Filed Pursuant to Rule 424(b)(5)
Registration No. 333-38071
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 22, 2002)
2,800,000 SHARES
(LOGO)
6 3/4% SERIES A CONVERTIBLE CUMULATIVE PREFERRED SHARES
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
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We are offering and selling 2,800,000 6 3/4% Series A Convertible
Cumulative Preferred Shares to Cohen & Steers Capital Management, Inc., on
behalf of itself and as investment adviser to certain client accounts with this
prospectus supplement.
Distributions on the Series A preferred shares offered hereby are
cumulative from February 16, 2002 and are payable quarterly in arrears on or
about the 15th day of February, May, August and November of each year,
commencing on May 15, 2002, at the rate of 6 3/4% of the liquidation preference
per annum (equivalent to $1.6875 per annum per Series A preferred share).
Series A preferred shares are convertible at any time, in whole or in part,
at the option of the holders, into our common shares of beneficial interest at a
conversion price of $40.86 per common share (equivalent to a conversion rate of
..6119 common shares per Series A preferred share), subject to adjustment in
certain circumstances.
The Series A preferred shares generally are not redeemable prior to
February 18, 2003. On and after February 18, 2003, the Series A preferred shares
will be redeemable, in whole or in part, at our option, at a redemption price of
$25.00 per share, plus accrued and unpaid distributions, if any. The Series A
preferred shares have no stated maturity date and will not be entitled to the
benefit of any sinking fund or mandatory redemption provisions.
Our Series A preferred shares are listed on the New York Stock Exchange
under the symbol "CEIPrA." The last reported sales price on April 19, 2001 was
$20.60 per share.
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INVESTING IN OUR SERIES A PREFERRED SHARES INVOLVES RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE S-6 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE 3 OF
THE ACCOMPANYING PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
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Cohen & Steers will purchase our Series A preferred shares at a price of
$18.00 per share, resulting in $49,092,000 of net proceeds to us after we pay
placement agent fees and other estimated expenses of this offering.
The Series A preferred shares are expected to be delivered on or about
April 26, 2002.
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The date of this prospectus supplement is April 22, 2002.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. IF
ANYONE PROVIDES YOU WITH DIFFERENT OR ADDITIONAL INFORMATION, YOU SHOULD NOT
RELY ON IT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE
SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATES
OF THIS DOCUMENT.
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
Cautionary Statement Regarding Forward-Looking
Information............................................... S-1
Crescent Real Estate Equities Company....................... S-2
The Offering................................................ S-5
Risk Factors................................................ S-6
Use of Proceeds............................................. S-7
Federal Income Tax Considerations........................... S-7
Plan of Distribution........................................ S-23
Legal Matters............................................... S-23
Experts..................................................... S-23
PROSPECTUS
About this Prospectus....................................... 1
Cautionary Statements Concerning Forward-Looking
Statements................................................ 1
Crescent Real Estate Equities Company....................... 2
Risk Factors................................................ 3
Use of Proceeds............................................. 13
Ratio of Earnings to Fixed Charges and Preferred Share
Dividends................................................. 13
Description of Common Shares................................ 13
Description of Common Share Warrants........................ 16
Description of Preferred Shares............................. 17
Certain Provisions of Our Declaration of Trust, Bylaws and
Texas Law................................................. 23
ERISA Considerations........................................ 27
Plan of Distribution........................................ 29
Legal Matters............................................... 29
Experts..................................................... 29
Where You Can Find More Information......................... 30
References to "we," "us" or "our" refer to Crescent Real Estate Equities
Company and, unless the context otherwise requires, Crescent Real Estate
Equities Limited Partnership, which we refer to as our Operating Partnership.
References to "Crescent" refer to Crescent Real Estate Equities Company. We
conduct our business and operations through the Operating Partnership and its
subsidiaries. The term "you" refers to a prospective investor. The sole general
partner of the Operating Partnership is Crescent Real Estate Equities, Ltd., a
wholly owned subsidiary of Crescent Real Estate Equities Company, which we refer
to as the General Partner.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Our prospectus supplement and the accompanying prospectus, including our
documents incorporated herein by reference, contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Also, documents
which we subsequently file with the Securities and Exchange Commission, which is
also referred to in this prospectus supplement as the SEC or the Commission, and
are incorporated herein by reference will contain forward-looking statements.
When we refer to forward-looking statements or information, sometimes we use
words such as "may," "will," "could," "should," "plan," "intend," "expect,"
"believe," "estimate," "anticipate" and "continue." In particular, the risk
factors included or incorporated by reference in this prospectus supplement and
accompanying prospectus describe forward-looking information. The risk factors
address material risks known to us but are not all-inclusive, particularly with
respect to possible future events. Other parts of, or documents incorporated by
reference into, our prospectus supplement and accompanying prospectus may also
include forward-looking information. Many events can occur that would cause our
actual results to be different than those described. These factors include:
- Our inability, as the most significant secured and unsecured creditor of
Crescent Operating, Inc., to obtain the confirmation of a proposed
prepackaged bankruptcy plan of Crescent Operating that would bind all
creditors and Crescent Operating shareholders;
- Our inability to successfully integrate the lessee interests in the
resort/hotel properties and the voting interests in the residential
development corporations and related entities that we acquired from
Crescent Operating in transfers made in lieu of foreclosure, into our
current business and operations;
- Our inability to distribute to our common shareholders shares of a new
entity to purchase Crescent Operating's interest in AmeriCold Logistics,
LLC, the tenant of our temperature-controlled logistics properties;
- Further deterioration or continued underperformance in the
resort/business class hotel markets or in the market for residential land
or luxury residences, which include single-family homes, townhomes and
condominiums, or in the economy in general;
- Our ability, at our office properties, to timely lease unoccupied square
footage and timely re-lease occupied square footage upon expiration on
favorable terms, which may be adversely affected by changes in real
estate conditions (including rental rates and competition from other
properties and new development of competing properties or a general
downturn in the economy);
- Financing risks, such as the ability to generate revenue sufficient to
service and repay existing or additional debt, the ability to meet
applicable debt covenants, our ability to fund the share repurchase
program, increases in debt service associated with increased debt and
with variable-rate debt, and the ability to consummate financings and
refinancings on favorable terms and within any applicable time frames;
- Continued adverse conditions in the temperature-controlled logistics
business (including both industry-specific conditions and a general
downtown in the economy) which may further jeopardize the ability of
AmeriCold Logistics to pay rent;
- Adverse changes in the financial condition of existing tenants;
- The concentration of a significant percentage of our assets in Texas;
S-1
- Our ability to find acquisition and development opportunities which meet
our investment strategy;
- The existence of complex regulations relating to our status as a real
estate investment trust, or REIT, the effect of future changes in REIT
requirements as a result of new legislation and the adverse consequences
of the failure to qualify as a REIT; and
- Other risks detailed from time to time in our filings with the SEC.
Given these uncertainties, readers are cautioned not to place undue
reliance on these forward-looking statements. We also make no promise to update
any of the forward-looking statements, or to publicly release the results if we
revise any of them. You should carefully review the risks and the risk factors
described under "Risk Factors" on Page S-6 of this prospectus supplement and on
Page 3 of the accompanying prospectus, as well as the other information in this
prospectus supplement and the accompanying prospectus before buying our Series A
preferred shares.
CRESCENT REAL ESTATE EQUITIES COMPANY
GENERAL
We operate as a REIT for federal income tax purposes. We provide
management, leasing and development services for some of our properties and
conduct all of our business through our Operating Partnership and its
subsidiaries. We are structured to facilitate and maintain our qualification as
a REIT. This structure permits persons contributing properties (or interests in
properties) to us to defer some or all of the tax liability that they otherwise
might have incurred in connection with the sale of assets to us.
Our principal executive offices are located at 777 Main Street, Suite 2100,
Fort Worth, Texas 76102 and our telephone number is (817) 321-2100. Our Web site
address is www.cei-crescent.com. The information contained on our Web site is
not a part of this prospectus supplement or the accompanying prospectus.
As of December 31, 2001, our assets and operations were composed of four
investment segments:
- Office Segment;
- Resort/Hotel Segment;
- Residential Development Segment; and
- Temperature-Controlled Logistics Segment.
Within these segments, we owned or had an interest in the following real
estate assets as of December 31, 2001:
- the OFFICE SEGMENT consisted of 74 office properties located in 26
metropolitan submarkets in six states with an aggregate of approximately
28.0 million net rentable square feet;
- the RESORT/HOTEL SEGMENT consisted of five luxury and destination fitness
resorts and spas with a total of 1,028 rooms/guest nights and four
upscale business-class hotel properties with a total of 1,769 rooms;
- the RESIDENTIAL DEVELOPMENT SEGMENT consisted of our ownership of real
estate mortgages and non-voting common stock representing interests
ranging from 90% to 95% in five unconsolidated residential development
corporations, which in turn, through joint venture or partnership
arrangements, owned 21 upscale residential development properties; and
- the TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of our 40%
interest in a general partnership which owns all of the common stock,
representing substantially all of the economic interest of AmeriCold
Corporation, a REIT which, as of December 31, 2001, directly or
indirectly owned 89 temperature-controlled logistics properties with an
aggregate of approximately 445.2 million cubic feet (17.7 million square
feet) of warehouse space.
S-2
RECENT DEVELOPMENTS
Transactions with Crescent Operating. In April 1997, we established a new
Delaware corporation, Crescent Operating. All of the outstanding stock of
Crescent Operating, valued at $0.99 per share, was distributed, effective June
12, 1997, to those persons who were our shareholders or limited partners of our
Operating Partnership on May 30, 1997, in a spin-off.
Crescent Operating was formed to become a lessee and operator of various
assets to be acquired by us, including certain resort/hotel and residential
development assets, and to perform the intercompany agreement between us and
Crescent Operating, pursuant to which each agreed to provide the other with
rights to participate in certain transactions. We were not permitted to operate
or lease these assets under then-existing tax laws applicable to REITs. In
connection with the formation and capitalization of Crescent Operating, and the
subsequent operations and investments of Crescent Operating since 1997, we made
loans to Crescent Operating under a line of credit and various term loans.
On January 1, 2001, the provisions of a new federal law relating to REITs,
which we refer to as The REIT Modernization Act, became effective. This
legislation allows us, through our subsidiaries, to operate or lease certain of
our investments that had been previously operated or leased by Crescent
Operating.
We and Crescent Operating entered into an asset and stock purchase
agreement on June 28, 2001, in which we agreed to acquire the lessee interests
in the eight resort/hotel properties leased to subsidiaries of Crescent
Operating, the voting interests held by subsidiaries of Crescent Operating in
three of our residential development corporations and other assets in exchange
for $78.4 million. In connection with that agreement, we agreed that we would
not charge interest on our loans to Crescent Operating from May 1, 2001 and that
we would allow Crescent Operating to defer all principal and interest payments
due under the loans until December 31, 2001.
Also on June 28, 2001, we entered into an agreement to make a $10.0 million
investment in Crescent Machinery Company, a wholly owned subsidiary of Crescent
Operating. This investment, together with capital from a third-party investment
firm, was expected to put Crescent Machinery on solid financial footing.
Following the date of the agreements relating to the acquisition of
Crescent Operating assets and stock and the investment in Crescent Machinery,
the results of operations for the Crescent Operating hotel operations and the
Crescent Operating land development interests declined, due in part to the
slowdown in the economy after September 11. In addition, Crescent Machinery's
results of operations suffered because of the economic environment and the
overall reduction in national construction levels that has affected the
equipment rental and sale business, particularly post-September 11. As a result,
we believe that a significant additional investment would have been necessary to
adequately capitalize Crescent Machinery and satisfy concerns of Crescent
Machinery's lenders.
We stopped recording rent from the leases of the eight resort/hotel
properties leased to subsidiaries of Crescent Operating on October 1, 2001, and
recorded impairment and other adjustments related to Crescent Operating in the
fourth quarter of 2001, based on the estimated fair value of the underlying
collateral.
On January 22, 2002, we terminated the purchase agreement pursuant to which
we would have acquired the lessee interests in the eight resort/hotel properties
leased to subsidiaries of Crescent Operating, the voting interests held by
subsidiaries of Crescent Operating in three of the residential development
corporations and other assets. On February 4, 2002, we terminated the agreement
relating to our planned investment in Crescent Machinery.
On February 6, 2002, Crescent Machinery filed for protection under the
federal bankruptcy laws.
On February 12, 2002, we delivered default notices to Crescent Operating
relating to approximately $49.0 million of unpaid rent and approximately $76.2
million of principal and accrued interest due to us under secured loans.
On February 14, 2002, we entered into an agreement, which we call the
Agreement, with Crescent Operating, pursuant to which Crescent Operating
transferred to some of our subsidiaries, in lieu of foreclosure,
S-3
Crescent Operating's lessee interests in the eight resort/hotel properties then
leased to subsidiaries of Crescent Operating, Crescent Operating's voting
interests in three of our residential development corporations and other assets
and we agreed to assist Crescent Operating's pursuit of, and provide funding to
Crescent Operating for, the implementation of a prepackaged bankruptcy of
Crescent Operating. In connection with the transfer, Crescent Operating's rent
obligations to us were reduced by $23.6 million, and its debt obligations were
reduced by $40.1 million. These amounts include $18.3 million of value
attributed to the lessee interests transferred by Crescent Operating to us;
however, in accordance with generally accepted accounting principles, we
assigned no value to these interests for financial reporting purposes.
We hold the eight lessee interests and the voting interests in the three
residential development corporations through three newly organized entities that
are our wholly owned subsidiaries, or taxable REIT subsidiaries. We will include
these assets in our Resort/Hotel Segment and our Residential Development Segment
beginning on the dates of the transfers of these assets.
Under the Agreement, we agreed to provide approximately $14.0 million to
Crescent Operating in the form of cash and our common shares to fund costs,
claims and expenses relating to the bankruptcy and related transactions, and to
provide for the distribution of our common shares to the Crescent Operating
stockholders. We estimate that the value of the common shares that will be
issued to the Crescent Operating stockholders will be approximately $5.0 million
to $8.0 million. The Agreement provides that we and Crescent Operating will seek
to have a plan of reorganization for Crescent Operating, reflecting the terms of
the agreement and a draft plan of reorganization, approved by the bankruptcy
court. The actual value of the common shares issued to the Crescent Operating
stockholders will not be determined until the confirmation of Crescent
Operating's bankruptcy plan and could vary substantially from the estimated
amount.
In addition, we have agreed to use commercially reasonable efforts to
assist Crescent Operating in arranging Crescent Operating's repayment of its
$15.0 million obligation to Bank of America, together with any accrued interest.
Crescent Operating obtained the loan primarily to participate with us in
investments. At the time Crescent Operating obtained the loan, Bank of America
required, as a condition to making the loan, that Richard E. Rainwater, the
Chairman of our Board of Trust Managers, and John C. Goff, Vice Chairman of our
Board of Trust Managers and our Chief Executive Officer and sole director and
Chief Executive Officer of the General Partner, enter into a support agreement
with Crescent Operating and Bank of America, pursuant to which they agreed to
make additional equity investments in Crescent Operating if Crescent Operating
defaulted on payment obligations under its line of credit with Bank of America
and the net proceeds of an offering of Crescent Operating securities were
insufficient to allow Crescent Operating to pay Bank of America in full. We
believe, based on advice of counsel, that the support agreement should be
unenforceable in a Crescent Operating bankruptcy. Effective December 31, 2001,
the parties executed an amendment to the line of credit providing that any
defaults existing under the line of credit on or before March 8, 2002 are
temporarily cured unless and until a new default shall occur.
We hold a first lien security interest in Crescent Operating's entire
membership interest in AmeriCold Logistics. REIT rules prohibit us from
acquiring or owning the membership interest that Crescent Operating owns in
AmeriCold Logistics. Under the Agreement, we agreed to allow Crescent Operating
to grant Bank of America a first priority security interest in the membership
interest and to subordinate our own security interest to Bank of America. In
addition, we have agreed to form and capitalize a separate entity to be owned by
our shareholders and unitholders of our Operating Partnership, and to cause the
new entity to commit to acquire Crescent Operating's entire membership interest
in AmeriCold Logistics, for approximately $15.5 million. Under the Agreement,
Crescent Operating has agreed that it will use the proceeds of the sale of the
membership interest to repay Bank of America in full.
Completion and effectiveness of the plan of reorganization for Crescent
Operating is contingent upon a number of conditions, including the vote of
Crescent Operating's stockholders, the approval of the plan by certain of
Crescent Operating's creditors and the approval of the bankruptcy court.
Debt Offering. On April 15, 2002, our Operating Partnership completed a
private offering of $375.0 million in senior, unsecured notes due 2009. The
notes bear interest at an annual rate of 9.25% and were issued at 100% of issue
price. The notes are callable after April 15, 2006. Our Operating Partnership
has agreed to
S-4
register a similar series of notes with the SEC and to effect an exchange offer
of the registered notes for the privately placed notes and to, in certain cases,
register the notes for resale by their holders. In the event that the exchange
offer or resale registration is not completed on or before October 15, 2002, the
interest rate on the notes will increase until the exchange offer or resale
registration is completed.
The net proceeds from the offering of notes were approximately $366.5
million. Approximately $309.5 million of the proceeds were used to pay down
amounts outstanding under our $400.0 million revolving line of credit and the
remaining proceeds are expected to be used to pay down short-term indebtedness
and redeem approximately $52.0 million of preferred units of one of our
Operating Partnership's subsidiaries. Borrowings under the revolving line of
credit are expected to be used to repay or repurchase from time to time $150.0
million of 7.0% unsecured notes due in September, approximately $52.4 million of
which have been repurchased to date. In addition, borrowings under our line of
credit are also expected to be used to repay a $63.5 million 7.47% mortgage loan
due in December. As of April 19, 2002, we had outstanding borrowings of $78.0
million under our revolving line of credit, which bear interest at LIBOR plus
187.5 basis points (3.79% as of April 19, 2002).
THE OFFERING
For a description of the terms of the Series A preferred shares offered
hereby, see "Description of Preferred Shares" beginning on Page 18 of the
accompanying prospectus.
Securities offered............ 2,800,000 6 3/4% Series A Convertible
Cumulative Preferred Shares
Price per share............... $18.00
Series A preferred shares to
be outstanding after this
offering...................... 10,800,000(1)
Use of proceeds............... We intend to contribute the net proceeds from
this offering to our Operating Partnership in
exchange for a preferred interest in our
Operating Partnership. The terms of the
preferred interest in our Operating Partnership
will be substantially equivalent to the terms
of the Series A preferred shares. Our Operating
Partnership intends to use the amounts received
from us to redeem preferred units of one of its
subsidiaries.
Risk factors.................. See "Risk Factors" beginning on Page S-6 of
this prospectus supplement and on Page 4 of the
accompanying prospectus and other information
contained herein for a discussion of factors
you should carefully consider before deciding
to invest in our Series A preferred shares.
New York Stock Exchange
symbol........................ "CEIPrA"
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(1) Includes 8,000,000 Series A preferred shares issued on February 19, 1998.
S-5
RISK FACTORS
Before you consider investing in our Series A preferred shares, you should
be aware that there are risks in making this investment. You should carefully
consider these risk factors, as well as the "Risk Factors" beginning on Page 3
of the accompanying prospectus, together with all of the information included or
incorporated by reference in this prospectus supplement and the accompanying
prospectus before you decide to invest in our Series A preferred shares. This
section includes certain forward-looking statements.
THERE ARE GENERAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE SERIES A PREFERRED
SHARES
The market value of the Series A preferred shares could be substantially
affected by general market conditions, including changes in interest rates,
government regulatory action and changes in tax laws. An increase in market
interest rates may lead purchasers of the Series A preferred shares to require a
higher annual dividend yield on the Series A preferred shares as a percentage of
the purchase price, which could adversely affect the market price of the Series
A preferred shares. Moreover, numerous other factors, such as government
regulatory action and changes in tax laws could have a significant impact on the
future market price of the Series A preferred shares or other securities.
THE TERMS OF SOME OF OUR DEBT MAY PREVENT US FROM PAYING DISTRIBUTIONS ON THE
SERIES A PREFERRED SHARES
Some of our debt limits the Operating Partnership's ability to make some
types of payments or equity and other distributions to us which would limit our
ability to make some types of payments, including payments of distributions on
the Series A preferred shares, unless we meet certain financial tests or if
required to maintain our qualification as a REIT. In addition, certain of our
bank lenders may choose to include in our bank loans the same or similar
covenant terms we have in our other bank loans for our recently issued senior
unsecured notes due 2009. As a result, if we are unable to meet the applicable
financial tests, we may not be able to pay distributions on the Series A
preferred shares in one or more periods.
OUR ANNUAL REPORT FOR 2001 IS BEING REVIEWED BY THE COMMISSION
In connection with our registration statement for the potential issuance of
common shares to Crescent Operating shareholders, the Commission has notified us
that they will review the annual report on Form 10-K we filed with the
Commission for the year ended December 31, 2001. As a result of the Commission's
review, we may be required to make changes to our financial statements and other
information, including the description of our business. We believe that our
financial statements incorporated by reference in this prospectus supplement
have been prepared in a manner that complies, in all material respects, with
generally accepted accounting principles, and the regulations published by the
Commission. In connection with its review, however, the Commission may require
us to amend our financial statements or other information we present in, or
incorporate by reference into, this prospectus supplement.
