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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-12252
EQUITY RESIDENTIAL PROPERTIES TRUST
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 13-3675988
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
(Address of Principal Executive Offices) (Zip Code)
(312) 474-1300
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common Shares of Beneficial Interest, $0.01 Par Value New York Stock Exchange
(Title of Class) (Name of Each Exchange on Which Registered)
Preferred Shares of Beneficial Interest, $0.01 Par Value New York Stock Exchange
(Title of Class) (Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting and non-voting shares held by
non-affiliates of the Registrant was approximately $5.1 billion based upon the
closing price on March 1, 2000 of $40 using beneficial ownership of shares rules
adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude
voting shares owned by Trustees and Officers, some of whom may not be held to be
affiliates upon judicial determination.
At March 1, 2000, 127,911,989 of the Registrant's Common Shares of Beneficial
Interest were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference information to be contained in the Company's
definitive proxy statement, which the Company anticipates will be filed no later
than March 31, 2000, and thus these items have been omitted in accordance with
General Instruction G(3) to Form 10-K.
2
EQUITY RESIDENTIAL PROPERTIES TRUST
TABLE OF CONTENTS
PART I. PAGE
----
Item 1. Business 4
Item 2. The Properties 28
Item 3. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 32
PART II.
Item 5. Market for Registrant's Common Equity and Related 33
Shareholder Matters
Item 6. Selected Financial Data 33
Item 7. Management's Discussion and Analysis of Financial Condition 36
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure about Market Risk 47
Item 8. Financial Statements and Supplementary Data 48
Item 9. Changes in and Disagreements with Accountants on Accounting and 48
Financial Disclosure
PART III.
Item 10. Trustees and Executive Officers of the Registrant 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners and Management 49
Item 13. Certain Relationships and Related Transactions 49
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 50
3
PART I
ITEM 1. BUSINESS
GENERAL
Equity Residential Properties Trust ("EQR") is a self-administered and
self-managed equity real estate investment trust ("REIT"). EQR was organized in
March 1993 and commenced operations on August 18, 1993 upon completion of its
initial public offering (the "EQR IPO") of 13,225,000 common shares of
beneficial interest, $0.01 par value per share ("Common Shares"). EQR was formed
to continue the multifamily property business objectives and acquisition
strategies of certain affiliated entities controlled by Mr. Samuel Zell,
Chairman of the Board of Trustees of EQR. These entities had been engaged in the
acquisition, ownership and operation of multifamily residential properties since
1969. As used herein, the term "Company" includes EQR and those entities owned
or controlled by it, as the survivor of the mergers between EQR and each of
Wellsford Residential Property Trust ("Wellsford") (the "Wellsford Merger"),
Evans Withycombe Residential, Inc. ("EWR") (the "EWR Merger"), Merry Land &
Investment Company, Inc. ("MRY") (the "MRY Merger") and Lexford Residential
Trust ("LFT") ("the LFT Merger") (collectively, the "Mergers").
The Company has formed a series of partnerships (the "Financing
Partnerships") which beneficially own certain Properties (see definition below)
that may be encumbered by mortgage indebtedness. In general, these are
structured so that ERP Operating Limited Partnership (the "Operating
Partnership"), a subsidiary of EQR, owns a 1% limited partner interest and a 98%
general partner interest in each, with the remaining 1% general partner interest
in each Financing Partnership owned by various qualified REIT subsidiaries
wholly owned by the Company (each a "QRS Corporation"). Rental income from the
Properties that are beneficially owned by a Financing Partnership is used first
to service the applicable mortgage debt and pay other operating expenses and any
excess is then distributed 1% to the applicable QRS Corporation, as the general
partner of such Financing Partnership, and 99% to the Operating Partnership, as
the sole 1% limited partner and as the 98% general partner. The Company has also
formed a series of limited liability companies that own certain Properties
(collectively, the "LLCs"). The Operating Partnership is a 99% managing member
of each LLC and a QRS Corporation is a 1% member of each LLC.
The Company's subsidiaries include the Operating Partnership, a series
of management limited partnerships and companies (collectively, the "Management
Partnerships" or the "Management Companies"), the Financing Partnerships, the
LLC's and certain other entities.
As of December 31, 1999, the Company owned or had interests in 1,062
multifamily properties containing 225,708 units, of which it wholly-owned a
portfolio of 983 multifamily properties (individually, a "Property" and
collectively, the "Properties") containing 214,060 units. The remaining 79
properties represent investments in partnership interests and/or subordinated
mortgages containing 11,648 units. The Company's Properties are located in 35
states throughout the United States. The Company is one of the largest publicly
traded REIT's (based on the aggregate market value of its outstanding Common
Shares) and is the largest publicly traded REIT owner of multifamily properties
(based on the number of apartment units wholly owned and total revenues earned).
Since the EQR IPO and through December 31, 1999, the Company, through
the Operating Partnership, has acquired direct interests in 988 properties
containing 209,975 units in the aggregate for a total purchase price of
approximately $12 billion, including the assumption of approximately $3.2
billion of mortgage indebtedness and $848.2 million of unsecured notes. Since
the EQR IPO and through December 31, 1999, the Company has disposed of 74
properties, containing 17,640 units for a total sales price of approximately
$654.2 million.
4
PART I
The Company's corporate headquarters and executive offices are located
in Chicago, Illinois. In addition, the Company has 31 management offices in the
following cities:
- Scottsdale and Tucson, Arizona;
- Irvine, Sacramento and San Francisco, California;
- Denver, Colorado;
- Tampa, Jacksonville, Ft. Lauderdale and Orlando, Florida;
- Atlanta and Augusta, Georgia;
- Chicago, Illinois;
- Kansas City, Kansas;
- Louisville, Kentucky;
- Bethesda, Maryland;
- Ypsilanti, Michigan;
- Minneapolis, Minnesota;
- Las Vegas, Nevada;
- Charlotte and Raleigh, North Carolina;
- Reynoldsburg, Ohio
- Tulsa, Oklahoma;
- Portland, Oregon;
- Nashville and Memphis, Tennessee.
- Dallas, Houston and San Antonio, Texas; and
- Seattle and Redmond, Washington
The Company has approximately 6,700 employees. An on-site manager, who
supervises the on-site employees and is responsible for the day-to-day
operations of the Property, directs each of the Company's Properties. A leasing
administrator and/or property administrator generally assists the manager. In
addition, a maintenance director at each Property supervises a maintenance staff
whose responsibilities include a variety of tasks, including responding to
service requests, preparing vacant apartments for the next resident and
performing preventive maintenance procedures year-round.
BUSINESS OBJECTIVES AND OPERATING STRATEGIES
The Company seeks to maximize both current income and long-term growth
in income, thereby increasing:
- the value of the Properties;
- distributions on a per Common Share basis; and
- shareholders' value.
The Company's strategies for accomplishing these objectives are:
- maintaining and increasing Property occupancy while increasing
rental rates;
- controlling expenses, providing regular preventive maintenance,
making periodic renovations and enhancing amenities;
- maintaining a ratio of consolidated debt-to-total market
capitalization of less than 50%;
- strategically acquiring and disposing of properties; and
- purchasing newly developed, as well as co-investing in the
development of, multifamily communities.
The Company is committed to tenant satisfaction by striving to
anticipate industry trends and implementing strategies and policies consistent
with providing quality tenant services. In addition, the
5
PART I
Company continuously surveys rental rates of competing properties and
conducts satisfaction surveys of residents to determine the factors they
consider most important in choosing a particular apartment unit.
ACQUISITION STRATEGIES
The Company anticipates that future property acquisitions will be
located in the continental United States. Management will continue to use market
information to evaluate acquisition opportunities. The Company's market database
allows it to review the primary economic indicators of the markets where the
Company currently manages Properties and where it expects to expand its
operations. Acquisitions may be financed from various sources of capital, which
may include retained cash flow, issuance of additional equity securities, sales
of Properties and collateralized and uncollateralized borrowings. In addition,
the Company may acquire additional multifamily properties in transactions that
include the issuance of limited partnership interests in the Operating
Partnership ("OP Units") as consideration for the acquired properties. Such
transactions may, in certain circumstances, partially defer the sellers' tax
consequences.
When evaluating potential acquisitions, the Company will consider:
- the geographic area and type of community;
- the location, construction quality, condition and design of the
property;
- the current and projected cash flow of the property and the ability
to increase cash flow;
- the potential for capital appreciation of the property;
- the terms of resident leases, including the potential for rent
increases;
- the potential for economic growth and the tax and regulatory
environment of the community in which the property is located;
- the occupancy and demand by residents for properties of a similar
type in the vicinity (the overall market and submarket);
- the prospects for liquidity through sale, financing or refinancing
of the property;
- the benefits of integration into existing operations; and
- competition from existing multifamily properties and the potential
for the construction of new multifamily properties in the area.
The Company expects to purchase multifamily properties with physical
and market characteristics similar to the Properties.
DEVELOPMENT STRATEGIES
The Company seeks to acquire newly constructed properties and make
investments towards the development of properties in markets where it discerns
strong demand, which the Company believes will enable it to achieve superior
rates of return. The Company's current communities under development and future
developments are in markets or will be in markets where certain market
demographics justify the development of high quality multifamily communities. In
evaluating whether to develop an apartment community in a particular location,
the Company analyzes relevant demographic, economic and financial data.
Specifically, the Company considers the following factors, among others, in
determining the viability of a potential new apartment community:
- income levels and employment growth trends in the relevant market;
- uniqueness of location;
- household growth and net migration of the relevant market's
population;
- supply/demand ratio, competitive housing alternatives, sub-market
occupancy and rent levels;
- barriers to entry that would limit competition; and
- purchase prices and yields of available existing stabilized
communities, if any.
6
PART I
DISPOSITION STRATEGIES
Management will use market information to evaluate dispositions.
Factors the Company considers in deciding whether to dispose of its Properties
include the following:
- potential increases in new construction;
- areas where the economy is expected to decline substantially; and
- markets where the Company does not intend to establish long-term
concentrations.
The Company will reinvest the proceeds received from property
dispositions primarily to fund property acquisitions as well as fund development
activities. In addition, when feasible the Company may structure these
transactions as tax deferred exchanges.
FINANCING STRATEGIES
The Company intends to maintain a ratio of consolidated debt-to-total
market capitalization of 50% or less. At December 31, 1999, the Company had a
ratio of approximately 42.75% based on the market value of equity equal to the
closing price of the Company's Common Shares on the New York Stock Exchange and
assuming conversion of all OP Units plus the liquidation preference of the
Company's preferred shares of beneficial interest, $0.01 par value per share
("Preferred Shares") and the Operating Partnership's preference units and
interests. It is the Company's policy that EQR shall not incur indebtedness
other than short-term trade, employee compensation, dividends payable or similar
indebtedness that will be paid in the ordinary course of business, and that
indebtedness shall instead be incurred by the Operating Partnership to the
extent necessary to fund the business activities conducted by the Operating
Partnership and its subsidiaries.
