EXHIBIT 99
UNLESS OTHERWISE INDICATED, WHEN USED HEREIN, THE TERMS "WE" AND "US"
REFER TO EQUITY RESIDENTIAL PROPERTIES TRUST, A MARYLAND REAL ESTATE
INVESTMENT TRUST, AND ITS SUBSIDIARIES, INCLUDING ERP OPERATING LIMITED
PARTNERSHIP, AN ILLINOIS LIMITED PARTNERSHIP.
RISK FACTORS
Set forth below are the risks that we believe are important to investors
who purchase or own our common shares of beneficial interest or preferred
shares of beneficial interest (which we refer to collectively as "Shares") or
units of limited partnership interest ("Units") of ERP Operating Limited
Partnership, our operating partnership, which are redeemable on a one-for-one
basis for common shares or their cash equivalent. In this section, we refer
to the Shares and the Units together as our "securities," and the investors
who own Shares and/or Units as our "security holders."
DEBT FINANCING AND PREFERRED SHARES COULD ADVERSELY AFFECT OUR PERFORMANCE
GENERAL
As of December 31, 1998, our multifamily properties were subject to
approximately $2.4 billion of mortgage indebtedness and our total debt
equaled approximately $4.7 billion. Of our total debt outstanding, $840
million (including the balance of $290 million on our $620 million unsecured
lines of credit) was floating rate debt, which included $685 million issued
at tax exempt rates. In addition to debt, we have issued preferred shares of
beneficial interest and depositary shares. Our use of debt and preferred
equity financing creates certain risks, including the following.
SCHEDULED DEBT PAYMENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
In the future, our cash flow could be insufficient to pay distributions
on our securities at expected levels and to meet required payments of
principal and interest. We may not be able to refinance existing debt (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. 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. As a result, we may be
forced to postpone capital expenditures necessary for the maintenance of our
properties and may have to dispose of one or more properties on terms that
would otherwise be unacceptable to us.
FINANCIAL COVENANTS COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL
CONDITION
If a property we own is mortgaged to secure payment of indebtedness and
we are unable to meet the mortgage payments, the holder of the mortgage could
foreclose on the property, resulting in loss of income and asset value.
Foreclosure on mortgaged properties or an inability to refinance existing
indebtedness would likely have a negative impact on our financial condition
and results of operations. A foreclosure could also result in our
recognition of taxable income without our actually receiving cash proceeds
from the disposition of the
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property with which to pay the tax. This would adversely affect our cash
flow and would make it more difficult for us to meet our distribution
requirements as a real estate investment trust (a "REIT").
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. The
indentures under which a substantial portion of our debt was issued contain
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 (including acquisition financing), sell
all or substantially all of our assets and engage in mergers, consolidations
and certain acquisitions. Accordingly, in the event that we are unable to
raise additional equity or borrow money because of these restrictions, our
ability to acquire additional properties may be limited. If we are unable to
acquire additional properties, our ability to increase the distributions to
security holders, as we have done in the past, will be limited to
management's ability to increase funds from operations, and thereby cash
available for distributions, from the existing properties in our portfolio at
such time.
Some of the properties were financed with tax-exempt bonds that contain
certain restrictive covenants or deed restrictions. We have retained an
independent outside consultant to monitor compliance with the restrictive
covenants and deed restrictions that affect these properties. If these bond
compliance requirements require us to lower our rental rates to attract low
or moderate income tenants, or eligible/qualified tenants, then our income
from these properties may be limited.
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 and Units)
was approximately 41% as of December 31, 1998. We have a policy of incurring
indebtedness for borrowed money only through ERP Operating Limited
Partnership and its subsidiaries and only if upon such incurrence our debt to
market capitalization ratio would be approximately 50% or less. Our degree
of leverage could have important consequences to security holders. For
example, the degree of leverage could affect our ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, development or other general corporate purposes, making us more
vulnerable to a downturn in business or the economy generally.
RISING INTEREST RATES COULD ADVERSELY AFFECT CASH FLOW
Advances under our credit facilities bear interest at variable rates
based upon one, two, three or six month LIBOR, plus a certain rate based upon
our credit rating. Certain of our senior unsecured debt instruments also,
from time to time, bear interest at floating rates. We may also borrow
additional money with variable interest rates in the future. Increases in
interest rates would increase our interest expenses under these debt
instruments and would increase the costs of refinancing existing indebtedness
and of issuing new debt. Accordingly, higher interest rates would adversely
affect cash flow and our ability to service our debt and to make
distributions to security holders.
