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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0001012870-01-501557.txt : 20010814
<SEC-HEADER>0001012870-01-501557.hdr.sgml : 20010814
ACCESSION NUMBER: 0001012870-01-501557
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 20010630
FILED AS OF DATE: 20010813
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ESSEX PROPERTY TRUST INC
CENTRAL INDEX KEY: 0000920522
STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798]
IRS NUMBER: 770369576
STATE OF INCORPORATION: MD
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-13106
FILM NUMBER: 1706365
BUSINESS ADDRESS:
STREET 1: 925 EAST MEADOW DR
CITY: PALO ALTO
STATE: CA
ZIP: 94303
BUSINESS PHONE: 6504943700
MAIL ADDRESS:
STREET 1: 925 EAST MEADOW DRIVE
CITY: PALO ALTO
STATE: CA
ZIP: 94303
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>d10q.txt
<DESCRIPTION>FORM 10-Q PERIOD ENDED 06/30/2001
<TEXT>
<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 1-13106
ESSEX PROPERTY TRUST, INC.
(Exact name of Registrant as specified in its Charter)
Maryland 77-0369576
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
925 East Meadow Drive, Palo Alto, California 94303
(Address of principal executive offices)
(Zip code)
(650) 494-3700
(Registrant's telephone number, including area code)
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 for such shorter period that the Registrant was required
to file such report, and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date:
18,474,237 shares of Common
Stock as of August 1, 2001
<PAGE>
TABLE OF CONTENTS
FORM 10-Q
Part I Page No.
--------
Item 1 Financial Statements (Unaudited) 3
Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000 4
Consolidated Statements of Operations for the three months
ended June 30, 2001 and 2000 5
Consolidated Statements of Operations for the six months
ended June 30, 2001 and 2000 6
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2001
and the year ended December 31, 2000 7
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2001 and 2000 8
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3 Quantitative and Qualitative Disclosure About Market Risk 25
Part II
Item 2 Changes in Securities and Use of Proceeds 26
Item 4 Submission of Matter to a Vote of Security Holders 27
Item 6 Exhibits and Reports on Form 8-K 27
Signatures 28
2
<PAGE>
Part I Financial Information
Item 1: Financial Statements (Unaudited)
"Essex" or the "Company" means Essex Property Trust, Inc., a real
estate investment trust incorporated in the State of Maryland, or
where the context otherwise requires, Essex Portfolio, L.P., a limited
partnership in which Essex Property Trust, Inc. is the sole general
partner.
The information furnished in the accompanying consolidated unaudited
balance sheets, statements of operations, stockholders' equity and
cash flows of the Company reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the
aforementioned financial statements for the interim periods.
The accompanying unaudited consolidated financial statements should be
read in conjunction with the notes to such financial statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
3
<PAGE>
ESSEX PROPERTY TRUST, INC.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 2001 2000
------ ------------ ------------
<S> <C> <C>
Real estate:
Rental properties:
Land and land improvements $ 291,245 $ 289,796
Buildings and improvements 875,452 866,612
------------ ------------
1,166,697 1,156,408
Less accumulated depreciation (137,734) (119,499)
------------ ------------
1,028,963 1,036,909
Investments 77,113 65,703
Real estate under development 62,728 38,231
------------ ------------
1,168,804 1,140,843
Cash and cash equivalents-unrestricted 12,666 6,600
Cash and cash equivalents-restricted 16,530 18,965
Notes receivable from investees and
related parties 118,236 77,081
Notes and other receivables 29,050 24,062
Prepaid expenses and other assets 7,429 7,654
Deferred charges, net 6,207 6,644
------------ ------------
$ 1,358,922 $ 1,281,849
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Mortgage notes payable $ 566,024 $ 502,066
Lines of credit 95,158 93,469
Accounts payable and accrued
liabilities 29,040 30,430
Dividends payable 16,553 14,538
Other liabilities 6,417 6,539
Deferred gain 5,002 5,002
------------ ------------
Total liabilities 718,194 652,044
Minority interests 250,796 238,130
Stockholders' equity:
8.75% Convertible Preferred Stock,
Series 1996A: $.0001 par value, no
shares authorized, issued and outstanding - -
Common stock, $.0001 par value, 656,682,178
and 656,682,178 authorized, 18,473,237
and 18,130,317 issued and outstanding 2 2
Cumulative redeemable preferred stock;
$.0001 par value, no shares issued and
outstanding:
7.875% Series B 2,000,000 shares authorized - -
9.125% Series C 500,000 shares authorized - -
9.30% Series D 2,000,000 shares authorized - -
9.25% Series E 2,200,000 shares authorized - -
Excess stock, $.0001 par value, 330,000,000
shares authorized and no shares issued and
outstanding - -
Additional paid-in capital 429,960 428,433
Distributions in excess of accumulated
earnings (40,030) (36,760)
------------ ------------
Total stockholders' equity 389,932 391,675
------------ ------------
$ 1,358,922 $ 1,281,849
============ ============
</TABLE>
See accompanying notes to the consolidated unaudited financial statements.
4
<PAGE>
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
Three months ended
-------------------------------
June 30, June 30,
2001 2000
------------ ------------
<S> <C> <C>
Revenues:
Rental $ 45,044 $ 39,056
Other property 1,465 1,151
------------ ------------
Total property 46,509 40,207
Interest and other 4,536 2,205
------------ ------------
Total revenues 51,045 42,412
------------ ------------
Expenses:
Property operating expenses
Maintenance and repairs 2,927 2,413
Real estate taxes 2,961 2,863
Utilities 2,492 1,967
Administrative 3,622 3,440
Advertising 648 515
Insurance 233 249
Depreciation and amortization 8,927 6,950
------------ ------------
21,810 18,397
Interest 9,637 6,467
Amortization of deferred financing costs 207 160
General and administrative 1,854 1,170
------------ ------------
Total expenses 33,508 26,194
------------ ------------
Income before minority interests 17,537 16,218
Minority interests (6,010) (5,945)
------------ ------------
Net income 11,527 10,273
Preferred stock dividends - (129)
------------ ------------
Net income available to common stockholders $ 11,527 $ 10,144
============ ============
Per share data:
Basic:
Net income $ 0.62 $ 0.56
============ ============
Weighted average number of shares
outstanding during the period 18,462,237 18,109,641
============ ============
Diluted:
Net income $ 0.61 $ 0.55
============ ============
Weighted average number of shares
outstanding during the period 18,777,636 18,617,756
============ ============
Dividend per share $ 0.70 $ 0.61
============ ============
</TABLE>
See accompanying notes to the consolidated unaudited financial statements.
5
<PAGE>
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
Six months ended
-------------------------------
June 30, June 30,
2001 2000
------------ ------------
<S> <C> <C>
Revenues:
Rental $ 89,635 $ 75,902
Other property 2,923 2,105
------------ ------------
Total property 92,558 78,007
Interest and other 8,596 3,941
------------ ------------
Total revenues 101,154 81,948
------------ ------------
Expenses:
Property operating expenses
Maintenance and repairs 5,668 4,564
Real estate taxes 6,042 5,461
Utilities 4,981 4,024
Administrative 7,245 6,772
Advertising 1,358 1,011
Insurance 495 470
Depreciation and amortization 17,753 13,617
------------ ------------
43,542 35,919
Interest 19,061 12,275
Amortization of deferred financing costs 367 319
General and administrative 3,729 2,295
------------ ------------
Total expenses 66,699 50,808
------------ ------------
Income before gain on the sales of real estate
and minority interests 34,455 31,140
Gain on the sales of real estate - 4,022
------------ ------------
Income before minority interests 34,455 35,162
Minority interests (11,880) (12,139)
------------ ------------
Net income 22,575 23,023
Preferred stock dividends - (246)
------------ ------------
Net income available to common stockholders $ 22,575 $ 22,777
============ ============
Per share data:
Basic:
Net income $ 1.22 $ 1.26
============ ============
Weighted average number of shares
outstanding during the period 18,445,361 18,088,667
============ ============
Diluted:
Net income $ 1.20 $ 1.24
============ ============
Weighted average number of shares
outstanding during the period 18,785,349 18,556,332
============ ============
Dividend per share $ 1.40 $ 1.16
============ ============
</TABLE>
See accompanying notes to the consolidated unaudited financial statements.
6
<PAGE>
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2001 and the
year ended December 31, 2000
(Unaudited)
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Distributions
Preferred stock Common stock Additional in excess of
------------------- ----------------- paid - in accumulated
Shares Amount Shares Amount capital earnings Total
------ ------ ------ ------ --------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1999 185 $ 1 18,050 $ 2 $425,089 $(37,399) $387,693
Shares issued on conversion
of Convertible Preferred Stock (185) (1) 211 - - - (1)
Net proceeds from options exercised - - 156 - 3,344 - 3,344
Net income - - - - - 44,353 44,353
Dividends declared - - - - - (43,714) (43,714)
------- ----- ------ ---- -------- -------- --------
Balances at December 31, 2000 - - 18,417 2 428,433 (36,760) 391,675
Net proceeds from options exercised - - 56 - 1,527 - 1,527
Net income - - - - - 22,575 22,575
Dividends declared - - - - - (25,845) (25,845)
------- ----- ------ ---- -------- -------- --------
Balances at June 30, 2001 - $ - 18,473 $ 2 $429,960 $(40,030) $389,932
======= ===== ====== ==== ======== ======== ========
</TABLE>
See accompanying notes to the consolidated unaudited financial statements
7
<PAGE>
ESSEX PROPERTY TRUST, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
Six months ended
-------------------------
June 30, June 30,
2001 2000
--------- --------
<S> <C> <C>
Net cash provided by operating activities: $ 50,305 $ 36,395
--------- --------
Cash flows from investing activities:
Additions to real estate (13,658) (29,677)
Proceeds received from the disposition of real estate - 31,302
Proceeds received from contribution of real estate to
corporate investee 15,987 -
Decrease / (increase) in restricted cash 2,435 124
Additions to notes receivable from investees,
related parties and other receivables (61,846) (36,135)
Repayment of notes receivable from investees,
related parties and other receivables 13,818 3,566
Additions to real estate under development (17,519) (16,888)
Net contribution to investments in corporations
and limited partnerships (11,762) (2,281)
--------- --------
Net cash used in investing activities (72,545) (49,989)
--------- --------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable
and lines of credit 169,294 88,596
Repayment of mortgage and other notes payable
and lines of credit (109,791) (51,522)
Additions to deferred charges (140) (847)
Net proceeds from stock options exercised and shares
issued through dividend reinvestment plan 1,527 1,857
Contributions from minority interest partners 6,000 -
Distributions to minority interest partners (11,928) (11,449)
Redemption of operating partnership units (2,555) (164)
Dividends paid (24,101) (19,988)
--------- --------
Net cash provided by financing activities 28,306 6,483
--------- --------
Net increase in cash and cash equivalents 6,066 (7,111)
Cash and cash equivalents at beginning of period 6,600 12,348
--------- --------
Cash and cash equivalents at end of period $ 12,666 $ 5,237
========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of $1,303 and
$1,356 capitalized $ 18,213 $ 10,899
========= ========
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of Operating Partnership Units in
connection with the purchase of real estate $ 10,381 $ 2,365
========= ========
Real estate under development transferred to rental properties $ - $ 89,483
========= ========
Exchange of notes receivable from investees for investments $ 8,347 $ -
========= ========
Contribution of real estate in exchange for notes receivable and
investments $ 22,463 $ -
========= ========
Consolidation of previously unconsolidated investment $ 8,087 $ -
========= ========
Mortgage note payable assumed in connection with
purchase of real estate $ 6,144 $ 53,900
========= ========
Exchange of investment for note receivable from investee $ 1,501 $ -
========= ========
</TABLE>
See accompanying notes to consolidated unaudited financial statements.
8
<PAGE>
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(1) Organization and Basis of Presentation
The unaudited consolidated financial statements of the Company are
prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to
Form 10-Q. In the opinion of management, all adjustments necessary for a
fair presentation of the financial position, results of operations and
cash flows for the periods presented have been included and are normal
and recurring in nature. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements included in the Company's annual report on Form 10-K
for the year ended December 31, 2000.
The unaudited consolidated financial statements for the three and six
months ended June 30, 2001 and 2000 include the accounts of the Company
and Essex Portfolio, L.P. (the "Operating Partnership", which holds the
operating assets of the Company). The Company is the sole general partner
in the Operating Partnership, owning an 89.0%, 89.6% and 89.5% general
partnership interest as of June 30, 2001, December 31, 2000 and June 30,
2000, respectively.
As of June 30, 2001, the Company operates and has ownership interests in
84 multifamily properties (containing 18,914 units) and five commercial
properties (with approximately 290,000 square feet) (collectively, the
"Properties"). The Properties are located in Northern California (the San
Francisco Bay Area), Southern California (Los Angeles, Ventura, Orange
and San Diego counties), and the Pacific Northwest (the Seattle,
Washington and Portland, Oregon metropolitan areas).
All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements.
(2) Significant Transactions
(A) Acquisition Activities
On May 1, 2001 the Company purchased Andover Park Apartments, a 240-unit
apartment community located in Beaverton, Oregon for a contract price of
$16,633. The Company plans to contribute this property to a joint venture
that was formed (see Note F, "Subsequent Event"). Accordingly, the
Company's investment is reflected in the Company's financial statements
as notes receivable from investees and related parties and investments.
On June 1, 2001 the Company completed the partner buyout of Mt. Sutro
Terrace Apartments, a 99-unit apartment community located in San
Francisco, California. The buyout was at the Company's option under a
capped pricing formula which terms were agreed to at the time of the
Company's initial investment in September 1999. In conjunction with the
partner buyout the Company issued 50,725 Operating Partnership units
which are convertible into Common Stock at the option of the holder.
On June 29, 2001, the Company purchased Moanalua Hillside Apartments
through one of its taxable REIT subsidiaries. Moanalua Hillside
Apartments is a 700-unit apartment community located in Honolulu, Hawaii
which was acquired for a contract price of $42,200. The Company has
entered into a contract to resell this property to an unrelated third
party at a price in excess of the Company's purchase price. However,
there can be no assurance that the sale of the property will close as
expected. Accordingly, the Company's net investment is reflected in the
Company's financial statements as notes receivable and investments from
investees and related parties.
9
<PAGE>
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(B) Development Communities
The Company defines development communities as new apartment properties
that are being constructed or are newly constructed and in a phase of
lease-up and have not yet reached stabilized operations. At June 30,
2001, the Company has ownership interests in six development communities,
with an aggregate of 1,678 multifamily units.
(C) Redevelopment Communities
The Company defines redevelopment communities as existing properties
owned or recently acquired which have been targeted for investment by the
Company with the expectation of increased financial returns through
property improvement. Redevelopment communities typically have apartment
units that are not available for rent and, as a result, may have less
than stabilized operations. At June 30, 2001, the Company has ownership
interests in six redevelopment communities, which contain an aggregate of
1,786 units with total originally projected investment of $35,375 of
which approximately $13,374 remains to be expended.
(D) Debt Transactions
On May 3, 2001 the Company entered into a $5,144 long-term non-recourse
second mortgage secured by a property. This loan bears interest at a
fixed rate of 7.49% and is due in April 2008.
On June 26, 2001 the Company entered into a $16,600 long-term
non-recourse mortgage secured by a previously unencumbered property. The
loan bears interest at a fixed rate of 7.03% and is due in July 2011.
The proceeds from these mortgages were used to reduce outstanding
balances on the Company's unsecured lines of credit.
Acquisition and development and redevelopment and other activities for
the second quarter of 2001 were funded through Operating Partnership unit
issuance and debt transactions as noted above and the Company's unsecured
lines of credit.