EQUITY OFFERINGS FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
During 1997, the Company issued 84,183 Common Shares pursuant to the
Employee Share Purchase Plan at net prices which ranged from $35.63 per share to
$42.08 per share and raised approximately $3.2 million in connection therewith.
In March 1997, the Company completed three separate public offerings
relating to an aggregate of 1,921,000 publicly registered Common Shares, which
were sold to the public at a price of $46 per share. The Company received net
proceeds of approximately $88.3 million therefrom.
In May 1997, the Company sold 7,000,000 depositary shares (the "Series
D Depositary Shares"). Each Series D Depositary Share represents a 1/10
fractional interest in a 8.60% Series D Cumulative Redeemable Preferred Share of
Beneficial Interest, $0.01 par value per share (the "Series D Preferred
Shares"). The liquidation preference of each of the Series D Preferred shares is
$250.00 (equivalent to $25 per Series D Depositary Share). The Company received
net proceeds of approximately $169.5 million from this offering (the "Series D
Preferred Share Offering").
In June 1997, the Company completed five separate public offerings
comprising an aggregate of 8,992,023 publicly registered Common Shares, which
were sold to the public at prices ranging from $44.06 to $45.88 per share. The
Company received net proceeds of approximately $398.9 million therefrom.
In September 1997, the Company completed the sale of 498,000 publicly
registered Common Shares, which were sold to the public at a price of $51.125
per share. The Company received net proceeds of approximately $24.2 million in
connection with this offering.
7
PART I
In September 1997, the Company sold 11,000,000 depositary shares (the
"Series G Depositary Shares"). Each Series G Depositary Share represents a 1/10
fractional interest in a 7 1/4% Series G Convertible Cumulative Preferred Share
of Beneficial Interest, $0.01 par value per share (the "Series G Preferred
Shares"). Series G Depositary Shares representing Series G Preferred Shares are
convertible at the option of the holder thereof at any time into Common Shares
at a conversion price of $58.58 per Common Share (equivalent to a conversion
rate of approximately .4268 Common Shares for each Series G Depositary Share).
The liquidation preference of each of the Series G Preferred Shares is $250.00
per share (equivalent to $25 per Series G Depositary Share). The Company
received net proceeds of approximately $264 million from this offering (the
"Series G Preferred Share Offering"). In addition, in October 1997, the Company
sold 1,650,000 additional Series G Depositary Shares pursuant to an
over-allotment option granted to the underwriters and received net proceeds of
approximately $39.6 million therefrom.
In October 1997, in connection with the acquisition of a portfolio of
Properties, the Company issued 3,315,500 publicly registered Common Shares,
which were issued at a price of $45.25 per share with a value of approximately
$150 million.
On November 3, 1997, the Company filed with the SEC a Form S-3
Registration Statement to register 7,000,000 Common Shares pursuant to a
Distribution Reinvestment and Share Purchase Plan. This registration statement
was declared effective on November 25, 1997. The Distribution Reinvestment and
Share Purchase Plan (the "DRIP Plan") of the Company provides holders of record
and beneficial owners of Common Shares, Preferred Shares, and limited
partnership interests in the Operating Partnership with a simple and convenient
method of investing cash distributions in additional Common Shares (which is
referred to herein as the "Dividend Reinvestment - DRIP Plan"). Common Shares
may also be purchased on a monthly basis with optional cash payments made by
participants in the Plan and interested new investors, not currently
shareholders of the Company, at the market price of the Common Shares less a
discount ranging between 0% and 5%, as determined in accordance with the DRIP
Plan (which is referred to herein as the "Share Purchase - DRIP Plan").
In December 1997, in connection with an acquisition of a Property, the
Company issued 736,296 publicly registered Common Shares, which were issued at a
price of $48.85 per share with a value of approximately $36 million.
Also in December 1997, the Company completed the sale of 467,722
publicly registered Common Shares, which were sold at a price of $51.3125 per
share. The Company received net proceeds of approximately $22.8 million in
connection with this offering.
During 1998, the Company issued 93,521 Common Shares pursuant to the
Employee Share Purchase Plan and received net proceeds of approximately $3.7
million.
During 1998, the Company issued 1,023,184 Common Shares pursuant to the
Share Purchase - DRIP Plan and received net proceeds of approximately $50.7
million.
During 1998, the Company issued 10,230 Common Shares pursuant to the
Dividend Reinvestment - DRIP Plan and received net proceeds of approximately
$0.4 million.
On January 27, 1998, the Company completed an offering of 4,000,000
publicly registered Common Shares, which were sold to the public at a price of
$50.4375 per share. The Company received net proceeds of approximately $195.3
million in connection therewith.
On February 3, 1998, the Company filed with the SEC a Form S-3
Registration Statement to register $1 billion of equity securities. The SEC
declared this registration statement effective on February
8
PART I
27, 1998. In addition, the Company carried over $272 million related to the
registration statement effective on August 4, 1997. As of December 31, 1999,
$1.1 billion remained outstanding under this registration statement.
On February 18, 1998, the Company completed two offerings of 988,340
publicly registered Common Shares, which were sold to the public at a price of
$50.625 per share. On February 23, 1998, the Company completed an offering of
1,000,000 publicly registered Common Shares, which were sold to the public at a
price of $48 per share. The Company received net proceeds from these offerings
of approximately $95 million.
On March 30, 1998, the Company completed an offering of 495,663
publicly registered Common Shares, which were sold at a price of $47.9156 per
share. The Company received net proceeds of approximately $23.7 million in
connection therewith.
On April 29, 1998, the Company completed an offering of 946,565
publicly registered Common Shares, which were sold at a price of $46.5459 per
share. The Company received net proceeds of approximately $44.1 million in
connection therewith.
On September 20, 1998, the Company completed its repurchase of
2,367,400 of its Common Shares of beneficial interest, on the open market, for
an average price of $40 per share. The purchases were made between August 5 and
September 17, 1998. The Company paid approximately $94.7 million in connection
therewith. These shares were subsequently retired.
During 1999, the Company issued 147,885 Common Shares pursuant to the
Employee Share Purchase Plan and received net proceeds of approximately $5.2
million.
During 1999, the Company issued 22,534 Common Shares pursuant to the
Share Purchase - DRIP Plan and received net proceeds of approximately $1.0
million.
During 1999, the Company issued 36,132 Common Shares pursuant to the
Dividend Reinvestment - DRIP Plan and received net proceeds of approximately
$1.5 million.
On October 12, 1999, the Company repurchased and retired 148,453 Common
Shares previously issued in connection with the LFT Merger. These Common Shares
were owned by various LFT employees and trustees. The Company paid approximately
$6.3 million in connection therewith.
DEBT OFFERINGS FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
In October 1997, the Operating Partnership issued $150 million of
unsecured fixed rate notes (the "2017 Notes") in a public debt offering. The
2017 Notes are due on October 15, 2017 and bear interest at 7.125%, which is
payable semiannually in arrears on April 15 and October 15, commencing April 15,
1998. The 2017 Notes are redeemable at any time by the Operating Partnership
pursuant to the terms thereof. The Operating Partnership received net proceeds
of approximately $147.4 million in connection with this issuance.
In November 1997, the Operating Partnership issued $200 million of
unsecured fixed rate notes in a public debt offering. Of the $200 million
issued, $150 million of these notes are due November 15, 2001 (the "2001 Notes")
and bear interest at a rate of 6.55%, which is payable semiannually in arrears
on May 15 and November 15, commencing on May 15, 1998. The remaining $50 million
of these notes are due November 15, 2003 (the "2003 Notes") and bear interest at
a rate of 6.65%, which is payable semiannually
9
PART I
in arrears on May 15 and November 15, commencing on May 15, 1998. The Operating
Partnership received net proceeds of approximately $198.5 million in connection
with the 2001 Notes and the 2003 Notes.
On February 3, 1998, the Operating Partnership filed a Form S-3
Registration Statement to register $1 billion of debt securities. The SEC
declared this registration statement effective on February 27, 1998. As of
December 31, 1999, $430 million remained outstanding under this registration
statement.
In April 1998, the Operating Partnership issued $300 million of
unsecured fixed rate notes (the "2015 Notes") in a public debt offering. The
2015 Notes were issued at a discount, which is being amortized over the life of
the notes on a straight-line basis. The 2015 Notes are due April 13, 2015. The
annual interest rate on the 2015 Notes to April 13, 2005 (the "Remarketing
Date") is 6.63%, which is payable semi-annually in arrears on October 13 and
April 13, commencing October 13, 1998. The 2015 Notes are subject to mandatory
tender to the remarketing agent on the Remarketing Date, at the election of the
remarketing dealer and subject to certain limitations. If the remarketing
dealer, initially Salomon Brothers Inc., does not purchase all tendered 2015
Notes on the Remarketing Date, or in certain other limited circumstances, the
Operating Partnership will be required to repurchase the 2015 Notes at 100% of
their principal amount plus accrued interest. If the 2015 Notes are remarketed,
the 2015 Notes will bear interest at the rate determined by the remarketing
dealer on and after the Remarketing Date. The Operating Partnership received net
proceeds of approximately $298.1 million in connection with this issuance. The
Operating Partnership also received approximately $8.1 million from the sale of
the option to remarket the 2015 Notes on the Remarketing Date, which is being
amortized over the term of the 2015 Notes. Prior to the issuance of the 2015
Notes, the Operating Partnership entered into an interest rate protection
agreement to effectively fix the interest rate cost of such issuance at the
Remarketing Date. The Operating Partnership received a one-time settlement
payment from this transaction, which was approximately $0.6 million and is being
amortized over seven years.
In August 1998, the Operating Partnership issued $100 million of
Remarketed Reset Notes (the "August 2003 Notes") in a public debt offering. The
August 2003 Notes were issued at a discount, which is being amortized over the
life of the notes on a straight-line basis. The August 2003 Notes are due August
21, 2003. During the period from and including August 21, 1998 to but excluding
August 23, 1999 (the "Initial Spread Period") the interest rate on the August
2003 Notes was LIBOR plus 0.45%. The current interest rate for the period from
August 23, 1999 to August 22, 2000 is LIBOR plus 0.75%. Beginning August 23,
1999, the Operating Partnership is entitled to redeem the August 2003 Notes on
certain dates and in certain circumstances. The Operating Partnership received
net proceeds of approximately $99.7 million in connection with this issuance.
