross receipts and reimbursements for
on-site personnel.
The Partnership owning the Properties is a member of the J. Nordstrom
Medical Tower Condominium Association (the Association), which provides
administrative services relating to building operations of the Nordstrom Medical
Tower. The Association is managed by an affiliate. The Association pays all
operating expenses associated with the building and is reimbursed annually by
condominium unit owners, including Nordstrom Medical Tower. The Properties
incurred $510,000 under this agreement during 1996.
The Properties lease each of their parking garages to an affiliate of the
seller in exchange for a percentage of the parking revenue, net of expenses.
5. COMMITMENTS
The land underlying Rainier Plaza is leased under a 55-year lease agreement
expiring in 2040, plus an option for an additional 35 years. The minimum annual
rent is $566,800 at September 30, 1996. The lease also provides for contingent
rent based upon the gross income of the property, as defined in the lease. No
contingent rentals were due for 1996.
The land underlying One Bellevue Center is leased under a 70-year lease
expiring on June 30, 2052 with an option to extend for an additional 20 years.
The basic rent under the ground lease agreement is $39,055 per month at
September 30, 1996, plus all taxes, utility charges, and other assessments on
the property. In July of each year, the basic rent increases 2%. Additional rent
may be due based on adjusted gross revenue, as defined in the lease agreement.
No additional rent was due in 1996.
The parking garage facilities located adjacent to the 1001 Fifth Avenue are
leased through May 31, 1998, with renewal options for ten and five years. The
lease provides for minimum payments of $175,000 per year, plus 50% of the
adjusted gross annual revenues in excess of $300,000 from the garage operations.
Rent expense under this lease was $637,000 in 1996.
The land underlying the Calais I & II are leased under a ground lease,
expiring in 2029, with four ten-year options to extend. Monthly rental payments
are $8,000 per month until December 31, 1999, at which time monthly payments
will increase to approximately $9,000. Beginning in 2005, monthly payments are
subject to annual adjustments based on office rentals and changes in the
consumer price index.
There is an agreement with a bank through 2037, whereby the bank agreed to
certain building restrictions that limit the height and bulk of current and
future improvements, if any, to be placed on the bank's land, which is adjacent
to 1111 Third Avenue. There are options to extend this agreement for at least an
additional 39 years. In return for these restrictions, 1111 Third Avenue is
obligated to pay the bank $75,000 per year, plus 4% of annual net proceeds from
the property (prior to debt service) in excess of $4,847,000 on an annual basis.
Total amounts paid or accrued under this agreement were $75,000 for the year
ended September 30, 1996.
F-101
228
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Beacon Properties Corporation:
We have audited the consolidated balance sheets of Beacon Properties
Corporation as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1996 and 1995 and the period May 26, 1994 to December 31,
1994. We have also audited the combined statement of operations, owners' equity
and cash flows of the Predecessor, more fully described in Note 1, for the
period January 1, 1994 to May 25, 1994. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Beacon Properties Corporation as of December 31, 1996 and 1995 and the
consolidated results of its operations and its cash flows for the years ended
December 31, 1996 and 1995 and the period May 26, 1994 to December 31, 1994, and
the combined results of operations and cash flows of the Predecessor for the
period January 1, 1994 to May 25, 1994 in conformity with generally accepted
accounting principles.
Boston, Massachusetts /s/ Coopers & Lybrand L.L.P.
January 28, 1997
F-102
229
BEACON PROPERTIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
----------------------
1996 1995
---------- --------
ASSETS
Real estate:
Land...................................................... $ 213,858 $ 43,077
Buildings, improvements and equipment..................... 1,477,672 428,065
---------- --------
1,691,530 471,142
Less accumulated depreciation............................. 97,535 66,571
---------- --------
1,593,995 404,571
Deferred financing and leasing costs, net of accumulated
amortization of $16,370 and $14,509....................... 17,321 9,486
Cash and cash equivalents................................... 36,086 4,501
Restricted cash............................................. 2,599 2,764
Accounts receivable......................................... 11,609 6,128
Accrued rent................................................ 13,065 6,493
Prepaid expenses and other assets........................... 1,093 8,060
Mortgage notes receivable................................... 51,491 34,778
Investments in and advance to joint ventures and
corporations.............................................. 52,153 58,016
---------- --------
TOTAL ASSETS........................................... $1,779,412 $534,797
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................... $ 452,212 $ 70,536
Note payable, Credit Facility............................. 153,000 130,500
Accounts payable, accrued expenses and other
liabilities............................................ 41,764 14,022
Investment in joint venture............................... 24,735 23,955
---------- --------
TOTAL LIABILITIES...................................... 671,711 239,013
---------- --------
Commitments and contingencies............................. -- --
Minority interest in Operating Partnership................ 108,551 36,962
---------- --------
Stockholders' equity:
Common stock, $.01 par value, authorized 100,000,000
shares, issued and outstanding 48,116,480 and
20,215,822 shares...................................... 481 202
Additional paid-in capital................................ 1,022,110 267,727
Cumulative net income..................................... 60,047 23,715
Cumulative dividends...................................... (83,488) (32,822)
---------- --------
Total stockholders' equity............................. 999,150 258,822
---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $1,779,412 $534,797
========== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-103
230
BEACON PROPERTIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PREDECESSOR
---------------
FOR THE PERIOD FOR THE PERIOD
YEAR ENDED YEAR ENDED MAY 26, 1994 JANUARY 1, 1994
DECEMBER 31, DECEMBER 31, TO TO
1996 1995 DECEMBER 31, 1994 MAY 25, 1994
------------ ------------ ----------------- ---------------
Revenues:
Rental income......................... $147,825 $71,050 $25,144 $5,776
Management fees....................... 3,005 2,203 -- 1,521
Recoveries from tenants............... 16,719 9,742 4,488 1,040
Mortgage interest income.............. 4,970 2,546 -- --
Other income.......................... 11,272 5,502 2,301 675
---------- ---------- ---------- ------
Total revenues................... 183,791 91,043 31,933 9,012
---------- ---------- ---------- ------
Expenses:
Property expenses..................... 37,211 18,090 7,034 2,086
Real estate taxes..................... 18,124 10,217 3,325 595
General and administrative............ 19,331 9,755 3,122 1,399
Mortgage interest expense............. 30,300 15,226 4,992 2,798
Interest -- amortization of financing
costs.............................. 2,084 1,370 617 373
Depreciation and amortization......... 33,184 17,428 6,924 2,385
---------- ---------- ---------- ------
Total expenses................... 140,234 72,086 26,014 9,636
---------- ---------- ---------- ------
Income (loss) from operations........... 43,557 18,957 5,919 (624)
Equity in net income of joint ventures
and corporations...................... 4,989 3,234 929 198
---------- ---------- ---------- ------
Income (loss) from continuing
operations............................ 48,546 22,191 6,848 (426)
Discontinued operations -- Construction
Company:
Income (loss) from operations......... (2,609) (12) 477 102
Loss on sale.......................... (249) -- -- --
---------- ---------- ---------- ------
Income (loss) before minority
interest.............................. 45,688 22,179 7,325 (324)
Minority interest in loss of combined
partnerships.......................... -- -- -- 931
Minority interest in Operating
Partnership........................... (5,988) (4,119) (1,670) --
---------- ---------- ---------- ------
Income before extraordinary items....... 39,700 18,060 5,655 607
Extraordinary items, net of minority
interest.............................. (3,368) -- -- 8,898
---------- ---------- ---------- ------
Net income.............................. $ 36,332 $18,060 $ 5,655 $9,505
========== ========== ========== ======
Income before extraordinary items per
common share.......................... $ 1.32 $ 1.09 $ .48 --
Extraordinary items per common share.... (0.11) -- -- --
---------- ---------- ---------- ------
Net income per common share............. $ 1.21 $ 1.09 $ .48 --
========== ========== ========== ======
Weighted average common shares
outstanding........................... 29,932,327 16,525,245 11,816,380 --
========== ========== ========== ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-104
231
BEACON PROPERTIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STOCKHOLDERS' EQUITY PREDECESSOR
--------------------------------------------- -----------
COMMON ADDITIONAL OWNERS'
SHARES STOCK PAID-IN CUMULATIVE CUMULATIVE EQUITY
ISSUED AMOUNT CAPITAL NET INCOME DIVIDENDS (DEFICIT)
---------- ------ ---------- ---------- ---------- -----------
Balance at December 31, 1993....... $(57,954)
Net income from January 1, 1994 to
May 25, 1994..................... 9,505
Contributions and other, net of
distributions from January 1,
1994 to May 25, 1994............. 1,083
Issuance of stock for cash -- May
26, 1994 -- Initial Offering..... 11,117,850 $111 $ 173,341 --
Issuance of stock in connection
with purchase of minority
interests........................ 698,530 7 11,868 --
Charge to reflect carryover of
historical basis of accounting
and recognition of minority
interest in Operating Partnership
for continuing investors......... -- -- (77,600) 47,366
Net income from May 26, 1994 to
December 31, 1994................ -- -- -- $ 5,655 --
Dividends declared ($0.96 per
share)........................... -- -- -- -- $(11,344) --
---------- ---- ---------- ------- -------- --------
Balance at December 31, 1994....... 11,816,380 118 107,609 5,655 (11,344) --
Issuance of stock.................. 8,341,050 84 159,236 -- -- --
Issuance of stock under dividend
reinvestment and share purchase
plan............................. 25,437 -- 492 -- -- --
Issuance of stock by exercise of
options.......................... 12,367 -- 216 -- -- --
Issuance of stock in exchange for
Operating Partnership unit
redemptions...................... 20,588 -- 174 -- -- --
Net income......................... -- -- -- 18,060 -- --
Dividends declared ($1.24 per
share)........................... -- -- -- -- (21,478) --
---------- ---- ---------- ------- -------- --------
Balance at December 31, 1995....... 20,215,822 202 267,727 23,715 (32,822) --
Issuance of stock.................. 27,641,400 276 749,589 -- -- --
Issuance of stock under dividend
reinvestment and share purchase
plan............................. 101,431 1 2,647 -- -- --
Issuance of stock by exercise of
options.......................... 97,827 1 1,662 -- -- --
Issuance of stock in exchange for
Operating Partnership unit
redemptions...................... 60,000 1 485 -- -- --
Net income......................... -- -- -- 36,332 -- --
Dividends declared ($1.765 per
share)........................... -- -- -- -- (50,666) --
---------- ---- ---------- ------- -------- --------
Balance at December 31, 1996....... 48,116,480 $481 $1,022,110 $60,047 $(83,488) $ --
========== ==== ========== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-105
232
BEACON PROPERTIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PREDECESSOR
---------------
FOR THE PERIOD FOR THE PERIOD
YEAR ENDED YEAR ENDED MAY 26, 1994 TO JANUARY 1, 1994
DEC. 31, 1996 DEC. 31, 1995 DECEMBER 31, 1994 TO MAY 25, 1994
------------- ------------- ----------------- ---------------
Cash flows from operating activities:
Net income............................................... $ 36,332 $ 18,060 $ 5,655 $ 9,505
----------- --------- --------- -------
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in accrued rent............................... (6,572) (3,741) (915) (1,181)
Depreciation, amortization and interest -- amortization
of financing costs................................... 35,268 18,798 7,541 2,848
Equity in net income of joint ventures and
corporations......................................... (2,131) (3,222) (469) (201)
Minority interest in loss of combined partnerships..... -- -- -- (1,519)
Minority interest in Operating Partnership............. 5,988 4,119 1,670 --
Extraordinary items.................................... 3,368 -- -- (8,898)
Deferred interest...................................... -- -- -- 367
Increase in accounts receivable........................ (5,481) (1,746) (3,385) (376)
(Increase) decrease in prepaid expenses and other
assets............................................... (333) (82) 2,388 (1,940)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities....................... 25,243 332 (107) 1,636