WE MAY INCUR MATERIAL EXPENSES OR DELAYS IN FINANCINGS OR SEC FILINGS IF WE NEED
TO CHANGE AUDITORS
On March 14, 2002, the United States Department of Justice obtained an
indictment against Arthur Andersen LLP, our independent accountants, on a single
count of obstruction of justice in connection with a matter unrelated to us or
our financial statements. We do not know the consequences of the indictment at
this time. In addition, we do not know whether future governmental action may be
taken against Arthur Andersen. In addition, the indictment, along with pending
governmental inquiries and private lawsuits, have raised questions concerning
Arthur Andersen's ability to effectively continue to provide auditing services
to its clients. Arthur Andersen has provided the Commission with assurances that
it will continue to audit financial statements in accordance with generally
accepted auditing standards and applicable professional and firm auditing
standards, including quality control standards. Arthur Andersen also has
committed to advise the Commission immediately if it becomes unable to continue
to provide those assurances. In addition, Arthur Andersen has provided us with
similar assurances.
The audit committee of our Board of Trust Managers reviews the selection of
our independent accountants each year and will continue to monitor the Arthur
Andersen situation, including that firm's ability to comply with its quality
control assurances.
S-6
If Arthur Andersen were found or pleaded guilty to a felony in the future,
current Commission rules would prohibit our use of an audit opinion signed by
Arthur Andersen in connection with our obligations to file audited financial
statements with the Commission on Form 10-K. Our access to the capital markets
and our ability to make timely SEC filings would likely be impaired if the SEC
were to refuse to accept financial statements audited by Arthur Andersen, if
Arthur Andersen became unable to make required assurances to us or if for any
reason, including the loss of key members of our audit team from Arthur
Andersen, Arthur Andersen were unable to perform required audit-related services
for us in a timely manner. In that event, we would promptly seek to engage new
independent auditors, which could be costly or disruptive to our operations, or
could affect the price and liquidity of our securities. Furthermore, relief
which may be available under the federal securities laws against auditing firms
may not be available as a practical matter against Arthur Andersen should it
cease to operate or be financially impaired.
USE OF PROCEEDS
The net proceeds to us from the sale of the Series A preferred shares
offered hereby, after deducting estimated fees and expenses related to this
offering of $1,308,000, are approximately $49,092,000. We intend to contribute
the net proceeds from this offering to our Operating Partnership in exchange for
a preferred interest in our Operating Partnership. The terms of the preferred
interest in our Operating Partnership will be substantially equivalent to the
terms of the Series A preferred shares. Our Operating Partnership intends to use
the amounts received from us to redeem preferred units of one of its
subsidiaries.
FEDERAL INCOME TAX CONSIDERATIONS
The following sections summarize the federal income tax issues that you may
consider relevant to an investment in our Series A preferred shares. Because
this section is a summary, it does not address all of the tax issues that may be
important to you. In addition, this section does not address the tax issues that
may be important to certain types of shareholders that are subject to special
treatment under the federal income tax laws, such as insurance companies,
tax-exempt organizations (except to the extent discussed in "-- Taxation of
Tax-Exempt U.S. Shareholders" below), financial institutions and broker-dealers,
and non-U.S. individuals and foreign corporations (except to the extent
discussed in "-- Taxation of Non-U.S. Shareholders" below).
The statements in this section are based on the current federal income tax
laws governing our qualification as a REIT. We cannot assure you that new laws,
interpretations of laws or court decisions, any of which may take effect
retroactively, will not cause any statement in this section to be inaccurate.
We urge you to consult your own tax advisor regarding the specific federal,
state, local, foreign and other tax consequences to you of purchasing, owning
and disposing of our securities, our election to be taxed as a REIT and the
effect of potential changes in applicable tax laws.
TAXATION OF CRESCENT
We elected to be taxed as a REIT under the federal income tax laws when we
filed our 1994 tax return. We have operated in a manner intended to qualify as a
REIT and we intend to continue to operate in that manner. This section discusses
the laws governing the federal income tax treatment of a REIT and its
shareholders. These laws are highly technical and complex.
In the opinion of our tax counsel, Shaw Pittman LLP, (i) we qualified as a
REIT under Sections 856 through 859 of the Internal Revenue Code of 1986, as
amended, which we refer to as the Code, with respect to our taxable years ended
on or before December 31, 2001; and (ii) we are organized in conformity with the
requirements for qualification and taxation as a REIT under the Code, and our
current and proposed method of operation will enable us to meet the requirements
for qualification as a REIT for the current taxable year and for future taxable
years, provided that we have operated and continue to operate in accordance with
various assumptions and factual representations made by us concerning our
business, properties and operations. We may not, however, have met or continue
to meet such requirements. You should be aware that opinions of counsel are not
binding on the IRS or any court. Our qualification as a REIT depends on our
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ability to meet, on a continuing basis, certain qualification tests set forth in
the federal tax laws. Those qualification tests involve the percentage of income
that we earn from specified sources, the percentage of our assets that fall
within certain categories, the diversity of the ownership of our shares, and the
percentage of our earnings that we distribute. Accordingly, for the current
taxable year and for future taxable years, no assurance can be given that our
actual operating results will satisfy the qualification tests. For a discussion
of the tax treatment of us and our shareholders if we fail to qualify as a REIT,
see "-- Requirements for REIT Qualification -- Failure to Qualify."
If we qualify as a REIT, we generally will not be subject to federal income
tax on the taxable income that we distribute to our shareholders. The benefit of
that tax treatment is that it avoids the "double taxation" (i.e., at both the
corporate and stockholder levels) that generally results from owning stock in a
corporation. However, we will be subject to federal tax in the following
circumstances:
- we will pay federal income tax on taxable income (including net capital
gain) that we do not distribute to our shareholders during, or within a
specified time period after, the calendar year in which the income is
earned;
- we may be subject to the "alternative minimum tax" on any items of tax
preference that we do not distribute or allocate to our shareholders;
- we will pay income tax at the highest corporate rate on (i) net income
from the sale or other disposition of property acquired through
foreclosure that we hold primarily for sale to customers in the ordinary
course of business and (ii) other non-qualifying income from foreclosure
property;
- we will pay a 100% tax on net income from certain sales or other
dispositions of property (other than foreclosure property) that we hold
primarily for sale to customers in the ordinary course of business
("prohibited transactions");
- if we fail to satisfy the 75% gross income test or the 95% gross income
test (as described below under "-- Requirements for REIT
Qualification -- Income Tests"), and nonetheless continue to qualify as a
REIT because we meet certain other requirements, we will pay a tax equal
to (i) the gross income attributable to the greater of either (a) the
amount by which 75% of our gross income exceeds the amount qualifying
under the 75% test for the taxable year or (b) the amount by which 90% of
our gross income exceeds the amount qualifying under the 95% test for the
taxable year, multiplied by (ii) a fraction intended to reflect our
profitability;
- if we fail to distribute during a calendar year at least the sum of (i)
85% of our REIT ordinary income for such year, (ii) 95% of our REIT
capital gain net income for such year, and (iii) any undistributed
taxable income from prior periods, we will pay a 4% excise tax on the
excess of such required distribution over the amount we actually
distributed;
- if we acquire any asset from a C corporation (a corporation generally
subject to full corporate-level tax) in a merger or other transaction in
which we acquire a "carryover" basis in the asset, which is the basis
determined by reference to the C corporation's basis in the asset (or
another asset), we will pay tax at the highest regular corporate rate
applicable if we recognize gain on the sale or disposition of that asset
during the 10-year period after we acquire such asset. The amount of gain
on which we will pay tax is the lesser of (i) the amount of gain that we
recognize at the time of the sale or disposition and (ii) the amount of
gain that we would have recognized if we had sold the asset at the time
we acquired the asset; and
- we will incur a 100% excise tax on transactions with a "taxable REIT
subsidiary" of ours that are not conducted on an arm's-length basis.
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Requirements for REIT Qualification. In order to qualify as a REIT, we
must be a corporation, trust or association and meet the requirements that:
1. we are managed by one or more trustees or directors;
2. our beneficial ownership is evidenced by transferable shares, or by
transferable certificates of beneficial interest;
3. we would be taxable as a domestic corporation, but for Sections 856
through 859 of the Code;
4. we are neither a financial institution nor an insurance company
subject to certain provisions of the Code;
5. at least 100 persons are beneficial owners of our shares or
ownership certificates;
6. not more than 50% in value of our outstanding shares or ownership
certificates is owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half
of any taxable year (the "5/50 Rule");
7. we elect to be a REIT (or have made that election for a previous
taxable year that has not been terminated or revoked) and satisfy all
relevant filing and other administrative requirements established by the
IRS that must be met to elect and maintain REIT status;
8. we use a calendar year for federal income tax purposes and comply
with the record-keeping requirements of the Code and the related Treasury
Regulations; and
9. we meet certain other qualification tests, described below,
regarding the nature of our income and assets.
We must meet requirements 1 through 4 during our entire taxable year and
must meet requirement 5 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. We were
not required to meet requirements 5 and 6 during 1994. If we comply with all the
requirements for ascertaining the ownership of our outstanding shares in a
taxable year and have no reason to know that we violated the 5/50 Rule, we will
be deemed to have satisfied the 5/50 Rule for such taxable year. For purposes of
determining share ownership under the 5/50 Rule, an "individual" generally
includes a supplemental unemployment compensation benefits plan, a private
foundation, or a portion of a trust permanently set aside or used exclusively
for charitable purposes. An "individual," however, generally does not include a
trust that is a qualified employee pension or profit sharing trust under Code
Section 401(a), and beneficiaries of such a trust will be treated as holding our
shares in proportion to their actuarial interests in the trust for purposes of
the 5/50 Rule.
We believe we have issued sufficient common shares with sufficient
diversity of ownership to satisfy requirements 5 and 6 set forth above. In
addition, our declaration of trust restricts the ownership and transfer of the
common shares so that we should continue to satisfy requirements 5 and 6. The
provisions of our declaration of trust restricting the ownership and transfer of
the common shares are described in "Description of Common Shares -- Ownership
Limits and Restrictions on Transfer" beginning on Page 14 of the accompanying
prospectus.
We currently have several wholly owned corporate subsidiaries and may have
additional corporate subsidiaries in the future. A corporation that is a
"qualified REIT subsidiary" is not treated as a corporation separate from its
parent REIT. All assets, liabilities, and items of income, deduction, and credit
of a qualified REIT subsidiary are treated as assets, liabilities, and items of
income, deduction, and credit of the REIT. A qualified REIT subsidiary is a
corporation, all of the capital stock of which is owned by the parent REIT.
Thus, in applying the requirements described herein, any qualified REIT
subsidiary of ours will be ignored, and all assets, liabilities, and items of
income, deduction, and credit of such subsidiary will be treated as our assets,
liabilities, and items of income, deduction, and credit. We believe our wholly
owned corporate subsidiaries are qualified REIT subsidiaries. Accordingly, they
are not subject to federal corporate income taxation, though they may be subject
to state and local taxation.
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A REIT is treated as owning its proportionate share of the assets of any
partnership in which it is a partner and as earning its allocable share of the
gross income of the partnership for purposes of the applicable REIT
qualification tests. Thus, our proportionate share of the assets, liabilities
and items of income, deduction and credit of our Operating Partnership and of
any other partnership (or limited liability company treated as a partnership) in
which we have acquired or will acquire an interest, directly or indirectly (a
"subsidiary partnership"), are treated as our assets, liabilities and items of
income, deduction and credit for purposes of applying the various REIT
qualification requirements.
As of January 1, 2001, a REIT may own up to 100% of the outstanding capital
stock of one or more "taxable REIT subsidiaries," which we refer to as TRSs. A
TRS is a fully taxable corporation that pays income tax at regular corporate
rates on its taxable income. A TRS may earn income that would not be qualifying
income if earned directly by the parent REIT. Both the TRS and the REIT must
jointly elect to treat the subsidiary as a TRS. Overall, no more than 20% of the
value of a REIT's assets may consist of securities of one or more TRSs. In
addition, the TRS rules may limit the deductibility of interest paid or accrued
by a TRS to its parent REIT to assure that the TRS is subject to the appropriate
level of corporate taxation. The rules also impose a 100% excise tax on
transactions between a TRS and its parent REIT or the REIT's tenants that are
not conducted on an arm's-length basis. We currently own interests in several
TRSs, but the collective value of our interests in the TRSs does not exceed 20%
of the value of our assets. In addition, we believe that all transactions
between us, our tenants and our TRSs have been, and continue to be, conducted on
an arm's-length basis.
Income Tests. We must satisfy two gross income tests annually to maintain
our qualification as a REIT:
- At least 75% of our gross income (excluding gross income from prohibited
transactions) for each taxable year must consist of defined types of
income that we derive, directly or indirectly, from investments relating
to real property or mortgages on real property or temporary investment
income (the "75% gross income test"). Qualifying income for purposes of
the 75% gross income test includes "rents from real property," interest
on debt secured by mortgages on real property or on interests in real
property, and dividends or other distributions on and gain from the sale
of shares in other REITs; and
- At least 95% of our gross income (excluding gross income from prohibited
transactions) for each taxable year must consist of income that is
qualifying income for purposes of the 75% gross income test, dividends,
other types of interest, gain from the sale or disposition of stock or
securities, or any combination of the foregoing (the "95% gross income
test").
Application of Income Tests to Crescent. Our Operating Partnership's
primary source of income is from leasing its office properties and resort/hotel
properties. Rents under these leases will constitute "rents from real property,"
which is qualifying income for purposes of the 75% and 95% gross income tests,
only if the following requirements are met.
1. The rent is not based, in whole or in part, on the income or
profits of any person, although, generally, rent may be based on a fixed
percentage or percentages of receipts or sales.
2. Neither we nor someone who owns 10% or more of our shares owns 10%
or more of a tenant from which our Operating Partnership receives rent,
excluding TRSs under certain circumstances (a "related party tenant"). Our
ownership and the ownership of a tenant is determined based on direct,
indirect, and constructive ownership.
3. The rent attributable to any personal property leased in connection
with a lease of property is no more than 15% of the total rent received
under the lease.
4. Neither our Operating Partnership nor any of the subsidiary
partnerships operates or manages its property or furnishes or renders
services to its tenants, except through a TRS or through an "independent
contractor" that is adequately compensated and from which our Operating
Partnership and the subsidiary partnerships do not derive revenue. Our
Operating Partnership and the subsidiary partnerships may provide services
directly if the services are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not
otherwise considered rendered to the occupant. In addition,
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our Operating Partnership and the subsidiary partnerships may render
directly a de minimis amount of "non-customary" services to the tenants of
a property without disqualifying the income as "rents from real property,"
as long as its income from the services does not exceed 1% of its income
from the property.
5. The hotel properties are either (a) leased to unrelated tenants, or
(b) leased to TRSs and are managed by "eligible independent contractors,"
which are independent contractors that, at the time they entered into
management agreements with the TRSs, were actively engaged in the business
of operating lodging facilities for people or entities not related to us or
the TRSs.
Tax legislation effective January 1, 2001 permits us to lease our
resort/hotel properties to a TRS of ours so long as certain conditions,
described below, are satisfied. On February 14, 2002, certain of our TRSs
acquired Crescent Operating's lessee interests in eight of our resort/hotel
properties. In order for the rent paid pursuant to the leases of those
properties to constitute "rents from real property," each resort/hotel property
must be a "qualified lodging facility" and must be operated on behalf of the TRS
by an "eligible independent contractor." A "qualified lodging facility" is,
generally, a hotel or motel at which no authorized gambling activities are
conducted and the customary amenities and facilities operated as part of, or
associated with, the hotel or motel. An "eligible independent contractor" is an
independent contractor that, at the time a management agreement is entered into
with a TRS to operate a "qualified lodging facility," is actively engaged in the
trade or business of operating "qualified lodging facilities" for a person or
persons unrelated to either the TRS or any REITs with which the TRS is
affiliated. A hotel management company that otherwise would qualify as an
"eligible independent contractor" with regard to a TRS of ours will not so
qualify if the hotel management company and/or one or more actual or
constructive owners of 10% or more of the hotel management company actually or
constructively own more than 35% of us, or one or more actual or constructive
owners of more than 35% of the hotel management company own 35% or more of us
(determined taking into account only the stock held by persons owning, directly
or indirectly, more than 5% of our outstanding common shares and, if the stock
of the eligible independent contractor is publicly-traded, 5% of the
publicly-traded stock of the eligible independent contractor). We believe, based
on part on an opinion of counsel, that each of our resort/hotel properties is a
"qualified lodging facility." In addition, we believe, based on part on an
opinion of counsel, and currently intend to take all steps reasonably
practicable to ensure, that none of our TRSs or any of their subsidiaries will
engage in "operating" or "managing" our resort/hotel properties and that the
hotel management companies engaged to operate and manage such properties qualify
as "eligible independent contractors" with regard to our lessee TRSs.
In addition to the foregoing, we, based in part upon opinions of our tax
counsel as to whether various tenants constitute related party tenants, believe
that the income we have received in each taxable year since 1994 and will
receive in subsequent taxable years from rent that does not satisfy the five
requirements set forth above will not cause us to fail to meet the gross income
tests.
Our Operating Partnership will also receive fixed and contingent interest
on its real estate mortgages on the residential development properties. Interest
on mortgages secured by real property satisfies the 75% and 95% gross income
tests only if it does not include any amount that is based in whole or in part
upon the income of any person, except that (1) an amount is not excluded from
qualifying interest solely by reason of being based on a fixed percentage or
percentages of receipts or sales and (2) income derived from a shared
appreciation provision in a mortgage is treated as gain recognized from the sale
of the mortgaged property. Some of the residential development property
mortgages contain provisions for contingent interest based upon property sales.
Our tax counsel has opined that each of the residential development property
mortgages constitutes debt for federal income tax purposes, any contingent
interest derived therefrom will be treated as being based on a fixed percentage
of sales, and therefore all interest derived therefrom will constitute interest
received from mortgages for purposes of the 75% and 95% gross income tests. If,
however, the contingent interest provisions were instead characterized as shared
appreciation provisions, any resulting income would be treated as income from
prohibited transactions, because the underlying properties are primarily held
for sale to customers in the ordinary course. Such income would not satisfy the
75% and 95% gross income tests and would be subject to a 100% tax.
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In applying the 95% and 75% gross income tests, we must consider the form
in which our assets are held, whether that form will be respected for federal
income tax purposes, and whether, in the future, such form may change into a new
form with different tax attributes. For example, the residential development
properties are primarily held for sale to customers in the ordinary course of
business, and the income resulting from such sales, if directly attributed to
us, would not qualify under the 75% and 95% gross income tests. In addition,
such income would be considered "net income from prohibited transactions" and
thus would be subject to a 100% tax. The income from such sales, however, will
be earned by the residential development corporations rather than by our
Operating Partnership and will be paid to our Operating Partnership in the form
of interest and principal payments on the residential development property
mortgages or distributions with respect to the stock in the residential
development corporations held by our Operating Partnership. In similar fashion,
the income earned by the hotel properties, if directly attributed to us, would
not qualify under the 75% and 95% gross income tests because it would not
constitute "rents from real property." This income is, however, earned by the
lessees of these hotel properties and what our Operating Partnership receives
from the lessees of these hotel properties is rent. Either our tax counsel or
other law firms have opined that:
1. the residential development properties or any interest therein will
be treated as owned by the residential development corporations;
2. amounts derived by our Operating Partnership from the residential
development corporations under the terms of the residential development
property mortgages will qualify as interest or principal, as the case may
be, paid on mortgages on real property for purposes of the 75% and 95%
gross income tests;
3. amounts derived by our Operating Partnership with respect to the
stock of the residential development corporations will be treated as
distributions on stock for purposes of the 75% and 95% gross income tests;
and
4. each lease of a hotel property will be treated as a lease for
federal income tax purposes, the hotel property will constitute a
"qualified lodging facility" managed by an "eligible independent
contractor," and the rent payable thereunder will qualify as "rents from
real property."
Investors should be aware that there are no controlling Treasury
regulations, published rulings, or judicial decisions involving transactions
with terms substantially the same as those with respect to the residential
development corporations and the leases of the hotel properties. Therefore, the
opinions of our tax counsel with respect to these matters are based upon all of
the facts and circumstances and upon rulings and judicial decisions involving
situations that are considered to be analogous. Opinions of counsel are not
binding upon the IRS or any court, and there can be no complete assurance that
the IRS will not assert successfully a contrary position. If one or more of the
leases of the hotel properties is not a true lease, part or all of the payments
that our Operating Partnership or one of the subsidiary partnerships receives
from the respective lessee may not satisfy the various requirements for
qualification as "rents from real property," or our Operating Partnership might
be considered to operate the hotel properties directly. In that case, we likely
would not be able to satisfy either the 75% or 95% gross income tests and, as a
result, likely would lose our REIT status. Similarly, if the IRS were to
challenge successfully the arrangements with the residential development
corporations, our qualification as a REIT could be jeopardized.