In September 1998, the Operating Partnership issued $145 million of
unsecured fixed rate notes (the "2000 Notes") in a public debt offering. The
2000 Notes were issued at a discount, which is being amortized over the life of
the notes on a straight-line basis. The 2000 Notes are due September 15, 2000.
The annual interest rate on the 2000 Notes is 6.15%, which is payable
semi-annually in arrears on March 15 and September 15, commencing March 15,
1999. The Operating Partnership received net proceeds of approximately $144.5
million in connection with this issuance.
In June 1999, the Operating Partnership issued $300 million of
redeemable unsecured fixed rate notes (the "June 2004 Notes") in connection with
the Debt Shelf Registration in a public debt offering. The June 2004 Notes were
issued at a discount, which is being amortized over the life of the notes on a
straight-line basis. The June 2004 Notes are due June 23, 2004. The annual
interest rate on the June 2004 Notes is 7.10%, which is payable semiannually in
arrears on December 23 and June 23, commencing December 23, 1999. The Operating
Partnership received net proceeds of approximately $298.0 million in connection
with this issuance.
10
PART I
CREDIT FACILITY
On August 12, 1999 the Company obtained a new three year $700 million
unsecured revolving credit facility, with Bank of America Securities LLC and
Chase Securities Inc. acting as joint lead arrangers. The new line of credit
replaced the Company's $500 million unsecured revolving credit facility, as well
as the $120 million unsecured revolving credit facility which the Company
assumed in the MRY Merger. The prior existing revolving credit facilities were
repaid in full and terminated upon the closing of the new facility. This new
credit facility matures in August 2002 and will be used to fund property
acquisitions, costs for certain properties under development and short term
liquidity requirements. Advances under the credit facility bear interest at
variable rates based upon LIBOR available at various interest periods, plus a
certain spread dependent upon the Company's credit rating. As of March 7, 2000,
$110 million was outstanding under this new facility bearing interest at a
weighted average rate of 6.28%.
BUSINESS COMBINATIONS
On May 30, 1997, the Company completed the acquisition of the
multifamily property business of Wellsford through the Wellsford Merger. The
transaction was valued at approximately $1 billion and included 72 Properties of
Wellsford containing 19,004 units. The purchase price consisted of:
- 10.8 million Common Shares issued by the Company with a market value,
at the date of closing, of $443.7 million;
- liquidation value of $157.5 million for the following:
a) Wellsford Series A Cumulative Convertible Preferred Shares of
Beneficial Interest;
b) Wellsford Series B Cumulative Redeemable Preferred Shares of
Beneficial Interest;
- assumption of mortgage indebtedness and unsecured notes in the amount
of $345 million;
- assumption of other liabilities of approximately $33.5 million; and
- other merger related costs of approximately $23.4 million.
In the Wellsford Merger, each outstanding common share of beneficial
interest of Wellsford was converted into .625 of a Common Share. In addition,
Wellsford Series A Cumulative Convertible Preferred Shares of Beneficial
Interest were redesignated as the Company's 3,999,800 Series E Cumulative
Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share
(the "Series E Preferred Shares") and Wellsford's Series B Cumulative Redeemable
Preferred Shares of Beneficial Interest were redesignated as the Company's
2,300,000 9.65% Series F Cumulative Redeemable Preferred Shares of Beneficial
Interest, $0.01 par value per share (the "Series F Preferred Shares").
On December 23, 1997, the Company completed the acquisition of the
multifamily property business of EWR through the EWR Merger. The transaction was
valued at approximately $1.2 billion and included 53 Properties of EWR
containing 15,331 units and three Properties under construction or expansion
containing 953 units. The purchase price consisted of:
- 10.3 million Common Shares issued by the Company with a market value,
at the date of closing, of approximately $501.6 million;
- assumption of EWR's minority interest with a market value of
approximately $107.3 million;
- assumption of mortgage indebtedness and unsecured notes in the amount
of $498 million;
- assumption of other liabilities of approximately $28.2 million; and
- other merger related costs of approximately $16.7 million.
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PART I
In the EWR Merger, each outstanding common share of beneficial interest
of EWR was converted into .50 of a Common Share.
On October 19, 1998, the Company completed the acquisition of the
multifamily property business of MRY through the MRY Merger. The transaction
was valued at approximately $2.2 billion and included 108 Properties
containing 32,315 units, three Properties under construction and/or expansion
anticipated to contain 872 units and six Additional Properties containing
1,297 units that were contributed to six joint ventures. The purchase price
consisted of:
- 21.8 million Common Shares issued by the Company with a market value,
at the date of closing, of approximately $1 billion;
- liquidation value of $369.1 million for the following:
a) MRY Series A Cumulative Convertible Preferred Shares of Beneficial
Interest;
b) MRY Series B Cumulative Convertible Preferred Shares of Beneficial
Interest;
c) MRY Series C Cumulative Convertible Preferred Shares of Beneficial
Interest;
d) MRY Series D Cumulative Redeemable Preferred Shares of Beneficial
Interest;
e) MRY Series E Cumulative Redeemable Preferred Shares of Beneficial
Interest;
- assumption of MRY's minority interest with a market value of
approximately $40.2 million.
- assumption of mortgage indebtedness, unsecured notes and the
outstanding balance under a line of credit in the amount of $723.5
million;
- assumption of other liabilities of approximately $46.5 million; and
- other merger related costs of approximately $51.9 million.
In the MRY Merger, each outstanding common share of beneficial interest
of MRY was converted into .53 of a Common Share. In addition, MRY spun-off
certain assets and liabilities to Merry Land Properties, Inc. ("MRYP Spinco").
In connection with this spin-off, each holder of MRY common shares received one
share of MRYP Spinco for each twenty shares of MRY common held. As partial
consideration for the transfer, the Company extended a $25 million, one year,
non-revolving loan to MRYP Spinco pursuant to a Senior Debt Agreement. As
additional consideration, the Company extended an additional $20 million of
indebtedness to MRYP Spinco under a 15-year Subordinated Debt Agreement, bearing
interest payable quarterly. The Company also entered into the Preferred Stock
Agreement and received 5,000 shares of MRYP Spinco Preferred Stock with a
liquidation preference of $1,000 per share. In June 1999, MRYP Spinco repaid the
entire outstanding Senior Note balance of $18.3 million and the Subordinated
Debt Agreement balance of $20.0 million and repurchased all 5,000 shares of the
preferred stock for $2.7 million. There is no further obligation by either party
in connection with these agreements.
In addition, MRY Series A Cumulative Convertible Preferred Shares of
Beneficial Interest were redesignated as the Company's 164,951 Series H
Cumulative Convertible Preferred Shares of Beneficial Interest, $0.01 par value
per share (the "Series H Preferred Shares"), the MRY Series B Cumulative
Convertible Preferred Shares of Beneficial Interest were redesignated as the
Company's 4,000,000 Series I Cumulative Convertible Preferred Shares of
Beneficial Interest, $0.01 par value per share (the "Series I Preferred
Shares"), the MRY Series C Cumulative Convertible Preferred Shares of Beneficial
Interest were redesignated as the Company's 4,599,400 Series J Cumulative
Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share
(the "Series J Preferred Shares"), the MRY Series D Cumulative Redeemable
Preferred Shares of Beneficial Interest were redesignated as the Company's
1,000,000 Series K Cumulative Redeemable Preferred Shares of Beneficial
Interest, $0.01 par value per share (the "Series K Preferred Shares") and the
MRY Series E Cumulative Redeemable Preferred Shares of Beneficial Interest were
redesignated as the Company's 4,000,000 Series L Cumulative Redeemable Preferred
Shares of
12
PART I
Beneficial Interest, $0.01 par value per share (the "Series L Preferred
Shares"). During 1999, all of the Series I Preferred Shares were converted into
2,566,797 Common Shares of the Company.
On August 23, 1999, the Company sold its entire interest in the six
joint venture properties to MRYP Spinco and received $54.1 million. There is no
further obligation by either party in connection with the joint venture
agreements.
On October 1, 1999, the Company completed the acquisition of the
multifamily property business of LFT through the LFT Merger. The transaction was
valued at approximately $738 million and included 402 Properties of LFT
containing 36,609 units. The purchase price consisted of:
- 4.0 million Common Shares issued by the Company with a market value,
at the date of closing, of approximately $181.1 million;
- assumption of mortgage indebtedness and unsecured notes in the amount
of $528.3 million;
- acquisition of other assets of approximately $40.9 million and
assumption of other liabilities of approximately $25.3 million; and
- other merger related costs of approximately $24.5 million.
In the LFT Merger, each outstanding common share of beneficial interest
of LFT was converted into .463 of a Common Share.
RECENT TRANSACTIONS
On January 14, 2000, the Company entered into an agreement to acquire,
in an all cash and debt transaction, Globe Business Resources, Inc. ("Globe"),
one of the nation's largest providers of temporary corporate housing and
furniture rental. The shareholders of Globe will receive $13.00 per share upon
closing and up to an additional $0.50 per share post closing, upon final
determination of costs, if any, relating to any potential breaches of certain
representations and covenants. At full funding of $13.50 per share, the Company
would pay approximately $64.8 million in cash for Globe. In addition, the
Company will assume approximately $69.4 million in debt. The acquisition, which
is expected to close during the second quarter of 2000, requires Globe
shareholder approval.
From January 1, 2000 through March 3, 2000, the Company acquired
Windmont Apartments, a 178-unit property located in Atlanta, GA from an
unaffiliated party for a total purchase price of approximately $10.3 million.
From January 1, 2000 through March 3, 2000, the Company disposed of six
Properties for a total sales price of $46.7 million.
On March 3, 2000, Lexford Properties, L.P., a wholly-owned subsidiary
of the Operating Partnership, issued 1.1 million units of 8.50% Series B
Cumulative Convertible Redeemable Preference Units with an equity value of $55.0
million. Lexford Properties, L.P. received $53.6 million in net proceeds from
this transaction. The liquidation value of these units is $50 per unit. The 1.1
million units are exchangeable into 1.1 million shares of 8.50% Series M-1
Cumulative Redeemable Preferred Shares of Beneficial Interest of the Company.
The Series M-1 Preferred Shares are not convertible to EQR Common Shares.
Dividends for the Series B Preference Units or the Series M-1 Preferred Shares
are payable quarterly at the rate of $4.25 per unit/share per year. The net
proceeds received from this transaction will be used for scheduled mortgage and
line of credit repayments.