----------- --------- --------- -------
Total adjustments.................................. 55,350 14,458 6,723 (9,264)
----------- --------- --------- -------
Net cash provided by operating activities.......... 91,682 32,518 12,378 241
----------- --------- --------- -------
Cash flows from investing activities:
Property additions....................................... (1,088,775) (67,610) (204,582) (978)
Payment of deferred leasing costs........................ (6,157) (2,646) (1,010) (124)
Decrease (increase) in prepaid expenses and other
assets................................................. 5,000 (5,000) -- --
Purchase of minority interests........................... -- -- (11,688) --
Investments in joint ventures............................ -- -- (15,802) --
Distributions from joint ventures........................ 8,727 3,692 1,637 --
Investments in and advance to corporations............... -- (41,471) (5,800) --
Cash from contributed assets............................. -- -- 6,978 --
Restricted cash from contributed assets.................. -- -- 420 --
Purchase of mortgage notes receivable.................... (16,713) (34,778) -- --
Decrease (increase) in restricted cash................... 165 2,063 (4,827) --
----------- --------- --------- -------
Net cash used by investing activities.............. (1,097,753) (145,750) (234,674) (1,102)
----------- --------- --------- -------
Cash flows from financing activities:
Proceeds from offerings.................................. 754,778 160,028 173,452 --
Owners' contributions.................................... -- -- -- 412
Owners' distributions.................................... -- -- -- (4,329)
Borrowings on Credit Facility............................ 468,000 124,700 130,300 --
Borrowings on mortgage notes............................. 608,000 -- -- 874
Repayments on Credit Facility............................ (445,500) (124,500) -- --
Repayments on mortgage notes............................. (281,814) (20,400) (49,677) (460)
Advances (repayments of) amounts due to affiliates....... -- -- (5,355) 2,800
Payment of deferred financing costs...................... (9,811) (2,457) (2,852) (13)
Decrease (increase) in prepaid expenses and other
assets................................................. 2,300 (2,300) -- --
Distributions paid to minority interests................. (7,631) (6,230) (1,858) --
Dividends paid to stockholders........................... (50,666) (26,205) (6,617) --
----------- --------- --------- -------
Net cash provided (used) by financing activities... 1,037,656 102,636 237,393 (716)
----------- --------- --------- -------
Net increase (decrease) in cash and cash equivalents....... 31,585 (10,596) 15,097 (1,577)
Cash and cash equivalents, beginning of period............. 4,501 15,097 -- 6,150
----------- --------- --------- -------
Cash and cash equivalents, end of period................... $ 36,086 $ 4,501 $ 15,097 $ 4,573
=========== ========= ========= =======
Supplemental disclosures:
Cash paid during the period for interest................. $ 28,777 $ 14,738 $ 5,278 $ 2,811
Noncash activities:
Acquisition of interests in properties................... -- -- 22,721 --
Increase in minority interest as a result of acquisition
of interests in properties............................. 74,226 -- 9,200 --
Liabilities assumed in connection with contributions and
acquisitions of properties............................. 55,529 861 93,518 --
Dividends declared to stockholders....................... -- -- 4,727 --
Distributions declared to minority interest.............. -- -- 1,524 --
Receivable from equity investment........................ 781 1,057 -- --
Redemption of Operating Partnership units for common
stock.................................................. 486 174 -- --
Common stock issued in connection with purchase of
minority interests..................................... -- -- 11,875 --
The accompanying notes are an integral part of these consolidated financial
statements.
F-106
233
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION, OFFERINGS AND ACQUISITIONS:
Beacon Properties Corporation (the "Company") was incorporated on March 4,
1994 as a Maryland corporation, and commenced operations effective with the
completion of its initial offering on May 26, 1994. The Company qualifies as a
real estate investment trust under the Internal Revenue Code of 1986, as
amended. Concurrent with the initial offering, the Company contributed its
interests in two properties and the net proceeds of the offering which
approximated $173.5 million in exchange for an approximate 78% interest in
Beacon Properties, L.P., (the "Operating Partnership"), which became the
successor entity to The Beacon Group (the "Predecessor").
The Company was formed to continue and expand the commercial real estate
development, construction, acquisition, leasing, design and management business
of the Predecessor. Prior to the initial offering, the Predecessor was comprised
of interests in 13 office properties and entities which provided design,
leasing, development and construction services to each of the properties and
unrelated third parties.
During 1995, the Company completed three offerings totaling 8,341,050
shares of common stock. The net proceeds from these offerings totaling $159.3
million were used primarily to retire indebtedness incurred to acquire new
properties and to acquire additional properties.
During 1996, the Company completed three offerings totaling 27,641,400
shares of common stock. The net proceeds from these offerings totaling $749.9
million were used primarily to acquire additional properties.
The following schedule summarizes the Company's interest in the properties
as a result of its initial and subsequent offerings, and the related acquisition
of properties and partnership interests. All properties have been consolidated
by the Company and its Predecessor unless otherwise indicated in the notes:
DATE RENTABLE OWNERSHIP
ACQUIRED BY AREA IN INTEREST AT ACCOUNTING
THE COMPANY SQUARE FEET 12/31/96 METHOD NOTES
----------- ----------- ----------- ------------
Properties:
Wellesley Office Park -- Buildings 1-8,
Wellesley, MA................................... (A) 623,000 100% (E)
Crosby Corporate Center, Bedford, MA.............. (B) 336,000 100%
South Station, Boston, MA......................... (B) 149,000 100%
175 Federal Street, Boston, MA.................... (B) 203,000 100% (E)
One Post Office Square, Boston, MA................ (B) 764,000 50% (D)
Center Plaza, Boston, MA.......................... (B) 649,000 100%
Rowes Wharf, Boston, MA........................... (B) 344,000 45% (F)
150 Federal Street, Boston, MA.................... (B) 530,000 100%
Polk and Taylor Buildings, Arlington, VA.......... (B) 890,000 10% (G)
One Canal Park, Cambridge, MA..................... 6/10/94 100,000 100%
Westwood Business Centre, Westwood, MA............ 6/10/94 160,000 100%
Russia Wharf, Boston, MA.......................... 8/10/94 315,000 100%
Westlakes Office Park -- Buildings 1-3 and 5,
Berwyn, PA...................................... (C) 444,000 100%
75-101 Federal Street, Boston, MA................. 9/29/95 812,000 52% (H)
Two Oliver Street and 147 Milk Street, Boston,
MA.............................................. 10/6/95 271,000 100%
Ten Canal Park, Cambridge, MA..................... 12/21/95 110,000 100%
Perimeter Center, Atlanta, GA..................... 2/15/96 3,302,000 100%
1333 H Street, N.W., Washington, D.C.............. 8/16/96 239,000 100%
AT&T Plaza, Oak Brook, IL......................... 8/16/96 225,000 100%
Tri-State International, Lincolnshire, IL......... 8/16/96 548,000 100%
John Marshall I, McLean, VA....................... 9/5/96 261,000 100%
E.J. Randolph, McLean, VA......................... 9/5/96 165,000 100%
F-107
234
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DATE RENTABLE OWNERSHIP
ACQUIRED BY AREA IN INTEREST AT ACCOUNTING
THE COMPANY SQUARE FEET 12/31/96 METHOD NOTES
----------- ----------- ----------- ------------
Northridge I, Herndon, VA......................... 9/5/96 124,000 100%
1300 North 17th Street, Rosslyn, VA............... 10/18/96 373,000 100%
1616 North Fort Myer Drive, Rosslyn, VA........... 10/18/96 293,000 100%
New England Executive Park, Burlington, MA........ 11/15/96 817,000 100%
The Riverview Building, Cambridge, MA............. 11/21/96 263,000 100%
10960 Wilshire Boulevard, Westwood, CA............ 11/21/96 544,000 100%
Shoreline Technology Park, Mountain View, CA...... 12/20/96 727,000 100%
Lake Marriott Business Park, Santa Clara, CA...... 12/20/96 400,000 100%
Presidents Plaza, Chicago, IL..................... 12/27/96 791,000 100%
----------
15,772,000
==========
Service Entities:
Beacon Construction Company, Inc.................. (B) 99% (I)
Beacon Property Management, L.P................... (B) 100%
Beacon Property Management Corporation............ (B) 99% (I)
Beacon Design Corporation......................... (B) 99% (I)
Beacon Design, L.P................................ (B) 100%
- ---------------
(A) Wellesley Building 8 was acquired May 4, 1995. Interests in the remaining
Wellesley Buildings were contributed as part of the initial public offering.
(B) Interests in this property or company were contributed or acquired as part
of the initial public offering.
(C) Westlakes Buildings 1, 3 and 5 were acquired October 21, 1994. Westlakes
Building 2 was acquired July 26, 1995.
(D) The Company is a general partner in the joint venture which owns the
property and utilizes the equity method of accounting for its investment.
(E) On October 28, 1994, the Company acquired the remaining interest in the 175
Federal Street and Wellesley 6 Joint Ventures which owned these properties.
Prior to the acquisition of the remaining interest, the Company and its
Predecessor used the equity method of accounting for its investments.
(F) The Company owns an indirect limited partner interest and utilizes the
equity method of accounting for its investment.
(G) The Company owns a 1% general partner interest and a 9% limited partner
interest and utilizes the equity method of accounting for its investment.
(H) The Company is a shareholder in the corporation (private REIT) which owns
the property and utilizes the equity method of accounting for its
investment.
(I) The Company used the cost method of accounting for its investments in these
subsidiaries prior to 1995. The Company currently uses the equity method of
accounting for its investments. (See Note 2).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business
The Company is a self-managed and self-administered real estate investment
trust (a "REIT") which currently has interests in a portfolio of 104 Class A
office properties and other commercial properties containing approximately 15.8
million rentable square feet located in Boston, Atlanta, Chicago, Los Angeles,
Philadelphia, San Francisco, and Washington, D.C.
The Company also owns and operates commercial real estate development,
acquisition, leasing, design and management businesses. The Company manages
approximately 2.9 million square feet of commercial and
F-108
235
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
office space owned by third parties in various locations, including Boston,
Waltham, and Springfield, Massachusetts and Chicago, Illinois.
Principles of Consolidation
The accompanying financial statements of the Company have been prepared on
a consolidated basis which include all the accounts of the Company, its majority
owned Operating Partnership and its subsidiaries. All significant intercompany
balances and transactions have been eliminated. The Company's consolidated
financial statements reflect the properties acquired at their historical basis
of accounting to the extent of the acquisition of interests from the
Predecessors' owners who continued on as investors. The remaining interests
acquired from the Predecessors' owners have been accounted for as a purchase and
the excess of the purchase price over the related historical cost basis was
allocated to real estate. The consolidated financial statements of the Company
include, along with the contributed properties of the Predecessor, significant
acquisitions of properties and ownership interests subsequent to the initial
public offering; consequently, the operating results of the Company are not
directly comparable to the Predecessor.
The accompanying financial statements of the Predecessor have been
presented on a combined basis which include all of the contributed properties
and the management, leasing, and design entities.
Real Estate
Buildings and improvements are recorded at cost and are depreciated on the
straight-line and declining balance methods over their estimated useful lives of
nineteen to forty years and fifteen to twenty years, respectively. The cost of
buildings and improvements includes the purchase price of the property or
interests in property, legal fees, acquisition costs, interest, property taxes
and other costs incurred during the period of construction. The Company
capitalized interest costs of $1.0 million in 1996, $0.1 million in 1995, and $0
in 1994. In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, the Company periodically reviews its properties to determine if
its carrying costs will be recovered from future operating cash flows. In cases
where the Company does not expect to recover its carrying costs, the Company
would recognize an impairment loss. No such losses have been recognized to date.
