-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S8wTovGiaP38H4yXf2smSBCgQbjiTy9E5XcxvWA+63htbFiB6RLH910M5mNzDBCC Z4TjQ/6NuU9mkXEe0wDsnA== 0000950134-98-008154.txt : 19981019 0000950134-98-008154.hdr.sgml : 19981019 ACCESSION NUMBER: 0000950134-98-008154 CONFORMED SUBMISSION TYPE: 10-12G/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19981016 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIMCO PROPERTIES LP CENTRAL INDEX KEY: 0000926660 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF APARTMENT BUILDINGS [6513] IRS NUMBER: 841275621 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12G/A SEC ACT: SEC FILE NUMBER: 000-24497 FILM NUMBER: 98727215 BUSINESS ADDRESS: STREET 1: SKADDEN,ARPS, SLATE,MEAGHER & FLOM LLP STREET 2: 919 THIRD AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 10-12G/A 1 AMENDMENT NO. 1 TO FORM 10-12G 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1998 FILE NO. 0-24497 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 1 TO FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------- AIMCO PROPERTIES, L.P. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 84-1275621 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1873 SOUTH BELLAIRE STREET SUITE 1700 DENVER, COLORADO 80222-4348 (Address of Principal (Zip Code) Executive Offices)
--------------------- REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 757-8101 SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NOT APPLICABLE NOT APPLICABLE (Title of each class (Name of each exchange on which to be so registered) each class to be registered)
--------------------- SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: PARTNERSHIP COMMON UNITS (Title of class) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 Certain statements in this registration statement (the "Registration Statement") contain or may contain information that is forward-looking, including, without limitation: statements regarding the effect of acquisitions, the future financial performance of AIMCO Properties, L.P., a Delaware limited partnership (the "Partnership" and, together with AIMCO (as defined below), consolidated entities and majority-owned subsidiaries, the "Company"), and Apartment Investment and Management Company, a Maryland corporation which controls the Partnership ("AIMCO"), the ability of AIMCO to qualify as a real estate investment trust (a "REIT"), which involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and the effect of government regulations. Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors including, without limitation, national and local economic conditions, the general level of interest rates, terms of governmental regulations that affect the Company and interpretations of those regulations, the competitive environment in which the Company operates, financing risks, including the risk that the Company's cash flows from operations may be insufficient to meet required payments of principal and interest, real estate risks, including variations of real estate values and the general economic climate in local markets and competition for tenants in such markets, acquisition and development risks, including failure of such acquisitions to perform in accordance with projections, and possible environmental liabilities, including costs which may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by the Company. Readers should carefully review this Registration Statement in its entirety, including but not limited to the Company's financial statements and the notes thereto. ITEM 1. BUSINESS. OVERVIEW The Partnership is a Delaware limited partnership organized pursuant to the provisions of the Delaware Revised Uniform Limited Partnership Act (as amended from time to time, or any successor to such statute, the "Act"), engaged in the ownership, acquisition, development, expansion, and management of multi-family apartment properties. The term of the Partnership commenced on May 16, 1994, and will continue until December 31, 2093, unless the Partnership is dissolved sooner pursuant to the provisions of the Agreement or as otherwise provided by the Act. AIMCO-GP, Inc., a Delaware corporation and a wholly owned subsidiary of AIMCO (the "General Partner"), is the sole general partner of the Partnership, and another wholly owned subsidiary of AIMCO, AIMCO-LP, Inc., a Delaware corporation (the "Special Limited Partner"), is a limited partner in the Partnership. As of September 30, 1998, AIMCO held an approximate 89% interest in the Partnership. AIMCO, which was formed on January 10, 1994, is a self-administered and self-managed REIT which does not have any material assets or operations other than its interest in the Partnership. On July 24, 1994, AIMCO completed its initial public offering and engaged in a business combination and consummated a series of related transactions which enabled it to continue and expand the property management and related businesses of Property Asset Management, L.L.C. and its affiliated companies, and PDI Realty Enterprises, Inc. (collectively, the "AIMCO Predecessors"). As of October 1, 1998, the Company owned or controlled 58,495 units in 209 apartment communities (the "Owned Properties"), held an equity interest in 239,879 units in 1,335 apartment communities (the "Equity Properties"), and managed 97,716 units in 759 apartment communities for third parties and affiliates (the "Managed Properties" and, together with the Owned Properties and Equity Properties, the "AIMCO Properties"), bringing the total owned and managed portfolio to 396,090 units in 2,303 apartment communities. By virtue of its aggregate 89% interest in the Partnership and its control of the General Partner, AIMCO has the ability to control all of the day-to-day operations of the Partnership. Moreover, by virtue of its ownership interest in the Partnership and the General Partner, AIMCO is able to approve amendments to the Third Amended and Restated Agreement of Limited Partnership, dated as of July 29, 1994 (the "Partnership Agreement"), without the approval of any other limited partners of the Partnership, except for certain amendments that require the approval of all of the limited partners. See "Item 11 -- Description of Registrant's Securities to be Registered -- Amendment of the Agreement." 1 3 The AIMCO Properties are located in 49 states, the District of Columbia and Puerto Rico. The Partnership's principal executive offices are located at 1873 South Bellaire Street, Suite 1700, Denver, Colorado 80222, and its telephone number is (303) 757-8101. 1998 DEVELOPMENTS Ambassador Apartments Acquisition On May 8, 1998, Ambassador Apartments, Inc. ("Ambassador"), a self-administered and self-managed REIT engaged in the ownership and management of garden-style apartment properties leased primarily to middle income tenants, merged with and into AIMCO, with AIMCO being the surviving corporation (the "Ambassador Merger"). Pursuant to the Ambassador Merger, all outstanding shares of Ambassador Common Stock were converted into shares of AIMCO Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"), at a conversion ratio of 0.553 shares of Class A Common Stock per share of Ambassador Common Stock, resulting in the issuance of 6,578,833 shares of Class A Common Stock. Concurrently, all outstanding options to purchase Ambassador Common Stock were converted into options to purchase Class A Common Stock, at the same conversion ratio, or cash. Contemporaneously with the consummation of the Ambassador Merger, AIMCO MergerSub, L.P., a Delaware limited partnership and 99.9% owned subsidiary partnership of the Partnership ("MergerSub"), merged with and into Ambassador Apartments, L.P. (the "Ambassador Operating Partnership") with the Ambassador Operating Partnership surviving (the "OP Merger"), and each outstanding unit of limited partnership interest in the Ambassador Operating Partnership was converted into the right to receive 0.553 Partnership Common Units ("OP Units") of the Partnership. As a result of the OP Merger, the Ambassador Operating Partnership became a 99.9%-owned subsidiary of the Company. As of the consummation of the Ambassador Merger, Ambassador owned 52 apartment communities with a total of 15,728 units located in Arizona, Colorado, Florida, Georgia, Illinois, Tennessee and Texas, and managed one property containing 252 units for an unrelated third party. Insignia Merger On October 1, 1998 Insignia Financial Group, Inc. ("Insignia") was merged into AIMCO, and each outstanding share of Insignia's common stock was converted into the right to receive 0.262 shares of AIMCO's Class E Preferred Stock. As a result, AIMCO will issue up to 8,945,921 shares of its Class E Preferred Stock. In addition to receiving the same dividends as holders of shares of AIMCO's Class A Common Stock, holders of Class E Preferred Stock will be entitled to receive a special dividend of $50 million in the aggregate. When this special dividend is paid in full, each share of Class E Preferred Stock will automatically convert into one share of AIMCO Class A Common Stock (subject to certain antidilution adjustments). In addition, approximately $458 million in outstanding debt and other liabilities of Insignia and its subsidiaries became obligations of AIMCO and its subsidiaries after the Insignia merger. As a result of the Insignia merger, AIMCO acquired: (i) Insignia's interests in Insignia Properties Trust, a Maryland REIT, which is a majority owned subsidiary of Insignia ("IPT"); (ii) Insignia's interests in Insignia Properties, L.P., IPT's operating partnership ("IPLP"); (iii) 100% of the ownership of the Insignia entities that provide multifamily property management and partnership administrative services; (iv) Insignia's interest in multifamily coinvestments; (v) Insignia's ownership of subsidiaries that control multifamily properties not included in IPT; (vi) Insignia's limited partner interests in public and private syndicated real estate limited partnerships; and (vii) assets incidental to the foregoing businesses (collectively, the "Insignia Multifamily Business"). Prior to the Insignia merger, Insignia's other businesses were transferred to Insignia/ESG Holdings, Inc., which was spun-off to Insignia's stockholders. IPT Merger Agreement As a result of the Insignia merger, AIMCO now owns approximately 51% of the outstanding shares of beneficial interest of IPT. AIMCO and IPT have entered into a merger agreement, dated as of October 1, 2 4 1998, pursuant to which IPT will be merged into AIMCO. The IPT merger agreement provides for IPT stockholders (other than AIMCO) to receive $13.25 per share in cash or $13.28 in shares of AIMCO Class A Common Stock, at AIMCO's option. Other Potential Property Acquisitions In the ordinary course of business, the Company engages in discussions and negotiations regarding the acquisition of apartment properties (including interests in entities that own apartment properties). The Company frequently enters into contracts and nonbinding letters of intent with respect to the purchase of properties. These contracts are typically subject to certain conditions and often permit the Company to terminate the contract in its sole and absolute discretion if it is not satisfied with the results of its due diligence investigation of the properties. The Company believes that such contracts essentially result in the creation of an option on the subject properties and give the Company greater flexibility in seeking to acquire properties. As of October 5, 1998, the Company had under contract or letter of intent an aggregate of 44 multi-family apartment properties with a maximum aggregate purchase price of approximately $666 million, including estimated capital improvements, which, in some cases, may be paid in the form of assumption of existing debt. All such contracts are subject to termination by the Company as described above. No assurance can be given that any of these possible acquisitions will be completed or, if completed, that they will be accretive to Funds From Operations ("FFO") on a per unit basis. Individual Property Acquisitions During the period from January 1, 1998 through September 30, 1998, the Company has purchased eighteen apartment communities containing 4,185 apartment units, as described below:
NUMBER DATE ACQUIRED PROPERTY LOCATION OF UNITS - ------------- -------- -------- -------- 1/98................................. Crossings at Amarillo, TX 160 Bell 2/98................................. Steeplechase Tyler, TX 484 3/98................................. Casa Anita Phoenix, AZ 224 3/98................................. San Marina Phoenix, AZ 399 3/98................................. Cobble Creek Tucson, AZ 301 3/98................................. Rio Cancion Tucson, AZ 379 3/98................................. Sundown Village Tucson, AZ 330 4/98................................. Arbor Station Montgomery, AL 264 4/98................................. Heather Ridge Arlington, TX 72 5/98................................. Landmark Albuquerque, NM 101 6/98................................. Citrus Grove Redlands, CA 198 6/98................................. Villa La Paz Sun City, CA 96 7/98................................. Sunset Village Oceanside, CA 114 7/98................................. Sunset Citrus Vista, CA 97 7/98................................. Rancho Escondido, CA 334 Escondido 8/98................................. Atrium Plantation, FL 210 8/98................................. Colony Bradenton, FL 166 9/98................................. Fisherman's Hillsborough Cty, FL 256 Landing 9/98................................. Sun Lake Brandon, FL 600 ----- 4,785 =====
The Company paid aggregate consideration of $170.3 million for these properties, consisting of $51.0 million in cash, 867,751 OP Units valued at $29.3 million and the assumption of $90.0 million of secured long-term indebtedness. The cash portions of the acquisitions were funded with borrowings under the Company's revolving credit facilities. 3 5 Property Dispositions In January 1998, the Company sold the Sun Valley Apartments, an apartment community containing 430 apartment units located in Salt Lake City, Utah, for $11.5 million, less selling costs of $0.3 million. The Company recognized a $3.3 million gain on the sale. Cash proceeds from the sale were used to repay a portion of the Partnership's outstanding short-term indebtedness. In September 1998, the Company sold the Rillito Village Apartments, an apartment community containing 272 apartment units located in Tucson, Arizona, for $6.8 million. The Company recognized a gain on the sale of approximately $75,000 and used the cash proceeds to pay down a portion of the outstanding balance on the Credit Facilities and to pay closing costs. 1997 DEVELOPMENTS NHP Acquisition On December 8, 1997, AIMCO completed the acquisition by merger (the "NHP Merger") of NHP Incorporated, a Delaware corporation ("NHP"). The consideration issued in the NHP Merger to former NHP stockholders consisted of approximately 4.6 million shares of AIMCO Class A Common Stock and $0.3 million in cash. The Company had previously acquired an aggregate of 6,930,122 shares of NHP Common Stock, representing approximately 53.3% of the shares outstanding as of September 30, 1997. The total consideration paid for all shares of NHP totaled $349.5 million, which included cash payments of $86.5 million and the issuance of 6.8 million shares of AIMCO Class A Common Stock. NHP was primarily involved in the business of providing real estate property management and asset management services. As of September 30, 1997, NHP's management portfolio (which is included in the AIMCO Properties) included 732 properties containing 79,208 conventional units and 55,102 "affordable" units (units benefitting from some form of interest rate or rental subsidy or otherwise subject to governmental programs aimed at providing low and moderate income housing) located in 38 states, the District of Columbia and Puerto Rico. Immediately following the NHP Merger, AIMCO restructured the assets and operations of NHP (the "NHP Reorganization"), resulting in (i) the liquidation of NHP and the transfer of its assets and liabilities to AIMCO, (ii) the reorganization and recapitalization of NHP's primary subsidiary, NHP Management Company, as an unconsolidated subsidiary of the Partnership, and (iii) the transfer of 12 properties previously owned by NHP to AIMCO/NHP Partners, L.P. In addition, pursuant to rights distributed to NHP stockholders in May 1997, on December 8, 1997, all of the outstanding shares of NHP's mortgage banking subsidiary, The WMF Group, Ltd., were distributed to former NHP stockholders. As a result of the NHP Reorganization, the former operations of NHP are now primarily conducted through unconsolidated subsidiaries of the Partnership (the "Unconsolidated Subsidiaries"). In June 1997, AIMCO acquired a group of companies (the "NHP Real Estate Companies") previously owned by NHP that hold interests in partnerships (the "NHP Partnerships") that own 534 conventional and affordable multifamily apartment properties (the "NHP Properties") containing 87,659 units, a captive insurance subsidiary and certain related assets (the "NHP Real Estate Acquisition" and, together with the NHP Merger and the NHP Stock Purchase, the "NHP Acquisition"). The NHP Properties are included in the AIMCO Properties described above. AIMCO is currently engaged in a reorganization (the "NHP Real Estate Reorganization") of its interests in the NHP Real Estate Companies, which will result in a substantial majority of the assets of the NHP Real Estate Companies being owned by a limited partnership (the "Unconsolidated Partnership") in which the Company holds a 99% limited partner interest and certain directors and officers of AIMCO, directly or indirectly, hold a 1% general partner interest. Individual Property Acquisitions During the year ended December 31, 1997, the Company purchased or acquired control of 59 properties (including 15 NHP Properties) consisting of 17,191 apartment units. The cash portion of the purchase price for the acquisitions was funded with proceeds from equity offerings by AIMCO (which were contributed to the Company in exchange for OP Units or Partnership Preferred Units of the Partnership ("Preferred Units" 4 6 and, together with the OP Units, "Partnership Units")), borrowings under the Company's revolving credit facility, other short-term and long-term financings, or with working capital. Property Dispositions In October 1997, the Company sold the Meadowbrook, Ashwood, Parkside, Chimney Ridge and Cobble Creek apartment properties, which consisted of an aggregate of 916 units located in Texas and Arizona, to an unaffiliated third party. Cash proceeds from the sale of approximately $22.7 million were used to repay a portion of the Company's outstanding short-term indebtedness. The Company recognized a gain of approximately $2.8 million on the disposition of these five properties. DEBT ASSUMPTIONS AND FINANCINGS Secured Notes Payable The following table summarizes the Company's secured notes payable as of June 30, 1998 and December 31, 1997, all of which are non-recourse to the Company (dollars in thousands):
JUNE 30, 1998 DECEMBER 31, 1997 ------------- ----------------- Fixed rate, fully-amortizing notes...................... $653,423 $561,056 Fixed rate, non-amortizing notes........................ 84,096 106,424 Floating rate, non-amortizing notes..................... 13,818 13,941 -------- -------- Total......................................... $751,337 $681,421 ======== ========
Secured Tax-Exempt Bond Financing The following table summarizes the Company's secured tax-exempt bond financing at June 30, 1998 and December 31, 1997 (dollars in thousands):
JUNE 30, 1998 DECEMBER 31, 1997 ------------- ----------------- Fixed rate, fully-amortizing bonds...................... $ 55,302 $ 56,027 Fixed rate, non-amortizing bonds........................ 17,823 17,983 Floating rate, fully-amortizing bonds................... 289,824 -- Floating rate, non-amortizing bonds..................... 31,713 -- -------- -------- Total......................................... $394,662 $ 74,010 ======== ========
Secured and Unsecured Short-Term Financing The Company utilizes a variety of secured short-term financing instruments to manage its working capital needs and to fund real estate investments, including variable rate revolving credit facilities, as well as various fixed and floating rate term loans. On October 1, 1998, the Company amended and restated its credit agreement with Bank of America National Trust and Savings Association ("Bank of America") and BankBoston, N.A. The credit agreement now provides a revolving credit facility of up to $100 million, including a swing line of up to $30 million (the "BOA Credit Facility"). The Partnership is the borrower under the BOA Credit Facility, and all obligations thereunder are guaranteed by AIMCO and certain of its subsidiaries. The annual interest rate under the BOA Credit Facility is based on either LIBOR or a base rate which is the higher of Bank of America's reference rate or 0.5% over the federal funds rate, plus, in either case, an applicable margin. The Partnership elects which interest rate will be applicable to particular borrowings under the BOA Credit Facility. The margin ranges between 1.25% and 2.0% in the case of LIBOR-based loans and between negative 0.25% and positive 0.5% in the case of base rate loans, depending upon a ratio of the Company's consolidated unsecured indebtedness to the value of certain unencumbered assets. The BOA Credit Facility matures on October 1, 1999 unless extended, at the discretion of the lenders. The BOA Credit Facility provides for the conversion of the revolving facility into a three year term loan. The availability of funds to the Partnership under the BOA 5 7 Credit Facility is subject to certain borrowing base restrictions and other customary restrictions, including compliance with financial and other covenants thereunder. The financial covenants contained in the BOA Credit Facility require the Partnership to maintain a ratio of debt to gross asset value of no more than 0.55 to 1.0, an interest coverage ratio of 2.25 to 1.0 and a fixed charge coverage ratio of at least 1.6 to 1.0 through December 31, 1998, 1.7 to 1.0 from January 1, 1999 through June 30, 1999, and 1.8 to 1.0 thereafter. In addition, the BOA Credit Facility limits the Partnership from distributing more than 80% of its Funds From Operations (as defined) to holders of OP Units, imposes minimum net worth requirements and provides other financial covenants related to certain unencumbered assets. In October 1998, the Partnership and AIMCO entered into a $300 million senior unsecured interim term loan agreement with an affiliate of Lehman Brothers Inc. (the "Interim Term Loan Agreement"). The term loan matures in one year. AIMCO used the proceeds to refinance existing outstanding indebtedness of Insignia at the time of the merger. In February 1998, the Partnership, as borrower, and AIMCO and certain single asset wholly-owned subsidiaries of the Company (the "Owners"), as guarantors, entered into a five year, $50 million secured credit facility agreement (the "WMF Credit Facility") with Washington Mortgage Financial Group, Ltd. ("Washington Mortgage"), which provides for the conversion of all or a portion of such revolving credit facility to a base loan facility. The WMF Credit Facility provides that all the rights of Washington Mortgage are assigned to the Federal National Mortgage Association ("FNMA"), but FNMA does not assume Washington Mortgage's obligations under the WMF Credit Facility. At the Partnership's request, the commitment amount may be increased to an amount not to exceed $250 million, subject to the consent of Washington Mortgage and FNMA in their sole and absolute discretion. The Partnership and affiliates have pledged their ownership interests in the Owners as security for its obligations under the WMF Credit Facility. The guarantees of the Owners are secured by assets of the Owners, including four apartment properties and two mortgage notes. Advances to the Partnership under the WMF Credit Facility are funded with the proceeds of the sale to investors of FNMA mortgage-backed securities that are secured by the advance and an interest in the collateral. The interest rate on each advance is determined by investor bids for such mortgage-backed securities, plus a margin presently equal to 0.5%. The maturity date of each advance under the revolving portion of the WMF Credit Facility is a date between three and nine months from the closing date of the advance, as selected by the Partnership. Advances under the base facility mature at a date, selected by the Partnership, between ten and twenty years from the date of the advance. Subject to certain conditions, the Partnership has the right to add or substitute collateral. The WMF Credit Facility requires the Company to maintain a ratio of debt to gross asset value of no more than 55%, an interest coverage ratio of at least 225%, and a debt service coverage ratio of at least 145% for the Trailing 12 Month Period (as defined in the WMF Credit Facility) and 135% for the Trailing Three Month Period (as defined in the WMF Credit Facility), imposes minimum net worth requirements and also provides other financial covenants and interest coverage ratio requirements that are specifically related to the collateral. The WMF Credit Facility was fully utilized as of June 30, 1998. Convertible Note As a result of the Insignia merger, AIMCO assumed Insignia's obligations under its 6 1/2% convertible debentures. In connection therewith, the Partnership issued a convertible note to the Special Limited Partner with terms economically equivalent to those of the convertible debentures. The convertible note will mature on September 30, 2016 and bears interest at the rate of 6.5% per annum, with quarterly interest payments payable in arrears. Interest payments may be deferred from time to time, but not for more than 20 consecutive 6 8 quarters. The convertible note is convertible into the Partnership's Class E Partnership Preferred Units at $57.21 per unit through September 30, 2016. The convertible note may be redeemed after November 1, 1999. Interest Rate Lock Agreements From time to time, the Company enters into interest rate lock agreements with major investment banking firms, in anticipation of refinancing debt. Interest rate lock agreements related to planned refinancing of identified variable rate indebtedness are accounted for as anticipatory hedges. Upon the refinancing of such indebtedness, any gain or loss associated with the termination of the interest rate lock agreement is deferred and recognized over the life of the refinanced indebtedness. In order for the interest rate lock to qualify as an anticipatory hedge, the following criteria must be met: (a) the refinance being hedged exposes the Company to interest rate risk; (b) the interest rate lock is designated as a hedge; (c) the significant characteristics and expected terms of the refinance are identified; and (d) it is probable that the refinance will occur. The Company believes that all four of the above qualifications have been met for interest rate lock agreements previously entered into. In the event that any of the above qualifications are not met, the interest rate lock agreement will not qualify as an anticipatory hedge, and any gain or loss realized on the interest rate lock agreement will be recognized in the current period's earnings. In September 1997, the Company entered into an interest rate lock agreement having a notional principal amount of $75.0 million, in anticipation of refinancing certain floating rate indebtedness. The interest rate lock agreement fixed the ten-year treasury rate at 6.32%. During 1998, the Company refinanced certain mortgage indebtedness relating to ten real estate partnerships and realized losses of approximately $3.9 million, which have been deferred and will be amortized over the life of the refinanced debt. These losses, when amortized, will result in effective interest rates of 7.7% over the life of the refinanced debt. Interest Rate Swap Agreements On May 8, 1998, in connection with the consummation of the merger with Ambassador, the Company assumed six interest rate swap agreements, having termination dates between October 3, 2003, and March 3, 2004, with several major investment banking firms. The swap agreements modify the interest characteristics of a portion of the Company's outstanding debt. Each interest rate swap agreement is designated with all or a portion of the principal balance and term of a specific debt obligation. These agreements involve the exchange of amounts based on a fixed interest rate for amounts based on variable interest rates over the life of the agreement without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued and recognized as adjustment of interest expense related to the debt. Pursuant to the terms of the swap and related credit support agreements, the Company is required to post collateral to the swap providers for an amount equal to their exposure, as defined, in each case to the extent that a specified threshold is exceeded. The collateral posted by the Company may be in the form of cash or governmental securities, as determined by the Company. At June 30, 1998, the Company had posted approximately $6.6 million in cash collateral under its swap agreements. The Company estimates that for every 0.25% decrease in the LIBOR interest rate yield, it will be required to post approximately $2 million of additional collateral with the swap providers. If interest rates rise, the Company estimates that for every 0.25% increase in the LIBOR interest rate yield curve, recovery of the posted collateral of a similar amount will be received up to the outstanding collateral balances. On June 2, 1998, the Company settled one of the swap agreements. It is the intent of the Company to terminate the remaining swap agreements in December, 1998. Based on the market value of the outstanding swap agreements at June 30, 1998, the Company had an unrealized loss of $1.9 million. EQUITY OFFERINGS BY AIMCO From time to time, AIMCO issues shares of Class A Common Stock or shares of its Preferred Stock, par value $.01 per share ("Preferred Stock") (hereinafter sometimes referred to as, collectively or individually, "AIMCO Stock"). The Partnership Agreement requires that, whenever AIMCO issues shares of its Class A 7 9 Common Stock or Preferred Stock, the proceeds from such issuance are contributed to the Partnership in exchange for equal numbers of OP Units or Preferred Units, respectively. The proceeds received by the Partnership are then generally used to repay indebtedness under the Partnership's credit facilities or to fund other cash needs. In 1997, AIMCO issued 16.4 million shares of Class A Common Stock (exclusive of shares issued in the NHP Acquisition) and 3.2 million shares of Preferred Stock, for an aggregate of $513 million and $135 million, respectively, the proceeds of which were contributed to the Partnership for 16.4 million OP Units and 3.2 million Preferred Units, respectively. During the period from January 1, 1998 through September 30, 1998, AIMCO issued 0 shares of Class A Common Stock and 10,250,000 million shares of Preferred Stock, for aggregate net proceeds of $247.6 million, the proceeds of which were contributed to the Partnership for 0 OP Units and 10,250,000 million Preferred Units, respectively. In addition, AIMCO expects to issue up to 8,945,921 shares of preferred stock as a result of the Insignia merger. CONTRIBUTION AND MANAGEMENT AGREEMENT In order to maintain AIMCO's qualification as a REIT under the Code, AIMCO has acquired, and may in the future acquire, an interest in entities in which the Partnership does not own any interest (the "QRSs"). AIMCO and the Partnership have entered into a Contribution and Management Agreement (the "Management Agreement"), pursuant to which the Partnership has acquired from AIMCO, in exchange for interests in the Partnership, the economic benefits of the assets owned by the QRSs, and AIMCO has granted the Partnership certain rights with respect to the assets owned by the QRSs. Under the Management Agreement, the Partnership has a right of first refusal to acquire the assets owned by the QRSs for no additional consideration. Under the Management Agreement, AIMCO is obligated to contribute to the Partnership all dividends, distributions and other proceeds received from the QRSs (excluding distributions received in respect of any interests in the Partnership). FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company operates in one industry segment, the ownership and management of real estate properties. See the consolidated financial statements and notes thereto included elsewhere in this Registration Statement for financial information relating to the Company. Properties owned by the QRSs and properties in which the QRSs have ownership interests are included in the AIMCO Properties. GROWTH STRATEGIES The Company's primary objective is to maximize the Company's value by increasing the amount and predictability of its FFO on a per unit basis. The Company seeks to achieve this objective primarily by improving net operating income from its Owned Properties and by acquiring additional properties at values that are accretive on a per unit basis. The Partnership's operating and financial strategies include: (i) maintaining a geographically diversified portfolio of properties; (ii) providing a minimum of $300 per apartment unit per year for capital replacements to maintain its properties; (iii) emphasizing long-term, fixed rate, fully amortizing debt; and (iv) maintaining a dividend payout ratio of less than 80% of FFO. See "Item 2 -- Financial Information -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Funds From Operations." As part of its growth strategy, the Company intends to continue to selectively acquire real estate and interests in real estate, and to expand the use of Partnership Units to purchase such real estate and real estate interests. During 1997 and the six months ended June 30, 1998, the Partnership issued 1.9 million and 0.9 million OP Units, respectively, in connection with property acquisitions. Management of the Company believes that the ability to use Partnership Units to purchase real estate and interests in real estate is advantageous from the Company's standpoint because sellers of such interests may be able to defer recognition of taxable gain on such sales if they receive Partnership Units as consideration, thereby making such transactions more attractive to sellers than sales that result in an immediate recognition of taxable gain. Accordingly, subject to their fiduciary duties to the limited partners of partnerships in which it may have an interest, management intends to increase significantly the use of Partnership Units to purchase real estate and interests in real estate in the future. 8 10 Acquisitions During 1997, the Company directly acquired 44 apartment properties containing 11,706 units for total consideration of $467.4 million, consisting of $191.0 million in cash, approximately 1.9 million OP Units valued at $56.0 million and the assumption or incurrence of $220.4 million of indebtedness. In addition, the Company acquired a controlling interest in 15 partnerships which own 5,285 units located in 15 apartment communities as a result of the acquisition of the NHP Real Estate Companies, subsequent tender offers made to investors in certain NHP Partnerships, and the purchase of mortgage debt and land leases. As a result of these transactions, the Company increased the number of apartment units it owned or controlled to 40,039 units as of December 31, 1997, a net increase of approximately 68% from the 23,764 units number of units owned or controlled as of December 31, 1996. The Company subsequently increased the number of apartment units it owns or controls to 58,495 units in 209 properties as of October 1, 1998. The Company intends to continue to expand its portfolio of Owned Properties by: (i) acquiring properties in markets which management determines are attractive; (ii) developing and expanding its Owned Properties; and (iii) acquiring controlling interests in companies that own or manage multi-family properties. Managed Properties The Company believes its property management operations are integral to its overall business strategy. The economies of scale realized from managing almost 400,000 apartment units enable the Company to operate its properties more efficiently. In addition, the Company believes that managing properties for third parties improves the performance of its Owned Properties by subjecting property managers to market-based pricing and service standards. The Company's property management operations also support the Company's acquisition activities by enhancing its ability to identify and evaluate acquisition and development opportunities in its markets. The Company's local and regional personnel maintain first-hand knowledge of local market conditions and often obtain early notification of Managed Properties and other properties that may be offered for sale. Redevelopment and Expansion Properties The Company has a cautious strategy concerning new development of properties and intends to develop properties only in situations in which it believes it has a significant advantage. The Company believes that redevelopment of selected properties in superior locations can provide advantages over the development of new properties because, compared with new development, redevelopment generally can be accomplished with relatively lower financial risk, in less time and with reduced delays attributable to governmental approval procedures. The Company believes that expansion within, or adjacent to, existing properties will provide growth opportunities at lower risks than are associated with new development, and may offer certain cost advantages to the extent common area amenities and on-site management personnel can be utilized. The Company generally finances redevelopment and expansion activities initially with short-term indebtedness, and subsequently arranges permanent financing. OPERATING STRATEGIES Internal Growth Strategy The Company's strategy for internal growth and to increase cash flow is to continually: (i) seek higher net rental revenues by enhancing and maintaining the competitiveness of properties through periodic property upgrades which typically include cable television, selective refurbishment and the addition of other amenities; (ii) provide a high level of service to residents; (iii) manage expenses through a system of detailed management reporting and accountability; and (iv) provide training programs, orientation workshops and technical courses for on-site marketing, maintenance and management personnel. In pursuing its internal growth strategy, the Company's policy is to: (i) provide on-site management trained to respond promptly to residents' needs; (ii) conduct annual resident satisfaction surveys; (iii) respond 9 11 to maintenance calls within 24 hours; and (iv) maintain the quality and appearance of its properties with an annual provision of $300 per apartment unit for capital replacements. Property Management The Company seeks to improve the operating results from its property management business by, among other methods, combining centralized financial control and uniform operating procedures with localized property management decision-making and market knowledge. The Company's management operations are organized into five Divisions, each supervised by a Division Vice President, who has, on average, 17 years of experience in apartment management. Diversified Markets The Company seeks to operate primarily in markets: (i) where population and employment growth rates are expected to exceed the national averages; (ii) where it believes it can become one of the regionally significant owners and managers of multi-family apartment properties; and (iii) that will enable the Company to maintain a geographically diversified portfolio or otherwise gain significant financial benefits. The distribution of the Owned Properties reflects the Company's focus on growth markets and its belief that geographic diversification will help to insulate the portfolio from regional and local economic fluctuations. The Company also seeks to create concentrations of properties within each of its markets in order to achieve economies of scale in management and operations. The Company owns or manages apartment units in 42 principal markets, including in excess of 5,000 apartment units in the Atlanta, Baltimore, Chicago, Dallas, Denver, Ft. Lauderdale, Houston, Indianapolis, Los Angeles, New York, Orlando, Philadelphia, Phoenix, San Antonio, Tampa and Washington, D.C. metropolitan areas. TAXATION ISSUES A discussion of the taxation of both the Partnership and AIMCO is contained in Item 11 herein, entitled "Description of Registrant's Securities to be Registered." COMPETITION There are numerous housing alternatives that compete with the Company's Owned Properties and Managed Properties in attracting residents. The Company's properties compete directly with other multi-family rental apartments and single family homes that are available for rent in the markets in which the Company's properties are located. The Company's properties also compete for residents with new and existing homes and condominiums. The number of competitive properties in a particular area could have a material effect on the Company's ability to lease apartment units at its properties and on the rents charged. The Company competes with numerous real estate companies in acquiring, developing and managing multi-family apartment properties and seeking tenants to occupy the AIMCO Properties. In addition, the Company competes with numerous property management companies in the markets where the Managed Properties are located. CASH DISTRIBUTIONS During 1996 and 1997, the Partnership made quarterly cash distributions in the amount of $0.425 and $0.4625 per OP Unit, respectively. Thus far in 1998, the Partnership has made two quarterly distributions in the amount of $0.5625 per OP Unit. See "Item 9 -- Market Price of and Distributions on the Registrant's 10 12 Common Units and Related Unitholder Matters." The quarterly cash distributions paid by the Partnership to the holders of OP Units are expected to be identical to the cash dividends paid by AIMCO to its stockholders.