If any of the Residential Development Properties were to be acquired by our
Operating Partnership as a result of foreclosure on any of the residential
development property mortgages, or if any of the hotel properties were to be
operated directly by our Operating Partnership or a subsidiary partnership as a
result of a default by the lessee under the lease, such property would
constitute foreclosure property for three years following its acquisition (or
for up to an additional three years if an extension is granted by the IRS) if we
make an election to treat the property as foreclosure property, provided that
(i) our Operating Partnership or its subsidiary partnership conducts sales or
operations through an independent contractor; (ii) our Operating Partnership or
its subsidiary partnership does not undertake any construction on the foreclosed
property other than completion of improvements which were more than 10% complete
before default became imminent; and (iii) foreclosure was not regarded as
foreseeable at the time we acquired the residential development property
mortgages or leased the hotel properties. For so long as any of these properties
constitutes foreclosure property, the income from the disposition or operation
of such property would be subject to tax at the maximum
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corporate rates and would qualify under the 75% and 95% gross income tests.
However, if any of these properties does not constitute foreclosure property at
any time in the future, income earned from the disposition or operation of such
property will not qualify under the 75% and 95% gross income tests and, in the
case of the residential development properties, will be subject to the 100% tax.
We anticipate that we will have certain income that will not satisfy the
75% or the 95% gross income test. For example, income from dividends on the
stock of the residential development corporations or other TRSs will not satisfy
the 75% gross income test. It is also possible that certain income resulting
from the use of creative financing or acquisition techniques would not satisfy
the 75% or 95% gross income tests. We believe, however, that the aggregate
amount of nonqualifying income will not cause us to exceed the limits on
nonqualifying income under the 75% or 95% gross income tests.
Relief from Consequences of Failing to Meet Income Tests. If we fail to
satisfy one or both of the 75% and 95% gross income tests for any taxable year,
we nevertheless may qualify as a REIT for such year if we qualify for relief
under certain provisions of the Code. Those relief provisions generally will be
available if our failure to meet such tests is due to reasonable cause and not
due to willful neglect, we attach a schedule of the sources of our income to our
tax return, and any incorrect information on the schedule was not due to fraud
with intent to evade tax. We may not qualify for the relief provisions in all
circumstances. In addition, as discussed above in "-- Taxation of Crescent,"
even if the relief provisions apply, we would incur a tax equal to (i) the gross
income attributable to the greater of either (a) the amount by which 75% of our
gross income exceeds the amount qualifying under the 75% test for the taxable
year or (b) the amount by which 90% of our gross income exceeds the amount
qualifying under the 95% test for the taxable year, multiplied by (ii) a
fraction intended to reflect our profitability.
Asset Tests. To maintain our qualification as a REIT, we also must satisfy
three asset tests at the close of each quarter of each taxable year:
1) At least 75% of the value of our total assets must consist of cash
or cash items (including certain receivables), government securities, "real
estate assets," or qualifying temporary investments (the "75% asset test").
- "Real estate assets" include interests in real property, interests in
mortgages on real property and stock in other REITs.
- "Interests in real property" include an interest in mortgage loans or
land and improvements thereon, such as buildings or other inherently
permanent structures (including items that are structural components
of such buildings or structures), a leasehold of real property, and an
option to acquire real property (or a leasehold of real property).
- Qualifying temporary investments are investments in stock or debt
instruments during the one-year period following our receipt of new
capital that we raise through equity or long-term (at least five-year)
debt offerings.
2) For investments not included in the 75% asset test, (A) the value
of our interest in any one issuer's securities may not exceed 5% of the
value of our total assets (the "5% asset test") and (B) we may not own more
than 10% of the voting power or value of any one issuer's outstanding
securities (the "10% asset test").
3) As mentioned above, the collective value of our interests in TRSs
cannot exceed 20% of the value of our assets.
For purposes of the second asset test, the term "securities" does not
include our equity ownership in another REIT, our equity or debt securities of a
qualified REIT subsidiary or a TRS, or our equity interest in any partnership.
The term "securities," however, generally includes our debt securities issued by
a partnership, except that non-participating debt securities of a partnership
are not treated as "securities" for purposes of the value portion of the 10%
asset test if we own at least a 20% profits interest in the partnership.
We intend to select future investments so as to comply with the asset
tests.
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If we failed to satisfy the asset tests at the end of a calendar quarter,
we would not lose our REIT status if (i) we satisfied the asset tests at the
close of the preceding calendar quarter and (ii) the discrepancy between the
value of our assets and the asset test requirements arose from changes in the
market values of our assets and was not wholly or partly caused by the
acquisition of one or more nonqualifying assets. If we did not satisfy the
condition described in clause (ii) of the preceding sentence, we still could
avoid disqualification as a REIT by eliminating any discrepancy within 30 days
after the close of the calendar quarter in which the discrepancy arose.
We own a 40% interest in a general partnership which owns all of the common
stock of AmeriCold Corporation. We believe, based in part upon our review of an
opinion of counsel, that AmeriCold Corporation is a REIT and, thus, that its
stock constitutes a "real estate asset" for purposes of the asset tests. If
AmeriCold Corporation has not qualified as a REIT or does not continue to do so
in the future, we would lose our REIT status.
Our Operating Partnership owns 100% of the stock of three of our
residential development corporations and 100% of the non-voting stock of two of
our residential development corporations. Our tax counsel has opined that our
ownership of interests in the residential development corporations prior to 2001
did not violate the 10% asset test, as in effect during that time. In order to
avoid violating the 10% asset test for 2001 and subsequent taxable years,
effective January 1, 2001, we made a joint election with each residential
development corporation for it to be treated as a TRS. In addition, our
Operating Partnership owns the residential development property mortgages. As
stated above, our tax counsel has opined that each of these mortgages will
constitute debt for federal income tax purposes and therefore will be treated as
a real estate asset; however, the IRS could assert that such mortgages should be
treated as equity interests in their respective issuers, which would not qualify
as real estate assets. By virtue of our ownership of partnership interests in
our Operating Partnership, we will be considered to own our pro rata share of
these assets. We believe that the collective value of our pro rata shares of the
value of the securities of the residential development corporations and our
other TRSs does not exceed 20% of the value of our assets. These beliefs are
based in part upon our analysis of the estimated values of the various
securities owned by our Operating Partnership relative to the estimated value of
the total assets owned by our Operating Partnership. No independent appraisals
will be obtained to support this conclusion, and our tax counsel, in rendering
its opinion as to our qualification as a REIT, is relying on our conclusions as
to the value of the various securities and other assets. There can be no
assurance, however, that the IRS might not contend that the values of the
various securities held by us through our Operating Partnership, in the
aggregate, exceed the 20% value limitation. Finally, if our Operating
Partnership were treated for tax purposes as a corporation rather than as a
partnership, we would violate the 10% asset test and 5% of value limitation, and
the treatment of any of our Operating Partnership's subsidiary partnerships as a
corporation rather than as a partnership could also violate one or the other, or
both, of these limitations. In the opinion of our tax counsel, for federal
income tax purposes our Operating Partnership and all the subsidiary
partnerships will be treated as partnerships and not as either associations
taxable as corporations or publicly traded partnerships. See "-- Tax Aspects of
Our Investments in Our Operating Partnership, the Subsidiary Partnerships and
Our TRSs "below.
The various percentage requirements must be satisfied not only on the date
we first acquire corporate securities, but also each time we increase our
ownership of securities (including as a result of increasing our interest in our
Operating Partnership either with the proceeds of this offering or by acquiring
units from limited partners of our Operating Partnership upon the exercise of
their rights, subject to certain restrictions, to exchange their units for our
common shares on a one-for-two basis). Although we plan to take steps to ensure
that we satisfy the 5% and 25% value tests for any quarter with respect to which
retesting is to occur, there can be no assurance that such steps (i) will always
be successful; (ii) will not require a reduction in our overall interest in the
various corporations; or (iii) will not restrict the ability of the residential
development corporations to increase the sizes of their respective businesses,
unless the value of our assets is increasing at a commensurate rate.
Distribution Requirements. Each taxable year, we must distribute dividends
(other than capital gain dividends and deemed distributions of retained capital
gain) to our shareholders in an aggregate amount at least equal to (1) the sum
of 90% of (A) our "REIT taxable income" (computed without regard to the
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dividends paid deduction and our net capital gain or loss) and (B) our net
income (after tax), if any, from foreclosure property, minus (2) certain items
of non-cash income.
We must pay such distributions in the taxable year to which they relate, or
in the following taxable year if we declare the distribution before we timely
file our federal income tax return for such year and pay the distribution on or
before the first regular dividend payment date after such declaration.
We will pay federal income tax on taxable income (including net capital
gain) that we do not distribute to shareholders. Furthermore, we will incur a 4%
nondeductible excise tax if we fail to distribute during a calendar year (or, in
the case of distributions with declaration and record dates falling in the last
three months of the calendar year, by the end of January following such calendar
year) at least the sum of (1) 85% of our REIT ordinary income for such year, (2)
95% of our REIT capital gain income for such year, and (3) any undistributed
taxable income from prior periods. The excise tax is on the excess of such
required distribution over the amounts we actually distributed. We may elect to
retain and pay income tax on the net long-term capital gain we receive in a
taxable year. See "-- Taxation of Taxable U.S. Shareholders." For purposes of
the 4% excise tax, we will be treated as having distributed any such retained
amount.
We believe that we have made, and we intend to continue to make, timely
distributions sufficient to satisfy the annual distribution requirements. In
this regard, the partnership agreement of our Operating Partnership (the
"Partnership Agreement") authorizes the 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 us to meet these distribution
requirements. It is possible, however, that, from time to time, we may
experience 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 our "REIT taxable income." Issues may
also arise as to whether certain items should be included in income. In
addition, it is possible that certain creative financing or creative acquisition
techniques used by the Operating Partnership may result in income (such as
income from cancellation of indebtedness or gain upon the receipt of assets in
foreclosure the fair market value of which exceeds the Operating Partnership's
basis in the debt that was foreclosed upon) that is not accompanied by cash
proceeds. In this regard, the modification of a debt can result in taxable gain
equal to the difference between the holder's basis in the debt and the principal
amount of the modified debt. Based on the foregoing, we may have less cash
available for distribution in a particular year than is necessary to meet our
annual distribution requirement or to avoid tax with respect to capital gain or
the excise tax imposed on certain undistributed income for such year. To meet
the distribution requirement necessary to qualify as a REIT or to avoid tax with
respect to capital gain or the excise tax imposed on certain undistributed
income, we may find it appropriate to arrange for borrowings through the
Operating Partnership or to pay distributions in the form of taxable share
dividends.
Under certain circumstances, we may be able to correct a failure to meet
the distribution requirement for a year by paying deficiency dividends to our
shareholders in a later year. We may include such deficiency dividends in our
deduction for dividends paid for the earlier year. Although we may be able to
avoid income tax on amounts distributed as deficiency dividends, we will be
required to pay interest to the IRS based upon the amount of any deduction we
take for deficiency dividends.
Record Keeping Requirements. We must maintain certain records in order to
qualify as a REIT. In addition, to avoid a monetary penalty, we must request on
an annual basis certain information from our shareholders designed to disclose
the actual ownership of our outstanding stock. We have complied, and we intend
to continue to comply, with such requirements.
Failure to Qualify. If we failed to qualify as a REIT in any taxable year,
and no relief provision applied, we would be subject to federal income tax
(including any applicable alternative minimum tax) on our taxable income at
regular corporate rates. In calculating our taxable income in a year in which we
failed to qualify as a REIT, we would not be able to deduct amounts paid out to
shareholders. In fact, we would not be required to distribute any amounts to
shareholders in such year. In such event, to the extent of our current and
accumulated earnings and profits, all distributions to shareholders would be
taxable as ordinary income. Subject to certain limitations of the Code,
corporate shareholders might be eligible for the dividends received deduction.
Unless we qualified for relief under specific statutory provisions, we also
would be disqualified from
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electing taxation as a REIT for the four taxable years following the year during
which we ceased to qualify as a REIT. We cannot predict whether in all
circumstances we would qualify for such statutory relief.
TAXATION OF SERIES A PREFERRED SHARES
Distributions of Series A Preferred Shares. Distributions with respect to
the Series A preferred shares will be taxable as described below in "-- Taxation
of Taxable U.S. Shareholders," "-- Taxation of Tax-Exempt U.S. Shareholders" and
"-- Taxation of Non-U.S. Shareholders."
Redemption or Conversion of Series A Preferred Shares to Common
Shares. Assuming that Series A preferred shares will not be redeemed or
converted at a time when there are distributions in arrears, in general, no gain
or loss will be recognized for federal income tax purposes upon the redemption
or conversion of the Series A preferred shares at the option of the holder
solely into common shares. The basis that a holder will have for tax purposes in
the common shares received will be equal to the adjusted basis the holder had in
the Series A preferred shares so redeemed or converted and, provided that the
Series A preferred shares were held as a capital asset, the holding period for
the common shares received will include the holding period for the Series A
preferred shares redeemed or converted. A holder, however, generally will
recognize gain or loss on the receipt of cash in lieu of a fractional common
share in an amount equal to the difference between the amount of cash received
and the holder's adjusted basis in such fractional share.
If a redemption or conversion occurs when there is a dividend arrearage on
the Series A preferred shares and the fair market value of the common shares
exceeds the issue price of the Series A preferred shares, a portion of the
common shares received might be treated as a dividend distribution taxable as
ordinary income.
Adjustments to Conversion Price. Under Section 305 of the Code, holders of
preferred stock may be deemed to have received a constructive distribution of
stock that is taxable as a dividend where the conversion ratio is adjusted to
reflect a cash or property distribution with respect to the common stock into
which it is convertible. An adjustment to the conversion price made pursuant to
a bona fide, reasonable adjustment formula that has the effect of preventing
dilution of the interest of the holders, however, will generally not be
considered to result in a constructive distribution of stock. Certain of the
possible adjustments provided in the Series A preferred shares may not qualify
as being pursuant to a bona fide, reasonable adjustment formula. If a
nonqualifying adjustment were made, the holders of the Series A preferred shares
might be deemed to have received a taxable stock dividend.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as we qualify as a REIT, a taxable "U.S. shareholder" must take
into account distributions out of our current or accumulated earnings and
profits (and that we do not designate as capital gain dividends or retained
long-term capital gain) as ordinary income. A U.S. shareholder will not qualify
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. shareholder" means a holder of common shares or
Series A preferred shares that for U.S. federal income tax purposes is:
- a citizen or resident of the United States;
- a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of a political subdivision
thereof;
- an estate whose income is subject to U.S. federal income taxation
regardless of its source; or
- any trust with respect to which (A) a U.S. court is able to exercise
primary supervision over the administration of such trust and (B) one or
more U.S. persons have the authority to control all substantial decisions
of the trust.
A U.S. shareholder will recognize distributions that we designate as
capital gain dividends as long-term capital gain (to the extent they do not
exceed our actual net capital gain for the taxable year) without regard to the
period for which the U.S. shareholder has held its common shares or Series A
preferred shares. Subject to certain limitations, we will designate our capital
gain dividends as either 20% or 25% rate distributions. A
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corporate U.S. shareholder, however, may be required to treat up to 20% of
certain capital gain dividends as ordinary income.
We may elect to retain and pay income tax on the net long-term capital gain
that we receive in a taxable year. In that case, a U.S. shareholder would be
taxed on its proportionate share of our undistributed long-term capital gain.
The U.S. shareholder would receive a credit or refund for its proportionate
share of the tax we paid. The U.S. shareholder would increase the basis in its
stock by the amount of its proportionate share of our undistributed long-term
capital gain, minus its share of the tax we paid.
A U.S. shareholder will not incur tax on a distribution in excess of our
current and accumulated earnings and profits if such distribution does not
exceed the adjusted basis of the U.S. shareholder's common shares or Series A
preferred shares. Instead, such distribution will reduce the adjusted basis of
such shares. A U.S. shareholder will recognize a distribution in excess of both
our current and accumulated earnings and profits and the U.S. shareholder's
adjusted basis in its common shares or Series A preferred shares as long-term
capital gain (or short-term capital gain if the shares have been held for one
year or less), assuming the common shares or Series A preferred shares are a
capital asset in the hands of the U.S. shareholder. In addition, if we declare a
distribution in October, November, or December of any year that is payable to a
U.S. shareholder of record on a specified date in any such month, such
distribution shall be treated as both paid by us and received by the U.S.
shareholder on December 31 of such year, provided that we actually pay the
distribution during January of the following calendar year. We will notify U.S.
shareholders after the close of our taxable year as to the portions of the
distributions attributable to that year that constitute ordinary income or
capital gain dividends.
Taxation of U.S. Shareholders on the Disposition of the Common Shares or
Series A Preferred Shares. In general, a U.S. shareholder who is not a dealer in
securities must treat any gain or loss realized upon a taxable disposition of
the common shares or Series A preferred shares as long-term capital gain or loss
if the U.S. shareholder has held the common shares or Series A preferred shares
for more than one year and otherwise as short-term capital gain or loss.
However, a U.S. shareholder must treat any loss upon a sale or exchange of
common shares or Series A preferred shares held by such shareholder for six
months or less (after applying certain holding period rules) as a long-term
capital loss to the extent of capital gain dividends and other distributions
from us that such U.S. shareholder treats as long-term capital gain. All or a
portion of any loss a U.S. shareholder realizes upon a taxable disposition of
the common shares or Series A preferred shares may be disallowed if the U.S.
shareholder purchases additional common shares or Series A preferred shares
within 30 days before or after the disposition.
Capital Gains and Losses. A taxpayer generally must hold a capital asset
for more than one year for gain or loss derived from its sale or exchange to be
treated as long-term capital gain or loss. The highest marginal individual
income tax rate is 38.6%. On June 7, 2001, President Bush signed into law the
Economic Growth and Tax Relief Reconciliation Act of 2001. That legislation
reduces the highest marginal individual income tax rate of 38.6% to 37.6% for
the period from January 1, 2004 to December 31, 2005, and to 35% for the period
from January 1, 2006 to December 31, 2010. The maximum tax rate on long-term
capital gain applicable to non-corporate taxpayers is 20% for sales and
exchanges of assets held for more than one year. The maximum tax rate on
long-term capital gain from the sale or exchange of "Section 1250 property"
(i.e., depreciable real property) is 25% to the extent that such gain would have
been treated as ordinary income if the property were "Section 1245 property."
With respect to distributions that we designate as capital gain dividends and
any retained capital gain that we are deemed to distribute, we may designate
(subject to certain limits) whether such a distribution is taxable to our
non-corporate shareholders at a 20% or 25% rate. Thus, the tax rate differential
between capital gain and ordinary income for non-corporate taxpayers may be
significant. A U.S. shareholder required to include retained long-term capital
gains in income will be deemed to have paid, in the taxable year of the
inclusion, its proportionate share of the tax paid by us in respect of such
undistributed net capital gains. U.S. shareholders subject to these rules will
be allowed a credit or a refund, as the case may be, for the tax deemed to have
been paid by such shareholders. U.S. shareholders will increase their basis in
their common shares or Series A preferred shares by the difference between the
amount of such includible gains and the tax deemed paid by the U.S. shareholder
in respect of such gains. In addition, the characterization of income as capital
gain or ordinary income may affect the deductibility of capital losses. A
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non-corporate taxpayer may deduct capital losses not offset by capital gains
against its ordinary income only up to a maximum annual amount of $3,000. A
non-corporate taxpayer may carry forward unused capital losses indefinitely. A
corporate taxpayer must pay tax on its net capital gain at ordinary corporate
rates. A corporate taxpayer can deduct capital losses only to the extent of
capital gains, with unused losses being carried back three years and forward
five years.
Information Reporting Requirements and Backup Withholding. We will report
to our shareholders and to the IRS the amount of distributions we pay during
each calendar year, and the amount of tax we withhold, if any. Under the backup
withholding rules, a shareholder may be subject to backup withholding at the
rate of 30%, gradually decreasing to 28% in 2006, with respect to our
distributions unless such holder (1) is a corporation or comes within certain
other exempt categories and, when required, demonstrates this fact or (2)
provides a taxpayer identification number, certifies as to no loss of exemption
from backup withholding, and otherwise complies with the applicable requirements
of the backup withholding rules. A shareholder who does not provide us with its
correct taxpayer identification number also may 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, we may be required to withhold
a portion of capital gain distributions to any shareholders who fail to certify
their non-foreign status to us.
TAXATION OF TAX-EXEMPT U.S. SHAREHOLDERS
Most tax-exempt employees' pension trusts are not subject to federal income
tax except to the extent of their receipt of "unrelated business taxable
income," or "UBTI." Distributions by us to a shareholder that is a tax-exempt
entity should not constitute UBTI, provided that the tax-exempt entity has not
financed the acquisition of our shares with "acquisition indebtedness" and the
shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity. In addition, certain pension trusts that own more than 10% of
a "pension-held REIT" must report a portion of the dividends that they receive
from such a REIT as UBTI. We have not been and do not expect to be treated as a
pension-held REIT for purposes of this rule.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "non-U.S. shareholders") are complex. This section
is only a summary of such rules. We urge non-U.S. shareholders to consult their
own tax advisors to determine the impact of federal, state, and local income tax
laws on ownership of common shares or Series A preferred shares, including any
reporting requirements.