13
PART I
COMPETITION
All of the Properties are located in developed areas that include other
multifamily properties. The number of competitive multifamily properties in a
particular area could have a material effect on the Company's ability to lease
units at the Properties or at any newly acquired properties and on the rents
charged. The Company may be competing with other entities that have greater
resources than the Company and whose managers have more experience than the
Company's officers and trustees. In addition, other forms of multifamily
properties, including multifamily properties and manufactured housing controlled
by Mr. Zell, and single-family housing, provide housing alternatives to
potential residents of multifamily properties.
RISK FACTORS
THE FOLLOWING RISK FACTORS OMIT THE USE OF DEFINED TERMS USED ELSEWHERE HEREIN
AND CONTAIN DEFINED TERMS THAT ARE DIFFERENT FROM THOSE USED IN THE OTHER
SECTIONS OF THIS REPORT. UNLESS OTHERWISE INDICATED, WHEN USED IN THIS SECTION,
THE TERMS "WE" AND "US" REFER TO EQUITY RESIDENTIAL PROPERTIES TRUST AND ITS
SUBSIDIARIES, INCLUDING ERP OPERATING LIMITED PARTNERSHIP.
Set forth below are the risks that we believe are important to
investors who purchase or own our common shares of beneficial interest or
preferred shares of beneficial interest (which we refer to collectively as
"Shares") or units of limited partnership interest ("Units") of ERP Operating
Limited Partnership, our operating partnership, which are redeemable on a
one-for-one basis for common shares or their cash equivalent. In this section,
we refer to the Shares and the Units together as our "securities," and the
investors who own Shares and/or Units as our "security holders."
DEBT FINANCING AND PREFERRED SHARES COULD ADVERSELY AFFECT OUR PERFORMANCE
GENERAL
As of December 31, 1999, certain of our multifamily properties were
subject to approximately $2.9 billion of mortgage indebtedness and our total
debt equaled approximately $5.5 billion. Of our total debt outstanding, $700.9
million (including the balance of $300 million outstanding on our $700 million
unsecured line of credit) was floating rate debt, and $965.8 million was issued
at tax exempt rates. In addition to debt, we have issued preferred shares of
beneficial interest. Our use of debt and preferred equity financing creates
certain risks, including the following.
SCHEDULED DEBT PAYMENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
In the future, our cash flow could be insufficient to meet required
payments of principal and interest or to pay distributions on our securities at
expected levels. We may not be able to refinance existing debt (which in
virtually all cases requires substantial principal payments at maturity) and, if
we can, the terms of such refinancing might not be as favorable as the terms of
existing indebtedness. If principal payments due at maturity cannot be
refinanced, extended or paid with proceeds of other capital transactions, such
as new equity capital, our cash flow will not be sufficient in all years to
repay all maturing debt. As a result, we may be forced to postpone capital
expenditures necessary for the maintenance of our properties and may have to
dispose of one or more properties on terms that would otherwise be unacceptable
to us.
FINANCIAL COVENANTS COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL
CONDITION
If a property we own is mortgaged to secure payment of indebtedness and
we are unable to meet
14
PART I
the mortgage payments, the holder of the mortgage could foreclose on the
property, resulting in loss of income and asset value. Foreclosure on mortgaged
properties or an inability to refinance existing indebtedness would likely have
a negative impact on our financial condition and results of operations. A
foreclosure could also result in our recognition of taxable income without our
actually receiving cash proceeds from the disposition of the property with which
to pay the tax. This could adversely affect our cash flow and could make it more
difficult for us to meet our distribution requirements as a real estate
investment trust (a "REIT").
The mortgages on our properties contain customary negative covenants
that, among other things, limit our ability, without the prior consent of the
lender, to further mortgage the property and to discontinue insurance coverage.
In addition, our credit facilities contain certain customary restrictions,
requirements and other limitations on our ability to incur indebtedness. The
indentures under which a substantial portion of our debt was issued contain
certain financial and operating covenants including, among other things,
maintenance of certain financial ratios, as well as limitations on our ability
to incur secured and unsecured indebtedness (including acquisition financing),
sell all or substantially all of our assets and engage in mergers,
consolidations and certain acquisitions. Accordingly, in the event that we are
unable to raise additional equity or borrow money because of these restrictions,
our ability to acquire additional properties may be limited. If we are unable to
acquire additional properties, our ability to increase the distributions to
security holders, as we have done in the past, will be limited to management's
ability to increase funds from operations, and thereby cash available for
distributions, from the existing properties in our portfolio at such time.
Some of the properties were financed with tax-exempt bonds that contain
certain restrictive covenants or deed restrictions. We have retained an
independent outside consultant to monitor compliance with the restrictive
covenants and deed restrictions that affect these properties. If these bond
compliance requirements require us to lower our rental rates to attract low or
moderate income tenants, or eligible/qualified tenants, then our income from
these properties may be limited.
OUR DEGREE OF LEVERAGE COULD LIMIT OUR ABILITY TO OBTAIN ADDITIONAL
FINANCING
Our debt to market capitalization ratio (total debt as a percentage of
total debt plus the market value of the outstanding common and preferred shares
and units) was approximately 42.75% as of December 31, 1999. We have a policy of
incurring indebtedness for borrowed money only through the Operating Partnership
and its subsidiaries and only if upon such incurrence our debt to market
capitalization ratio would be approximately 50% or less. Our degree of leverage
could have important consequences to security holders. For example, the degree
of leverage could affect our ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, development or
other general corporate purposes, making us more vulnerable to a downturn in
business or the economy generally.
RISING INTEREST RATES COULD ADVERSELY AFFECT CASH FLOW
Advances under our credit facility bear interest at variable rates
based upon LIBOR available at various interest periods, plus a certain spread
dependent upon the Company's credit rating. Certain of our senior unsecured debt
instruments also, from time to time, bear interest at floating rates. We may
also borrow additional money with variable interest rates in the future.
Increases in interest rates would increase our interest expenses under these
debt instruments and would increase the costs of refinancing existing
indebtedness and of issuing new debt. Accordingly, higher interest rates would
adversely affect cash flow and our ability to service our debt and to make
distributions to security holders.
15
PART I
CONTROL AND INFLUENCE BY SIGNIFICANT SHAREHOLDERS COULD BE EXERCISED IN A MANNER
ADVERSE TO OTHER SHAREHOLDERS
GENERAL
As of March 1, 2000, (1) Samuel Zell and certain of the current holders
of Units issued to affiliates of Mr. Zell, who contributed 33 properties to us
at the time of our initial public offering, owned in the aggregate approximately
2.85% of our common shares (Mr. Zell and these affiliates are described herein
as the "Zell Original Owners"); (2) certain entities controlled by Starwood
Capital Partners LP ("Starwood") and its affiliates, who contributed 23
properties to us at the time of our initial public offering, owned less than 1%
of our common shares; and (3) our executive officers and trustees, excluding Mr.
Zell (see disclosure above), owned approximately 4.37% of our common shares.
These percentages assume all options are exercised for common shares and all
Units are converted to common shares. In addition, the consent of certain
affiliates of Mr. Zell and Starwood is required for certain amendments to the
Fifth Amended and Restated ERP Operating Limited Partnership Agreement of
Limited Partnership (the "Partnership Agreement"). As a result of their security
ownership and rights concerning amendments to the Partnership Agreement, Mr.
Zell and the Starwood owners may have substantial influence over the Company.
Although these security holders have not agreed to act together on any matter,
they would be in a position to exercise even more influence over the Company's
affairs if they were to act together in the future. This influence might be
exercised in a manner that is inconsistent with the interests of other security
holders.
MR. ZELL AND OTHERS ARE EXEMPT FROM THE 5% OWNERSHIP LIMIT GENERALLY
APPLICABLE TO SECURITIES HOLDERS
In order to maintain its qualification as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"), not more than 50% of the value of
the outstanding Shares may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities). To assure
compliance with this test, our Declaration of Trust restricts the ownership of
more than 5% of the lesser of the number or value of the outstanding Shares by
any single security holder, subject to certain exceptions. These restrictions do
not apply to the ownership of common shares that may be acquired by the holders
of Units issued to the Zell Original Owners and the Starwood owners.
Additionally, our Declaration of Trust exempts any transferees of such common
shares from the 5% ownership limit, provided such transfers do not result in an
increased concentration in the ownership.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND CAN BE COSTLY
Federal, state and local laws and regulations relating to the
protection of the environment may require a current or previous owner or
operator of real estate to investigate and clean up hazardous or toxic
substances or petroleum product releases at such property. The owner or operator
may have to pay a governmental entity or third parties for property damage and
for investigation and clean-up costs incurred by such parties in connection with
the contamination. These laws typically impose clean-up responsibility and
liability without regard to whether the owner or operator knew of or caused the
presence of the contaminants. Even if more than one person may have been
responsible for the contamination each person covered by the environmental laws
may be held responsible for all of the clean-up costs incurred. In addition,
third parties may sue the owner or operator of a site for damages and costs
resulting from environmental contamination emanating from that site.
Environmental laws also govern the presence, maintenance and removal of
asbestos. These laws require that owners or operators of buildings containing
asbestos properly manage and maintain the asbestos, that they notify and train
those who may come into contact with asbestos and that they
16
PART I
undertake special precautions, including removal or other abatement, if asbestos
would be disturbed during renovation or demolition of a building. These laws may
impose fines and penalties on building owners or operators who fail to comply
with these requirements and may allow third parties to seek recovery from owners
or operators for personal injury associated with exposure to asbestos fibers.
Substantially all of our properties have been the subject of
environmental assessments completed by qualified independent environmental
consultant companies. These environmental assessments have not revealed, nor are
we aware of, any environmental liability that our management believes would have
a material adverse effect on our business, results of operations, financial
condition or liquidity.
We cannot assure you that existing environmental assessments of our
properties reveal all environmental liabilities, that any prior owner of any of
our properties did not create a material environmental condition not known to
us, or that a material environmental condition does not otherwise exist as to
any one or more of our properties.
OUR PERFORMANCE AND SHARE VALUE ARE SUBJECT TO RISKS ASSOCIATED WITH THE REAL
ESTATE INDUSTRY
GENERAL
Real property investments are subject to varying degrees of risk and
are relatively illiquid. Several factors may adversely affect the economic
performance and value of our properties. These factors include changes in the
national, regional and local economic climate, local conditions such as an
oversupply of multifamily properties or a reduction in demand for our
multifamily properties, the attractiveness of our properties to tenants,
competition from other available multifamily property owners and changes in
market rental rates. Our performance also depends on our ability to collect rent
from tenants and to pay for adequate maintenance, insurance and other operating
costs, including real estate taxes, which could increase over time. Also, the
expenses of owning and operating a property are not necessarily reduced when
circumstances such as market factors and competition cause a reduction in income
from the property.