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CONTROL AND INFLUENCE BY SIGNIFICANT SHAREHOLDERS COULD BE EXERCISED IN A
MANNER ADVERSE TO OTHER SHAREHOLDERS
GENERAL
As of December 31, 1998, (i) Samuel Zell and certain of the current
holders of Units issued to affiliates of Mr. Zell, who contributed 33
properties to us at the time of our initial public offering, owned in the
aggregate approximately 3.69% of our common shares (Mr. Zell and these
affiliates are described herein as the "Zell Original Owners"); (ii) certain
entities controlled by Starwood Capital Partners L.P. ("Starwood") and its
affiliates, who contributed 23 properties to us at the time of our initial
public offering, owned approximately 0.24% of our common shares; and (iii)
certain of our officers, employees, trustees and consultants, some of whom
are affiliated with Mr. Zell, owned approximately 4.31% of our common shares.
These percentages assume all options are exercised for common shares and all
Units are converted to common shares. In addition, the consent of certain
affiliates of Mr. Zell and Starwood is required for certain amendments to the
Fifth Amended and Restated ERP Operating Limited Partnership Agreement of
Limited Partnership (the "Partnership Agreement"). As a result of their
security ownership and rights concerning amendments to the Partnership
Agreement, Mr. Zell and the Starwood owners may have substantial influence
over the Company. Although these security holders have not agreed to act
together on any matter, they would be in a position to exercise even more
influence over the Company's affairs if they were to act together in the
future. This influence might be exercised in a manner that is inconsistent
with the interests of other security holders.
MR. ZELL AND OTHERS ARE EXEMPT FROM THE 5% OWNERSHIP LIMIT GENERALLY
APPLICABLE TO SECURITIES HOLDERS
In order to maintain its qualification as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"), not more than 50% of the value
of the outstanding Shares may be owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain entities). To
assure compliance with this test, our Declaration of Trust restricts the
ownership of more than 5% of the lesser of the number or value of the
outstanding Shares by any single security holder, subject to certain
exceptions. These restrictions do not apply to the ownership of common
shares that may be acquired by the holders of Units issued to the Zell
Original Owners and the Starwood owners. Additionally, our Declaration of
Trust exempts any transferees of such common shares from the 5% ownership
limit, provided such transfers do not result in an increased concentration in
the ownership.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND CAN 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 or third parties for property damage and for
investigation and clean-up costs incurred by such parties in connection with
the contamination. These 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
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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. These 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.
These 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.
All of our properties have been the subject of a Phase I, and in certain
cases a supplemental, environmental assessment completed by qualified
independent environmental consultant companies. Environmental assessments
were obtained prior to our acquisition of each of our properties. These
environmental assessments have not revealed, nor are we aware of, any
environmental liability that our management believes would have a material
adverse effect on our business, results of operations, financial condition
or liquidity.
We cannot assure you that existing environmental assessments of our
properties reveal all environmental liabilities, that any prior owner of any
of our properties did not create a material environmental condition not known
to us, or that a material environmental condition does not otherwise exist as
to any one or more of our properties.
OUR PERFORMANCE AND SHARE VALUE ARE SUBJECT TO RISKS ASSOCIATED WITH THE REAL
ESTATE INDUSTRY
GENERAL
Real property investments are subject to varying degrees of risk and are
relatively illiquid. 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 multifamily properties or a reduction in demand for our
multifamily properties, the attractiveness of our properties to tenants,
competition from other available multifamily property owners and changes in
market rental rates. 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.
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 not be able to relet their space. Even if the tenants do renew or we can
relet the space, the terms of renewal or reletting may be less favorable
than current lease terms. If we are unable to promptly renew the leases or
relet the space, or if the rental rates upon renewal or reletting are
significantly lower than expected rates, then our results of operations and
financial condition will
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be adversely affected. Consequently, our cash flow and ability to service
debt and make distributions to security holders would be reduced.