Ordinary Dividends. A non-U.S. shareholder that receives a distribution
that is not attributable to gain from our sale or exchange of U.S. real property
interests (as defined below) and that we do not designate as a capital gain
dividend or retained capital gain will recognize ordinary income to the extent
that we pay such distribution out of our current or accumulated earnings and
profits. A withholding tax equal to 30% of the gross amount of the distribution
ordinarily will apply to such distribution unless an applicable tax treaty
reduces or eliminates the tax. However, if a distribution is treated as
effectively connected with the non-U.S. shareholder's conduct of a U.S. trade or
business, the non-U.S. shareholder generally will be subject to federal income
tax on the distribution at graduated rates, in the same manner as U.S.
shareholders are taxed with respect to such distributions (and also may be
subject to the 30% branch profits tax in the case of a non-U.S. shareholder that
is a non-U.S. corporation). We plan to withhold U.S. income tax at the rate of
30% on the gross amount of any such distribution paid to a non-U.S. shareholder
unless (i) a lower treaty rate applies and the non-U.S. shareholder files IRS
Form W-8BEN with us evidencing eligibility for that reduced rate or (ii) the
non-U.S. shareholder files an IRS Form W-8ECI with us claiming that the
distribution is effectively connected income.
Return of Capital. A non-U.S. shareholder will not incur tax on a
distribution in excess of our current and accumulated earnings and profits if
such distribution does not exceed the adjusted basis of its common shares or
Series A preferred shares. Instead, such a distribution will reduce the adjusted
basis of such shares. A non-U.S. shareholder will be subject to tax on a
distribution that exceeds both our current and accumulated
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earnings and profits and the adjusted basis of its common shares or Series A
preferred shares, if the non-U.S. shareholder otherwise would be subject to tax
on gain from the sale or disposition of its common shares or Series A preferred
shares, as described below. Because we generally cannot determine at the time we
make a distribution whether or not the distribution will exceed our current and
accumulated earnings and profits, we normally will withhold tax on the entire
amount of any distribution at the same rate as we would withhold on a dividend.
However, a non-U.S. shareholder may obtain a refund of amounts that we withhold
if we later determine that a distribution in fact exceeded our current and
accumulated earnings and profits.
Capital Gain Dividends. For any year in which we qualify as a REIT, a
non-U.S. shareholder will incur tax on distributions that are attributable to
gain from our sale or exchange of "U.S. real property interests" under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). The term "U.S. real property interests" includes certain interests
in real property and stock in corporations at least 50% of whose assets consists
of interests in real property, but excludes mortgage loans and mortgage-backed
securities. Under FIRPTA, a non-U.S. shareholder is taxed on distributions
attributable to gain from sales of U.S. real property interests as if such gain
were effectively connected with a U.S. business of the non-U.S. shareholder. A
non-U.S. shareholder thus would be taxed on such a distribution at the normal
capital gain rates applicable to U.S. shareholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of a
nonresident alien individual). A non- U.S. corporate shareholder not entitled to
treaty relief or exemption also may be subject to the 30% branch profits tax on
distributions subject to FIRPTA. We must withhold 35% of any distribution that
we could designate as a capital gain dividend. However, if we make a
distribution and later designate it as a capital gain dividend, then (although
such distribution may be taxable to a non-U.S. shareholder) it is not subject to
withholding under FIRPTA. Instead, we must make-up the 35% FIRPTA withholding
from distributions made after the designation, until the amount of distributions
withheld at 35% equals the amount of the distribution designated as a capital
gain dividend. A non-U.S. shareholder may receive a credit against its FIRPTA
tax liability for the amount we withhold.
Distributions to a non-U.S. shareholder that we designate at the time of
distribution as capital gain dividends which are not attributable to or treated
as attributable to our disposition of a U.S. real property interest generally
will not be subject to U.S. federal income taxation, except as described below
under "-- Sale of Shares."
Sale of Shares. A non-U.S. shareholder generally will not incur tax under
FIRPTA on gain from the sale of its common shares or Series A preferred shares
as long as we are a "domestically controlled REIT." A "domestically controlled
REIT" is a REIT in which at all times during a specified testing period non-U.S.
persons held, directly or indirectly, less than 50% in value of the stock. We
anticipate that we will continue to be a "domestically controlled REIT." In
addition, a non-U.S. shareholder that owns, actually or constructively, 5% or
less of our outstanding common shares or Series A preferred shares at all times
during a specified testing period will not incur tax under FIRPTA if the common
shares or Series A preferred shares are "regularly traded" on an established
securities market. If neither of these exceptions were to apply, the gain on the
sale of the common shares or Series A preferred shares would be taxed under
FIRPTA, in which case a non-U.S. shareholder would be taxed in the same manner
as U.S. shareholders with respect to such gain (subject to 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 non-U.S. corporations).
A non-U.S. shareholder will incur tax on gain not subject to FIRPTA if (1)
the gain is effectively connected with the non-U.S. shareholder's U.S. trade or
business, in which case the non-U.S. shareholder will be subject to the same
treatment as U.S. shareholders with respect to such gain, or (2) the non-U.S.
shareholder is a nonresident alien individual who was present in the U.S. for
183 days or more during the taxable year, in which case the non-U.S. shareholder
will incur a 30% tax on his capital gains. Capital gains dividends not subject
to FIRPTA will be subject to similar rules.
Backup Withholding. Backup withholding tax (which generally is withholding
tax imposed at the rate of 30%, gradually decreasing to 28% in 2006, on certain
payments to persons that fail to furnish certain
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information under the United States information reporting requirements) and
information reporting will generally not apply to distributions to a non-U.S.
shareholder provided that the non-U.S. shareholder certifies under penalty of
perjury that the shareholder is a non-U.S. shareholder, or otherwise establishes
an exemption. As a general matter, backup withholding and information reporting
will not apply to a payment of the proceeds of a sale of common shares or Series
A preferred shares effected at 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 shares or Series A preferred shares by a foreign
office of a broker that:
- is a U.S. person;
- derives 50% or more of its gross income for a specified three year period
from the conduct of a trade or business in the U.S.;
- is a "controlled foreign corporation" (generally, a foreign corporation
controlled by U.S. shareholders) for U.S. tax purposes; or
- is a foreign partnership, if at any time during its tax year, 50% or more
of its income or capital interest is held by U.S. persons or if it is
engaged in the conduct of a trade or business in the U.S.
Information reporting will not apply under these circumstances if the
broker has documentary evidence in its records that the holder or beneficial
owner is a non-U.S. shareholder and certain other conditions are met, or the
shareholder otherwise establishes an exemption. Payment of the proceeds of a
sale of common shares or Series A preferred shares effected at a U.S. office of
a broker 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. Backup withholding
is not an additional tax. A non-U.S. shareholder may obtain a refund of excess
amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the IRS.
OTHER TAX CONSEQUENCES
State and Local Taxes. We and/or you may be subject to state and local tax
in various states and localities, including those states and localities in which
we or you transact business, own property or reside. The state and local tax
treatment in such jurisdictions may differ from the federal income tax treatment
described above. Consequently, you should consult your own tax advisor regarding
the effect of state and local tax laws upon an investment in our securities.
TAX ASPECTS OF OUR INVESTMENTS IN OUR OPERATING PARTNERSHIP, THE SUBSIDIARY
PARTNERSHIPS AND OUR TRSs
The following discussion summarizes certain federal income tax
considerations applicable to our direct or indirect investments in the Operating
Partnership and its subsidiary partnerships and our TRSs. The discussion does
not cover state or local tax laws or any federal tax laws other than income tax
laws.
Classification as Partnerships. Our tax counsel has opined, based on the
provisions of the Partnership Agreement and the partnership agreements and
operating agreements of the various subsidiary partnerships, certain factual
assumptions and certain representations described in the opinion, that the
Operating Partnership and the subsidiary partnerships will each be treated as a
partnership and not as either an association taxable as a corporation for
federal income tax purposes, or a "publicly traded partnership" taxable as a
corporation. Unlike a ruling from the IRS, however, an opinion of counsel is not
binding on the IRS or the courts, and no assurance can be given that the IRS
will not challenge the status of the Operating Partnership and its subsidiary
partnerships as partnerships for federal income tax purposes. If for any reason
the Operating Partnership were taxable as a corporation rather than as a
partnership for federal income tax purposes, we would fail to qualify as a REIT
because we would not be able to satisfy the income and asset requirements. See
"-- Taxation of the Company," above. In addition, any change in the Operating
Partnership's status for tax purposes might be treated as a taxable event, in
which case we might incur a tax liability without any related cash
distributions. See "-- Taxation of the Company," above. Further, items of income
and deduction for the Operating Partnership would not pass through to the
respective partners, and the partners would be treated as shareholders for tax
purposes. The Operating Partnership would be required to pay income tax at
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regular corporate tax rates on its net income, and distributions to partners
would constitute dividends that would not be deductible in computing the
Operating Partnership's taxable income. Similarly, if any of the subsidiary
partnerships were taxable as a corporation rather than as a partnership for
federal income tax purposes, such treatment might cause us to fail to qualify as
a REIT, and in any event such partnership's items of income and deduction would
not pass through to its partners, and its net income would be subject to income
tax at regular corporate rates.
Income Taxation of the Operating Partnership and its Partners. The
partners of the Operating Partnership are subject to taxation. The Operating
Partnership itself is not a taxable entity for federal income tax purposes.
Rather, we are required to take into account our allocable share of the
Operating Partnership's income, gains, losses, deductions and credits for any
taxable year of the Operating Partnership ending during our taxable year,
without regard to whether we have received or will receive any distribution from
the Operating Partnership. The Operating Partnership's income, gains, losses,
deductions and credits for any taxable year will include its allocable share of
such items from its subsidiary partnerships.
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses 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. 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 Operating Partnership's
allocations of taxable income, gain and loss are intended to comply with the
requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
Section 704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated in a manner such
that the contributing partner is charged with, or benefits from, respectively,
the unrealized gain or unrealized loss associated with the property at the time
of the contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of contributed
property at the time of contribution and the adjusted tax basis of such property
at the time of contribution (a "Book-Tax Difference"). Such allocations are
solely for federal income tax purposes and do not affect the book capital
accounts or other economic or legal arrangements among the partners. The
Operating Partnership was formed by way of contributions of appreciated property
and has received contributions of appreciated property since its formation. In
general, the fair market value of the properties initially contributed to the
Operating Partnership were substantially in excess of their adjusted tax bases.
The Partnership Agreement requires that allocations attributable to each item of
initially contributed property be made so as to allocate the tax depreciation
available with respect to such property first to the partners other than the
partner that contributed the property, to the extent of, and in proportion to,
such partners' share of book depreciation, and then, if any tax depreciation
remains, to the partner that contributed the property. Accordingly, the
Operating Partnership's allocations of depreciation deductions allocable will
not correspond exactly to the percentage interests of the partners. Upon the
disposition of any item of initially contributed property, any gain attributable
to an excess at such time of basis for book purposes over basis for tax purposes
will be allocated for tax purposes to the contributing partner and, in addition,
the Partnership Agreement provides that any remaining gain will be allocated for
tax purposes to the contributing partners to the extent that tax depreciation
previously allocated to the noncontributing partners was less than the book
depreciation allocated to them. These allocations are intended to be consistent
with Section 704(c) of the Code and with Treasury Regulations thereunder. The
tax treatment of properties contributed to the Operating Partnership subsequent
to its formation is expected generally to be consistent with the foregoing.
In general, the partners who contribute property to the Operating
Partnership will be allocated depreciation deductions for tax purposes which are
lower than such deductions would be if determined on a pro rata basis. In
addition, in the event of the disposition of any of the contributed assets
(including our properties) which have a Book-Tax Difference, all income
attributable to such Book-Tax Difference will
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generally be allocated to the contributing partners, including us, and each
partner will generally be allocated only its share of capital gains attributable
to appreciation, if any, occurring after the closing of any offering of
securities hereunder. This will tend to eliminate the Book-Tax Difference over
the life of the Operating Partnership. However, the special allocation rules of
Section 704(c) do not always entirely eliminate the Book-Tax Difference on an
annual basis or with respect to a specific taxable transaction such as a sale.
Thus, the carryover basis of the contributed assets in the hands the Operating
Partnership will cause us to be allocated lower depreciation and other
deductions, and possibly an amount of taxable income in the event of a sale of
such contributed assets in excess of the economic or book income allocated to it
as a result of such sale. This may cause us to recognize taxable income in
excess of cash proceeds, which might adversely affect our ability to comply with
the REIT distribution requirements. See "-- Requirements for REIT
Qualification -- Distribution Requirements." The foregoing principles also apply
in determining our earnings and profits for purposes of determining the portion
of distributions taxable as dividend income. The application of these rules over
time may result in a higher portion of distributions being taxed as dividends
than would have occurred had we purchased the contributed assets at their agreed
values.
Sale of the Operating Partnership's Property. Generally, any gain realized
by the Operating Partnership on the sale of property held by the Operating
Partnership for more than one year will be long-term capital gain, except for
any portion of such gain that is treated as depreciation or cost recovery
recapture. Any gain recognized by the Operating Partnership on the disposition
of contributed properties will be allocated first to the partners of the
Operating Partnership under Section 704(c) of the Code to the extent of their
"built-in gain" on those properties for federal income tax purposes. The
partners' "built-in gain" on the contributed properties sold will equal the
excess of the partners' proportionate share of the book value of those
properties over the partners' tax basis allocable to those properties at the
time of the sale. Any remaining gain recognized by the Operating Partnership on
the disposition of the contributed properties, and any gain recognized by the
Operating Partnership on the disposition of the other properties, will be
allocated among the partners in accordance with their respective percentage
interests in the Operating Partnership.
Our share of any gain realized by the Operating Partnership on the sale of
any property held by the Operating Partnership as inventory or other property
held primarily for sale to customers in the ordinary course of the Operating
Partnership's trade or business 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 the Operating Partnership's 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 its properties for
investment with a view to long-term appreciation, to engage in the business of
acquiring, developing, owning and operating the properties, and to make such
occasional sales of properties as are consistent with these investment
objectives.
Taxation of the Residential Development Corporations and Other TRSs. A
portion of the amounts to be used to fund distributions to shareholders is
expected to come from the residential development corporations and other TRSs
through dividends on stock thereof held by the Operating Partnership and
interest on the residential development property mortgages held by the Operating
Partnership. The residential development corporations and other TRSs will pay
federal, state and local income taxes on their taxable incomes at normal
corporate rates, which taxes will reduce the cash available for distribution by
us to our shareholders. Any federal, state or local income taxes that the
residential development corporations and other TRSs are required to pay will
reduce the cash available for distribution by us to our shareholders.
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PLAN OF DISTRIBUTION
Subject to the terms and conditions of a purchase agreement dated April 22,
2002, Cohen & Steers Capital Management, Inc., on behalf of itself and as
investment adviser to certain client accounts ("Cohen & Steers") has agreed to
purchase, and we have agreed to sell to Cohen & Steers, the number of Series A
preferred shares set forth on the cover page of this prospectus supplement. The
purchase agreement provides that the obligations of Cohen & Steers to purchase
the Series A preferred shares included in this offering are subject to the
approval of certain legal matters by counsel and to certain other conditions.
Merrill Lynch, Pierce, Fenner & Smith Incorporated is acting as our
placement agent, on a best efforts basis, in connection with the sale of our
Series A preferred shares to Cohen & Steers, and Merrill Lynch will receive a
placement agent fee of $1,008,000. We have agreed to indemnify the placement
agent against certain liabilities under the Securities Act of 1933, as amended,
or contribute to payments that the placement agent may be required to make
because of any of those liabilities.
The expenses of the offering, including the placement agent fee, are
estimated at $1,308,000 and are payable by us.
The placement agent and its affiliates have, from time to time, provided,
and in the future, may provide, certain investment banking services to us and
our affiliates, for which they have received, and in the future, would receive,
customary fees.
LEGAL MATTERS
The validity of the Series A preferred shares offered by this prospectus
supplement will be passed upon for us by Shaw Pittman LLP, a limited liability
partnership including professional corporations. In addition, the description of
federal income tax consequences contained herein under "Federal Income Tax
Considerations" is, to the extent that it describes matters of law, summarizes
legal matters or provides legal conclusions, based upon the opinion of Shaw
Pittman LLP.
EXPERTS
The consolidated financial statements and schedule incorporated by
reference in the accompanying prospectus have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are incorporated by reference herein in reliance upon the authority
of said firm as experts in giving said report.
S-23
PROSPECTUS
$1,500,000,000
(CRESCENT LOGO)
PREFERRED SHARES, COMMON SHARES AND COMMON SHARE WARRANTS
---------------------
We may from time to time offer, in one or more series, separately or
together, the following:
- our preferred shares of beneficial interest;
- our common shares of beneficial interest; or
- warrants to purchase our common shares.
The aggregate initial public offering price of the securities that we may
offer through this prospectus will be up to $1,500,000,000.
We will offer our securities in amounts, at prices and on terms to be
determined at the time we offer such securities. When we sell a particular
series of securities, we prepare a prospectus supplement describing the offering
and the terms of that series of securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN OUR SECURITIES.
Please read this prospectus and the applicable supplement carefully before
you invest.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is complete or accurate. Any representation to the contrary is a
criminal offense.
The date of this prospectus is April 22, 2002.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we, Crescent Real
Estate Equities Company, filed with the Securities and Exchange Commission,
which is also referred to in this prospectus supplement as the SEC or the
Commission, using a "shelf" registration process. Under this shelf process, we
may sell any combination of the securities described in this prospectus in one
or more offerings up to a total dollar amount of $1.5 billion. This prospectus
provides you with a general description of these securities. Each time we sell
securities, we will provide a prospectus supplement that will contain specific
information about all of the terms of that offering. The prospectus supplement
may also add, update or change information contained in this prospectus. You
should read both this prospectus and the applicable prospectus supplement,
together with additional information described under the heading "Where You Can
Find More Information." The registration statement that contains this prospectus
(including the exhibits to the registration statement) contains additional
information about us and the securities offered under this prospectus. That
registration statement can be read at the SEC's web site or at the SEC offices
listed under the heading "Where You Can Find More Information."
References to "we," "us" or "our" refer to Crescent Real Estate Equities
Company and, unless the context otherwise requires, Crescent Real Estate
Equities Limited Partnership, which we refer to as the Operating Partnership. We
conduct our business and operations through the Operating Partnership and these
subsidiaries. The term "you" refers to a prospective investor. The sole general
partner of the Operating Partnership is Crescent Real Estate Equities, Ltd., a
wholly owned subsidiary of Crescent Real Estate Equities Company.
CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
Our prospectus, including our documents incorporated herein by reference,
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Also, documents which we
subsequently file with the SEC and are incorporated herein by reference will
contain forward-looking statements. When we refer to forward-looking statements
or information, sometimes we use words such as "may," "will," "could," "should,"
"plan," "intend," "expect," "believe," "estimate," "anticipate" and "continue."
In particular, the risk factors included or incorporated by reference in this
prospectus describe forward-looking information. The risk factors address
material risks known to us but are not all-inclusive, particularly with respect
to possible future events. Other parts of, or documents incorporated by
reference into, our prospectus may also include forward-looking information.
Many events can occur that would cause our actual results to be different than
those described. These factors include:
- Our inability, as the most significant secured and unsecured creditor of
Crescent Operating, Inc., to obtain the confirmation of a proposed
prepackaged bankruptcy plan of Crescent Operating that would bind all
creditors and Crescent Operating shareholders;
- Our inability to successfully integrate the lessee interests in the
resort/hotel properties and the voting interests in the residential
development corporations and related entities that we acquired from
Crescent Operating in transfers made in lieu of foreclosure, into our
current business and operations;
- Our inability to distribute to our common shareholders shares of a new
entity to purchase Crescent Operating's interest in AmeriCold Logistics,
LLC, the tenant of our temperature-controlled logistics properties;
- Further deterioration or continued underperformance in the
resort/business class hotel markets or in the market for residential land
or luxury residences, which include single-family homes, townhomes and
condominiums, or in the economy generally;
- Our ability, at our office properties, to timely lease unoccupied square
footage and timely re-lease occupied square footage upon expiration on
favorable terms, which may be adversely affected by
1
changes in real estate conditions (including rental rates and competition
from other properties and new development of competing properties or a
general downturn in the economy);
- Financing risks, such as the ability to generate revenue sufficient to
service and repay existing or additional debt, the ability to meet
applicable debt covenants, our ability to fund the share repurchase
program, increases in debt service associated with increased debt and
with variable-rate debt, and the ability to consummate financings and
refinancings on favorable terms and within any applicable time frames;
- Continued adverse conditions in the temperature-controlled logistics
business (including both industry-specific conditions and a general
downtown in the economy) which may further jeopardize the ability of
AmeriCold Logistics to pay rent;
- Adverse changes in the financial condition of existing tenants;
- The concentration of a significant percentage of our assets in Texas;
- Our ability to find acquisition and development opportunities which meet
our investment strategy;
- The existence of complex regulations relating to our status as a real
estate investment trust, or REIT, the effect of future changes in REIT
requirements as a result of new legislation and the adverse consequences
of the failure to qualify as a REIT; and
- Other risks detailed from time to time in our filings with the SEC.
Given these uncertainties, readers are cautioned not to place undue
reliance on these forward-looking statements. We also make no promise to update
any of the forward-looking statements, or to publicly release the results if we
revise any of them. You should carefully review the risks and the risk factors
described under "Risk Factors" beginning on Page 3, as well as the other
information in this prospectus before buying our securities.
CRESCENT REAL ESTATE EQUITIES COMPANY
GENERAL
We operate as a REIT for federal income tax purposes. We provide
management, leasing and development services for some of our properties and
conduct all of our business through our Operating Partnership and its
subsidiaries. We are structured to facilitate and maintain our qualification as
a REIT. This structure permits persons contributing properties (or interests in
properties) to us to defer some or all of the tax liability that they otherwise
might have incurred in connection with the sale of assets to us.