(E) Equity Transactions
On June 28, 2001, the Operating Partnership issued 200,000 Series Z
Incentive Units of limited partner interest (the "Series Z Incentive
Units") to eleven senior executives of the Company in exchange for a
capital commitment of $1.00 per Series Z Incentive Unit, for an aggregate
offering price of $200,000. Upon certain triggering events, the Series Z
Incentive Units will automatically convert into common Operating
Partnership units based on a conversion ratio that may increase over time
upon satisfaction of specific conditions. The conversion ratio, initially
set at zero, will increase on January 1 of each year for each
participating executive who remains employed by the Company if the
Company has met a specified "funds from operations" per share target for
the prior year, up to a maximum conversion ratio of 1.0. In certain
change of control situations, the participating executives will also be
given the option to convert their units at the then-effective conversion
ratio. In addition, the Operating Partnership has the option to redeem
Series Z Incentive Units held by any executive whose employment has been
terminated for any reason and the obligation to redeem any such units
following the death of the holder. In such event, the Operating
Partnership will redeem the units for, at its option, either common
Operating Partnership units or shares of the Company's common stock based
on the then-effective conversion ratio.
10
<PAGE>
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
The Series Z Incentive Units are entitled to participate in regular
quarterly distributions on an adjusted basis. Initially, each Series Z
Incentive Unit will receive 10% of the distribution received by each
common Operating Partnership unit. Over time the distribution percentage
may increase, generally based on satisfaction of the same conditions as
increases in the conversion ratio.
(F) Subsequent Event
On July 11, 2001, Essex Apartment Value Fund, L.P. (the "Fund"), an
investment fund controlled by the Company, had its initial closing with
three institutional investors. The Fund will acquire, develop, and manage
multifamily properties located in California, Oregon, and Washington. The
Fund's objective is to add value through rental growth and appreciation,
using the Company's development, redevelopment and asset management
capabilities.
The total equity committed to the Fund by investors, including the
Operating Partnership, at the initial closing was $105 million. An
affiliate of the Company, Essex VFGP, L.P., is the Fund's general partner
(the "General Partner"). The Operating Partnership owns a 99% limited
partner interest in the General Partner. Additional closings are expected
to occur as investors who have been offered the opportunity to invest in
the Fund make their determinations, before the final closing date of
January 15, 2002. The Fund is currently anticipated to have total capital
commitments of between $200 million and $250 million and will utilize
leverage of between 60% to 65% of the value of the underlying real estate
portfolio. After the initial closing, the Company, through the General
Partner, has a 47.62% interest in the Fund on economic terms identical to
the other investors with respect to capital invested. Though the Company
expects its interest in the Fund to be diluted as a result of future
closings, the Company is committed to invest an amount equal to or
greater than 20% of the aggregate capital committed to the Fund.
The General Partner will transfer to the Fund ownership of several
properties which were acquired over the last eleven months in
anticipation of the Fund's formation. These properties include six
apartment properties having 1377 apartment units and two development land
parcels on which approximately 368 units are planned for construction.
Following such transfer, five of the properties will be encumbered by
non-recourse mortgages in the aggregate amount of approximately $70
million. The Company's net investment in these six properties has been
carried in notes receivable from investees and related parties.
In addition to distributions with respect to its share of the Fund's
invested capital, the General Partner (1) will receive distributions from
the Fund in the annual amount of 1% of the Fund's committed capital,
payable quarterly for managing the Fund's operations, and (2) may receive
over the life of the Fund incentive distributions up to 20% of the
cumulative net profits on all of the Fund's investments, if the Fund
exceeds certain financial return benchmarks, including a minimum 10%
compounded annual return on the investors' total capital contributions.
The General Partner will also be paid fees consistent with industry
standards for its property management, development and redevelopment
services with respect to the Fund's investments. The General Partner will
not receive transaction fees, such as acquisition, disposition, financing
or similar fees, in connection with the operation of the Fund.
11
<PAGE>
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
Subject to specific exceptions, the Fund will generally be the Company's
exclusive investment vehicle for new investments until the earlier of (i)
the date at least 90% of the Fund's aggregate capital commitments have
been invested or committed or reserved for investments or (ii) December
31, 2003. The exceptions are: (1) properties acquired to complete
transactions intended to qualify for non-recognition under Section 1031
of the Internal Revenue , (2) transactions involving properties with 75
units or less, (3) transactions which require equity securities of the
Company, including convertible or exchangeable securities, with a value
of at least $750,000, (4) mezzanine loans, (4) follow-on investments and
re-building of properties which have been destroyed or damaged, (5) land
leases with remaining terms of less than 35 years; and (6) other
transactions which are prohibited from being consummated on behalf of the
Fund due to express restrictions or diversification limitations.
The Company's senior executives, Keith Guericke, Michael Schall, John
Eudy, Craig Zimmerman and John Burkart, serve as the Fund's investment
committee and are required to devote such time as is reasonably necessary
to achieve the objectives of the Fund. Investors have the right to
suspend their capital commitments to the Fund if two or more of these
executives are no longer actively involved in the management of the Fund.
John Burkart serves as portfolio manager and is committed to devote
substantially all of his time to the Fund during the investment period.
The Fund has a five-person advisory committee representing the investors.
12
<PAGE>
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(3) Related Party Transactions
All general and administrative expenses of the Company and Essex Management
Corporation, an unconsolidated preferred stock subsidiary of the Company
("EMC"), are initially borne by the Company, with a portion subsequently
allocated to EMC. Expenses allocated to EMC for the three months ended June
30, 2001 and 2000 totaled $488 and $270, respectively, and $918 and $503
for the six months ended June 30, 2001 and 2000, respectively. The
allocation is reflected as a reduction in general and administrative
expenses in the accompanying consolidated statements of operations.
Other income includes interest income of $1,319 and $827 for the three
months ended June 30, 2001 and 2000, respectively, and $2,219 and $1,471
for the six months ended June 30, 2001 and 2000, respectively. The majority
of interest income was earned on the notes receivable from investees. Other
income also includes management fee income and investment income from the
Company's investees of $423 and $706 for the three months ended June 30,
2001 and 2000, respectively, and $770 and $1,344 for the six months ended
June 30, 2001 and 2000, respectively.
Notes receivable from investees and related parties as of June 30, 2001 and
December 31, 2000 consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2001 2000
---- ----
Notes receivable from joint ventures investees:
<S> <C> <C>
Notes receivable from VFGP L.P.'s, secured,
bearing interest at 9% - Prime + 3%, due 2001-2010 $ 56,943 $ 47,840
Note receivable from Highridge Apartments, secured,
bearing interest at 9%, due March 2008 - 1,047
Note receivable from Highridge Apartments, secured,
bearing interest at 10%, due on demand 2,950 2,950
Notes receivable from Fidelity 1, secured,
bearing interest at 7% - LIBOR + 2.5%, due 2002-2004 41,741 5,613
Receivables from Down REIT entities, non interest bearing,
due on demand - 8,281
Receivable from Newport Beach North LLC and Newport Beach
South LLC, non interest bearing, due on demand 648 1,753
Receivable from City Heights LP, non interest bearing,
due on demand 865 865
Receivables from VFGP L.P.s, non interest bearing, due on demand 9,991 4,804
Other related party receivables:
Loans to officers, secured, bearing interest at 8%, due April 2006 633 633
Other related party receivables, substantially due on demand 4,465 3,295
--------- --------
$ 118,236 $ 77,081
========= ========
</TABLE>
Other related party receivables consist primarily of accrued interest
income on notes receivable from joint venture investees and loans to
officers, advances and accrued management fees from joint venture
investees and unreimbursed expenses due from EMC.
13
<PAGE>
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(4) New Accounting Pronouncements
The Company has adopted SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities." effective January 1, 2001. Under the SFAS 133
derivative instruments are required to be included in the balance sheet at
fair value. The changes in the fair value of the derivatives are accounted
for depending on the use of the derivative and whether it has been
designated and qualifies as a part of hedging relationship. If the hedged
exposure is a cash flow exposure, the effective portion of the gain or loss
on the derivative instrument is reported initially as a component of other
comprehensive income and subsequently reclassified into earnings when the
forecasted transaction affects earnings. The ineffective portion of the
gain or loss is reported in earnings immediately. The difference between a
derivative's previous carrying amount and its fair value was recorded as a
transition adjustment, which was allocated between net income and other
comprehensive income based on the entity's strategy for assessing the
effectiveness of the hedge.
During 1996 and 1999, the Company purchased interest rate cap contracts in
order to reduce the risks associated with increases in interest rates on
its tax exempt variable rate demand bonds. The Company has the right to
receive cash if interest rates increase above a specified level. The
purpose of the caps is to hedge the exposure to variability in expected
future interest cash flows above a fixed interest rate, and, accordingly,
they are accounted for as cash flow hedges under SFAS 133. The Company
determines the fair value of the caps and assesses the ineffectiveness of
the hedge based on changes in the time value of the caps. As of January 1,
2001, there were no changes in the intrinsic value of the caps since the
date the caps were purchased, and the changes in fair value of the caps is
attributable entirely to changes in time value. The amortized cost of the
cap contracts exceeded their fair value by approximately $450,000, which
resulted in a transition adjustment (charge to earnings) of that amount in
the quarter ended March 31, 2001.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and also specifies the criteria
that intangible assets acquired in a business combination must meet in
order to be recognized and reported apart from goodwill. Statement 142
requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead be tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142
also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. We do not expect the adoption of Statements 141
and 142 to have a material effect on our financial statements.
14
<PAGE>
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(5) Segment Information
The Company defines its reportable operating segments as the three
geographical regions in which its properties are located: Northern
California, Southern California and the Pacific Northwest. Excluded from
segment revenues are interest and other corporate income. Other non-segment
assets include investments, real estate under development, cash,
receivables and other assets. The revenues, net operating income, and
assets for each of the reportable operating segments are summarized as
follows for the periods presented.
<TABLE>
<CAPTION>
Three months ended
June 30, 2001 June 30, 2000
----------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Northern California $ 16,869 $ 13,556
Southern California 18,249 16,772
Pacific Northwest 11,391 9,879
------------- -------------
Total segment revenues 46,509 40,207
Interest and other income 4,536 2,205
------------- -------------
Total revenues $ 51,045 $ 42,412
============= =============
Net operating income:
Northern California $ 13,036 10,379
Southern California 12,681 11,697
Pacific Northwest 7,909 6,684
------------- -------------
Total segment net operating income 33,626 28,760
Interest and other income 4,536 2,205
Depreciation and amortization (8,927) (6,950)
Interest (9,637) (6,467)
Amortization of deferred financing costs (207) (160)
General and administrative (1,854) (1,170)
------------- -------------
Income before gain on the sales of real
estate, minority interests and
extraordinary item $ 17,537 $ 16,218
============= =============
Six months ended
June 30, 2001 June 30, 2000
----------------------------------------------------------------------------------
Revenues
Northern California $ 33,794 $ 26,190
Southern California 35,986 32,545
Pacific Northwest 22,778 19,272
------------- -------------
Total segment revenues 92,558 78,007
Interest and other income 8,596 3,941
------------- -------------
Total revenues $ 101,154 $ 81,948
============= =============
Net operating income:
Northern California $ 26,167 20,211
Southern California 24,908 22,417
Pacific Northwest 15,694 13,077
------------- -------------
Total segment net operating income 66,769 55,705
Interest and other income 8,596 3,941
Depreciation and amortization (17,753) (13,617)
Interest (19,061) (12,275)
Amortization of deferred financing costs (367) (319)
General and administrative (3,729) (2,295)
------------- -------------
Income before gain on the sales of real
estate, minority interests and
extraordinary item $ 34,455 $ 31,140
============= =============
</TABLE>
15
<PAGE>
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(5) Segment Information (continued)
-------------------------------
<TABLE>
<CAPTION>
June 30, 2001 December 31, 2000
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Northern California $ 305,506 $ 289,839
Southern California 459,259 478,835
Pacific Northwest 264,198 268,235
------------- -------------
Total segment net real estate assets 1,028,963 1,036,909
Non-segment assets 329,959 244,940
------------- -------------
Total assets $ 1,358,922 $ 1,281,849
============= =============
(6) Net Income Per Share
--------------------
Three months ended Three months ended
June 30, 2001 June 30, 2000
------------------------------ ------------------------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
Net Income $ 11,527 $ 10,273
Less: dividends on preferred stock - (129)
-------- --------
Basic:
Income available to
common stockholders 11,527 18,462 $ 0.62 10,144 18,110 $ 0.56
-------- ------- ====== -------- ------- ======
Effect of Dilutive Securities:
Convertible limited partnership
units - - (1) - - (1)
Convertible preferred stock - - 129 211
Stock options - 316 - 297
-------- ------- -------- -------
Diluted:
Income available to common
Stockholders plus assumed
conversions $ 11,527 18,778 $ 0.61 $ 10,273 18,618 $ 0.55
======== ======= ====== ======== ======= ======
Six months ended Six months ended
June 30, 2001 June 30, 2000
------------------------------ ------------------------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
Net Income $ 22,575 $ 23,023
Less: dividends on preferred stock - (246)
-------- --------
Basic:
Income available to
common stockholders 22,575 18,445 $ 1.22 22,777 18,089 $ 1.26
-------- ------- ====== -------- ------- ======
Effect of Dilutive Securities:
Convertible limited partnership
units - - (1) - - (1)
Convertible preferred stock - - 246 211
Stock options - 340 - 256
-------- ------- -------- -------
Diluted:
Income available to common
Stockholders plus assumed
conversions $ 22,575 18,785 $ 1.20 $ 23,023 18,556 $ 1.24
======== ======= ====== ======== ======= ======
</TABLE>
(1) Securities not included because they were anti-dilutive.
16
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The following discussion is based primarily on the consolidated unaudited
financial statements of Essex Property Trust, Inc. ("Essex" or the "Company")
for the three and six months ended June 30, 2001 and 2000. This information
should be read in conjunction with the accompanying consolidated unaudited
financial statements and notes thereto. These consolidated financial statements
include all adjustments which are, in the opinion of management, necessary to
reflect a fair statement of the results and all such adjustments are of a normal
recurring nature.
Substantially all of the assets of the Company are held by, and substantially
all operations are conducted through, Essex Portfolio, L.P. (the "Operating
Partnership"). The Company is the sole general partner of the Operating
Partnership and, as of June 30, 2001, December 31, 2000 and June 30, 2000, owned
an 89.0%, 89.6% and 89.5% general partnership interest in the Operating
Partnership, respectively. The Company has elected to be treated as a real
estate investment trust (a "REIT") for federal income tax purposes.
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in the quarterly report on
Form 10-Q which are not historical facts may be considered forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
including statements regarding the Company's expectations, hopes, intentions,
beliefs and strategies regarding the future. Forward looking statements include
the Company's expectation as to its resale of the Moanalua Hillside Apartments,
the Company's expectations as to the total capital commitments of the Essex
Apartment Value Fund and the acquisition activities of that fund, statements
regarding the Company's expectation as to the timing of completion of current
development projects, beliefs as to the adequacy of future cash flows to meet
operating requirements, and to provide for dividend payments in accordance with
REIT requirements and expectations as to the amount of non-revenue generating
capital expenditures for the year ended December 31, 2001, potential
acquisitions and developments, the anticipated performance of existing
properties, future acquisitions and developments and statements regarding the
Company's financing activities. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors including, but not limited
to, that the Company's resale of the Moanlua Hillside Apartments will not be
completed as expected, that the total capital commitments and acquisition
activities of the Essex Apartment Value Fund will be less than anticipated, that
the actual completion of development projects will be subject to delays, that
such development projects will not be completed, that future cash flows will be
inadequate to meet operating requirements and/or will be insufficient to provide
for dividend payments in accordance with REIT requirements, that the actual
non-revenue generating capital expenditures will exceed the Company's current
expectations, as well as those risks, special considerations, and other factors
discussed under the caption "Other Matters/Risk Factors" in Item 1 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2000, and
those other risk factors and special considerations set forth in the Company's
other filings with the Securities and Exchange Commission (the "SEC") which may
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements.