NEW ACQUISITIONS OR DEVELOPMENTS MAY FAIL TO PERFORM AS EXPECTED AND
COMPETITION FOR ACQUISITIONS MAY RESULT IN INCREASED PRICES FOR PROPERTIES
We intend to continue to actively acquire or develop multifamily
properties. Newly acquired or developed 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 or to
develop a property. Additionally, we expect other major real estate
investors with significant capital will compete with us for attractive
investment opportunities. This competition has increased prices for
multifamily properties. We may not be in a position or have the opportunity
in the future to make suitable property acquisitions on favorable terms.
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 and ability
to make distributions to our security holders.
CHANGES IN LAWS COULD AFFECT OUR BUSINESS
We are generally not able to pass through to our tenants under existing
leases increases in real estate taxes, income taxes and service or other
taxes. Consequently, any such increases may adversely affect our financial
condition and limit our ability to make distributions to our security
holders. Similarly, changes that increase our potential liability under
environmental laws or our expenditures on environmental compliance would
adversely affect our cash flow and ability to make distributions on our
securities.
SHAREHOLDERS' ABILITY TO EFFECT CHANGES IN CONTROL OF THE COMPANY IS LIMITED
PROVISIONS OF OUR DECLARATION OF TRUST AND BYLAWS COULD INHIBIT CHANGES IN
CONTROL
Certain provisions of our Declaration of Trust and Bylaws may delay or
prevent a change in control of the Company or other transactions that could
provide the security holders with a premium over the then-prevailing market
price of their securities or which might otherwise be in the best interest of
our security holders. These include a staggered Board of Trustees and the 5%
Ownership Limit described below. See "--We Have a Share Ownership Limit for
REIT Tax Purposes." Also, any future series of preferred shares of
beneficial interest may have certain voting provisions that could delay or
prevent a change of control or other transactions that might otherwise be in
the interest of our security holders.
WE HAVE A SHARE OWNERSHIP LIMIT FOR REIT TAX PURPOSES
To remain qualified as a REIT for federal income tax purposes, not more
than 50% in value of our outstanding Shares may be owned, directly or
indirectly, by five or fewer individuals at any time during the last half of
any year. To facilitate maintenance of our REIT qualification, our
Declaration of Trust, subject to certain exceptions, prohibits ownership by
any single
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shareholder of more than 5% of the lesser of the number or value of the
outstanding class of common or preferred shares. See "--Control and
Influence by Significant Shareholders--Mr. Zell and Others are Exempt from
the 5% Ownership Limit Generally Applicable to Securities Holders." We refer
to this restriction as the "Ownership Limit." Absent any exemption or
waiver, securities acquired or held in violation of the Ownership Limit will
be transferred to a trust for the exclusive benefit of a designated
charitable beneficiary, and the security holder's rights to distributions and
to vote would terminate. A transfer of Shares may be void if it causes a
person to violate the Ownership Limit. The Ownership Limit could delay or
prevent a change in control and, therefore, could adversely affect our
security holders' ability to realize a premium over the then-prevailing
market price for their Shares.
OUR PREFERRED SHARES OF BENEFICIAL INTEREST MAY AFFECT CHANGES IN CONTROL
Our Declaration of Trust authorizes the Board of Trustees to issue up to
100 million preferred shares of beneficial interest, and to establish the
preferences and rights (including the right to vote and the right to convert
into common shares) of any preferred shares issued. The Board of Trustees
may use its powers to issue preferred shares and to set the terms of such
securities to delay or prevent a change in control of the Company, even if a
change in control were in the interest of security holders. As of
December 31, 1998, 55,422,951 preferred shares were issued and outstanding.
INAPPLICABILITY OF MARYLAND LAW LIMITING CERTAIN CHANGES IN CONTROL
Certain provisions of Maryland law applicable to real estate investment
trusts prohibit "business combinations" (including certain issuances of
equity securities) with any person who beneficially owns ten percent or more
of the voting power of outstanding securities, or with an affiliate 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 trust's
outstanding voting securities (an "Interested Shareholder"), or with an
affiliate of an Interested Shareholder. These prohibitions last for five
years after the most recent date on which the Interested Shareholder became
an Interested Shareholder. After the five-year period, a business
combination with an Interested Shareholder must be approved by two
super-majority shareholder votes unless, among other conditions, the trust's
holders of common shares receive a minimum price 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 Maryland
law, however, the Board of Trustees of the Company has opted out of these
restrictions with respect to any business combination involving the Zell
Original Owners and persons acting in concert with any of the Zell Original
Owners. Consequently, the five-year prohibition and the super-majority vote
requirements will not apply to a business combination involving us and any of
them. Such business combinations may not be in the best interest of our
security holders.