Tenant improvements are depreciated over the terms of the related leases.
Furniture, fixtures and equipment are depreciated using straight-line and
declining balance methods over their expected useful lives of five to seven
years.
Expenditures for maintenance and repairs are charged to operations as
incurred. Significant renovations or betterments which extend the economic
useful life of the assets are capitalized.
Deferred Financing and Leasing Costs
Deferred financing costs include fees and costs incurred to obtain
long-term financings, and are amortized over the terms of the respective loans
on a basis which approximates the interest method. Deferred leasing costs
incurred in the successful negotiation of leases, including brokerage, legal and
other costs, have been deferred and are being amortized on a straight-line basis
over the terms of the respective leases.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid assets with original
maturities of three months or less from the date of purchase. The majority of
the Company's cash and cash equivalents are held at major commercial banks. The
Company has not experienced any losses to date on its invested cash. The
carrying value of the cash and cash equivalents approximate market.
F-109
236
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restricted Cash
Restricted cash consists of cash held in escrow as required by lenders to
satisfy real estate taxes and tenant improvement costs.
Investments in and Advance to Joint Ventures and Corporations
The Company and Predecessor use the equity method of accounting for their
earnings in property joint ventures and corporations which it does not control.
Losses in excess of investments are not recorded where the Company or the
Predecessor is a limited partner and has not guaranteed nor intends to provide
any future financial support to the respective properties.
The Company utilized the cost method in 1994 for its earnings from service
corporations. In 1995, the Company adopted the accounting prescribed in Emerging
Issues Task Force Issue 95-6 "Accounting by a Real Estate Investment Trust for
an Investment in a Service Corporation" and utilized the equity method for its
investment in and earnings of service corporations. The effect of this change on
1994 results was not material and such amounts have been reclassified to conform
to the 1995 presentation.
Mortgage Notes Receivable
Discounts from the principal balance on mortgage notes receivable, net of
acquisition costs, are amortized as interest income over the term of the related
notes using the effective yield method, based on management's evaluation of the
current facts and circumstances and the ultimate ability to collect the
principal balance of such notes.
Offering Costs
Underwriting commissions and offering costs incurred in connection with the
initial and subsequent offerings have been reflected as a reduction of
additional paid-in capital.
Revenue Recognition
Base rental income is reported on a straight-line basis over the terms of
the respective leases. The impact of the straight-line rent adjustment increased
revenues for the Company by $6.6 million, $3.7 million and $0.9 million and
increased the Company's equity in net income of property joint ventures and
corporations by $0.1 million, $0.2 million and $0.3 million for the years ended
December 31, 1996 and 1995 and the period May 26, 1994 to December 31, 1994,
respectively. Construction income of the Predecessor was recognized on the
percentage-of-completion method on the basis of costs incurred and expected to
be incurred. Management fees are recognized when they are earned.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue
Code commencing with its taxable period ended December 31, 1994. As a result,
the Company will generally not be subject to federal income tax on its taxable
income at corporate rates to the extent it distributes annually at least 95% of
its taxable income to its shareholders and complies with certain other
requirements. Accordingly, no provision has been made for federal income taxes
in the accompanying consolidated financial statements. Certain subsidiaries are
subject to federal and state income tax on their taxable income at regular
corporate rates.
The Predecessor was not a legal entity subject to income taxes. No federal
or state income taxes were applicable to the entities that managed and owned the
properties; accordingly, none have been provided in the accompanying combined
financial statements.
F-110
237
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest Rate Protection Agreements
The Company has entered into interest rate protection agreements to reduce
the impact of certain changes in interest rates on its variable rate debt. These
agreements are accounted for as a hedge. Amounts paid for the agreements are
amortized over the lives of the agreements on a basis which approximates the
interest method.
Payments under interest rate swap agreements are recognized as adjustments
to interest expense when incurred. The Company's policy is to write-off
unamortized amounts paid under interest rate protection agreements, when the
related debt is paid off or there is a termination of the agreements prior to
their maturity. The Company is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate protection agreements.
However, the Company does not anticipate nonperformance by the counterparties.
Per Share Data
The assumed exercise of outstanding share options, using the treasury stock
method, is not dilutive and, therefore, such amounts are not presented (see Note
9). The income tax status of dividends declared during the years ended December
31, 1996 and 1995 and the period May 26, 1994 to December 31, 1994 are as
follows:
1996 1995 1994
---- ---- ----
Ordinary income............................................. 91% 87% 66%
Return of capital........................................... 9% 13% 34%
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
Reclassifications
Certain prior year balances have been reclassed to conform with current
year presentation.
3. ACCOUNTS RECEIVABLE:
DECEMBER 31,
-----------------
1996 1995
------- ------
Tenants..................................................... $ 5,072 $2,137
Other....................................................... 4,228 1,006
Affiliates.................................................. 3,683 3,322
Allowance for uncollectible amounts......................... (1,374) (337)
------- ------
Total..................................................... $11,609 $6,128
======= ======
4. MORTGAGE NOTES RECEIVABLE:
The Company acquired a fifty percent interest in certain mortgage notes
collateralized by property owned by a joint venture in which the Company has an
indirect interest. The terms of the notes require interest-only payments at
8.71% quarterly on a principal balance of approximately $63.0 million and are
due on April 1, 1999. The term may be extended for up to three years under
certain conditions. The Company also has an option to purchase from an affiliate
other mortgages collateralized by the same property.
F-111
238
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVESTMENTS IN AND ADVANCE TO JOINT VENTURES AND CORPORATIONS:
The following is summarized financial information for the property joint
ventures and corporation:
DECEMBER 31,
--------------------
1996 1995
-------- --------
Balance sheets:
Real estate, net.......................................... $410,207 $419,096
Other assets.............................................. 51,669 55,714
-------- --------
Total assets........................................... $461,876 $474,810
======== ========
Mortgage notes payable.................................... $377,754 $380,827
Loans and notes payable................................... 72,136 68,606
Other liabilities......................................... 13,040 14,072
Partners' and shareholders' equity (deficiency)........... (1,054) 11,305
-------- --------
Total liabilities and equity (deficiency).............. $461,876 $474,810
======== ========
PREDECESSOR
------------
MAY 26, 1994 JAN. 1, 1994
TO TO
1996 1995 DEC. 31, 1994 MAY 25, 1994
-------- -------- ------------- ------------
Summary of operations:
Rentals............................... $117,283 $ 91,048 $ 59,983 $ 38,386
Other income............................ 3,453 3,861 5,717 2,941
Operating expenses...................... (61,086) (49,472) (34,688) (22,632)
Mortgage interest expense............... (28,712) (23,232) (16,261) (13,432)
Depreciation and amortization........... (18,592) (14,537) (11,427) (8,228)
-------- -------- -------- --------
Net income (loss)....................... $ 12,346 $ 7,668 $ 3,324 $ (2,965)
======== ======== ======== ========
A reconciliation of interests in the underlying net assets to the Company's
carrying value of property investments in joint ventures and corporation is as
follows:
DECEMBER 31,
------------------
1996 1995
------- -------
Partners' and shareholders' equity (deficiency), as above... $(1,054) $11,305
Deficits of other partners and shareholders................. 23,532 13,259
------- -------
Company's share of equity................................... 22,478 24,564
Excess of cost of investments over the net book value of
underlying net assets, net of amortization and accumulated
amortization of $122 and $75, respectively................ 1,310 1,357
------- -------
Carrying value of property investments in joint ventures and
corporation............................................... $23,788 $25,921
======= =======
F-112
239
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is summarized financial information for the service
corporations:
DECEMBER 31,
------------------
1996 1995
------- -------
Balance sheets:
Equipment, net............................................ $ 1,806 $ 715
Other assets.............................................. 34,155 29,560
------- -------
Total assets........................................... $35,961 $30,275
======= =======
Other liabilities......................................... $37,360 $27,124
Shareholders' equity (deficiency)......................... (1,399) 3,151
------- -------
Total liabilities and equity (deficiency).............. $35,961 $30,275
======= =======
MAY 26, 1994
TO
1996 1995 DEC. 31, 1994
--------- --------- -------------
Summary of operations:
Construction income............................. $ 140,903 $ 108,913 $ 52,429
Consulting and management fees.................. 2,537 7,576 4,848
Interest and other income....................... 266 383 184
Construction, consulting and management fee
costs........................................ (141,167) (110,835) (52,388)
General and administrative expense.............. (5,121) (4,880) (3,564)
Depreciation and amortization................... (584) (336) (186)
Minority interest in net income of joint
venture...................................... (52) (130) (90)
Interest expense to stockholder................. -- (650) --
--------- --------- --------
Net income (loss)............................... $ (3,218) $ 41 $ 1,233
========= ========= ========
A reconciliation of the underlying net assets to the Company's carrying
value of investments in and advance to service corporations is as follows:
DECEMBER 31,
--------------------
1996 1995
-------- --------
Shareholders' equity (deficiency), as above................. $ (1,399) $ 3,151
Less equity (deficiency) of other shareholders.............. (29) 11
-------- --------
Company's share of equity (deficiency)...................... (1,370) 3,140
Advance..................................................... 5,000 5,000
-------- --------
Carrying value of investments in and advance to service
corporations.............................................. 3,630 8,140
Carrying value of property investments in joint ventures and
corporation, as above..................................... 23,788 25,921
-------- --------
Total..................................................... $ 27,418 $ 34,061
======== ========
Per consolidated balance sheet:
Investments in and advance to joint ventures and
corporations.............................................. $ 52,153 $ 58,016
Investment in joint venture................................. (24,735) (23,955)
-------- --------
Total..................................................... $ 27,418 $ 34,061
======== ========
F-113
240
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. MORTGAGE NOTES PAYABLE:
The mortgage notes payable, collateralized by the certain properties and
assignment of leases, are as follows:
DECEMBER 31,
-------------------
1996 1995
-------- -------
Mortgage notes with fixed interest at:
8.00% maturing July 1, 1998................................. $ 12,970 $13,236
6.67% maturing November 1, 1998............................. 56,920 57,300
7.23% maturing February 1, 2003............................. 55,000 --
7.23% maturing March 1, 2003................................ 60,000 --
7.08% maturing March 31, 2006............................... 218,000 --
8.19% maturing January 1, 2007.............................. 15,000 --
8.19% maturing January 1, 2007.............................. 13,600 --
8.38% maturing December 1, 2008............................. 20,722 --
-------- -------
Total mortgage notes payable........................... $452,212 $70,536
======== =======
The Company's restricted cash consists of cash required by these mortgages
to be held in escrow for capital expenditures and/or real estate taxes.
Scheduled maturities of mortgage notes payable are as follows:
1997........................................................ $ 2,127
1998........................................................ 72,611
1999........................................................ 6,602
2000........................................................ 7,608
2001........................................................ 8,171
Thereafter.................................................. 355,093
--------
Total.................................................. $452,212
========
The Company computes the fair value of its mortgage notes payable based
upon the discounted cash flows at a discount rate that approximates the
Company's effective borrowing rate and the Company has determined that the fair
value of its mortgage notes approximates their carrying value.
In March 1996, the Company repaid a debt and recorded an extraordinary item
of $1.9 million, net of minority interest, in connection with the write-off of
fees and costs to acquire the debt. The extraordinary item during the period
January 1, 1994 through May 25, 1994 represents the gains resulting from the
settlement of certain mortgage notes payable. As the prepayments were a
condition to transferring the assets to the Company, these items were recorded
by the Predecessor entity.