YEAR ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ------- ------- ------ 1st Quarter................................................. $0.5625 $0.4625 $0.425 2nd Quarter................................................. $0.5625 $0.4625 $0.425 3rd Quarter................................................. -- $0.4625 $0.425 4th Quarter................................................. -- $0.4625 $0.425
REGULATION General Multifamily apartment properties are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities such as swimming pools, activity centers and other common areas. Changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions, as well as changes in laws affecting development, construction and safety requirements, may result in significant unanticipated expenditures, which would adversely affect the Company's cash flows from operating activities. In addition, future enactment of rent control or rent stabilization laws or regulations or other laws or regulations regulating multi-family housing may reduce rental revenue or increase operating costs in particular markets. Restrictions Imposed by Laws Benefitting Disabled Persons Under the Americans with Disabilities Act of 1990 (the "ADA"), all places of public accommodation are required to meet certain Federal requirements related to access and use by disabled persons. These requirements became effective in 1992. A number of additional Federal, state and local laws exist which also may require modifications to the Owned Properties, or restrict certain further renovations thereof, with respect to access thereto by disabled persons. For example, the Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment properties first occupied after March 13, 1990 to be accessible to the handicapped. Noncompliance with the ADA or the FHAA could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. Although management believes that the Owned Properties are substantially in compliance with present requirements, if the Owned Properties are not in compliance, the Company is likely to incur additional costs to comply with the ADA and the FHAA. HUD Enforcement and Limited Denials A significant number of the affordable units included in the AIMCO Properties are subject to regulation by the U.S. Department of Housing and Urban Development ("HUD"). HUD has the authority to suspend or deny property owners and managers from participation in HUD programs with respect to additional assistance within a geographic region through imposition of a limited denial of participation ("LDP") by any HUD office or nationwide for violations of HUD regulatory requirements. See "Item 2 -- Financial Information -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Contingencies." Environmental Matters Under federal, state and local environmental laws and regulations, a current or previous owner or operator of real property may be required to investigate and clean up a release of hazardous substances at such property, and may, under such laws and common law, be held liable for property damage and other costs incurred by third parties in connection with such releases. The liability under certain of these laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The failure to remediate the property properly may also adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. In connection with its ownership, 11 13 operation and management of the AIMCO Properties, the Company could be potentially liable for environmental liabilities or costs associated with its properties or properties it may in the future acquire or manage. See "Item 2 -- Financial Information -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Contingencies." INSURANCE Management believes that the Owned Properties are covered by adequate fire, flood and property insurance provided by reputable companies and with commercially reasonable deductibles and limits. EMPLOYEES The Company has a staff of employees performing various acquisition, redevelopment and management functions. The Company has approximately 8,500 employees, most of whom are employed at the property level. None of the employees are represented by a union, and the Company has never experienced a work stoppage. The Company believes it maintains satisfactory relations with its employees. 12 14 ITEM 2. FINANCIAL INFORMATION. SELECTED HISTORICAL FINANCIAL DATA The historical selected financial data for the Company for the six months ended June 30, 1998 and 1997 is unaudited. The historical selected financial data for the Company for the years ended December 31, 1997, 1996 and 1995, the period July 29, 1994 (the date of inception) through December 31, 1994, the period January 10, 1994 through July 28, 1994, and the year ended December 31, 1993, is based on audited financial statements. This information should be read in conjunction with such financial statements, including the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein.
THE COMPANY ---------------------------------------------------------- FOR THE SIX MONTHS FOR THE YEAR ENDED ENDED JUNE 30, DECEMBER 31, ----------------------- -------------------------------- 1998 1997 1997 1996 1995 ---------- ---------- ---------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) OPERATING DATA: RENTAL PROPERTY OPERATIONS: Rental and other income........... $ 161,264 $ 79,719 $ 193,006 $100,516 $ 74,947 Property operating expenses....... (59,643) (31,160) (76,168) (38,400) (30,150) Owned property management expenses........................ (4,713) (2,734) (6,620) (2,746) (2,276) Depreciation...................... (34,289) (15,046) (37,741) (19,556) (15,038) ---------- ---------- ---------- -------- -------- 62,619 30,779 72,477 39,814 27,483 ---------- ---------- ---------- -------- -------- SERVICE COMPANY BUSINESS: Management fees and other income.......................... 9,562 5,605 13,937 8,367 8,132 Management and other expenses..... (5,470) (2,643) (9,910) (5,352) (4,953) Corporate overhead allocation..... (196) (294) (588) (590) (581) Other assets, depreciation and amortization.................... (3) (161) (453) (218) (168) Owner and seller bonuses.......... -- -- -- -- -- Amortization of management company goodwill........................ -- -- (948) (500) (428) ---------- ---------- ---------- -------- -------- 3,893 2,507 2,038 1,707 2,002 Minority interests in service company business.................. (1) (2) (10) 10 (29) ---------- ---------- ---------- -------- -------- Company's shares of income from service company business.......... 3,892 2,505 2,028 1,717 1,973 ---------- ---------- ---------- -------- -------- General and administrative expenses.......................... (4,103) (784) (5,396) (1,512) (1,804) Interest income..................... 11,350 1,341 8,676 523 658 Interest expense.................... (34,778) (20,604) (51,385) (24,802) (13,322) Minority interest in other partnerships...................... (516) (565) 1,008 (111) -- Equity in losses of unconsolidated partnerships(c)................... (4,681) (379) (1,798) -- -- Equity in earnings of unconsolidated subsidiaries(d)................... 5,609 (86) 4,636 -- -- Amortization of goodwill............ (3,394) (474) -- -- -- ---------- ---------- ---------- -------- -------- Income from operations.............. 35,998 11,733 30,246 15,629 14,998 Gain on disposition of properties... 2,526 -- 2,720 44 -- Provision for income taxes.......... -- -- -- -- -- ---------- ---------- ---------- -------- -------- Income (loss) before extraordinary item.............................. 38,524 11,733 32,966 15,673 14,988 Extraordinary item -- early extinguishment of debt............ -- (269) (269) -- -- ---------- ---------- ---------- -------- -------- Net income (loss)................... $ 38,524 $ 11,464 $ 32,697 $ 15,673 $ 14,988 ========== ========== ========== ======== ======== OTHER INFORMATION: Total owned properties (end of period)........................... 210 107 147 94 56 Total owned apartment units (end of period)........................... 58,345 27,056 40,039 23,764 14,453 Units under management (end of period)........................... 68,248 70,213 69,587 19,045 19,594 Basic earnings per OP Unit.......... $ 0.61 $ 0.53 $ 1.09 $ 1.05 $ 0.86 Diluted earnings per OP Unit........ $ 0.61 $ 0.53 $ 1.08 $ 1.04 $ 0.86 Distributions paid per OP Unit...... $ 1.125 $ 0.925 $ 1.85 $ 1.70 $ 1.66 Cash flows provided by operating activities........................ 5,838 25,035 73,032 38,806 25,911 Cash flows used in investing activities........................ (100,669) (108,134) (717,663) (88,144) (60,821) Cash flows provided by (used in) financing activities.............. 107,063 91,450 668,549 60,129 30,145 Funds from operations(e)............ 83,657 28,441 81,155 35,185 25,285 Weighted average number of OP Units outstanding....................... 51,478 21,590 29,119 14,994 11,461 BALANCE SHEET INFORMATION: Real estate, before accumulated depreciation...................... $2,585,204 $1,102,073 $1,657,207 $865,222 $477,162 Real estate, net of accumulated depreciation...................... 2,287,309 945,969 1,503,922 745,145 448,425 Total assets........................ 3,054,741 1,272,890 2,100,510 827,673 480,361 Total mortgages and notes payable... 1,314,475 644,457 808,530 522,146 268,692 Redeemable partnership units(f)..... 238,369 94,777 197,086 96,064 38,463 Mandatorily redeemable 1994 Cumulative Senior Preferred Units............................. -- -- -- -- -- Partners' Capital................... 1,290,719 357,066 960,176 178,462 160,947 THE COMPANY'S THE COMPANY PREDECESSORS(a) -------------- ----------------------------- FOR THE PERIOD FOR THE PERIOD JULY 29, JANUARY 10, 1994 1994 FOR THE YEAR THROUGH THROUGH ENDED DECEMBER 31, JULY 28, DECEMBER 31, 1994 1994(b) 1993 -------------- -------------- ------------ (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) OPERATING DATA: RENTAL PROPERTY OPERATIONS: Rental and other income........... $ 24,894 $ 5,805 $ 8,056 Property operating expenses....... (10,330) (2,263) (3,200) Owned property management expenses........................ (711) -- -- Depreciation...................... (4,727) (1,151) (1,702) -------- ------- ------- 9,126 2,391 3,154 -------- ------- ------- SERVICE COMPANY BUSINESS: Management fees and other income.......................... 3,217 6,533 8,069 Management and other expenses..... (2,047) (5,823) (6,414) Corporate overhead allocation..... -- -- -- Other assets, depreciation and amortization.................... (150) (146) (204) Owner and seller bonuses.......... -- (204) (468) Amortization of management company goodwill........................ -- -- -- -------- ------- ------- 1,020 360 983 Minority interests in service company business.................. (14) -- -- -------- ------- ------- Company's shares of income from service company business.......... 1,006 360 983 -------- ------- ------- General and administrative expenses.......................... (977) -- -- Interest income..................... 123 -- -- Interest expense.................... (1,576) (4,214) (3,510) Minority interest in other partnerships...................... -- -- -- Equity in losses of unconsolidated partnerships(c)................... -- -- -- Equity in earnings of unconsolidated subsidiaries(d)................... -- -- -- Amortization of goodwill............ -- -- -- -------- ------- ------- Income from operations.............. 7,702 (1,463) 627 Gain on disposition of properties... -- -- -- Provision for income taxes.......... -- (36) (336) -------- ------- ------- Income (loss) before extraordinary item.............................. 7,702 (1,499) 291 Extraordinary item -- early extinguishment of debt............ -- -- -- -------- ------- ------- Net income (loss)................... $ 7,702 $(1,499) $ 291 ======== ======= ======= OTHER INFORMATION: Total owned properties (end of period)........................... 48 4 4 Total owned apartment units (end of period)........................... 12,513 1,711 1,711 Units under management (end of period)........................... 20,758 29,343 28,422 Basic earnings per OP Unit.......... $ 0.42 N/A N/A Diluted earnings per OP Unit........ $ 0.42 N/A N/A Distributions paid per OP Unit...... $ 0.29 N/A N/A Cash flows provided by operating activities........................ 16,825 2,678 2,203 Cash flows used in investing activities........................ (186,481) (924) (16,352) Cash flows provided by (used in) financing activities.............. 176,800 (1,032) 14,114 Funds from operations(e)............ 9,391 N/A N/A Weighted average number of OP Units outstanding....................... 10,920 N/A N/A BALANCE SHEET INFORMATION: Real estate, before accumulated depreciation...................... $406,067 $47,500 $46,819 Real estate, net of accumulated depreciation...................... 392,368 33,270 33,701 Total assets........................ 416,361 39,042 38,914 Total mortgages and notes payable... 141,315 40,873 41,893 Redeemable partnership units(f)..... 32,047 -- -- Mandatorily redeemable 1994 Cumulative Senior Preferred Units............................. 107,228 -- -- Partners' Capital................... 137,354 (9,345) (7,556)
13 15 - --------------- (a) On July 29, 1994, AIMCO completed its initial public offering of 9,075,000 shares of AIMCO Class A Common Stock and issued 966,000 shares of convertible preferred stock and 513,514 unregistered shares of AIMCO Common Stock. The proceeds from the offering and such other issuances were contributed by AIMCO to the Partnership for 9,075,000 OP Units, 966,000 Preferred Units and 513,514 OP Units, respectively. On such date, the Company and the Company's Predecessors engaged in a business combination and consummated a series of related transactions which enabled the Company to continue and expand the property management and related businesses of the Company's Predecessors. The 966,000 shares of convertible preferred stock and 513,514 shares of AIMCO Class A Common Stock that were issued concurrently with the initial public offering were repurchased by the Company in 1995. (b) Represents the period January 1, 1994 through July 28, 1994, the date of the completion of the business combination with the Company. (c) Represents the Company's share of earnings from partnerships that own 83,431 apartment units in which partnerships the Company purchased an equity interest from the NHP Real Estate Companies. (d) Represents the Company's equity earnings in the Unconsolidated Subsidiaries. (e) The Partnership's management believes that the presentation of FFO, when considered with the financial data determined in accordance with GAAP, provides a useful measure of the Partnership's performance. However, FFO does not represent cash flow and is not necessarily indicative of cash flow or liquidity available to the Partnership, nor should it be considered as an alternative to net income as an indicator of operating performance. The Board of Governors of NAREIT defines FFO as net income (loss), computed in accordance with GAAP, excluding gains and losses from debt restructuring and sales of property, plus real estate related depreciation and amortization (excluding amortization of financing costs), and after adjustments for unconsolidated partnerships and joint ventures. The Partnership calculates FFO consistent with the NAREIT definition, plus amortization of management company goodwill, the non-cash deferred portion of the income tax provision for unconsolidated subsidiaries and less the payments of dividends on preferred stock. The Partnership's management believes that presentation of FFO provides investors with industry-accepted measurements which help facilitate an understanding of the Partnership's ability to make required dividend payments, capital expenditures and principal payments on its debt. There can be no assurance that the Partnership's basis of computing FFO is comparable with that of other REITs. The following is a reconciliation of net income to FFO:
FOR THE SIX MONTHS FOR THE ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31, PERIOD ------------------- --------------------------------- JANUARY 10, 1998 1997 1997 1996 1995 1994 -------- -------- --------- --------- --------- ----------- (IN THOUSANDS) Net income............................ $38,524 $11,464 $32,697 $15,673 $14,988 $ 7,702 Gain on disposition of property....... (2,526) -- (2,720) (44) -- -- Extraordinary item.................... -- 269 269 -- -- -- Real estate depreciation, net of minority interests.................. 32,423 13,250 33,751 19,056 15,038 4,727 Amortization of goodwill.............. 4,727 474 948 500 428 76 Equity in earnings of Unconsolidated Subsidiaries: Real estate depreciation............ -- 1,263 3,584 -- -- -- Amortization of management contracts........................ 3,088 150 1,587 -- -- -- Deferred taxes...................... 4,291 874 4,894 -- -- -- Equity in earnings of other partnerships: Real estate depreciation............ 9,131 697 6,280 -- -- -- Preferred stock dividends........... (6,001) -- (135) -- (5,169) (3,114) ------- ------- ------- ------- ------- ------- Funds from operations................. $83,657 $28,441 $81,155 $35,185 $25,285 $ 9,391 ======= ======= ======= ======= ======= =======
(f) Effective October 1, 1998, pursuant to an amendment to the Partnership agreement in which the Partnership obtained control over the redemption rights of the units, these units will be reclassified as a component of permanent partners' capital. 14 16 SUMMARY PRO FORMA FINANCIAL AND OPERATING INFORMATION The following table sets forth summary pro forma financial and operating information of the Company for the six months ended June 30, 1998 and for the year ended December 31, 1997. The pro forma financial and operating information gives effect to AIMCO's merger with Insignia Financial Group, Inc., the transfer of certain assets and liabilities of Insignia to unconsolidated subsidiaries and a number of transactions completed before the Insignia merger.
THE COMPANY ------------------------------------ FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JUNE 30, DECEMBER 31, 1998 1997 --------------- --------------- (IN THOUSANDS, EXCEPT PER UNIT DATA) OPERATING DATA: RENTAL PROPERTY OPERATIONS: Rental and other income................................... $ 206,931 $ 402,202 Property operating expenses............................... (78,825) (169,166) Owned property management expenses........................ (4,880) (10,412) Depreciation.............................................. (45,728) (87,246) ---------- --------- 77,498 135,378 ---------- --------- SERVICE COMPANY BUSINESS: Management fees and other income.......................... 19,525 41,676 Management and other expenses............................. (9,660) (23,683) Corporate overhead allocation............................. (196) (588) Depreciation and amortization............................. (7,223) (21,841) ---------- --------- 2,446 (4,436) Minority interests in service company business............ (1) (10) ---------- --------- Partnership's shares of income from service company business............................................... 2,445 (4,446) ---------- --------- General and administrative expenses....................... (4,678) (21,228) Interest income........................................... 15,781 21,543 Interest expense.......................................... (52,393) (96,830) Minority interest......................................... (6,103) (9,662) Equity in losses of unconsolidated partnerships........... 435 (22,899) Equity in earnings of unconsolidated subsidiaries......... 1,996 2,344 Amortization of Goodwill.................................. (3,394) -- ---------- --------- Net income............................................. $ 31,587 $ 4,200 ========== ========= PER OP UNIT DATA: Basic earnings (loss) per OP Unit........................... $ 0.22 $ (0.45) Diluted earnings (loss) per OP Unit......................... 0.21 (0.45) Distributions paid per OP Unit.............................. 1.125 1.85 CASH FLOW DATA: Cash provided by operating activities(a).................... $ 94,313 $ 149,005 Cash used by investing activities(b)........................ (8,942) (17,884) Cash used by financing activities(c)........................ (98,317) (168,003) OTHER DATA: Funds from operations(d).................................... $ 111,245 $ 159,620 Weighted average number of OP Units outstanding............. 70,868 69,128 BALANCE SHEET DATA: Real estate, before accumulated depreciation................ $2,669,776 Real estate, net of accumulated depreciation................ 2,371,881 Total assets................................................ 3,996,029 Total mortgages and notes payable........................... 1,490,801 Company-obligated mandatorily redeemable convertible securities of a subsidiary trust.......................... 149,500 Redeemable Partnership Units................................ 238,369 Partners' capital........................................... 1,898,443
15 17 - --------------- (a) Pro forma cash provided by operating activities represents net income, plus depreciation and amortization less the non-cash portion of the Partnership's equity in earnings of unconsolidated subsidiaries. The pro forma amounts do not include adjustments for changes in working capital resulting from changes in current assets and current liabilities as there is no historical data available as of both the beginning and end of each period presented. (b) On a pro forma basis, cash used in investing activities represents the minimum annual provision for capital replacements of $300 per owned apartment unit. (c) Pro forma cash used in financing activities represents (i) estimated distributions to be paid based on the Partnership's historical distribution rate of $1.125 per OP Unit for the six months ended June 30, 1998 and $1.85 per OP Unit for the year ended December 31, 1997, on outstanding OP Units, (ii) estimated distributions to be paid based on the rate of $3.5625 per unit for the six months ended June 30, 1998 and $7.125 per unit for the year ended December 31, 1997 on outstanding Class B Preferred Units, (iii) estimated distributions to be paid based on the rate of $1.125 per unit for the six months ended June 30, 1998 and $2.25 per unit for the year ended December 31, 1997 on outstanding Class C Preferred Units, (iv) estimated distributions to be paid based on the rate of $1.095 per unit for the six months ended June 30, 1998 and $2.19 per unit for the year ended December 31, 1997 on outstanding Class D Preferred Units, (v) estimated distributions to be paid based on the rate of $1.1718 per unit for the six months ended June 30, 1998 and $2.34375 per unit for the year ended December 31, 1997 on outstanding Class G Preferred Units, and (vi) estimated distributions to be paid based on the rate of $1.1875 per unit for the six months ended June 30, 1998 and $2.375 per unit for the year ended December 31, 1997 on outstanding Class H Preferred Units. (d) The Partnership's management believes that the presentation of FFO, when considered with the financial data determined in accordance with GAAP, provides useful measures of the Partnership's performance. However, FFO does not represent cash flow and is not necessarily indicative of cash flow or liquidity available to the Partnership, nor should it be considered as an alternative to net income as an indicator of operating performance. The Board of Governors of NAREIT defines FFO as net income (loss), computed in accordance with GAAP, excluding gains and losses from debt restructuring and sales of property, plus real estate related depreciation and amortization (excluding amortization of financing costs), and after adjustments for unconsolidated partnerships and joint ventures. The Partnership calculates FFO in a manner consistent with the NAREIT definition, plus amortization of management company goodwill, the non-cash deferred portion of the income tax provision for unconsolidated subsidiaries and less the payments of dividends on preferred stock. The Partnership's management believes that presentation of FFO provides investors with an industry accepted measurement which helps facilitate an understanding of the Partnership's ability to make required dividend payments, capital expenditures and principal payments on its debt. There can be no assurances that the Partnership's basis of computing FFO is comparable with that of other REITs. 16 18 The following is a reconciliation of pro forma net income to pro forma FFO:
PRO FORMA (INSIGNIA MERGER) ---------------------------- FOR THE SIX MONTHS FOR THE ENDED YEAR ENDED JUNE 30, DECEMBER 31, ACCOUNT 1998 1997 ------- ------------ ------------ (IN THOUSANDS) Net income (loss).................................. $ 31,587 $ 4,200 HUD release fee and legal reserve.................. -- 10,202 Real estate depreciation, net of minority interests........................................ 43,391 81,936 Amortization of management contracts............... 5,773 11,546 Amortization of management company goodwill........ 4,466 8,930 Equity in earnings of unconsolidated subsidiaries: Real estate depreciation......................... -- 1,715 Amortization of management company goodwill...... 959 1,918 Amortization of management contracts............. 15,345 29,951 Deferred taxes................................... 1,572 (397) Equity in earnings of other partnerships: Real estate depreciation......................... 27,579 48,452 Interest on Convertible Debentures................. (5,012) (10,003) Preferred Unit distributions....................... (14,415) (28,830) -------- -------- Funds From Operations.............................. $111,245 $159,620 ======== ========
17 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion and analysis of the results of operations and financial condition of the Company should be read in conjunction with the audited financial statements incorporated herein. RESULTS OF OPERATIONS Comparison of the Six Months Ended June 30, 1998 to the Six Months Ended June 30, 1997 Net Income The Company recognized net income of $35.3 million for the six months ended June 30, 1998, compared to $9.8 million for the six months ended June 30, 1997. The increase in net income of $25.5 million, or 260%, was primarily the result of a significant increase in the number of owned properties and a significant increase in investments in unconsolidated subsidiaries and real estate partnerships during 1997 (the "1997 Acquisitions"), and the acquisition of Ambassador and the purchase of twelve properties in the first six months of 1998 (the "1998 Acquisitions"). The increase in net income was partially offset by the sale of five properties in 1997 (the "1997 Sold Properties") and one property in 1998 (the "1998 Sold Property"), increased real estate depreciation, increased goodwill amortization and increased interest expense associated with indebtedness which was assumed or incurred in connection with the acquisitions described above. These factors are discussed in more detail in the following paragraphs. Rental Property Operations Rental and other property revenues from the Company's Owned Properties totaled $161.3 million for the six months ended June 30, 1998, compared to $79.7 million for the six months ended June 30, 1997, an increase of $81.6 million, or 102%. Rental and other property revenues consisted of the following (dollars in thousands):
SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1998 JUNE 30, 1997 ---------------- ---------------- "Same store" properties.............................. $ 68,133 $65,146 1997 Acquisitions.................................... 68,305 4,639 1998 Acquisitions.................................... 18,850 -- 1997 Sold Properties................................. -- 2,460 1998 Sold Property................................... 103 1,061 Properties in lease-up after the completion of an expansion or renovation............................ 5,873 6,413 -------- ------- Total...................................... $161,264 $79,719 ======== =======
Property operating expenses, consisting of on-site payroll costs, utilities (net of reimbursements received from tenants), contract services, turnover costs, repairs and maintenance, advertising and marketing, property taxes and insurance, totaled $59.6 million for the six months ended June 30, 1998, compared to $31.2 million for the six months ended June 30, 1997, an increase of $28.4 million or 91%. Operating expenses consisted of the following (dollars in thousands):
SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1998 JUNE 30, 1997 ---------------- ---------------- "Same store" properties.............................. $26,578 $26,073 1997 Acquisitions.................................... 24,886 1,674 1998 Acquisitions.................................... 5,970 -- 1997 Sold Properties................................. -- 978 1998 Sold Property................................... 197 373 Properties in lease-up after the completion of an expansion or renovation............................ 2,012 2,062 ------- ------- Total...................................... $59,643 $31,160 ======= =======
18 20 Owned property management expenses, representing the costs of managing the Company's Owned Properties, totaled $4.7 million for the six months ended June 30, 1998, compared to $2.7 million for the six months ended June 30, 1997, an increase of $2.0 million, or 74%. The increase resulted from the acquisition of properties in 1997 and 1998. Service Company Business The Company's share of income from the service company business was $3.9 million for the six months ended June 30, 1998, compared to $2.5 million for the six months ended June 30, 1997. The increase in service company business income of $1.4 million was due to increased management and other fees from the acquisition of partnership interests and properties, and the acquisition of a captive insurance subsidiary in connection with the acquisition of the NHP Real Estate Companies in June 1997. General and Administrative Expenses General and administrative expenses increased from $0.8 million for the six months ended June 30, 1997 to $4.1 million for the six months ended June 30, 1998, a 412% increase. The increase is primarily due to additional corporate costs and additional employee salaries associated with the purchase of the NHP Real Estate Companies in June 1997. In addition, due to the growth of the Company, several new departments have been added, including legal, tax, and tender coordination, as well as increased levels of personnel in the accounting and finance departments. Interest Expense Interest expense, which includes the amortization of deferred financing costs, totaled $34.8 million for the six months ended June 30, 1998, compared to $20.6 million for the six months ended June 30, 1997, an increase of $14.2 million, or 69%. The increase consists of the following (dollars in thousands): Interest expense on secured short-term and long-term indebtedness incurred in connection with the 1997 Acquisitions.............................................. $10,599 Interest expense on secured and unsecured short-term and long-term indebtedness incurred in connection with the 1998 Acquisitions......................................... 3,480 Increase in interest expense on the Company's other indebtedness.............................................. 95 ------- Total increase.............................................. $14,174 =======
Interest Income Interest income totaled $11.4 million for the six months ended June 30, 1998, compared to $1.4 million for the six months ended June 30, 1997. The increase of $10.0 million is primarily due to interest earned on loans made by the Company to partnerships in which the Company acts as the general partner. Comparison of the Three Months Ended June 30, 1998 to the Three Months Ended June 30, 1997 The Company recognized net income of $13.6 million for the three months ended June 30, 1998, compared to $5.3 million for the three months ended June 30, 1997. The increase in net income of $8.3 million, or 156%, was primarily the result of a significant increase in the number of owned properties and a significant increase in investments in unconsolidated subsidiaries and real estate partnerships during 1997 (the "1997 Acquisitions"), and the acquisition of Ambassador and the purchase of twelve properties in the first six months of 1998 (the "1998 Acquisitions"). The increase in net income was partially offset by the sale of five properties in 1997 (the "1997 Sold Properties") and one property in 1998 (the "1998 Sold Property"), increased real estate depreciation, increased goodwill amortization and increased interest expense associated with indebtedness which was assumed or incurred in connection with the acquisitions described above. These factors are discussed in more detail in the following paragraphs. 19 21 Rental Property Operations Rental and other property revenues from the Company's Owned Properties totaled $89.9 million for the three months ended June 30, 1998, compared to $41.7 million for the three months ended June 30, 1997, an increase of $48.2 million, or 116%. Rental and other property revenues consisted of the following (dollars in thousands):
THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, 1998 JUNE 30, 1997 ------------------ ------------------ "Same store" properties........................... $34,198 $32,755 1997 Acquisitions................................. 34,439 3,935 1998 Acquisitions................................. 18,524 -- 1997 Sold Properties.............................. -- 1,260 1998 Sold Property................................ -- 541 Properties in lease-up after the completion of an expansion or renovation......................... 2,767 3,188 ------- ------- Total................................... $89,928 $41,679 ======= =======
Property operating expenses, consisting of on-site payroll costs, utilities (net of reimbursements received from tenants), contract services, turnover costs, repairs and maintenance, advertising and marketing, property taxes and insurance, totaled $33.3 million for the three months ended June 30, 1998, compared to $16.7 million for the three months ended June 30, 1997, an increase of $16.6 million or 99%. Operating expenses consisted of the following (dollars in thousands):
THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, 1998 JUNE 30, 1997 ------------------ ------------------ "Same store" properties........................... $13,900 $13,480 1997 Acquisitions................................. 12,605 1,466 1998 Acquisitions................................. 5,815 -- 1997 Sold Properties.............................. -- 510 1998 Sold Property................................ -- 187 Properties in lease-up after the completion of an expansion or renovation......................... 1,014 1,061 ------- ------- Total................................... $33,334 $16,704 ======= =======
Owned property management expenses, representing the costs of managing the Company's Owned Properties, totaled $2.6 million for the three months ended June 30, 1998, compared to $1.4 million for the three months ended June 30, 1997, an increase of $1.2 million, or 86%. The increase resulted from the acquisition of properties in 1997 and 1998. Service Company Business The Company's share of income from the service company business was $1.2 million for the three months ended June 30, 1998, compared to $1.7 million for the three months ended June 30, 1997. The decrease in service company business income of $0.5 million was due to increased management and other expenses from the acquisition of partnership interests and properties, and the acquisition of a captive insurance subsidiary in connection with the acquisition of the NHP Real Estate Companies in June 1997. General and Administrative Expenses General and administrative expenses increased from $0.4 million for the three months ended June 30, 1997 to $2.1 million for the three months ended June 30, 1998, a 425% increase. The increase is primarily due to additional corporate costs and additional employee salaries associated with the purchase of the NHP Real Estate Companies in June 1997. In addition, due to the growth of the Company, several new departments have 20 22 been added, including legal, tax, and tender coordination, as well as increased levels of personnel in the accounting and finance departments. Interest Expense Interest expense, which includes the amortization of deferred financing costs, totaled $19.3 million for the three months ended June 30, 1998, compared to $11.2 million for the three months ended June 30, 1997, an increase of $8.1 million, or 72%. The increase consists of the following (dollars in thousands): Interest expense on secured short-term and long-term indebtedness incurred in connection with the 1997 Acquisitions.............................................. $4,654 Interest expense on secured and unsecured short-term and long-term indebtedness incurred in connection with the 1998 Acquisitions......................................... 3,394 Increase in interest expense on the Company's other indebtedness.............................................. 137 ------ Total increase.................................... $8,185 ======
Interest Income Interest income totaled $5.3 million for the three months ended June 30, 1998, compared to $0.8 million for the three months ended June 30, 1997. The increase of $4.5 million is primarily due to interest earned on loans made by the Company to partnerships in which the Company acts as the general partner. Comparison of the year ended December 31, 1997 to the year ended December 31, 1996 Net Income The Company recognized net income of $32.7 million and net income attributable to holders of OP Units of $30.4 million for the year ended December 31, 1997 compared to net income of $15.7 million, all attributable to holders of OP Units, for the year ended December 31, 1996. Net income attributable to holders of OP Units represents net income less a provision for accrued dividends on the Partnership's Class B Partnership Preferred Units and Class C Partnership Preferred Units, which were issued in August and December 1997, respectively. There were no Preferred Units outstanding during 1996. The increase in net income allocable to holders of OP Units of $14.7 million, or 93.6%, was primarily the result of the following: - the acquisition of 10,484 units in 42 apartment communities primarily during November and December 1996 (the "1996 Acquisitions"); - the acquisition of 11,706 units in 44 apartment communities during 1997; - the acquisition of interests in the NHP Partnerships during the period June through December 1997; - the acquisition of NHP in December 1997; and - interest income on general partner loans to unconsolidated real estate partnerships. The effect of these acquisitions on net income was partially offset by the sale of four properties in August 1996 (the "1996 Dispositions") and five properties in October 1997. These factors are discussed in more detail in the following paragraphs. 21 23 Rental Property Operations Rental and other property revenues from the Company's Owned Properties totaled $193.0 million for the year ended December 31, 1997, compared to $100.5 million for the year ended December 31, 1996, an increase of $92.5 million, or 92.0%. Rental and other property revenues consisted of the following (in thousands):
YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- "Same store" properties............................. $ 78,724 $ 75,069 1996 Acquisitions................................... 68,505 14,970 1997 Acquisitions................................... 22,163 -- Acquisition of interests in the NHP Partnerships.... 15,592 -- 1996 Dispositions................................... -- 3,363 1997 Dispositions................................... 4,092 4,719 Properties in lease-up after the completion of an expansion or renovation........................... 3,930 2,395 -------- -------- Total..................................... $193,006 $100,516 ======== ========
Average monthly rent per occupied unit for the same store properties increased to $571 at December 31, 1997 from $560 at December 31, 1996, an increase of 2.0%. Weighted average physical occupancy for the properties increased to 94.8% at December 31, 1997 from 94.5% at December 31, 1996, an increase of 0.3%. Property operating expenses consist of on-site payroll costs, utilities (net of reimbursements received from tenants), contract services, turnover costs, repairs and maintenance, advertising and marketing, property taxes and insurance. Property operating expenses totaled $76.2 million for the year ended December 31, 1997, compared to $38.4 million for the year ended December 31, 1996, an increase of $37.8 million, or 98.4%. Property operating expenses consisted of the following (in thousands):
YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- "Same store" properties............................. $28,009 $28,234 1996 Acquisitions................................... 28,911 5,258 1997 Acquisitions................................... 8,402 -- Acquisition of interests in the NHP Partnerships.... 7,304 -- 1996 Dispositions................................... -- 1,793 1997 Dispositions................................... 1,972 2,300 Properties in lease-up after the completion of an expansion or renovation........................... 1,570 815 ------- ------- Total..................................... $76,168 $38,400 ======= =======
Owned Property management expenses, representing the costs of managing the Owned Properties, totaled $6.6 million for the year ended December 31, 1997, compared to $2.7 million for the year ended December 31, 1996, an increase of $3.9 million, or 144.4%. The increase resulted from the acquisition of properties in 1996 and 1997 and the acquisition of interests in the NHP Partnerships. Service Company Business The Company's share of income from the service company business was $2.0 million for the year ended December 31, 1997, compared to $1.7 million for the year ended December 31, 1996, an increase of $0.3 million or 17.6%. The increase is due to the acquisition by the Company of property management businesses in August and November 1996, the acquisition of partnership interests which provide for certain partnership and administrative fees, and a captive insurance subsidiary acquired in connection with the acquisition of the NHP Real Estate Companies in June 1997, which were offset by the expiration of the 22 24 Company's commercial asset management contracts on March 31, 1997. The Company's share of income from service company businesses consisted of the following (in thousands):
YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- Properties managed for third parties and affiliates Management fees and other income.................. $ 9,353 $ 5,679 Management and other expenses..................... (9,045) (4,405) ------- ------- 308 1,274 ------- ------- Commercial asset management Management and other income....................... 245 1,026 Management and other expenses..................... (275) (339) ------- ------- (30) 687 ------- ------- Reinsurance operations Revenues.......................................... 4,228 1,267 Expenses.......................................... (360) (282) ------- ------- 3,868 985 ------- ------- Brokerage and other Revenues.......................................... 111 395 Expenses.......................................... (230) (326) ------- ------- (119) 69 ------- ------- $ 4,027 $ 3,015 ======= =======
Income from the management of properties for third parties and affiliates was $0.3 million for the year ended December 31, 1997, compared to $1.3 million for the year ended December 31, 1996, a decrease of $1.0 million, or 76.9%. Losses from commercial asset management were $30,000 for the year ended December 31, 1997 compared to income of $0.7 million for the year ended December 31, 1996. The decrease is primarily due to the expiration of certain commercial management contracts in March 1997. Income from the reinsurance operations for the year ended December 31, 1997 increased by $2.9 million from the year ended December 31, 1996, due to increased premiums collected from a larger work force, improved loss experience and the closure of claims for less than the amounts previously reserved, as well as the acquisition of the NHP Real Estate Companies, which included the acquisition of a captive insurance company. General and Administrative Expenses General and administrative expenses totaled $5.4 million for the year ended December 31, 1997 compared to $1.5 million for the year ended December 31, 1996, an increase of $3.9 million, or 260.0%. The increase in general and administrative expenses is primarily due to the payment of incentive compensation to members of senior management and other employees. 23 25 Interest Expense Interest expense, which includes the amortization of deferred finance costs, totaled $51.4 million for the year ended December 31, 1997, compared to $24.8 million for the year ended December 31, 1996, an increase of $26.6 million or 107.3%. The increase consists of the following (in thousands): Interest expense on secured short-term and long-term indebtedness incurred in connection with the 1996 Acquisitions.............................................. $11,054 Interest expense on secured and unsecured short-term and long-term indebtedness incurred in connection with the 1997 Acquisitions......................................... 7,082 Interest expense on secured and unsecured short-term and long-term indebtedness incurred in connection with the acquisition of interests in the NHP Partnerships.......... 6,924 Increase in interest expense on the Credit Facility due to borrowings used in connection with the refinancing of short-term indebtedness and the acquisition of the NHP Real Estate Companies in June 1997, net of decreased interest expense on existing indebtedness due to principal amortization.............................................. 1,523 ------- Total increase.................................... $26,583 =======
Interest income Interest income totaled $8.7 million for the year ended December 31, 1997, compared to $0.5 million for the year ended December 31, 1996. The increase is primarily due to interest earned on general partner loans to unconsolidated real estate partnerships acquired in 1997. Comparison of the year ended December 31, 1996 to the year ended December 31, 1995 The Company recognized net income of $15.7 million for the year ended December 31, 1996, all of which was attributable to holders of OP Units. For the year ended December 31, 1995, the Company recognized net income of $15.0 million, of which $5.2 million was attributable to the holder of Preferred Units and $9.8 million was attributable to holders of OP Units. The increase in net income allocable to the holders of OP Units in 1996 of 60.2% was primarily the result of the 1996 Acquisitions offset by the 1996 Dispositions. The increase in net income is partially offset by increased interest expense associated with debt which was incurred in June 1995 and September 1995 upon the repurchase of 966,000 Preferred Units and 513,514 OP Units, increased interest expense attributable to indebtedness assumed or incurred in connection with the 1996 Acquisitions, offset by decreased interest expense after the pay down of the Company's credit facility with proceeds from the 1996 Dispositions. These factors are discussed in more detail in the following paragraphs. Rental Property Operations Rental and other property revenues from the Owned Properties totaled $100.5 million for the year ended December 31, 1996, compared to $74.9 million for the year ended December 31, 1995, an increase of $25.6 million, or 34.2%. Rental and other property revenues consisted of the following (in thousands):
YEAR ENDED YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- "Same store" properties............................. $ 69,268 $67,058 1996 Acquisitions................................... 25,929 517 1996 Dispositions................................... 3,363 5,272 Properties in lease-up after the completion of an expansion or renovation........................... 1,956 2,100 -------- ------- Total..................................... $100,516 $74,947 ======== =======
24 26 Average monthly rent per occupied unit for these 42 properties at December 31, 1996 and 1995 was $546 and $531, respectively, an increase of 2.8%. Weighted average physical occupancy for the 42 properties increased from 94.2% at December 31, 1995 to 94.9% at December 31, 1996, a 0.7% increase. Property operating expenses totaled $38.4 million for the year ended December 31, 1996, compared to $30.2 million for the year ended December 31, 1995, an increase of $8.2 million, or 27.2%. Property operating expenses consisted of the following (in thousands):
YEAR ENDED YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- "Same store" properties............................. $26,103 $25,615 1996 Acquisitions................................... 9,652 218 1996 Dispositions................................... 1,793 3,146 Properties in lease-up after the completion of an expansion or renovation........................... 852 1,171 ------- ------- Total..................................... $38,400 $30,150 ======= =======
Owned property management expenses totaled $2.7 million for the year ended December 31, 1996, compared to $2.3 million for the year ended December 31, 1995, an increase of $0.4 million or 17.4%. The increase is primarily due to the acquisition of properties in 1996. Service Company Business The Company's share of income from the service company business was $1.7 million for the year ended December 31, 1996 compared to $2.0 million for the year ended December 31, 1995. Management fees and other income totaled $8.4 million for the year ended December 31, 1996 compared to $8.1 million for the year ended December 31, 1995, reflecting an increase of $0.3 million, or 3.7%. Management and other expenses totaled $5.4 million for the year ended December 31, 1996 compared to $5.0 million for the year ended December 31, 1995, reflecting an increase of $0.4 million, or 8.0%. Major sources of revenue and expense before amortization of management company goodwill, corporate overhead allocations, depreciation and amortization and minority interest are described below (in thousands).
YEAR ENDED YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- Properties managed for third parties and affiliates Management fees and other income.................. $ 5,679 $ 4,878 Management and other expenses..................... (4,405) (3,620) ------- ------- 1,274 1,258 ------- ------- Commercial asset management Management and other income....................... 1,026 1,564 Management and other expenses..................... (339) (562) ------- ------- 687 1,002 ------- ------- Reinsurance operations Revenues.......................................... 1,267 1,193 Expenses.......................................... (282) (432) ------- ------- 985 761 ------- ------- Brokerage and other Revenues.......................................... 395 497 Expenses.......................................... (326) (339) ------- ------- 69 158 ------- ------- $ 3,015 $ 3,179 ======= =======
25 27 Income from the management of properties for third parties and affiliates was $1.3 million for the years ended December 31, 1996 and 1995. Management fee revenues increased from $4.9 million for the year ended December 31, 1995 to $5.7 million for the year ended December 31, 1996, an increase of $0.8 million or 16.4%, primarily as a result of the acquisition of properties in 1996. A comparable increase in management expenses was also experienced in 1996. Income from commercial asset management was $0.7 million for the year ended December 31, 1996 compared to $1.0 million for the year ended December 31, 1995, a decrease of $0.3 million or 30.0%. Commercial management revenues declined from $1.6 million in 1995 to $1.0 million in 1996, primarily due to the reduction in the number of properties managed. Commercial management expenses declined from $0.6 million to $0.3 million as a result of fewer managed properties. The asset management contracts expired on March 31, 1997. Income from the reinsurance operations for the year ended December 31, 1996 increased by $0.2 million, or 29.4%, from the year ended December 31, 1995, due to increased premiums collected from a larger work force, improved loss experience and the closure of claims for less than the amounts previously reserved. General and Administrative Expenses General and administrative expenses totaled $1.5 million for the year ended December 31, 1996 compared to $1.8 million for the year ended December 31, 1995, a decrease of $0.3 million or 16.7%. The amount presented for 1996 included $1.5 million for payroll, overhead and other costs associated with operating a public company and $0.6 million for payroll and other costs incurred in the development of new business offset by a corporate overhead allocation of $0.6 million to the service company business. The amount presented for 1995 included $1.6 million for payroll, overhead and other costs associated with operating a public company, and $0.8 million for payroll and other costs incurred in the development of new business offset by a corporate overhead allocation of $0.6 million to the service company business. The net decrease in general and administrative expenses for the year ended December 31, 1996 is attributable to fewer personnel and a decrease in state income taxes paid in 1996 as a result of the restructuring in early 1995. Interest Expense Interest expense totaled $24.8 million for the year ended December 31, 1996 compared to $13.3 million for the year ended December 31, 1995, an increase of $11.5 million or 86.5%. The increase consists primarily of $5.7 million of interest expense on secured long-term debt incurred in connection with refinancings completed in June 1995 and September 1995 to refinance certain secured notes payable, repurchase 966,000 Preferred Units and 513,514 OP Units, and $5.6 million of interest expense on long-term and short-term indebtedness incurred or assumed in connection with the 1996 Acquisitions. Interest expense on secured tax-exempt bond financing increased by $1.0 million, or 13.5%, due to an increase in interest rate on the $48.1 million of tax-exempt bonds refinanced in June 1996 and the borrowing of $9.9 million in June 1996 (proceeds of which were used to pay down the Company's credit facility). During the year ended December 31, 1996, the Company capitalized interest of $0.8 million as a result of increased construction and renovation activities compared to $0.1 million which was capitalized during the year ended December 31, 1995. Interest expense, amortization of deferred financing costs and unused commitment fees on the Credit Facility were $1.6 million for the years ended December 31, 1996 and 1995. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1998, the Company had $49.3 million in cash and cash equivalents. In addition, the Company had $75.1 million of restricted cash primarily consisting of reserves and impounds held by lenders for capital expenditures, property taxes and insurance. The Company's principal demands for liquidity include normal operating activities, payments of principal and interest on outstanding debt, capital improvements, acquisitions of or investments in properties and distributions paid to limited partners in the Partnership. The Company considers its cash provided by operating activities, and funds available under its credit facilities, to be adequate to meet short-term liquidity demands. The Company utilizes its revolving credit facilities for general corporate purposes and to fund investments on an interim basis. 26 28 On October 1, 1998, the Company amended and restated its credit agreement with Bank of America National Trust and Savings Association ("Bank of America") and BankBoston, N.A. The credit agreement now provides a revolving credit facility of up to $100 million, including a swing line of up to $30 million (the "BOA Credit Facility"). The Partnership is the borrower under the BOA Credit Facility, and all obligations thereunder are guaranteed by AIMCO and certain of its subsidiaries. The annual interest rate under the BOA Credit Facility is based on either LIBOR or a base rate which is the higher of Bank of America's reference rate or 0.5% over the federal funds rate, plus, in either case, an applicable margin. The Partnership elects which interest rate will be applicable to particular borrowings under the BOA Credit Facility. The margin ranges between 1.25% and 2.0% in the case of LIBOR-based loans and between negative 0.25% and positive 0.5% in the case of base rate loans, depending upon a ratio of the Company's consolidated unsecured indebtedness to the value of certain unencumbered assets. The BOA Credit Facility matures on October 1, 1999 unless extended, at the discretion of the lenders. The BOA Credit Facility provides for the conversion of the revolving facility into a three year term loan. The availability of funds to the Partnership under the BOA Credit Facility is subject to certain borrowing base restrictions and other customary restrictions, including compliance with financial and other covenants thereunder. The financial covenants contained in the BOA Credit Facility require the Partnership to maintain a ratio of debt to gross asset value of no more than 0.55 to 1.0, an interest coverage ratio of 2.25 to 1.0 and a fixed charge coverage ratio of at least 1.6 to 1.0 through December 31, 1998, 1.7 to 1.0 from January 1, 1999 through June 30, 1999, and 1.8 to 1.0 thereafter. In addition, the BOA Credit Facility limits the Partnership from distributing more than 80% of its Funds From Operations (as defined) to holders of OP Units, imposes minimum net worth requirements and provides other financial covenants related to certain unencumbered assets. In October 1998, the Partnership and AIMCO entered into the $300 million Interim Term Loan Agreement. The term loan matures in one year. AIMCO used the proceeds to refinance existing outstanding indebtedness of Insignia at the time of the merger. In February 1998, the Partnership, as borrower, and AIMCO and the Owners, as guarantors, entered into the five year, $50 million secured WMF Credit Facility with Washington Mortgage, which provides for the conversion of all or a portion of such revolving credit facility to a term facility. The WMF Credit Facility provides that all the rights of Washington Mortgage are assigned to FNMA, but FNMA does not assume Washington Mortgage's obligations under the WMF Credit Facility. At the Partnership's request, the commitment amount under the WMF Credit Facility may be increased to an amount not to exceed $250 million, subject to the consent of Washington Mortgage and FNMA in their sole and absolute discretion. The Partnership and affiliates have pledged their ownership interests in the Owners as security for its obligations under the WMF Credit Facility. The guarantees of the Owners are secured by assets of the Owners, including four apartment properties and two mortgage notes. Advances to the Partnership under the WMF Credit Facility are funded with the proceeds of the sale to investors of mortgage-backed securities issued by FNMA, that are secured by the advance and an interest in the collateral. The interest rate on each advance is determined by investor bids for such mortgage-backed securities, plus a margin presently equal to 0.5%. The maturity date of each advance under the revolving portion of the WMF Credit Facility is a date between three and nine months from the closing date of the advance, as selected by the Partnership. Advances under the term facility mature at a date, selected by the Partnership, between ten and twenty years from the date of the advance. Subject to certain conditions, the Partnership has the right to add or substitute collateral. The WMF Credit Facility requires the Company to maintain a ratio of debt to gross asset value of no more than 55%, an interest coverage ratio of at least 225%, and a debt service coverage ratio of at least 14.5% for the Trailing 12 Month Period and 135% for the Trailing Three Month Period, imposes minimum net worth requirements and also provides other financial covenants and interest coverage ratio requirements that are specifically related to the collateral. The Partnership had outstanding borrowings under the WMF Credit Facility of $50.0 million as of June 30, 1998. As a result of the Insignia merger, AIMCO assumed Insignia's obligations under its 6 1/2% convertible debentures. In connection therewith, the Partnership issued a convertible note to the Special Limited Partner with terms economically equivalent to those of the convertible debentures. The convertible note will mature on September 30, 2016 and bears interest at the rate of 6.5% per annum, with quarterly interest payments payable 27 29 in arrears. Interest payments may be deferred from time to time, but not for more than 20 consecutive quarters. The convertible note is convertible into the Partnership's Class E Partnership Preferred Units at $57.21 per unit through September 30, 2016. The convertible note may be redeemed after November 1, 1999. In September 1997, the Company entered into an interest rate lock agreement with a major investment banking company, having a notional principal amount of $75.0 million, in anticipation of refinancing certain floating rate indebtedness. The interest rate lock agreement fixed the ten-year treasury rate at 6.32%. During 1998, the Company refinanced certain mortgage indebtedness relating to ten real estate partnerships and realized losses of approximately $3.9 million, which have been deferred and will be amortized over the life of the refinanced debt. These losses, when amortized, will result in effective interest rates of 7.7% over the life of the refinanced debt. On May 8, 1998, in connection with the consummation of the merger with Ambassador, the Company assumed six interest rate swap agreements, having termination dates between October 3, 2003, and March 3, 2004, with several major investment banking firms. The swap agreements modify the interest characteristics of a portion of the Company's outstanding debt. Each interest rate swap agreement is designated with all or a portion of the principal balance and term of a specific debt obligation. These agreements involve the exchange of amounts based on a fixed interest rate for amounts based on variable interest rates over the life of the agreement without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued and recognized as adjustment of interest expense related to the debt. The related interest amount payable to or receivable from counterparties is included in other liabilities or assets. The fair value of the swap agreements and changes in the fair value as a result of changes in market interest rates are not recognized in the financial statements. Pursuant to the terms of the swap and related credit support agreements, the Company is required to post collateral to the swap providers for an amount equal to their exposure, as defined, in each case to the extent that a specified threshold is exceeded. The collateral posted by the Company may be in the form of cash or governmental securities, as determined by the Company. At June 30, 1998, the Company had posted approximately $6.6 million in cash collateral under its swap agreements. The Company estimates that for every 0.25% decrease in the LIBOR interest rate yield, it will be required to post approximately $2 million of additional collateral with the swap providers. If interest rates rise, the Company estimates that for every 0.25% increase in the LIBOR interest rate yield curve, recovery of the posted collateral of a similar amount will be received up to the outstanding collateral balances. On June 2, 1998, the Company settled one of the swap agreements. It is the intent of the Company to terminate the remaining swap agreements in December, 1998. Based on the market value of the outstanding swap agreements at June 30, 1998, the Company had an unrealized loss of $1.9 million. From time to time, the Company has offered to acquire and, in the future, may offer to acquire the interests held by third party investors in certain limited partnerships for which the Company acts as general partner. Any such acquisitions will require funds to pay the purchase price for such interests. Cash payments made in connection with such acquisitions totaled $10.9 million for the six months ended June 30, 1998. The Company expects to meet its short-term liquidity requirements, including property acquisitions, tender offers, refinancings of short-term debt, the funds needed to purchase shares of Insignia under the Call Agreements, the IPT Shares and the funds needed for the Special Dividend, with long-term, fixed rate, fully amortizing debt, secured or unsecured short-term indebtedness (including indebtedness under the BOA Credit Facility, the WMF Credit Facility and the Interim Term Loan Agreement), the issuance of debt securities, Partnership Units or equity securities in public offerings or private placements, and cash generated from operations. In April 1997, AIMCO filed a shelf registration statement with the SEC that registered $1.0 billion of securities for sale on a delayed or continuous basis. The shelf registration statement was declared effective in May 1997. As of August 28, 1998, AIMCO had issued common and preferred stock thereunder and received net proceeds of approximately $726.8 million. The net proceeds from such offerings are contributed by AIMCO to the Partnership. 28 30 As of June 30, 1998, 94% of the Company's Owned Properties and 43% of its total assets were encumbered by debt, and the Company had total outstanding indebtedness of $1,314.5 million, of which $1,196.0 was secured by Owned Properties and other assets. The Company's indebtedness is comprised of $751.3 million of secured, long-term financing, $50.0 million of secured, short-term financing, $394.7 million of secured, tax-exempt bonds and $118.5 million outstanding under the BOA Credit Facility, which is unsecured. As of June 30, 1998, approximately 14% of the Company's indebtedness bears interest at variable rates. General Motors Acceptance Corporation has made 93 loans (the "GMAC Loans"), with an aggregate outstanding principal balance of $420.1 million as of June 30, 1998, to property-owning partnerships controlled by the Company, each of which is secured by the property owned by such partnership. GMAC Loans with an aggregate outstanding principal balance of $163.8 million as of June 30, 1998, are cross-collateralized with certain other GMAC Loans, and certain loans held by FNMA, having an aggregate principal balance of $303.9 million as of June 30, 1998, are cross-collateralized and cross-defaulted with certain other FNMA loans to the Company. Other than certain GMAC Loans, FNMA loans and loans under the BOA Credit Facility, the Interim Term Loan Agreement and the WMF Credit Facility, none of the Company's debt is subject to cross-collateralization or cross-default provisions. At June 30, 1998 the weighted average interest rate on the Company's consolidated indebtedness was 7.9%, with a weighted average maturity of 13 years. CAPITAL EXPENDITURES For the six months ended June 30, 1998, the Company spent $13.5 million for capital replacements (expenditures for routine maintenance of a property) and $8.0 million for initial capital expenditures (expenditures at a property that have been identified, at the time the property is acquired, as expenditures to be incurred within one year of the acquisition). In addition, the Company spent an aggregate of $5.3 million for capital enhancements (spending to increase a property's revenue potential including renovations, developments and expansions) and the renovation of four properties owned by the Company. These expenditures were funded by working capital reserves, borrowings under the Company's credit facilities and cash provided by operating activities. The Company reserves $300 per apartment unit per annum for capital replacements, which totaled $6.6 million for the six months ended June 30, 1998. The Company has $2.4 million of reserved but unspent amounts remaining from prior periods that can be used for future capital replacements. The Company expects to incur initial capital expenditures and capital enhancements of approximately $56 million during the balance of the year ended December 31, 1998. Initial capital expenditures and capital enhancements will be funded with cash from operating activities and borrowings under the Company's revolving credit facilities. For the year ended December 31, 1997, the Company spent $7.4 million for capital replacements, $9.1 million for initial capital expenditures, and $8.5 million for construction and capital enhancements (amenities that add a material new feature or revenue source at a property). These expenditures were funded by borrowings under the BOA Credit Facility, working capital reserves and net cash provided by operating activities. 29 31 The Company's accounting treatment of various capital and maintenance costs is detailed in the following table:
ACCOUNTING DEPRECIABLE EXPENDITURE TREATMENT LIFE IN YEARS ----------- ---------- ------------- Initial capital expenditures................................ capitalize 5 to 30 Capital enhancements........................................ capitalize 5 to 30 Capital replacements: Carpet/vinyl replacement.................................. capitalize 5 Carpet cleaning........................................... expense N/A Major appliance replacement (refrigerators, stoves, dishwashers, washers/dryers)........................................ capitalize 5 Cabinet replacement....................................... capitalize 5 Major new landscaping..................................... capitalize 5 Seasonal plantings and landscape replacements............. expense N/A Roof replacements......................................... capitalize 30 Roof repairs.............................................. expense N/A Model furniture........................................... capitalize 5 Office equipment.......................................... capitalize 5 Exterior painting, significant............................ capitalize 5 Interior painting......................................... expense N/A Parking lot repairs....................................... expense N/A Parking lot repaving...................................... capitalize 30 Equipment repairs......................................... expense N/A General policy for capitalization......................... capitalize various amounts in excess of $250
FUNDS FROM OPERATIONS The Company measures its economic profitability based on Funds From Operations ("FFO"). The Company's management believes that FFO provides investors with an understanding of the Company's ability to incur and service debt and make capital expenditures. The Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net income (loss), computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains and losses from debt restructuring and sales of property, plus real estate related depreciation and amortization (excluding amortization of financing costs), and after adjustments for unconsolidated partnerships and joint ventures. The Company calculates FFO in a manner consistent with the NAREIT definition, which includes adjustments for amortization of management company goodwill, the non-cash, deferred portion of the income tax provision for unconsolidated subsidiaries and the payment of dividends on Preferred Units. FFO should not be considered as an alternative to net income or net cash flows from operating activities, as calculated in accordance with GAAP, as an indication of the Company's performance or as a measure of liquidity. FFO is not necessarily indicative of cash available to fund future cash needs. In addition, there can be no assurance that the Company's basis for computing FFO is comparable with that of other real estate investment trusts. 30 32 For the six months ended June 30, 1998 and 1997, and the years ended December 31, 1997, 1996 and 1995, the Company's FFO was as follows (amounts in thousands):
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31, ------------------- --------------------------------- 1998 1997 1997 1996 1995 -------- -------- --------- --------- --------- Net income........................... $38,524 $11,464 $32,697 $15,673 $14,988 Extraordinary item................... -- 269 269 -- -- Gain on disposition of properties.... (2,526) -- (2,720) (44) -- Real estate depreciation, net of minority interests................. 32,423 13,250 33,751 19,056 15,038 Amortization of management company goodwill........................... 4,727 474 948 500 428 Equity in earnings of other partnerships: Real estate depreciation........... 9,131 697 6,280 -- -- Equity in earnings of unconsolidated subsidiaries: Real estate depreciation........... -- 1,263 3,584 -- -- Deferred taxes..................... 4,291 874 4,894 -- -- Amortization of management contracts....................... 3,088 472 1,587 -- -- Less amortization of management contracts where the recorded values of certain contracts are not expected to be recovered through future cash flows....... -- (322) -- -- -- Preferred Unit distributions......... (6,001) -- (135) -- (5,169) ------- ------- ------- ------- ------- Funds From Operations (FFO).......... $83,657 $28,441 $81,155 $35,185 $25,285 ======= ======= ======= ======= ======= Weighted average number of OP Units and OP Unit equivalents outstanding: OP Units........................... 48,812 21,455 27,732 14,978 11,453 OP Unit equivalents................ 203 135 381 16 8 Preferred Units convertible to OP Units........................... 2,463 -- 1,006 -- -- ------- ------- ------- ------- ------- 51,478 21,590 29,119 14,994 11,461 ======= ======= ======= ======= =======
CASH FLOW For the six months ended June 30, 1998 and 1997, and the years ended December 31, 1997, 1996 and 1995, the Company's net cash flows were as follows (amounts in thousands):
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31, ------------------------- ------------------------------- 1998 1997 1997 1996 1995 ----------- ----------- --------- -------- -------- CASH FLOW INFORMATION: Cash flow provided by operating activities...... $ 5,838 $ 25,035 $ 73,032 $ 38,806 $ 25,911 Cash flow used in investing activities................ (100,669) (108,134) (717,663) (88,144) (60,821) Cash flow provided by (used in) financing activities................ 107,063 91,450 668,549 60,129 30,145
31 33 COMMITMENTS AND CONTINGENCIES HUD Enforcement and Limited Denials of Participation A significant number of units included in the AIMCO Properties are subject to regulation by HUD. Under its regulations, HUD has the authority to suspend or deny property owners and managers from participation in HUD programs with respect to additional assistance within a geographic region through imposition of an LDP by any HUD office or nationwide for violations of HUD regulatory requirements. In March 1997, HUD announced its intention to step up enforcement against property owners and managers who violate their agreements with HUD, and, in July 1997, HUD announced the creation of a new department-wide enforcement division. In June 1997, the St. Louis HUD field office issued an LDP to NHP as a result of a physical inspection and mortgage default at one property owned and managed by NHP-related companies. The LDP suspended NHP's ability to manage or acquire additional HUD-assisted properties in eastern Missouri until June 24, 1998. Although the LDP has expired by its terms, the Company has proposed a settlement agreement with HUD which includes aggregate payments to HUD of approximately $485,000 and withdrawal of the LDP as of its date of issuance. The Company believes a settlement will be executed in the near future. Because an LDP is prospective, existing HUD agreements are not affected, so an LDP is not expected to result in the loss of management service revenue from or to otherwise affect properties that the Company currently manages in the subject regions. In addition, the Company has resolved concerns raised by two other HUD field offices. If HUD were to disapprove the Company as property manager for one or more properties, the Company's ability to obtain property management revenues from additional HUD-regulated properties may be impaired. HUD monitors the performance of properties with HUD-insured mortgage loans. HUD also monitors compliance with applicable regulations, and takes performance and compliance into account in approving management of HUD-assisted properties. In this regard, since July 1988, 29 HUD-assisted properties owned or managed by NHP or NHP-related companies have defaulted on non-recourse HUD-insured mortgage loans. Eight of these 29 properties are also currently managed by the Company. An additional six properties owned or managed by NHP have received unsatisfactory performance ratings. As a result of the defaults and unsatisfactory ratings, the national HUD office must review any application by the Company to act as property manager or owner for additional HUD-assisted properties. The national HUD office has consistently approved NHP's applications to manage new properties, and the Company received HUD clearance to acquire its interests in NHP and NHP-related companies. The Company believes that it enjoys a good working relationship with HUD and that the national office will continue to apply the clearance process to large management portfolios such as the Company's with discretion and flexibility. While there can be no assurance, the Company believes that the unsatisfactory reviews and the mortgage defaults will not have a material impact on its results of operations or financial condition. In October 1997, NHP received a subpoena from the Inspector General of HUD (the "Inspector General") requesting documents relating to any arrangement whereby NHP or any of its affiliates provides or has provided compensation to owners of HUD multifamily projects in exchange for or in connection with property management of a HUD project. The Company believes that other owners and managers of HUD projects have received similar subpoenas. Documents relating to certain of the Company's acquisitions of property management rights for HUD projects may be responsive to the subpoena. The Company is in the process of complying with the subpoena and has provided certain documents to the Inspector General, without conceding that they are responsive to the subpoena. The Company believes that its operations are in compliance, in all material respects, with all laws, rules and regulations relating to HUD-assisted or HUD-insured properties. Effective February 13, 1998, counsel for the Company and the U.S. Attorney for the Northern District of California entered into a tolling agreement related to certain civil claims the government may have against the Company. Although no action has been initiated against the Company or, to the Company's knowledge, any owner of a HUD property managed by the Company, if any such action is taken in the future, it could ultimately affect existing arrangements with respect to HUD projects or otherwise have a material adverse effect on the Company's results of operations. 32 34 Environmental Under Federal, state and local environmental laws and regulations, a current or previous owner or operator of real property may be required to investigate and clean up a release of hazardous substances at such property, and may, under such laws and common law, be held liable for property damage and other costs incurred by third parties in connection with such releases. The liability under certain of these laws has been interpreted to be joint and several unless the harm is divisible or there is a reasonable basis for allocation of responsibility. The failure to remediate the property properly may also adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. In connection with its ownership, operation or management of the AIMCO Properties, the Company could be potentially liable for environmental liabilities or costs associated with its properties or properties it may in the future acquire or manage. Certain Federal, state and local laws and regulations govern the removal, encapsulation or disturbance of asbestos-containing materials ("ACMs") when those materials are in poor condition or in the event of building remodeling, renovation or demolition; impose certain worker protection and notification requirements and govern emissions of and exposure to asbestos fibers in the air. These laws also impose liability for a release of ACMs and may enable third parties to seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership, operation or management of properties, the Company could be potentially liable for those costs. There are ACMs at certain of the Owned Properties, and there may be ACMs at certain of the other AIMCO Properties. The Company has developed and implemented operations and maintenance programs, as appropriate, that establish operating procedures with respect to the ACMs at most of the Owned Properties, and intends to develop and implement, as appropriate, such programs at AIMCO Properties that do not have such programs. Certain of the Owned Properties, and some of the other AIMCO Properties, are located on or near properties that contain or have contained underground storage tanks or on which activities have occurred which could have released hazardous substances into the soil or groundwater. There can be no assurances that such hazardous substances have not been released or have not migrated, or in the future will not be released or will not migrate, onto the AIMCO Properties. Such hazardous substances have been released at certain Owned Properties and, in at least one case, have migrated from an off-site location onto the Company's property. In addition, the Company's Montecito property in Austin, Texas, is located adjacent to, and may be partially on, land that was used as a landfill. Low levels of methane and other landfill gas have been detected at Montecito. The City of Austin, the former landfill operator, has assumed responsibility for conducting all investigation and remedial activities to date associated with the methane and other landfill gas. The remediation of the landfill gas is now substantially complete and the Texas Natural Resources Conservation Commission ("TNRCC") has preliminarily approved the methane gas remediation efforts. Final approval of the site and the remediation process is contingent upon the results of continued methane gas monitors to confirm the effectiveness of the remediation efforts. Should further actionable levels of methane gas be detected, the City of Austin may implement a proposed contingency plan of passive methane gas venting. The City of Austin has also conducted testing at Montecito to determine whether, and to what extent, groundwater has been impacted. Based on test reports received to date by the Company, the groundwater does not appear to be contaminated at actionable levels. The Company has not incurred, and does not expect to incur, liability for the landfill investigation and remediation. However, in connection with the present raising of four of its buildings in order to install stabilizing piers under the building slabs, the Company has relocated some of its tenants and has installed a venting system according to the TNRCC's specifications. The restabilization was substantially completed as of January 1998, at a total cost of approximately $550,000. The City of Austin will be responsible for monitoring the conditions of Montecito. All of the Owned Properties were subject to Phase I or similar environmental audits by independent environmental consultants prior to acquisition. The audits did not reveal, nor is the Company aware of, any environmental liability relating to such properties that would have a material adverse effect on the Company's business, assets or results of operations. However, such audits involve a number of judgments and it is possible that such audits did not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. In addition, the Managed Properties may not have been subject to Phase I or similar environmental audits by independent environmental consultants. While the Company is not aware 33 35 of any environmental liability that it believes would have a material adverse effect on its business, financial condition or results of operations relating to the Managed Properties, there can be no assurance that material environmental liabilities of which the Company is unaware do not exist at such properties. In October 1997, NHP received a letter (the "EPA Letter") from the U.S. Department of Justice ("DOJ") which stated that the U.S. Environmental Protection Agency ("EPA") has requested that the DOJ file a lawsuit against NHP alleging, among other things, that NHP violated the Clean Air Act, the National Recycling and Emissions Reduction Programs and associated regulations in connection with the employment of certain unlicensed personnel, maintenance and disposal of certain refrigerants, and record-keeping practices at two properties. A settlement in principle between NHP and EPA has been reached whereby NHP has agreed to pay a fine of less than $100,000, permit EPA to audit 40 NHP properties with respect to their use and disposal of such refrigerants, and continue to provide training to all maintenance workers with respect to the disposal of such refrigerants. A formal settlement agreement is expected to be executed in 1998. It is possible that the future EPA audits agreed to in the settlement could result in additional allegations by EPA of violations at such properties; however, based on the terms of the settlement agreement with DOJ, the Company anticipates that the fines, if any, resulting from such audits will be nominal. Uncertainties Regarding Status of Federal Subsidies The Company owns and/or manages approximately 44,000 units that are subsidized under Section 8 of the United States Housing Act of 1937, as amended ("Section 8"). These subsidies are generally provided pursuant to project-based Housing Assistance Payment Contracts ("HAP Contracts") between HUD and the owners of the properties or, with respect to a limited number of units managed by the Company, pursuant to vouchers received by tenants. On October 27, 1997, the President of the United States signed into law the Multifamily Assisted Housing Reform and Affordability Act of 1997 (the "1997 Housing Act"). Under the 1997 Housing Act, the mortgage financing and HAP Contracts of certain properties assisted under Section 8, with rents above market levels and financed with HUD-insured mortgage loans, will be restructured by reducing subsidized rents to market levels, thereby reducing rent subsidies, and lowering required debt service payments as needed to ensure financial viability at the reduced rents and subsidy levels. The 1997 Housing Act retains project-based subsidies for most properties (properties in rental markets with limited supply, properties serving the elderly and certain other properties). The 1997 Housing Act phases out project-based subsidies on selected properties serving families not located in the rental markets with limited supply, converting such subsidies to a tenant-based subsidy. Under a tenant based system, rent vouchers would be issued to qualified tenants who then could elect to reside at a property of their choice, provided the tenant has the financial ability to pay the difference between the selected property's monthly rent and the value of the voucher, which would be established based on HUD's regulated fair market rent for the relevant geographical areas. The 1997 Housing Act provides that properties will begin the restructuring process in Federal fiscal year 1999 (beginning October 1, 1998), and that HUD will issue final regulations implementing the 1997 Housing Act on or before October 27, 1998. Congress has elected to renew HAP Contracts expiring before October 1, 1998 for one year terms, generally at existing rents, so long as the properties remain in compliance with the HAP Contracts. While the Company does not expect the provisions of the 1997 Housing Act to result in a significant number of tenants relocating from properties managed by the Company, there can be no assurance that the provisions will not significantly affect the Company's management portfolio. Furthermore, there can be no assurance that other changes in Federal housing subsidy will not occur. Any such changes could have an adverse effect on the Company's property management revenues. Year 2000 Compliance The Company's management has determined that it will be necessary to modify or replace certain accounting and operational software and hardware to enable its computer systems to operate properly subsequent to December 31, 1999. As a result, management has appointed a team of internal staff to research and manage the conversion or replacement of existing systems to comply with year 2000 requirements. The 34 36 team's activities are designed to ensure that there is no adverse effect on the Company's core business operations, and that transactions with tenants, suppliers and financial institutions are fully supported. The Company utilizes numerous accounting and reporting software packages and computer hardware to conduct its business, some of which already comply with year 2000 requirements. Management estimates that the modification or replacement of non-compliant accounting and reporting software and hardware will total approximately $0.3 million. The Company's management also believes that certain of the AIMCO Properties possess operational systems (e.g. elevators, fire alarm and extinguishment systems and security systems) which also must be modified or replaced in order to function properly after December 31, 1999. Management is currently engaged in the identification of all non-compliant operational systems, and has not yet determined the estimated cost of replacing or modifying such systems. High Performance Units In January 1998, the Partnership sold 15,000 Class I High Performance Partnership Units (the "High Performance Units") to a joint venture formed by fourteen officers of the General Partner, SMP I, L.L.C., a Delaware limited liability company ("SMP"), and to three of AIMCO's non-employee directors for $2.1 million in cash. The High Performance Units have nominal value unless the total return of AIMCO's Class A Common Stock (dividend income plus share price appreciation), over the three year period ending December 31, 2000, is at least 30% and exceeds the industry average, as determined by a peer group index, by at least 15%. At the conclusion of the three year period, if the Total Return on AIMCO's Class A Common Stock satisfies these criteria, the holders of the High Performance Units will receive distributions and allocations of income and loss from the Partnership in the same amounts and at the same times as would holders of a number of OP Units equal to the quotient obtained by dividing (i) the product of (a) 15% of the amount by which the total return on AIMCO's Class A Common Stock over the three year period exceeds the greater of 115% of a peer group index or 30%, multiplied by (b) the weighted average market value of AIMCO's equity capitalization (including Class A Common Stock and OP Units), by (ii) the market value of one share of Class A Common Stock at the end of the three year period. The three year measurement period will be shortened in the event of a change of control of the Company. Unlike OP Units, the High Performance Units are not redeemable or convertible into Class A Common Stock unless a change of control of the Company occurs. Because there is substantial uncertainty that the High Performance Units will have more than nominal value due to the required performance criteria over the three year term, the Partnership has not recorded any value to the High Performance Units. If the measurement period would have ended June 30, 1998, the value of the High Performance Units (the product referred to in clause (i) above) would have been $17.2 million, and such High Performance Units would represent no dilutive effect on net income per share. See "Item 11 -- Description of Registrant's Securities to be Registered -- Partnership Units -- High Performance Units." Inflation Substantially all of the leases at the Company's apartment properties are for a period of six months or less, allowing, at the time of renewal, for adjustments in the rental rate and the opportunity to re-lease the apartment unit at the prevailing market rate. The short term nature of these leases generally serves to minimize the risk to the Company of the adverse effect of inflation and the Company does not believe that inflation has had a material adverse impact on its revenues. 35 37 ITEM 3. PROPERTIES. The AIMCO Properties are located in 49 states, Puerto Rico and the District of Columbia. A significant portion of the AIMCO Properties are concentrated in or around 16 metropolitan areas in which the Company owns, controls or manages more than 5,000 units. The following table sets forth certain market information for the AIMCO Properties as of October 1, 1998:
PERCENTAGE OF TOTAL UNITS NUMBER OF NUMBER OF OWNED/CONTROLLED PROPERTIES UNITS OR MANAGED ---------- --------- ---------------- Atlanta, GA..................................... 44 9,311 2% Baltimore, MD................................... 39 6,297 2% Chicago, IL..................................... 46 10,789 3% Dallas, TX...................................... 86 16,764 4% Denver, CO...................................... 47 6,558 2% Ft. Lauderdale, FL.............................. 95 21,114 5% Houston, TX..................................... 84 20,196 5% Indianapolis, IN................................ 32 9,467 2% Los Angeles, CA................................. 65 9,630 2% New York, NY.................................... 50 7,603 2% Orlando, FL..................................... 37 8,662 2% Philadelphia, PA................................ 32 10,752 3% Phoenix, AZ..................................... 47 10,925 3% San Antonio, TX................................. 34 6,202 2% Tampa, FL....................................... 40 11,560 3% Washington, DC.................................. 72 13,049 3% ----- ------- ---- 850 178,879 45% 1,453 217,211 55% ----- ------- ---- Total................................. 2,303 396,000 100% ===== ======= ====
As of October 1, 1998, the AIMCO Properties average 210 apartment units each, with the largest property containing 2,899 apartment units. The Owned Properties are located in 19 states, primarily located in the Sunbelt regions of the United States. A significant portion of the Owned Properties are concentrated in or around 10 metropolitan areas in which the Company owns or controls more than 2,000 units. The following table sets forth certain market information for Owned Properties as of October 1, 1998:
PERCENTAGE OF NUMBER OF NUMBER OF TOTAL UNITS PROPERTIES UNITS OWNED OR CONTROLLED ---------- --------- ------------------- Atlanta, GA................................... 9 2,652 4.5% Austin, TX.................................... 10 2,011 3.4% Dallas, TX.................................... 11 2,685 4.6% Ft. Lauderdale, FL............................ 10 4,554 7.8% Houston, TX................................... 32 8,496 14.5% Phoenix, AZ................................... 28 7,054 12.1% San Antonio, TX............................... 17 4,181 7.1% Tampa, FL..................................... 12 3,684 6.3% Tucson, AZ.................................... 11 2,787 4.8% Washington, DC................................ 1 2,113 3.6% --- ------ ----- Principal Market Total.............. 141 40,217 68.7% --- ------ ----- Other Markets................................. 68 18,278 31.3% === ====== ===== Total............................... 209 58,495 100.0% === ====== =====
36 38 As of October 1, 1998, the Company owned or controlled 209 properties containing 58,495 units. The Owned Properties average 280 apartment units each, with the largest property containing 2,113 apartment units. The Owned Properties offer residents a range of amenities. Many of the Owned Properties include a swimming pool and clubhouse, spas, fitness centers, tennis courts and saunas. Many of the apartment units offer design and appliance features such as vaulted ceilings, fireplaces, washer and dryer hook-ups, cable television, balconies and patios. Substantially all of the Owned Properties are encumbered by mortgage indebtedness or serve as collateral for the Company's indebtedness. As of June 30, 1998, the Company had aggregate mortgage indebtedness totaling $1,171.6 million, which was secured by 195 Owned Properties with a combined net book value of $1,796.5 million, having an aggregate weighted average interest rate of 7.9%. See the financial statements included elsewhere in this Registration Statement for additional information about the Company's indebtedness. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information available to the Partnership, as of September 30, 1998, with respect to OP Units of the Company held by (i) each director and the five most highly compensated executive officers of the General Partner who were serving as of December 31, 1997, (ii) all directors and executive officers of the Partnership as a group and (iii) those persons known to the Company to be the beneficial owners (as determined under the rules of the Commission) of more than 5% of such OP Units. This table does not reflect options that are not exercisable within 60 days, or the beneficial ownership of High Performance Units by executive officers and directors of the General Partner. The business address of each of the following persons is 1873 South Bellaire Street, Suite 1700, Denver, Colorado 80222-4348, unless otherwise specified.
NAME AND ADDRESS OF NUMBER OF PERCENTAGE OWNERSHIP BENEFICIAL OWNER OP UNITS OF THE PARTNERSHIP ------------------- ---------- -------------------- Directors & Executive Officers of the General Partner: Terry Considine.................................... 784,967(1) 1.40% Peter K. Kompaniez................................. 23,625 .04% Steven D. Ira...................................... 96,605 .20% Thomas W. Poomey................................... 0 0% Harry G. Alcock.................................... 0 0% All directors and executive officers as a group (5) persons)........................................ 905,197 1.70% 5% or greater; Aimco-LP, Inc...................................... 47,451,071 88.6%
- --------------- (1) Includes 162,980 OP Units held by entities in which Mr. Considine has sole voting and investment power, 2,300 OP Units held by the Considine Partnership for 99% of which Mr. Considine disclaims beneficial ownership, and 157,698 OP Units held by Mr. Considine's spouse, Elizabeth Considine, for which Mr. Considine disclaims beneficial ownership. 37 39 ITEM 5. BOARD OF DIRECTORS AND OFFICERS. All of the executive officers of the General Partner of the Partnership also serve as executive officers of AIMCO. Accordingly, the information below reflects the directors of the General Partner and the executive officers of both the General Partner of the Partnership and AIMCO. The officers of AIMCO and the General Partner of the Partnership are elected annually by their respective Boards of Directors.