General Background
The Company's property revenues are generated primarily from multifamily
property operations, which accounted for greater than 99% of its property
revenues for the three and six months ended June 30, 2001 and 2000. The
Company's multifamily properties (the "Properties") are located in Northern
California (the San Francisco Bay Area), Southern California (Los Angeles,
Ventura, Orange and San Diego counties) and the Pacific Northwest (the Seattle,
Washington and Portland, Oregon metropolitan areas). The average occupancy
levels of the Company's portfolio has exceeded 95% for the last five years.
17
<PAGE>
The Company has elected to be treated as a real estate investment trust ("REIT")
for federal income tax purposes, commencing with the year ended December 31,
1994. The Company provides some of its fee-based asset management and
disposition services as well as third-party property management and leasing
services through Essex Management Corporation ("EMC"), in order to maintain
compliance with REIT tax rules. The Company owns 100% of EMC's 19,000 shares of
Series A non-voting Preferred Stock and 6,085 shares of Series B non-voting
Preferred Stock. Executives of the Company own 100% of EMC's 1,000 shares of
Common Stock.
Since the Company's initial public offering (the "IPO") in June 1994, the
Company has acquired ownership interests in 69 multifamily residential
properties and its headquarter and regional office buildings. Of the multifamily
properties acquired since the IPO, 14 are located in Northern California, 35 are
located in Southern California, 15 are located in the Seattle, Washington
metropolitan area and five are located in the Portland, Oregon metropolitan
area. In total, these acquisitions consist of 15,007 multifamily units with
total capitalized acquisition costs of approximately $1,198.2 million.
Additionally since its IPO, the Company has developed and has ownership
interests in eight multifamily development properties that have reached
stabilized operations. These development properties consist of 1,540 units with
total capitalized development costs of $180.6 million. As part of its active
portfolio management strategy, the Company has disposed of, since its IPO, 8
multifamily residential properties (six in Northern California, one in Southern
California and one in the Pacific Northwest) consisting of a total of 1,021
units, six retail shopping centers in the Portland, Oregon metropolitan area and
one commercial property in Northern California at an aggregate gross sales price
of approximately $116.4 million resulting in total net realized gains of
approximately $27.2 million and a deferred gain of $5.0 million.
The Company is currently developing six multifamily residential communities,
with an aggregate of 1,678 multifamily units. In connection with these
development projects, the Company has directly, or in some cases through its
joint venture partners, entered into contractual construction related
commitments with unrelated third parties for approximately $212.2 million. As of
June 30, 2001, together with its joint venture partners, the Company's remaining
development commitment is approximately $89.3 million.
Results of Operations
Comparison of the Three Months Ended June 30, 2001 to the Three Months Ended
- ----------------------------------------------------------------------------
June 30, 2000
- -------------
Average financial occupancy rates of the Company's multifamily Quarterly Same
Store Properties (properties owned by the Company for each of the three months
ended June 30, 2001 and 2000) was 95.6% and 97.1%, for the three months ended
June 30, 2001 and 2000, respectively. "Financial occupancy" is defined as the
percentage resulting from dividing actual rental income by total possible rental
income. Total possible rental income is determined by valuing occupied units at
contractual rents and vacant units at market rents. The regional breakdown of
financial occupancy for the multifamily Quarterly Same Store Properties for the
three months ended June 30, 2001 and 2000 are as follows:
June 30, June 30,
2001 2000
---- ----
Southern California 95.8% 96.3%
Northern California 95.6% 98.1%
Pacific Northwest 95.2% 96.7%
18
<PAGE>
Total Revenues increased by $8,633,000 or 20.4% to $51,045,000 in the second
quarter of 2001 from $42,412,000 in the second quarter of 2000. The following
table sets forth a breakdown of these revenue amounts, including the revenues
attributable to the Quarterly Same Store Properties.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
Number of -------- Dollar Percentage
Properties 2001 2000 Change Change
---------- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues
Property revenues Quarterly
Same Store Properties
Southern California 16 $ 11,181 $ 10,418 $ 763 7.3%
Northern California 14 14,553 12,796 1,757 13.7
Pacific Northwest 19 8,986 8,716 270 3.1
-- -------- -------- ------- -----
Properties 49 34,720 31,930 2,790 8.7
Property revenues properties
acquired/disposed of
subsequent March 31, 2000 11,789 8,277 3,512 42.4
-------- -------- ------- -----
Total property revenues(1) 46,509 40,207 6,302 15.7
-------- -------- ------- -----
Interest and other income 4,536 2,205 2,331 105.7
-------- -------- ------- -----
Total revenues $ 51,045 $ 42,412 $ 8,633 20.4%
======== ======== ======= =====
</TABLE>
(1) Also includes two commercial properties, redevelopment communities, and
development communities.
As set forth in the above table, $3,512,000 of the $8,633,000 net increase in
total revenues is attributable to properties acquired or disposed of subsequent
to March 31, 2000, redevelopment communities, development communities and two
commercial properties. During this period, the Company acquired interests in
thirteen multifamily properties and reached stabilized operations at two
development communities (the "Quarterly Acquisition Properties").
Of the increase in total revenues, $2,790,000 is attributable to increases in
property revenues from the Quarterly Same Store Properties. Property revenues
from the Quarterly Same Store Properties increased by approximately 8.7% to
$34,720,000 in the second quarter of 2001 from $31,930,000 in the second quarter
of 2000. The majority of this increase was attributable to the 14 Quarterly Same
Store Properties located in Northern California. The property revenues of the
Quarterly Same Store Properties in Northern California increased by $1,757,000
or 13.7% to $14,553,000 in the second quarter of 2001 from $12,796,000 in the
second quarter of 2000. This $1,757,000 increase is primarily attributable to
rental rate increases as offset by a decrease in financial occupancy to 95.6% in
the second quarter of 2001 from 98.1% in the second quarter of 2000. The 16
Quarterly Same Store Properties located in Southern California accounted for the
next largest regional component of the Quarterly Same Store Property revenue
increase. The property revenues of these properties increased by $763,000 or
7.3% to $11,181,000 in the second quarter of 2001 from $10,418,000 in the second
quarter of 2000. The $763,000 increase is attributable to rental rate increases
as offset by a decrease in financial occupancy to 95.8% in the second quarter of
2001 from 96.3% in the second quarter of 2000. The 19 multifamily residential
properties located in the Pacific Northwest also contributed to the Quarterly
Same Store Properties property revenues increase. The property revenues of these
properties increased by $270,000 or 3.1% to $8,986,000 in the second quarter of
2001 from $8,716,000 in the second quarter of 2000. The $270,000 increase is
primarily attributable to rental rate increases as offset by a decrease in
financial occupancy to 95.2% in the second quarter of 2001 from 96.7% in the
second quarter of 2000. The increase in total revenue also reflected an increase
of $2,331,000 attributable to interest and other income, which primarily relates
to interest income on notes receivables and income earned on the Company's joint
venture investments.
19
<PAGE>
Total Expenses increased by $7,314,000 or approximately 27.9% to $33,508,000 in
the second quarter of 2001 from $26,194,000 in the second quarter of 2000.
Interest expense increased by $3,170,000 or 49.0% to $9,637,000 in the second
quarter of 2001 from $6,467,000 in the second quarter of 2000. Such increase was
primarily due to the net addition of outstanding mortgage debt in connection
with property and investment acquisitions which was offset in part by
capitalization of interest charges relating to the Company's development and
redevelopment communities. Property operating expenses, exclusive of
depreciation and amortization, increased by $1,436,000 or 12.5% to $12,883,000
in the second quarter of 2001 from $11,447,000 in the second quarter of 2000. Of
such increase, $1,086,000 was attributable to the Quarterly Acquisition
Properties. Utility cost, a component of property operating expense, increased
by $525,000 or 29.7% to $2,492,000 in the second quarter of 2001 from $1,967,000
in the second quarter of 2000 and was attributable to the Quarterly Acquisition
Properties and as a result of shortages of natural gas and electricity
throughout the western region of the United States. Depreciation and
amortization increased by $1,977,000 or approximately 28.4% to $8,927,000 in the
second quarter of 2001 from $6,950,000 in the second quarter of 2000, primarily
due to the acquisition of assets.
General and administrative expenses represent the costs of the Company's various
acquisition and administrative departments as well as partnership administration
and non-operating expenses. Such expenses increased by $684,000 in the second
quarter of 2001 from the amount for the second quarter of 2000. This increase is
largely due to additional staffing requirements resulting from the growth of the
Company as offset by an increase in the allocation of general and administrative
expenses to EMC.
Net income increased by $1,254,000 to $11,527,000 in the second quarter of 2001
from $10,273,000 in the second quarter of 2000. This increase is primarily
attributable to the net contribution of the Quarterly Acquisition Properties and
the increase in net operating income from the Quarterly Same Store Properties.
Comparison of the Six Months Ended June 30, 2001 to the Six Months Ended June
30, 2000
- -------------------------------------------------------------------------------
Average financial occupancy rates of the Company's multifamily Same Store
Properties (properties owned by the Company for each of the six months June 30,
2001 and 2000) was 95.9% and 96.7%, for the six months ended June 30, 2001 and
2000, respectively. "Financial occupancy" is defined as the percentage resulting
from dividing actual rental income by total possible rental income. Total
possible rental income is determined by valuing occupied units at contractual
rents and vacant units at market rents. The regional breakdown of financial
occupancy for the multifamily Same Store Properties for the six months ended
June 30, 2001 and 2000 are as follows:
June 30, June 30,
2001 2000
---- ----
Southern California 95.7% 96.3%
Northern California 96.3% 97.7%
Pacific Northwest 95.3% 95.7%
20
<PAGE>
Total Revenues increased by $19,206,000 or 23.4% to $101,154,000 in the six
months ended June 30, 2001 from $81,948,000 in the six months ended June 30,
2000. The following table sets forth a breakdown of these revenue amounts,
including the revenues attributable to the Same Store Properties.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
Number of -------- Dollar Percentage
Properties 2001 2000 Change Change
---------- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues
Property revenues
Same Store Properties
Southern California 16 $ 22,183 $ 20,748 $ 1,435 6.9%
Northern California 14 29,030 25,007 4,023 16.1
Pacific Northwest 19 17,985 17,126 859 5.0
-- -------- -------- -------- -------
Properties 49 69,198 62,881 6,317 10.0
Property revenues properties
acquired/disposed of
subsequent December 31, 1999 23,360 15,126 8,234 54.4
-------- -------- -------- -------
Total property revenues(1) 92,558 78,007 14,551 18.7
-------- -------- -------- -------
Interest and other income 8,596 3,941 4,655 118.1
-------- -------- -------- -------
Total revenues $101,154 $ 81,948 $ 19,206 23.4%
======== ======== ======== =======
</TABLE>
(1) Also includes two commercial properties, redevelopment communities, and
development communities.
As set forth in the above table, $8,234,000 of the $19,206,000 net increase in
total revenues is attributable to properties acquired or disposed of subsequent
to December 31, 1999, redevelopment communities, development communities and two
commercial properties. During this period, the Company acquired interests in
thirteen multifamily properties and reached stabilized operations at five
development communities (the "Post 1999 Acquisition Properties") and disposed of
one multifamily property (the "Post 1999 Disposition Properties").
Of the increase in total revenues, $6,317,000 is attributable to increases in
property revenues from the Same Store Properties. Property revenues from the
Same Store Properties increased by approximately 10.0% to $69,198,000 in the six
months ended June 30, 2001 from $62,881,000 in the six months ended June 30,
2000. The majority of this increase was attributable to the 14 Same Store
Properties located in Northern California. The property revenues of the Same
Store Properties in Northern California increased by $4,023,000 or 16.1% to
$29,030,000 in the six months ended June 30, 2001 from $25,007,000 in the six
months ended June 30, 2000. This $4,023,000 increase is primarily attributable
to rental rate increases offset by a decrease in financial occupancy to 96.3% in
the six months ended June 30, 2001 from 97.7% in the six months ended June 30,
2000. The 16 Same Store Properties located in Southern California accounted for
the next largest regional component of the Same Store Property revenue increase.
The property revenues of these properties increased by $1,435,000 or 6.9% to
$22,183,000 in the six months ended June 30, 2001 from $20,748,000 in the six
months ended June 30, 2000. The $1,435,000 increase is attributable to rental
rate increases as offset by a decrease in financial occupancy to 95.7% in the
six months ended June 30, 2001 from 96.3% in the six months ended June 30, 2000.
The 19 multifamily residential properties located in the Pacific Northwest also
contributed to the Same Store Properties property revenues increase. The
property revenues of these properties increased by $859,000 or 5.0% to
$17,985,000 in the six months ended June 30, 2001 from $17,126,000 in the six
months ended June 30, 2000. The $859,000 increase is primarily attributable to
rental rate increases and as offset be a decrease in financial occupancy to
95.3% in the six months ended June 30, 2001 from 95.7% in the six months ended
June 30, 2000. The increase in total revenue also reflected an increase of
$4,655,000 attributable to interest and other income, which primarily relates to
interest income on notes receivables and income earned on the Company's joint
venture investments.
21
<PAGE>
Total Expenses increased by $15,891,000 or approximately 31.3% to $66,699,000 in
the six months ended June 30, 2001 from $50,808,000 in the six months ended June
30, 2000. Interest expense increased by $6,786,000 or 55.3% to $19,061,000 in
the six months ended June 30, 2001 from $12,275,000 in the six months ended June
30, 2000. Such increase was primarily due to the net addition of outstanding
mortgage debt in connection with property and investment acquisitions which was
offset in part by capitalization of interest charges relating to the Company's
development and redevelopment communities. Property operating expenses,
exclusive of depreciation and amortization, increased by $3,487,000 or 15.6% to
$25,789,000 in the six months ended June 30, 2001 from $22,302,000 in the six
months ended June 30, 2000. Of such increase, $2,613,000 was attributable to the
Post 1999 Acquisition Properties and the Post 1999 Disposition Properties.
Utility cost, a component of property operating expense, increased by $957,000
or 23.8% to $4,981,000 in the second quarter of 2001 from $4,024,000 in the
second quarter of 2000 and was attributable to the Post 1999 Acquisition
Properties and the Post 1999 Disposition Properties and as a result of shortages
of natural gas and electricity throughout the western region of the United
States. Depreciation and amortization increased by $4,136,000 or approximately
30.4% to $17,753,000 in the six months ended June 30, 2001 from $13,617,000 in
the six months ended June 30, 2000, primarily due to the acquisition of assets.
General and administrative expenses represent the costs of the Company's various
acquisition and administrative departments as well as partnership administration
and non-operating expenses. Such expenses increased by $1,434,000 in the six
months ended June 30, 2001 from the amount for the six months ended June 30,
2000. This increase is largely due to additional staffing requirements resulting
from the growth of the Company as offset by an increase in the allocation of
general and administrative expenses to EMC.
Net income decreased by $448,000 to $22,575,000 in the six months ended June 30,
2001 from $23,023,000 in the six months ended June 30, 2000. This decrease is
primarily attributable to the gain on the sales of real estate of $4,022,000 in
the first six months of 2000. There was no gain on the sales of real estate in
the first six months of 2001. This decrease was offset by the net contribution
of the Post 1999 Acquisition Properties and the increase in net operating income
from the Same Store Properties.
Liquidity and Capital Resources
At June 30, 2001 the Company had $12,666,000 of unrestricted cash and cash
equivalents. The Company expects to meet its short-term liquidity requirements
by using its working capital, cash generated from operations and amounts
available under lines of credit. The Company believes that its current net cash
flows will be adequate to meet operating requirements and to provide for payment
of dividends by the Company in accordance with REIT qualification requirements.
The Company expects to meet its long-term funding requirements relating to
property acquisition and development (beyond the next 12 months) by using
working capital, amounts available from its lines of credit, net proceeds from
public and private debt and equity issuances, and proceeds from the disposition
of properties that may be sold from time to time. There can, however, be no
assurance that the Company will have access to the debt and equity markets in a
timely fashion to meet such future funding requirements or that future working
capital, and borrowings under its lines of credit will be available, or if
available, will be sufficient to meet the Company's requirements or that the
Company will be able to dispose of properties in a timely manner and under terms
and conditions that the Company deems acceptable.