7. NOTE PAYABLE, CREDIT FACILITY:
The Company has a three-year, $300 million revolving credit facility (the
"Credit Facility"). The Credit Facility matures in June 1999 and is secured by
cross-collateralized mortgages and assignment of rents on certain properties.
Outstanding balances under the Credit Facility bear interest, at the
Company's option, at either (i) the higher of (x) Bank of Boston's base interest
rate and (y) one-half of one percent (1/2%) above the overnight federal funds
effective rate or (ii) the Eurodollar rate plus 175 basis points (1.75%). The
Company has an interest rate protection agreement through May 1997 with respect
to $135 million of the Credit Facility, which provides for offsetting payments
to the Company in the event that 90-day LIBOR exceeds 9.47% per annum.
F-114
241
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective May 1997 through May 1999, the Company has an interest rate protection
agreement with respect to $137.5 million of the Credit Facility, which provides
for offsetting payments to the Company in the event that 90-day LIBOR exceeds
8.75% per annum. This interest rate protection arrangement may be applied during
any four quarters in the period from May 1997 to May 1999.
The outstanding balance of the Credit Facility at December 31, 1996 was
$153.0 million. The weighted average amount outstanding during the years ended
December 31, 1996 and 1995 and the period May 26, 1994 to December 31, 1994 was
$42.3 million, $99.7 million and $50.4 million, respectively. The weighted
average interest rate on amounts outstanding during the years ended December 31,
1996 and 1995 and the period May 26, 1994 to December 31, 1994 was approximately
7.78%, 8.25% and 7.57%, respectively. The applicable interest rate under the
Credit Facility at December 31, 1996 was 8.25%.
Based upon the Credit Facility's variable interest rate and the Company's
determination of the fair value of its interest rate agreement based upon the
quoted market prices of similar instruments, the Company has determined that the
fair value of these instruments approximate their carrying value.
As a result of the substantial modification of the terms of the Credit
Facility in June 1996, the Company recorded an extraordinary item of $1.5
million, net of minority interest, in connection with the write-off of fees and
costs relating to the prior Credit Facility.
8. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES:
DECEMBER 31,
-----------------------
1996 1995
------- -------
Accounts payable and accrued expenses....................... $29,904 $ 8,092
Deferred liability.......................................... 4,912 1,164
Affiliates.................................................. 1,258 2,952
Other liabilities........................................... 504 647
Security deposits........................................... 5,186 1,167
------- -------
Total.................................................. $41,764 $14,022
======= =======
9. STOCKHOLDERS' EQUITY:
Stock Option Plans
During 1994, the Company adopted the 1994 Stock Option Plan, which
initially reserved 1,102,080 shares of common stock. In May, 1996 the 1994 Stock
Option Plan was amended to reserve an additional 1,621,485 shares of common
stock. The 1994 Stock Option Plan is administered by the Compensation Committee
of the Board of Directors (the "Committee") and officers and certain other
employees of the Company are eligible to participate. Non-employee Directors of
the Company are eligible to receive stock options under the 1994 Stock Option
Plan on a limited basis.
The 1994 Stock Option Plan authorizes (i) the grant of stock options that
qualify as incentive stock options under Section 422 of the Code ("ISOs"), (ii)
the grant of stock options that do not so qualify ("NQSOs"), (iii) the grant of
stock options in lieu of cash for Directors' fees and employee bonuses, (iv)
grants of shares of common stock contingent on the attainment of performance
goals or subject to other restrictions, and (v) grants of shares of common stock
in lieu of cash compensation. The exercise price of stock options will be
determined by the Committee, but may not be less than 100% of the fair market
value of the shares of Common Stock on the date of grant in the case of ISOs.
However, in the case of grants of NQSOs granted in lieu of cash for Directors'
fees and employee bonuses, the exercise price may not be less than 50% of the
fair market value of the shares of common stock on the date of grant. NQSOs
granted under the 1994 Stock Option Plan may, if approved by the Committee,
accrue annually a dividend equivalent right
F-115
242
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which will entitle the option-holder to receive additional shares of common
stock upon the exercise of the option. The Company has reserved 29,425 shares of
common stock for issuance under the 1994 Stock Option Plan. Options issued vest
at such time or times as determined by the committee except for options issued
to independent directors which vest on the date of grant. All options have a
term of ten years from the grant date.
In October 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan"), which provides for the granting of options to purchase up to an
aggregate of 750,000 shares of common stock to all employees other than the
senior executive officers of the Company. The Company has reserved 168,500
shares of common stock for issuance under the 1996 Option Plan. The term of each
option is fixed by the Committee. The Committee also determines at what time or
times each option becomes vested and exercisable and, subject to the terms of
the Plan, the period of time, if any, after death, disability, or termination of
employment during which options may be exercised. The Committee may accelerate
the exercisability of any option at any time.
Changes in options outstanding under the 1994 and 1996 plans during the
period were as follows:
OPTION
PRICE
NUMBER ---------
OF SHARES PER SHARE
UNDER OPTION AVERAGE
------------ ---------
Granted at Initial Offering................................. 630,250 $17.00
Granted May-December 1994................................... 27,500 18.16
Canceled May-December 1994.................................. (15,750) 17.00
--------- ------
Shares under Option at December 31, 1994.................... 642,000 17.05
Exercised -- 1995........................................... (12,367) 17.46
Granted -- 1995............................................. 414,000 20.14
Canceled -- 1995............................................ (9,662) 17.00
--------- ------
Shares under Option at December 31, 1995.................... 1,033,971 18.28
Exercised -- 1996........................................... (97,827) 17.00
Granted -- 1996............................................. 2,236,550 28.72
Canceled -- 1996............................................ (7,248) 19.16
--------- ------
Shares under option at December 31, 1996.................... 3,165,446 25.69
========= ======
Options available for grant at beginning of year............ 55,826 --
Options available for grant at end of year.................. 197,925 --
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its plans. Financial Accounting Standards
Board Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123")
was issued in 1995 and, if fully adopted, changes the methods for recognition of
cost on plans similar to those of the Company. Adoption of SFAS 123 is optional;
however, had compensation cost for the Company's 1996 grants for stock-based
compensation plans been determined consistent with SFAS 123, the Company's net
income, net income applicable to common shareholders, and net income per common
share would approximate the pro forma amounts below:
1996 1995
------- -------
Net income:
As reported............................................... $36,332 $18,060
Pro forma (unaudited)..................................... 35,530 18,007
Net income per common share:
As reported............................................... 1.21 1.09
Pro forma (unaudited)..................................... 1.19 1.09
F-116
243
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated.
The fair value of each option granted under SFAS 123, estimated on the date
of grant using the Black-Scholes option-pricing model, is $3.38 for 1996 and
$2.04 for 1995. The following table presents the annualized weighted-average
values of the significant assumptions used to estimate the fair values of the
options:
1996 1995
---- ----
Risk-free interest rate..................................... 6.22% 5.45%
Expected life in years...................................... 6.0 6.0
Expected volatility......................................... 16.6% 16.1%
Expected dividend yield..................................... 6.0% 6.0%
The following table summarizes information about options outstanding at
December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------ ---------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE PRICE AT 12/31/96 PRICE
--------------- ----------- ---------------- -------- ----------- --------
$12.0625 - $15.0000 .................... 2,614 9.48 $13.4150 2,576 $13.4230
17.0000 - 17.0000 .................... 497,396 7.38 17.0000 300,998 17.0000
17.1875 - 18.3125 .................... 22,936 7.54 18.1680 20,437 18.1580
20.1250 - 20.1250 .................... 395,000 8.92 20.1250 136,685 20.1250
20.3750 - 25.8750 .................... 426,000 9.28 24.9049 26,000 22.4807
26.0000 - 26.7500 .................... 35,000 9.49 26.2142 15,000 26.0000
29.6250 - 29.6250 .................... 1,779,500 9.85 29.6250 0 0.0000
31.0000 - 31.0000 .................... 1,000 9.89 31.0000 0 0.0000
31.5000 - 31.5000 .................... 1,000 9.90 31.5000 0 0.0000
32.2500 - 32.2500 .................... 5,000 9.94 32.2500 0 0.0000
- ------------------- --------- ---- -------- ------- --------
12.0625 - 32.2500 .................... 3,165,446 9.25 $25.6915 501,696 $18.4333
========= ==== ======== ======= ========
Stock Purchase Plan
In 1995, the Company instituted a dividend reinvestment and stock purchase
plan for holders of the Company's stock. The plan permits shareholders to
automatically reinvest their cash dividends or invest limited amounts of cash
payments in newly issued shares or open market purchases of the Company's common
stock. At December 31, 1996 and 1995, there were 373,132 and 474,563 shares
reserved for issuance under the dividend reinvestment and stock purchase plan.
10. TRANSACTIONS WITH AFFILIATES:
PREDECESSOR
------------
MAY 26, 1994 JAN. 1, 1994
TO TO
1996 1995 DEC. 31, 1994 MAY 25, 1994
------ ------- ------------- ------------
Management, design and construction fees
and interest income...................... $9,176 $ 5,640 $1,809
Administrative salaries and expenses....... -- -- 469
Construction costs......................... 8,352 11,108 $241 --
In 1995, the Company entered into an agreement to lease its corporate
offices from a joint venture in which the Company has an indirect interest. It
previously subleased corporate office space from another affiliate. Rental
expense related to these arrangements was $1.3 million, $0.3 million and $0.1
million for the
F-117
244
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years ended December 31, 1996 and 1995 and the period from May 26, 1994 to
December 31, 1994, respectively.
Future minimum rental payments at December 31, 1996 for the Company's
corporate offices are $1.3 million for 1997, $1.4 million for 1998 through 2001,
and $1.0 million for 2002.
11. MINORITY INTERESTS:
Minority Interest in Operating Partnership
Minority interest in the Operating Partnership relates to the portion which
is not owned by the Company and, at December 31, 1996, amounted to 11.5%.
In conjunction with the formation of the Company persons contributing
interests in properties to the Operating Partnership elected to receive either
common stock of the Company or interests in the Operating Partnership ("Units").
Each Unit may be redeemed for cash equal to the fair market value of a share of
common stock at the time of redemption or, at the option of the Company, one
share of common stock. When a unitholder redeems a Unit for a share of common
stock or cash, minority interest is reduced and the Company's investment in the
Operating Partnership is increased. At December 31, 1996 and 1995, 6,273,928 and
3,788,549 units were outstanding, respectively.
Minority Interest in Combined Partnerships
This amount presented in the financial statements of the Predecessor
represents the losses of the properties in excess of capital of owners, who will
continue to hold their respective economic interest in the combined
partnerships, and are capable of funding their share of future capital calls.
12. COMMITMENTS AND CONTINGENCIES:
Pension Plan
The Company participates in a defined-benefit pension plan with some of its
affiliates. This plan covers substantially all full-time non-union employees.
The Company's portion of pension expense for the years ended December 31, 1996
and 1995 and the period May 26, 1994 to December 31, 1994 was $0.2 million, $0.1
million, and $0.1 million, respectively. The Predecessor's comparable allocated
portion of pension expense amounted to $0.1 million for the period January 1,
1994 to May 25, 1994.
401K Plan
The eligible employees of the Company participate in a contributory savings
plan with some of its affiliates. Under the plan, the Company may match
contributions made by eligible employees based on a percentage of the employee's
salary. The Company matches 25% of contributions up to 3% of such employee's
salary (up to $30,000). The matching amount may be changed from time to time by
the Board of Directors. Expenses under this Plan for 1995, 1994 and 1993 were
not material.