WE MAY BE UNABLE TO RENEW LEASES OR RELET SPACE AS LEASES EXPIRE
When our tenants decide not to renew their leases upon expiration, we
may not be able to relet their space. Even if the tenants do renew or we can
relet the space, the terms of renewal or reletting may be less favorable than
current lease terms. If we are unable to promptly renew the leases or relet the
space, or if the rental rates upon renewal or reletting are significantly lower
than expected rates, then our results of operations and financial condition will
be adversely affected. Consequently, our cash flow and ability to service debt
and make distributions to security holders would be reduced.
NEW ACQUISITIONS OR DEVELOPMENTS MAY FAIL TO PERFORM AS EXPECTED AND
COMPETITION FOR ACQUISITIONS MAY RESULT IN INCREASED PRICES FOR
PROPERTIES
We intend to continue to actively acquire or develop multifamily
properties. Newly acquired or developed properties may fail to perform as
expected. We may underestimate the costs necessary to bring an acquired property
up to standards established for its intended market position or to develop a
property. Additionally, we expect that other major real estate investors with
significant capital will compete with us for attractive investment
opportunities. This competition has increased prices for multifamily properties.
We may not be in a position or have the opportunity in the future to make
suitable property acquisitions on favorable terms.
17
PART I
BECAUSE REAL ESTATE INVESTMENTS ARE ILLIQUID, WE MAY NOT BE ABLE TO
SELL PROPERTIES WHEN APPROPRIATE
Real estate investments generally cannot be sold quickly. We may not be
able to vary our portfolio promptly in response to economic or other conditions.
This inability to respond promptly to changes in the performance of our
investments could adversely affect our financial condition and ability to make
distributions to our security holders.
CHANGES IN LAWS COULD AFFECT OUR BUSINESS
We are generally not able to pass through to our tenants under existing
leases increases in real estate taxes, income taxes and service or other taxes.
Consequently, any such increases may adversely affect our financial condition
and limit our ability to make distributions to our security holders. Similarly,
changes that increase our potential liability under environmental laws or our
expenditures on environmental compliance would adversely affect our cash flow
and ability to make distributions on our securities.
SHAREHOLDERS' ABILITY TO EFFECT CHANGES IN CONTROL OF THE COMPANY IS LIMITED
PROVISIONS OF OUR DECLARATION OF TRUST AND BYLAWS COULD INHIBIT CHANGES
IN CONTROL
Certain provisions of our Declaration of Trust and Bylaws may delay or
prevent a change in control of the Company or other transactions that could
provide the security holders with a premium over the then-prevailing market
price of their securities or which might otherwise be in the best interest of
our security holders. These include a staggered Board of Trustees and the 5%
Ownership Limit described below. See "--We Have a Share Ownership Limit for REIT
Tax Purposes." Also, any future series of preferred shares of beneficial
interest may have certain voting provisions that could delay or prevent a change
of control or other transactions that might otherwise be in the interest of our
security holders.
WE HAVE A SHARE OWNERSHIP LIMIT FOR REIT TAX PURPOSES
To remain qualified as a REIT for federal income tax purposes, not more
than 50% in value of our outstanding Shares may be owned, directly or
indirectly, by five or fewer individuals at any time during the last half of any
year. To facilitate maintenance of our REIT qualification, our Declaration of
Trust, subject to certain exceptions, prohibits ownership by any single
shareholder of more than 5% of the lesser of the number or value of the
outstanding class of common or preferred shares. See "--Control and Influence by
Significant Shareholders--Mr. Zell and Others are Exempt from the 5% Ownership
Limit Generally Applicable to Securities Holders." We refer to this restriction
as the "Ownership Limit." Absent any exemption or waiver, securities acquired or
held in violation of the Ownership Limit will be transferred to a trust for the
exclusive benefit of a designated charitable beneficiary, and the security
holder's rights to distributions and to vote would terminate. A transfer of
Shares may be void if it causes a person to violate the Ownership Limit. The
Ownership Limit could delay or prevent a change in control and, therefore, could
adversely affect our security holders' ability to realize a premium over the
then-prevailing market price for their Shares.
OUR PREFERRED SHARES OF BENEFICIAL INTEREST MAY AFFECT CHANGES IN
CONTROL
Our Declaration of Trust authorizes the Board of Trustees to issue up
to 100 million preferred shares of beneficial interest, and to establish the
preferences and rights (including the right to vote and the right to convert
into common shares) of any preferred shares issued. The Board of Trustees may
use its powers to issue preferred shares and to set the terms of such securities
to delay or prevent a change in control of the Company, even if a change in
18
PART I
control were in the interest of security holders. As of December 31, 1999,
25,085,652 preferred shares were issued and outstanding.
INAPPLICABILITY OF MARYLAND LAW LIMITING CERTAIN CHANGES IN CONTROL
Certain provisions of Maryland law applicable to real estate investment
trusts prohibit "business combinations" (including certain issuances of equity
securities) with any person who beneficially owns ten percent or more of the
voting power of outstanding securities, or with an affiliate who, at any time
within the two-year period prior to the date in question, was the beneficial
owner of ten percent or more of the voting power of the trust's outstanding
voting securities (an "Interested Shareholder"), or with an affiliate of an
Interested Shareholder. These prohibitions last for five years after the most
recent date on which the Interested Shareholder became an Interested
Shareholder. After the five-year period, a business combination with an
Interested Shareholder must be approved by two super-majority shareholder votes
unless, among other conditions, the trust's holders of common shares receive a
minimum price for their shares and the consideration is received in cash or in
the same form as previously paid by the Interested Shareholder for its common
shares. As permitted by Maryland law, however, the Board of Trustees of the
Company has opted out of these restrictions with respect to any business
combination involving the Zell Original Owners and persons acting in concert
with any of the Zell Original Owners. Consequently, the five-year prohibition
and the super-majority vote requirements will not apply to a business
combination involving us and any of them. Such business combinations may not be
in the best interest of our security holders.
OUR SUCCESS AS A REIT IS DEPENDENT ON COMPLIANCE WITH FEDERAL INCOME TAX
REQUIREMENTS
OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE SERIOUS ADVERSE
CONSEQUENCES TO OUR SECURITY HOLDERS
We believe that we have qualified for taxation as a REIT for federal
income tax purposes since our taxable year ended December 31, 1992. We plan to
continue to meet the requirements for taxation as a REIT. Many of these
requirements, however, are highly technical and complex. We cannot, therefore,
guarantee that we have qualified or will qualify in the future as a REIT. The
determination that we are a REIT requires an analysis of various factual matters
that may not be totally within our control. For example, to qualify as a REIT,
at least 95% of our gross income must come from sources that are itemized in the
REIT tax laws. We are also required to distribute to security holders at least
95% of our REIT taxable income excluding capital gains. The fact that we hold
our assets through ERP Operating Limited Partnership and its subsidiaries
further complicates the application of the REIT requirements. Even a technical
or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress
and the IRS might make changes to the tax laws and regulations, and the courts
might issue new rulings that make it more difficult, or impossible, for us to
remain qualified as a REIT. We do not believe, however, that any pending or
proposed tax law changes would jeopardize our REIT status.
If we fail to qualify as a REIT, we would be subject to federal income
tax at regular corporate rates. Also, unless the IRS granted us relief under
certain statutory provisions, we would remain disqualified as a REIT for four
years following the year we first failed to qualify. If we fail to qualify as a
REIT, we would have to pay significant income taxes. We, therefore, would have
less money available for investments or for distributions to security holders.
This would likely have a significant adverse affect on the value of our
securities. In addition, we would no longer be required to make any
distributions to security holders.
19
PART I
WE COULD BE DISQUALIFIED AS A REIT OR HAVE TO PAY TAXES IF OUR MERGER
PARTNERS DID NOT QUALIFY AS REIT'S
If any of our recent merger partners had failed to qualify as a REIT
throughout the duration of their existence, then they might have had
undistributed "C corporation earnings and profits" at the time of their merger
with us. If that was the case and we did not distribute those earnings and
profits prior to the end of the year in which the merger took place, we might
not qualify as a REIT. We believe that each of our merger partners qualified as
a REIT and that, in any event, none of them had any undistributed "C corporation
earnings and profits" at the time of their merger with us. If any of our merger
partners failed to qualify as a REIT, an additional concern would be that they
would have recognized taxable gain at the time they were merged with us. We
would be liable for the tax on such gain. In this event, we would have to pay
corporate income tax on any gain existing at the time of the applicable merger
on assets acquired in the merger if the assets are sold within ten years of the
merger. Finally, we could be precluded from electing REIT status for up to four
years after the year in which the predecessor entity failed to qualify for REIT
status.
OTHER TAX LIABILITIES
Even if we qualify as a REIT, we will be subject to certain federal,
state and local taxes on our income and property. In addition, our third-party
management operations, which are conducted through subsidiaries, generally will
be subject to federal income tax at regular corporate rates.
WE DEPEND ON OUR KEY PERSONNEL
We depend on the efforts of the Chairman of our Board of Trustees,
Samuel Zell, and our executive officers, particularly Douglas Crocker II and
Gerald A. Spector. If they resign, our operations could be temporarily adversely
effected. Mr. Crocker and Mr. Spector have entered into Deferred Compensation
Agreements with the Company which provide both with a salary benefit after their
respective termination of employment with the Company. In addition, Mr. Zell,
Mr. Crocker and Mr. Spector have entered into Noncompetition Agreements with the
Company.
COMPLIANCE WITH REIT DISTRIBUTION REQUIREMENTS MAY AFFECT OUR FINANCIAL
CONDITION
DISTRIBUTION REQUIREMENTS MAY INCREASE THE INDEBTEDNESS OF THE COMPANY
We may be required from time to time, under certain circumstances, to
accrue as income for tax purposes interest and rent earned but not yet received.
In such event, or upon our repayment of principal on debt, we could have taxable
income without sufficient cash to enable us to meet the distribution
requirements of a REIT. Accordingly, we could be required to borrow funds or
liquidate investments on adverse terms in order to meet these distribution
requirements.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL
Because of our annual REIT distribution requirements, we may not be
able to fund all future capital needs, including for acquisitions and
developments, from income generated by operations and the disposition of certain
assets. We therefore may have to rely on third-party sources of capital, which
may or may not be available on favorable terms or at all. Our access to
third-party sources of capital depends on a number of things, including the
market's perception of our growth potential and our current and potential future
earnings. Moreover, additional equity offerings, if pursued, may result in
dilution of security holders' interests, and additional debt financing may
increase our leverage.