The Company has two outstanding unsecured lines of credit for an aggregate
amount of $150,000,000. The first line, in the amount of $120,000,000, matures
in May 2002, with an option to extend it for one year thereafter. Outstanding
balances under this line of credit bear interest at a rate which uses a tiered
rate structure tied to the Company corporate ratings, if any, and leverage
rating which has been priced at LIBOR plus 1.15% during its term. At June 30,
2001 the Company had $95,158,000 outstanding on this line of credit, which bore
interest rates of approximately 5.0%. A second line of credit in the amount of
$30,000,000 matures in August 2001, with an option to extend for one year
thereafter. Outstanding balances, if any, on this second line bear interest
based on a tiered rate structure currently at LIBOR plus 1.175%. At June 30,
2001 the Company had no outstanding balances on this line of credit.
22
<PAGE>
In addition to the unsecured lines of credit, the Company had $566,024,000 of
secured indebtedness at June 30, 2001. Such indebtedness consisted of
$507,204,000 in fixed rate debt with interest rates varying from 5.8% to 8.3%
and maturity dates ranging from 2002 to 2026. The indebtedness also included
$58,820,000 of debt represented by tax exempt variable rate demand bonds with
interest rates paid during the second quarter of 2001 ranging from 4.0% to 5.5%
and maturity dates ranging from 2020 to 2026. The tax-exempt variable rate
demand bonds are capped at interest rates ranging from 7.1% to 7.3%.
The Company's unrestricted cash balance increased by $6,066,000 from $6,600,000
as of December 31, 2000 to $12,666,000 as of June 30, 2001. This increase was
primarily a result of $50,305,000 net cash provided by operating activities and
$28,306,000 of net cash provided by financing activities, which was offset by
$72,545,000 of net cash used in investing activities. Of the $28,306,000 of net
cash provided by financing activities, $169,294,000 was received in proceeds
from mortgage and other notes payable and lines of credit, which was off set by
$109,791,000 in repayments of mortgage and other notes payable and lines of
credit, and $24,101,000 in dividends/distributions paid. The $72,545,000 of net
cash used in investing activities was primarily a result of $61,846,000 in
additions to notes receivable and investments made to finance real estate
acquisitions by the Company's investees, related party notes and other
receivables, $17,519,000 used to fund real estate under development, and
$13,658,000 used to purchase and upgrade rental properties which was offset by
$15,987,000 in proceeds received from contribution of real estate to corporate
investee.
Non-revenue generating capital expenditures are improvements and upgrades that
extend the useful life of the property and are not related to preparing a
multifamily property unit to be rented to a tenant. The Company expects to incur
approximately $330 per weighted average occupancy unit in non-revenue generating
capital expenditures for the year ended December 31, 2001. These expenditures do
not include the improvements required in connection with the origination of
mortgage loans, expenditures for renovations and improvements on recently
acquired properties which are expected to generate additional revenue, and
renovation expenditures required pursuant to tax-exempt bond financings. The
Company expects that cash from operations and/or its lines of credit will fund
such expenditures. However, there can be no assurance that the actual
expenditures incurred during 2001 and/or the funding thereof will not be
significantly different than the Company's current expectations.
The Company is developing six multifamily residential communities, with an
aggregate of 1,678 multifamily units. Such projects involve certain risks
inherent in real estate development. See "Other Matters/Risk Factors - Risks
That Development Activities Will Be Delayed or Not Completed" in Item 1 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2000. In
connection with these development projects, the Company has directly, or in some
cases through its joint venture partners, entered into contractual construction
related commitments with unrelated third parties for a total amount of
approximately $212,200,000. As of June 30, 2001, the Company's remaining
commitment to fund the estimated cost to complete is approximately $89,300,000.
The Company expects to fund such commitments with a combination of its working
capital, operating cash flows, amounts available on its lines of credit, net
proceeds from public and private equity and debt issuances, and proceeds from
the disposition of properties, which may be sold from time to time.
Pursuant to existing shelf registration statements, the Company has the capacity
to issue up to $342,000,000 of equity securities and the Operating Partnership
has the capacity to issue up to $250,000,000 of debt securities.
The Company pays quarterly dividends from cash available for distribution. Until
it is distributed, cash available for distribution is invested by the Company
primarily in short-term investment grade securities or is used by the Company to
reduce balances outstanding under its line of credit.
23
<PAGE>
Funds from Operations
Industry analysts generally consider funds from operations, ("Funds From
Operations"), an appropriate measure of performance of an equity REIT.
Generally, Funds From Operations adjusts the net income of equity REITs for
non-cash charges such as depreciation and amortization of rental properties,
gains/losses on sales of real estate property and extraordinary items.
Management considers Funds From Operations to be a useful financial performance
measurement of an equity REIT because, together with net income and cash flows,
Funds From Operations provides investors with an additional basis to evaluate
the ability of a REIT to incur and service debt and to fund acquisitions and
other capital expenditures. Funds From Operations does not represent net income
or cash flows from operations as defined by generally accepted accounting
principles ("GAAP") and is not intended to indicate whether cash flows will be
sufficient to fund cash needs. It should not be considered as an alternative to
net income as an indicator of the REIT's operating performance or to cash flows
as a measure of liquidity. Funds From Operations does not measure whether cash
flow is sufficient to fund all cash needs including principal amortization,
capital improvements and distributions to shareholders. Funds From Operations
also does not represent cash flows generated from operating, investing or
financing activities as defined under GAAP. Further, Funds from Operations as
disclosed by other REITs may not be comparable to the Company's presentation of
Funds From Operations. The following table sets forth the Company's calculation
of Funds from Operations for the three and six months ended June 30, 2001 and
2000.
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income before gain on the sales of
real estate and minority interests $ 17,537,000 $ 16,218,000 $ 34,455,000 $ 31,140,000
Adjustments:
Depreciation and amortization 8,927,000 6,950,000 17,753,000 13,617,000
Unconsolidated joint ventures 1,201,000 1,054,000 2,438,000 2,063,000
Minority interests(1) (4,602,000) (4,778,000) (9,206,000) (9,504,000)
------------ ------------- ------------- -------------
Funds From Operations $ 23,063,000 $ 19,444,000 $ 45,440,000 $ 37,316,000
============ ============= ============ ============
Weighted average number
shares outstanding diluted(1) 21,034,366 20,708,639 20,970,138 20,641,343
============ ============= ============ ============
</TABLE>
(1) Assumes conversion of all outstanding operating partnership interests in the
Operating Partnership. Minority interests have been adjusted to reflect such
conversion.
24
<PAGE>
Item 3: Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company is exposed to interest rate changes primarily as a result of its
lines of credit and long-term debt used to maintain liquidity and fund capital
expenditures and expansion of the Company's real estate investment portfolio and
operations. The Company's interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. To achieve its objectives the Company borrows primarily
at fixed rates and may enter into derivative financial instruments such as
interest rate swaps, caps and treasury locks in order to mitigate its interest
rate risk on a related financial instrument. The Company does not enter into
derivative or interest rate transactions for speculative purposes.
The Company's interest rate risk is monitored using a variety of techniques. The
table below presents the principal amounts and weighted average interest rates
by year of expected maturity to evaluate the expected cash flows and sensitivity
to interest rate changes. The Company believes that the principal amounts of the
Company's mortgage notes payable and line of credit approximate fair value as of
June 30, 2001 as interest rates and other terms are consistent with yields
currently available to the Company for similar instruments.
<TABLE>
<CAPTION>
For Year Ended: 2001 2002 2003 2004 2005 Thereafter Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt (In thousands)
Amount $ 1,826 12,225 21,490 3,602 35,624 432,437 $ 507,204
Average interest rate 7.3% 7.0% 7.0% 7.3% 6.8% 6.8%
Variable rate LIBOR debt (In thousands)
Amount $ - 94,158 - - - 58,820(1) $ 153,978
Average interest - 5.0% - - - 5.1%
</TABLE>
(1) Capped at interest rates ranging from 7.1% to 7.3%.
The Company does not have any exposures related to forward contracts at June 30,
2001.
25
<PAGE>
Part II Other Information
- ------- -----------------
Item 2: Changes in Securities and Use of Proceeds
On June 1, 2001, in connection with the completion of its acquisition of the
Mt. Sutro Terrace Apartments, the Company issued 50,725 Operating Partnership
Units, which are convertible into common stock of the Company at the option of
the holder. This private placement of operating partnership units was completed
pursuant to the exemption from registration contained in Section 4(2) of the
Securities Act of 1933, as amended.
On June 28, 2001, the Operating Partnership completed a private placement of
200,000 Series Z Incentive Units of limited partner interest (the "Series Z
Incentive Units") as part of the Company's Long Term Incentive Plan. The
Operating Partnership offered these Series Z Incentive Units to eleven senior
executives of the Company in exchange for a capital commitment of $1.00 per
Series Z Incentive Unit, for an aggregate offering price of $200,000. Upon
certain triggering events, the Series Z Incentive Units will automatically
convert into common Operating Partnership units based on a conversion ratio that
may increase over time upon satisfaction of specific conditions. The conversion
ratio, initially set at zero, will increase on January 1 of each year for each
participating executive who remains employed by the Company if the Company has
met a specified "funds from operations" per share target for the prior year, up
to a maximum conversion ratio of 1.0. The Series Z Incentive Units will
automatically convert (1) if the conversion ratio reaches the maximum level of
1.0, (2) if none of the participating executives remain employed by the Company,
(3) if the Company dissolves or is liquidated or, (4) at the latest, on January
1, 2016. In certain change of control situations, the participating executives
will also be given the option to convert their units at the then-effective
conversion ratio. In addition, the Operating Partnership has the option to
redeem Series Z Incentive Units held by any executive whose employment has been
terminated for any reason and the obligation to redeem any such units following
the death of the holder. In such event, the Operating Partnership will redeem
the units for, at its option, either common Operating Partnership units or
shares of the Company's common stock based on the then-effective conversion
ratio.
The Series Z Incentive Units are entitled to participate in regular quarterly
distributions on an adjusted basis. Initially, each Series Z Incentive Unit will
receive 10% of the distribution received by each common Operating Partnership
unit. Over time the distribution percentage may increase, generally based on
satisfaction of the same conditions as increases in the conversion ratio.
The Operating Partnership did not engage any underwriters or placement agents in
connection with the private placement and no commissions were paid. The Company
anticipates collecting the capital commitment by offsetting future distributions
to the participating executives and using the proceeds for working capital
purposes. In light of information received by the Operating Partnership in
connection with such transaction, management believes that the private placement
was exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended.
26
<PAGE>
Item 4: Submission of Matters to a Vote of Security Holders
At the Company's annual meeting, held on May 15, 2001 in Menlo Park,
California, the following votes of security holders occurred:
(a) The following persons were duly elected by the holders of the
Company's Common Stock (the "Stockholders") as Class I directors of the Company,
each for a three (3) year term (until 2004) and until their successors are
elected and qualified:
(1) Keith R. Guericke, 16,854,796 votes for and 22,356 votes
withheld;
(2) Issie N. Rabinovitch, 16,855,096 votes for and 22,056 votes
withheld; and
(3) Thomas E. Randlett, 16,855,096 votes for and 22,056 votes
withheld.
(b) The Stockholders ratified the appointment of KPMG LLP as the Company's
independent public auditors for the year ending December 31, 2001 by a vote of
16,570,456 for, 11,711 votes against and 294,984 votes abstaining.
Item 6: Exhibits and Reports on Form 8-K
A. Exhibits
--------
10.1 Sixth Amendment to the First Amended and Restated Agreement of
Limited Partnership of Essex Portfolio, L.P.
B. Reports on Form 8-K
-------------------
None
27
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESSEX PROPERTY TRUST, INC.
/S/ MARK J. MIKL
-----------------------------------------
Mark J. Mikl, Vice President and Controller
(Authorized Officer and
Principal Accounting Officer)
August 13, 2001
---------------
Date
28
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>3
<FILENAME>dex101.txt
<DESCRIPTION>AMENDED AND RESTATED AGRMT OF LIMITED PARTNERSHIP
<TEXT>
<PAGE>
EXHIBIT 10.1
SIXTH AMENDMENT TO THE
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
ESSEX PORTFOLIO, L.P.
Dated as of June 28, 2001
This Sixth Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P., as amended (as amended, the "Partnership
Agreement"), dated as of the date shown above (the "Amendment"), is executed by
Essex Property Trust, Inc., a Maryland corporation (the "General Partner"), as
the General Partner and on behalf of the existing Limited Partners of Essex
Portfolio, L.P. (the "Partnership"), and the individuals whose names are set
forth on Exhibit Q as holders of Series Z Incentive Units issued pursuant to
this Amendment (the "Series Z Partners").
RECITALS
WHEREAS, the Partnership was formed pursuant to the Partnership Agreement;
WHEREAS, the Partnership desires to issue as of the date hereof an
aggregate amount of 200,000 Series Z Incentive Units (the "Series Z Incentive
Units") of limited partnership interests in the Partnership with rights, terms
and conditions as set forth herein, in exchange for a capital commitment (the
"Capital Commitment") in the amount of $1.00 per unit;
WHEREAS, as of the date hereof, each of the Series Z Partners has made a
capital commitment to the Partnership in the amount set forth on Exhibit Q, in
exchange for which such Partner is entitled to receive the number Series Z
Incentive Units set forth on Exhibit Q;
WHEREAS, pursuant to the authority granted to the General Partner under the
Partnership Agreement, the General Partner desires to amend the Partnership
Agreement to reflect (i) the issuance of the Series Z Incentive Units, (ii) the
admission of the Series Z Partners as Additional Limited Partners and holders of
a certain number of Series Z Incentive Units and (iii) certain other matters
described herein; and
WHEREAS, the Series Z Partners desire to become parties to the Partnership
Agreement as Limited Partners and to be bound by all terms, conditions and other
provisions of this Amendment and the Partnership Agreement.
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the General Partner hereby amends the Partnership Agreement as
follows:
<PAGE>
1. Definitions. Capitalized terms used herein, unless otherwise defined
herein, shall have the same meanings as set forth in the Partnership Agreement.
2. Amended Definitions. Section 1.1 of the Partnership Agreement is hereby
amended to delete the definition of "Percentage Interest" in its entirety and
substituting the following definition of "Percentage Interest," in its place:
"Percentage Interest" shall mean (i) with respect to any Partner other
than holders of Series B Preferred Units, Series C Preferred Units, Series
D Preferred Units, Series E Preferred Units or Series Z Incentive Units,
the undivided percentage ownership interest of such Partner in the
Partnership, as determined by dividing (A) the number of Partnership Units
owned by such Partner by (B) the sum of (x) the total number of Partnership
Units then outstanding (excluding the Series A Preferred Interest, the
Series B Preferred Interest, the Series B Partnership Units, the Series C
Preferred Interest, the Series C Preferred Units, the Series D Preferred
Interest, the Series D Preferred Units, the Series E Preferred Interest,
the Series E Preferred Units and the Series Z Incentive Units) and (y) the
total number of outstanding Series Z Incentive Units multiplied by the
Distribution Ratchet Percentage with respect to each such Series Z
Incentive Unit, calculated on a unit-by-unit basis, and (ii) with respect
to any holder of Series Z Incentive Units, the undivided percentage
ownership interest of such Partner in the Partnership as determined by
dividing (A) the product resulting from multiplying the total number of
outstanding Series Z Incentive Units owned by such Partner by the
Distribution Ratchet Percentage attributable to such holder's Series Z
Incentive Units, by (B) the sum of (x) the total number of Partnership
Units then outstanding (excluding the Series A Preferred Interest, the
Series B Preferred Interest, the Series B Partnership Units, the Series C
Preferred Interest, the Series C Preferred Units, the Series D Preferred
Interest, the Series D Preferred Units, the Series E Preferred Interest,
the Series E Preferred Units and the Series Z Incentive Units) and (y) the
total number of outstanding Series Z Incentive Units multiplied by the
Distribution Ratchet Percentage with respect to each such Series Z
Incentive Unit, calculated on a unit-by-unit basis. If any Partner holds
both Common Units and Series Z Incentive Units, then such Partner's
Percentage Interest shall equal the sum of the amounts calculated under
clauses (i) and (ii) of this definition of "Percentage Interest",
determined by assuming for purposes of clause (i) that such Partner holds
only Common Units and for purposes of clause (ii) that such Partner holds
only Series Z Incentive Units.