NAME AGE FIRST ELECTED CURRENT POSITION - ---- --- ------------- ---------------- Terry Considine................... 51 July 1994 Chairman of the Board of Directors and Chief Executive Officer Peter K. Kompaniez................ 53 July 1994 Vice Chairman of the Board of Directors and President Steven D. Ira..................... 47 July 1994 Executive Vice President and Co- Founder Thomas W. Toomey.................. 37 January 1996 Executive Vice President -- Finance and Administration Joel F. Bonder.................... 49 December 1997 Executive Vice President, General Counsel and Secretary Patrick J. Foye................... 41 May 1998 Executive Vice President Robert Ty Howard.................. 40 February 1998 Executive Vice President -- Ancillary Services David L. Williams................. 52 January 1997 Executive Vice President -- Property Operations Harry G. Alcock................... 34 July 1996 Senior Vice President -- Acquisitions Troy D. Butts..................... 33 November 1997 Senior Vice President and Chief Financial Officer
The following is a biographical summary of the experience of the current directors of the General Partner and executive officers of the General Partner and AIMCO for the past five years or more. Terry Considine. Mr. Considine has been Chairman of the Board of Directors and Chief Executive Officer of the General Partner and AIMCO since July 1994. He is the sole owner of Considine Investment Co. and prior to July 1994 was owner of approximately 75% of Property Asset Management, L.L.C., Limited Liability company, a Colorado limited liability company, and its related entities (collectively, "PAM"), one of AIMCO's predecessors. On October 1, 1996, Mr. Considine was appointed Co-Chairman and director of Asset Investors Corp. and Commercial Asset Investors, Inc., two other public real estate investment trusts, and appointed as a director of Financial Assets Management, LLC, a real estate investment trust manager. Mr. Considine has been and remains involved as a principal in a variety of real estate activities, including the acquisition, renovation, development and disposition of properties. Mr. Considine has also controlled entities 38 40 engaged in other businesses such as television broadcasting, gasoline distribution and environmental laboratories. Mr. Considine received a B.A. from Harvard College, a J.D. from Harvard Law School and is admitted as a member of the Massachusetts Bar. Mr. Considine has had substantial multifamily real estate experience. From 1975 through July 1994, partnerships or other entities in which Mr. Considine had controlling interests invested in approximately 35 multifamily apartment properties and commercial real estate properties. Six of these real estate assets (four of which were multifamily apartment properties and two of which were office properties) did not generate sufficient cash flow to service their related indebtedness and were foreclosed upon by their lenders, causing pre-tax losses of approximately $11.9 million to investors and losses of approximately $2.7 million to Mr. Considine. Peter K. Kompaniez. Mr. Kompaniez has been Vice Chairman and a director of AIMCO since July 1994 and was appointed President of AIMCO in July 1997. Mr. Kompaniez has served as Vice President of the General Partner from July 1994 through July 1998 and was appointed President in July 1998. Mr. Kompaniez has been a director of the General Partner since July 1994. Since September 1993, Mr. Kompaniez has owned 75% of PDI Realty Enterprises, Inc., a Delaware corporation ("PDI"), one of AIMCO's predecessors, and served as its President and Chief Executive Officer. From 1986 to 1993, he served as President and Chief Executive Officer of Heron Financial Corporation ("HFC"), a United States holding company for Heron International, N.V.'s real estate and related assets. While at HFC, Mr. Kompaniez administered the acquisition, development and disposition of approximately 8,150 apartment units (including 6,217 units that have been acquired by the Company) and 3.1 million square feet of commercial real estate. Prior to joining HFC, Mr. Kompaniez was a senior partner with the law firm of Loeb and Loeb where he had extensive real estate and REIT experience. Mr. Kompaniez received a B.A. from Yale College and a J.D. from the University of California (Boalt Hall). Steven D. Ira. Mr. Ira is a Co-Founder of the Company and has served as Executive Vice President of AIMCO since July 1994. Mr. Ira has been Executive Vice President of the General Partner since July 1998. From 1987 until July 1994, he served as President of PAM. Prior to merging his firm with PAM in 1987, Mr. Ira acquired extensive experience in property management. Between 1977 and 1981 he supervised the property management of over 3,000 apartment and mobile home units in Colorado, Michigan, Pennsylvania and Florida, and in 1981 he joined with others to form the property management firm of McDermott, Stein and Ira. Mr. Ira served for several years on the National Apartment Manager Accreditation Board and is a former president of both the National Apartment Association and the Colorado Apartment Association. Mr. Ira is the sixth individual elected to the Hall of Fame of the National Apartment Association in its 54-year history. He holds a Certified Apartment Property Supervisor (CAPS) and a Certified Apartment Manager designation from the National Apartment Association, a Certified Property Manager (CPM) designation from the National Institute of Real Estate Management (IREM) and he is a member of the Boards of Directors of the National Multi-Housing Council, the National Apartment Association and the Apartment Association of Metro Denver. Mr. Ira received a B.S. from Metropolitan State College in 1975. Thomas W. Toomey. Mr. Toomey has served as Senior Vice President -- Finance and Administration of AIMCO since January 1996 and was promoted to Executive Vice President -- Finance and Administration in March 1997. Mr. Toomey has been Executive Vice President -- Finance and Administration of the General Partner since July 1998. From 1990 until 1995, Mr. Toomey served in a similar capacity with Lincoln Property Company ("LPC") as Vice President/Senior Controller and Director of Administrative Services of Lincoln Property Services where he was responsible for LPC's computer systems, accounting, tax, treasury services and benefits administration. From 1984 to 1990, he was an audit manager with Arthur Andersen & Co. where he served real estate and banking clients. From 1981 to 1983, Mr. Toomey was on the audit staff of Kenneth Leventhal & Company. Mr. Toomey received a B.S. in Business Administration/Finance from Oregon State University and is a Certified Public Accountant. Joel F. Bonder. Mr. Bonder has been Executive Vice President and General Counsel of AIMCO since December 8, 1997. Mr. Bonder has been Executive Vice President and General Counsel of the General Partner since July 1998. Prior to joining the Company, Mr. Bonder served as Senior Vice President and General Counsel of NHP Incorporated from April 1994 until December 1997. Mr. Bonder served as Vice 39 41 President and Deputy General Counsel of NHP Incorporated from June 1991 to March 1994 and as Associate General Counsel of NHP Incorporated from 1986 to 1991. From 1983 to 1985, Mr. Bonder was with the Washington, D.C. law firm of Lane & Edson, P.C. From 1979 to 1983, Mr. Bonder practiced with the Chicago law firm of Ross and Hardies. Mr. Bonder received an A.B. from the University of Rochester and a J.D. from Washington University School of Law. Patrick J. Foye. Patrick Foye has served as Executive Vice President of the General Partner and AIMCO since May 1998. Mr. Foye is responsible for acquisitions of partnership securities, consolidation of minority interests, and corporate and other acquisitions. Mr. Foye was a Mergers and Acquisitions partner with Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to 1998 and was Managing Partner of the Firm's Brussels, Budapest and Moscow offices from 1992 through 1994. In addition, Mr. Foye is the Deputy Chairman of the Long Island Power Authority ("LIPA"), and a member of the New York State Privatization Council. Mr. Foye received a B.A. from Fordham College, a J.D. from Fordham Law School and was Associate Editor of the Fordham Law Review. Robert Ty Howard. Mr. Howard has served as Executive Vice President -- Ancillary Services of AIMCO since February 1998. Mr. Howard was appointed Executive Vice President -- Ancillary Services of the General Partner in July 1998. Prior to joining the Company, Mr. Howard served as an officer and/or director of four affiliated companies, Hecco Ventures, Craig Corporation, Reading Company and Decurion Corporation. Mr. Howard was responsible for financing, mergers and acquisitions activities, investments in commercial real estate, both nationally and internationally, cinema development and interest rate risk management. From 1983 to 1988, he was employed by Spieker Properties. Mr. Howard received a B.A. from Amherst College, a J.D. from Harvard Law School and an M.B.A. from Stanford University Graduate School of Business. David L. Williams. Mr. Williams has been Executive Vice President -- Operations of AIMCO since January 1997. Mr. Williams has been Executive Vice President -- Operations of the General Partner since July 1998. Prior to joining the Company, Mr. Williams was Senior Vice President of Operations at Evans Withycombe Residential, Inc. from January 1996 to January 1997. Previously, he was Executive Vice President at Equity Residential Properties Trust from October 1989 to December 1995. He has served on National Multi-Housing Council Boards and NAREIT committees. Mr. Williams also served as Senior Vice President of Operations and Acquisitions of US Shelter Corporation from 1983 to 1989. Mr. Williams has been involved in the property management, development and acquisition of real estate properties since 1973. Mr. Williams received his B.A. in education and administration from the University of Washington in 1967. Harry G. Alcock. Mr. Alcock has served as a Vice President of the General Partner and AIMCO since July 1996, and was promoted to Senior Vice President -- Acquisitions in October 1997, with responsibility for acquisition and financial activities since July 1994. From June 1992 until July 1994, Mr. Alcock served as Senior Financial Analyst for PDI and HFC. From 1988 to 1992, Mr. Alcock worked for Larwin Development Corp., a Los Angeles based real estate developer, with responsibility for raising debt and joint venture equity to fund land acquisitions and development. From 1987 to 1988, Mr. Alcock worked for Ford Aerospace Corp. He received his B.S. from San Jose State University. Troy D. Butts. Mr. Butts has served as Senior Vice President and Chief Financial Officer of AIMCO since November 1997. Mr. Butts has been Senior Vice President and Chief Financial Officer of the General Partner since July 1998. Prior to joining the Company, Mr. Butts served as a Senior Manager in the audit practice of the Real Estate Services Group for Arthur Andersen, LLP in Dallas, Texas. Mr. Butts was employed by Arthur Andersen, LLP for ten years and his clients were primarily publicly-held real estate companies, including office and multi-family real estate investment trusts. Mr. Butts holds a Bachelor of Business Administration degree in Accounting from Angelo State University and is a Certified Public Accountant. 40 42 ITEM 6. EXECUTIVE COMPENSATION. The following table sets forth the compensation paid for each of the three fiscal years ending December 31, 1997, 1996 and 1995 to the directors of the General Partner, and the Chief Executive Officer and each of the four other most highly compensated executive officers of the General Partner and AIMCO (the "Named Executive Officers"). Information regarding stock options and other stock based compensation payable by AIMCO has been included for informational purposes since the Partnership will issue to AIMCO additional OP Units upon the exercise of such stock options and the contribution to the Partnership of the net proceeds therefrom. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION(1) AWARDS --------------- ANNUAL COMPENSATION SECURITIES ------------------------------------------------ UNDERLYING OTHER ANNUAL STOCK OPTIONS/ ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(2) COMPENSATION($) SARS(#) COMPENSATION($) - --------------------------- ---- --------- ----------- --------------- --------------- --------------- Terry Considine............ 1997 $275,000 $2,060,000 -- -- -- Chairman of the Board of 1996 267,500 20,000 -- 165,000 -- Directors and Chief 1995 257,500 6,000 -- -- -- Executive Officer Peter K. Kompaniez......... 1997 $235,000 $ 800,000 -- -- -- Vice Chairman and 1996 227,500 20,000 -- 87,000 -- President 1995 227,500 6,000 -- -- -- Steven D. Ira.............. 1997 $200,000 $ 500,000 -- -- -- Executive Vice President 1996 194,000 20,000 -- 77,000 -- and Co-Founder 1995 158,500 6,000 -- -- -- Thomas W. Toomey........... 1997 $180,000 $ 555,000 -- -- -- Executive Vice President -- 1996 130,000 50,000 -- 73,000 -- Finance and Administration 1995 (3) -- -- -- -- Harry G. Alcock............ 1997 $120,200 $ 300,000 -- 4,000 -- Senior Vice President -- 1996 60,700 22,000 -- -- -- Acquisitions 1995 55,000 6,000 -- 650 --
- --------------- (1) Excludes 1,227,078, 376,526, 125,632, 165,632 and 14,000 shares of AIMCO Class A Common Stock underlying options granted to Messrs. Considine, Kompaniez, Ira, Toomey and Alcock, respectively, from 1995 to 1997, which were immediately exercised to purchase shares pursuant to AIMCO's leveraged stock purchase program. See "Item 7 -- Certain Relationships and Related Transactions -- Stock Purchase Loans." (2) Includes all discretionary and incentive cash compensation earned by the Named Executive Officers in 1997. (3) Mr. Toomey was not an employee of the General Partner or AIMCO prior to January 1996. 41 43 OPTION/SAR GRANTS IN LAST FISCAL YEAR Information on options granted in 1997 to the Named Executive Officers is set forth in the following table. Such options reflect options to purchase shares of AIMCO Class A Common Stock.
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE --------------------------------------------------------- VALUE AT ASSUMED NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR UNDERLYING GRANTED EXERCISE OR OPTION TERM(3) OPTIONS/SARS TO EMPLOYEES BASE EXPIRATION ---------------------- NAME GRANTED(#)(2) IN FISCAL YEAR PRICE($/SH) DATE 5%($) 10%($) ---- ------------- -------------- ----------- ---------- --------- ---------- Terry Considine........ -- -- -- -- -- -- Peter K. Kompaniez..... -- -- -- -- -- -- Steven D. Ira.......... -- -- -- -- -- -- Thomas W. Toomey....... -- -- -- -- -- -- Harry G. Alcock........ 4,000 0.28% 26.75 2/04/2007 $67,292 $170,530
- --------------- (1) Unless otherwise specified, options vest over five years. Under the terms of the Apartment Investment and Management Company 1997 Stock Award and Incentive Plan, as amended (the "1997 Stock Plan"), the plan administrator retains discretion, subject to certain restrictions, to modify the terms of outstanding options. The exercise price of incentive and non-qualified options granted under the 1997 Stock Plan will generally equal the fair market value of a share of Class A Common Stock on the date of grant. (2) Excludes 691,578, 210,526, 52,632, 52,632 and 14,000 shares of Class A Common Stock underlying options granted to Messrs. Considine, Kompaniez, Ira, Toomey and Alcock, respectively, which were immediately exercised to purchase shares pursuant to AIMCO's leveraged stock purchase program. See "Item 7 -- Certain Relationships and Related Transactions -- Stock Purchase Loans." (3) Assumed annual rates of stock price appreciation are set forth for illustrative purposes only. The amounts shown are for the assumed rates of appreciation only, do not constitute projections of future stock price performance, and may not be realized. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES Information on option exercises during 1997 by the Named Executive Officers, and the value of unexercised options held by Named Executive Officers at December 31, 1997 is set forth in the following table. Such options reflect options to purchase shares of AIMCO Class A Common Stock.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTIONS/SARS SHARES FY-END(#) AT FY-END($)(3) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE(#)(1) REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- -------------- -------------- ----------- ------------- ----------- ------------- Terry Considine...... 153,000 2,333,250 0 9,600 0 154,800 Peter K. Companiez... 83,800 1,110,450 0 3,200 0 51,600 Steven D. Ira........ 0 0 73,800 3,200 1,180,900 51,600 Thomas W. Toomey..... 73,000 972,250 0 0 0 0 Harry G. Alcock...... 0 0 5,241 828 63,185 15,469
- --------------- (1) Excludes 691,578, 210,526, 52,632, 52,632 and 14,000 shares of Class A Common Stock underlying options granted to Messrs. Considine, Kompaniez, Ira, Toomey and Alcock, respectively, which were immediately exercised to purchase shares pursuant to AIMCO's leveraged stock purchase program. See "Item 7 -- Certain Relationships and Related Transactions -- Stock Purchase Loans." (2) "Value Realized" includes amounts withheld for payment of Federal and state taxes. (3) Market value of underlying securities at fiscal year-end, less the exercise price. Market value is determined based on the closing price of the Class A Common Stock on the New York Stock Exchange on December 31, 1997 of $36.75 per share. 42 44 EMPLOYMENT ARRANGEMENTS Each of Messrs. Considine, Kompaniez and Ira receive annual cash compensation pursuant to employment contracts with the Partnership. The initial two-year term of each of these contracts expired in July 1996 but the contracts are automatically renewed for successive one-year terms unless the officer is terminated by the Partnership. The base salary payable under the employment contracts is subject to annual review and adjustment by the Compensation Committee of AIMCO's Board of Directors. The base annual salaries of Messrs. Considine, Kompaniez and Ira are $275,000, $235,000 and $200,000, respectively, for 1997 and 1998. Each of Messrs. Considine, Kompaniez and Ira are also eligible for a bonus set by the Compensation Committee of AIMCO's Board of Directors. The employment contracts provide that upon a change in control of the Partnership or a termination of employment under certain circumstances, the employee will be entitled to a payment equal to three times the average annual salary for the previous three years. The contracts provide that during the terms of the contract and for one year thereafter, except with respect to certain existing investments held by the employee (which the employees have committed to liquidate in an orderly manner), in no event will the employees engage in the acquisition, development, operation or management of other multifamily rental apartment properties outside of the Partnership. In addition, the contracts provide that the employees will not engage in any active or passive investment in property relating to multifamily rental apartment properties, with the exception of the ownership of up to 1% of the securities of any publicly-traded company involved in those activities. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. From time to time, the Partnership and AIMCO have entered into various transactions with certain of their executive officers and directors. The purpose of these transactions often is to satisfy certain requirements of the Code with respect to AIMCO's continued qualification as a REIT and to maximize value to the Company. The Partnership and AIMCO attempt to price such transactions based on fair market value, and believe that the transactions are on terms that are as favorable to the Partnership and AIMCO, as the case may be, as could be achieved with unrelated third parties. FORMATION OF MANAGEMENT SUBSIDIARIES In order to satisfy certain requirements of the Code with respect to AIMCO's continued qualification as a REIT, from time to time the Company has acquired interests in corporations (the "Management Subsidiaries") in which the Company holds non-voting preferred stock representing a 95% economic interest in such corporations. The remaining 5% economic interest, which represents 100% of the voting interest, is owned by certain of AIMCO's executive officers, including Messrs. Considine and Kompaniez. Although transactions between the Company and the Preferred Stock Subsidiaries are not made on an arms-length basis, the Company believes that such transactions are at fair market value. During 1997, in connection with the NHP Acquisition, the following Management Subsidiaries were formed: AIMCO/NHP Holdings, Inc. ("ANHI"), NHP Management Company ("NHP Management"), AIMCO/NHP Properties, Inc. ("ANPI") and NHP A&R Services, Inc. ("NHPAR"). Mr. Considine acquired 4% of the outstanding stock of each of ANHI, NHP Management, ANPI and NHPAR for $2,526,315, $2,219,776, $17,458 and $1,052,631, respectively, with a total of $5,816,180 financed with loans from the Company or the Management Subsidiaries. Mr. Kompaniez acquired 1% of the outstanding stock of each of ANHI, NHP Management, ANPI and NHPAR for $631,578, $554,944, $4,365 and $263,158, respectively, with a total of $1,454,044 financed with loans from the Company or the Management Subsidiaries. For the year ended December 31, 1997, Messrs. Considine and Kompaniez have received dividends of approximately $1,703,500, $420,700 and $19,550, respectively, on their shares of common stock of the Management Subsidiaries, and the Partnership has received dividends of $40,731,250 on its shares of preferred stock of the Management Subsidiaries. Substantially all of the amounts paid as dividends to Messrs. Considine and Kompaniez were used to pay interest and/or principal due under promissory notes to AIMCO and the Management Subsidiaries. 43 45 TRANSACTIONS WITH THE MANAGEMENT SUBSIDIARIES On May 5, 1997, pursuant to a Stock Purchase Agreement dated as of April 16, 1997, AIMCO acquired 2,866,073 shares of common stock ("NHP Common Stock") of NHP from certain holders (collectively, the "NHP Sellers") in exchange for 2,142,857 shares of AIMCO Class A Common Stock with a recorded value of $57.3 million. Subsequent to the purchase, AIMCO contributed the NHP Common Stock to the Partnership in exchange for additional OP Units. The Company then contributed the NHP Common Stock to ANHI in exchange for all of the shares of ANHI's non-voting preferred stock, representing a 95% economic interest in ANHI. Concurrently, ANHI obtained a loan in the amount of $72.6 million (the "ANHI Credit Facility") and used the proceeds from the loan to purchase an additional 3,630,000 shares of NHP Common Stock from the NHP Sellers. Upon the completion of this transaction, ANHI owned 6,496,073 shares of NHP Common Stock, representing 51.3% of the NHP Common Stock outstanding as of May 31, 1997. In separate transactions, occurring in August and September 1997, ANHI sold to AIMCO 5,717,000 shares of NHP Common Stock for an aggregate purchase price of $114.4 million. ANHI used $74.3 million of the proceeds from the sale to repay the principal and accrued interest outstanding under the ANHI Credit Facility and distributed $40.0 million to the Partnership and its other shareholders. In addition, AIMCO acquired an additional 434,049 shares of NHP Common Stock from the NHP Sellers, bringing the total number of shares of NHP Common Stock owned by AIMCO and ANHI to 6,930,122. As a result of the NHP Merger on December 8, 1997, the outstanding shares of NHP Common Stock, other than the shares owned by ANHI, were converted into the right to receive an aggregate of 4,554,827 shares of AIMCO Class A Common Stock and cash payments of $0.3 million, excluding cash paid to ANHI of $7.8 million. Immediately following the NHP Merger, AIMCO completed the NHP Reorganization, as a result of which the former operations of NHP are now primarily conducted through the Management Subsidiaries. On August 15, 1997, the Company contributed stock of a captive insurance subsidiary to Property Management Services, Inc. ("PAMS Inc.") Messrs. Considine, Kompaniez and Ira made additional capital contributions (in the form of promissory notes) to PAMS Inc. of $133,389, $26,678 and $25,196, respectively ($185,263 in the aggregate), to maintain their aggregate 5% interest in PAMS Inc. (3.6%, 0.72% and 0.68%, respectively). On July 10, 1997, the Partnership acquired a 99% limited partner interest in the Unconsolidated Partnership in exchange for partnership interests in certain limited partnerships formerly owned by NHP, with an aggregate, estimated value of $2,259,000, and an affiliate of Messrs. Considine and Kompaniez acquired a 1% general partner interest in exchange for promissory notes with an aggregate principal amount of $22,590. During 1997, in order to preserve AIMCO's REIT status, AIMCO transferred the following assets to Management Subsidiaries in exchange for non-voting preferred stock: (i) partnership interests with an estimated value of approximately $419,333 to ANPI: (ii) partnership interests with an estimated value of approximately $5,919 to ANHI: (iii) partnership interests, a $50 million promissory note and certain management agreements with an aggregate estimated value of approximately $53.7 million to NHP Management; and (iv) stock of certain corporations with an estimated value of $25 million to NHPAR. On January 31, 1998, AIMCO entered into a Contribution Agreement (the "Contribution Agreement"), with CK Services, Inc. ("CK") and the stockholders of CK to cause certain assets of AIMCO to be contributed to CK and, subject to certain conditions, to distribute all outstanding stock of CK to the stockholders of AIMCO. CK is a corporation wholly-owned by Terry Considine, AIMCO's Chairman and Chief Executive Officer, and Peter Kompaniez, AIMCO's President and Vice Chairman. It is AIMCO's intent to use CK as a vehicle for holding property and performing services that AIMCO is limited or prohibited from holding or providing due to AIMCO's election to be taxed as a REIT. AIMCO is finalizing which assets will be contributed to CK. Any transfer of assets or services to CK will be at market prices and approved by the independent members of the AIMCO Board of Directors, and if market prices are difficult to ascertain, there can be no assurance that the pricing will favor AIMCO. It is anticipated that the assets to be contributed to CK will be immaterial compared to total assets held by AIMCO. 44 46 On July 1, 1998, Messrs. Considine and Kompaniez and AIMCO contributed their stock in PAMS Inc. to NHP Management and Mr. Ira's interest in PAMS, Inc. was redeemed. STOCK PURCHASE LOANS During 1997, AIMCO issued 1,462,735 shares of Class A Common Stock to certain executive officers (or entities controlled by them) for an aggregate purchase price of $34,957,250, which is equal to the aggregate of the closing prices of the Class A Common Stock on the New York Stock Exchange on each date of issuance. In payment for such shares, the executive officers executed notes payable to AIMCO bearing interest at 7.25% per annum, payable quarterly, and due in 2007. These stock purchase notes are secured by the shares purchased and are recourse as to 15% to 33% of the amount borrowed. The following table sets forth the amounts owed under such stock purchase notes:
AMOUNTS HIGHEST AMOUNT REPAID AMOUNT OWED 12/31/97 REPAID DURING 1998 9/30/98 NAME DURING 1997 BALANCE SINCE INCEPTION (AS OF 9/30/98) BALANCE ---- ----------- ----------- --------------- --------------- ----------- Terry Considine....... $23,795,317 $22,020,964 $19,285,816 $5,470,790 $16,550,174 Peter K. Kompaniez.... 7,510,749 4,124,478 7,811,787 0 4,124,478 Steven D. Ira......... 3,068,884 3,052,093 98,539 56,922 2,995,171 Thomas W. Toomey...... 3,212,525 1,363,946 4,473,224 69,500 1,294,446 Harry G. Alcock....... 406,050 404,289 81,012 78,301 325,988 David L. Williams..... 1,578,960 1,568,309 1,578,960 1,568,309 --(1) Troy Butts............ 1,050,008 1,048,619 12,356 10,967 1,037,652 Ty Howard............. 0 0 15,072 15,072 1,432,428
- --------------- (1) Repaid in full in July 1998. MANAGEMENT OF CERTAIN PROPERTIES Mr. Considine has retained the Company to manage two properties owned by his affiliates. These contracts are on similar terms as contracts with other property owners and are terminable upon 30 days notice. During 1997, an aggregate of $105,000 in management fees were paid to the Company for management of these properties. SALE OF HIGH PERFORMANCE UNITS On January 21, 1998, the Partnership sold an aggregate of 15,000 High Performance Units to SMP and to three of AIMCO's non-employee directors, J. Landis Martin, Thomas I. Rhodes and John D. Smith, for an aggregate purchase price of $2,070,000, of which $1,980,300 was paid by SMP and an aggregate of $89,700 was paid by the three non-employee directors of AIMCO. The purchase price of the High Performance Units was determined by the Board of Directors of AIMCO, based upon the advice of an independent valuation expert that this purchase price represented the fair market value of the High Performance Units. The sale of the High Performance Units was ratified by AIMCO stockholders on May 8, 1998. ITEM 8. LEGAL PROCEEDINGS. The Company is a party to various legal actions resulting from its operating activities. These actions are routine litigation and administrative proceedings arising in the ordinary course of business, some of which are covered by liability insurance, and none of which are expected to have a material adverse effect on the consolidated financial condition or results of operations of the Company and its subsidiary, taken as a whole. In connection with the Company's acquisition of interests in limited partnerships that own or manage apartments properties, through tender offers or otherwise, from time to time, the Company is subject to legal actions arising from such activities, including allegations that such activities may involve breaches of fiduciary duties to the limited partners of such partnerships or may violate the relevant partnership agreements. The 45 47 Company policy is to comply with its fiduciary obligations to its limited partners and with the partnership agreements to which it is a party, and does not expect such claims to have a material adverse effect on the consolidated financial conditions or results of operations of the Company and its subsidiaries taken as a whole. ITEM 9. MARKET PRICE OF AND DISTRIBUTIONS ON THE REGISTRANT'S COMMON UNITS AND RELATED UNITHOLDER MATTERS. There is no public market for the OP Units, and the Partnership does not intend to list the OP Units on any securities exchange. In addition, the Partnership Agreement restricts the transferability of OP Units. See "Item 11 -- Description of Registrant's Securities to be Registered -- Transfers and Withdrawals" and a copy of the Partnership Agreement, incorporated herein by reference. The following table sets forth the cash distributions per OP Unit during the years ended December 31, 1996 and 1997, as well as the distributions paid to date for 1998.