20
PART I
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes all of the federal income tax
considerations material to a holder of common shares. It is not exhaustive of
all possible tax considerations. For example, it does not give a detailed
discussion of any state, local or foreign tax considerations. The following
discussion also does not address all tax matters that may be relevant to
prospective shareholders in light of their particular circumstances. Moreover,
it does not address all tax matters that may be relevant to shareholders who are
subject to special treatment under the tax laws, such as insurance companies,
tax-exempt entities, financial institutions or broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States.
The specific tax attributes of a particular shareholder could have a
material impact on the tax considerations associated with the purchase,
ownership and disposition of common shares. Therefore, it is essential that each
prospective shareholder consult with his or her own tax advisors with regard to
the application of the federal income tax laws to the shareholder's personal tax
situation, as well as any tax consequences arising under the laws of any state,
local or foreign taxing jurisdiction.
OUR TAXATION
We elected REIT status beginning with the year that ended December 31,
1992. In any year in which we qualify as a REIT, we generally will not be
subject to federal income tax on the portion of our REIT taxable income or
capital gain that we distribute to our shareholders. This treatment
substantially eliminates the double taxation that applies to most corporations,
which pay a tax on their income and then distribute dividends to shareholders
who are in turn taxed on the amount they receive. However, we will be subject to
federal income tax at regular corporate rates upon our REIT taxable income or
capital gain that we do not distribute to our shareholders. We also may be
subject to the corporate "alternate minimum tax" on items of preference under
this alternative tax regime. In addition, we will be subject to a 4% excise tax
if we do not satisfy specific REIT distribution requirements. Moreover, we may
be subject to taxes in certain situations and on certain transactions that we do
not presently contemplate.
If we fail to qualify for taxation as a REIT in any taxable year, we
will be subject to tax on our taxable income at regular corporate rates. We also
may be subject to the corporate "alternate minimum tax." As a result, our
failure to qualify as a REIT would significantly reduce the cash we have
available to distribute to our shareholders. Unless entitled to statutory
relief, we would be disqualified from qualification as a REIT for the four
taxable years following the year during which qualification was lost. It is not
possible to state whether we would be entitled to statutory relief.
Our qualification and taxation as a REIT depend on our ability to
satisfy various requirements under the Internal Revenue Code. We are required to
satisfy these requirements on a continuing basis through actual annual operating
and other results. These requirements relate to the sources of our gross income,
the composition of our assets, the amount of dividends we pay to shareholders,
the diversity of our share ownership, and other aspects of our operations. The
purpose of these requirements is to allow the tax benefit of REIT status only to
companies that:
(a) primarily own, and primarily derive income from, real
estate-related assets and certain other assets which are passive in
nature, and
(b) distribute 95% of the taxable income, computed without regard to
net capital gain, to shareholders.
21
PART I
On December 17, 1999, as part of a larger bill, the President signed
into law the REIT Modernization Act ("RMA"). Effective beginning January 1,
2001, the RMA will amend the tax rules relating to the composition of a REIT's
assets. Under current law, a REIT is precluded from owning more than 10% of the
outstanding voting securities of any one issuer, other than a wholly owned
subsidiary or another REIT. Beginning in 2001, a REIT will remain subject to the
current restriction and be precluded from owning more than 10% of the value of
all classes of any one issuer.
There is an exception to this prohibition. A REIT will be allowed to
own up to 100% of the securities of a taxable REIT subsidiary ("TRS") that can
provide services to REIT tenants and others without disqualifying the rents that
a REIT receives from its tenants. However, no more than 20% of the value of a
REIT's total assets can be represented by securities of one or more TRS. The
amount of debt and rental payments from a TRS to a REIT will be limited to
ensure that a TRS is subject to an appropriate level of corporate tax. The new
10% asset test will not apply to certain arrangements (including third party
subsidiaries) in place on July 12, 1999, provided that a subsidiary does not
engage in a "substantial" new line of business, its existing business does not
increase, and a REIT does not acquire any new securities in the subsidiary.
Under the RMA, a third party subsidiary will be able to convert tax free into a
TRS.
In addition to the above legislative changes, effective January 1,
2001, the distribution of taxable income requirement of a REIT will be reduced
from 95% to 90%. Further, effective January 1, 2001, the 15% personal property
test (which generally requires that the adjusted basis of a REIT's personal
property not exceed 15% of its real and personal property in order for income to
be considered rents from real property) will be based on fair market values
instead of adjusted tax basis.
We believe that we have qualified as a REIT for all of our taxable
years beginning with 1992. We also believe that our current structure and method
of operation is such that we will continue to qualify as a REIT. However, we
cannot guarantee that the actual results of our operations have satisfied or
will satisfy the requirements under the Internal Revenue Code.
Piper, Marbury, Rudnick & Wolfe, our special tax counsel, will provide
an opinion to the effect that we were organized and have operated in conformity
with the requirements for qualification and taxation as a REIT under the
Internal Revenue Code for each of our taxable years beginning in 1992. The
opinion will also provide that our current organization and method of operation
should enable us to continue to meet the requirements for qualification and
taxation as a REIT. It must be emphasized that the opinion will be based on
various assumptions and factual representations relating to our organization and
our prior and expected operations. In each case, these representations include
representations about our predecessors. Piper, Marbury, Rudnick & Wolfe will not
review our compliance with these requirements on a continuing basis.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
General. If we qualify as a REIT, distributions made to our taxable
domestic shareholders with respect to their common shares, other than capital
gain distributions, will be treated as ordinary income to the extent that the
distributions come out of earnings and profits. These distributions will not be
eligible for the dividends received deduction for shareholders that are
corporations. In determining whether distributions are out of earnings and
profits, we will allocate our earnings and profits first to preferred shares and
second to the common shares. We cannot guarantee that we will have sufficient
earnings and profits to cover distributions on the preferred shares.
To the extent we make distributions to our taxable domestic
shareholders in excess of our earnings and profits, such distributions will be
considered a return of capital. Such distributions will be
22
PART I
treated as a tax free distribution and will reduce the tax basis of a
shareholder's common shares by the amount of the distribution so treated. To the
extent that such distributions cumulatively exceed a taxable domestic
shareholder's tax basis, such distributions are taxable as a gain from the sale
of his shares. Shareholders may not include in their individual income tax
returns any of our net operating losses or capital losses.
Distributions made by us that we properly designate as capital gain
dividends will be taxable to taxable domestic shareholders as gain from the sale
or exchange of a capital asset held for more than one year. This treatment
applies only to the extent that the designated distributions do not exceed our
actual net capital gain for the taxable year. It applies regardless of the
period for which a domestic shareholder has held his or her common shares.
Despite this general rule, corporate shareholders may be required to treat up to
20% of certain capital gain dividends as ordinary income.
Generally, we will classify a portion of our designated capital gains
dividend as a 20% rate gain distribution and the remaining portion as an
unrecaptured Section 1250 gain distribution. As the names suggest, a 20% rate
gain distribution would be taxable to taxable domestic shareholders that are
individuals, estates or trusts at a maximum rate of 20%. An unrecaptured Section
1250 gain distribution would be taxable to taxable domestic shareholders that
are individuals, estates or trusts at a maximum rate of 25%.
If, for any taxable year, we elect to designate as capital gain
dividends any portion of the dividends paid or made available for the year to
holders of all classes of shares of beneficial interest, then the portion of the
capital gains dividends that will be allocable to the holders of common shares
will be the total capital gain dividends multiplied by a fraction. The numerator
of the fraction will be the total dividends paid or made available to the
holders of the common shares for the year. The denominator of the fraction will
be the total dividends paid or made available to holders of all classes of
shares of beneficial interest.
In general, a shareholder will recognize gain or loss for federal
income tax purposes on the sale or other disposition of common shares in an
amount equal to the difference between:
(a) the amount of cash and the fair market value of any property
received in the sale or other disposition, and
(b) the shareholder's adjusted tax basis in the common shares.
The gain or loss will be capital gain or loss if the common shares were
held as a capital asset. Generally, the capital gain or loss will be long-term
capital gain or loss if the common shares were held for more than one year. The
Taxpayer Relief Act of 1997 allows the IRS to issue regulations relating to the
manner in which capital gain rates will apply to sales of capital assets by
REIT's and to sales of interests in REIT's. The IRS has not issued these
regulations. However, if the IRS does issue these regulations, they could affect
the taxation of gain and loss realized on the disposition of common shares.
Shareholders are urged to consult with their own tax advisors with respect to
the rules contained in the Taxpayer Relief Act.
In general, a loss recognized by a shareholder upon the sale of common
shares that were held for six months or less, determined after applying certain
holding period rules, will be treated as long-term capital loss to the extent
that the shareholder received distributions that were treated as long-term
capital gains. For shareholders who are individuals, trusts and estates, the
long-term capital loss will be apportioned among the applicable long-term
capital gain rates to the extent that distributions received by the shareholder
were previously so treated.
23
PART I
We may elect to retain (rather than distribute as is generally
required) net capital gain for a taxable year and pay the income tax on that
gain. If we make this election, shareholders must include in income, as
long-term capital gain, their proportionate share of the undistributed net
capital gain. Shareholders will be treated as having paid their proportionate
share of the tax paid by us on these gains. Accordingly, they will receive a
credit or refund for the amount. Shareholders will increase the basis in their
common shares by the difference between the amount of capital gain included in
their income and the amount of the tax they are treated as having paid. Our
earnings and profits will be adjusted appropriately.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Most tax-exempt organizations are not subject to federal income tax
except to the extent of their unrelated business taxable income, which is often
referred to as UBIT. Unless a tax-exempt shareholder holds its common shares as
debt financed property or uses the common shares in an unrelated trade or
business, distributions to the shareholder should not constitute UBIT.
Similarly, if a tax-exempt shareholder sells common shares, the income from the
sale should not constitute UBIT unless the shareholder held the shares as debt
financed property or used the shares in a trade or business.
However, for tax-exempt shareholders that are social clubs, voluntary
employee benefit associations, supplemental unemployment benefit trusts, and
qualified group legal services plans, income from owning or selling common
shares will constitute UBIT unless the organization is able to properly deduct
amounts set aside or placed in reserve so as to offset the income generated by
its investment in common shares. These shareholders should consult their own tax
advisors concerning these set aside and reserve requirements which are set forth
in the Internal Revenue Code.
In addition, certain pension trusts that own more than 10% of a
pension-held REIT must report a portion of the distributions that they receive
from the REIT as UBIT. We have not been and do not expect to be treated as a
pension-held REIT for purposes of this rule.