3. Definitions. Section 1.1 of the Partnership Agreement is hereby amended
to include the following definitions, to be inserted in alphabetical order in
such Section 1.1:
"Actual FFO" shall mean with respect to any fiscal period "funds from
operations" of the General Partner as determined with respect to such
fiscal period by the Board of Directors of the General Partner using a
consistently applied methodology that conforms with the standards for
computation of "funds from operations" established by the National
Association of Real Estate Investment Trusts, Inc. (or successor
organizations) from time to time; it being understood that, to the extent
that the General Partner discloses "funds from operations" for any fiscal
period in any of its periodic reports publicly filed with the Securities
and Exchange Commission, Actual FFO for
2
<PAGE>
such fiscal period for the purposes of this Agreement will conform to such
publicly disclosed "funds from operations."
"Actual FFO Per Share" shall mean with respect to any fiscal period
the Actual FFO for such period divided by the number of Common Equivalent
Shares.
"Change in Control" shall mean the earliest to occur of any of the
following events:
(i) any "person," as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") other
than any trustee, fiduciary or other person or entity holding securities
under any employee benefit plan or trust of any of the General Partner or
any of its subsidiaries or affiliates), together with all "affiliates" and
"associates" (as such terms are defined in Rule 12b-2 under the Exchange
Act) of such person, shall become the "beneficial owner" (as such term is
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the General Partner representing thirty percent (30%) or more
of the combined voting power of the General Partner's then outstanding
securities having the right to vote in an election of the General Partner's
Board of Directors ("Voting Securities") (other than as a result of an
acquisition of securities directly from the General Partner).
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to
have occurred for purposes of this clause (i) solely as the result of an
acquisition of securities by the General Partner which, by reducing the
number of shares of Voting Securities outstanding, increases the
proportionate number of shares of Voting Securities beneficially owned by
any person (as defined in the foregoing clause) to thirty percent (30%) or
more of the combined voting power of all then outstanding Voting
Securities; provided, however, that if such person shall thereafter become
the beneficial owner of any additional shares of Voting Securities (other
than pursuant to a stock split, stock dividend, or similar transaction or
as a result of an acquisition of securities directly from the General
Partner) and immediately thereafter beneficially owns thirty percent (30%)
or more of the combined voting power of all then outstanding Voting
Securities, then a "Change in Control" shall be deemed to have occurred for
purposes of this clause (i).
(ii) the moment immediately prior to the consummation of a merger,
reorganization or consolidation of the General Partner or the occurrence of
any other event (including without limitation a tender or exchange offer),
the result of which is that the "beneficial owners" (as such term is
defined in Rule 13d-3 of the Exchange Act) of the Voting Securities of the
General Partner before the merger, reorganization, consolidation or other
transaction are not the "beneficial owners", directly or indirectly, of a
majority of the voting power of the surviving or resulting entity upon
completion of such merger, reorganization, consolidation or other
transaction;
(iii) the moment immediately prior to the consummation of a merger,
reorganization or consolidation of the Partnership, unless the General
Partner immediately prior to such merger, reorganization or consolidation
remains the sole general partner of the Partnership after such merger;
3
<PAGE>
(iv) the moment immediately prior to the consummation of a change
(whether by removal, withdrawal, transfer or otherwise) in the general
partner of the Partnership;
(v) persons who, as of June 1, 2001, constitute the General Partner's
Board of Directors (the "Incumbent Directors") cease for any reason,
including, without limitation, as a result of a tender or exchange offer,
proxy contest, merger or similar transaction, to constitute at least a
majority of the Board of Directors of the General Partner (rounded up to
the next whole number), provided that any person becoming a director of the
General Partner subsequent to such date shall be considered an Incumbent
Director if such person's election was approved by or such person was
nominated for election by a vote of a majority of the Incumbent Directors;
provided, however, that any person whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of members of the Board of Directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a "person" other
than the Board of Directors, including by reason of agreement intended to
avoid or settle any such actual or threatened contest or solicitation,
shall not be considered an Incumbent Director; or
(vi) the moment immediately prior to the consummation of a sale of all
or substantially all of the assets of the General Partner and/or the
Partnership.
"Clawback Amount" shall mean at any time with respect to each Series Z
Incentive Unit, an amount equal to the positive difference, if any, between
(i) the then unpaid Capital Commitment with respect to such Series Z
Incentive Unit, and (ii) the sum of any distributions deemed to offset the
Clawback Amount in accordance with Section 6 below. The unpaid Capital
Commitment of a Series Z Partner with respect to a Series Z Incentive Unit
shall never be greater than the Clawback Amount with respect to such Series
Z Incentive Unit, as adjusted from time to time.
"Common Equivalent Shares" shall mean the total number of shares of
Common Stock outstanding on a fully diluted basis, calculated in a manner
consistent with the manner used by the General Partner for reporting
diluted earnings or loss per share under generally accepted accounting
principles, it being understood that, to the extent that the General
Partner discloses diluted earnings or loss per share in any of its periodic
reports publicly filed with the Securities and Exchange Commission, Common
Equivalent Shares for such period for the purposes of this Agreement shall
be calculated in a manner consistent with such public disclosure.
"Common Unit" shall mean a Partnership Unit representing an interest
in the Partnership, other than a Series A Preferred Interest, Series B
Preferred Unit, Series B Preferred Interest, Series C Preferred Unit,
Series C Preferred Interest, Series D Preferred Unit, Series D Preferred
Interest, Series E Preferred Unit, Series E Preferred Interest, Series Z
Incentive Unit or any other Preferred Interest or Preferred Partnership
Units.
"Compensation Committee" shall mean the Compensation Committee of the
Board of Directors of the General Partner or, if no such committee exists,
the full Board of Directors of the General Partner.
4
<PAGE>
"Conversion Ratchet Percentage" with respect to any Series Z Incentive
Unit (i) shall equal 0% on the date hereof, (ii) shall increase by twenty
percentage points on January 1 of the first calendar year after the date
hereof on which (x) the holder of such Series Z Incentive Unit is an
employee of the General Partner and/or the Partnership and/or any
subsidiary or affiliate thereof as of such January 1, (y) the Actual FFO
Per Share of the General Partner for the calendar year preceding such
January 1 is greater than or equal to the Target FFO for such year, and (z)
the Conversion Ratchet Percentage prior to such increase is less than 100%,
and (iii) shall increase ten percentage points on January 1 of every
calendar year thereafter on which the conditions in clauses (x), (y) and
(z) of the immediately preceding clause (ii) are met; provided, however,
that if the Compensation Committee determines that Actual FFO Per Share is
no longer an appropriate corporate performance parameter for establishing
management objectives or that the applicable target levels are no longer
feasible in light of factors or circumstances outside of the Partnership's
or the General Partner's control (such as general economic conditions,
legal/regulatory changes, war or similar events), it may, in its reasonable
good faith discretion without any consent or other action on the part of
the Series Z Partners or any other Partners of the Partnership, revise and
amend the requirement in (y) above (and any definitions involved therein)
to reflect one or more different or additional parameters, objectives or
performance measures, so long as the Compensation Committee, in its
reasonable good faith discretion, determines that the revised or amended
clause (y) is, considered as a whole, comparable or more effective as a
means for analyzing the performance of the Partnership and incentivizing
the Series Z Partners (it being understood that such amended or restated
clause (y) shall not be more difficult to achieve than the present
requirements of clause (y)).
"Distribution Ratchet Percentage" with respect to any Series Z
Incentive Unit (i) shall equal 10% on the date hereof, (ii) shall increase
on January 1, 2002, to (a) twenty-five percent (25%) if the Conversion
Ratchet Percentage with respect to such Series Z Incentive Units also
increases to 20%, or (b) fifteen percent (15%) if the Conversion Ratchet
Percentage with respect to such Series Z Incentive Units remains at 0%,
(iii) shall increase, to the extent it has not already done so, to
twenty-five percent (25%) at such time as such Conversion Ratchet
Percentage is equal to 20%, and (iv) after such time as the Conversion
Ratchet Percentage with respect to such Series Z Incentive Units is equal
to or greater than 30%, the Distribution Ratchet Percentage shall be equal
to the Conversion Ratchet Percentage with respect to such Series Z
Incentive Units.
"Forfeited Capital Account" shall mean that portion of the Capital
Account attributable to a Series Z Incentive Unit equal to the product of
(a) the excess of (i) the Adjusted Capital Account Balance (as defined in
Section 10.9(a)) allocable to such Series Z Incentive Unit over (ii) the
sum of (A) the capital contribution made with respect to such Series Z
Incentive Unit and (B) the excess of the sum of the net allocations of
operating income made with respect to such Series Z Incentive Unit for all
fiscal years (taking into account allocations of Net Operating Loss made
with respect to such Series Z Incentive Unit for all fiscal years) over the
distributions of operating cash flow made to such Series Z Unit (except to
the extent such allocations have reduced the Clawback Amount) multiplied by
(b) 100% minus the Conversion Ratchet Percentage applicable to such Series
Z Incentive Unit.
5
<PAGE>
"Net Operating Income" shall mean, for any fiscal year or portion
thereof, the excess of the items of income and gain over the items of
deduction and loss, excluding, in each case, items of gain or loss realized
in connection with the sale or disposition of real property and other
capital assets.
"Net Operating Loss" shall mean, for any fiscal year or portion
thereof, the excess the items of deduction and loss over the items of
income and gain, excluding, in each case, items of gain or loss realized
in connection with the sale or disposition of real property and other
capital assets.
"Net Property Gain" shall mean, for any fiscal year or portion
thereof, the excess of gains realized from the sale or disposition of real
property and other capital assets over the losses realized in connection
with the sale or disposition of real property and other capital assets.
"Net Property Loss" shall mean, for any fiscal year or portion
thereof, the excess of losses realized from the sale or disposition of real
property and other capital assets over the gains realized in connection
with the sale or disposition of real property and other capital assets.
"Series Z Incentive Unit" shall mean a Series Z Incentive Unit of
limited partnership interest in the Partnership with the rights set forth
in this Agreement.
"Target FFO" shall mean Actual FFO Per Share equal to $4.29 with
respect to fiscal year 2001 and, with respect to each fiscal year
thereafter, shall mean Actual FFO Per Share equal to the lesser of (x) the
product of $4.29 times 1.1N, where "N" is equal to 1 with respect to fiscal
year 2002 plus an additional 1 for each fiscal year thereafter, and (y)
110% of the Actual FFO Per Share applicable to the immediately preceding
fiscal year; provided, however, that if the Compensation Committee
determines that Actual FFO Per Share is no longer an appropriate corporate
performance parameter for establishing management objectives or that the
applicable target levels are no longer feasible in light of factors or
circumstances outside of the Partnership's or the General Partner's control
(such as general economic conditions, legal/regulatory changes, war or
similar events), it may, in its reasonable good faith discretion without
any consent or other action on the part of the Series Z Partners or any
other Partners of the Partnership, revise and amend this definition of
Target FFO (and any definitions involved herein) to reflect one or more
different or additional parameters, objectives or performance measures, so
long as the Compensation Committee, in its reasonable good faith
discretion, determines that the revised or amended definition is,
considered as a whole, comparable as a means for analyzing the performance
of the Partnership and incentivizing the Series Z Partners (it being
understood that such amended or restated definition shall not be more
difficult to achieve than the present requirements of this definition).
"Trigger Event" shall mean the earliest to occur of any of the
following events:
(i) such time as a plan of dissolution or liquidation (but not
including a deemed liquidation for tax purposes in connection with one or
more transfers of interest
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<PAGE>
in the Partnership) of the General Partner and/or the Partnership is duly
adopted by appropriate corporate or partnership action;
(ii) the date on which the Conversion Ratchet Percentage applicable to
all Series Z Incentive Units held by then current employees of the General
Partner and/or the Partnership (i.e., other than holders of Series Z
Incentive Units whose employment with the General Partner and/or the
Partnership has terminated) reaches 100%;
(iii) the earliest date on which the employment of all holders of
Series Z Incentive Units has been terminated; and
(iv) January 1, 2016.
"Weighted Number of Series Z Incentive Units" as determined from time
to time shall mean the total number of outstanding Series Z Incentive
Units, multiplied by the Conversion Ratchet Percentage with respect to each
such Series Z Incentive Unit, calculated on a unit-by-unit basis.
4. Restatement of Exhibit A, Exhibit E and Exhibit M. Exhibit A to the
Partnership Agreement is amended and restated by replacing such Exhibit A with
Exhibit A attached to this Amendment. Exhibit E to the Partnership Agreement is
amended and restated by replacing such Exhibit E with Exhibit E attached to this
Amendment. Exhibit M to the Partnership Agreement is amended and restated by
replacing such Exhibit M with Exhibit M attached to this Amendment.
5. Admission of Series Z Partners. Effective immediately prior to the
effectiveness of the next succeeding sentence, the capital accounts of the
Partnership shall be adjusted to reflect each Partner's share of the net fair
market value of the Partnership's assets (a "book-up") by adjusting the Gross
Asset Values of all Partnership assets to their respective gross fair market
values and allocating the amount of such adjustment as Net Property Gain or Net
Property Loss pursuant to Section 2(b) or 2(c) of Exhibit E hereof. Each of the
Series Z Partners is hereby admitted as an Additional Limited Partner in
accordance with Section 4.6 of the Partnership Agreement holding that number of
Series Z Incentive Units as is set forth next to his or her name on Exhibit Q.
Each of the Series Z Partners hereby agrees to become a party to the Partnership
Agreement as a Limited Partner and to be bound by all the terms, conditions and
other provisions of the Partnership Agreement, as amended by this Amendment.
Pursuant to Section 4.6(b) of the Partnership Agreement, the General Partner
hereby consents to the admission of each of the Series Z Partners as an
Additional Limited Partner of the Partnership. The admission of the Series Z
Partners shall become effective as of the date of this Amendment, which shall
also be the date on which the name of each Series Z Partner is recorded on the
books and records of the Partnership.
6. Distributions to Series Z Partners. The Partnership Agreement is hereby
amended by adding the following language after Section 6.2(c) thereof:
"(d) Notwithstanding the foregoing, at any time that the Clawback
Amount with respect to a Series Z Incentive Unit is greater than zero, then, to
the extent of such Clawback Amount, the distributions otherwise provided for by
this Section with respect to such
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<PAGE>
Series Z Incentive Unit shall not be paid in cash and shall instead be deemed to
offset the applicable Series Z Partners' unpaid Capital Commitment and thereby
reduce the then existing Clawback Amount with respect to such Series Z Incentive
Unit in an amount equal to the distributions that would have otherwise been paid
with respect to such Series Z Incentive Unit."
7. Transfer Restrictions. Section 9.2A of the Partnership Agreement shall
be amended by inserting the following as the last sentence thereof:
"In addition, the Partners hereby acknowledge and agree that the
Series Z Incentive Units shall not be Transferred, other than (a) by
operation of law to the estate of a Series Z Partner or (b) to the
Partnership or the General Partner."