YEAR ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ------- ------- ------ 1st Quarter................................................. $0.5625 $0.4625 $0.425 2nd Quarter................................................. $0.5625 $0.4625 $0.425 3rd Quarter................................................. -- $0.4625 $0.425 4th Quarter................................................. -- $0.4625 $0.425
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES. During 1997 and the period from January 1, 1998 through September 30, 1998, the Partnership issued 1.9 million and 0.9 million OP Units, respectively, in transactions to acquire real property or interests in real property. Each of these transactions was exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) thereof or Regulation D thereunder. In addition, during those same time periods, the Partnership issued to AIMCO in exchange for cash, 25,459,000 and 0 OP Units, respectively, 750,000 and 0 Class B Partnership Preferred Units, respectively, 2,400,000 and 0 Class C Partnership Preferred Units, respectively, 0 and 4,200,000 Class D Partnership Preferred Units, respectively, 0 and 4,050,000 Class G Preferred Units, respectively, and 0 and 2,000,000 Class H Preferred Units, respectively. Each of these transactions was also exempt from registration under the Securities Act, pursuant to Section 4(2) thereof or Regulation D thereunder. Finally, in January 1998, the Partnership sold 15,000 High Performance Units to SMP and three non-employee directors of AIMCO. This transaction was also exempt from registration under the Securities Act, pursuant to Section 4(2) thereof or Regulation D thereunder. ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED. PARTNERSHIP UNITS The following description sets forth certain general terms and provisions of the Partnership Units and the Partnership Agreement. The Partnership Agreement is filed as an exhibit to this Form 10 Registration Statement, and this description is qualified in its entirety by the terms of the Partnership Agreement. Following this subsection entitled "Partnership Units" is a section entitled "AIMCO Stock." While the OP Units are the only securities being registered pursuant to this Registration Statement, a description of the AIMCO Stock is included herein to assist readers in a better understanding of the relationship between the Partnership and AIMCO. PURPOSE AND BUSINESS The purpose and nature of the Partnership is to conduct any business, enterprise or activity permitted by or under the Act, including, but not limited to, (i) to conduct the business of ownership, construction, development and operation of multifamily rental apartment communities, (ii) to enter into any partnership, 46 48 joint venture, business trust arrangement, limited liability company or other similar arrangement to engage in any business permitted by or under the Act, or to own interests in any entity engaged in any business permitted by or under the Act, (iii) to conduct the business of providing property and asset management and brokerage services, whether directly or through one or more partnerships, joint ventures, subsidiaries, business trusts, limited liability companies or other similar arrangements, and (iv) to do anything necessary or incidental to the foregoing; provided, however, such business and arrangements and interests may be limited to and conducted in such a manner as to permit AIMCO, in the sole and absolute discretion of the General Partner, at all times to be classified as a REIT. MANAGEMENT BY THE GENERAL PARTNER Except as otherwise expressly provided in the Partnership Agreement, all management powers over the business and affairs of the Partnership are exclusively vested in the General Partner. No limited partner of the Partnership (each, a "Limited Partner") or any other person to whom one or more OP Units have been transferred (each, an "Assignee") will take part in the operations, management or control (within the meaning of the Act) of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. The General Partner may not be removed by the Limited Partners with or without cause, except with the consent of the General Partner. In addition to the powers granted a general partner of a limited partnership under applicable law or that are granted to the General Partner under any other provision of the Partnership Agreement, the General Partner, subject to the other provisions of the Partnership Agreement, has full power and authority to do all things deemed necessary or desirable by it to conduct the business of the Partnership, to exercise all powers of the Partnership and to effectuate the purposes of the Partnership. The Partnership may incur debt or enter into other similar credit, guarantee, financing or refinancing arrangements for any purpose (including, without limitation, in connection with any acquisition of properties) upon such terms as the General Partner determines to be appropriate. The General Partner is authorized to execute, deliver and perform certain agreements and transactions on behalf of the Partnership without any further act, approval or vote of the Partners. Restrictions on General Partner's Authority. The General Partner may not take any action in contravention of the Partnership Agreement. The General Partner may not, without the prior consent of the Limited Partners, undertake, on behalf of the Partnership, any of the following actions or enter into any transaction that would have the effect of such transactions: (i) except as provided in the Partnership Agreement, amend, modify or terminate the Partnership Agreement other than to reflect the admission, substitution, termination or withdrawal of Partners; (ii) make a general assignment for the benefit of creditors or appoint or acquiesce in the appointment of a custodian, receiver or trustee for all or any part of the assets of the Partnership; (iii) institute any proceeding for bankruptcy on behalf of the Partnership; or (iv) subject to certain exceptions, approve or acquiesce to the transfer of the partnership interest of the General Partner, or admit into the Partnership any additional or successor General Partners. Additional Limited Partners. The General Partner is authorized to admit additional Limited Partners to the Partnership from time to time, on terms and conditions and for such capital contributions as may be established by the General Partner in its reasonable discretion. The net capital contribution need not be equal for all Partners. No action or consent by the Limited Partners is required in connection with the admission of any additional Limited Partner. The General Partner is expressly authorized to cause the Partnership to issue additional interests (i) upon the conversion, redemption or exchange of any debt, OP Units or other securities issued by the Partnership, (ii) for less than fair market value, so long as the General Partner concludes in good faith that such issuance is in the best interests of the General Partner and the Partnership, and (iii) in connection with any merger of any other entity into the Partnership if the applicable merger agreement provides that persons are to receive interests in the Partnership in exchange for their interests in the entity merging into the Partnership. Subject to Delaware law, any additional partnership interests may be issued in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties as shall be determined by the General Partner, in its sole and absolute discretion without the approval of any Limited Partner, and set forth in a written document thereafter attached to and made an exhibit to the Agreement. Without limiting the generality of the foregoing, the General Partner shall have authority to specify (a) the allocations of items of 47 49 partnership income, gain, loss, deduction and credit to each such class or series of partnership interests; (b) the right of each such class or series of partnership interests to share in Partnership distributions; (c) the rights of each such class or series of partnership interests upon dissolution and liquidation of the Partnership; (d) the voting rights, if any, of each such class or series of partnership interests; and (e) the conversion, redemption or exchange rights applicable to each such class or series of partnership interests. Preferred Units are interests in the Partnership that have distribution rights, or rights upon liquidation, winding up or dissolution, that are superior or prior to the OP Units. No Person will be admitted as an additional Limited Partner without the consent of the General Partner, which consent may be given or withheld in the General Partner's sole and absolute discretion. CLASS B PARTNERSHIP PREFERRED UNITS On August 4, 1997, in connection with AIMCO's issuance of 750,000 shares of Class B Cumulative Convertible Preferred Stock, par value $.01 per share ("Class B Preferred Stock"), the Partnership issued 750,000 Class B Partnership Preferred Units (the "Class B Partnership Preferred Units") to the Special Limited Partner. The terms of the Class B Partnership Preferred Units are substantially the same as the terms of the Class B Preferred Stock. The Class B Partnership Preferred Units entitle the Special Limited Partner to receive preferred quarterly cash distributions of $1.78125 per unit or, if greater, the distributions then payable on OP Units into which such Class B Partnership Preferred Units are convertible. On or after August 4, 1998, upon the conversion of Class B Preferred Stock into AIMCO Class A Stock, a number of Class B Partnership Preferred Units equal to the number of shares of Class B Preferred Stock so converted will be converted into OP Units. The number of OP Units issued upon conversion of Class B Partnership Preferred Units is determined by dividing the Class B Partnership Preferred Unit's liquidation preference of $100 per unit by $30.45. In addition, each Class B Partnership Preferred Unit has a priority in liquidation equal to $100 per unit plus an amount equal to the accumulated, accrued and unpaid dividends on a share of Class B Preferred Stock. CLASS C PARTNERSHIP PREFERRED UNITS On December 23, 1997, in connection with AIMCO's issuance of 2,400,000 shares of Class C Cumulative Preferred Stock, par value $.01 per share ("Class C Preferred Stock"), the Partnership issued 2,400,000 Class C Partnership Preferred Units (the "Class C Partnership Preferred Units") to the Special Limited Partner. The terms of the Class C Partnership Preferred Units are substantially the same as the terms of the Class C Preferred Stock. The Class C Partnership Preferred Units entitle the Special Limited Partner to receive preferred quarterly cash distributions of $0.5625 per unit ($2.25 per annum). In addition, each Class C Partnership Preferred Unit has a priority in liquidation equal to $25 per unit plus an amount equal to the accumulated, accrued and unpaid dividends on a share of Class C Preferred Stock. CLASS D PARTNERSHIP PREFERRED UNITS On February 19, 1998, in connection with AIMCO's issuance of 4,200,000 shares of Class D Cumulative Preferred Stock, par value $.01 per share ("Class D Preferred Stock"), the Partnership issued 4,200,000 Class D Partnership Preferred Units (the "Class D Partnership Preferred Units") to the Special Limited Partner. The terms of the Class D Partnership Preferred Units are substantially the same as the terms of the Class D Preferred Stock. The Class D Partnership Preferred Units entitle the Special Limited Partner to receive preferred quarterly cash distributions of $0.546875 per unit ($2.1875 per annum). In addition, each Class D Partnership Preferred Unit has a priority in liquidation equal to $25 per unit plus an amount equal to the accumulated, accrued and unpaid dividends on a share of Class D Preferred Stock. CLASS E PARTNERSHIP PREFERRED UNITS In connection with the Insignia Merger, AIMCO will issue up to 8,945,921 shares of Class E Preferred Stock. AIMCO will contribute assets formerly held by Insignia to the Partnership in exchange for Class E Partnership Preferred Units issued to the Special Limited Partner. The terms of the Class E Partnership Preferred Units are substantially the same as the terms of the Class E Preferred Stock. The Class E 48 50 Partnership Preferred Units entitle the Special Limited Partner to receive preferred quarterly distributions equal (on a per unit basis) to the dividends paid on the AIMCO Class A Common Stock (on a per share basis), and a special distribution of $50 million in the aggregate. Upon payment of the special distribution, the Class E Partnership Preferred Units automatically convert into an equal number of OP Units. Each Class E Partnership Preferred Unit has a priority in liquidation equal to $1.00 per unit plus an amount equal to the accumulated, accrued and unpaid dividends on a share of Class E Preferred Stock. In addition, the convertible note issued by the Partnership to the Special Limited Partner in connection with AIMCO's October 1, 1998 assumption of 6 1/2% convertible debentures is convertible into Class E Preferred Units at a price of $57.21 per unit. CLASS G PARTNERSHIP PREFERRED UNITS On July 15, 1998, in connection with AIMCO's issuance of 4,050,000 shares of Class G Cumulative Preferred Stock, par value $.01 per share (the "Class G Preferred Stock"), the Partnership issued 4,050,000 Class G Partnership Preferred Units (the "Class G Partnership Preferred Units") to the Special Limited Partner. The terms of the Class G Partnership Preferred Units are substantially the same as the terms of the Class G Preferred Stock. The Class G Partnership Preferred Units entitle the Special Limited Partner to receive preferred quarterly cash distributions of $0.5859375 per unit ($2.34375 per annum). In addition, each Class G Partnership Preferred Unit has a priority in liquidation equal to $25 per unit plus an amount equal to the accumulated, accrued and unpaid dividends on a share of Class G Preferred Stock. CLASS H PARTNERSHIP PREFERRED UNITS On August 14, 1998, in connection with AIMCO's issuance of 2,000,000 shares of Class H Cumulative Preferred Stock, par value $.01 per share ("Class H Preferred Stock"), the Partnership issued 2,000,000 Class H Partnership Preferred Units to the Special Limited Partner. The terms of the Class H Partnership Preferred Units are substantially the same as the Class H Preferred Stock. The Class H Partnership Units entitle the Special Limited Partner to receive quarterly cash distributions of $0.59375 per unit ($2.375 per annum). In addition, each Class H Partnership Preferred Unit has a priority in liquidation equal to $25 per unit plus an amount equal to the accumulated, accrued and unpaid dividends on a share of Class H Preferred Stock. HIGH PERFORMANCE UNITS In January 1998, the Partnership sold an aggregate of 15,000 High Performance Units to SMP and to three of AIMCO's non-employee directors, Messrs. Martin, Rhodes and Smith. Holders of High Performance Units have no rights to receive distributions or allocations of income or loss, or to redeem their High Performance Units prior to the date (the "Valuation Date") that is the earlier of (i) January 1, 2001, or (ii) the date on which a change of control (as defined in the Partnership Agreement) occurs. If, on the Valuation Date, the cumulative Total Return of the Class A Common Stock from January 1, 1998 to the Valuation Date (the "Measurement Period") exceeds 115% of the cumulative Total Return (as defined below) of a peer group index over the same period, and is at least the equivalent of a 30% cumulative Total Return over three years (the "Minimum Return"), then, on and after the Valuation Date, holders of the 15,000 High Performance Units will be entitled to receive distributions and allocations of income and loss from the Partnership in the same amounts and at the same times (subject to certain exceptions upon liquidation of the Partnership) as would holders of a number of OP Units equal to the quotient obtained by dividing (i) the product of (A) 15% of the amount by which the cumulative Total Return of the Class A Common Stock over the Measurement Period exceeds the greater of 115% of the peer group index or the Minimum Return, multiplied by (B) the weighted average market value of AIMCO's equity capitalization (including Class A Common Stock and OP Units) by (ii) the market value of one share of Class A Common Stock on the Valuation Date. If, on the Valuation Date, the cumulative Total Return of the Class A Common Stock does not satisfy these criteria, then, on and after the Valuation Date, holders of the 15,000 High Performance Units will be entitled to receive distributions and allocations of income and loss from the Partnership in the same amounts and at the same times (subject to certain exceptions upon a liquidation of 49 51 the Partnership) as would holders of 150 OP Units. For purposes of determining the market value of Class A Common Stock or OP Units as of any date, the average closing price of the Class A Common Stock for the 20 trading days immediately preceding such date is used. It is expected that the Morgan Stanley REIT Index, a capitalization-weighted index with dividends reinvested of the most actively traded real estate investment trusts, will be used as the peer group index for purposes of the High Performance Units. "Total Return" means, for any security and for any period, the cumulative total return for such security over such period, as measured by (i) the sum of (a) the cumulative amount of dividends paid in respect of such security for such period (assuming that all cash dividends are reinvested in such security as of the payment date for such dividend based on the security price on the dividend payment date), and (b) an amount equal to (x) the security price at the end of such period, minus (y) the security price at the beginning of such period, divided by (ii) the security price at the beginning of the measurement period; provided, however, that if the foregoing calculation results in a negative number, the "Total Return" shall be equal to zero. Upon the occurrence of a change of control, any holder of High Performance Units may, subject to certain restrictions, require the Partnership to redeem all or a portion of the High Performance Units held by such party in exchange for a cash payment per unit equal to the market value of a share of Class A Common Stock at the time of redemption. However, in the event that any High Performance Units are tendered for redemption, the Partnership's obligation to pay the redemption price is subject to the prior right of AIMCO to acquire such High Performance Units in exchange for an equal number of shares of Class A Common Stock (subject to certain adjustments). DISTRIBUTIONS Subject to the rights of holders of any outstanding Preferred Units, the Partnership Agreement requires the General Partner to cause the Partnership to distribute quarterly all, or such portion as the General Partner may in its sole and absolute discretion determine, of Available Cash (as defined in the Partnership Agreement) generated by the Partnership during such quarter to the General Partner, the Special Limited Partner and the holders of OP Units ("Unitholders") on the record date established by the General Partner with respect to such quarter, in accordance with their respective interests in the Partnership on such record date. Holders of any Preferred Units issued in the future may have priority over the General Partner, the Special Limited Partner and holders of OP Units with respect to distributions of Available Cash, distributions upon liquidation or other distributions. Distributions payable with respect to any interest in the Partnership that was not outstanding during the entire quarterly period in respect of which any distribution is made will be prorated based on the portion of the period that such interest was outstanding. The General Partner in its sole and absolute discretion may distribute to the Limited Partners Available Cash on a more frequent basis and provide for an appropriate record date. The Partnership Agreement requires the General Partner to take such reasonable efforts, as determined by it in its sole and absolute discretion and consistent with AIMCO's qualification as a REIT, to cause the Partnership to distribute sufficient amounts to enable the General Partner to transfer funds to AIMCO and enable AIMCO to pay stockholder dividends that will (i) satisfy the requirements (the "REIT Requirements") for qualifying as a REIT under the Code, and the applicable Treasury regulations promulgated under the Code, as amended from time to time (the "Regulations") and (ii) avoid any federal income or excise tax liability of AIMCO. While certain of the debt instruments to which the Partnership is a party, including, but not limited to, the aforementioned BOA Credit Facility and the WMF Credit Facility, contain restrictions on the payment of distributions to unitholders of the Partnership, the debt instruments allow the Partnership to distribute sufficient amounts to enable the General Partner to transfer funds to AIMCO which are then used to pay stockholder dividends thereby allowing AIMCO to maintain its status as a REIT under the Code. Distributions in Kind. No Unitholder has any right to demand or receive property other than cash as provided in the Partnership Agreement. The General Partner may determine, in its sole and absolute discretion, to make a distribution in kind of Partnership assets to the Unitholders, and such assets will be 50 52 distributed in such a fashion as to ensure that the fair market value is distributed and allocated in accordance with the Partnership Agreement. Distributions Upon Liquidation. Subject to the rights of holders of any outstanding Preferred Units, net proceeds from the sale or other disposition of all or substantially all of the assets of the Partnership or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the assets of the Partnership (a "Terminating Capital Transaction"), and any other cash received or reductions in reserves made after commencement of the liquidation of the Partnership, will be distributed to the Unitholders in accordance with the Partnership Agreement. Restricted Distributions. The Partnership Agreement prohibits the Partnership and the General Partner, on behalf of the Partnership, from making a distribution to any Unitholder on account of its interest in OP Units if such distribution would violate Section 17-607 of the Act or other applicable law. High Performance Units. On and after the Valuation Date, holders of High Performance Units may be entitled to receive distributions in accordance with the terms of the High Performance Units. See "-- High Performance Units." ALLOCATIONS OF NET INCOME AND NET LOSS OP Units. Net Income (as defined in the Partnership Agreement) and Net Loss (as defined in the Partnership Agreement) of the Partnership will be determined and allocated with respect to each fiscal year of the Partnership as of the end of each such year. Except as otherwise provided in the Partnership Agreement, an allocation to a Unitholder of a share of Net Income or Net Loss will be treated as an allocation of the same share of each item of income, gain, loss or deduction that is taken into account in computing Net Income or Net Loss. Except as otherwise provided in the Partnership Agreement and subject to the terms of any outstanding Preferred Units, Net Income and Net Loss will be allocated to the holders of OP Units in accordance with their respective OP Units at the end of each fiscal year. The Partnership Agreement contains provisions for special allocations intended to comply with certain regulatory requirements, including the requirements of Regulations Sections 1.704-1(b) and 1.704-2. Except as otherwise provided in the Partnership Agreement and subject to the terms of any outstanding Partnership Preferred Units, for income tax purposes under the Code and the Regulations, each Partnership item of income, gain, loss and deduction will be allocated among the Unitholders in the same manner as its correlative item of "book" income, gain, loss or deduction is allocated pursuant to the Agreement. Preferred Units. With respect to the Preferred Units, gross income and, if necessary, gain will be allocated to the holders of the Preferred Units for any fiscal year (and, if necessary, subsequent fiscal years) to the extent that the holders of the Preferred Units receive a distribution on any Preferred Units (other than an amount included in any redemption of Preferred Units). If any Preferred Units are redeemed, for the fiscal year that includes such redemption (and, if necessary, for subsequent fiscal years) (i) gross income and gain (in such relative proportions as the General Partner in its discretion will determine) will be allocated to the holders of such class of Preferred Units to the extent that the redemption amounts paid or payable with respect to the Preferred Units so redeemed exceeds the aggregate capital contributions (net of liabilities assumed or taken subject to by the Partnership) per Preferred Unit allocable to the Preferred Units so redeemed and (ii) deductions and losses (in such relative proportions as the General Partner in its discretion will determine) will be allocated to the holders of such class of Preferred Units to the extent that the aggregate Capital Contributions (net of liabilities assumed or taken subject to by the Partnership) per Preferred Unit allocable to the Preferred Units so redeemed exceeds the redemption amount paid or payable with respect to the Preferred Units so redeemed. High Performance Units. On and after the Valuation Date, holders of High Performance Units may be allocated income and loss in accordance with the terms of the High Performance Units. See "-- High Performance Units." 51 53 WITHHOLDING The Partnership is authorized to withhold from or pay on behalf of or with respect to each Limited Partner any amount of federal, state, local or foreign taxes that the General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to the Partnership Agreement. RETURN OF CAPITAL No Partner ("Partner" means the General Partner or Limited Partner, and "Partners" means the General Partner and the Limited Partners) is entitled to interest on its capital contribution or on such Partner's Capital Account. Except (i) pursuant to the rights of Redemption set forth in the Agreement, (ii) as provided by law, or (iii) pursuant to the terms of any outstanding Preferred Units, no Partner has any right to demand or receive the withdrawal or return of its capital contribution from the Partnership, except to the extent of distributions made pursuant to the Partnership Agreement or upon termination of the Partnership. Except to the extent otherwise expressly provided in the Partnership Agreement and subject to the terms of any outstanding Preferred Units, no Limited Partner or Assignee will have priority over any other Limited Partner or Assignee either as to the return of capital contributions or as to profits, losses or distributions. REDEMPTION RIGHTS OF QUALIFYING PARTIES After the first anniversary of becoming a holder of OP Units, each Unitholder and certain Assignees have the right, subject to the terms and conditions set forth in the Partnership Agreement, to require the Partnership to redeem all or a portion of the OP Units held by such party in exchange for shares of AIMCO Class A Common Stock or a cash amount based on the value of shares of AIMCO Class A Common Stock, at the Partnership's option (a "Redemption"). See Section 8.6 of the Partnership Agreement. The Partnership may, in its sole and absolute discretion but subject to the restrictions on the ownership of AIMCO Class A Common Stock imposed under AIMCO's Charter and the transfer restrictions and other limitations thereof, elect to cause AIMCO to acquire some or all of the tendered OP Units from the tendering party in exchange for AIMCO Class A Common Stock, based on an exchange ratio of one share of AIMCO Class A Common Stock for each OP Unit, subject to adjustment as provided in the Partnership Agreement. The Partnership Agreement does not obligate AIMCO or the General Partner to register, qualify or list any AIMCO Class A Common Stock issued in exchange for OP Units with the Securities and Exchange Commission, with any state securities commissioner, department or agency, or with any stock exchange. AIMCO Class A Common Stock issued in exchange for OP Units pursuant to the Partnership Agreement will contain legends regarding restrictions under the Securities Act and applicable state securities laws as AIMCO in good faith determines to be necessary or advisable in order to ensure compliance with securities laws. In the event of a change of control, holders of High Performance Units will have the same redemption rights as holders of OP Units. See "-- High Performance Units." PARTNERSHIP RIGHT TO CALL LIMITED PARTNER INTERESTS Notwithstanding any other provision of the Partnership Agreement, on and after the date on which the aggregate percentage interests of the Limited Partners, other than the Special Limited Partner, are less than one percent (1%), the Partnership will have the right, but not the obligation, from time to time and at any time to redeem any and all outstanding Limited Partner interests (other than the Special Limited Partner's interest) by treating any Limited Partner as if such Limited Partner had tendered for Redemption pursuant to the Partnership Agreement the amount of OP Units specified by the General Partner, in its sole and absolute discretion, by notice to the Limited Partner. TRANSFERS AND WITHDRAWALS Restrictions on Transfer. The Partnership Agreement restricts the transferability of OP Units. Any transfer or purported transfer of an OP Unit not made in accordance with the Partnership Agreement will be null and void ab initio. Until the expiration of one year from the date on which a Unitholder acquired 52 54 OP Units, subject to certain exceptions, such Unitholder may not transfer all or any portion of its OP Units to any transferee without the consent of the General Partner, which consent may be withheld in its sole and absolute discretion. After the expiration of one year from the date on which a Unitholder acquired OP Units, such Unitholder has the right to transfer all or any portion of its OP Units to any person, subject to the satisfaction of certain conditions specified in the Partnership Agreement, including the General Partner's right of first refusal. It is a condition to any transfer (whether or not such transfer is effected before or after the one year holding period) that the transferee assumes by operation of law or express agreement all of the obligations of the transferor Limited Partner under the Partnership Agreement with respect to such OP Units, and no such transfer (other than pursuant to a statutory merger or consolidation wherein all obligations and liabilities of the transferor Partner are assumed by a successor corporation by operation of law) will relieve the transferor Partner of its obligations under the Partnership Agreement without the approval of the General Partner, in its sole and absolute discretion. In connection with any transfer of OP Units, the General Partner will have the right to receive an opinion of counsel reasonably satisfactory to it to the effect that the proposed transfer may be effected without registration under the Securities Act and will not otherwise violate any federal or state securities laws or regulations applicable to the Partnership or the OP Units transferred. No transfer by a Limited Partner of its OP Units (including any Redemption or any acquisition of OP Units by the General Partner or by the Partnership) may be made to any person if (i) in the opinion of legal counsel for the Partnership, it would result in the Partnership being treated as an association taxable as a corporation, or (ii) such transfer is effectuated through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704 of the Code. Substituted Limited Partners. No Limited Partner will have the right to substitute a transferee as a Limited Partner in its place. A transferee of the interest of a Limited Partner may be admitted as a substituted Limited Partner only with the consent of the General Partner, which consent may be given or withheld by the General Partner in its sole and absolute discretion. If the General Partner, in its sole and absolute discretion, does not consent to the admission of any permitted transferee as a substituted Limited Partner, such transferee will be considered an Assignee for purposes of the Partnership Agreement. An Assignee will be entitled to all the rights of an assignee of a limited partnership interest under the Act, including the right to receive distributions from the Partnership and the share of Net Income, Net Losses and other items of income, gain, loss, deduction and credit of the Partnership attributable to the OP Units assigned to such transferee and the rights to transfer the OP Units provided in the Partnership Agreement, but will not be deemed to be a holder of OP Units for any other purpose under the Partnership Agreement, and will not be entitled to effect a consent or vote with respect to such OP Units on any matter presented to the Limited Partners for approval (such right to consent or vote, to the extent provided in the Partnership Agreement or under the Act, fully remaining with the transferor Limited Partner). Withdrawals. No Limited Partner may withdraw from the Partnership other than as a result of a permitted transfer of all of such Limited Partner's OP Units in accordance with the Partnership Agreement, with respect to which the transferee becomes a substituted Limited Partner, or pursuant to a Redemption (or acquisition by AIMCO) of all of such Limited Partner's OP Units. Restrictions on General Partner. The General Partner may not transfer any of its General Partner Interest or withdraw from the Partnership unless (i) the Limited Partners consent or (ii) immediately after a merger of the General Partner into another entity, substantially all of the assets of the surviving entity, other than the General Partner Interest held by the General Partner, are contributed to the Partnership as a capital contribution in exchange for OP Units. ISSUANCE OF AIMCO CAPITAL STOCK BY AIMCO Pursuant to the Agreement, upon the issuance of AIMCO capital stock, AIMCO is generally obligated to contribute the cash proceeds or other consideration received from such issuance to the Partnership in exchange for, in the case of AIMCO Class A Common Stock, OP Units, or in the case of an issuance of AIMCO Preferred Stock, Preferred Units with designations, preferences and other rights, terms and 53 55 provisions that are substantially the same as the designations, preferences and other rights, terms and provisions of such preferred stock. DILUTION The General Partner has the power, without the consent of the Limited Partners, to cause the Partnership to issue OP Units and Preferred Units. Any such issuance may dilute the interests of existing Limited Partners. In addition, the terms of the Preferred Units entitle the Unitholder to receive preferential distributions of cash and a priority in liquidation, as well as certain class voting rights. AMENDMENT OF THE PARTNERSHIP AGREEMENT By the General Partner Without the Consent of the Limited Partners. The General Partner has the power, without the consent of the Limited Partners, to amend the Partnership Agreement as may be required to facilitate or implement any of the following purposes: (1) to add to the obligations of the General Partner or surrender any right or power granted to the General Partner or any affiliate of the General Partner for the benefit of the Limited Partners; (2) to reflect the admission, substitution or withdrawal of Partners or the termination of the Partnership in accordance with the Partnership Agreement; (3) to reflect a change that is of an inconsequential nature and does not adversely affect the Limited Partners in any material respect, or to cure any ambiguity, correct or supplement any provision in the Partnership Agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under the Partnership Agreement that will not be inconsistent with law or with the provisions of the Partnership Agreement; (4) to satisfy any requirements, conditions or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law; (5) to reflect such changes as are reasonably necessary for AIMCO to maintain its status as a REIT; and (6) to modify the manner in which capital accounts are computed (but only to the extent set forth in the definition of "Capital Account" in the Partnership Agreement or contemplated by the Code or the Regulations). With the Consent of the Limited Partners. With the exception of the circumstances described above whereby the General Partner may, without the consent of the Limited Partners, amend the Partnership Agreement, amendments to the Partnership Agreement require the Limited Partners' consent. Amendments to the Partnership Agreement may be proposed by the General Partner or by holders of a majority of the outstanding OP Units, excluding the Special Limited Partner (a "Majority in Interest"). Following such proposal, the General Partner will submit any proposed amendment to the Limited Partners. The General Partner will seek the written consent of the Limited Partners on the proposed amendment or will call a meeting to vote thereon and to transact any other business that the General Partner may deem appropriate. For purposes of obtaining a written consent, the General Partner may require a written response within a reasonable specified time, but not less than fifteen (15) days, and failure to respond in such time period shall constitute a consent that is consistent with the General Partner's recommendation with respect to the proposal, provided, however, that an action shall become effective at such time as requisite consents are received even if prior to such specified time. PROCEDURES FOR ACTIONS AND CONSENTS OF PARTNERS Meetings of the Partners may be called by the General Partner and will be called upon the receipt by the General Partner of a written request by a Majority in Interest of the Limited Partners. Notice of any such meeting will be given to all Partners not less than seven (7) days nor more than thirty (30) days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Each meeting of Partners will be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate in its sole and absolute discretion. Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by Partners holding a majority of outstanding OP Units (or such other percentage as is expressly required by the Agreement for the action in question). Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of the Partners holding a majority of outstanding OP Units (or such other percentage 54 56 as is expressly required by the Agreement for the action in question). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified. RECORDS AND ACCOUNTING; FISCAL YEAR The Partnership Agreement requires the General Partner to keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership's business. The books of the Partnership will be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with generally accepted accounting principles, or on such other basis as the General Partner determines to be necessary or appropriate. To the extent permitted by sound accounting practices and principles, the Partnership, the General Partner and AIMCO may operate with integrated or consolidated accounting records, operations and principles. The fiscal year of the Partnership is the calendar year. REPORTS As soon as practicable, but in no event later than one hundred and five (105) days after the close of each calendar quarter and each Fiscal Year, the General Partner will cause to be mailed to each Limited Partner, of record as of the last day of the calendar quarter or as of the close of the Fiscal Year, as the case may be, a report containing financial statements of the Partnership, or of AIMCO if such statements are prepared solely on a consolidated basis with AIMCO, for such calendar quarter or Fiscal Year, as the case may be, presented in accordance with generally accepted accounting principles, and such other information as may be required by applicable law or regulation or as the General Partner determines to be appropriate. Statements included in quarterly reports are not audited. Statements included in annual reports are audited by a nationally recognized firm of independent public accountants selected by the General Partner. TAX MATTERS PARTNER The General Partner is the "tax matters partner" of the Partnership for federal income tax purposes. The tax matters partner is authorized, but not required, to take certain actions on behalf of the Partnership with respect to tax matters. In addition, the General Partner will arrange for the preparation and timely filing of all returns with respect to the Partnership's income, gains, deductions, losses and other items required of the Partnership for federal and state income tax purposes and will use all reasonable effort to furnish, within ninety (90) days of the close of each taxable year, the tax information reasonably required by Limited Partners for federal and state income tax reporting purposes. The Limited Partners will promptly provide the General Partner with such information as may be reasonably requested by the General Partner from time to time. DISSOLUTION AND WINDING UP Dissolution. The Partnership will dissolve, and its affairs will be wound up, upon the first to occur of any of the following (each a "Liquidating Event") (i) December 31, 2093; (ii) an event of withdrawal, as defined in the Act (including, without limitation, bankruptcy"), of the sole General Partner unless, within ninety (90) days after the withdrawal, a "majority in interest" (as such phrase is used in Section 17-801(3) of the Act) of the remaining Partners agree in writing, in their sole and absolute discretion, to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a successor General Partner; (iii) an election to dissolve the Partnership made by the General Partner in its sole and absolute discretion, with or without the consent of the Limited Partners; (iv) entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act; (v) the occurrence of a Terminating Capital Transaction; or (vi) the Redemption (or acquisition by AIMCO, the General Partner and/or the Special Limited Partner) of all OP Units other than OP Units held by the General Partner or the Special Limited Partner. Winding Up. Upon the occurrence of a Liquidating Event, the Partnership will continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets and satisfying the claims of its creditors and Partners. The General Partner (or, in the event that there is no remaining General Partner or the General Partner has dissolved, become bankrupt within the meaning of the Act or ceased to operate, any 55 57 Person elected by a Majority in Interest of the Limited Partners) will be responsible for overseeing the winding up and dissolution of the Partnership and will take full account of the Partnership's liabilities and property, and the Partnership's property will be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the General Partner, include AIMCO Stock) will be applied and distributed in the following order: (i) first, to the satisfaction of all of the Partnership's debts and liabilities to creditors other than the Partners and their Assignees (whether by payment or the making of reasonable provision for payment thereof); (ii) second, to the satisfaction of all the Partnership's debts and liabilities to the General Partner (whether by payment or the making of reasonable provision for payment thereof), including, but not limited to, amounts due as reimbursements under the Partnership Agreement; (ii) third, to the satisfaction of all of the Partnership's debts and liabilities to the other Partners and any Assignees (whether by payment or the making of reasonable provision for payment thereof); (iv) fourth, to the satisfaction of all liquidation preferences of outstanding Partnership Preferred Units, if any, and (v) the balance, if any, to the General Partner, the Limited Partners and any Assignees in accordance with and in proportion to their positive capital account balances, after giving effect to all contributions, distributions and allocations for all periods. AIMCO STOCK While AIMCO capital stock is not being registered pursuant to this Registration Statement, OP Units are, subject to certain conditions, redeemable at the option of the Unitholder, and AIMCO may elect to issue shares of Class A Common Stock for any such redemption. See "Partnership Units -- Redemption Rights of Qualifying Parties." Accordingly, a description of the AIMCO capital stock is included herein to assist readers in a better understanding of the relationship between the Partnership and AIMCO. GENERAL AIMCO's Charter authorizes the issuance of up to 510,750,000 shares of capital stock with a par value of $.01 per share, of which 486,027,500 shares were classified as Class A Common Stock and 262,500 shares were classified as Class B Common Stock as of October 1, 1998 (the Class A Common Stock and the Class B Common Stock are collectively referred to as the "Common Stock"). As of September 30, 1998, there were 47,987,092 shares of Class A Common Stock issued and outstanding and 162,500 shares of Class B Common Stock issued and outstanding. In addition, up to 150,000 shares of Class A Common Stock have been reserved for issuance under AIMCO's 1994 Stock Option Plan, up to 500,000 shares of Class A Common Stock have been reserved for issuance under AIMCO's 1996 Stock Award and Incentive Plan, and up to 500,000 shares of Class A Common Stock have been reserved for issuance under AIMCO's Non-Qualified Stock Option Plan. Under AIMCO's 1997 Stock Plan, AIMCO may issue up to 20,000,000 shares of Common Stock. The Class A Common Stock is traded on the NYSE under the symbol "AIV." BankBoston, N.A. serves as transfer agent and registrar of the Class A Common Stock. In addition, AIMCO's Charter authorizes the issuance of up to 24,460,000 shares of preferred stock with a par value of $.01 per share, of which 750,000 shares are classified as Class B Preferred Stock, all of which are issued and outstanding, 2,760,000 shares are classified as Class C Preferred Stock, of which 2,400,000 shares are issued and outstanding, 4,600,000 shares are classified as Class D Preferred Stock, of which 4,200,000 shares are issued and outstanding, 10,000,000 shares are classified as Class E Preferred Stock, of which up to 8,945,921 shares are expected to be issued pursuant to the Insignia merger, 4,050,000 shares are classified as Class G Preferred Stock, all of which are issued and outstanding, and 2,300,000 shares are classified as Class H Preferred Stock, of which 2,000,000 shares are issued and outstanding. AIMCO's Board of Directors, by resolution or resolutions, may from time to time classify and reclassify any unissued shares of capital stock by setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares of capital stock, including but not limited to, ownership restrictions with respect to each class or subclass of capital stock, and the number of shares constituting each class or subclass, and to increase or decrease the number of shares of any such class or subclass. 56 58 CLASS A COMMON STOCK Holders of the Class A Common Stock are entitled to receive dividends, when and as declared by the Board of Directors, out of funds legally available therefor. The holders of shares of Class A Common Stock, upon any liquidation, dissolution or winding up of AIMCO, are entitled to receive ratably any assets remaining after payment in full of all liabilities of AIMCO and the liquidation preferences of preferred stock. The shares of Class A Common Stock possess ordinary voting rights for the election of Directors and in respect of other corporate matters, each share entitling the holder thereof to one vote. Holders of shares of Class A Common Stock do not have cumulative voting rights in the election of Directors, which means that holders of more than 50% of the shares of Class A Common Stock voting for the election of Directors can elect all of the Directors if they choose to do so and the holders of the remaining shares cannot elect any Directors. Holders of shares of Class A Common Stock do not have preemptive rights, which means they have no right to acquire any additional shares of Class A Common Stock that may be issued by AIMCO at a subsequent date. RESTRICTIONS ON TRANSFER For AIMCO to qualify as a REIT under the Code, not more than 50% in value of its outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year and the shares of common stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. For purposes of calculating the amount of stock owned by a given individual, the individual's Common Stock and OP Units are aggregated. Because the Board of Directors believes that it is essential for AIMCO to continue to qualify as a REIT and to provide additional protection for AIMCO's stockholders in the event of certain transactions, the Board of Directors has adopted, and the stockholders have approved, provisions of AIMCO's Charter restricting the acquisition of shares of Common Stock. Subject to certain exceptions specified in AIMCO's Charter, no holder may own, or be deemed to own by virtue of various attribution and constructive ownership provisions of the Code and Rule 13d-3 under the Exchange Act, more than 8.7% (or 15% in the case of certain pension trusts described in the Code, investment companies registered under the Investment Company Act of 1940 and Mr. Considine) of the outstanding shares of Common Stock. For purposes of calculating the amount of stock owned by a given individual, the individual's Common Stock and OP Units are aggregated. The Board of Directors may waive the Ownership Limit if evidence satisfactory to the Board of Directors and AIMCO's tax counsel is presented that such ownership will not then or in the future jeopardize AIMCO's status as a REIT. However, in no event may such holder's direct or indirect ownership of Common Stock exceed 9.8% of the total outstanding shares of Common Stock. As a condition of such waiver, the Board of Directors may require opinions of counsel satisfactory to it and/or an undertaking from the applicant with respect to preserving the REIT status of AIMCO. The foregoing restrictions on transferability and ownership will not apply if the Board of Directors determines that it is no longer in the best interests of AIMCO to attempt to qualify, or to continue to quality as a REIT and a resolution terminating AIMCO's status as a REIT and amending AIMCO's Charter to remove the foregoing restrictions is duly adopted by the Board of Directors and a majority of AIMCO's stockholders. If shares of Common Stock in excess of the Ownership Limit, or shares of Common Stock that would cause the REIT to be beneficially owned by fewer than 100 persons, or which would result in AIMCO being "closely held," within the meaning of Section 856(h) of the Code, or which would otherwise result in AIMCO failing to qualify as a REIT, are issued or transferred to any person, such issuance or transfer shall be null and void to the intended transferee, and the intended transferee would acquire no rights to the stock. Shares of Common Stock transferred in excess of the Ownership Limit or other applicable limitations will automatically be transferred to a trust for the exclusive benefit of one or more qualifying charitable organizations to be designated by AIMCO. Shares transferred to such trust will remain outstanding, and the trustee of the trust will have all voting and dividend rights pertaining to such shares. The trustee of such trust may transfer such shares to a person whose ownership of such shares does not violate the Ownership Limit or other applicable limitation. Upon a sale of such shares by the trustee, the interest of the charitable beneficiary will terminate, and the sales proceeds would be paid, first, to the original intended transferee, to the extent of the lesser of (a) such transferee's original purchase price (or the original market value of such shares if 57 59 purportedly acquired by gift or devise) and (b) the price received by the trustee, and, second, any remainder to the charitable beneficiary. In addition, shares of stock held in such trust are purchasable by AIMCO for a 90-day period at a price equal to the lesser of the price paid for the stock by the original intended transferee (or the original market value of such shares if purportedly acquired by gift or devise) and the market price for the stock on the date that AIMCO determines to purchase the stock. The 90-day period commences on the date of the violative transfer or the date that the Board of Directors determines in good faith that a violative transfer has occurred, whichever is later. All certificates representing shares of Common Stock bear a legend referring to the restrictions described above. All persons who own, directly or by virtue of the attribution provisions of the Code and Rule 13d-3 under the Exchange Act, more than a specified percentage of the outstanding shares of Common Stock must file an affidavit with AIMCO containing the information specified in AIMCO's Charter within 30 days after January 1 of each year. In addition, each stockholder shall upon demand be required to disclose to AIMCO in writing such information with respect to the direct, indirect and constructive ownership of shares as the Board of Directors deems necessary to comply with the provisions of the Code applicable to a REIT or to comply with the requirements of any taxing authority or governmental agency. The ownership limitations may have the effect of precluding acquisition of control of AIMCO by a third party unless the Board of Directors determines that maintenance of REIT status is no longer in the best interests of AIMCO. CLASS B COMMON STOCK In connection with the initial formation of AIMCO, Terry Considine, Peter Kompaniez, Steven Ira and Robert Lacy, a former officer of AIMCO, acquired an aggregate of 650,000 shares of AIMCO's Class B Common Stock (which was authorized in the AIMCO Charter at that time). The Class B Common Stock does not have voting or dividend rights and, unless converted into Class A Common Stock, as described below, is subject to repurchase by AIMCO as described below. As of December 31 of each of the years 1994 through 1998 (each, a "Year-End Testing Date"), a number of the shares of Class B Common Stock outstanding as of such date (the "Eligible Class B Shares") become eligible for automatic conversion (subject to the Ownership Limit) into an equal number of shares of Class A Common Stock (subject to adjustment upon the occurrence of certain events in respect of the Class A Common Stock, including stock dividends, subdivisions, combinations and reclassifications). Once Class B Common Stock has been converted into Class A Common Stock, holders of such shares of converted Class A Common Stock will have voting and dividend rights of Class A Common Stock generally. Once converted or forfeited, the Class B Common Stock may not be reissued by AIMCO. The Eligible Class B Shares convert to Class A Common Stock if (i) AIMCO's Funds from Operations Per Share (as defined below) reaches certain annual and cumulative growth targets and (ii) the average market price for a share of Class A Common Stock for a 90 calendar day period beginning on any day on or after the October 1 immediately preceding the relevant Year-End Testing Date equals or exceeds a specified target price. "Funds from Operations Per Share" or "FFO Per Share" means, for any period, (i) net income (loss), computed in accordance with generally accepted accounting principles, excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures, less any preferred stock dividend payments, divided by (ii) the sum of (a) the number of shares of the Class A Common Stock outstanding on the last day of such period (excluding any shares of the Class A Common Stock into which shares of the Class B Common Stock shall have been converted as a result of the conversion of shares of the Class B Common Stock on the last day of such period) and (b) the number of shares of the Class A Common Stock issuable to acquire units of limited partnership interest that (x) may be tendered for redemption in any limited partnership in which AIMCO serves as general partner and (y) are outstanding on the last day of such period. 58 60 Set forth below for the remaining Year-End Testing Date is (i) the number of shares of Class B Common Stock that become Eligible Class B Shares as of such date, (ii) the annual FFO Per Share growth target (as a percentage increase in FFO Per Share from the prior year), (iii) the cumulative FFO Per Share growth target (in FFO Per Share) and (iv) the average market price target:
ANNUAL FFO PER CUMULATIVE FFO AVERAGE ELIGIBLE CLASS B SHARE GROWTH PER SHARE GROWTH MARKET YEAR-END TESTING DATE SHARES(1) TARGET TARGET PRICE TARGET --------------------- ---------------- -------------- ---------------- -------------- December 31, 1998.......... 162,500 8.5% $2.760 $26.373
- --------------- (1) Assumes that only the shares of Class B Common Stock outstanding as of December 31, 1997 remain outstanding until converted into shares of Class A Common Stock. Any Class B Common Stock that has not been converted into Class A Common Stock following December 31, 1998 will be subject to repurchase by AIMCO at a price of $0.10 per share. Class B Common Stock is also subject to automatic conversion upon the occurrence of certain events, including a change of control (as defined in AIMCO's Charter). The Board of Directors may increase the number of shares which are eligible for conversion as of any Year-End Testing Date and may, under certain circumstances, accelerate the conversion of outstanding Class B Common Stock at such time and in such amount as it may determine appropriate. All of the 65,000 shares of Class B Common Stock eligible for conversion as of the December 31, 1994 Year-End Testing Date, all of the 130,000 shares of Class B Common Stock eligible for conversion as of the December 31, 1995 Year-End Testing Date, all of the 130,000 shares of Class B Common Stock eligible for conversion as of December 31, 1996 and all of the 162,500 shares of Class B Common Stock eligible for conversion as of December 31, 1997, have been converted into shares of Class A Common Stock. As of October 1, 1998, the outstanding Class B Common Stock was held as follows: 93,428 shares by Mr. Considine, 41,438 shares by Mr. Kompaniez, 13,821 shares by Mr. Ira and 13,813 shares by Mr. Robert Lacy. CLASS B PREFERRED STOCK On August 4, 1997, AIMCO issued 750,000 shares of Class B Preferred Stock to an institutional investor (the "Preferred Share Investor") for $75.0 million. The Class B Preferred Stock has an aggregate liquidation value of $75 million and, with respect to dividend rights and rights upon liquidation, dissolution or winding up of AIMCO, ranks (a) prior or senior to the Class A Common Stock, the Class B Common Stock, the Class E Preferred Stock and any other class or series of capital stock of AIMCO if the holders of the Class B Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding-up in preference or priority to the holders of shares of such class or series ("Class B Junior Stock"), (b) on a parity with the Class C Preferred Stock, the Class D Preferred Stock, the Class G Preferred Stock, the Class H Preferred Stock, and any other class or series of capital stock of AIMCO if the holders of such class of stock or series and the Class B Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences, without preference or priority of one over the other ("Class B Parity Stock") and (c) junior to any class or series of capital stock of AIMCO if the holders of such class or series shall be entitled to the receipt of dividends or amounts distributable upon liquidation, dissolution or winding up in preference or priority to the holders of the Class B Preferred Stock ("Class B Senior Stock"). Holders of the Class B Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors, quarterly cash dividends per share equal to the greater of (i) $1.78125 (the "Base Rate") and (ii) the cash dividends declared on the number of shares of Class A Common Stock into which one share of Class B Preferred Stock is convertible. On or after August 4, 1998, each share of Class B Preferred Stock may be converted at the option of the holder into 3.28407 shares of Class A Common Stock, subject to certain anti-dilution adjustments. AIMCO may redeem any or all of the Class B Preferred Stock on or after August 4, 2002, at a redemption price of $100 per share, plus unpaid dividends accrued on the shares redeemed. 59 61 Holders of Class B Preferred Stock, voting as a class with the holders of all Class B Parity Stock, will be entitled to elect (i) two directors of AIMCO if six quarterly dividends (whether or not consecutive) on the Class B Preferred Stock or any Class B Parity Stock are in arrears, and (ii) one director of AIMCO if for two consecutive quarterly dividend periods AIMCO fails to pay at least $0.4625 in dividends on the Class A Common Stock and, in any such case, the number of directors constituting the Board of Directors shall be increased by one or two, as the case may be (if not already increased by reason of similar types of provisions with respect to shares of Class B Parity Stock). The affirmative vote of the holders of 66 2/3% of the outstanding shares of Class B Preferred Stock will be required to amend AIMCO's Charter in any manner that would adversely affect the rights of the holders of Class B Preferred Stock, and to approve the issuance of any capital stock that ranks senior to the Class B Preferred Stock with respect to payment of dividends or upon liquidation, dissolution, winding up or otherwise. If the IRS should make a final determination that AIMCO does not qualify as a REIT in accordance with Sections 856 through 860 of the Code, the Base Rate for the quarterly cash dividends will increase to $3.03125 per share. The agreement pursuant to which AIMCO issued the Class B Preferred Stock (the "Preferred Share Purchase Agreement") provides that the Preferred Share Investor may require AIMCO to repurchase such investor's Class B Preferred Stock in whole or in part at a price of 105% of the liquidation preference thereof, plus accrued and unpaid dividends on the purchased shares, if (i) AIMCO shall fail to continue to be taxed as a real estate investment trust pursuant to Sections 856 through 860 of the Code, or (ii) upon the occurrence of a change of control (as defined in the Preferred Share Purchase Agreement). The Preferred Share Purchase Agreement also provides that, so long as the Preferred Share Investor owns Class B Preferred Stock with an aggregate liquidation preference of at least $18.75 million, neither AIMCO, the Partnership nor any subsidiary of AIMCO may issue preferred securities or incur indebtedness for borrowed money if immediately following such issuance and after giving effect thereto and the application of the net proceeds therefrom, AIMCO's ratio of aggregate consolidated earnings before interest, taxes, depreciation and amortization to aggregate consolidated fixed charges for the four fiscal quarters immediately preceding such issuance would be less than 1.5 to 1. Subject to certain exceptions specified in the Articles Supplementary establishing the terms of the Class B Preferred Stock, no holder may own, or be deemed to own by virtue of various attribution and constructive ownership provisions of the Code and Rule 13d-3 under the Exchange Act, shares of Class B Preferred Stock with a value in excess of (i) 8.7% (or 15% in the case of certain pension trusts described in the Code, investment companies registered under the Investment Company Act of 1940 and Mr. Considine) of the aggregate value of all shares of capital stock of AIMCO over (ii) the aggregate value of all shares of capital stock of AIMCO other than Class B Preferred Stock that are owned by such holder (the "Class B Preferred Ownership Limit"). The AIMCO Board of Directors may waive such ownership limit if evidence satisfactory to the AIMCO Board of Directors and AIMCO's tax counsel is presented that such ownership will not then or in the future jeopardize AIMCO's status as a real estate investment trust. As a condition of such waiver, the AIMCO Board of Directors may require opinions of counsel satisfactory to it and/or an undertaking from the applicant with respect to preserving the real estate investment trust status of AIMCO. If shares of Class B Preferred Stock in excess of the Class B Preferred Ownership Limit, or shares of Class B Preferred Stock which would result in AIMCO being "closely held," within the meaning of Section 856(h) of the Code, or which would otherwise result in AIMCO failing to qualify as a REIT, are issued or transferred to any person, such issuance or transfer will be null and void to the intended transferee, and the intended transferee would acquire no rights to the stock. Shares of Class B Preferred Stock transferred in excess of the Class B Preferred Ownership Limit or other applicable limitations will automatically be transferred to a trust for the exclusive benefit of one or more qualifying charitable organizations to be designated by AIMCO. Shares transferred to such trust will remain outstanding, and the trustee of the trust will have all voting and dividend rights pertaining to such shares. The trustee of such trust may transfer such shares to a person whose ownership of such shares does not violate the Class B Preferred Ownership Limit or other applicable limitation. Upon a sale of such shares by the trustee, the interest of the charitable beneficiary will terminate, and the sales proceeds would be paid, first, to the original intended transferee, to the extent of the lesser of (a) such transferee's original purchase price (or the original market value of such shares if purportedly acquired by gift or devise) and (b) the price received by the trustee, and, second, any remainder to the 60 62 charitable beneficiary. In addition, shares of stock held in such trust are purchasable by AIMCO for a 90-day period at a price equal to the lesser of the price paid for the stock by the original intended transferee (or the original market value of such shares if purportedly acquired by gift or devise) and the market price for the stock on the date that AIMCO determines to purchase the stock. The 90-day period commences on the date of the violative transfer or the date that the AIMCO Board of Directors determines in good faith that a violative transfer has occurred, whichever is later. All certificates representing shares of Class B Preferred Stock bear a legend referring to the restrictions described above. CLASS C PREFERRED STOCK On December 23, 1997, AIMCO issued 2,400,000 shares of Class C Preferred Stock in an underwritten public offering for net proceeds of approximately $57.9 million. The Class C Preferred Stock, with respect to dividend rights and rights upon liquidation, dissolution or winding up of AIMCO, ranks (a) prior or senior to the Class A Common Stock, the Class B Common Stock, the Class E Preferred Stock and any other class or series of capital stock of AIMCO if the holders of the Class C Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution, or winding-up in preference or priority to the holders of shares of such class or series ("Class C Junior Stock"), (b) on a parity with the Class B Preferred Stock, the Class D Preferred Stock, the Class G Preferred Stock, the Class H Preferred Stock, and with any other class or series of capital stock of AIMCO if the holders of such class of stock or series and the Class C Preferred Stock shall be entitled to the receipt of dividends and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences, without preference or priority of one over the other ("Class C Parity Stock") and (c) junior to any class or series of capital stock of AIMCO if the holders of such class or series shall be entitled to the receipt of dividends or amounts distributable upon liquidation, dissolution or winding up in preference or priority to the holders of the Class C Preferred Stock ("Class C Senior Stock"). Holders of Class C Preferred Stock are entitled to receive cash dividends at the rate of 9% per annum of the $25 liquidation preference (equivalent to $2.25 per annum per share). Such dividends are cumulative from the date of original issue, and are payable quarterly on or before January 15, April 15, July 15 and October 15 of each year. Upon any liquidation, dissolution or winding up of AIMCO, before payment or distribution by AIMCO shall be made to or set apart for the holders of any shares of Class C Junior Stock, the holders of Class C Preferred Stock shall be entitled to receive a liquidation preference of $25 per share (the "Class C Liquidation Preference"), plus an amount equal to all accumulated, accrued and unpaid dividends to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. If proceeds available for distribution shall be insufficient to pay the preference described above and any liquidating payments on any other shares of any class or series of Class C Parity Stock, then such proceeds shall be distributed among the holders of Class C Preferred Stock and any such other Class C Parity Stock ratably in the same proportion as the respective amounts that would be payable on such Class C Preferred Stock and any such other Class C Parity Stock if all amounts payable thereon were paid in full. On and after December 23, 2002, AIMCO may redeem shares of Class C Preferred Stock, in whole or in part, at a cash redemption price equal to 100% of the Class C Liquidation Preference plus all accrued and unpaid dividends to the date fixed for redemption. The Class C Preferred Stock has no stated maturity and will not be subject to any sinking fund or mandatory redemption provisions. Holders of shares of Class C Preferred Stock have no voting rights, except that if distributions on Class C Preferred Stock or any series or class of Class C Parity Stock shall be in arrears for six or more quarterly periods, the number of directors constituting the AIMCO Board of Directors shall be increased by two (if not already increased by reason of similar types of provisions with respect to shares of Class C Parity Stock) and the holders of Class C Preferred Stock (voting together as a single class with all other shares of Class C Parity Stock which are entitled to similar voting rights) will be entitled to vote for the election of the two additional directors of AIMCO at any annual meeting of stockholders or at a special meeting of the holders of the Class C Preferred Stock called for such purpose. 61 63 There are ownership restrictions applicable to the Class C Preferred Stock that are similar to those for the Class B Preferred Stock. CLASS D PREFERRED STOCK On February 13, 1998, AIMCO issued 4,200,000 shares of Class D Preferred Stock in an underwritten public offering, for net proceeds of approximately $101.5 million. The Class D Preferred Stock, with respect to dividend rights and rights upon liquidation, dissolution or winding up of AIMCO, ranks (a) prior or senior to the Class A Common Stock, the Class B Common Stock, the Class E Preferred Stock and any other class or series of capital stock of AIMCO if the holders of the Class D Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding-up in preference or priority to the holders of shares of such class or series ("Class D Junior Stock"), (b) on a parity with the Class B Preferred Stock, the Class C Preferred Stock, the Class G Preferred Stock, the Class H Preferred Stock, and with any other class or series of capital stock of AIMCO if the holders of such class of stock or series and the Class D Preferred Stock shall be entitled to the receipt of dividends and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences, without preference or priority of one over the other ("Class D Parity Stock") and (c) junior to any class or series of capital stock of AIMCO if the holders of such class or series shall be entitled to the receipt of dividends or amounts distributable upon liquidation, dissolution or winding up in preference or priority to the holders of the Class D Preferred Stock ("Class D Senior Stock"). Holders of Class D Preferred Stock are entitled to receive cash dividends at the rate of 8 3/4% per annum of the $25 liquidation preference (equivalent to $2.1875 per annum per share). Such dividends are cumulative from the date of original issue, and are payable quarterly on or before January 15, April 15, July 15 and October 15 of each year. Upon any liquidation, dissolution or winding up of AIMCO, before payment or distribution by AIMCO shall be made to or set apart for the holders of any shares of Class D Junior Stock, the holders of Class D Preferred Stock shall be entitled to receive a liquidation preference of $25 per share (the "Class D Liquidation Preference"), plus an amount equal to all accumulated, accrued and unpaid dividends to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. If proceeds available for distribution shall be insufficient to pay the preference described above and any liquidating payments on any other shares of any class or series of Class D Parity Stock, then such proceeds shall be distributed among the holders of Class D Preferred Stock and any such other Class D Parity Stock ratably in the same proportion as the respective amounts that would be payable on such Class D Preferred Stock and any such other Class D Parity Stock if all amounts payable thereon were paid in full. On and after February 19, 2003, AIMCO may redeem shares of Class D Preferred Stock, in whole or in part, at a cash redemption price equal to 100% of the Class D Liquidation Preference plus all accrued and unpaid dividends to the date fixed for redemption. The Class D Preferred Stock has no stated maturity and will not be subject to any sinking fund or mandatory redemption provisions. Holders of shares of Class D Preferred Stock have no voting rights, except that if distributions on Class D Preferred Stock or any series or class of Class D Parity Stock shall be in arrears for six or more quarterly periods, the number of directors constituting the AIMCO Board of Directors shall be increased by two (if not already increased by reason of similar types of provisions with respect to shares of Class D Parity Stock) and the holders of Class D Preferred Stock (voting together as a single class with all other shares of Class D Parity Stock which are entitled to similar voting rights) will be entitled to vote for the election of the two additional directors of AIMCO at any annual meeting of stockholders or at a special meeting of the holders of the Class D Preferred Stock called for the purpose. There are ownership restrictions applicable to the Class D Preferred Stock that are similar to those for the Class B Preferred Stock. CLASS E PREFERRED STOCK On October 1, 1998, Insignia was merged into AIMCO. As merger consideration, AIMCO will issue to former Insignia stockholders up to 8,945,921 shares of Class E Preferred Stock. The Class E Preferred Stock 62 64 (a) ranks prior to Class A Common Stock and Class B Common Stock, and any other class or series of capital stock of AIMCO if holders of the Class E Preferred Stock are to be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution, and winding-up in preference or priority to the holders of shares of such class or series ("Class E Junior Stock"), (b) ranks on a parity with any class or series of capital stock of AIMCO if the holders of such class or series of stock and the Class E Preferred Stock shall be entitled to the receipt of dividends and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences, without preference or priority one over the other ("Class E Parity Stock") and (c) ranks junior to the Class B Preferred Stock, the Class C Preferred Stock, the Class D Preferred Stock, the Class G Preferred Stock, the Class H Preferred Stock and any other class or series of capital stock of AIMCO if the holders of such class or series shall be entitled to the receipt of dividends or amounts distributable upon liquidation, dissolution or winding up in preference or priority to the holders of the Class E Preferred Stock ("Class E Senior Stock"). On any date (each, a "Dividend Payment Date") on which cash dividends are paid on the Class A Common Stock prior to the Call Date (as defined below), holders of Class E Preferred Stock shall be entitled to receive cash dividends payable in an amount per share of Class E Preferred Stock equal to the per share dividend payable on Class A Common Stock on such Dividend Payment Date. Such dividends shall be cumulative from the date of original issue, and shall be payable quarterly in arrears on the Dividend Payment Dates, commencing on the first Dividend Payment Date after the date of original issue. Holders of Class E Preferred Stock will be entitled to receive the same cash dividends per share as holders of Class A Common Stock. In addition, holders of Class E Preferred Stock on the record date for payment to be set by AIMCO's board of directors will be entitled to receive a special dividend in an aggregate amount of $50 million (the "Special Dividend"). Upon any liquidation, dissolution or winding up of AIMCO, before payment or distribution by AIMCO shall be made to or set apart for the holders of any shares of Class E Junior Stock, the holders of Class E Preferred Stock shall be entitled to receive a liquidation preference of $1 per share plus the Special Dividend if such dividend is unpaid on the date of the final distribution to such holders (collectively, the "Class E Liquidation Preference"), and thereafter each share of Class E Preferred Stock shall have the same rights with respect to assets of AIMCO as one share of Class A Common Stock. On or after the twentieth anniversary of the consummation of the Insignia merger, AIMCO may redeem shares of Class E Preferred Stock, in whole or in part, at a cash redemption price equal to the sum of (i) the greater of (A) the Current Market Price (as defined in the Insignia Merger Agreement) of the Class A Common Stock on the date specified for redemption by AIMCO in a notice sent to holders of Class E Preferred Stock (the "Call Date") or (B) the AIMCO Index Price (as defined in the Insignia Merger Agreement), but determined without giving effect to the limitation of $38.00 per share, plus (ii) all accrued and unpaid dividends to the Call Date. The Class E Preferred Stock has no stated maturity and will not be subject to any sinking fund or mandatory redemption provisions. Holders of shares of Class E Preferred Stock are entitled to one-half ( 1/2) of one vote with respect to all matters in which holders of Class A Common Stock are entitled to vote thereon. In addition, if any portion of the Special Dividend has yet to be declared and paid to the holders of Class E Preferred Stock on January 15, 1999, or if distributions on Class E Preferred Stock or any series or class of Preferred Stock of AIMCO shall be in arrears for six or more quarterly periods, the number of directors constituting the AIMCO Board of Directors shall be increased by two (without duplication of any increase made pursuant to the terms of any other series of preferred stock of AIMCO) and the holders of Class E Preferred Stock (voting together as a single class with all other shares of Class E Parity Stock which are entitled to similar voting rights) will be entitled to vote for the election of the additional directors of AIMCO. Such right shall continue until full cumulative dividends for all past dividend periods on all shares of Preferred Stock of AIMCO, including any shares of Class E Preferred Stock, have been paid or declared and set apart for payment. On any date which the Special Dividend, or any portion thereof, is paid (which may be declared by the AIMCO Board in its sole discretion), the holders of Class E Preferred Stock shall be entitled to receive an amount per share of Class E Preferred Stock equal to the Special Dividend divided by the Series E Conversion Ratio (as defined in the Insignia Merger Agreement). After January 15, 1999, if any portion of the Special 63 65 Dividend or any other dividend has yet to be declared and paid to the holders of Class E Preferred Stock, no dividends may be declared or paid or set apart for payment by AIMCO on its common stock. On the close of business on the day on which the Special Dividend (or any remaining unpaid portion thereof) is paid to the holders of the Class E Preferred Stock, each share of Class E Preferred Stock will be automatically converted into one share of Class A Common Stock without any action on the part of AIMCO or the holder of such share (the "Conversion Date"). If AIMCO at any time following the consummation of the Insignia Merger pays a dividend or makes a distribution, subdivides, combines, reclassifies, issues rights, options or warrants or makes any other distribution in securities in relation to its outstanding Class A Common Stock, then AIMCO will contemporaneously do the same with respect to the Class E Preferred Stock. CLASS G PREFERRED STOCK In July 1998, AIMCO issued 4,050,000 shares of Class G Preferred Stock in an underwritten public offering for net proceeds of approximately $98.0 million. The Class G Preferred Stock, with respect to dividend rights and rights upon liquidation, dissolution or winding up of AIMCO, ranks (a) prior or senior to the Class A Common Stock, the Class B Common Stock, the Class E Preferred Stock and any other class or series of capital stock of AIMCO if the holders of the Class G Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution, or winding-up in preference or priority to the holders of shares of such class or series ("Class G Junior Stock"), (b) on parity with the Class B Preferred Stock, the Class C Preferred Stock, the Class D Preferred Stock, the Class H Preferred Stock, and with any other class or series of capital stock of AIMCO if the holders of such class of stock or series and the Class G Preferred Stock shall be entitled to the receipt of dividends and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences, without preference or priority of one over the other ("Class G Parity Stock") and (c) junior to any class or series of capital stock of AIMCO if the holders of such class or series shall be entitled to the receipt of dividends or amounts distributable upon liquidation, dissolution or winding up in preference or priority to the holders of the Class G Preferred Stock ("Class G Senior Stock"). Holders of Class G Preferred Stock are entitled to receive cash dividends at the rate of 9 3/8% per annum of the $25 liquidation preference (equivalent to $2.34375 per annum per share). Such dividends are cumulative from the date of original issue, and are payable quarterly on or before January 15, April 15, July 15 and October 15 of each year, commencing October 15, 1998. Upon any liquidation, dissolution or winding up of AIMCO, before payment or distribution by AIMCO shall be made to or set apart for the holders of any shares of Class G Junior Stock, the holders of Class G Preferred Stock shall be