Contingencies
The Company is subject to various legal proceedings and claims that arose
in the ordinary course of business. These matters are generally covered by
insurance. Management believes that the final outcome of such matters will not
have a material adverse effect on the financial position, results of operations
or liquidity of the Company.
F-118
245
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Lease
The South Station property is subject to a ground lease expiring in 2024.
The lease provides for two 15-year extension options. Under certain conditions,
the lessor reserves the right to terminate the lease at the end of the initial
term or at the end of the first extension period and pay the lessee an amount
based on a formula payment of fair value. The minimum rents in connection with
the lease are substantially based on percentage rent until 1997. The Company is
obligated to provide loans to the lessor under certain conditions subject to a
maximum of $0.9 million. As of December 31, 1996, no such loans were
outstanding.
Environmental
A former tenant of Crosby Corporate Center has agreed to perform the
necessary investigation and cleanup actions regarding remediation of possible
contamination, bear all costs associated with such cleanup activities and
indemnify the Company for any costs or damages it incurs in connection with such
contamination. As the owner of the property, however, the Company could be held
liable for the costs of such activities if the former tenant fails to undertake
such actions.
As a lessee of certain property, the Company has received an indemnity from
the owner to the extent the Company is assessed costs relating to environmental
cleanup.
Site assessments at the New England Executive Park have identified
contamination in the groundwater at a monitoring well which flows into an
aquifer, which supplies drinking water to the Town of Burlington. The Town of
Burlington has allocated funds for, and is in the process of constructing, a
groundwater treatment facility at its drinking water supply that draws from the
subject aquifer. The Company has been advised that such treatment facility has
the capacity to treat any contaminants which may be derived from the groundwater
passing beneath the New England Executive Park.
Based on site assessments performed at The Riverview Building which have
identified the presence of oil that slightly exceeds the concentration that
requires reporting to the Massachusetts Department of Environmental Protection,
an environmental consultant has advised the Company that applicable regulatory
requirements can be satisfied without the need to perform any remediation at the
property.
In connection with the acquisition of the John Marshall land, the sellers
have reported the findings of contamination to the Virginia Department of
Environmental Quality and have retained an environmental consultant to prepare a
remediation plan. Units valued at approximately $1.0 million were escrowed from
the purchase price to be released to the seller upon performance of remediation
pursuant to a remediation plan approved by the Company. The escrow further
provides that the Company may receive some or all of the remaining escrowed
Units upon certain conditions.
The Company does not believe that any costs, if incurred, in connection
with these environmental matters would have a material adverse effect on the
financial position, results of operations, or liquidity of the Company.
Other
The Company guarantees the surety bonds of an affiliate in an amount up to
$5.0 million.
The Company has an obligation to pay $17.0 million in connection with the
acquisition of real estate upon the achievement of conditions regarding
occupancy or rental income levels.
In connection with the acquisition of the John Marshall I, E. J. Randolph
and Northridge I properties, the Company has agreed to maintain the non-recourse
financing assumed from the sellers for a five year period and not to dispose of
the property for a seven year period. If the Company should choose not to
maintain the non-recourse provisions of the existing or new debt, or sell the
properties, within these respective time periods
F-119
246
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
it shall be required to make payments to the sellers of approximately $6.0
million in 1997, reducing ratably to zero through 2003.
13. SEGMENT INFORMATION:
The Predecessor operated principally in three segments: rental operations,
property management, and construction. Revenues for the management segment
include management revenues earned from the rental operations segment which are
subsequently eliminated in consolidation.
Income (loss) from operations consists of total revenues less total
expenses excluding the effects of the following items: equity in net income
(loss) of joint ventures, minority interest in loss of combined partnerships and
extraordinary gain.
JANUARY 1, 1994 - MAY 25, 1994
---------------------------------------------------------------
RENTAL MANAGEMENT CONSTRUCTION ELIMINATION TOTAL
------- ---------- ------------ ----------- -------
Revenues................................. $ 7,610 $1,766 $24,238 $(364) $33,250
Income (Loss) from Operations............ (1,848) 1,260 102 (36) (522)
Identifiable Assets...................... 63,335 283 14,141 (289) 77,470
Depreciation and Amortization............ 2,383 2 91 -- 2,476
Capital Expenditures..................... 837 -- 141 -- 978
14. FUTURE MINIMUM RENTS:
Future minimum rentals to be received under noncancelable tenant leases in
effect at December 31, 1996 are as follows:
1997........................................................ $ 188,032
1998........................................................ 175,732
1999........................................................ 170,086
2000........................................................ 143,288
2001........................................................ 113,718
Thereafter.................................................. 370,698
----------
Total..................................................... $1,161,554
==========
15. GEOGRAPHIC CONCENTRATION:
The Company owns properties with a total cost at December 31, 1996 as
follows:
Downtown Boston............................................. $ 284,574
Suburban Boston............................................. 279,987
Suburban Atlanta............................................ 343,014
Suburban Philadelphia....................................... 59,018
Suburban Virginia........................................... 178,166
Suburban Los Angeles........................................ 133,307
Suburban San Francisco...................................... 184,207
Suburban Chicago............................................ 175,819
Downtown Washington......................................... 53,438
----------
Total..................................................... $1,691,530
==========
F-120
247
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SELECTED QUARTERLY FINANCIAL INFORMATION: (UNAUDITED)
The following schedule is a summary of the quarterly results of operations
for the years ended December 31, 1996 and 1995 and the period May 26, 1994 to
December 31, 1994:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
YEAR ENDED DECEMBER 31, 1996
Revenue....................................... $33,668 $41,438 $46,602 $62,082 $183,791
Income from continuing operations............. 6,899 10,053 11,603 15,002 43,557
Discontinued operations -- Construction
Company:
Loss from operations........................ (407) (663) (841) (698) (2,609)
Loss on sale................................ -- -- -- (249) (249)
Extraordinary items, net of minority
interest.................................... (1,726) (1,642) -- -- (3,368)
Net income.................................... 4,994 7,550 10,524 13,265 36,332
Net income per common share................... 0.23 0.28 0.34 0.34 1.21
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
YEAR ENDED DECEMBER 31, 1995
Revenue........................................ $20,801 $22,124 $23,595 $24,523 $91,043
Income from continuing operations.............. 3,498 4,620 5,510 5,329 18,957
Discontinued operations -- Construction
Company:
Loss from operations......................... -- -- (12) -- (12)
Net income..................................... 3,081 4,151 5,088 5,740 18,060
Net income per common share.................... 0.25 0.26 0.29 0.28 1.09
SECOND THIRD FOURTH
QUARTER QUARTER QUARTER TOTAL
------- ------- ------- -------
MAY 26, 1994 TO DECEMBER 31, 1994
Revenue.................................................. $3,997 $11,387 $16,549 $31,933
Income from continuing operations........................ 784 1,578 3,557 5,919
Discontinued operations -- Construction Company:
Income from operations................................. 42 165 270 477
Net income............................................... 826 1,826 3,003 5,655
Net income per common share.............................. 0.07 0.15 0.26 0.48
17. PRO FORMA RESULTS: (UNAUDITED)
The following unaudited pro forma operating results for the Company have
been prepared as if capital contributions and property acquisitions during 1995
and 1996 had occurred on January 1, 1995. Unaudited pro forma financial
information is presented for informational purposes only and may not be
indicative of what the actual results of operations of the Company would have
been had the events occurred as of January 1, 1995, nor does it purport to
represent the results of operations for future periods. Pro forma results have
not been presented for 1994 as the Company operations did not commence until May
26, 1994.
DECEMBER 31,
--------------------
1996 1995
-------- --------
Revenues.................................................... $299,147 $266,882
Income before extraordinary items........................... 74,845 69,894
Net income.................................................. 71,416 69,894
Net income per common share................................. 1.48 1.45
F-121
248
BEACON PROPERTIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. DISCONTINUED OPERATIONS:
On December 31, 1996, certain assets of the Construction Company were sold.
These assets included fixed assets, general construction contracts in progress,
and the receivables and payables related to these contracts. All employees were
transferred to the buyer who is expected to complete all outstanding
construction work for projects not purchased as part of the sale.
19. SUBSEQUENT EVENTS:
Declaration of Dividend
On January 28, 1997, the Company declared a quarterly dividend of $0.4625
per common share, payable on February 28, 1997 to shareholders of record on
February 10, 1997.