TAXATION OF FOREIGN SHAREHOLDERS
The following is a discussion of certain anticipated United States
federal income tax consequences of the ownership and disposition of common
shares applicable to a foreign shareholder. It is based on current law and is
for general information only. A "foreign shareholder" is any person other than:
(a) a citizen or resident of the United States,
(b) a corporation or partnership created or organized in the United
States or under the laws of the United States or of any state
thereof, or
(c) an estate or trust whose income is includable in gross income for
United States federal income tax purposes regardless of its
source.
Distributions by Us. Distributions by us to a foreign shareholder that
are neither attributable to gain from sales or exchanges by us of United States
real property interests nor designated by us as capital gains dividends will be
treated as dividends of ordinary income to the extent that they are made out of
our earnings and profits. These distributions ordinarily will be subject to
withholding of United States federal income tax on a gross basis at a 30% rate,
or a lower treaty rate, unless the dividends are treated as effectively
connected with the conduct by the foreign shareholder of a United States trade
or business. Please note that under certain treaties lower withholding rates
generally applicable to dividends do not apply to dividends from REIT's.
Dividends that are effectively connected with a United States trade or business
will be subject to tax on a net basis at graduated rates, and are generally not
subject to
24
PART I
withholding. Certification and disclosure requirements must be satisfied
before a dividend is exempt from withholding under this exemption. A foreign
shareholder that is a corporation also may be subject to an additional branch
profits tax at a 30% rate or a lower treaty rate.
We expect to withhold United States income tax at the rate of 30% on
any distributions made to a foreign shareholder unless:
(a) a lower treaty rate applies and any required form or certification
evidencing eligibility for that reduced rate is filed with us, or
(b) the foreign shareholder files an IRS Form 4224 with us claiming
that the distribution is effectively connected income.
A distribution in excess of our current or accumulated earnings and
profits will not be taxable to a foreign shareholder to the extent that the
distribution does not exceed the adjusted basis of the shareholder's common
shares. Instead, the distribution will reduce the adjusted basis of the common
shares. To the extent that the distribution exceeds the adjusted basis of the
common shares, it will give rise to gain from the sale or exchange of the
shareholder's common shares. The tax treatment of this gain is described below.
As a result of a legislative change made by the Small Business Job
Protection Act of 1996, it appears that we will be required to withhold 10% of
any distribution in excess of our earnings and profits. Consequently, although
we intend to withhold at a rate of 30%, or a lower applicable treaty rate, on
the entire amount of any distribution, to the extent that we do not do so,
distributions will be subject to withholding at a rate of 10%. However, a
foreign shareholder may seek a refund of the withheld amount from the IRS if it
subsequently determined that the distribution was, in fact, in excess of our
earnings and profits, and the amount withheld exceeded the foreign shareholder's
United States tax liability with respect to the distribution.
Distributions to a foreign shareholder that we designate at the time of
the distributions as capital gain dividends, other than those arising from the
disposition of a United States real property interest, generally will not be
subject to United States federal income taxation unless:
(a) the investment in the common shares is effectively connected with
the foreign shareholder's United States trade or business, in
which case the foreign shareholder will be subject to the same
treatment as domestic shareholders, except that a shareholder that
is a foreign corporation may also be subject to the branch profits
tax, as discussed above, or
(b) the foreign shareholder is a nonresident alien individual who is
present in the United States for 183 days or more during the
taxable year and has a "tax home" in the United States, in which
case the nonresident alien individual will be subject to a 30% tax
on the individual's capital gains.
Under the Foreign Investment in Real Property Tax Act, which is known
as FIRPTA, distributions to a foreign shareholder that are attributable to gain
from sales or exchanges of United States real property interests will cause the
foreign shareholder to be treated as recognizing the gain as income effectively
connected with a United States trade or business. This rule applies whether or
not a distribution is designated as a capital gain dividend. Accordingly,
foreign shareholders generally would be taxed on these distributions at the same
rates applicable to U.S. shareholders, subject to a special alternative minimum
tax in the case of nonresident alien individuals. In addition, a foreign
corporate shareholder might be subject to the branch profits tax discussed
above. We are required to withhold 35% of these distributions. The withheld
amount can be credited against the foreign shareholder's United States federal
income tax liability.
25
PART I
Although the law is not entirely clear on the matter, it appears that
amounts we designate as undistributed capital gains in respect of the common
shares held by U.S. shareholders would be treated with respect to foreign
shareholders in the same manner as actual distributions of capital gain
dividends. Under that approach, foreign shareholders would be able to offset as
a credit against the United States federal income tax liability their
proportionate share of the tax paid by us on these undistributed capital gains.
In addition, foreign shareholders would be able to receive from the IRS a refund
to the extent their proportionate share of the tax paid by us were to exceed
their actual United States federal income tax liability.
SALES OF COMMON SHARES. Gain recognized by a foreign shareholder upon
the sale or exchange of common shares generally will not be subject to United
States taxation unless the shares constitute a "United States real property
interest" within the meaning of FIRPTA. The common shares will not constitute a
United States real property interest so 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 less than 50% in value of its stock is held directly or
indirectly by foreign shareholders. We believe that we are a domestically
controlled REIT. Therefore, we believe that the sale of common shares will not
be subject to taxation under FIRPTA. However, because common shares and
preferred shares are publicly traded, we cannot guarantee that we will continue
to be a domestically controlled REIT. In any event, gain from the sale or
exchange of common shares not otherwise subject to FIRPTA will be taxable to a
foreign shareholder if either:
(a) the investment in the common shares is effectively connected with
the foreign shareholder's United States trade or business, in
which case the foreign shareholder will be subject to the same
treatment as domestic shareholders with respect to the gain, or
(b) the foreign shareholder is a nonresident alien individual who is
present in the United States for 183 days or more during the
taxable year and has a tax home in the United States, in which
case the nonresident alien individual will be subject to a 30% tax
on the individual's capital gains.
Even if we do not qualify as or cease to be a domestically controlled
REIT, gain arising from the sale or exchange by a foreign shareholder of common
shares still would not be subject to United States taxation under FIRPTA as a
sale of a United States real property interest if:
(a) the class or series of shares being sold is "regularly traded," as
defined by applicable IRS regulations, on an established
securities market such as the New York Stock Exchange, and
(b) the selling foreign shareholder owned 5% or less of the value of
the outstanding class or series of shares being sold throughout
the five-year period ending on the date of the sale or exchange.
If gain on the sale or exchange of common shares were subject to
taxation under FIRPTA, the foreign shareholder would be subject to regular
United States income tax with respect to the gain in the same manner as a
taxable U.S. shareholder, subject to any applicable alternative minimum tax, a
special alternative minimum tax in the case of nonresident alien individuals and
the possible application of the branch profits tax in the case of foreign
corporations. The purchaser of the common shares would be required to withhold
and remit to the IRS 10% of the purchase price.
OTHER TAX CONSIDERATIONS
CLINTON ADMINISTRATION PROPOSAL. The Clinton Administration's fiscal
year 2001 budget proposal was announced on February 1, 2000. One part of the
proposed budget would amend the tax rules relating to the distribution of a
REIT's income. Under current law, a REIT is required to distribute
26
PART I
at least 85% of its ordinary income and 95% of its capital gains during a
taxable year in order to avoid a 4% excise tax on the undistributed amount.
Under the Clinton Administration proposal, a REIT would be required to
distribute 98% of both ordinary income and capital gain net income to avoid the
excise tax. If this proposal were enacted, it would be effective for calendar
years beginning after December 31, 2000.
As in previous Clinton Administration proposals, the administration
proposes a "closely held REIT" ownership test, under which no "person" (i.e., a
corporation, partnership or trust, including a pension or profit sharing trust)
could own stock of a REIT possessing 50% or more of the total combined voting
power of all classes of voting stock or 50% or more of the total value of shares
of all classes of stock. This 2001 proposal contains an exception for REIT's
owning more than 50% of another REIT. Further, there is a newly proposed
"limited look-through rule" for partnerships that own REIT's. There is no
exception for publicly traded REIT's. This proposal, if enacted, would be
effective for entities electing REIT status for taxable years beginning on or
after the date of first committee action (an entity that has elected REIT status
prior to this date will avoid these restrictions so long as it has sufficient
business assets or activities as of such date). It is presently uncertain
whether these REIT proposals, or any other proposals regarding REIT's, will be
enacted.
OUR MANAGEMENT COMPANY AND OTHER SUBSIDIARIES. A small portion of the
cash to be used by the Operating Partnership to fund distributions to us is
expected to come from payments of dividends on non-voting stock of management
companies and other companies held by the Operating Partnership. These companies
pay federal and state income tax at the full applicable corporate rates. They
will attempt to minimize the amount of these taxes, but we cannot guarantee
whether or the extent to, which measures taken to minimize these taxes, will be
successful. To the extent that these companies are required to pay taxes, the
cash available for distribution from these management companies by us to
shareholders will be reduced accordingly.
STATE AND LOCAL TAXES. We and our shareholders may be subject to state
or local taxation in various jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of us and our
shareholders may not conform to the federal income tax consequence discussed
above. Consequently, prospective shareholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
common shares.
27
PART I
ITEM 2. THE PROPERTIES
As of December 31, 1999, the Company owned or had interests in a
portfolio of 1,062 multifamily Properties located in 35 states containing
225,708 apartment units. The Company has:
AVERAGE AVERAGE AVERAGE
NUMBER OF NUMBER OCCUPANCY MONTHLY RENT
TYPE PROPERTIES OF UNITS PERCENTAGE
------------------------- ---------------- ------------ -------------- --------------
GARDEN 652 282 94.9% $ 764
MID/HIGH-RISE 24 360 95.4% $ 1,239
RANCH 386 85 93.3% $ 463
----------------
TOTAL 1,062
================
Tenant leases are generally year-to-year and require security deposits.
The garden-style properties are generally defined as properties with two and/or
three floors while the mid-rise/high-rise properties are defined as properties
greater than three floors. These two property types typically provide residents
with amenities, which may include a clubhouse, swimming pool, laundry facilities
and cable television access. Certain of these properties offer additional
amenities such as saunas, whirlpools, spas, sports courts and exercise rooms.
The ranch-style properties, which are defined as single story properties,
generally do not provide additional amenities for its residents.
It is management's role to monitor compliance with Property policies
and to provide preventive maintenance of the Properties including common areas,
facilities and amenities. The Company holds periodic meetings of its Property
management personnel for training and implementation of the Company's
strategies. The Company believes that, due in part to this strategy, the
Properties historically have had high occupancy rates.