8. Conversion Rights of Series Z Partners.
(a) Section 10.8 of the Partnership Agreement is hereby amended by
deleting the first sentence thereof and replacing it with the following:
"So long as Code Section 1014 or a successor provision remains in
effect and provides for the "step-up" in basis of an asset upon death, as
determined by the Partnership's counsel, upon the death of a Limited
Partner, all of such Limited Partner's Partnership Units shall, without the
taking of any action by the General Partner or any heir, representative,
administrator or executor of or for such Limited Partner, automatically
convert as of the date of such death into shares of Common Stock in the
amount of the Common Stock Amount; provided that the General Partner, in
its sole and absolute discretion, shall have the option, instead of issuing
the Common Stock Amount to the estate of the decedent Limited Partner, of
paying to such estate the Cash Amount or any combination of cash and Common
Stock equal to the Cash Amount; provided, however, that, notwithstanding
the foregoing, the provisions of this Section shall not apply to any Series
Z Incentive Units held by such Limited Partner."
(b) The Partnership Agreement is hereby amended by adding the
following language after Section 10.8 thereof:
"10.9 Conversion and Redemption of Series Z Incentive Units.
(a) Upon the occurrence of any Trigger Event with respect to the
Series Z Incentive Units, the Forfeited Capital Account with respect to
such Series Z Incentive Units shall be forfeited and each such Series Z
Incentive Unit shall, without the taking of any action by the General
Partner or any Series Z Partners, automatically convert into that number of
Common Units calculated by dividing (i) the remainder resulting from (x)
the portion of the adjusted Capital Account balance properly allocable to
each such Series Z Incentive Unit at the time of conversion, as determined
by the General Partner, taking into account all allocations made pursuant
to Exhibit E hereof (including Section 2(d) thereof) through and including
the date of the conversion (as so adjusted, the "Adjusted Capital Account
Balance"), minus (y) the Forfeited Capital Account as of the time of
conversion minus (z) the Clawback Amount, if any, with respect to such
Series Z Incentive Unit, by (ii) the adjusted Capital Account balance
properly allocable to one Common Unit determined immediately prior to such
8
<PAGE>
conversion, after taking into account any adjustments made pursuant to
Exhibit E hereof (including Section 2(d) thereof) through and including the
date of conversion.
(b) In the event of a Change in Control, (1) the Partnership
shall give each Series Z Partner notice as required by Section 10.9(d) and
otherwise comply with the procedures set forth in such section and (2) upon
or at any time (except as expressly provided in clause (ii) below)
following the occurrence of such Change in Control, each Series Z Partner
shall have the right to elect, in accordance with the procedures set forth
in Section 10.9(d), to forfeit the Forfeited Capital Account with respect
to all of the Series Z Incentive Units held by such Series Z Partner and
convert each such Series Z Incentive Unit into either:
(i) that number of Common Units calculated by dividing (I) the
remainder resulting from (x) the Adjusted Capital Account balance properly
allocable to each such Series Z Incentive Unit at the time of an election
pursuant to this Section 10.9(b), as determined by the General Partner
after taking into account all allocations required to be made pursuant to
Exhibit E hereof, including Section 2(d) thereof) minus (y) the Forfeited
Capital Account as of the time of conversion, minus (z) the Clawback
Amount, if any, with respect to such Series Z Incentive Unit, by (II) the
adjusted Capital Account balance properly allocable to one Common Unit
determined immediately prior to such conversion, after taking into account
any adjustments made pursuant to Exhibit E hereof (including Section 2(d)
thereof) through and including the date of conversion; provided, however,
that, if applicable, references to "Common Units" in this clause shall be
deemed to refer to the class or series of equity interests in the
Substitute Umbrella Partnership (as defined in Section 10.9(c)) most
comparable to the Common Units, after taking into account all relevant
rights, benefits, terms and conditions and economic factors and all
references to capital account balances and numbers of Common Units shall be
equitably adjusted, as nearly as may be practicable, to give effect to the
rights and obligations of the Series Z Incentive Units or, if applicable,
the Substitute Incentive Units; or
(ii) that amount and type of cash, securities or other property
as such holder would have received in connection with such Change in
Control if he, she or it had elected to convert such Series Z Incentive
Units into Common Units in accordance with the immediately preceding clause
(i) prior to the consummation of the Change in Control and received (or had
the right to elect to receive) such consideration in connection with the
Change in Control as the Holder of the number of Common Units into which
such Series Z Incentive Units would have converted as of the date of
occurrence of such Change of Control without any increase in the Conversion
Ratchet Percentage that may have occurred after such date; provided,
however, that any election pursuant to this clause (ii) must be made within
the twelve (12) month period immediately following the occurrence of such
Change in Control. For the avoidance of doubt, it is the intent of the
parties hereto that a holder's right to make the election provided in this
clause (ii) shall continue notwithstanding that, within such twelve (12)
month period, another Change in Control occurs, such holder's employment is
terminated as referred to in clause (e) below, or such holder dies as
referred to in clause (f) below; provided, further, that if a Trigger Event
occurs, such holder's right to make the election
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<PAGE>
provided in this clause (ii) shall continue only until the moment
immediately prior to the occurrence of such Trigger Event.
For the avoidance of doubt, the Series Z Incentive Units of any
Series Z Partner who has not made the election contemplated by this Section
10.9(b) shall remain outstanding until such election is made or another
clause of this Section 10.9 becomes applicable, and thereafter shall
continue to be entitled to all the rights and benefits of the Series Z
Incentive Units, including without limitation the right to make an election
pursuant to this Section 10.9(b) with respect to any subsequent Change in
Control and the potential for continued increase in the Conversion Ratchet
Percentage.
(c) Notwithstanding anything in this Agreement to the contrary,
in connection with any Change in Control following which the Partnership
will not continue to exist as a separate legal entity or following which
the Partnership, despite continuing in legal existence, will no longer
conduct its business in a fashion substantially similar to the fashion in
which it conducted its business immediately prior to such Change of Control
(e.g., owning similar properties and operating in a comparable fashion),
the General Partner shall use commercially reasonable efforts (after taking
into account the fiduciary duties owed by the General Partner to the other
Partners in the Partnership in connection with negotiating the Change in
Controltransaction as a whole) to cause the resulting or surviving entity
and/or the entity primarily succeeding to the business of the Partnership,
as the case may be, to be a partnership, limited liability company or other
pass-through entity organized under the laws of any state of the United
States or the District of Columbia (a "Substitute Umbrella Partnership"),
and, in the event the Change in Control does result in a Substitute
Umbrella Partnership, shall use commercially reasonable efforts to (1)
cause the Substitute Umbrella Partnership to issue in connection with such
Change in Control in substitution for any Series Z Incentive Units
remaining outstanding as of the effective time thereof other interests in
the Substitute Umbrella Partnership having substantially the same terms and
rights as the Series Z Incentive Units, including with respect to
distributions, conversions, ratcheting, voting rights and rights upon
liquidation, dissolution or winding-up (the "Substitute Incentive Units"),
(2) make equitable and appropriate provisions for adjustments to the terms
of the Substitute Incentive Units such that the rights and obligations of
the Series Z Partners after such Change in Control as holders of Substitute
Incentive Units of the Substitute Umbrella Partnership shall be equivalent,
as nearly as may be practicable, to their rights and obligations as holders
of Series Z Incentive Units of the Partnership, and (3) secure a commitment
of the general partner or other controlling person of the Substitute
Umbrella Partnership to undertake to perform the obligations and covenants
of the General Partner with respect to the Series Z Partners.
(d) As promptly as possible prior to the consummation of a Change
of Control (but in any event not later than ten (10) days following
consummation of such Change in Control), the Partnership shall deliver a
written notice of such Change of Control to each Series Z Partner at their
addresses as shown on the records of the Partnership, containing all
instructions and materials necessary to enable such Series Z Partners to
make an election pursuant to Section 10.9(b) hereof and describing the
circumstances and relevant facts regarding such Change of Control,
including without
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<PAGE>
limitation the expected date of consummation. Failure to give or receive
such notice or any defect therein shall not affect the legality or validity
of any proceedings in connection with such Change of Control or otherwise
as contemplated by this Agreement. Each Series Z Partner may exercise his
or her right to convert in accordance with Section 10.9(b) by delivering
written notice of such intent (and specifying whether he or she is electing
to convert pursuant to Section 10.9(b)(i) or Section 10.9(b)(ii)) to the
Partnership, Attn: Chief Financial Officer, with a copy to Goodwin Procter
LLP, Attn: Ettore A. Santucci, P.C. (such notice, an "Election Notice") On
or before the later of (i) the effective date of such Change in Control and
(ii) the tenth (10th) business day following the date of such Election
Notice, the Partnership shall issue the consideration required by Section
10.9(b) to the Series Z Partner making the election in exchange for his or
her Series Z Incentive Units (or, if applicable, Substitute Incentive
Units).
(e) Effective as of such time as (other than by reason of death,
as provided in Section 10.9(f)) a holder of Series Z Incentive Units is no
longer an employee of the Partnership, the General Partner or any of their
subsidiaries or affiliates, the Forfeited Capital Account with respect to
such holder's Series Z Incentive Units shall be forfeited and the
Partnership shall have the right, for 90 days following the date of
termination of such holder's employment, to redeem each Series Z Incentive
Unit held by such holder in exchange for, at the Partnership's option,
either (1) a number of shares of Common Stock then owned by the Partnership
calculated by dividing (i) the remainder resulting from (x) the Adjusted
Capital Account Balance properly allocable to each such Series Z Incentive
Unit as determined by the General Partner after taking into account all
allocations required to be made pursuant to Exhibit E hereto (including
Section 2(d) thereof) and, in the event the provisions of Section 2(f)
thereof are inapplicable, in a manner consistent with the provisions of
Treasury Regulation Section 1.704-1(b)(2)(iv)(f) minus (y) the Forfeited
Capital Account as of the time of redemption minus (z) the Clawback Amount,
if any, with respect to such Series Z Incentive Unit, by (ii) the Closing
Price of Common Stock determined as of such date; or (2) a number of Common
Units calculated by dividing (i) the remainder resulting from (x) the
Adjusted Capital Account Balance which would be allocable to each such
Series Z Incentive Unit as determined by the General Partner after taking
into account all allocations required to be made pursuant to Exhibit E
hereof (including Section 2(d) thereof) and assuming that the Capital
Accounts of the Partners were adjusted at such time as provided in Section
2(f) of Exhibit E hereto minus (y) the Forfeited Capital Account minus (z)
the Clawback Amount, if any, with respect to such Series Z Incentive Unit,
by (ii) the adjusted Capital Account balance properly allocable to one
Common Unit determined immediately prior to such redemption, after taking
into account any adjustments made pursuant to Exhibit E hereof (including
Section 2(d) thereof) and assuming that the Capital Accounts of the
Partners were adjusted at such time as provided in Section 2(f) of Exhibit
E hereto through and including the date of redemption. The Partnership may
exercise its rights under this Section 10.9(e) by providing written notice
to the terminated Series Z Partner within 90 days of such termination and
consummating the redemption promptly thereafter.
(f) Upon the death of a holder of Series Z Incentive Units, the
Forfeited Capital Account with respect to such Series Z Incentive Units
shall be forfeited
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<PAGE>
and each such Series Z Incentive Unit held by such holder shall be redeemed
by the Partnership for, at its option, either (1) a number of shares of
Common Stock then owned by the Partnership calculated by dividing (i) the
remainder resulting from (x) the Adjusted Capital Account Balance properly
allocable to each such Series Z Incentive Unit as determined by the General
Partner after taking into account all allocations required to be made by
Exhibit E hereto (including Section 2(d) thereof) and in the event that the
provisions of Section 2(f) are inapplicable, in a manner consistent with
the provisions of Treasury Regulation Section 1.704-1(b)(2)(iv)(f) minus
(y) the Forfeited Capital Account as of the time of redemption minus (z)
the Clawback Amount, if any, with respect to such Series Z Incentive Unit,
by (ii) the Closing Price of Common Stock determined immediately prior to
such redemption; or (2) a number of Common Units calculated by dividing (i)
the remainder resulting from (x) the Adjusted Capital Account Balance which
would be allocable to each such Series Z Incentive Unit as determined by
the General Partner after taking into account all allocations required to
be made by Exhibit E hereto (including Section 2(d) thereof) and in the
event that the provisions of Section 2(f) are inapplicable, in a manner
consistent with the provisions of Treasury Regulation Section
1.704-1(b)(2)(iv)(f) minus (y) the Forfeited Capital Account as of the time
of redemption minus (z) the Clawback Amount, if any, with respect to such
Series Z Incentive Unit, by (ii) the average adjusted Capital Account
balance properly allocable to one Common Unit determined immediately prior
to such redemption, as determined by the General Partner after taking into
account all allocations required to be made by Exhibit E hereto (including
Section 2(d) thereof) and in the event that the provisions of Section 2(f)
are inapplicable in a manner consistent with the provisions of Treasury
Regulation Section 1.704-1(b)(2)(iv)(f). The Partnership shall effect the
redemption required by this Section 10.9(f) within 60 days follow its
receipt of written notification of the death of a Series Z Partner.
(g) In lieu of delivering a fractional share of Common Stock
pursuant to this Section 10.9, the Partnership may deliver cash equal to
the Closing Price attributable to such fractional share. In lieu of issuing
a fractional Common Unit pursuant to this Section 10.9, the Partnership may
deliver cash equal to the product of (i) the Closing Price multiplied by
the Conversion Factor, and (ii) such fractional Common Unit. For the
avoidance of doubt, as to any fractional Common Unit or fraction of a share
of Common Stock which would otherwise be delivered, the Partnership shall
pay a cash adjustment in respect of such final fraction (which for each
holder of Series Z Incentive Units shall be deemed to be a fraction of the
last fractional Common Unit or fraction of a share of Common Stock after
taking into account all Series Z Incentive Units held by such holder, not
on a unit-by-unit basis) in the amount provided for in this clause (g).
(h) The holder of any Common Units received upon a conversion or
redemption of Series Z Incentive Units pursuant to this Section 10.9 shall
have an aggregate Capital Account balance with respect to such Common Units
equal to the remainder resulting from (x) the Adjusted Capital Account
Balance of such holder's Series Z Incentive Units (determined pursuant to
the applicable sub-section of this Section 10.9) immediately prior to
conversion or redemption minus (y) the Forfeited Capital Account minus (z)
the Clawback Amount, if any, with respect to such Series Z
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<PAGE>
Incentive Unit, and such holder of Common Units shall have all of the
rights of holders of Common Units as set forth in this Agreement.
Immediately upon conversion or redemption of any Series Z Incentive Units
pursuant to this Section 10, the aggregate Forfeited Capital Accounts with
respect to all Series Z Incentive Units being converted or redeemed shall
be reallocated among the Capital Accounts of the holders of Common Units
immediately subsequent to such conversion or redemption on a pro rata
basis, in proportion to the Capital Account balances of all such units
immediately subsequent to such conversion or redemption. Any Common Units
received upon the conversion or redemption of Series Z Incentive Units
pursuant to this Section 10.9 may thereafter be converted into Common Stock
pursuant to Section 10.8 and the holder of such Common Units shall have the
Rights provided in Article XI; provided, however, that, notwithstanding
anything to the contrary contained in Section 10.8, Article XI or Exhibit
I, (i) the General Partner may, in its sole discretion, choose to assign
its obligation pursuant to Section 10.8, Article XI or Exhibit I, as the
case may be, to the Partnership, in which case the Partnership will deliver
shares of Common Stock that it holds on such date in exchange for the
Common Units to be converted or redeemed, in lieu of the General Partner
issuing new shares of Common Stock to the holder of such Common Units and
(ii) neither the General Partner nor the Partnership shall pay cash (in
whole or in part) with respect to the conversion of Common Units received
upon conversion or redemption of Series Z Incentive Units."
9. Restatement of Exhibit E. Exhibit E to the Partnership Agreement is
hereby amended and restated in its entirety by replacing such Exhibit E with
Exhibit E attached to this Amendment.
10. Voting Rights.
(a) Holders of the Series Z Incentive Units will not have any voting
rights or rights to consent to any matters, except as set forth in Section 10(b)
below.