F-122
249
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders of
Beacon Properties Corporation:
Our report on the consolidated financial statements of Beacon Properties
Corporation is included on page F-1 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedules listed in the Item 14(a) of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 28, 1997
F-123
250
SCHEDULE III
BEACON PROPERTIES CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
INITIAL COST
----------------------------
BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS
- ----------- ------------ ------------- ------------
Commercial Property:
Wellesley Office Park -- Buildings 1-8 -- Wellesley, MA... $ 55,000 $ 9,110 $ 75,829
Crosby Corporate Center -- Bedford, MA.................... --(1) 978 10,478
South Station -- Boston, MA............................... -- -- 21,487
175 Federal St. -- Boston, MA............................. 12,970 1,404 24,505
Center Plaza -- Boston, MA................................ 60,000 7,301 65,712
150 Federal St. -- Boston, MA............................. 56,920(2) 11,265 101,280
One Canal Park -- Cambridge, MA........................... --(1) 931 8,444
Ten Canal Park -- Cambridge, MA........................... --(1) 1,179 10,609
Two Oliver Street -- Boston, MA........................... --(1) 1,796 16,166
Westwood Business Centre -- Westwood, MA.................. --(1) 1,159 10,498
Russia Wharf -- Boston, MA................................ --(1) 1,442 12,974
Westlakes Office Park -- Buildings 1, 2, 3 and 5 --
Berwyn, PA.............................................. --(1) 6,335 46,267
Perimeter Center--Atlanta, GA............................. 218,000 46,438 292,305
AT&T Plaza -- Oak Brook, IL............................... --(1) 3,510 31,587
Tri-State International -- Lincolnshire, IL............... --(1) 6,222 55,999
1333H Street, N.W. -- Washington, D.C..................... --(1) 5,337 48,033
E.J. Randolph -- McLean, VA............................... 15,000 3,590 19,520
John Marshall I -- McLean, VA............................. 20,722 5,996 27,991
Northridge I -- Herndon, VA............................... 13,600 1,911 19,264
1300 North 17th Street -- Rosslyn, VA..................... --(1) 8,007 46,758
1616 North Fort Myer Drive -- Rosslyn, VA................. --(1) 6,156 38,651
New England Executive Park -- Burlington, MA.............. --(1) 7,067 68,259
10960 Wilshire Boulevard -- Westwood, CA.................. -- 11,200 122,039
The Riverview Building -- Cambridge, MA................... -- 4,513 40,616
Shoreline Technology Park -- Mountain View, CA............ -- 39,547 101,444
Lake Marriott Business Park -- Santa Clara, CA............ -- 12,032 31,128
Presidents Plaza -- Chicago, IL........................... -- 7,750 69,752
-------- -------- ----------
$452,212 $212,176 $1,417,595
======== ======== ==========
F-124
251
SCHEDULE III
BEACON PROPERTIES CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION -- CONTINUED
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
SUBSEQUENT TO GROSS AMOUNT AT WHICH
ACQUISITION CARRIED AT CLOSE OF PERIOD
Cost Capitalized --------------------- ------------------------------------
BUILDINGS BUILDINGS
AND AND
DESCRIPTION LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ----------- ------ ------------ -------- ------------ ----------
Commercial Property:
Wellesley Office Park -- Buildings 1-8 --
Wellesley, MA............................... -- $12,866 $ 9,110 $ 88,695 $ 97,805
Crosby Corporate Center -- Bedford, MA........ $1,505 14,880 2,483 25,358 27,841
South Station -- Boston, MA................... -- 861 -- 22,348 22,348
175 Federal St. -- Boston, MA................. -- 3,196 1,404 27,701 29,105
Center Plaza -- Boston, MA.................... -- 8,810 7,301 74,522 81,823
150 Federal St. -- Boston, MA................. -- 1,326 11,265 102,606 113,871
One Canal Park -- Cambridge, MA............... -- 139 931 8,583 9,514
Ten Canal Park -- Cambridge, MA............... -- 135 1,179 10,744 11,923
Two Oliver Street -- Boston, MA............... -- 1,376 1,796 17,542 19,338
Westwood Business Centre -- Westwood, MA...... -- 674 1,159 11,172 12,331
Russia Wharf -- Boston, MA.................... 177 3,496 1,619 16,470 18,089
Westlakes Office Park -- Buildings 1, 2, 3 and
5 -- Berwyn, PA............................. -- 6,416 6,335 52,683 59,018
Perimeter Center -- Atlanta, GA............... -- 4,271 46,438 296,576 343,014
AT&T Plaza -- Oak Brook, IL................... -- 18 3,510 31,605 35,115
Tri-State International -- Lincolnshire, IL... -- 950 6,222 56,949 63,171
1333H Street, N.W. -- Washington, D.C......... -- 68 5,337 48,101 53,438
E.J. Randolph -- McLean, VA................... -- 36 3,590 19,556 23,146
John Marshall I -- McLean, VA................. -- 147 5,996 28,138 34,134
Northridge I -- Herndon, VA................... -- 41 1,911 19,305 21,216
1300 North 17th Street -- Rosslyn, VA......... -- 11 8,007 46,769 54,776
1616 North Fort Myer Drive -- Rosslyn, VA..... -- 87 6,156 38,738 44,894
New England Executive Park -- Burlington,
MA.......................................... -- 64 7,067 68,323 75,390
10960 Wilshire Boulevard -- Westwood, CA...... -- 68 11,200 122,107 133,307
The Riverview Building -- Cambridge, MA....... -- 54 4,513 40,670 45,183
Shoreline Technology Park -- Mountain View,
CA.......................................... -- 49 39,547 101,493 141,040
Lake Marriott Business Park -- Santa Clara,
CA.......................................... -- 7 12,032 31,135 43,167
Presidents Plaza -- Chicago, IL............... -- 31 7,750 69,783 77,533
------ ------- -------- ---------- ----------
$1,682 $60,077 $213,858 $1,477,672 $1,691,530
====== ======= ======== ========== ==========
F-125
252
SCHEDULE III
BEACON PROPERTIES CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION -- CONTINUED
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
LIFE ON
WHICH
DEPRECIATION
IN LATEST
DATE OF INCOME
ACCUMULATED CONSTRUCTION/ DATE STATEMENTS
DESCRIPTION DEPRECIATION RENOVATION ACQUIRED IS COMPUTED
- ----------- ------------ ------------- ------------ ------------
Commercial Property:
Wellesley Office Park -- Buildings 1-8 --
Wellesley, MA............................... $33,913 1963-1984 1994/1995 (3)
Crosby Corporate Center -- Bedford, MA........ 6,702 1981 5/26/94 (3)
South Station -- Boston, MA................... 13,434 1988 5/26/94 (3)
175 Federal St. -- Boston, MA................. 7,258 1977 10/28/94 (3)
Center Plaza -- Boston, MA.................... 5,884 1966-1969 12/01/94 (3)
150 Federal St. -- Boston, MA................. 8,961 1988 5/26/94 (3)
One Canal Park -- Cambridge, MA............... 770 1987 6/10/94 (3)
Ten Canal Park -- Cambridge, MA............... 386 1987 12/20/95 (3)
Two Oliver Street -- Boston, MA............... 783 1982-1988 10/06/95 (3)
Westwood Business Centre -- Westwood, MA...... 1,083 1985 6/10/94 (3)
Russia Wharf -- Boston, MA.................... 1,453 1978-1982 8/10/94 (3)
Westlakes Office Park -- Buildings 1, 2, 3 and
5 -- Berwyn, PA............................. 3,931 1988-1990 7/95 & 10/94 (3)
Perimeter Center -- Atlanta, GA............... 8,822 1970-1989 2/15/96 (3)
AT&T Plaza -- Oak Brook, IL................... 395 1984 8/16/96 (3)
Tri-State International -- Lincolnshire, IL... 710 1986 8/16/96 (3)
1333H Street, N.W. -- Washington, D.C......... 601 1984 8/16/96 (3)
E.J. Randolph -- McLean, VA................... 217 1983 9/05/96 (3)
John Marshall I -- McLean, VA................. 306 1981 9/05/96 (3)
Northridge I -- Herndon, VA................... 214 1988 9/05/96 (3)
1300 North 17th Street -- Rosslyn, VA......... 325 1980 10/18/96 (3)
1616 North Fort Myer Drive -- Rosslyn, VA..... 271 1974 10/18/96 (3)
New England Executive Park -- Burlington,
MA.......................................... 291 1970-1985 11/15/96 (3)
10960 Wilshire Boulevard -- Westwood, CA...... 439 1971-1992 11/21/96 (3)
The Riverview Building -- Cambridge, MA....... 170 1985-1986 11/21/96 (3)
Shoreline Technology Park -- Mountain View,
CA.......................................... 141 1985-1991 12/20/96 (3)
Lake Marriott Business Park -- Santa Clara,
CA.......................................... 43 1981 12/20/96 (3)
Presidents Plaza -- Chicago, IL............... 32 1980-1982 12/27/96 (3)
-------
$97,535
=======
- ---------------
(1) These properties are collateral for a Note Payable under the Credit
Facility. The outstanding balance under the Note at December 31, 1996 is
$153,000.
(2) This property is comprised of two Units. Unit A is collateral for a Note
Payable under the Credit Facility. Unit B is collateral for a Mortgage Note
Payable in the amount of $56,920.
(3) Buildings and improvements -- 19 to 40 years; Personal property -- 5 to 10
years; tenant improvements -- over the terms of the related leases.
F-126
253
SCHEDULE III
BEACON PROPERTIES CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION -- CONTINUED
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
Depreciation of building and improvements and personal property is
calculated over the following estimated useful lives, using straight line and
declining balance methods:
Buildings and improvements -- 19 to 40 years
Tenant Improvements -- over the terms of the related leases
Personal property -- 5 to 10 years
The aggregate cost for federal income tax purposes was approximately
$1,390.3 million at December 31, 1996.
The changes in total real estate assets for the years ended December 31,
1996 and 1995, the period May 26, 1994 to to December 31, 1994 and the period
January 1, 1994 to May 25, 1994 are as follows:
COMPANY PREDECESSOR
--------------------------------------- ------------
MAY 26, 1994 JAN. 1, 1994
TO TO
1996 1995 DEC. 31, 1994 MAY 25, 1994
---------- -------- ------------- ------------
Balance, beginning of period........... $ 471,142 $400,419 $207,013* $81,220
Acquisitions, Construction Costs and
Improvements......................... 1,220,388 70,723 193,406 978
---------- -------- -------- -------
Balance, end of period................. $1,691,530 $471,142 $400,419 $82,198
========== ======== ======== =======
- ---------------
* Represents initial acquisition cost of properties in the formation of the
Company.
The changes in accumulated depreciation for the years ended December 31,
1996 and 1995, the period May 26, 1994 to to December 31, 1994 and the period
January 1, 1994 to May 25, 1994 are as follows:
COMPANY PREDECESSOR
--------------------------------------- ------------
MAY 26, 1994 JAN. 1, 1994
TO TO
1996 1995 DEC. 31, 1994 MAY 25, 1994
---------- -------- ------------- ------------
Balance, beginning of period........... $ 66,571 $ 51,115 $ 45,044** $37,167
Depreciation for period................ 30,964 15,456 6,071 2,055
---------- -------- -------- -------
Balance, end of period................. $ 97,535 $ 66,571 $ 51,115 $39,222
========== ======== ======== =======
- ---------------
** Balance reflects prior accumulated depreciation carried over due to
accounting for formation acquisitions as poolings of interests.
F-127
254
SCHEDULE IV
BEACON PROPERTIES CORPORATION
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
PRINCIPAL
AMOUNT OF
LOANS
SUBJECT TO
FINAL FACE CARRYING DELINQUENT
COMMERCIAL PROPERTY INTEREST MATURITY PERIODIC PRIOR AMOUNT OF AMOUNT OF PRINCIPAL OR
INTEREST RATE DATE PAYMENT TERM LIENS MORTGAGES MORTGAGES(1) INTEREST
------------------- -------- -------- ------------- ------- --------- ------------ ------------
Rowes Wharf Boston,
MA................. 8.71% 4/1/99 Interest-only $ -- 63,000 $51,491 --
- ---------------
(1) The aggregate cost of the Company's mortgage loans for federal income tax
purposes was $51,491 at December 31, 1996.
Reconciliation of Mortgage Loans on real estate for the year ended December
31:
1996
-------
Balance at beginning of year................................ $34,778
Additions during period:
Acquisition of mortgage loans.......................... 16,713
Deductions during period:
Principal collections.................................. --
-------
Balance at end of year...................................... $51,491
=======
F-128
255
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON SHARES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
SUMMARY TABLE OF CONTENTS
PAGE
----
Summary................................ 2
Risk Factors........................... 9
The Company............................ 18
Price Range of Common Shares and
Distribution History................. 20
Capitalization......................... 21
Selected Combined Financial Data....... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 24
Beacon Selected Combined Financial
Data.................................
Beacon Management's Discussion and
Analysis of Financial Condition and
Results of Operations................
The Properties......................... 40
Management............................. 51
Certain Relationships and
Transactions......................... 61
Policies with Respect to Certain
Activities........................... 64
Principal Shareholders................. 67
Shares of Beneficial Interest.......... 69
Certain Provisions of Maryland Law and
the Company's Declaration of Trust
and Bylaws........................... 75
Partnership Agreement.................. 78
Selling Shareholder.................... 81
Redemption of Units.................... 82
Federal Income Tax Considerations...... 96
ERISA Considerations................... 113
Experts................................ 114
Legal Matters.......................... 114
Available Information.................. 114
Glossary............................... 116
Index to Financial Statements.......... F-1
======================================================
======================================================
8,413,308 SHARES
EQUITY OFFICE
PROPERTIES TRUST
COMMON SHARES
OF BENEFICIAL INTEREST,
(PAR VALUE $.01 PER SHARE)
------------------------
PROSPECTUS
------------------------
, 1998
======================================================
256
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 32. SALES TO SPECIAL PARTIES
Not applicable
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
Prior to the IPO, the Company sold 1,000 unregistered Common Shares to Mr.
Zell for a purchase price of $25.00 per Common Share.
Immediately prior to the closing of the IPO, pursuant to the Contribution
Agreement, (i) each ZML Opportunity Partnership contributed to the Operating
Partnership substantially all of its assets and liabilities in exchange for an
aggregate of 119,652,403 Common Shares and (ii) EGI, EOP and EOH, each of which
is owned by affiliates of Mr. Zell and which are referred to collectively as the
"Equity Group," contributed the Management Business, and EOP contributed 95% of
the economic value of that portion of the Management Business that relates to
the Third-Party Management Business, to the Operating Partnership in exchange
for 8,358,822 Units. EOP and the Operating Partnership then jointly contributed
the Third-Party Management Business to the Management Corp., with EOP receiving
voting stock representing 5% of the economic value of the Management Corp. and
the Operating Partnership receiving non-voting stock representing 95% of the
economic value of the Management Corp. In connection with its contribution of
the Management Business, EGI and EOH also contributed their asset management
contracts relating to the Office Properties and the Parking Facilities to the
Operating Partnership in exchange for Units.