Our principal executive offices are located at 777 Main Street, Suite 2100,
Fort Worth, Texas 76102, and our telephone number is (817) 321-2100. Our Web
site address is www.cei-crescent.com. The information contained on our Web site
is not a part of this prospectus.
As of December 31, 2001, our assets and operations were composed of four
investment segments:
- Office Segment;
- Resort/Hotel Segment;
- Residential Development Segment; and
- Temperature-Controlled Logistics Segment.
Within these segments, we owned or had an interest in the following real
estate assets as of December 31, 2001:
- the OFFICE SEGMENT consisted of 74 office properties located in 26
metropolitan submarkets in six states with an aggregate of approximately
28.0 million net rentable square feet;
2
- the RESORT/HOTEL SEGMENT consisted of five luxury and destination fitness
resorts and spas with a total of 1,028 rooms/guest nights and four
upscale business-class hotel properties with a total of 1,769 rooms;
- the RESIDENTIAL DEVELOPMENT SEGMENT consisted of our ownership of real
estate mortgages and non-voting common stock representing interests
ranging from 90% to 95% in five unconsolidated residential development
corporations, which in turn, through joint venture or partnership
arrangements, owned 21 upscale residential development properties; and
- the TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of our 40%
interest in a general partnership which owns all of the common stock,
representing substantially all of the economic interest, of AmeriCold
Corporation, a REIT which, as of December 31, 2001, directly or
indirectly owned 89 temperature-controlled logistics properties with an
aggregate of approximately 445.2 million cubic feet (17.7 million square
feet) of warehouse space.
During the first quarter of 2002, we executed an agreement with Crescent
Operating, pursuant to which Crescent Operating transferred to us, in lieu of
foreclosure, Crescent Operating's lessee interests in the eight resort/hotel
properties then leased to subsidiaries of Crescent Operating, the voting
interests in three of our residential development corporations and other assets.
We will fully consolidate the operations of the eight resort/hotel properties
and the three residential development corporations as of the date of the
transfers of these assets.
RISK FACTORS
Before you consider investing in our securities, you should be aware that
there are risks in making this investment. You should carefully consider these
risk factors together with all of the information included or incorporated by
reference in this prospectus before you decide to invest in our securities. This
section includes certain forward-looking statements.
WE DERIVE THE SUBSTANTIAL MAJORITY OF OUR OFFICE RENTAL REVENUES FROM
GEOGRAPHICALLY CONCENTRATED MARKETS
As of December 31, 2001, approximately 77% of our office portfolio, based
on total net rentable square feet, representing 63% of our total revenues for
the year ended December 31, 2001, was located in the metropolitan areas of
Dallas/Fort Worth and Houston, Texas. Due to our geographic concentration in
these metropolitan areas, any deterioration in economic conditions in the
Dallas/Fort Worth or Houston metropolitan areas, or in other geographic markets
in which we in the future may acquire substantial assets, could adversely affect
our results of operations and our ability to make distributions to our
shareholders and decrease our cash flow. In addition, we compete for tenants
based on rental rates, attractiveness and location of a property and quality of
maintenance and management services. An increase in the supply of properties
competitive with ours in these markets could have a material adverse effect on
our ability to attract and retain tenants in these markets.
OUR PERFORMANCE AND VALUE ARE SUBJECT TO GENERAL RISKS ASSOCIATED WITH THE REAL
ESTATE INDUSTRY
Our economic performance and the value of our real estate assets, and
consequently the value of our investments, will be adversely affected if our
office, resort/hotel, residential development and temperature-controlled
logistics properties do not generate revenues sufficient to meet our operating
expenses, including debt service and capital expenditures. Any reduction in the
revenues that our properties generate will adversely affect our cash flow and
ability to meet our obligations. As a real estate company, we are susceptible to
the following real estate industry risks:
- downturns in the national, regional and local economic conditions where
our properties are located;
- competition from other office, resort/hotel, residential development and
temperature-controlled logistics properties;
3
- adverse changes in local real estate market conditions, such as
oversupply or reduction in demand for office space, resort/hotel space,
luxury residences or temperature-controlled logistics storage space;
- changes in tenant preferences that reduce the attractiveness of our
properties to tenants;
- tenant defaults;
- zoning or other regulatory restrictions;
- decreases in market rental rates;
- costs associated with the need to periodically repair, renovate and
re-lease space;
- increases in the cost of maintenance, insurance and other operating
costs, including real estate taxes, associated with one or more
properties, which may occur even when circumstances such as market
factors and competition cause a reduction in revenues from one or more
properties; and
- illiquidity of real estate investments, which may limit our ability to
vary our portfolio promptly in response to changes in economic or other
conditions.
WE MAY EXPERIENCE DIFFICULTY OR DELAY IN RENEWING LEASES OR RE-LEASING SPACE
We derive most of our revenue directly or indirectly from rent received
from our tenants. We are subject to the risks that, upon expiration, leases for
space in our office properties may not be renewed, the space may not be
re-leased, or the terms of renewal or re-lease, including the cost of required
renovations or concessions to tenants, may be less favorable than current lease
terms. In the event of any of these circumstances, our results of operations and
our ability to meet our obligations could be adversely affected.
As of December 31, 2001, office properties with leases for approximately
3.9 million, 3.5 million and 4.3 million square feet, representing approximately
15%, 14% and 17% of net rentable area, expire in 2002, 2003 and 2004,
respectively. During these same three years, leases of approximately 39% of the
net rentable area of our office properties in Dallas and approximately 52% of
the net rentable area of our office properties in Houston expire.
MANY REAL ESTATE COSTS ARE FIXED, EVEN IF INCOME FROM OUR PROPERTIES DECREASES
Our financial results depend primarily on leasing space in our office
properties to tenants, renting rooms at our resorts and hotels and successfully
developing and selling lots, single-family homes, condominiums, town homes and
time-share units at our residential development properties, in each case on
terms favorable to us. Costs associated with real estate investment, such as
real estate taxes and maintenance costs, generally do not decrease even when a
property is not fully occupied, or the rate of sales at a project decreases, or
other circumstances cause a reduction in income from the investment.
As a result, cash flow from the operations of our office properties may be
reduced if a tenant does not pay its rent. Under those circumstances, we might
not be able to enforce our rights as landlord without delays, and we might incur
substantial legal costs. The income from our office properties also may be
reduced if tenants are unable to pay rent or we are unable to rent properties on
favorable terms. Our income from our resorts and hotels may be reduced if we are
unable to rent a sufficient number of rooms on favorable terms, and our income
from our residential development properties may decrease if we are unable to
sell the lots or other components of a particular residential development
project at the rates or on the terms we anticipated. Additionally, new
properties that we may acquire or develop may not produce any significant
revenue immediately, and the cash flow from existing operations may be
insufficient to pay the operating expenses and debt service associated with that
property until the property is fully leased.
WE MAY HAVE LIMITED FLEXIBILITY IN DEALING WITH OUR JOINTLY OWNED INVESTMENTS
Our organizational documents do not limit the amount of funds that we may
invest in properties and assets jointly with other persons or entities.
Approximately 12% of the net rentable area of our office properties
4
currently is held jointly with other persons or entities. In addition, as of
December 31, 2001, all of our residential development corporations and our
temperature-controlled logistics investments were owned jointly.
Joint ownership of properties may involve special risks, including the
possibility that our partners or co-investors might become bankrupt, that those
partners or co-investors might have economic or other business interests or
goals which are unlike or incompatible with our business interests or goals, and
that those partners or co-investors may be in a position to take action contrary
to our suggestions or instructions, or in opposition to our policies or
objectives. Joint ownership also gives a third party the opportunity to
influence the return we can achieve on some of our investments and may adversely
affect our results of operations and our ability to meet our obligations. In
addition, in many cases we do not control the timing or amount of distributions
that we receive from the joint investment, and amounts otherwise available for
distribution to us instead may be reinvested in the property or used for other
costs and expenses of the joint operation.
ACQUISITIONS AND NEW DEVELOPMENTS MAY FAIL TO PERFORM AS EXPECTED
We intend to focus our investment strategy on investment opportunities and
markets considered "demand-driven," primarily within our office property
segment, with a long-term strategy of acquiring properties at a cost
significantly below that which would be required to develop a comparable
property. Acquisition or development of properties entails risks that include
the following, any of which could adversely affect our results of operations and
our ability to meet our obligations:
- We may not be able to identify suitable properties to acquire or may be
unable to complete the acquisition of the properties we select for
acquisition.
- We may not be able to integrate new acquisitions into our existing
operations successfully.
- Our estimate of the costs of improving, repositioning or redeveloping an
acquired property may prove to be too low, and, as a result, the property
may fail to meet our estimates of the profitability of the property,
either temporarily or for a longer time.
- Office properties, resorts or hotels we acquire may fail to achieve the
occupancy and rental or room rates we anticipate at the time we make the
decision to invest in the properties, resulting in lower profitability
than we expected in analyzing the properties.
- Our pre-acquisition evaluation of the physical condition of each new
investment may not detect certain defects or necessary repairs until
after the property is acquired, which could significantly increase our
total acquisition costs.
- Our investigation of a property or building prior to its acquisition, and
any representations we may receive from the seller, may fail to reveal
various liabilities, which could effectively reduce the cash flow from
the property or building, or increase our acquisition cost.
WE MAY BE UNABLE TO SELL PROPERTIES WHEN APPROPRIATE BECAUSE REAL ESTATE
INVESTMENTS ARE ILLIQUID
Real estate investments generally cannot be sold quickly. In addition,
there are some limitations under federal income tax laws applicable to REITs
that may limit our ability to sell assets. We may not be able to alter our
portfolio promptly in response to changes in economic or other conditions. Our
inability to respond quickly to adverse changes in the performance of our
investments could have an adverse effect on our ability to meet our obligations.
WE MAY BE UNABLE TO INTEGRATE COPI'S RESORT/HOTEL AND RESIDENTIAL DEVELOPMENT
SEGMENTS INTO OUR OPERATIONS SUCCESSFULLY
In the first quarter of 2002, in satisfaction of some of its outstanding
debt and rental obligations to us, Crescent Operating transferred to us, in lieu
of foreclosure, its lessee interests in eight resort/hotel properties that it
leased from us, its voting interests in three of our residential development
corporations, in which we already owned the nonvoting stock, and other assets.
We will face significant challenges in integrating these hotel and Residential
Development Segments of Crescent Operating into our Resort/Hotel and Residential
5
Development Segments in a timely and efficient manner. The integration will be
complex and time-consuming. The consolidation of operations will require
substantial attention from management. The diversion of management attention and
any difficulties encountered in the transition and integration process, as well
as any unanticipated and undisclosed liabilities, could adversely affect our
results of operations and our ability to meet our obligations. In addition, if
the transfers were challenged by Crescent Operating's shareholders or creditors
or other claims are made, we could incur additional costs in protecting our
position. These risks would increase if Crescent Operating's proposed
prepackaged bankruptcy plan were not consummated.
THE REVENUES FROM OUR NINE RESORT/HOTEL PROPERTIES ARE SUBJECT TO RISKS
ASSOCIATED WITH THE HOSPITALITY INDUSTRY
The following factors, among others, are common to the resort/hotel
industry, and may reduce the receipts generated by our resort/hotel properties.
- Based on features such as access, location, quality of accommodations,
room rate structure and, to a lesser extent, the quality and scope of
other amenities such as food and beverage facilities, our resort/hotel
properties compete for guests with other resorts and hotels, a number of
which have greater marketing and financial resources than our lessees or
the resort/hotel property managers.
- If there is an increase in operating costs resulting from inflation or
other factors, we or the property managers may not be able to offset the
increase by increasing room rates.
- Our resort/hotel properties are subject to fluctuating and seasonal
demands for business travel and tourism.
- Our resort/hotel properties are subject to general and local economic
conditions that may affect the demand for travel in general and other
factors that are beyond our control, such as acts of terrorism.
In addition, since September 11, 2001, our resort/hotel properties have
experienced a decrease in occupancy, average rates and revenue per available
room. For the year ended December 31, 2001, compared to the year ended December
31, 2000, the weighted average occupancy of our hotels decreased approximately
6%, the average daily rate decreased approximately 3%, revenue per available
room decreased approximately 6% and same-store net operating income decreased by
an average of 16%. Military actions against terrorists, new terrorist attacks
(actual or threatened) and other political events could cause a lengthy period
of uncertainty that might increase customer reluctance to travel and therefore
adversely affect our results of operations and our ability to meet our
obligations.
THE REVENUES FROM OUR NINE RESORT/HOTEL PROPERTIES, EVEN AFTER THE ACQUISITION
OF CRESCENT OPERATING'S HOTEL OPERATIONS, DEPEND ON THIRD-PARTY OPERATORS THAT
WE DO NOT CONTROL
We own nine resort/hotel properties, eight of which are leased to our own
subsidiaries. We currently lease the remaining resort/hotel property, the Omni
Austin Hotel, to a third-party entity, HCD Austin Corporation. To maintain our
status as a REIT, third-party property managers manage each of the nine
resort/hotel properties. As a result, we are unable to directly implement
strategic business decisions with respect to the operation and marketing of our
resort/hotel properties, such as decisions about quality of accommodations, room
rate structure and the quality and scope of other amenities such as food and
beverage facilities and similar matters. The amount of revenue that we receive
from the resort/hotel properties is dependent on the ability of the property
managers to maintain and increase the gross receipts from these properties.
Although we consult with the managers with respect to strategic business plans,
the managers are under no obligation to implement any of our recommendations
with respect to these matters. If the gross receipts of our resort/hotel
properties decline, our revenues will decrease as well, which could adversely
affect our results of operations and reduce the amount of cash available to meet
our obligations.
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THE PERFORMANCE OF OUR RESIDENTIAL DEVELOPMENT PROPERTIES IS AFFECTED BY
NATIONAL, REGIONAL AND LOCAL ECONOMIC CONDITIONS
Our residential development properties, which include The Woodlands and
Desert Mountain, are generally targeted toward purchasers of high-end primary
residences or seasonal secondary residences. As a result, the economic
performance and value of these properties is particularly sensitive to changes
in national, regional and local economic and market conditions. Economic
downturns may discourage potential customers from purchasing new, larger primary
residences or vacation or seasonal homes. In addition, other factors may affect
the performance and value of a property adversely, including changes in laws and
governmental regulations (including those governing usage, zoning and taxes),
changes in interest rates (including the risk that increased interest rates may
result in decreased sales of lots in any residential development property) and
the availability to potential customers of financing. Adverse changes in any of
these factors, each of which is beyond our control, could reduce the income that
we receive from the properties, and adversely affect our ability to meet our
obligations.
WE DO NOT CONTROL OUR TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES, AND THE
LESSEE MAY BE UNABLE TO MEET ALL OF ITS RENT OBLIGATIONS
We own a 40% interest in the temperature-controlled logistics partnership
that owns AmeriCold Corporation, which in turn directly or indirectly owns our
temperature-controlled logistics properties. The temperature-controlled
logistics properties are operated by, and leased to, AmeriCold Logistics, LLC,
which is indirectly owned 60% by Vornado Operating, Inc. and 40% by COPI Cold
Storage L.L.C. We have no ownership interest in AmeriCold Logistics and, thus,
do not have the authority to control the management or operation of our
temperature-controlled logistics properties.
Pursuant to the leases, AmeriCold Logistics may elect to defer a portion of
the rent for our temperature-controlled logistics properties for up to three
years beginning on March 12, 1999, to the extent that available cash, as defined
in the leases, is insufficient to pay such rent. The leases were amended on
February 22, 2001 to extend the rent deferral period to December 31, 2003.
Through December 31, 2001, AmeriCold Logistics had deferred approximately $49.9
million of rent, of which our portion was approximately $19.8 million. In
December 2001, the temperature-controlled logistics partnership, as lessor,
waived its rights to collect $39.8 million of the $49.9 million of deferred
rent, of which our share was $15.9 million. The remaining deferred rent, or rent
payable in the future, may not be paid in full on a timely basis.
We cannot assure you that AmeriCold Logistics will operate our
temperature-controlled logistics properties in a manner which will enable it to
meet its ongoing rental obligations to us. In the event that AmeriCold Logistics
is unable to make its rental payments, our cash flow would be adversely
affected, which could affect our results of operations and our ability to meet
our obligations.
THE AMOUNT OF DEBT THAT WE HAVE AND THE RESTRICTIONS IMPOSED BY THAT DEBT COULD
ADVERSELY AFFECT OUR BUSINESS AND OUR FINANCIAL CONDITION
We have a substantial amount of debt. As of December 31, 2001, we had
approximately $2.2 billion of consolidated debt outstanding, of which
approximately $1.5 billion was secured by approximately 32% of our gross total
assets. In addition, as a result of our acquisition of Crescent Operating's
lessee interests in eight resort/hotel properties then leased to subsidiaries of
Crescent Operating, the voting interests in three of our residential development
corporations and other assets, we are now required to consolidate an additional
approximately $166.0 million of debt.
Our organizational documents do not limit the level or amount of debt that
we may incur. We do not have a policy limiting the ratio of our debt to our
total capitalization or assets. The amount of debt we have and may have
outstanding could have important consequences to you. For example, it could:
- make it difficult to satisfy our debt service requirements;
- prevent us from making distributions on our outstanding common shares and
preferred shares;
7
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing funds available for
operations, property acquisitions and other appropriate business
opportunities that may arise in the future;
- require us to dedicate increased amounts of our cash flow from operations
to payments on our variable rate, unhedged debt if interest rates rise;
- limit our flexibility in planning for, or reacting to, changes in our
business and the factors that affect the profitability of our business;
- limit our ability to obtain additional financing, if we need it in the
future for working capital, debt refinancing, capital expenditures,
acquisitions, development or other general corporate purposes;
- increase the adverse effect on our available cash flow from operations
that may result from changes in conditions in the economy in general and
in the areas in which our properties are located; and
- limit our flexibility in conducting our business, which may place us at a
disadvantage compared to competitors with less debt.
Our ability to make scheduled payments of the principal of, to pay interest
on, or to refinance, our indebtedness will depend on our future performance,
which to a certain extent is subject to economic, financial, competitive and
other factors beyond our control. There can be no assurance that our business
will continue to generate sufficient cash flow from operations in the future to
service our debt or meet our other cash needs. If we are unable to do so, we may
be required to refinance all or a portion of our existing debt, or to sell
assets or obtain additional financing. We cannot assure you that any such
refinancing, sale of assets or additional financing would be possible on terms
that we would find acceptable.
If we were to breach certain of our debt covenants, our lenders could
require us to repay the debt immediately, and, if the debt is secured, could
immediately take possession of the property securing the loan. In addition, if
any other lender declared its loan due and payable as a result of a default, the
holders of our public and private notes, along with the lenders under our credit
facility, might be able to require that those debts be paid immediately. As a
result, any default under our debt covenants could have an adverse effect on our
financial condition, results of operations and our ability to meet our
obligations.
WE ARE OBLIGATED TO COMPLY WITH FINANCIAL AND OTHER COVENANTS IN OUR DEBT THAT
COULD RESTRICT OUR OPERATING ACTIVITIES, AND THE FAILURE TO COMPLY COULD RESULT
IN DEFAULTS THAT ACCELERATE THE PAYMENT UNDER OUR DEBT
Our secured debt generally contains customary covenants, including, among
others, provisions:
- relating to the maintenance of the property securing the debt;
- restricting our ability to pledge assets or create other liens;
- restricting our ability to incur additional debt;
- restricting our ability to amend or modify existing leases; and
- restricting our ability to enter into transactions with affiliates.
Our unsecured debt generally contains various restrictive covenants. The
covenants in our unsecured debt include, among others, provisions restricting
our ability to:
- incur additional debt;
- incur additional secured debt and subsidiary debt;
- make certain distributions, investments and other restricted payments,
including distribution payments on our or our subsidiaries' outstanding
common and preferred equity;
- limit the ability of restricted subsidiaries to make payments to us;
8
- enter into transactions with affiliates;
- create certain liens;
- sell assets;
- enter into certain sale-leaseback transactions; and
- consolidate, merge or sell all or substantially all of our assets.
In addition, certain covenants in our bank facilities require us and our
subsidiaries to maintain certain financial ratios.
Any of the covenants described in this risk factor may restrict our
operations and our ability to pursue potentially advantageous business
opportunities. Our failure to comply with these covenants could also result in
an event of default that, if not cured or waived, could result in the
acceleration of all or a substantial portion of our debt.
RISING INTEREST RATES COULD ADVERSELY AFFECT OUR CASH FLOW AND THE MARKET PRICE
OF OUR OUTSTANDING DEBT SECURITIES AND PREFERRED SHARES
Of our approximately $2.2 billion of debt outstanding as of December 31,
2001, approximately $300 million bears interest at variable rates and is
unhedged. We also may borrow additional funds at variable interest rates in the
future, and we have entered, and in the future may enter, into other
transactions to limit its exposure to rising interest rates. Increases in
interest rates, or the loss of the benefits of any interest rate hedging
arrangements, would increase our interest expense on our variable rate debt,
which would adversely affect cash flow and our ability to service our debt and
meet our obligations. In addition, an increase in market interest rates may lead
purchasers of our securities to demand a higher annual yield, which could
adversely affect the market price of our outstanding debt securities and
preferred shares.