The distribution of the Properties throughout the United States
reflects the Company's belief that geographic diversification helps insulate the
portfolio from regional and economic influences. At the same time, the Company
has sought to create clusters of Properties within each of its primary markets
in order to achieve economies of scale in management and operation; however, the
Company may acquire additional multifamily properties located anywhere in the
United States.
The Company beneficially owns fee simple title to 976 of the 983
controlled properties and holds a 99-year leasehold interest with respect to
one Property (Mallgate). In addition, with respect to two Properties, the
Company owns the debt collateralized by such Properties and with respect to
four Properties, the Company owns an interest in the debt collateralized by
the Properties. The remaining 79 properties represent investments in
partnership interests and/or subordinated mortgages containing 11,648 units.
Direct fee simple title for certain of the Properties is owned by
single-purpose nominee corporations, LLC's or land trusts that engage in no
business other than holding title to the Property for the benefit of the
Company. Holding title in such a manner is expected to make it less costly to
transfer such Property in the future in the event of a sale and should
facilitate financing, since lenders often require title to a Property to be held
in a single purpose entity in order to isolate that Property from potential
liabilities of other Properties. Direct fee simple title for certain other
Properties is owned by a single LLC.
The Company also leases (under operating leases) various management,
regional and corporate offices throughout the United States. See Item 1 for the
locations of these offices.
The following table sets forth certain information by type and by state
relating to the Properties owned by the Company or in which the Company had a
direct equity or mortgage interest at December 31, 1999.
28
PART I
GARDEN-STYLE PROPERTIES
AVERAGE DECEMBER 31, 1999
OCCUPANCY AVERAGE MONTHLY
NUMBER OF NUMBER PERCENTAGE OF PERCENTAGE AS OF RENTAL RATE PER
STATE PROPERTIES OF UNITS TOTAL UNITS DECEMBER 31, 1999 UNIT
- ----------------------------------------------------------------------------------------------------------------------
Alabama 12 2,483 1.10 % 87.4 % $507
Arizona 65 19,513 8.65 94.9 734
California 70 18,215 8.07 96.5 1,061
Colorado 31 8,102 3.59 95.0 733
Connecticut 1 156 0.07 93.6 814
Florida 85 24,448 10.83 94.5 717
Georgia 40 13,112 5.81 94.7 769
Illinois 6 2,154 0.95 96.1 978
Indiana 1 320 0.14 94.7 627
Iowa 1 200 0.09 93.0 596
Kansas 6 2,392 1.06 96.5 721
Kentucky 7 1,941 0.86 94.0 583
Maine 5 672 0.30 97.1 770
Maryland 27 6,587 2.92 95.9 786
Massachusetts 6 1,214 0.54 96.4 1,141
Michigan 11 4,084 1.81 94.4 821
Minnesota 17 3,641 1.61 95.4 907
Missouri 8 1,590 0.70 95.7 654
Nevada 11 3,595 1.59 93.8 677
New Hampshire 1 390 0.17 96.2 842
New Jersey 1 704 0.31 97.9 959
New Mexico 4 1,073 0.48 93.5 667
North Carolina 38 10,358 4.59 94.8 652
Ohio 1 827 0.37 92.7 836
Oklahoma 9 2,324 1.03 95.8 559
Oregon 11 3,448 1.53 94.1 694
South Carolina 8 1,473 0.65 94.4 543
Tennessee 18 5,081 2.25 94.6 662
Texas 84 26,158 11.59 94.3 704
Utah 4 1,426 0.63 93.5 612
Virginia 16 4,837 2.14 95.4 769
Washington 43 10,367 4.59 95.5 788
Wisconsin 4 1,281 0.57 95.6 897
------------ ------------ ------------
TOTAL GARDEN-STYLE 652 184,166 81.59 %
------------ ------------ ------------
------------ ------------- -----------
AVERAGE GARDEN-STYLE 282 94.9 % $764
------------ ------------- -----------
29
PART I
MID-RISE/HIGH-RISE PROPERTIES
AVERAGE DECEMBER 31, 1999
OCCUPANCY AVERAGE MONTHLY
NUMBER OF NUMBER PERCENTAGE OF PERCENTAGE AS OF RENTAL RATE PER
STATE PROPERTIES OF UNITS TOTAL UNITS DECEMBER 31, 1999 UNIT
- ----------------------------------------------------------------------------------------------------------------------
Arizona 1 611 0.27 % 91.2 % $581
California 1 164 0.07 94.0 1,670
Connecticut 2 407 0.18 95.3 1,939
Florida 2 457 0.20 97.0 973
Illinois 1 1,420 0.63 95.4 838
Iowa 1 186 0.08 95.1 799
Massachusetts 4 2,181 0.97 98.2 1,467
Minnesota 1 162 0.07 98.8 1,246
New Jersey 2 684 0.30 96.0 1,954
Ohio 1 765 0.34 79.3 987
Oregon 1 525 0.23 93.9 915
Texas 2 333 0.15 97.3 1,061
Virginia 1 277 0.12 97.8 1,031
Washington 4 472 0.21 95.0 985
------------ ------------ ------------
TOTAL MID-RISE/HIGH-RISE 24 8,644 3.83 %
------------ ------------ ------------
------------ ------------- -------------
AVERAGE MID-RISE/HIGH-RISE 360 95.4 % $1,239
------------ ------------- -------------
RANCH-STYLE PROPERTIES
Alabama 2 159 0.07 % 94.0 % $388
Florida 97 8,922 3.95 94.4 468
Georgia 60 4,964 2.20 93.6 494
Illinois 4 281 0.12 91.9 444
Indiana 51 4,415 1.96 90.6 450
Kentucky 27 2,026 0.90 95.2 428
Maryland 4 413 0.18 92.7 537
Michigan 21 1,720 0.76 97.3 539
Ohio 100 8,337 3.69 92.3 439
Pennsylvania 7 580 0.26 93.2 534
South Carolina 3 269 0.12 93.9 444
Tennessee 5 348 0.15 96.5 453
Texas 1 67 0.03 93.0 467
West Virginia 4 397 0.18 91.1 423
------------ ------------ ------------
TOTAL RANCH-STYLE 386 32,898 14.58 %
------------ ------------ ------------
------------ ------------- -------------
AVERAGE RANCH-STYLE 85 93.3 % $463
------------ ------------- -------------
TOTAL EQR RESIDENTIAL PORTFOLIO ------------ ------------ ------------
1,062 225,708 100.00 %
============ ============ ============
30
PART I
The properties currently under development (see discussion in Item 7) are
included in the following table.
DEVELOPMENT ESTIMATED EQR TOTAL EQR
ESTIMATED COST FUNDED FUTURE FUNDING FUNDING
DEVELOPMENT COST AT 12/31/1999 OBLIGATION OBLIGATION ESTIMATED
DEVELOPMENT NUMBER OF NUMBER (IN (IN (IN (IN COMPLETION
PROJECT NAME LOCATION PROPERTIES OF UNITS MILLIONS) MILLIONS)(1) MILLIONS)(1) MILLIONS)(1) DATE
- -----------------------------------------------------------------------------------------------------------------------------------
La Mirage IV (3) San Diego, CA 1 340 $ 54.4 $ 1.6 $ 52.8 $ 54.4 Q1 2001
Town Center II (2) Houston, TX 1 260 15.2 15.2 0.0 15.2 Completed
Prospect Towers II (3) Hackensack, NJ 1 203 33.8 0.6 33.2 33.8 Q2 2001
--- ----- ---------- -------- -------- --------
EXPANSION PROJECTS 3 803 $ 103.4 $ 17.4 $ 86.0 $ 103.4
--- ----- ---------- -------- -------- --------
Peachtree Atlanta, GA 1 355 $ 35.3 $ 8.8 $ 0.0 $ 8.8 Completed
Lincoln Park Lawrence, MA 1 174 17.8 4.5 0.0 4.5 Q2 2000
Mount Laurel Crossing Mt. Laurel, NJ 1 296 25.2 6.3 0.0 6.3 Q2 2000
Fairfax Corners Fairfax, VA 1 652 63.9 16.0 0.0 16.0 Q3 2001
Lakeside Park Tampa, FL 1 264 17.7 4.4 0.0 4.4 Q4 2000
Eden Village Loudon County, VA 1 298 28.7 0.0 7.2 7.2 Q4 2001
Landings, The Lake Zurich, IL 1 206 20.9 5.2 0.0 5.2 Q3 2000
Regents Court San Diego, CA 1 251 37.1 9.3 0.0 9.3 Q1 2001
Potomac Yard Alexandria, VA 1 588 65.7 0.0 16.4 16.4 Q3 2001
Waltham Terrace Waltham, MA 1 192 27.0 0.0 6.7 6.7 Q4 2001
Braintree Woods Braintree, MA 1 202 27.4 6.8 0.0 6.8 Q4 2000
Savannah at Park Place Atlanta, GA 1 416 43.9 9.9 1.1 11.0 Q4 2000
--- ----- ---------- -------- -------- --------
LINCOLN PROPERTY COMPANY
JOINT VENTURE PROJECTS 12 3,894 $ 410.6 $ 71.2 $ 31.4 $ 102.6
----- ----- -------- ------ ------ ------
Hampden Town Center Aurora, CO 1 444 $ 44.8 $ 9.5 $ 1.7 $ 11.2 Q1 2001
Warner Ridge Woodland Hills, CA 1 579 111.2 27.8 0.0 27.8 Q4 2001
----- ----- -------- ------ ------ ------
LEGACY PARTNERS JOINT VENTURE PROJECTS 2 1,023 $ 156.0 $ 37.3 $ 1.7 $ 39.0
----- ----- -------- ------ ------ ------
Parkfield Denver, CO 1 476 $ 37.9 $ 0.0 $ 37.9 $ 37.9 Q4 2000
----- ----- -------- ------ ------ ------
EARNOUT PROJECTS 1 476 $ 37.9 $ 0.0 $ 37.9 $ 37.9
----- ----- -------- ------ ------ ------
----- ----- -------- ------ ------ ------
TOTAL PROJECTS 18 6,196 $ 707.9 $ 125.9 $ 157.0 $ 282.9
===== ====== ====== ====== ====== =========
(1) The Company's funding of Lincoln Property Company Joint Venture
and Legacy Partners Joint Venture Projects is limited to 25% of
the total development cost.
(2) Town Center II was substantially completed and acquired on
December 22, 1999 and is included in the outstanding property and
unit counts as of that date.
(3) Estimated development cost does not include the cost of land
previously acquired by the Company.
31
PART I
ITEM 3. LEGAL PROCEEDINGS
Only ordinary routine litigation incidental to the business, which is
not deemed material, was i