Immediately prior to the closing of the IPO, pursuant to a merger
agreement, each ZML REIT merged with and into the Company and the Company issued
Common Shares to the ZML REIT shareholders. As part of the
Consolidation, each ZML Opportunity Partnership admitted the Company as its sole
managing general partner and each ZML Partner became a non-managing general
partner of its ZML Opportunity Partnership. As a result, the Company became the
1% managing general partner in each ZML Opportunity Partnership, the sole
limited partner in ZML Opportunity Partnerships III and IV, and the majority
limited partner in ZML Opportunity Partnerships I and II, owning at least 53%
and 83%, respectively, of the capital interests in those partnerships. See "The
Company -- Formation Transactions."
In October 1997, the Company sold an aggregate of $274 million of
Restricted Common Shares in two separate transactions to institutional investors
and contributed the proceeds to the Company in exchange for 9.7 million Units.
In February 1998, the Company also sold 6,000,000 5.25% Preferred Income
Equity Redeemable Shares(SM), designated by the Company as its 5.25% Series B
Convertible, Cumulative Preferred Shares of Beneficial Interest, $.01 par value
per share, $50.00 liquidation preference per share (the "Series B Preferred
Shares"), in a private placement (the "Series B Preferred Offering"). The
Company used the net proceeds from the Series B Preferred Offering to repay
amounts outstanding under the Credit Facilities. "Preferred Income Equity
Redeemable Shares(SM)" is a service mark owned by Lehman Brothers Inc.
In April 1998, the Company sold 1,628,009 Common Shares to Merrill Lynch,
Pierce, Fenner & Smith Incorporated in a private placement (the "UIT Offering").
Merrill Lynch, Pierce, Fenner & Smith Incorporated deposited these Common Shares
with the Trustee of the Equity Investor Fund Cohen & Steers Realty Majors
Portfolio (A Unit Investment Trust) (the "UIT") in exchange for units in the
UIT. The Company used the net proceeds from the UIT Offering to repay amounts
outstanding under the Credit Facilities.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's officers and directors are and will be indemnified under
Maryland and Delaware law, the Declaration of Trust and Bylaws of the Company
and the Partnership Agreement of the Operating Partnership
II-1
257
against certain liabilities. The Declaration of Trust of the Company requires it
to indemnify its directors and officers to the fullest extent permitted from
time to time under Maryland law.
The Declaration of Trust of the Company authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former trustee or officer or (b) any individual who, while a
trustee of the Company and at the request of the Company, serves or has served
as a director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise from and against any claim or liability to which such person
may become subject or which such person may incur by reason of his or her status
as a present or former trustee or officer of the Company. The Bylaws of the
Company obligate it, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former trustee or officer who
is made party to the proceeding by reason of his service in that capacity or (b)
any individual who, while a trustee or officer of the Company and at the request
of the Company, serves or has served another real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a trustee, director, officer or partner of such real estate
investment trust, corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise and who is made a party to the proceeding by
reason of his service in that capacity, against and claim or liability to which
he may become subject by reason of such status. The Declaration of Trust and
Bylaws also permit the Company to indemnify and advance expenses to any person
who serve as a predecessor of the Company in any of the capacities described
above and to any employee or agent of the Company or a predecessor of the
Company. The Bylaws require the Company to indemnify a trustee or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL permits a corporation to indemnify its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, under the MGCL,
a Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In accordance with the MGCL, the Bylaws of the
Company require it, as a condition to advancing expenses, to obtain (a) a
written affirmation by the director or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the Company as
authorized by the Bylaws and (b) a written statement by or on his behalf to
repay the amount paid or reimbursed by the Company if it shall ultimately be
determined that the standard of conduct was not met.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not Applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS, ALL OF WHICH ARE INCLUDED IN THE PROSPECTUS:
Report of Independent Auditors
Consolidated and Combined Balance Sheets of Equity Office
Properties Trust and Equity Office Predecessors as of
December 31, 1997 and 1996
II-2
258
Consolidated Statement of Operations of Equity Office
Properties Trust for the period from July 11, 1997 to
December 31, 1997, and the Combined Statements of
Operations of Equity Office Predecessors for the period
from January 1, 1997 to July 10, 1997 and the years
ended December 31, 1996 and 1995
Consolidated Statement of Cash Flows of Equity Office
Properties Trust for the period from July 11, 1997 to
December 31, 1997, and the Combined Statements of Cash
Flows of Equity Office Predecessors for the period from
January 1, 1997 to July 10, 1997 and the years ended
December 31, 1996 and 1995
Consolidated Statement of Shareholders' Equity of Equity
Office Properties Trust for the period from July 11,
1997 to December 31, 1997 and the Combined Statements
of Owners' Equity of Equity Office Predecessors for the
period from January 1, 1997 to July 10, 1997 and the
years ended December 31, 1996 and 1995
Notes to Consolidated and Combined Financial Statements
177 BROAD STREET
Report of Independent Auditors
Statement of Revenue and Certain Expenses for the year
ended December 31, 1996
Notes to Statement of Revenue and Certain Expenses
PRESTON COMMONS
Report of Independent Auditors
Statement of Revenue and Certain Expenses for the year
ended December 31, 1996
Notes to Statement of Revenue and Certain Expenses
OAKBROOK TERRACE TOWER
Report of Independent Auditors
Statements of Revenue and Certain Expenses for the three
months ended March 31, 1997 and the year ended December
31, 1996
Notes to Statements of Revenue and Certain Expenses
ONE MARITIME PLAZA
Report of Independent Auditors
Statements of Revenue and Certain Expenses for the three
months ended March 31, 1997 and the year ended December
31, 1996
Notes to Statements of Revenue and Certain Expenses
201 MISSION STREET
Report of Independent Auditors
Statements of Revenue and Certain Expenses for the three
months ended March 31, 1997 and the year ended December
31, 1996
Notes to Statements of Revenue and Certain Expenses
30 N. LASALLE
Report of Independent Auditors
Statements of Revenue and Certain Expenses for the three
months ended March 31, 1997 and the year ended December
31, 1996
Notes to Statements of Revenue and Certain Expenses
COLUMBUS AMERICA PROPERTIES
Report of Independent Auditors
Combined Statements of Revenue and Certain Expenses for
the period from January 1, 1997 to July 31, 1997 and
the year ended December 31, 1996
Notes to Combined Statements of Revenue and Certain
Expenses
II-3
259
PRUDENTIAL PROPERTIES
Report of Independent Auditors
Combined Statements of Revenue and Certain Expenses for
the period from January 1, 1997 to August 31, 1997 and
the year ended December 31, 1996
Notes to Combined Statements of Revenue and Certain
Expenses
550 SOUTH HOPE STREET
Report of Independent Auditors
Statements of Revenue and Certain Expenses for the period
from April 1, 1997 to July 31, 1997 and the year ended
March 31, 1997
Notes to Statements of Revenue and Certain Expenses
ACORN PROPERTIES
Report of Independent Auditors
Combined Statements of Revenue and Certain Expenses for
the period from January 1, 1997 to July 31, 1997 and
the year ended December 31, 1996
Notes to Combined Statements of Revenue and Certain
Expenses
10 & 30 SOUTH WACKER DRIVE
Report of Independent Auditors
Combined Statements of Revenue and Certain Expenses for
the period from January 1, 1997 to July 31, 1997 and
the year ended December 31, 1996
Notes to Combined Statements of Revenue and Certain
Expenses
ONE LAFAYETTE CENTRE
Report of Independent Auditors
Statements of Revenue and Certain Expenses for the period
from January 1, 1997 to July 31, 1997 and the year
ended December 31, 1996
Notes to Statements of Revenue and Certain Expenses
PPM PROPERTIES
Report of Independent Auditors
Combined Statements of Revenue and Certain Expenses for
the period from January 1, 1997 to August 31, 1997 and
the year ended December 31, 1996
Notes to Combined Statements of Revenue and Certain
Expenses
WRIGHT RUNSTAD PROPERTIES
Report of Independent Auditors
Combined Statements of Revenue and Certain Expenses for
the period from October 1, 1996 to August 31, 1997 and
the year ended September 30, 1996
Notes to Combined Statements of Revenue and Certain
Expenses
BEACON PROPERTIES CORPORATION
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and
1995
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 and for the periods May 26,
1994 to December 31, 1994 and January 1, 1994 to May
25, 1994
Consolidated Statements of Partners' Capital for the
period January 1, 1994 to December 31, 1996
Consolidated Statements of Cash Flows for the period
January 1, 1994 to December 31, 1996
Notes to Consolidated Financial Statements
Report of Independent Accountants on Financial Statement
Schedules
Schedule III -- Real Estate and Accumulated Depreciation
as of December 31, 1996
Schedule IV -- Mortgage Loans on Real Estate as of
December 31, 1996
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SCHEDULES
Schedule III -- Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
(B) EXHIBITS
3.1* Amended and Restated Declaration of Trust of the Company, as
amended
3.2** Articles Supplementary of the Company, dated December 15,
1997 and filed with the Maryland State Department of
Assessments and Taxation on December 17, 1997
3.3** Articles Supplementary of the Company, dated February 18,
1998 and filed with the Maryland State Department of
Assessments and Taxation on February 19, 1998
3.4** Bylaws of the Company (Incorporated herein by reference to
Exhibit 3.2 to the Registration Statement of the Company and
the Operating Partnership on Form S-4 (Commission File No.
333-40401))
4.1** Indenture, dated as of September 2, 1997, between the
Operating Partnership and State Street Bank and Trust
Company
4.2** First Supplemental Indenture, dated as of February 9, 1998,
between the Operating Partnership and State Street Bank and
Trust Company
4.3** $200,000,000 6.375% Note due 2003. A $100,000,000 6.375%
Note due 2003, identical in all material respects other than
principal amount to the Note filed as Exhibit 4.3, has not
been filed.
4.4** $200,000,000 6.625% Note due 2005. Another $200,000,000
6.625% Note due 2005, identical in all material respects to
the Note filed as Exhibit 4.4, has not been filed.
4.5** $200,000,000 6.750% Note due 2008. A $100,000,000 6.750%
Note due 2008, identical in all material respects other than
principal amount to the Note filed as Exhibit 4.5, has not
been filed.
4.6** $200,000,000 7.250% Note due 2018. A $50,000,000 7.250% Note
due 2018, identical in all material respects other than
principal amount to the Note filed as Exhibit 4.6, has not
been filed.
4.7** $200,000,000 6.376% Mandatory Par Put Remarketed
Securities(sm) due 2012. A $50,000,000 6.376% Mandatory Par
Put Remarketed Securities(sm) due 2012, identical in all
material respects to the note filed as Exhibit 4.7, has not
been filed.
4.8** $30,000,000 7.24% Senior Note due 2004
4.9** $50,000,000 7.36% Senior Note due 2005
4.10** $50,000,000 7.44% Senior Note due 2006
4.11** $50,000,000 7.41% Senior Note due 2007
4.12** Registration Rights Agreement, dated as of February 12,
1998, among the Operating Partnership, and (i) in the case
of the 6.375% Notes due 2003, the 6.625% Notes due 2005 and
the 7.250% Notes due 2018, Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"), Lehman Brothers Inc.