THE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR PUBLICLY TRADED SECURITIES
We have entered into various private placement transactions whereby units
and limited partnership interests in our Operating Partnership were issued in
exchange for properties or interests in properties. These units and interests
are currently exchangeable for our common shares on the basis of two shares for
each one unit or, at our option, an equivalent amount of cash. Upon exchange for
our common shares, those common shares may be sold in the public market pursuant
to registration rights. As of December 31, 2001, approximately 6,594,521 units
were outstanding, which were exchangeable for 13,189,042 of our common shares
or, at our option, an equivalent amount of cash. In addition, as of December 31,
2001, the Operating Partnership had outstanding options to acquire approximately
1,197,143 units, of which 882,857 options were exercisable at a weighted average
exercise price of $18.00 with a weighted average remaining contractual life of
4.8 years. We have also 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. As of December 31, 2001, we had outstanding options to
acquire approximately 6,975,334 common shares, of which approximately 3,126,684
options were exercisable at a weighted average exercise price of $24.00, with a
weighted average remaining contractual life of seven years. Our employees may
also participate in an employee stock purchase plan that allows them to purchase
up to 1,000,000 newly issued common shares. We cannot 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.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND MAY BE COSTLY
Under various federal, state and local laws, ordinances and regulations, we
may be required to investigate and clean up certain hazardous or toxic
substances released on or in properties we own or operate, and also may be
required to pay other costs relating to hazardous or toxic substances. This
liability may be imposed without regard to whether we knew about the release of
these types of substances or were responsible for their
9
release. The presence of contamination or the failure to remediate properly
contamination at any of our properties may adversely affect our ability to sell
or lease those properties or to borrow using those properties as collateral. The
costs or liabilities could exceed the value of the affected real estate. We have
not been notified by any governmental authority, however, of any environmental
non-compliance, liability or other environmental claim in connection with any of
our properties, and we are not aware of any other environmental condition with
respect to any of our properties that management believes would have a material
adverse effect on our business, assets or results of operations taken as a
whole.
The uses of any of our properties prior to our acquisition of the property
and the building materials used at the property are among the property-specific
factors that will affect how the environmental laws are applied to our
properties. In general, before we purchased each of our properties, independent
environmental consultants conducted Phase I environmental assessments, which
generally do not involve invasive techniques such as soil or ground water
sampling, and where indicated, based on the Phase I results, conducted Phase II
environmental assessments which do involve this type of sampling. None of these
assessments revealed any materially adverse environmental condition relating to
any particular property not previously known to us. We believe that all of those
previously known conditions either have been remediated or are in the process of
being remediated at this time. There can be no assurance, however, that
environmental liabilities have not developed since these environmental
assessments were prepared or that future uses or conditions (including changes
in applicable environmental laws and regulations) or new information about
previously unidentified historical conditions will not result in the imposition
of environmental liabilities. If we are subject to any material environmental
liabilities, the liabilities could adversely affect our results of operations
and our ability to meet our obligations.
COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT COULD BE COSTLY
Under the Americans with Disabilities Act of 1990, all public
accommodations and commercial facilities must meet certain federal requirements
related to access and use by disabled persons. Compliance with the ADA
requirements could involve removal of structural barriers from certain disabled
persons' entrances. Other federal, state and local laws may require
modifications to or restrict further renovations of our properties with respect
to such accesses. Although we believe that our properties are substantially in
compliance with present requirements, noncompliance with the ADA or related laws
or regulations could result in the United States government's imposition of
fines or in the award to private litigants of damages against us. Costs such as
these, as well as the general costs of compliance with these laws or
regulations, may adversely affect our ability to meet our obligations.
DEVELOPMENT AND CONSTRUCTION RISKS COULD ADVERSELY AFFECT OUR PROFITABILITY
We currently are developing, expanding or renovating some of our office or
resort/hotel properties and may in the future engage in these activities for
other properties we own. In addition, our residential development properties
engage in the development of raw land and construction of single-family homes,
condominiums, town homes and time-share units. These activities may be exposed
to the following risks, each of which could adversely affect our results of
operations and our ability to meet our obligations.
- We may be unable to obtain, or suffer delays in obtaining, necessary
zoning, land-use, building, occupancy and other required governmental
permits and authorizations, which could result in increased costs or our
abandonment of these activities.
- We may incur costs for development, expansion or renovation of a property
which exceed our original estimates due to increased costs for materials
or labor or other costs that were unexpected.
- We may not be able to obtain financing with favorable terms, which may
make us unable to proceed with our development and other related
activities on the schedule we originally planned or at all.
- We may be unable to complete construction and sale or lease-up of a lot,
office property or residential development unit on schedule, which could
result in increased debt service expense or construction costs.
10
Additionally, the time frame required for development, construction and
lease-up of these properties means that we may have to wait a few years for a
significant cash return. As a REIT, we are required to make cash distributions
to our shareholders. If our cash flow from operations are not sufficient, we may
be forced to borrow to fund these distributions, which could affect our ability
to meet our other obligations.
COMPETITION FOR ACQUISITIONS MAY RESULT IN INCREASED ACQUISITION COSTS
We plan to make select additional investments from time to time in the
future and may compete for available investment opportunities with entities that
have greater liquidity or financial resources. Several real estate companies may
compete with us in seeking properties for acquisition or land for development
and prospective tenants, guests or purchasers. This competition may increase the
costs of any acquisitions that we make and adversely affect our results of
operations and our ability to meet our obligations by:
- reducing the number of suitable investment opportunities offered to us;
and
- increasing the bargaining power of property owners.
In addition, if a competitor succeeds in making an acquisition in a market
in which our properties compete, ownership of that investment by a competitor
may adversely affect our results of operations and our ability to meet our
obligations by:
- interfering with our ability to attract and retain tenants, guests or
purchasers; and
- adversely affecting our ability to minimize expenses of operation.
WE ARE DEPENDENT ON OUR KEY PERSONNEL WHOSE CONTINUED SERVICE IS NOT GUARANTEED
To a large extent we are dependent on our executive officers, particularly
John C. Goff, Vice Chairman of our Board of Trust Managers and our Chief
Executive Officer, and we also depend on Richard E. Rainwater, Chairman of our
Board of Trust Managers for strategic business direction and real estate
experience. While we believe that we could find replacements for our key
personnel, loss of their services could adversely affect our operations. We do
not have key man life insurance for our executive officers.
OUR INSURANCE COVERAGE ON OUR PROPERTIES MAY BE INADEQUATE
We currently carry comprehensive insurance on all of our properties,
including insurance for liability, fire and flood. We believe this coverage is
of the type and amount customarily obtained for or by an owner of real property
assets. We intend to obtain similar insurance coverage on subsequently acquired
properties. Our existing insurance policies expire in October 2002.
As a consequence of the September 11, 2001 terrorist attacks, we may be
unable to renew or duplicate our current insurance coverage in adequate amounts
or at reasonable prices. In addition, insurance companies may no longer offer
coverage against certain types of losses, such as losses due to terrorist acts
and toxic mold, or, if offered, the expense of obtaining these types of
insurance may not be justified. We therefore may cease to have insurance
coverage against certain types of losses and/or there may be decreases in the
limits of insurance available. If an uninsured loss or a loss in excess of our
insured limits occurs, 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, but still remain obligated for any mortgage debt or other financial
obligations related to the property. We cannot guarantee that material losses in
excess of insurance proceeds will not occur in the future. If any of our
properties were to experience a catastrophic loss, it could seriously disrupt
our operations, delay revenue and result in large expenses to repair or rebuild
the property. Also, due to inflation, changes in codes and ordinances,
environmental considerations and other factors, it may not be feasible to use
insurance proceeds to replace a building after it has been damaged or destroyed.
Events such as these could adversely affect our results of operations and our
ability to meet our obligations.
11
FAILURE TO QUALIFY AS A REIT WOULD CAUSE US TO BE TAXED AS A CORPORATION, WHICH
WOULD SUBSTANTIALLY REDUCE FUNDS AVAILABLE FOR PAYMENT OF DISTRIBUTIONS
We intend to continue to operate in a manner that allows us to meet the
requirements for qualification as a REIT under the Internal Revenue Code of
1986, as amended, which we refer to as the Code. A REIT generally is not taxed
at the corporate level on income it distributes to its shareholders, as long as
it distributes at least 90 percent of its income to its shareholders annually
and satisfies certain other highly technical and complex requirements. Unlike
many REITs, which tend to make only one or two types of real estate investments,
we invest in a broad range of real estate products. Several of our investments
also are more complicated than those of other REITs. As a result, we are likely
to encounter a greater number of interpretative issues under the REIT
qualification rules, and more issues which lack clear guidance, than are other
REITs. We, as a matter of policy, consult with outside tax counsel in
structuring our new investments in an effort to satisfy the REIT qualification
rules. Shaw Pittman LLP, our tax counsel, has given us an opinion stating that
we qualified as a REIT under the Internal Revenue Code for taxable years ending
on or before December 31, 2001, that we are organized in conformity with the
requirements for qualification as a REIT under the Code and that our current and
proposed method of operation will permit us to continue to meet the requirements
for qualification and taxation as a REIT for our current and future taxable
years. This opinion is based on representations made by us as to factual
matters, opinions of other law firms and on existing law, which is subject to
change, both retroactively and prospectively, and to possibly different
interpretations. Shaw Pittman LLP's opinion also is not binding on either the
Internal Revenue Service or the courts.
We must meet the requirements of the Code in order to qualify as a REIT now
and in the future, so it is possible that we will not continue to qualify as a
REIT in the future. The laws and regulations governing federal income taxation
are the subject of frequent review and amendment, and proposed or contemplated
changes in the laws or regulations may affect our ability to qualify as a REIT
and the manner in which we conduct our business. If we fail to qualify as a REIT
for federal income tax purposes, we would not be allowed a deduction for
distributions to our shareholders in computing taxable income and would be
subject to federal income tax at regular corporate rates. In addition to these
taxes, we may be subject to the federal alternative minimum tax. Unless we are
entitled to relief under certain statutory provisions, we could not elect to be
taxed as a REIT for four taxable years following any year during which we were
first disqualified. Therefore, if we lose our REIT status, we could be required
to pay significant income taxes, which would reduce our funds available for
investments or for distributions to our shareholders. This would likely
adversely affect the value of your investment in us. In addition, we would no
longer be required by law or our operating agreements to make any distributions
to our shareholders.
PROVISIONS OF OUR DECLARATION OF TRUST AND BYLAWS COULD INHIBIT CHANGES IN
CONTROL OR DISCOURAGE TAKEOVER ATTEMPTS BENEFICIAL TO OUR SHAREHOLDERS
Certain provisions of our declaration of trust and bylaws may delay or
prevent either a change in our control or another transaction that could provide
our shareholders with a premium over the then-prevailing market price of our
common shares or which might otherwise be in the best interest of our security
holders. These include a staggered Board of Trust Managers, which makes it more
difficult for a third party to gain control of our Board, and the ownership
limit described below. In addition, any future series of preferred shares may
have certain voting provisions that could delay or prevent a change of control
or other transaction that might involve a premium price or otherwise be
beneficial to our security holders. The declaration of trust also establishes
special requirements with respect to "business combinations," including certain
issuances of equity securities, between us and an "interested shareholder," and
mandates procedures for obtaining voting rights with respect to "control shares"
acquired in a control share acquisition.
YOUR OWNERSHIP OF OUR SHARES IS SUBJECT TO LIMITATION 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 (as defined in the federal income tax
laws applicable to REITs) at any time during the last half of any taxable year,
and our outstanding shares must be beneficially owned by 100 or more persons at
least 335 days of a taxable year. To facilitate
12
maintenance of our REIT qualification, our declaration of trust, subject to
certain exceptions, prohibits ownership by any single shareholder of more than
8.0% of our issued and outstanding common shares or such greater percentage as
established by our Board of Trust Managers, but in no event greater than 9.9%,
or more than 9.9% of our issued and outstanding preferred shares. We refer to
these limits together as the "ownership limit." In addition, the declaration of
trust prohibits ownership by Richard E. Rainwater, the Chairman of our Board of
Trust Managers, together with certain of his affiliates or relatives, initially,
of more than 8.0% and subsequently, of more than 9.5% of our issued and
outstanding common shares. We refer to this limit as the "Rainwater ownership
limit." Any transfer of shares may be null and void if it causes a person to
violate the ownership limit, or Mr. Rainwater, together with his affiliates and
relatives, to violate the Rainwater ownership limit, and the intended transferee
or holder will acquire no rights in the shares. Those shares will automatically
convert into excess shares, and the shareholder's rights to distributions and to
vote will terminate. The shareholder would have the right to receive payment of
the purchase price for such excess shares and certain distributions upon our
liquidation. Excess shares will be subject to repurchase by us at our election.
While the ownership limit and the Rainwater ownership limit help preserve our
status as a REIT, they could also delay or prevent any person or small group of
persons from acquiring, or attempting to acquire, control of us and, therefore,
could adversely affect our shareholders' ability to realize a premium over the
then-prevailing market price for their shares.
USE OF PROCEEDS
Unless otherwise specified in the applicable prospectus supplement, we will
invest, contribute or otherwise transfer the net proceeds of a sale of
securities to the Operating Partnership. The Operating Partnership will use the
net proceeds from the sale of securities for one or more of the following:
- repayment of indebtedness;
- acquisition and development of additional properties;
- other acquisition transactions;
- repurchase our securities or securities of one of our subsidiaries;
- improvements to properties; and
- general business purposes.
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED SHARE DIVIDENDS
The ratio of combined fixed charges and preferred share dividends to
earnings for the fiscal years ended December 31, 2001, 2000, 1999, 1998 and
1997, are .97, 2.11, 1.00, 2.00, and 2.45, respectively. The ratio of fixed
charges and preferred share dividends to earnings is computed by dividing
earnings by fixed charges. For this purpose, earnings consist of income before
minority interest, extraordinary item, interest expense and amortization of
deferred financing costs and after preferred dividend requirements of one of our
subsidiaries. Fixed charges consist of interest expense, capitalized interest,
amortization of deferred financing costs preferred dividends and preferred
dividend requirements of one of our subsidiaries.
DESCRIPTION OF COMMON SHARES
GENERAL
Our declaration of trust authorizes the Board of Trust Managers to issue up
to 250,000,000 common shares, par value $0.01 per share, and 350,000,000 excess
shares, par value $0.01 per share, issuable in exchange for common shares as
described below at "-- Ownership Limits and Restrictions on Transfer." The
common shares are listed on the New York Stock Exchange under the symbol "CEI."
As of December 31, 2001, there were 119,094,222 common shares issued and
outstanding.
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Subject to any preferential rights that the Board of Trust Managers grants
in connection with the future issuance of preferred shares, holders of common
shares are entitled to one vote per share on all matters to be voted on by
shareholders. Matters submitted for shareholder approval generally require a
majority vote of the shares present and voting thereon.
Holders of common shares are entitled to receive ratably any distributions
that the Board of Trust Managers, in its discretion, declares on the common
shares. In the event of our liquidation, dissolution or winding up, holders of
common shares are entitled to share ratably in all assets remaining after
payment of all debts and other liabilities and any liquidation preference of the
holders of preferred shares.
Holders of common shares do not have subscription, redemption, conversion
or preemptive rights.
OWNERSHIP LIMITS AND RESTRICTIONS ON TRANSFER
For us to qualify as a REIT under the Code:
- not more than 50% in value of outstanding equity securities of all
classes, or equity shares, may be owned, directly or indirectly, by five
or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year,
- the equity shares 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, and
- certain percentages of our gross income must come from certain
activities.
To ensure that five or fewer individuals do not own more than 50% in value
of the outstanding equity shares, our declaration of trust provides that no
holder may own, or be deemed to own by virtue of certain attribution provisions
of the Code:
- more than 8.0% of the issued and outstanding common shares or such
greater percentage of the outstanding common shares as the Board of Trust
Managers may establish, but in no event greater than 9.9% of the
outstanding common shares, which we refer to as the Common Shares
Ownership Limit, or
- more than 9.9% of the issued and outstanding shares of any series of
preferred shares, which we refer to as the Preferred Shares Ownership
Limit.
However, Mr. Rainwater, the Chairman of the Board of Trust Managers, and
certain related persons, whom we refer to as the Rainwater Holder, together may
own, or be deemed to own by virtue of certain attribution provisions of the
Code, initially, up to 8.0%, and subsequently, such other percentage of the
outstanding common shares as the Board of Trust Managers may establish, but in
no event greater than 9.5%, which we refer to as the Rainwater Ownership Limit,
of the issued and outstanding common shares. Together, the Common Shares
Ownership Limit and the Preferred Shares Ownership Limit are referred to as the
Ownership Limit.
The Board of Trust Managers, upon receipt of a ruling from the Internal
Revenue Service, an opinion of counsel, or other evidence satisfactory to the
Board of Trust Managers, in its sole discretion, may waive or change, in whole
or in part, the application of the Ownership Limit with respect to any person
that is not an individual (as defined in Section 542(a)(2) of the Code). In
connection with any such waiver or change, the Board of Trust Managers may
require certain representations and undertakings from such person or affiliates
and may impose such other conditions as the Board of Trust Managers deems
necessary, advisable or prudent to determine the effect, if any, of the proposed
transaction or ownership of equity shares on our status as a REIT for federal
income tax purposes.
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In addition, the Board of Trust Managers, from time to time, may increase
the Common Shares Ownership Limit, except that:
- the Common Shares Ownership Limit may not be increased and no additional
limitations may be created if, after giving effect such increase or
limitations, we would be "closely held" within the meaning of Section
856(h) of the Code, and
- the Common Shares Ownership Limit may not be increased to a percentage
that is greater than 9.9%.
Under our declaration of trust, the Preferred Shares Ownership Limit may
not be increased to a percentage that is greater than 9.9% and the Rainwater
Ownership Limit may not be increased to a percentage that is greater than 9.5%.
The Board of Trust Managers may reduce the Rainwater Ownership Limit, with the
written consent of Mr. Rainwater, after the occurrence of any transfer permitted
by the declaration of trust. Prior to any modification of the Ownership Limit or
the Rainwater Ownership Limit, the Board of Trust Managers will have the right
to require such opinions of counsel, affidavits, undertakings or agreements as
it may deem necessary, advisable or prudent, in its sole discretion, in order to
determine or ensure our status as a REIT.
Under our declaration of trust, the Ownership Limit will not be
automatically removed even if:
- the REIT provisions of the Code are changed so that they no longer
contain any ownership concentration limitation, or
- the ownership concentration limit is increased.
In addition to preserving our status as a REIT for federal income tax
purposes, the Ownership Limit may prevent any person or small group of persons
from acquiring control of the company.
Our declaration of trust also provides that an issuance, transfer or
acquisition of equity shares will be null and void to the intended transferee or
holder, and the intended transferee or holder will acquire no rights to the
shares, if the issuance, transfer or acquisition:
- would result in a holder beneficially or constructively owning common
shares or preferred shares in excess of the Ownership Limit,
- would result in the Rainwater Holder beneficially or constructively
owning common shares in excess of the Rainwater Ownership Limit or
preferred shares in excess of the Preferred Ownership Limit,
- would cause us to be beneficially owned by less than 100 persons,
- would result in our being "closely held" within the meaning of Section
856(h) of the Code,
- would result in our owning an interest in a tenant and failing to satisfy
any of the gross income requirements of Section 856(c) of the Code, or
- would otherwise result in our failing to qualify as a REIT for federal
income tax purposes.
Pursuant to our declaration of trust, equity shares that are owned,
transferred or proposed to be transferred in excess of the Ownership Limit, or
that would otherwise jeopardize our status as a REIT under the Code, will
automatically be converted to excess shares. A holder of excess shares is not
entitled to distributions, voting rights and other benefits with respect to such
shares, except the right to payment of the purchase price for the shares and the
right to certain distributions upon liquidation. Any dividend or distribution
paid to a proposed transferee on excess shares pursuant to our declaration of
trust will be required to be repaid to us upon demand. Excess shares will be
subject to repurchase by us at our election.
The purchase price of any excess shares will be equal to the lesser of (i)
the price in such proposed transaction, or (ii) the average, for the 10 trading
days immediately preceding the date on which we or our
15
designee determines to exercise our repurchase right, of the last sale price or
the average of the closing bid and asked prices of one of the following:
- if the shares are then listed on the New York Stock Exchange, the last
sales price of such shares,
- if the shares are not then so listed, such price for the shares on the
principal exchange (including the Nasdaq National Market) on which such
shares are listed,
- if the shares are not then listed on a national securities exchange, the
latest quoted price for the shares,
- if not quoted, the average of the high bid and low asked prices if the
shares are then traded over-the-counter, as reported by the Nasdaq Stock
Market,
- if such system is no longer in use, the principal automated quotation
system then in use,
- if the shares are not quoted on such system, the average of the closing
bid and asked prices as furnished by a professional market maker making a
market in the shares, or
- if there is no such market maker or such closing prices otherwise are
unavailable, the fair market value as of such day, as determined by the
Board of Trust Managers in good faith.
Our declaration of trust also establishes certain restrictions relating to
transfers of any exchange shares that may be issued. If any legal decision,
statute, rule or regulation declares these transfer restrictions void or
invalid, then we will have the option to deem the intended transferee of any
excess shares to have acted as an agent on our behalf in acquiring such excess
shares and to hold such excess shares on our behalf.