OUR SUCCESS AS A REIT IS DEPENDENT ON COMPLIANCE WITH FEDERAL INCOME TAX
REQUIREMENTS
OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE SERIOUS ADVERSE CONSEQUENCES TO
OUR SECURITY HOLDERS
We believe that we have qualified for taxation as a REIT for federal income
tax purposes since our taxable year ended December 31, 1992. We plan to
continue to meet the
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requirements for taxation as a REIT. Many of these requirements, however, are
highly technical and complex. We cannot, therefore, guarantee that we have
qualified or will qualify in the future as a REIT. The determination that we
are a REIT requires an analysis of various factual matters 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 sources that are itemized in the REIT tax
laws. We are also required to distribute to security holders at least 95% of
our REIT taxable income excluding capital gains. The fact that we hold our
assets through ERP Operating Limited 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 us to remain qualified as a REIT. We do not believe, however, that any
pending or proposed tax law changes would jeopardize our REIT status.
If we fail to qualify as a REIT, we would be subject to federal income
tax at regular corporate rates. Also, unless the IRS granted us relief under
certain statutory provisions, we would remain disqualified as a REIT for four
years following the year we first failed to qualify. If we fail to qualify
as a REIT, we would have to pay significant income taxes. We, therefore,
would have less money available for investments or for distributions to
security holders. This would likely have a significant adverse affect on the
value of our securities. In addition, we would no longer be required to make
any distributions to security holders.
WE COULD BE DISQUALIFIED AS A REIT OR HAVE TO PAY TAXES IF OUR MERGER
PARTNERS DID NOT QUALIFY AS REITS
If any of our recent merger partners had failed to qualify as a REIT
throughout the duration of its existence, then it might have had
undistributed "C corporation earnings and profits" at the time of its merger
with us. If that were the case and we did not distribute those earnings and
profits prior to the end of the year in which the merger took place, we might
not qualify as a REIT. We believe that each of our merger partners qualified
as a REIT and that, in any event, none of them had any undistributed "C
corporation earnings and profits" at the time of its merger with us. If any
of our merger partners failed to qualify as a REIT, an additional concern
would be that it would have recognized taxable gain at the time it was merged
with us. We would be liable for the tax on such gain. In this event, we
would have to pay corporate income tax on any gain existing at the time of
the applicable merger on assets acquired in the merger if the assets are sold
within ten years of the merger. Finally, we could be precluded from electing
REIT status for up to four years after the year in which the predecessor
entity failed to qualify for REIT status.
OTHER TAX LIABILITIES
Even if the we qualify as REIT, we will be subject to certain federal,
state and local taxes on our income and property. In addition, our
third-party management operations, which are conducted through subsidiaries,
generally will be subject to federal income tax at regular corporate rates.
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WE DEPEND ON OUR KEY PERSONNEL
We depend on the efforts of our executive officers, particularly Samuel
Zell and Douglas Crocker II. If they resign, our operations could be
temporarily adversely effected. Neither Mr. Crocker nor Mr. Zell has entered
into an employment agreement with us.
COMPLIANCE WITH REIT DISTRIBUTION REQUIREMENTS MAY AFFECT OUR FINANCIAL
CONDITION
DISTRIBUTION REQUIREMENTS MAY INCREASE THE INDEBTEDNESS OF THE COMPANY
We may be required from time to time, under certain circumstances, to
accrue as income for tax purposes interest and rent earned but not yet
received. In such event, or upon our repayment of principal on debt, we could
have taxable income without sufficient cash to enable us to meet the
distribution requirements of a REIT. Accordingly, we could be required to
borrow funds or liquidate investments on adverse terms in order to meet these
distribution requirements.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL
Because of our annual REIT distribution requirements, it is not likely
that we will be able to fund all future capital needs, including for
acquisitions, from income generated by operations. We therefore will have to
rely on third-party sources of capital, which may or may not be available on
favorable terms or at all. Our access to third-party sources of capital
depends on a number of things, 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 security
holders' interests, and additional debt financing may substantially increase
our leverage.
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