("Lehman"), J.P. Morgan Securities Inc. ("J.P. Morgan"),
Salomon Brothers Inc ("Salomon") and UBS Securities LLC,
(ii) in the case of the 6.750% Notes due 2008, Merrill
Lynch, Lehman, J.P. Morgan and BancAmerica Robertson
Stephens and (iii) in the case of the 6.376% Mandatory Par
Put Remarketed Securities(sm) due February 15, 2012, Merrill
Lynch
4.13** Registration Rights Agreement, dated as of February 13,
1998, between the Company and Lehman
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261
5.1*** Opinion of Hogan & Hartson L.L.P. regarding the legality of
the securities being registered.
8.1*** Opinion of Hogan & Hartson L.L.P. regarding certain tax
matters.
10.1** Agreement of Limited Partnership of the Operating
Partnership, as amended
10.2** Registration Rights Agreement, dated as of July 11, 1997,
among the Company and the persons named therein
10.3** Noncompetition Agreement between the Company and Samuel Zell
10.4** Contribution Agreement, dated as of April 30, 1997, among
the Operating Partnership and the persons named therein
10.5** Merger Agreement, dated as of April 30, 1997, among the
Company and the persons named therein
10.6** Each member of the Company's Board of Trustees and each
Executive Officer of the Company has entered into an
Indemnification Agreement with the Company. These
Indemnification Agreements are identical in all material
respects. The schedule below sets forth the terms of each
Indemnification Agreement not filed which differ from the
copy of the example Indemnification Agreement (between the
Company and Samuel Zell, dated as of October 9, 1996), which
is filed as Exhibit 10.6 hereto:
NAME DATED AS OF
---- -----------
Timothy H. Callahan......................................... 10/9/96
Richard D. Kincaid.......................................... 3/14/97
Sheli Z. Rosenberg.......................................... 3/12/97
Thomas E. Dobrowski......................................... 7/11/97
James D. Harper, Jr. ....................................... 7/11/97
Peter Linneman.............................................. 7/11/97
Jerry M. Reinsdorf.......................................... 7/11/97
William W. Goodyear......................................... 7/11/97
David K. McKown............................................. 7/11/97
H. Jon Runstad.............................................. 12/18/97
Edwin N. Sidman............................................. 3/1/98
Michael A. Steele........................................... 10/9/96
Stanley M. Stevens.......................................... 10/9/96
Jeffrey L. Johnson.......................................... 3/14/97
10.7** Agreement and Plan of Merger, dated September 15, 1997, as
amended, among the Company, the Operating Partnership,
Beacon and Beacon Partnership (incorporated herein by
reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated September 15, 1997)
12.1** Statement of Computation of Ratios
21.1* List of Subsidiaries of the Company
23.1 Consent of Hogan & Hartson L.L.P. (included as part of
Exhibit 5.1).
23.2 Consent of Hogan & Hartson L.L.P. (included as part of
Exhibit 8.1).
23.3 Consent of Ernst & Young L.L.P.
23.4 Consent of Coopers & Lybrand LLP
24.1 Power of Attorney (included in signature page)
- -------------------------
* Incorporated herein by reference to the same-numbered exhibit to the
Company's Registration Statement on Form S-11 (Commission File No.
333-26629).
** Incorporated herein by reference to the same-numbered exhibit to the
Company's Annual Report on Form 10-K, as amended, for the fiscal year ended
December 31, 1997.
*** To be filed by Amendment.
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262
ITEM 36. UNDERTAKINGS
The Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended (the "Act"), the information omitted from the form of
Prospectus filed as part of the Registration Statement in reliance upon
rule 430A and contained in the form of Prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed
to be part of the Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus 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.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court or appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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263
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable ground to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Chicago, Illinois on this 1st day of May, 1998.
EQUITY OFFICE PROPERTIES TRUST
/s/ TIMOTHY H. CALLAHAN
By:
--------------------------------------
Timothy H. Callahan
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated as of the 1st day of May, 1998.
Each person whose signature appears below hereby constitutes and appoints
Samuel Zell and Timothy H. Callahan, and each of them, as his attorney-in-fact
and agent, with full power of substitution and resubstitution for him in any and
all capacities, to sign any or all amendments or post-effective amendments to
this Registration Statement, or any Registration Statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, and to file the same, with exhibits thereto and other documents in
connection therewith or in connection with the registration of the Common Shares
under the Securities Act of 1934, as amended, with the Securities and Exchange
Commission, granting unto such attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
in connection with such matters and hereby ratifying and confirming all that
such attorney-in-fact and agent or his substitutes may do or cause to be done by
virtue hereof.
SIGNATURE TITLE
--------- -----
/s/ TIMOTHY H. CALLAHAN President, Chief Executive Officer and Trustee
- ---------------------------------------------
Timothy H. Callahan
/s/ RICHARD KINCAID Chief Financial Officer (principal financial
- --------------------------------------------- officer and principal accounting officer)
Richard Kincaid
Chairman of the Board of Trustees
- ---------------------------------------------
Samuel Zell
/s/ SHELI Z. ROSENBERG Trustee
- ---------------------------------------------
Sheli Z. Rosenberg
/s/ THOMAS E. DOBROWSKI Trustee
- ---------------------------------------------
Thomas E. Dobrowski
/s/ JAMES D. HARPER, JR. Trustee
- ---------------------------------------------
James D. Harper, Jr.
/s/ PETER LINNEMAN Trustee
- ---------------------------------------------
Peter Linneman
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264
SIGNATURE TITLE
--------- -----
/s/ JERRY M. REINSDORF Trustee
- ---------------------------------------------
Jerry M. Reinsdorf
/s/ WILLIAM M. GOODYEAR Trustee
- ---------------------------------------------
William M. Goodyear
/s/ DAVID K. MCKOWN Trustee
- ---------------------------------------------
David K. McKown
/s/ H. JON RUNSTAD Trustee
- ---------------------------------------------
H. Jon Runstad
/s/ EDWIN N. SIDMAN Trustee
- ---------------------------------------------
Edwin N. Sidman
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EXHIBIT INDEX
EXHIBIT NO. PAGE NO.
- ----------- --------
3.1* Amended and Restated Declaration of Trust of the Company, as
amended
3.2** Articles Supplementary of the Company, dated December 15,
1997 and filed with the Maryland State Department of
Assessments and Taxation on December 17, 1997
3.3** Articles Supplementary of the Company, dated February 18,
1998 and filed with the Maryland State Department of
Assessments and Taxation on February 19, 1998
3.4** Bylaws of the Company (Incorporated herein by reference to
Exhibit 3.2 to the Registration Statement of the Company and
the Operating Partnership on Form S-4 (Commission File No.
333-40401))
4.1** Indenture, dated as of September 2, 1997, between the
Operating Partnership and State Street Bank and Trust
Company
4.2** First Supplemental Indenture, dated as of February 9, 1998,
between the Operating Partnership and State Street Bank and
Trust Company
4.3** $200,000,000 6.375% Note due 2003. A $100,000,000 6.375%
Note due 2003, identical in all material respects other than
principal amount to the Note filed as Exhibit 4.3, has not
been filed.
4.4** $200,000,000 6.625% Note due 2005. Another $200,000,000
6.625% Note due 2005, identical in all material respects to
the Note filed as Exhibit 4.4, has not been filed.
4.5** $200,000,000 6.750% Note due 2008. A $100,000,000 6.750%
Note due 2008, identical in all material respects other than
principal amount to the Note filed as Exhibit 4.5, has not
been filed.
4.6** $200,000,000 7.250% Note due 2018. A $50,000,000 7.250% Note
due 2018, identical in all material respects other than
principal amount to the Note filed as Exhibit 4.6, has not
been filed.
4.7** $200,000,000 6.376% Mandatory Par Put Remarketed
Securities(sm) due 2012. A $50,000,000 6.376% Mandatory Par
Put Remarketed Securities(sm) due 2012, identical in all
material respects to the note filed as Exhibit 4.7, has not
been filed.
4.8** $30,000,000 7.24% Senior Note due 2004
4.9** $50,000,000 7.36% Senior Note due 2005
4.10** $50,000,000 7.44% Senior Note due 2006
4.11** $50,000,000 7.41% Senior Note due 2007
4.12** Registration Rights Agreement, dated as of February 12,
1998, among the Operating Partnership, and (i) in the case
of the 6.375% Notes due 2003, the 6.625% Notes due 2005 and
the 7.250% Notes due 2018, Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"), Lehman Brothers Inc.
("Lehman"), J.P. Morgan Securities Inc. ("J.P. Morgan"),
Salomon Brothers Inc ("Salomon") and UBS Securities LLC,
(ii) in the case of the 6.750% Notes due 2008, Merrill
Lynch, Lehman, J.P. Morgan and BancAmerica Robertson
Stephens and (iii) in the case of the 6.376% Mandatory Par
Put Remarketed Securities(sm) due February 15, 2012, Merrill
Lynch
4.13** Registration Rights Agreement, dated as of February 13,
1998, between the Company and Lehman
5.1*** Opinion of Hogan & Hartson L.L.P. regarding the legality of
the securities being registered.
8.1*** Opinion of Hogan & Hartson L.L.P. regarding certain tax
matters.
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266
EXHIBIT NO. PAGE NO.
- ----------- --------
10.1** Agreement of Limited Partnership of the Operating
Partnership, as amended
10.2** Registration Rights Agreement, dated as of July 11, 1997,
among the Company and the persons named therein
10.3** Noncompetition Agreement between the Company and Samuel Zell
10.4** Contribution Agreement, dated as of April 30, 1997, among
the Operating Partnership and the persons named therein
10.5** Merger Agreement, dated as of April 30, 1997, among the
Company and the persons named therein
10.6** Each member of the Company's Board of Trustees and each
Executive Officer of the Company has entered into an
Indemnification Agreement with the Company. These
Indemnification Agreements are identical in all material
respects. The schedule below sets forth the terms of each
Indemnification Agreement not filed which differ from the
copy of the example Indemnification Agreement (between the
Company and Samuel Zell, dated as of October 9, 1996), which
is filed as Exhibit 10.6 hereto:
NAME DATED AS OF
---- -----------
Timothy H. Callahan......................................... 10/9/96
Richard D. Kincaid.......................................... 3/14/97
Sheli Z. Rosenberg.......................................... 3/12/97
Thomas E. Dobrowski......................................... 7/11/97
James D. Harper, Jr. ....................................... 7/11/97
Peter Linneman.............................................. 7/11/97
Jerry M. Reinsdorf.......................................... 7/11/97
William W. Goodyear......................................... 7/11/97
David K. McKown............................................. 7/11/97
H. Jon Runstad.............................................. 12/18/97
Edwin N. Sidman............................................. 3/1/98
Michael A. Steele........................................... 10/9/96
Stanley M. Stevens.......................................... 10/9/96
Jeffrey L. Johnson.......................................... 3/14/97
10.7** Agreement and Plan of Merger, dated September 15, 1997, as
amended, among the Company, the Operating Partnership,
Beacon and Beacon Partnership (incorporated herein by
reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated September 15, 1997)
12.1** Statement of Computation of Ratios
21.1* List of Subsidiaries of the Company
23.1 Consent of Hogan & Hartson L.L.P. (included as part of
Exhibit 5.1).
23.2 Consent of Hogan & Hartson L.L.P. (included as part of
Exhibit 8.1).
23.3 Consent of Ernst & Young L.L.P.
23.4 Consent of Coopers & Lybrand LLP
24.1 Power of Attorney (included in signature page)
- -------------------------
* Incorporated herein by reference to the same-numbered exhibit to the
Company's Registration Statement on Form S-11 (Commission File No.
333-26629).
** Incorporated herein by reference to the same-numbered exhibit to the
Company's Annual Report on Form 10-K, as amended, for the fiscal year ended
December 31, 1997.
*** To be filed by Amendment.
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