Under our declaration of trust, we have the authority at any time to waive
the requirement that excess shares be issued or be deemed outstanding in
accordance with the provisions of the declaration of trust if the issuance of
such excess shares or the fact that such excess shares are deemed to be
outstanding would, in the opinion of nationally recognized tax counsel,
jeopardize our status as a REIT for federal income tax purposes.
All certificates that we issue representing equity shares will bear a
legend referring to the restrictions described above.
Our declaration of trust also provides that all persons who own, directly
or by virtue of the attribution provisions of the Code, more than 5.0% of the
outstanding equity shares (or such lower percentage as may be set by the Board
of Trust Managers), must file an affidavit with us containing information
specified in our declaration of trust no later than January 31 of each year. In
addition, each shareholder, upon demand, must disclose to us in writing
information regarding the direct, indirect and constructive ownership of shares
as the trust managers deem necessary to comply with the REIT provisions of the
Code or to comply with the requirements of an authority or governmental agency.
The ownership limitations described above may have the effect of precluding
acquisitions of control of the company by a third party.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the common shares is Equiserve Trust
Company, N.A.
DESCRIPTION OF COMMON SHARE WARRANTS
We may issue common share warrants for the purchase of common shares.
Common share warrants may be issued independently or together with any other
securities offered by any prospectus supplement and may be attached to or
separate from such other securities. Each series of common share warrants will
be issued under a separate warrant agreement to be entered into between us and a
warrant agent specified in the applicable prospectus supplement. The warrant
agent will act solely as our agent in connection with the common share warrants
of such series and will not assume any obligation or relationship of agency or
trust for or with any holders or beneficial owners of common share warrants.
16
The following sections summarize certain general terms and provisions of
the common share warrants offered by this prospectus. Further terms of the
common share warrants and the applicable warrant agreements will be set forth in
the applicable prospectus supplement.
The applicable prospectus supplement will describe the terms of the common
share warrants in respect of which this prospectus is being delivered,
including, where applicable, the following:
- the title of such common share warrants,
- the aggregate number of such common share warrants,
- the price or prices at which such common share warrants will be issued,
- the number of common shares purchasable upon exercise of such common
share warrants,
- the designation and terms of any other securities offered thereby with
which such common share warrants are to be issued and the number of such
common share warrants issued with each such security offered thereby,
- the date, if any, on and after which such common share warrants and the
related common shares will be separately transferable,
- the price at which the common shares purchasable upon exercise of such
common share warrants may be purchased,
- the date on which the right to exercise such common share warrants will
commence and the date on which such right will expire,
- the minimum or maximum number of such common share warrants which may be
exercised at any one time,
- information with respect to book entry procedures, if any,
- any limitations on the acquisition or ownership of such common share
warrants which may be required in order to maintain our status as a REIT,
- a discussion of certain federal income tax considerations, and
- any other terms of such common share warrants, including terms,
procedures and limitations relating to the exchange and exercise of such
common share warrants.
Reference is made to the section captioned "Description of Common Shares"
for a general description of the common shares to be acquired upon the exercise
of the common share warrants, including a description of certain restrictions on
the ownership of common shares.
DESCRIPTION OF PREFERRED SHARES
GENERAL
Our Board of Trust Managers is authorized to issue up to 100,000,000
preferred shares, par value $0.01 per share, in one or more series, with such
designations, powers, preferences and rights of the shares of such series, and
with such qualifications, limitations or restrictions on the shares of such
series, if any, as our Board of Trust Managers may determine, without any
further vote or action by the shareholders. The designations, powers,
preferences and rights of, and the qualifications, limitations or restrictions
on, such shares may include, but are not limited to, distribution rights,
distribution rates, conversion rights, voting rights, terms of redemption
(including sinking fund provisions), redemption prices, and liquidation
preferences.
In February 1998, 8,000,000 of our Series A preferred shares were issued
pursuant to a Statement of Designation that sets forth the terms of a series of
preferred shares consisting of up to 9,200,000 shares, designated 6 3/4% Series
A Convertible Cumulative Preferred Shares. Our Board of Trust Managers has
17
adopted an additional Statement of Designation that have classified an
additional 2,800,000 of our Series A preferred shares that may be issued by the
Company. In this prospectus, "Statement of Designation" refers to either or both
of these Statements of Designation.
The following sections summarize the terms and provisions of the Series A
preferred shares. The following sections are not necessarily complete and are
qualified in their entirety by reference to the pertinent sections of our
declaration of trust and the Statement of Designation designating the Series A
preferred shares, each of which is available from us.
The registrar, transfer agent and distributions disbursing agent for the
Series A preferred shares is Equiserve Trust Company, N.A.
The Series A preferred shares are listed on the New York Stock Exchange
under the symbol "CEIPrA".
RANKING
The Series A preferred shares rank senior to the common shares as to rights
to receive distributions and to participate in distributions or payments upon
our liquidation, dissolution or winding up.
DISTRIBUTIONS
Holders of the Series A preferred shares are entitled to receive, when and
as authorized by the Board of Trust Managers, out of funds legally available for
the payment of distributions, cumulative cash distributions at the rate of
6 3/4% of the liquidation preference per year (equivalent to $1.6875 per year
per Series A preferred share). Distributions on the Series A preferred shares
will accrue and be cumulative from the date of original issue or, in the case of
Series A preferred shares issued in April 2002, from February 16, 2002, and will
be payable quarterly in arrears on the fifteenth day of February, May, August
and November of each year or, if not a business day, the next succeeding
business day (each, a "Distribution Payment Date").
Any distribution, including any distribution payable on the Series A
preferred shares for any partial distribution period, will be computed on the
basis of a 360-day year consisting of twelve 30-day months. Distributions are
payable to holders of record as they appear in our share records at the close of
business on the applicable record date, which will be the date that the Board of
Trust Managers designates for the payment of distributions that is not more than
30 nor less than 10 days prior to such Distribution Payment Date (each, a
"Distribution Payment Record Date").
The Board of Trust Managers will not authorize, pay or set apart for
payment by the company any distribution on the Series A preferred shares at any
time that:
- the terms and provisions of any agreement of the company, including any
agreement relating to our indebtedness, prohibits such authorization,
payment or setting apart for payment,
- the terms and provisions of any agreement of the company, including any
agreement relating to our indebtedness, provides that such authorization,
payment or setting apart for payment would constitute a breach of, or a
default under, such agreement, or
- the law restricts or prohibits such authorization or payment.
Notwithstanding the foregoing, distributions on the Series A preferred
shares will accrue whether or not:
- we have earnings,
- there are funds legally available for the payment of such distributions,
and
- such distributions are authorized.
Accrued but unpaid distributions on the Series A preferred shares will not
bear interest. Holders of the Series A preferred shares will not be entitled to
any distributions in excess of full cumulative distributions, as described
above.
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We intend to contribute or otherwise transfer the net proceeds of the sale
of any Series A Preferred Shares sold on or after the date of the prospectus to
the Operating Partnership in exchange for 6 3/4% Series A Preferred Units in the
Operating Partnership, the economic terms of which will be substantially
identical to those of the Series A Preferred Shares. As of the date of this
prospectus, we own 8,000,000 Series A Preferred Units. The Operating Partnership
will be required to make all required distributions on the Series A Preferred
Units (which will mirror the payments of distributions, including accrued and
unpaid distributions upon redemption, and of the liquidation preference amount
on the Series A Preferred Shares) prior to any distribution of cash or assets to
the holders of the Series A Preferred Units or to the holders of any other
interests in the Operating Partnership, except for any other series of preferred
units ranking on a parity with the Series A Preferred Units as to distributions
or liquidation rights, and except for distributions required to enable the
Company to maintain its qualification as a REIT.
Any distribution payment made on the Series A preferred shares will first
be credited against the earliest accrued but unpaid distribution due with
respect to such shares which remains payable.
If, for any taxable year, we elect to designate as "capital gain
distributions" (as defined in Section 857 of the Code) a portion, which we refer
to as the Capital Gains Amount, of the distributions paid or made available for
the year to the holders of all classes of shares, or the Total Distributions,
then the portion of the Capital Gains Amount that will be allocable to the
holders of Series A preferred shares will be the Capital Gains Amount multiplied
by a fraction, the numerator of which will be the total distributions (within
the meaning of the Code) paid or made available to the holders of the Series A
preferred shares for the year and the denominator of which will be the Total
Distributions.
LIQUIDATION PREFERENCE
In the event of our liquidation, dissolution or winding up of affairs, the
holders of the Series A preferred shares are entitled to be paid out of the
assets of the company legally available for distribution to our shareholders
liquidating distributions in cash or property at its fair market value as
determined by the Board of Trust Managers. Such liquidating distributions will
be paid to the holders of the Series A preferred shares in the amount of a
liquidation preference of $25.00 per share, plus an amount equal to any accrued
and unpaid distributions to the date of such liquidation, dissolution or winding
up. Such liquidating distributions will be paid to the holders of the Series A
preferred shares before any distribution of assets is made to holders of common
shares or any other capital shares of beneficial interest that rank junior to
the Series A preferred shares as to liquidation rights. After payment of the
full amount of the liquidating distributions to which they are entitled, the
holders of Series A preferred shares will have no right or claim to any of our
remaining assets.
Our consolidation or merger with or into any other entity or the sale of
all or substantially all of our property or business will not be deemed to
constitute a liquidation, dissolution or winding up of the company. The Series A
preferred shares will rank senior to the common shares as to priority for
receiving liquidating distributions.
REDEMPTION
The Series A preferred shares are not redeemable prior to February 18,
2003, except under the circumstances described below. On and after February 18,
2003, the Series A preferred shares may be redeemed at our option, in whole or
in part, from time to time, at a redemption price of $25.00 per share, plus all
distributions accrued and unpaid on the Series A preferred shares up to the date
of such redemption, upon the giving of notice, as provided below.
If fewer than all of the outstanding Series A preferred shares are to be
redeemed, the shares to be redeemed will be determined pro rata, by lot or in
such other manner as prescribed by the Board of Trust Managers. In the event
that such redemption is to be by lot, and if as a result of such redemption any
holder of Series A preferred shares would own, or be deemed by virtue of certain
attribution provisions of the Code to own, in excess of 9.9% of the issued and
outstanding Series A preferred shares (because such holder's Series A preferred
shares were not redeemed, or were only redeemed in part), then, except in
certain instances, we will redeem the requisite number of Series A preferred
shares of such shareholder such that the shareholder will
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not own or be deemed by virtue of certain attribution provisions of the Code to
own, in excess of 9.9% of the Series A preferred shares issued and outstanding
subsequent to such redemption.
Notice of redemption will be mailed not less than 30 nor more than 60 days
prior to the date fixed for redemption. Notice of redemption will be mailed to
each holder of record of Series A preferred shares that is to be redeemed. Such
notice will notify the holder of our election to redeem such shares and will
state at least the following:
- the date fixed for redemption thereof, which we refer to as the Series A
Preferred Shares Redemption Date,
- the redemption price,
- the number of shares to be redeemed (and, if fewer than all the Series A
preferred shares are to be redeemed, the number of shares to be redeemed
from such holder),
- the place(s) where the certificates representing the Series A preferred
shares are to be surrendered for payment,
- the date on which such holder's conversion rights as to the Series A
preferred shares will terminate, and
- that distributions on the Series A preferred shares will cease to accrue
on the Series A Preferred Shares Redemption Date.
On or after the Series A Preferred Shares Redemption Date, each holder of
Series A preferred shares to be redeemed must present and surrender the
certificates representing the Series A preferred shares to us at the place
designated in the notice of redemption. The redemption price of the shares will
then be paid to or on the order of the person whose name appears on such
certificates as the owner thereof. Each surrendered certificate will be
canceled. In the event that fewer than all the Series A preferred shares are to
be redeemed, a new certificate will be issued representing the unredeemed
shares.
From and after the Series A Preferred Shares Redemption Date (unless we
default in payment of the redemption price):
- all distributions on the Series A preferred shares designated for
redemption in such notice will cease to accrue,
- all rights of the holders of such shares, except the right to receive the
redemption price thereof (including all accrued and unpaid distributions
up to the Series A Preferred Shares Redemption Date), will cease and
terminate,
- such shares will not thereafter be transferred (except with our consent)
on our books, and
- such shares will not be deemed to be outstanding for any purpose
whatsoever.
At our election, we, prior to the Series A Preferred Shares Redemption
Date, may irrevocably deposit the redemption price (including accrued and unpaid
distributions) of the Series A preferred shares so called for redemption in
trust with a bank or trust company for the holders thereof. In that case, such
notice to holders of the Series A preferred shares to be redeemed will:
- state the date of such deposit,
- specify the office of such bank or trust company as the place of payment
of the redemption price, and
- call upon such holders to surrender the certificates representing such
Series A preferred shares at such place on or about the date fixed in
such redemption notice (which may not be later than the Series A
Preferred Shares Redemption Date) against payment of the redemption price
(including all accrued and unpaid distributions up to the Series A
Preferred Shares Redemption Date).
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The bank or trust company will return to us any moneys that we so deposit
that remain unclaimed by the holders of the Series A preferred shares at the end
of two years after the Series A Preferred Shares Redemption Date.
Notwithstanding the foregoing, unless full cumulative distributions on all
outstanding Series A preferred shares have been paid or declared and a sum
sufficient for the payment of such distributions has been set apart for payment
for all past distribution periods and the then-current distribution period, no
Series A preferred shares will be redeemed unless all outstanding Series A
preferred shares are simultaneously redeemed. However, the foregoing will not
prevent the purchase or acquisition of Series A preferred shares pursuant to a
purchase or exchange offer made on the same terms to holders of all outstanding
Series A preferred shares. Unless full cumulative distributions on all
outstanding Series A preferred shares have been paid or declared and a sum
sufficient for the payment of such distributions has been set apart for payment
for all past distribution periods and the then-current distribution period, we
will not purchase or otherwise acquire directly or indirectly any Series A
preferred shares (except by conversion into or exchange for shares of beneficial
interest of the company ranking junior to the Series A preferred shares as to
distribution rights and liquidation preference).
Notwithstanding any other provision relating to redemption of the Series A
preferred shares, we may redeem Series A preferred shares at any time, whether
or not prior to February 18, 2003, if the Board of Trust Managers determines
that the redemption:
- is necessary or advisable to preserve our status as a REIT, or
- is reasonable or appropriate in order to comply with any laws, rules or
regulations of any gaming authority.
The Series A preferred shares have no stated maturity date and will not be
subject to any sinking fund or mandatory redemption provisions.
VOTING RIGHTS
If distributions on the Series A preferred shares are in arrears for six or
more quarterly periods, whether or not these quarterly periods are consecutive,
holders of Series A preferred shares (voting separately as a class with all
other series of preferred shares upon which like voting rights have been
conferred and are exercisable) will be entitled to vote, at a special meeting
called by the holders of record of at least 10% of any series of preferred
shares as to which distributions are so in arrears or at the next annual meeting
of shareholders, for the election of two additional trust managers to serve on
the Board of Trust Managers until all distribution arrearages have been paid or
declared and a sum sufficient for the payment thereof set aside for payment.
In addition, certain changes that would be materially adverse to the rights
of holders of the Series A preferred shares cannot be made without the
affirmative vote of two-thirds of the Series A preferred shares (voting
separately as a class with all other series of preferred shares upon which like
voting rights have been conferred and are exercisable).
In any matter in which the Series A preferred shares are entitled to vote
(as expressly provided in our declaration of trust or Statements of Designation,
or as may be required by law), including any action by written consent, each
Series A preferred share will be entitled to one vote.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding Series A preferred shares shall have been redeemed
or called for redemption and sufficient funds shall have been deposited in trust
to effect such redemption.
CONVERSION RIGHTS
Subject to the restrictions on transfer and ownership described below in
"-- Ownership Limits and Restrictions on Transfer" and above in "Description of
Common Shares -- Ownership Limits and Restrictions on Transfer," Series A
preferred shares are convertible at any time, at the option of the holders
thereof,
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into common shares at a conversion price of $40.86 per common share (equivalent
to a conversion rate of .6119 common shares per Series A preferred share),
subject to adjustment as described below and referred to as the Conversion
Price. The right to convert Series A preferred shares called for redemption will
terminate at the close of business on the applicable Series A Preferred Shares
Redemption Date.
Conversion of Series A preferred shares, or a specified portion thereof,
may be effected by delivering certificates representing the Series A preferred
shares to be converted together with written notice of conversion and a proper
assignment of such certificates to the office of the transfer agent. Currently,
the principal corporate trust office of the transfer agent is Equiserve Trust
Company, N.A., 150 Royall Street, Canton, MA 02021.
Each conversion is deemed to be effected immediately prior to the close of
business on the date on which:
- the certificates were surrendered,
- we received notice, and
- if applicable, we received payment of any amount equal to the
distribution payable on such Series A preferred shares surrendered for
conversion, as described below.
The conversion will be at the Conversion Price in effect at such time and
on such date.
Holders of Series A preferred shares at the close of business on a
Distribution Payment Record Date will be entitled to receive the distribution
payable on such shares on the corresponding Distribution Payment Date, even if
the holder converted the shares after such Distribution Payment Record Date and
prior to such Distribution Payment Date.
However, if the holder surrenders its Series A preferred shares for
conversion between the close of business on any Distribution Payment Record Date
and the opening of business on the corresponding Distribution Payment Date
(except those shares converted after the issuance of a notice of redemption with
respect to a Series A Preferred Shares Redemption Date occurring during such
period or coinciding with such Distribution Payment Date, which will be entitled
to such distribution), the shares must be accompanied by payment of an amount
equal to the distribution payable on such shares on such Distribution Payment
Date.
A holder of Series A preferred shares on a Distribution Payment Record Date
who (or whose transferee) tenders any such shares for conversion into common
shares on such Distribution Payment Date will receive the distribution payable
by the Company on such Series A preferred shares on such date. The converting
holder need not include payment of the amount of such distribution upon
surrender of certificates for conversion.
Except as provided above, we will make no payment or allowance for unpaid
distributions, whether or not in arrears, on converted shares or for
distributions on the common shares that are issued upon such conversion.
We will not issue fractional common shares upon conversion. Instead, we
will pay a cash adjustment based on the current market price of the common
shares on the trading day immediately prior to the conversion date.
For a further discussion of the common shares to be received upon
conversion of Series A preferred shares, see "Description of Common Shares"
above.
CONVERSION PRICE ADJUSTMENTS
The Conversion Price is subject to adjustment upon certain events,
including the following:
- the payment of distributions payable in common shares on any class of
shares of beneficial interest of the company,
- the issuance to all holders of common shares of certain rights, options
or warrants entitling them to subscribe for or purchase common shares at
a price per share less than the fair market value per share of common
shares,
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- subdivisions, combinations and reclassifications of common shares,
- the payment of distributions to all holders of common shares of any
shares of beneficial interest of the company (other than common shares),
- the distribution to all holders of common shares of evidences of
indebtedness of the company or assets (excluding cash distributions paid
out of equity, including revaluation equity, applicable to common shares,
less stated capital attributable to common shares), and
- the distribution to all holders of common shares of rights, options or
warrants to subscribe for or purchase any of our securities (excluding
those rights, options and warrants referred to above).
In addition to these adjustments, we will be permitted to make reductions
in the Conversion Price that we consider advisable in order that any event
treated for federal income tax purposes as a dividend of stock or stock rights
will not be taxable to the holders of the common shares.
We may be a party to transactions such as mergers, consolidations,
statutory share exchanges, tender offers for all or substantially all of the
common shares, or sales of all or substantially all of our assets. If we are a
party to any transaction, including but not limited to those listed above, and
as a result of that transaction common shares will be converted into the right
to receive shares of beneficial interest, securities or other property
(including cash or any combination thereof), each Series A preferred share, if
convertible after the consummation of the transaction, will be convertible into
the kind and amount of shares of stock and other securities and property
receivable (including cash or any combination thereof) upon the consummation of
such transaction by a holder of that number of common shares or fraction thereof
into which one Series A preferred share was convertible immediately prior to
such transaction (assuming such holder of common shares (i) is not a person with
which we consolidated or into which we merged or which merged into us or to
which such sale or transfer was made, and (ii) failed to exercise any rights of
election and received for each common share the kind and amount of shares,
stock, securities and other property (including cash) receivable for each common
share by a plurality of non-electing common shares). We may not become a party
to any such transaction unless the terms thereof are consistent with the
foregoing.
We are not required to adjust the Conversion Price until cumulative
adjustments amount to 1% or more of the Conversion Price. Any adjustments that
we are not required to make will be carried forward and taken into account in
subsequent adjustments.
CERTAIN PROVISIONS OF OUR DECLARATION OF TRUST,
BYLAWS AND TEXAS LAW
Both our declaration of trust and bylaws contain certain provisions that
may inhibit or impede acquisition or attempted acquisition of control of us 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
us to negotiate first with our Board of Trust Managers. We believe that these
provisions increase the likelihood that proposals initially will be on more
attractive terms than would be the case in their absence and increase the
likelihood of negotiations, which might outweigh the potential disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals might result in improvement of terms. The description set forth below
is only a summary of the terms of our declaration of trust and bylaws (copies of
which have been incorporated by reference as exhibits to the Registration
Statement of which this prospectus forms a part). See "Description of Common
Shares -- Ownership Limits and Restrictions on Transfer."