(b) So long as any Series Z Incentive Units remains outstanding, the
Partnership shall not, without the affirmative vote of the holders of at least
two-thirds (2/3) of the Weighted Number of Series Z Incentive Units (i) amend,
alter or repeal any provisions of the Partnership Agreement, including without
limitation as a result of or in connection with a merger, consolidation or
otherwise, in a manner that would materially and adversely affect the powers,
special rights, preferences, privileges or voting power of the Series Z
Incentive Units or the holders thereof; provided, however, that the following
shall be deemed not to materially and adversely affect such powers, special
rights, preferences, privileges or voting power of the Series Z Incentive Units:
(a) any revision or amendment of the definition of "Conversion Ratchet
Percentage" or "Target FFO" in accordance with the proviso contained in each
such definition; (b) any increase in the amount of Partnership Interests or the
creation or issuance of any other class or series of Partnership Interests or
obligation or security convertible into or evidencing the right to purchase any
such Partnership Interests ranking senior to, junior to or on a parity with the
Series Z Incentive Units with respect to payment of distributions or the
distribution of assets upon liquidation, dissolution or winding up; or (c) any
amendment, alteration or repeal of any provision(s) of the Partnership Agreement
that also materially and adversely affects the Common Units or the holders
thereof in a comparable and proportionate fashion; provided, further, that
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<PAGE>
with respect to the occurrence of a merger, consolidation or comparable
transaction, so long as (l) the Partnership is the surviving entity and the
Series Z Incentive Units remain outstanding with the terms thereof unchanged, or
(2) the resulting, surviving or transferee entity is a partnership, limited
liability company or other pass-through entity organized under the laws of any
state and substitutes the Series Z Incentive Units for other interests in such
entity having substantially the same terms and rights as the Series Z Incentive
Units, including with respect to distributions, conversions, voting rights and
rights upon liquidation, dissolution or winding-up, then the occurrence of any
such event shall not be deemed to materially and adversely affect such rights,
privileges or voting powers of the holders of the Series Z Incentive Units.
Notwithstanding anything in this Section 10 to the contrary, the holders of
Series Z Incentive Units shall have no right to vote or consent with respect to
any transaction that constitutes a Trigger Event or that constitutes a Change in
Control so long as the provisions of Section 10.9(b) remain in effect.
11. Exhibit Q. The Partnership Agreement is hereby amended by adding
Exhibit Q, a copy of which is attached hereto. Exhibit Q is hereby inserted into
the Partnership Agreement following Exhibit P.
12. Ranking. The Series Z Incentive Units shall rank (i) junior to any and
all presently outstanding or subsequently issued Preferred Interests and
preferred Partnership Units of the Partnership, unless the terms of such
Preferred Interests and/or preferred Partnership Units expressly provide that
they shall rank junior to or pari passu with the Series Z Incentive Units or
Common Units, and (ii) pari passu with the Common Units and with any other class
or series of presently existing or subsequently issued Partnership Units of the
Partnership, the terms of which do not expressly provide that such Partnership
Units shall rank senior to the Series Z Incentive Units or the Common Units with
respect to the receipt of distributions and of amounts distributable upon
liquidation, dissolution or winding up.
13. Continuing Effect of Partnership Agreement. Except as modified herein,
the Partnership Agreement is hereby ratified and confirmed in its entirety and
shall remain and continue in full force and effect, provided, however, that to
the extent there shall be a conflict between the provisions of the Partnership
Agreement and this Amendment, the provisions in this Amendment will prevail. All
references in any document to the Partnership Agreement shall mean the
Partnership Agreement, as amended hereby.
14. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same agreement. Facsimile signatures shall be
deemed effective execution of this Agreement and may be relied upon as such by
the other party. In the event facsimile signatures are delivered, originals of
such signatures shall be delivered to the other party within three business days
after execution.
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IN WITNESS WHEREOF, the General Partner and the Series Z Partners have
executed this Amendment as of the date indicated above.
GENERAL PARTNER
ESSEX PROPERTY TRUST, INC.,
a Maryland corporation as General Partner
of Essex Portfolio, L.P. and on behalf of the
existing Limited Partners
By: /s/ Keith R. Guericke
----------------------------------------
Keith R. Guericke
Chief Executive Officer & President
S-1
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SERIES Z PARTNERS:
By: /s/ Keith R. Guericke
------------------------------------
Keith R. Guericke
By: /s/ Michael J. Schall
------------------------------------
Michael J. Schall
By: /s/ John D. Eudy
------------------------------------
John D. Eudy
By: /s/ Craig K. Zimmerman
------------------------------------
Craig K. Zimmerman
By: /s/ Robert C. Talbott
------------------------------------
Robert C. Talbott
By: /s/ Jordan E. Ritter
------------------------------------
Jordan E. Ritter
By: /s/ Gerald E. Kelly
------------------------------------
Gerald E. Kelly
By: /s/ Mark J. Mikl
------------------------------------
Mark J. Mikl
By: /s/ John F. Burkart
------------------------------------
John F. Burkart
S-2
<PAGE>
By: /s/ Bryan W. Meyer
------------------------------------
Bryan W. Meyer
By: /s/ Bruce Knoblock
------------------------------------
Bruce Knoblo
S-3
<PAGE>
EXHIBIT E
ALLOCATIONS
1. Allocation of Net Operating Income and Net Operating Loss.
(a) Net Operating Income. Except as otherwise provided herein, Net
Operating Income for any fiscal year or other applicable period shall be
allocated in the following order and priority:
(1) First, to the Partners, until the cumulative Net Operating Income
allocated pursuant to this subparagraph 1(a)(1) for the current and all prior
periods equals the cumulative Net Operating Loss allocated pursuant to
subparagraph 1(b)(2) hereof for all prior periods, among the Partners in the
same ratio and reverse order that such Net Operating Loss was allocated to the
Partners pursuant to subparagraph 1(b)(2) hereof (and, in the event of a shift
of a Partner's interest in the Partnership, to the Partners in a manner that
most equitably reflects the successors in interest to the Partners).
(2) Thereafter, the balance of the Net Operating Income, if any, shall
be allocated to the Partners in accordance with their respective Percentage
Interests.
(b) Net Operating Loss. Except as otherwise provided herein, Net Operating
Loss of the Partnership for each fiscal year or other applicable period shall be
allocated as follows:
(1) To the Partners in accordance with their respective Percentage
Interests.
(2) Notwithstanding subparagraph 1(b)(1) hereof, to the extent any Net
Operating Loss allocated to a Partner under subparagraph 1(b)(1) hereof or this
subparagraph 1(b)(2) would cause such Partner (hereinafter, a "Restricted
Partner") to have an Adjusted Capital Account Deficit as of the end of the
fiscal year to which such Net Operating Loss relates, such Net Operating Loss
shall not be allocated to such Restricted Partner and instead shall be allocated
to the other Partner(s) (hereinafter, the "Permitted Partners") pro rata in
accordance with their relative Percentage Interests.
(c) Notwithstanding Sections 1(a) and (b) above, on any date on which any
Series A Preferred Stock, any Series B Preferred Stock, any Series C Preferred
Stock, any Series D Preferred Stock, any Series E Preferred Stock, or any Series
B Preferred Unit, any Series C Preferred Unit, any Series D Preferred Unit or
any Series E Preferred Unit (or other Preferred Stock or other Preferred Units)
is outstanding, Net Operating Income and Net Operating Loss shall be allocated
as follows:
(1) Net Operating Income for any fiscal year or other applicable
period shall be allocated in the following order and priority:
(i) First, to the Partners, until the cumulative Net Operating
Income allocated pursuant to this subparagraph 1(c)(l)(i) for the current and
all prior periods equals the cumulative Net Operating Loss allocated pursuant to
subparagraphs 1(c)(2)(iii) and
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(iv) hereof for all prior periods, among the Partners in the same ratio and
reverse order that such Net Operating Loss was allocated (and, in the event of a
shift of a Partner's interest in the Partnership, to the Partners in a manner
that most equitably reflects the successors in interest to such Partners);
(ii) Second, to the General Partner, until the cumulative Net
Operating Income allocated pursuant to this subparagraph 1(c)(1)(ii) for the
current and all prior periods equals the cumulative Net Operating Loss allocated
pursuant to subparagraph 1(c)(2)(ii) hereof for all prior periods;
(iii) Third, on a pari passu basis, to (A) the General Partner
until the cumulative amount of Net Operating Income allocated pursuant to this
subparagraph 1(c)(1)(iii) equals the total amount of dividends paid on the
Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred
Stock, the Series D Preferred Stock and the Series E Preferred Stock (and other
Preferred Stock) as of or prior to the date of such allocation plus the total
amount of accrued but unpaid dividends on the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred
Stock and the Series E Preferred Stock (and other Preferred Stock) as of such
date; (B) to the holders of Series B Preferred Units until the cumulative amount
of Net Operating Income allocated pursuant to this subparagraph 1(c)(i)(iii)
equals the total amount of Priority Return paid on the Series B Preferred Units
as of or prior to the date of such allocation plus the total amount of accrued
but unpaid Priority Return on the Series B Preferred Units; (C) to the holders
of Series C Preferred Units until the cumulative amount of Net Operating Income
allocated pursuant to this subparagraph 1(c)(i)(iii) equals the total amount of
Priority Return paid on the Series C Preferred Units as of or prior to the date
of such allocation plus the total amount of accrued but unpaid Priority Return
on the Series C Preferred Units; (D) to the holders of Series D Preferred Units
until the cumulative amount of Net Operating Income allocated pursuant to this
subparagraph 1(c)(i)(iii) equals the total amount of Priority Return paid on the
Series D Preferred Units as of or prior to the date of such allocation plus the
total amount of accrued but unpaid Priority Return on the Series D Preferred
Units; and (E) to the holders of Series E Preferred Units until the cumulative
amount of Net Operating Income allocated pursuant to this subparagraph
1(c)(i)(iii) equals the total amount of Priority Return paid on the Series E
Preferred Units as of or prior to the date of such allocation plus the total
amount of accrued but unpaid Priority Return on the Series E Preferred Units.
(iv) Thereafter, the balance of the Net Operating Income, if any,
shall be allocated to the Partners in accordance with their respective
Percentage Interests.
(2) Net Operating Loss of the Partnership for each fiscal year or
other applicable period shall be allocated as follows:
(i) First, to the Partners in accordance with their respective
Percentage Interests until the Capital Account balances of the Limited Partners
(not including the holders of the Series B Preferred Units, the Series C
Preferred Units, the Series D Preferred Units and the Series E Preferred Units)
are reduced to zero (for purposes of this calculation, each Partner's Capital
Account balance shall be credited with the amount such Partner is obligated to
restore pursuant to the provisions of Section 1.704-1(b)(2)(ii)(c) of the
Regulations, or is deemed to be obligated to restore with respect to any deficit
balance pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and
1.704-2(i)(5) of the Regulations);
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(ii) Second, on a pari passu basis, to (A) the General Partner
until its Capital Account balance has been reduced to zero; (B) to the holders
of Series B Preferred Units until their Capital Account balances have been
reduced to zero (for purposes of this calculation, such Partners' share of
Partnership Minimum Gain shall be added back to their Capital Accounts); (C) to
the holders of Series C Preferred Units until their Capital Account balances
have been reduced to zero; (D) to the holders of Series D Preferred Units until
their Capital Account balances have been reduced to zero; and (E) to the holders
of Series E Preferred Units until their Capital Account balances have been
reduced to zero (for purposes of each such calculation, each Partner's Capital
Account balance shall be credited with the amount such Partner is obligated to
restore pursuant to the provisions of Section 1.704-1(b)(2)(ii)(c) of the
Regulations, or is deemed to be obligated to restore with respect to any deficit
balance pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and
1.704-2(i)(5) of the Regulations);
(iii) Thereafter, to the Partners in accordance with their then
Percentage Interests;
(iv) Notwithstanding subparagraph 2(c)(2)(iii) hereof, to the
extent any Net Operating Loss allocated to a Partner under subparagraph 2(c)(2)
would cause such Partner (hereinafter, a "Restricted Partner") to have an
Adjusted Capital Account Deficit as of the end of the fiscal year to which such
Net Operating Loss relates, such Net Operating Loss shall not be allocated to
such Restricted Partner and instead shall be allocated to the other Partner(s)
(hereinafter, the "Permitted Partners") pro rata in accordance with their
relative Percentage Interests.
(d) Adjustment of Percentage Interests Upon Conversion of Convertible
Preferred Stock to Common Stock. Upon the conversion of any Series A Preferred
Stock to Common Stock of the General Partner, the Percentage Interests of the
Partners shall be adjusted in accordance with the provisions of Article 4 of the
Partnership Agreement as if, on the date of such conversion, the General Partner
had made an additional Capital Contribution to the Partnership in an amount
equal to the number of shares of Common Stock issued as a result of such
conversion multiplied by the fair market value of such shares on the date of
conversion, and provided that in calculating such adjustments, the General
Partner shall be deemed not to have incurred any expenses in connection with
raising the funds used to make such additional Capital Contribution.
2. Allocation of Net Property Gain and Net Property Loss.
After the allocation of Net Operating Income or Net Operating Loss has been
made pursuant to Section 1 above, Net Property Gain and Net Property Loss shall
be allocated as follows:
(a) Net Property Gain. Except as otherwise provided herein, Net Property
Gain for any fiscal year or other applicable period shall be allocated in the
following order and priority:
(1) First, to the Partners, until the cumulative Net Property Gain
allocated pursuant to this subparagraph 2(a)(1) for the current and all prior
periods equals the cumulative Net Property Loss allocated pursuant to
subparagraph 2(b)(2) hereof for all prior periods, among the Partners in the
same ratio and reverse order that such Net Property Loss was allocated to the
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Partners pursuant to subparagraph 2(b)(2) hereof (and, in the event of a shift
of a Partner's interest in the Partnership, to the Partners in a manner that
most equitably reflects the successors in interest to the Partners).
(2) Thereafter, the balance of the Net Property Gain, if any, shall be
allocated to the Partners in accordance with their respective Percentage
Interests.
(b) Net Property Loss. Except as otherwise provided herein, Net Property
Loss of the Partnership for each fiscal year or other applicable period shall be
allocated as follows:
(1) To the Partners in accordance with their respective Percentage
Interests.
(2) Notwithstanding subparagraph 2(b)(1) hereof, to the extent any Net
Property Loss allocated to a Partner under subparagraph 2(b)(1) hereof or this
subparagraph 2(b)(2) would cause such Partner (hereinafter, a "Restricted
Partner") to have an Adjusted Capital Account Deficit as of the end of the
fiscal year to which such Net Property Loss relates, such Net Property Loss
shall not be allocated to such Restricted Partner and instead shall be allocated
to the other Partner(s) (hereinafter, the "Permitted Partners") pro rata in
accordance with their relative Percentage Interests.
(c) Notwithstanding Sections 2(a) and (b) above, on any date on which any
Series A Preferred Stock, any Series B Preferred Stock, any Series C Preferred
Stock, any Series D Preferred Stock, any Series E Preferred Stock or any Series
B Preferred Unit, any Series C Preferred Unit, any Series D Preferred Unit or
any Series E Preferred Unit (or other Preferred Stock or other Preferred Units)
is outstanding, Net Property Gain and Net Property Loss shall be allocated as
follows:
(1) Net Property Gain for any fiscal year or other applicable period
shall be allocated in the following order and priority:
(i) First, to the Partners, until the cumulative Net Property
Gain allocated pursuant to this subparagraph 2(c)(l)(i) for the current and all
prior periods equals the cumulative Net Property Loss allocated pursuant to
subparagraphs 2(c)(2)(iii) and (iv) hereof for all prior periods, among the
Partners in the same ratio and reverse order that such Net Property Loss was
allocated (and, in the event of a shift of a Partner's interest in the
Partnership, to the Partners in a manner that most equitably reflects the
successors in interest to such Partners);
(ii) Second, to the General Partner, until the cumulative Net
Property Gain allocated pursuant to this subparagraph 2(c)(1)(ii) for the
current and all prior periods equals the cumulative Net Property Loss allocated
pursuant to subparagraph 2(c)(2)(ii) hereof for all prior periods;
(iii) Third, on a pari passu basis, to (A) the General Partner
until the sum of (x) the total cumulative amount of Net Operating Income
allocated to the General Partner under Section 1(c)(1)(iii) for the current and
all prior periods plus (y) the total cumulative amount of Net Property Gain
allocated pursuant to this subparagraph 2(c)(1)(iii) equals the total amount of
dividends paid on the Series A Preferred Stock, the Series B Preferred Stock,
the Series C Preferred Stock, the Series D Preferred Stock and the Series E
Preferred Stock (and
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<PAGE>
other Preferred Stock) as of or prior to the date of such allocation plus the
total amount of accrued but unpaid dividends on the Series A Preferred Stock,
the Series B Preferred Stock, the Series C Preferred Stock, the Series D
Preferred Stock and the Series E Preferred Stock (and other Preferred Stock) as
of such date; (B) to the holders of Series B Preferred Units until the sum of
(x) the total cumulative amount of Net Operating Income allocated to the holders
of the Series B Preferred Units under Section 1(c)(1)(iii) for the current and
all prior periods plus (y) the total cumulative amount of Net Property Gain
allocated pursuant to this subparagraph 2(c)(i)(iii) to the holders of the
Series B Preferred Units equals the total amount of Priority Return paid on the
Series B Preferred Units as of or prior to the date of such allocation plus the
total amount of accrued but unpaid Priority Return on the Series B Preferred
Units; (C) to the holders of Series C Preferred Units until the sum of (x) the
total cumulative amount of Net Operating Income allocated to the holders of the
Series C Preferred Units under Section 1(c)(1)(iii) for the current and all
prior periods plus (y) the total cumulative amount of Net Property Gain
allocated pursuant to this subparagraph 2(c)(i)(iii) to the holders of the
Series C Preferred Units equals the total amount of Priority Return paid on the
Series C Preferred Units as of or prior to the date of such allocation plus the
total amount of accrued but unpaid Priority Return on the Series C Preferred
Units; (D) to the holders of Series D Preferred Units until the sum of (x) the
total cumulative amount of Net Operating Income allocated under Section
1(c)(1)(iii) for the current and all prior periods plus (y) the cumulative
amount of Net Property Gain allocated pursuant to this subparagraph 2(c)(i)(iii)
to the holders of the Series D Preferred Units equals the total amount of
Priority Return paid on the Series D Preferred Units as of or prior to the date
of such allocation plus the total amount of accrued but unpaid Priority Return
on the Series D Preferred Units; (E) to the holders of Series E Preferred Units
until the sum of (x) the total cumulative amount of Net Operating Income
allocated under Section 1(c)(1)(iii) for the current and all prior periods plus
(y) the cumulative amount of Net Property Gain allocated pursuant to this
subparagraph 2(c)(i)(iii) to the holders of the Series E Preferred Units equals
the total amount of Priority Return paid on the Series E Preferred Units as of
or prior to the date of such allocation plus the total amount of accrued but
unpaid Priority Return on the Series E Preferred Units.
(iv) Thereafter, the balance of the Net Property Gain, if any,
shall be allocated to the Partners in accordance with their respective
Percentage Interests.
(2) Net Property Loss of the Partnership for each fiscal year or other
applicable period shall be allocated as follows:
(i) First, to the Partners in accordance with their respective
Percentage Interests until the Capital Account balances of the Limited Partners
(not including the holders of the Series B Preferred Units, the Series C
Preferred Units, the Series D Preferred Units and the Series E Preferred Units)
are reduced to zero (for purposes of this calculation, such Partners' share of
Partnership Minimum Gain shall be added back to their Capital Accounts);
(ii) Second, on a pari passu basis, to (A) the General Partner
until its Capital Account balance has been reduced to zero (for purposes of this
calculation, such Partner's share of Partnership Minimum Gain shall be added
back to its Capital Account); (B) to the holders of Series B Preferred Units
until their Capital Account balances have been reduced to zero (for purposes of
this calculation, such Partners' share of Partnership Minimum Gain shall be
added back to their Capital Accounts); (C) to the holders of Series C Preferred
Units until their
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<PAGE>
Capital Account balances have been reduced to zero (for purposes of this
calculation, such Partners' share of Partnership Minimum Gain shall be added
back to their Capital Accounts); (D) to the holders of Series D Preferred Units
until their Capital Account balances have been reduced to zero (for purposes of
this calculation, such Partners' share of Partnership Minimum Gain shall be
added back to their Capital Accounts); and (E) to the holders of Series E
Preferred Units until their Capital Account balances have been reduced to zero
(for purposes of this calculation, such Partners' share of Partnership Minimum
Gain shall be added back to their Capital Accounts);
(iii) Thereafter, to the Partners in accordance with their then
Percentage Interests;
(iv) Notwithstanding subparagraph 2(c)(2)(iii) hereof, to the
extent any Net Property Loss allocated to a Partner under subparagraph
2(c)(2) would cause such Partner (hereinafter, a "Restricted Partner") to
have an Adjusted Capital Account Deficit as of the end of the fiscal year
to which such Net Property Loss relates, such Net Property Loss shall not
be allocated to such Restricted Partner and instead shall be allocated to
the other Partner(s) (hereinafter, the "Permitted Partners") pro rata in
accordance with their relative Percentage Interests.
(d) Special Allocation to Holders of Series Z Incentive Units.
(1) Subject only to the provisions of Section 2(c)(iii) but
notwithstanding any other provision of this Section 2, in the year in which the
Partnership sells or otherwise disposes of all or substantially all of its
assets in a single transaction or a series of related transactions, Net Property
Gain shall first be allocated to the holders of the Series Z Incentive Units pro
rata in proportion to the number of such Series Z Incentive Units outstanding,
until the Capital Account balance attributable to each such Series Z Incentive
Unit is equal to (A) the aggregate Capital Account balance attributable to the
Common Units outstanding (including any other Partnership Units convertible into
Common Units) divided by (B) the number of such Common Units outstanding. If Net
Property Gain is insufficient to make the full allocation provided in the
preceding sentence, then, in lieu of such special allocation of Net Property
Gain provided in the preceding sentence, items of gross capital gain shall be
allocated to the holders of Series Z Incentive Units, and, if such gross items
are insufficient to make the full required allocation, items of gross capital
loss shall be allocated pro rata with respect to such Common Units. The
allocations pursuant to this paragraph (d) shall be made after the allocation of
Net Operating Income or Net Operating Loss for the applicable period in which
such sale or other disposition occurs. For purposes of this clause (i) of this
Section 2(d) "all or substantially all" means assets representing not less than
95% of the aggregate fair market value of the Partnership's assets.
(2) Notwithstanding anything herein to the contrary, for the 12-month
period following the occurrence of a Change of Control (A) Net Operating Loss
and Net Property Loss, if any, shall be allocated pursuant to Section 1(b) or
1(c)(2), as applicable, or Section 2(b) or 2(c)(2), as applicable, as if the
Percentage Interest of each Series Z Partner were zero, and (B) with respect to
each Series Z Partner at the earlier of (x) the date such Partner makes the
election to convert his Series Z Incentive Units pursuant to Section 10.9(b)(i)
or (y) the expiration of a period of twelve (12) months after such Change in
Control, items of income, gain, deduction and loss shall be allocated so as to
cause the Capital Account balance of each
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<PAGE>
such Series Z Partner, and, as soon as possible after the end of such twelve
month period, the Capital Account balances of all Partners, to be in the same
ratio and amounts as if the allocations required by clause (A) of this Section
2(d)(2) had not been made.
(e) Definition of Percentage Interest. Solely for purposes of allocating
Net Property Gain and Net Property Loss under this Section 2, the Percentage
Interest of a Series Z Incentive Unit holder attributable to such Units shall be
deemed to be the undivided percentage ownership interest of such holder in the
Partnership as determined by dividing (A) the total number of outstanding Series
Z Incentive Units owned by such holder by (B) the total number of Partnership
Units then outstanding (excluding the Series A Preferred Interest, the Series B
Preferred Interest, the Series B Preferred Units, the Series C Preferred
Interest, the Series C Preferred Units, the Series D Preferred Interest, the
Series D Preferred Units, the Series E Preferred Interest, and the Series E
Preferred Units).
(f) Book-Up and Capital Account Adjustments. On any day on which (i) Series
A Preferred Stock (or other Preferred Stock), any series of Preferred Units or
Incentive Units are redeemed or converted into Common Stock or Common Units,
(ii) Percentage Interests are adjusted in the manner required in subparagraph
1(d), or (iii) in connection with the issuance of the Series Z Incentive Units
the Partnership shall adjust the Gross Asset Values of all Partnership assets to
equal their respective gross fair market values and shall allocate the amount of
such adjustment as Net Property Gain or Net Property Loss pursuant to Section
2(c) hereof, provided, however, that if no Series A Preferred Stock (or other
Preferred Stock) is outstanding after such redemption or conversion, such Net
Property Gain or Net Property Loss shall be allocated in such a manner that
after such allocation the Capital Accounts of the Partners are in proportion to
their Percentage Interests.
3. Special Allocations.
Notwithstanding any provision of sections 1 and 2 of this Exhibit E, the
following special allocations shall be made in the following order:
(a) Minimum Gain Chargeback (Nonrecourse Liabilities). If there is a net
decrease in Partnership Minimum Gain for any Partnership fiscal year (except as
a result of conversion or refinancing of Partnership indebtedness, certain
capital contributions or revaluation of the Partnership property as further
outlined in Regulation Sections 1.704-2(d)(4), (f)(2) or (f)(3)), each Partner
shall be specially allocated items of Partnership income and gain for such year
(and, if necessary, subsequent years) in an amount equal to that Partner's share
of the net decrease in Partnership Minimum Gain. The items to be so allocated
shall be determined in accordance with Regulation Section 1.704-2(f). This
paragraph 3(a) is intended to comply with the minimum gain chargeback
requirement in said section of the Regulations and shall be interpreted
consistently therewith. Allocations pursuant to this paragraph 3(a) shall be
made in proportion to the respective amounts required to be allocated to each
Partner pursuant hereto.
(b) Minimum Gain Attributable to Partner Nonrecourse Debt. If there is a
net decrease in Minimum Gain Attributable to Partner Nonrecourse Debt during any
fiscal year (other than due to the conversion, refinancing or other change in
the debt instrument causing it to become partially or wholly nonrecourse,
certain capital contributions, or certain revaluations of Partnership property
as further outlined in Regulations Sections 1.704-2(i)(4), each Partner shall
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<PAGE>
be specially allocated Partnership income and gain for such year (and, if
necessary, subsequent years) in an amount equal to that Partner's share of the
net decrease in the Minimum Gain Attributable to Partner Nonrecourse Debt. The
items to be so allocated shall be determined in accordance with Regulation
Section 1.704-2(i)(4) and (j)(2). This paragraph 3(b) is intended to comply with
the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt
contained in said section of the Regulations and shall be interpreted
consistently therewith. Allocations pursuant to this paragraph 3(b) shall be
made in proportion to the respective amounts required to be allocated to each
Partner pursuant hereto.
(c) Qualified Income Offset. In the event a Limited Partner unexpectedly
receives any adjustments, allocations or distributions described in Regulation
Section 1.704-1(b)(2)(ii)(d)(4), (5),or (6), and such Limited Partner has an
Adjusted Capital Account Deficit, items of Partnership income and gain shall be
specially allocated to such Partner in an amount and manner sufficient to
eliminate the Adjusted Capital Account Deficit as quickly as possible. This
paragraph 3(c) is intended to constitute a "qualified income offset" under
Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently
therewith.
(d) Nonrecourse Deductions. Nonrecourse Deductions for any fiscal year or
other applicable period shall be allocated to the Partners in accordance with
their respective Percentage Interests.
(e) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions for any
fiscal year or other applicable period shall be specially allocated to the
Partner that bears the economic risk of loss for the debt (i.e., the Partner
Nonrecourse Debt) in respect of which such Partner Nonrecourse Deductions are
attributable (as determined under Regulation Section 1.704-2(b)(4) and (i)(1)).
(f) Curative Allocations. The allocations set forth in paragraphs (a)-(e)
and Section 1(b)(2), Section 1(c)(2)(iv), Section 2(b)(2) and Section
2(c)(2)(iv), (the "Regulatory Allocations") are intended to comply with the
requirements of Treasury Regulations Sections 1.704-1(b) and 1.704-2.
Notwithstanding any other provisions of Sections 1 and 2, the Regulatory
Allocations shall be taken into account in allocating other items of income,
gain, deduction and loss among the Partners so that, to the extent possible, the
net amount of such allocations of other items and the Regulatory Allocations to
each Partner shall be equal to the net amount that would have been allocated to
each such Partner if the Regulatory Allocations had not occurred. This paragraph
(f) shall be interpreted and applied in such a manner and to such extent as is
reasonably necessary to eliminate, as quickly as possible, permanent economic
distortions that would otherwise occur as a consequence of the Regulatory
Allocations in the absence of this paragraph (f).
4. Tax Allocations.
(a) Generally. Subject to paragraphs 4(b) and (c) hereof, items of income,
gain, loss, deduction and credit to be allocated for income tax purposes
(collectively, "Tax Items") shall be allocated among the Partners on the same
basis as their respective book items.
(b) Sections 1245/1250 Recapture. If any portion of gain form the sale of
property is treated as gain which is ordinary income by virtue of the
application of Code Section 1245 or
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<PAGE>
1250 ("Affected Gain"), then (A) such Affected Gain shall be allocated among the
Partners in the same proportion that the depreciation and amortization
deductions giving rise to the Affected Gain were allocated and (B) other Tax
Items of gain of the same character that would have been recognized, but for the
application of Code Sections 1245 and/or 1250, shall be allocated away from
those Partners who are allocated Affected Gain pursuant to Clause (A) so that,
to the extent possible, the other Partners are allocated the same amount, and
type, of capital gain that would have been allocated to them had Code Sections
1245 and/or 1250 not applied; provided, however, that the net amount of Tax
Items allocated to each Partner shall be the same as if this paragraph 4(b) did
not exist. For purposes hereof, in order to determine the proportionate
allocations of depreciation and amortization deductions for each fiscal year or
other applicable period, such deductions shall be deemed allocated on the same
basis as Net Property Gain and Net Property Loss for such respective period.
(c) Allocations Respecting Section 704(c) and Revaluations. If any
Partnership property is subject to Code Section 704(c) or is reflected in the
Capital Accounts of the Partners and on the books of the Partnership at a book
value that differs from the adjusted tax basis of such property, then the tax
items with respect to such property shall, in accordance with the requirements
of Regulations Section 1.704-1(b)(4)(i), be shared among the Partners in a
manner that takes account of the variation between the adjusted tax basis of the
applicable property and its book value in the same manner as variations between
the adjusted tax basis and fair market value of property contributed to the
Partnership are taken into account in determining the Partners' share of tax
items under Code Section 704(c). The General Partner is authorized to choose any
reasonable method permitted by the Regulations pursuant to Code Section 704(c),
including the "remedial allocation" method, the "curative allocation" method and
the traditional method; provided that the General Partner agrees to use
reasonable efforts to minimize the amount of taxable income in excess of book
income allocated to the holders of the Series B Preferred Units, the Series C
Preferred Units, the Series D Preferred Units and the Series E Preferred Units.
(d) Code Section 752 Specification. Pursuant to Regulations Section
1.752-3, the Partners' interest in Partnership profits for purposes of
determining the Partners' shares of excess nonrecourse liabilities shall be
their Percentage Interests.
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</DOCUMENT>
</SEC-DOCUMENT>
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