STAGGERED BOARD OF TRUST MANAGERS
Both our declaration of trust and bylaws provide that our Board of Trust
Managers will be divided into three classes of trust managers, each class
constituting approximately one-third of the total number of trust managers, with
the classes serving staggered three-year terms. The classification of our Board
of Trust Managers will have the effect of making it more difficult for
shareholders to change the composition of our
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Board of Trust Managers, because only a minority of our trust managers are up
for election, and may be replaced by vote of the shareholders, at any one time.
We believe, however, that the longer terms associated with the classified Board
of Trust Managers will help to ensure continuity and stability of our management
and policies.
The classification provisions also could have the effect of discouraging a
third party from accumulating a large block of our capital shares or attempting
to obtain control of us, even though such an attempt might be beneficial to us
and some, or a majority, of our shareholders. Accordingly, under certain
circumstances shareholders could be deprived of opportunities to sell their
common shares at a higher price than might otherwise be available.
NUMBER OF TRUST MANAGERS; REMOVAL; FILLING VACANCIES
Subject to any rights of holders of preferred shares to elect additional
trust managers under specified circumstances, which rights are referred to as
preferred holders' rights, our declaration of trust provides that the number of
trust managers will be fixed by, or in the manner provided in, our bylaws, but
must not be more than 25 nor less than one. See "Description of Preferred
Shares -- Voting Rights" above. In addition, the bylaws provide that, subject to
any preferred holders' rights, the number of trust managers will be fixed by our
Board of Trust Managers, but must not be more than 25 or less than three. In
addition, our bylaws provide that, subject to any preferred holders' rights, and
unless the Board of Trust Managers otherwise determines, any vacancies (other
than vacancies created by an increase in the total number of trust managers)
will be filled by the affirmative vote of a majority of the remaining trust
managers, although less than a quorum, and any vacancies created by an increase
in the total number of trust managers may be filled by a majority of the entire
Board of Trust Managers. Accordingly, our Board of Trust Managers could
temporarily prevent any shareholder from enlarging the Board of Trust Managers
and then filling the new trust manager position with such shareholder's own
nominees.
Both our declaration of trust and bylaws provide that, subject to any
preferred holders' rights, trust managers may be removed only for cause upon the
affirmative vote of holders of at least 80% of the entire voting power of all
the then-outstanding shares entitled to vote generally in the election of trust
managers, voting together as a single class.
RELEVANT FACTORS TO BE CONSIDERED BY OUR BOARD OF TRUST MANAGERS
The declaration of trust provides that, in determining what is in our best
interest in evaluating a "business combination," "change in control" or other
transaction, our trust manager shall consider all of the relevant factors. These
factors may include (i) the immediate and long-term effects of the transaction
on our shareholders, including shareholders, if any, who do not participate in
the transaction; (ii) the social and economic effects of the transaction on our
employees, suppliers, creditors and customers and others dealing with us and on
the communities in which we operate and are located; (iii) whether the
transaction is acceptable, based on our historical and current operating results
and financial condition; (iv) whether a more favorable price could be obtained
for our shares or other securities in the future; (v) the reputation and
business practices of the other party or parties to the proposed transaction,
including its or their management and affiliates, as they would affect our
employees; (vi) the future value of our securities; (vii) any legal or
regulatory issues raised by the transaction; and (viii) the business and
financial condition and earnings prospects of the other party or parties to the
proposed transaction including, without limitation, debt service and other
existing financial obligations, financial obligations to be incurred in
connection with the transaction, and other foreseeable financial obligations of
such other party or parties. Pursuant to this provision, our Board of Trust
Managers may consider subjective factors affecting a proposal, including certain
nonfinancial matters, and, on the basis of these considerations, may oppose a
business combination or other transaction which, evaluated only in terms of its
financial merits, might be attractive to some, or a majority, of our
shareholders.
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ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND SHAREHOLDER PROPOSALS
The bylaws provide for an advance notice procedure for shareholders to make
nominations of candidates for trust manager or bring other business before an
annual meeting of our shareholders, which procedure we refer to as the
shareholder notice procedure.
Pursuant to the shareholder notice procedure (i) only persons who are
nominated (a) pursuant to our notice of an annual meeting delivered in
accordance with our bylaws, (b) by, or at the direction of, our Board of Trust
Managers, or (c) by a shareholder who has given timely written notice containing
specified information to our Secretary prior to the meeting at which trust
managers are to be elected, will be eligible for election as trust managers and
(ii) at an annual meeting, only such business may be conducted as has been
brought before the meeting (a) pursuant to our notice of an annual meeting
delivered in accordance with our bylaws, (b) by, or at the direction of, the
Chairman of our Board of Trust Managers, or (c) by a shareholder who has given
timely written notice to our Secretary of such shareholder's intention to bring
such business before such meeting. In general, for notice of shareholder
nominations or proposed business to be conducted at an annual meeting to be
timely, such notice must be received by us not less than 70 days nor more than
90 days prior to the first anniversary of the previous year's annual meeting.
The purpose of requiring shareholders to give us advance notice of
nominations and other business is to afford our Board of Trust Managers a
meaningful opportunity to consider the qualifications of the proposed nominees
or the advisability of the other proposed business and, to the extent deemed
necessary or desirable by our Board of Trust Managers, to inform shareholders
and make recommendations about such nominees or business, as well as to ensure
an orderly procedure for conducting meetings of shareholders. Although the
bylaws do not give our Board of Trust Managers power to block shareholder
nominations for the election of trust managers or proposal for action, the
shareholder notice procedure may have the effect of discouraging a shareholder
from proposing nominees or business, precluding a contest for the election of
trust managers or the consideration of shareholder proposals if procedural
requirements are not met, and deterring third parties from soliciting proxies
for a non-management proposal or slate of trust managers, without regard to the
merits of such proposal or slate.
PREFERRED SHARES
The declaration of trust authorizes our Board of Trust Managers to
establish one or more series of preferred shares and to determine, with respect
to any series of preferred shares, the preferences, rights and other terms of
such series. See "Description of Preferred Shares." We believe that the ability
of our Board of Trust Managers to issue one or more series of preferred shares
will provide us with increased flexibility in structuring possible future
financings and acquisitions, and in meeting other corporate needs. The
authorized preferred shares are available for issuance without further action by
our shareholders, unless such action is required by applicable law or the rules
of any stock exchange or automated quotation system on which our securities may
be listed or traded at the time of issuance or proposed issuance. Although our
Board of Trust Managers has no present intention to do so, it could, in the
future, issue a series of preferred shares which, due to its terms, could impede
a merger, tender offer or other transaction that some, or a majority, of our
shareholders might believe to be in their best interests or in which
shareholders might receive a premium over then-prevailing market prices for
their common shares.
AMENDMENT OF DECLARATION OF TRUST
The declaration of trust may be amended as prescribed in the declaration of
trust or by applicable law only by the affirmative vote of the holders of not
less than two-thirds of the votes entitled to be cast, except that the
provisions of the declaration of trust relating to "business combinations" or
"control shares" (as described below under "-- Business Combinations" and
"-- Control Share Acquisitions") may be amended only with the affirmative vote
of 80% of the votes entitled to be cast, voting together as a single class.
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RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
The declaration of trust authorizes our Board of Trust Managers, subject to
any rights of holders of any series of preferred shares, to create and issue
rights entitling the holders thereof to purchase from us equity shares or other
securities or property. The times at which and terms upon which such rights are
to be issued are within the discretion of our Board of Trust Managers. This
provision is intended to confirm the authority of our Board of Trust Managers to
issue share purchase rights which could have terms that would impede a merger,
tender offer or other takeover attempt, or other rights to purchase our
securities or any other entity.
BUSINESS COMBINATIONS
The declaration of trust establishes special requirements with respect to
"business combinations" (including a merger, consolidation, share exchange, or,
in certain circumstances, an asset transfer or issuance of reclassification of
equity securities) between us and any person who beneficially owns, directly or
indirectly, 10% or more of the voting power of our shares, which person we refer
to as an interested shareholder, subject to certain exemptions. In general, the
declaration of trust provides that an interested shareholder or any affiliate
thereof may not engage in a "business combination" with us for a period of five
years following the date he becomes an interested shareholder. Thereafter,
pursuant to the declaration of trust, such transactions must be recommended by
our Board of Trust Managers and approved by the affirmative vote of at least (i)
80% of the votes entitled to be cast by holders of outstanding voting shares,
voting together as a single voting group, and (ii) two-thirds of the votes
entitled to be cast by holders of voting shares, other than voting shares held
by the interested shareholder with whom the business combination is to be
effected, voting together as a single voting group, unless, among other things,
the holders of equity shares receive the highest amount determined as described
in the declaration of trust for their shares and the consideration is received
in cash or in the same form as previously paid by the interested shareholder for
his shares. These provisions of the declaration of trust do not apply, however,
to business combinations that are approved or exempted by our Board of Trust
Managers prior to the time that the interested shareholder becomes an interested
shareholder.
CONTROL SHARE ACQUISITIONS
The declaration of trust provides that "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 by the holders of equity
shares, excluding shares as to which the acquiror, our officers and our
employees who are also trust managers have the right to vote or direct the vote.
"Control shares" are equity shares which, if aggregated with all other
previously acquired equity shares which the person is entitled to vote, would
entitle the acquiror to vote (i) 20% or more but less than one-third; (ii)
one-third or more but less than a majority; or (iii) a majority of our
outstanding voting shares. Control shares do not include equity shares that the
acquiring person is entitled to vote on the basis of prior shareholder approval.
A "control share acquisition" is defined as the acquisition, directly or
indirectly, by any person, of ownership of, or the power to direct the exercise
of voting power with respect to, issued and outstanding control shares.
The declaration of trust provides that a person who has made or proposed to
make a control share acquisition and who has delivered an acquiring person
statement and obtained a definitive financing agreement with a responsible
financial institution providing for any amount of financing not to be provided
by the acquiring person and who gave a written undertaking to pay our expense of
a special meeting, may compel our Board of Trust Managers to call a special
meeting of shareholders to be held within 50 days of demand to consider the
voting rights of the equity shares. If no request for a meeting is made, the
declaration of trust permits us to present the question at any shareholders'
meeting.
Pursuant to the declaration of trust, if voting rights are not approved at
a shareholders' meeting and/or if the acquiring person does not deliver an
acquiring person statement as required by the declaration of trust, then,
subject to certain conditions and limitations set forth in the declaration of
trust, we will have the right to 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 of the control
shares, as of the date of the last control share acquisition or of any meeting
of shareholders at which the voting rights of such shares are
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considered and not approved. Under the declaration of trust, if, before a
control share acquisition has occurred, voting rights for control shares are
approved at a shareholders' meeting and, as a result, the acquiror would be
entitled to vote a majority or more of the equity shares entitled to vote, all
other shareholders will have the rights of dissenting shareholders under the
Texas Real Estate Investment Trust Act, which we refer to as the Texas REIT Act.
The declaration of trust provides that the fair value of the equity shares 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, and that certain
limitations and restrictions of the Texas REIT Act otherwise applicable to the
exercise of dissenters' rights do not apply.
These provisions of the declaration of trust do not apply to equity shares
acquired (i) under the laws of descent and distribution, (ii) under the
satisfaction of a pledge or other security interest, (iii) under a merger,
consolidation or share exchange if we are a party to the transaction, (iv) by or
from any person whose voting rights have previously been authorized by our
shareholders, or (v) by or from any person whose previous acquisition of shares
of beneficial interest would have constituted a control share acquisition but
for items (i) through (iii) above.
OWNERSHIP LIMITS AND RESTRICTIONS ON TRANSFER
In order to maintain our qualification as a REIT for federal income tax
purposes, our declaration of trust restricts ownership by any person of our
outstanding shares of beneficial interest. Our declaration of trust also
provides certain restrictions on the ownership and transfer of the shares of
beneficial interest of the company which will apply to conversions of the Series
A preferred shares, as well as the ownership and transfer of Series A preferred
shares. See "Description of Common Shares -- Ownership Limits and Restrictions
on Transfer" above.
ERISA CONSIDERATIONS
The following sections summarize the issues arising under the Employee
Retirement Income Security Act of 1974, as amended, which we refer to as ERISA,
and the prohibited transaction provisions of Section 4975 of the Code that you
may consider relevant. This discussion does not address all aspects of ERISA or
the Code that may be relevant to particular investors in light of their
particular circumstances.
We urge any prospective investor that is an employee benefit plan subject
to ERISA, a tax qualified retirement plan, an individual retirement account
(IRA) or a governmental, church or other plan or other plan that is exempt from
ERISA to consult its own legal advisor regarding the specific considerations
arising under ERISA, the Code and state law with respect to its purchase,
ownership, or sale of our securities.
FIDUCIARY DUTIES AND PROHIBITED TRANSACTIONS
If you are a fiduciary of a pension, profit-sharing, retirement or other
employee benefit plan subject to ERISA, which we refer to as an ERISA Plan, you
should consider the fiduciary standards under ERISA in the context of the ERISA
Plan's particular circumstances before authorizing an investment of any portion
of the ERISA Plan's assets in the Securities. Accordingly, you should consider:
- whether the investment satisfies the diversification requirements of
Section 404(a)(1)(C) of ERISA,
- whether the investment is in accordance with the documents and
instruments governing the ERISA Plan as required by Section 404(a)(1)(D)
of ERISA,
- whether the investment is prudent under Section 404(a)(1)(B) of ERISA,
and
- whether the investment is solely in the interests of the ERISA Plan
participants and beneficiaries and for the exclusive purpose of providing
benefits to the ERISA Plan participants and beneficiaries and defraying
reasonable administrative expenses of the ERISA Plan as required by
Section 404(a)(1)(A) of ERISA.
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In addition to the imposition of fiduciary standards, ERISA and Section
4975 of the Code prohibit a wide range of transactions between an ERISA Plan, an
IRA or certain other plans (collectively, a "Plan") and persons who have certain
specified relationships to the Plan ("parties in interest" within the meaning of
ERISA and "disqualified persons" within the meaning of the Code). Thus, if you
are a Plan fiduciary or the person making an investment decision for a Plan, you
also should consider whether the acquisition or the continued holding of the
Securities might constitute or give rise to a direct or indirect prohibited
transaction.
PLAN ASSETS
The prohibited transactions rules of ERISA and the Code apply to
transactions with a Plan and to transactions with the "plan assets" of a Plan.
The "plan assets" of a Plan include the Plan's interest in an entity in which
the Plan invests and, in certain circumstances, the assets of the entity in
which the Plan holds such interest. The term "plan assets" is not defined in
ERISA or the Code, and has not been interpreted definitively by the courts in
litigation. The United States Department of Labor, the governmental agency
primarily responsible for administering ERISA, has issued a final regulation,
which we refer to as the DOL Regulation, setting out the standards it will apply
in determining whether an equity investment in an entity will cause the assets
of such entity to constitute "plan assets." The DOL Regulation applies for
purposes of both ERISA and Section 4975 of the Code.
Under the DOL Regulation, if a Plan acquires an equity interest in an
entity that is not an operating company, and the equity interest is not a
"publicly-offered security," the Plan's assets generally would include both the
equity interest and an undivided interest in each of the entity's underlying
assets unless certain specified exceptions apply. 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 Section
12(b) or 12(g) of 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 after the end of the fiscal
year of the issuer during which the offering occurred). We will sell our
securities in an offering registered under the Securities Act and registered
under Section 12(b) of the Exchange Act.
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 that are
independent of the issuer and of one another. However, a class of securities
will not fail to be "widely held" solely 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. We expect our securities to be "widely
held" upon completion of any offering.
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The DOL Regulation further provides that when
a security is part of an offering in which the minimum investment is $10,000 or
less, as will be the case with any offering, certain restrictions ordinarily
will not affect the finding that such securities are freely transferable. We
believe that the restrictions imposed under our "declaration of trust" on the
transfer of our securities are limited to restrictions on transfer generally
permitted under the DOL Regulation and are not likely to result in the failure
of our securities to be "freely transferable." See "Description of Common
Shares -- Ownership Limits and Restrictions on Transfer." The DOL Regulation
establishes only a presumption in favor of a finding of free transferability. We
cannot assure you that the Department of Labor and the U.S. Treasury Department
would not reach a contrary conclusion with respect to our securities. Any
additional transfer restrictions imposed on the transfer of our securities will
be discussed in the applicable prospectus supplement.
Assuming that our securities will be "widely held" and "freely
transferable," we believe that our securities will be publicly-offered
securities for purposes of the DOL Regulation and that our assets will not be
deemed to be "plan assets" of any plan that invests in our securities.
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PLAN OF DISTRIBUTION
We may sell our securities to one or more underwriters for public offering
and sale by them, or we may sell our securities to investors directly or through
agents. We will name any underwriter or agent involved in the offer and sale of
our securities in the applicable prospectus supplement.
Underwriters may offer and sell our securities at a fixed price or prices,
which may be changed, related to the prevailing market prices at the time of
sale, or at negotiated prices. We also may, from time to time, authorize
underwriters acting as our agents to offer and sell our securities upon the
terms and conditions set forth in an applicable prospectus supplement. In
connection with the sale of securities, underwriters may be deemed to have
received compensation from us in the form of underwriting discounts or
commissions and may also receive commissions from purchasers of securities for
whom they may act as agent. Underwriters may sell our securities to or through
dealers, and the dealers may receive compensation in the form of discounts,
concessions from the underwriters or commissions from the purchasers for whom
they may act as agent.
We will set forth in the applicable prospectus supplement any underwriting
compensation that we pay to underwriters or agents in connection with the
offering of securities and any discounts, concessions or commissions allowed by
underwriters to participating dealers. Underwriters, dealers and agents
participating in the distribution of our securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of our securities may be deemed to be underwriting
discounts and commissions under the Securities Act. Underwriters, dealers and
agents may be entitled, under agreements entered into with us, to
indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act.
If so indicated in the applicable prospectus supplement, we will authorize
dealers acting as our agents to solicit offers by certain institutions to
purchase securities from us at the public offering price set forth in the
prospectus supplement pursuant to delayed delivery contracts, or Contracts. The
Contracts will provide for payment and delivery on the date or dates stated in
the prospectus supplement. Each Contract will be for an amount not less than,
and the aggregate principal amount of securities sold pursuant to Contracts will
be not less or more than, the respective amounts stated in the applicable
prospectus supplement. When authorized, we may enter into Contracts with
institutions such as commercial and savings banks, insurance companies, pension
funds, investment companies, educational and charitable institutions, and other
institutions. The institutions with which we may enter into Contracts will be
subject to our approval in all cases.
Contracts will not be subject to any conditions except the following:
- the purchase by an institution of our securities covered by its Contracts
will not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which the institution is subject,
and
- if our securities are being sold to underwriters, we will have sold to
the underwriters the total principal amount of our securities less the
principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for us and our subsidiaries in
the ordinary course of their business.
LEGAL MATTERS
Certain legal matters in connection with any offering of securities made by
this prospectus will be passed upon for us by Shaw Pittman LLP, a limited
liability partnership including professional corporations.
EXPERTS
The consolidated financial statements and schedule incorporated by
reference in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are incorporated by reference herein in reliance upon the authority
of said firm as experts in giving said report.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
SEC's website at http://www.sec.gov. You may also read and copy any document we
file at the SEC's public reference room at:
Public Reference Section
Securities and Exchange Commission
Room 1024, Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms.
We have filed with the SEC a registration statement (of which this
prospectus forms a part) on Form S-3 under the Securities Act with respect to
our securities. This prospectus does not contain all of the information set
forth in the registration statement, including the exhibits and schedules
thereto, parts of which are omitted as permitted by the rules and regulations of
the SEC.
We are "incorporating by reference" the information we file with the SEC,
which means we can disclose important information to you by referring you to
those documents. The information we incorporate by reference is an important
part of this prospectus, and all information that we file after the date of this
prospectus with the SEC will also be incorporated by reference herein and, as
appropriate, may automatically update and supersede the information contained in
this prospectus. We incorporate by reference the documents listed below, as well
as any future filings made with the SEC under Sections 13(a), 13(c), 14, or
15(d) of the Exchange Act (Exchange Act File No. 001-13038).
- Annual Report on Form 10-K for the fiscal year ended December 31, 2001,
as amended by a Form 10-K/A filed on April 1, 2002.
- Current Report on Form 8-K filed on April 16, 2002.
- Current Report on Form 8-K, filed on April 1, 2002.
You may request a copy of these documents, except the exhibits to these
documents (unless the exhibits are specifically incorporated by reference in the
documents or unless you specifically request them), at no cost, by writing or
telephoning our offices at the following address and telephone number:
Keira Moody
Vice President, Investor Relations
Crescent Real Estate Equities Company
777 Main Street
Suite 2100
Forth Worth, Texas 76102
(817) 321-2100
You should rely only on the information in this prospectus, any prospectus
supplement and the documents that are incorporated by reference. We have not
authorized anyone else to provide you with different information. We are not
offering these securities in any state where the offer is prohibited by law. You
should not assume that the information in this prospectus, any prospectus
supplement or any incorporated document is accurate as of any date other than
the date of the document.
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2,800,000 SHARES
(LOGO)
6 3/4% SERIES A CONVERTIBLE
CUMULATIVE PREFERRED SHARES
(LIQUIDATION PREFERENCE $25.00 PER SHARE)