entitled to receive a liquidation preference of $25 per share (the "Class G Liquidation Preference"), plus an amount equal to all accumulated, accrued and unpaid dividends to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. If proceeds available for distribution shall be insufficient to pay the preference described above and any liquidating payments on any other shares of any class or series of Class G Parity Stock, then such proceeds shall be distributed among the holders of Class G Preferred Stock and any such other Class G Parity Stock ratably in the same proportion as the respective amounts that would be payable on such Class G Preferred Stock and any such other Class G Parity Stock if all amounts payable thereon were paid in full. On and after July 15, 2008, AIMCO may redeem shares of Class G Preferred Stock, in whole or in part, at a cash redemption price equal to 100% of the Class G Liquidation Preference plus all accrued and unpaid dividends to the date fixed for redemption. The Class G Preferred Stock has no stated maturity and will not be subject to any sinking fund or mandatory redemption provisions. Holders of shares of Class G Preferred Stock have no voting rights, except that if distributions on Class G Preferred Stock or any series or class of Class G Parity Stock shall be in arrears for six or more quarterly periods, the number of directors constituting the AIMCO Board of Directors shall be increased by two (if not already increased by reason of similar types of provisions with respect to shares of Class G Parity Stock) and the holders of Class G Preferred Stock (voting together as a single class with all other shares of Class G Parity Stock which are entitled to similar voting rights) will be entitled to vote for the election of the two additional 64 66 directors of AIMCO at any annual meeting of stockholders or at a special meeting of the holders of the Class G Preferred Stock called for the purpose. There are ownership restrictions applicable to the Class G Preferred Stock that are similar to those for the Class B Preferred Stock. CLASS H PREFERRED STOCK On August 14, 1998, AIMCO issued 2,000,000 shares of Class H Preferred Stock in an underwritten public offering for net proceeds of approximately $48.1 million. The Class H Preferred Stock, with respect to dividend rights and rights upon liquidation, dissolution or winding up of AIMCO, ranks (a) prior or senior to the Class A Common Stock, the Class B Common Stock, the Class E Preferred Stock and any other class or series of capital Stock of AIMCO if the holders of the Class H Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding-up in preference or priority to the holders of shares of such class or series ("Class H Junior Stock"), (b) on a parity with the Class B Preferred Stock, the Class C Preferred Stock, the Class D Preferred Stock, the Class G Preferred Stock and with any other class or series of capital stock of AIMCO if the holders of such class or series of stock and the Class H Preferred Stock shall be entitled to the receipt of dividends and of amounts distributable upon liquidation, dissolution or winding-up in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences, without preference or priority of one over the other ("Class H Parity Stock") and (c) junior to any class or series of capital stock of AIMCO if the holders of such class or series shall be entitled to the receipt of dividends or amounts distributable upon liquidation, dissolution or winding-up in preference or priority to the holders of the Class H Preferred Stock ("Class H Senior Stock"). Holders of Class H Preferred Stock are entitled to receive cash dividends at the rate of 9 1/2% per annum of the $25 liquidation preference (equivalent to $2.375 per annum per share). Such dividends are cumulative from the date of original issue, and are payable quarterly on or before January 15, April 15, July 15 and October 15 of each year, commencing October 15, 1998. Upon any liquidation, dissolution or winding up of AIMCO, before payment or distribution by AIMCO shall be made to or set apart for the holders of any shares of Class H Junior Stock, the holders of Class H Preferred Stock shall be entitled to receive a liquidation preference of $25 per share (the "Class H Liquidation Preference"), plus an amount equal to all accumulated, accrued and unpaid dividends to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. If proceeds available for distribution shall be insufficient to pay the preference described above and any liquidating payments on any other shares of any class or series of Class H Parity Stock, then such proceeds shall be distributed among the holders of Class H Preferred Stock and any such other Class H Parity Stock ratably in the same proportion as the respective amount that would be payable on such Class H Preferred Stock and any such other Class H Parity Stock if all amounts payable thereon were paid in full. On and after August 14, 2003, AIMCO may redeem shares of Class H Preferred Stock, in whole or in part, at a cash redemption price equal to 100% of the Class H Liquidation Preference plus all accrued and unpaid dividends to the date fixed for redemption. The Class H Preferred Stock has no stated maturity and will not be subject to any sinking fund or mandatory redemption provisions. Holders of shares of Class H Preferred Stock have no voting rights, except that if distributions on Class H Preferred Stock or any series or class of Class H Parity Stock shall be in arrears for six or more quarterly periods, the number of directors constituting the AIMCO Board shall be increased by two and the holders of Class H Preferred Stock (voting together as a single class with all other shares of Class H Parity Stock, which are entitled to similar voting rights) will be entitled to vote for the election of the two additional directors of AIMCO at any annual meeting of stockholders or at a special meeting of the holders of the Class H Preferred Stock called for the purpose. The affirmative vote of the holders of two-thirds of the outstanding shares of Class H Preferred Stock will be required to amend the Charter in any manner that would adversely affect the rights of the holders of Class H Preferred Stock, and to approve the issuance of any capital Stock that ranks senior to the Class H Preferred Stock with respect to payment of dividends or upon liquidation, dissolution, winding up or otherwise. 65 67 There are ownership restrictions applicable to the Class H Preferred Stock that are similar to those for the Class B Preferred Stock. BUSINESS COMBINATIONS Under the Maryland General Corporation Law (the "MGCL"), certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any person who beneficially owns 10% or more of the voting power of the corporation's shares or an affiliate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of the corporation (an "Interested Stockholder") or an affiliate thereof are prohibited for five years after the most recent date on which the Interested Stockholder became an Interested Stockholder. Thereafter, any such business combination must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding voting shares of the corporation, voting together as a single voting group, and (b) two-thirds of the votes entitled to be cast by holders of outstanding voting shares of the corporation other than shares held by the Interested Stockholder or an affiliate or associate of the Interested Stockholder with whom the business combination is to be effected, unless, among other conditions, the corporation's stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its shares. For purposes of determining whether a Person is an Interested Stockholder of AIMCO, ownership of OP Units is treated as beneficial ownership of the shares of AIMCO Common Stock which may be issued in exchange for the OP Units when such OP Units are tendered for redemption. The business combination statute could have the effect of discouraging offers to acquire AIMCO and of increasing the difficulty of consummating any such offer. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the Interested Stockholder becomes an Interested Stockholder. AIMCO's Board has not passed such a resolution. CONTROL SHARE ACQUISITIONS The MGCL provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquirer or by officers or directors who are employees of the corporation. "Control shares" are voting shares of stock that, if aggregated with all other shares of stock previously acquired by that person, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority or (iii) a majority of all voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. For purposes of determining whether a Person is an Interested Stockholder of AIMCO, ownership of OP Units is treated as beneficial ownership of the shares of AIMCO Common Stock which may be issued in exchange for the OP Units may be redeemed. A "control share acquisition" means the acquisition of control shares, subject to certain exceptions. A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel the corporation's board of directors to call a special meeting of stockholders, to be held within 50 days of demand, to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting. If voting rights are not approved at the meeting or if the acquiring person does not deliver an "acquiring person statement" as required by the statute, then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares except those for which voting rights have previously been approved) for fair value determined, without regard to voting rights, as of the date of the last control share acquisition or of any meeting of stockholders at which the voting rights of such shares were considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal 66 68 rights. The fair value of the shares as determined for purposes of the appraisal rights may not be less than the highest price per share paid in the control share acquisition, and certain limitations and restrictions otherwise applicable to the exercise of dissenters' rights do not apply in the context of a control share acquisition. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or to acquisitions approved or exempted by the corporation's articles of incorporation or bylaws prior to the control share acquisition. The control share acquisition statute could have the effect of discouraging offers to acquire AIMCO and of increasing the difficulty of consummating any such offer. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following is a summary of certain federal income tax consequences resulting from the acquisition of, holding, exchanging, and otherwise disposing of OP Units and shares of AIMCO's capital stock ("AIMCO Stock"). This discussion is based upon the Code, regulations promulgated by the U.S. Treasury Department (the "Regulations"), rulings issued by the IRS, and judicial decisions, all in effect as of the date of this Registration Statement and all of which are subject to change, possibly retroactively. This summary is for general information only and does not purport to discuss all aspects of federal income taxation which may be important to a particular investor in light of its investment circumstances, or to certain types of investors subject to special tax rules (including financial institutions, broker-dealers, insurance companies, and, except to the extent discussed below, tax-exempt organizations and foreign investors). This summary assumes that investors will hold their OP Units and AIMCO Stock as "capital assets" (generally, property held for investment). No advance ruling has been or will be sought from the IRS regarding any matter discussed in this Registration Statement. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING, EXCHANGING, OR OTHERWISE DISPOSING OF OP UNITS OR OF AIMCO STOCK AND OF AIMCO'S ELECTION TO BE SUBJECT TO TAX, FOR FEDERAL INCOME TAX PURPOSES, AS A "REAL ESTATE INVESTMENT TRUST." TAXATION OF THE PARTNERSHIP AND THE PARTNERS GENERAL In general, a partnership is treated as a "pass-through" entity for federal income tax purposes and is not itself subject to federal income taxation. Each partner of a partnership, however, is subject to tax on his allocable share of partnership tax items, including partnership income, gains, losses, deductions, and credits ("Partnership Tax Items") for each taxable year during which he is a partner, regardless of whether he receives any actual distributions from the partnership during the taxable year. Generally, the characterization of any particular Partnership Tax Item is determined at the partnership, rather than at the partner level and the amount of a partner's allocable share of such item is governed by the terms of the partnership agreement. Accordingly, if the Partnership is characterized as a "partnership" for federal income tax purposes, a Partner will be (i) required to include in income his allocable share of any Partnership income or gains and (ii) entitled to deduct his allocable share of any Partnership deductions or losses, but only to the extent of the Partner's adjusted tax basis in his Partnership interest and subject to the "at risk" and "passive activity loss" rules discussed below under the heading "Loss Limitations." Some partnerships are, for federal income tax purposes, characterized not as a partnership but as an association taxable as a corporation or as a "publicly traded partnership" taxable as a corporation. A partnership will be classified as a publicly traded partnership if interests therein are traded on an "established securities market" or are "readily tradable" on a "secondary market (or the substantial equivalent thereof)." 67 69 The Partnership believes that the Partnership should not be classified as a publicly traded partnership because (i) the OP Units are not traded on an established securities market and (ii) the Partnership believes that the OP Units should not be considered readily tradeable on a secondary market or the substantial equivalent thereof. The determination of whether interests in a partnership are readily tradeable on a secondary market or the substantial equivalent thereof, however, depends on various facts and circumstances (including facts that are not within the control of the Partnership). Accordingly, there can be no assurance that the Partnership is not, or will not become, a publicly traded partnership. If the Partnership were characterized as a publicly traded partnership it would nevertheless not be taxable as a corporation as long as 90% or more of its gross income consists of "qualifying income." In general, qualifying income includes interest, dividends, real property rents (as defined by section 856 of the Code) and gain from the sale or disposition of real property. The Partnership believes that more than 90% of the Partnership's gross income consists of qualifying income, and therefore, that the Partnership would not be taxable as a corporation even if it were characterized as a publicly traded partnership. If the Partnership were characterized as a publicly traded partnership, however, each Partner would be subject to special rules under section 469 of the Code. See "Loss Limitations -- Passive Activity Loss Limitation" below. If the Partnership were characterized as an association or publicly traded partnership taxable as a corporation (because it did not meet the qualifying income exception discussed above), it would be subject to tax at the entity level as a regular corporation and the Partners would be subject to tax in the same manner as stockholders of a corporation. Thus, the Partnership would be subject to federal tax (and possibly state and local taxes) on its net income, determined without reduction for any distributions made to the Partners, at regular federal corporate income tax rates, thereby reducing the amount of any cash available for distribution to the Partners, which reduction could also materially and adversely impact the liquidity and value of the Partnership. In addition, Partnership Tax Items would not be passed through to the Partners and the Partners would not be subject to tax on the income earned by the Partnership. Distributions received by a Partner from the Partnership, however, would be treated as dividend income for federal income tax purposes, subject to tax as ordinary income to the extent of current and accumulated earnings and profits of the Partnership, and the excess, if any, as a nontaxable return of capital to the extent of the Partner's adjusted tax basis in his Partnership interest (without taking into account Partnership liabilities), and thereafter as gain from the sale of a capital asset. Characterization of the Partnership as an association or publicly traded partnership taxable as a corporation would also result in the termination of AIMCO's status as a REIT for federal income tax purposes which would have a material adverse impact on AIMCO. See "Taxation of AIMCO and AIMCO Stockholders -- Tax Aspects of AIMCO's Investments in Partnerships" below. No assurances can be given that the IRS would not challenge the status of the Partnership as a "partnership" for federal income tax purposes or that a court would not reach a result contrary to such position. Accordingly, each prospective investor is urged to consult his tax advisor regarding the treatment of the Partnership as a "partnership" for federal income tax purposes. TAX BASIS OF A PARTNERSHIP INTEREST A partner's adjusted tax basis in his partnership interest is relevant, among other things, for determining (i) gain or loss upon a taxable disposition of his partnership interest, (ii) gain upon the receipt of partnership distributions, and (iii) the limitations imposed on the use of partnership deductions and losses allocable to such partner. Generally, the adjusted tax basis of a partner's interest in the partnership is equal to (A) the sum of the adjusted tax basis of the property contributed by the partner to the partnership in exchange for an interest in the partnership and the amount of cash, if any, contributed by the partner to the partnership, (B) reduced, but not below zero, by the partner's allocable share of partnership distributions, deductions, and losses, (C) increased by the partner's allocable share of partnership income and gains, and (D) increased by the partner's allocable share of partnership liabilities and decreased by the partner's liabilities assumed by the partnership. 68 70 CASH DISTRIBUTIONS Cash distributions received from a partnership do not necessarily correlate with income earned by the partnership as determined for federal income tax purposes. Thus, a partner's federal income tax liability in respect of his allocable share of partnership taxable income for a particular taxable year may exceed the amount of cash, if any, received by the partner from the partnership during such year. If cash distributions, including a "deemed" cash distribution as discussed below, received by a Partner in any taxable year exceed his allocable share of the Partnership's taxable income for the year, the excess will constitute, for federal income tax purposes, a return of capital to the extent of such Partner's adjusted tax basis in his Partnership interest. Such return of capital will not be includible in the taxable income of the Partner, for federal income tax purposes, but it will reduce, but not below zero, the adjusted tax basis of the Partnership interest held by the Partner. If a Partner's tax basis in his Partnership interest is reduced to zero, a subsequent cash distribution received by the Partner will be subject to tax as capital gain income, but only if, and to the extent that, such distribution exceeds the subsequent positive adjustments, if any, to the tax basis of the Partner's Partnership interest as determined at the end of the taxable year during which such distribution is received. A decrease in a Partner's share of the Partnership liabilities resulting from the payment or other settlement of such liabilities is generally treated, for federal income tax purposes, as a deemed cash distribution. TAX CONSEQUENCES UPON CONTRIBUTION OF PROPERTY TO THE PARTNERSHIP Generally, neither the contributing partner nor the partnership will recognize a gain or loss, for federal income tax purposes, upon a contribution of property to the partnership in exchange for an interest in the partnership. Notwithstanding this general rule of nonrecognition, a Partner may recognize a gain where a Partner contributes to the Partnership property that is subject to liabilities, and the amount of the liabilities transferred by the Partner to the Partnership exceeds the amount of the Partnership liabilities allocated to the Partner as determined immediately after the transfer. Such excess is treated by the contributing Partner, for federal income tax purposes, as the receipt of a deemed distribution of cash from the Partnership. If a Partner transfers to the Partnership an interest in another partnership (the "Underlying Partnership") in exchange for an OP Unit, the Partner will be treated, for federal income tax purposes, as having transferred to the Partnership his allocable share of the liabilities of the Underlying Partnership, which could result in, or increase the amount of, a deemed cash distribution. As discussed above, such deemed cash distributions are generally treated as a nontaxable return of capital to the extent of the Partner's adjusted tax basis in his Partnership interest and thereafter as capital gain. If a Partner contributes property to the Partnership in which the adjusted tax basis of the property differs from its fair market value, Partnership Tax Items must be allocated in a manner such that the contributing Partner is charged with, or benefits from, respectively, the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of such unrealized gain or unrealized loss is generally equal to the difference between the fair market value of contributed property at the time of contribution, and the adjusted tax basis of such property at the time of contribution (a "Book-Tax Difference"). Such allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the Partners. The general purpose underlying this provision is to specially allocate certain Partnership Tax Items in order to place both the contributing and noncontributing Partners in the same tax position that they would have been in had the contributing Partner contributed property with an adjusted tax basis equal its fair market value. Regulations provide the Partnership with several alternative methods and allow the Partnership to adopt any other reasonable method to make allocations to reduce or eliminate Book-Tax Differences. The General Partner, in its discretion and in a manner consistent with the Regulations, will select and adopt a method of allocating Partnership Tax Items for purposes of eliminating such disparities. 69 71 LOSS LIMITATIONS Basis Limitation. To the extent that a Partner's allocable share of Partnership deductions and losses exceeds his adjusted tax basis in the Partnership interest at the end of the of the taxable year in which the losses and deductions flow through, the excess losses and deductions cannot be utilized, for federal income tax purposes, by the Partner in such year. The excess losses and deductions may, however, be utilized in the first succeeding taxable year in which, and to the extent that, there is an increase in the tax basis of the Partnership interest held by such Partner, but only to the extent permitted under the "at risk" and "passive activity loss" rules discussed below. "At Risk" Limitation. Under the "at risk" rules of section 465 of the Code, a noncorporate taxpayer and a closely held corporate taxpayer are generally not permitted to claim a deduction, for federal income tax purposes, in respect of a loss from an activity, whether conducted directly by the taxpayer or through an investment in a partnership, to the extent that the loss exceeds the aggregate dollar amount which the taxpayer has "at risk" in such activity at the close of the taxable year. To the extent that losses are not permitted to be used in any taxable year under the at risk rules, such losses may be carried over to subsequent taxable years and may be claimed as a deduction by the taxpayer if, and to the extent that, the amount which the taxpayer has "at risk" is increased. Provided certain requirements are met, the "at risk" rules generally do not apply to losses arising from any activity which constitutes "the holding of real property," which the holding of an OP Unit should constitute. "Passive Activity Loss" Limitation. The "passive activity" loss rules of section 469 of the Code limit the use of losses derived from passive activities, which generally includes an investment in limited partnership interests such as the OP Units. If an investment in an OP Unit is treated as a passive activity, a Limited Partner who is an individual investor, as well as certain other types of investors, would not be able to use losses from the Partnership to offset nonpassive activity income, including salary, business income, and portfolio income (e.g., dividends, interest, royalties, and gain on the disposition of portfolio investments) received during the taxable year. Passive activity losses that are disallowed for a particular taxable year may, however, be carried forward to offset passive activity income earned by the Partner in future taxable years. In addition, such disallowed losses may be claimed as a deduction, subject to the basis and at risk limitations discussed above, upon a taxable disposition of an OP Unit by the Limited Partner, regardless of whether such Partner has received any passive activity income during the year of disposition. If the Partnership were characterized as a publicly traded partnership, each Partner would be required to treat any loss derived from the Partnership separately from any income or loss derived from any other publicly traded partnership, as well as from income or loss derived from other passive activities. In such case, any net losses or credits attributable to the Partnership which are carried forward may only be offset against future income of the Partnership. Moreover, unlike other passive activity losses, suspended losses attributable to the Partnership will only be allowed upon the complete disposition of the Partner's "entire interest" in the Partnership (rather than upon the disposition of an interest in an "activity"). SALE, REDEMPTION, OR EXCHANGE OF A PARTNERSHIP INTEREST In general, a Limited Partner will recognize a capital gain or loss upon a sale of an OP Unit, a redemption of an OP Unit for cash, an exchange of an OP Unit for shares of AIMCO Stock, or other taxable disposition of an OP Unit. Such gain or loss will be equal to the difference between (i) the sum of the amount realized in the transaction, which in the case of the receipt of shares of AIMCO Stock will be an amount equal to their fair market value at the time that the transaction is consummated, and the amount of Partnership liabilities allocable to the OP Unit at such time and (ii) the Limited Partner's tax basis in the OP Unit disposed of, which tax basis will be adjusted for the Limited Partner's allocable share of the Partnership's income or loss for the taxable year of the disposition. If the Partnership redeems a Unitholder's OP Units for cash, the tax consequences generally would be the same as described in the preceding paragraphs, except that if the Partnership redeems less than all of a Unitholder's OP Units, the Unitholder would recognize no taxable loss and would recognize taxable gain only to the extent that the cash, plus the amount of Partnership liabilities allocable to the redeemed OP Units, 70 72 exceeded the Unitholder's adjusted tax basis in all of such Unitholder's OP Units immediately before the redemption. Under the recently enacted Internal Revenue Service Restructuring and Reform Act of 1998, capital gains recognized by individuals and certain other noncorporate taxpayers upon the sale or disposition of an OP Unit will be subject to a maximum federal income tax rate of 20% if the OP Unit is held for more than 12 months and will be taxed at ordinary income tax rates if the OP Unit is held for 12 months or less. Generally, gain or loss recognized by a Unitholder on the sale or other taxable disposition of an OP Unit will be taxable as capital gain or loss. However, to the extent that the amount realized upon the sale or other taxable disposition of an OP Unit attributable to a Unitholder's share of "unrealized receivables" of the Partnership exceeds the basis attributable to those assets, such excess will be treated as ordinary income. Among other things, "unrealized receivables" include amounts attributable to previously claimed depreciation deductions on certain types of property. In addition, the maximum federal income tax rate of individuals and certain other noncorporate taxpayers for net capital gains attributable to the sale of depreciable real property (which may be deemed to include an interest in a partnership) held for more than 12 months is currently 25% (rather than 20%) to the extent of previously claimed depreciation deductions that would not be treated as "unrealized receivables." TAXATION OF AIMCO AND AIMCO STOCKHOLDERS GENERAL The REIT provisions of the Code are highly technical and complex. The following summary sets forth certain aspects of the provisions of the Code that govern the federal income tax treatment of a REIT and its stockholders. This summary is qualified in its entirety by the applicable Code provisions, the Regulations, and administrative and judicial interpretations thereof, all of which are subject to change, possibly retroactively. AIMCO has elected to be taxed as a REIT under the Code commencing with its taxable year ending December 31, 1994, and AIMCO intends to continue such election. AIMCO believes that it was organized in conformity with the requirements for qualification as a REIT, and that its proposed method of operation, and its actual method of operation since its formation, will enable it to meet the requirements for qualification and taxation as a REIT under the Code. Such qualification and taxation as a REIT depends upon AIMCO's ability to meet, through actual annual operating results, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Code as discussed below. Accordingly, no assurance can be given that the actual results of AIMCO's operations for any one taxable year will satisfy such requirements. See "-- Failure to Qualify" below. No assurance can be given that the IRS will not challenge AIMCO's eligibility for taxation as a REIT. Provided AIMCO qualifies for taxation as a REIT, it will generally not be subject to federal corporate income tax on its net income that is currently distributed to its stockholders. This treatment substantially eliminates the "double taxation" (at the corporate and stockholder levels) that generally results from investment in a corporation. However, notwithstanding AIMCO's qualification as a REIT, AIMCO will be subject to federal income tax as follows: First, AIMCO will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains. Second, under certain circumstances, AIMCO may be subject to the "alternative minimum tax" on its items of tax preference. Third, if AIMCO has net income from prohibited transactions (which are, in general, certain sales or other dispositions of property held primarily for sale to customers in the ordinary course of business other than foreclosure property), such income will be subject to a 100% tax. Fourth, if AIMCO should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), but has nonetheless maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on an amount equal to (a) the gross income attributable to the greater of the amount by which AIMCO fails the 75% or 95% test multiplied by (b) a fraction intended to reflect AIMCO's profitability. Fifth, if AIMCO should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year (other than certain long-term capital 71 73 gains that AIMCO elects to retain and pay the tax thereon), and (iii) any undistributed taxable income from prior periods, AIMCO would be subjected to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. Sixth, if AIMCO acquires assets from a subchapter C corporation in a transaction in which the adjusted tax basis of the assets in the hands of AIMCO is determined by reference to the adjusted basis of such assets in the hands of the subchapter C corporation (such as the assets acquired from Insignia in the Insignia merger), then, under Regulations not yet promulgated, the subchapter C corporation would be required to recognize any net Built-In Gain (as defined below) that would have been realized if the subchapter C corporation had liquidated on the day before the date of the transfer. Pursuant to IRS Notice 88-19, AIMCO may elect, in lieu of the treatment described above, to be subject to tax if it recognizes gain on the disposition of any such assets during the ten-year period beginning on the day on which it acquires such assets, at the highest regular corporate tax rate on such gain to the extent of the excess, if any, of the fair market value over the adjusted basis of such assets as of the beginning of the ten-year period ("Built-in Gain"). AIMCO intends to make such an election and, therefore, will be taxed at the highest regular corporate rate on such Built-in Gain if, and to the extent that, any such asset is sold within the specified ten-year period. It should be noted that AIMCO has acquired (and may in the future acquire) a significant amount of assets with Built-in Gain and a taxable disposition by AIMCO of these assets within ten years of their acquisitions would subject AIMCO to tax under the foregoing rule. Seventh, AIMCO could be subject to foreign taxes on its investments and activities in foreign jurisdictions. In addition, AIMCO could also be subject to tax in certain situations and on certain transactions not presently contemplated. Requirements for Qualification. The Code defines a REIT as a corporation, trust or association (1) that is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (3) which would be taxable as a domestic corporation, but for the special Code provisions applicable to REITs; (4) that is neither a financial institution nor an insurance company subject to certain provisions of the Code; (5) the beneficial ownership of which is held by 100 or more persons; (6) in which, during the last half of each taxable year, not more than 50% in value of the outstanding stock is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities); and (7) which meets certain other tests described below (including with respect to the nature of its income and assets). The Code provides that conditions (1) through (4) must be met during the entire taxable year, and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. AIMCO's Charter provides certain restrictions regarding transfers of its shares, which provisions are intended to assist AIMCO in satisfying the share ownership requirements described in conditions (5) and (6) above. To monitor AIMCO's compliance with the share ownership requirements, AIMCO is required to maintain records regarding the actual ownership of its shares. To do so, AIMCO must demand written statements each year from the record holders of certain percentages of its stock in which the record holders are to disclose the actual owners of the shares (i.e., the persons required to include in gross income the dividends paid by AIMCO). A list of those persons failing or refusing to comply with this demand must be maintained as part of AIMCO's records. A stockholder who fails or refuses to comply with the demand must submit a statement with its tax return disclosing the actual ownership of the shares and certain other information. In addition, a corporation may not elect to become a REIT unless its taxable year is the calendar year. AIMCO satisfies this requirement. Ownership of Partnership Interests. In the case of a REIT that is a partner in a partnership, Regulations provide that the REIT is deemed to own its proportionate share of the partnership's assets and to earn its proportionate share of the partnership's income. In addition, the assets and gross income of the partnership retain the same character in the hands of the REIT for purposes of the gross income and asset tests applicable to REITs as described below. Thus, AIMCO's proportionate share of the assets, liabilities and items of income of the partnerships and limited liability companies in which it has ownership interests (the "Subsidiary Partnerships") will be treated as assets, liabilities and items of income of AIMCO for purposes of applying the REIT requirements described herein. A summary of certain rules governing the federal income taxation of partnerships and their partners is provided below in "Tax Aspects of AIMCO's Investments in Partnerships." 72 74 Income Tests. In order to maintain qualification as a REIT, AIMCO annually must satisfy two gross income requirements. First, at least 75% of AIMCO's gross income (excluding gross income from "prohibited transactions," i.e., certain sales of property held primarily for sale to customers in the ordinary course of business) for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property (including "rents from real property" and, in certain circumstances, interest) or from certain types of temporary investments. Second, at least 95% of AIMCO's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property investments, and from other dividends, interest and gain from the sale or disposition of stock or securities (or from any combination of the foregoing). Rents received by AIMCO through the Subsidiary Partnerships will qualify as "rents from real property" in satisfying the gross income requirements described above, only if several conditions are met, including the following. If rent attributable to personal property leased in connection with a lease of real property is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as "rents from real property." Moreover, for rents received to qualify as "rents from real property," the REIT generally must not operate or manage the property or furnish or render services to the tenants of such property, other than through an "independent contractor" from which the REIT derives no revenue. However, AIMCO (or its affiliates) are permitted to directly perform services that are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered rendered to the occupant of the property. In addition, AIMCO (or its affiliates) may provide non-customary services to tenants of its properties without disqualifying all of the rent from the property if the payment for such services does not exceed 1% of the total gross income from the property. For purposes of this test, the income received from such non-customary services is deemed to be at least 150% of the direct cost of providing the services. The Management Subsidiaries receive management fees and other income. A portion of such fees and other income will accrue to AIMCO through distributions from the Management Subsidiaries that will be classified as dividend income to the extent of the earnings and profits of the Management Subsidiaries. Such distributions will generally qualify under the 95% gross income test but not under the 75% gross income test. If AIMCO fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions will be generally available if AIMCO's failure to meet such tests was due to reasonable cause and not due to willful neglect, AIMCO attaches a schedule of the sources of its income to its return, and any incorrect information on the schedule was not due to fraud with intent to evade tax. It is not possible, however, to state whether in all circumstances AIMCO would be entitled to the benefit of these relief provisions. If these relief provisions are inapplicable to a particular set of circumstances involving AIMCO, AIMCO will not qualify as a REIT. As discussed above in "-- General," even where these relief provisions apply, a tax is imposed with respect to the excess net income. Asset Tests. AIMCO, at the close of each quarter of its taxable year, must also satisfy three tests relating to the nature of its assets. First, at least 75% of the value of AIMCO's total assets must be represented by real estate assets (including its allocable share of real estate assets held by the Subsidiary Partnerships), certain stock or debt instruments purchased by AIMCO with new capital, cash, cash items and U.S. government securities. Second, not more than 25% of AIMCO's total assets may be represented by securities other than those in the 75% asset class. Third, of the investments included in the 25% asset class, the value of any one issuer's securities owned by AIMCO may not exceed 5% of the value of AIMCO's total assets, and AIMCO may not own more than 10% of any one issuer's outstanding voting securities. AIMCO indirectly owns interests in the Management Subsidiaries. As set forth above, the ownership of more than 10% of the voting securities of any one issuer by a REIT or the investment of more than 5% of the REIT's total assets in any one issuer's securities is prohibited by the asset tests. AIMCO believes that its indirect ownership interests in the Management Subsidiaries qualify under the asset tests set forth above. However, no independent appraisals have been obtained to support AIMCO's conclusions as to the value of the Partnership's total assets and the value of the Partnership's interest in the Management Subsidiaries and 73 75 these values are subject to change in the future. Accordingly, there can be no assurance that the IRS will not contend that the Partnership's ownership interests in the Management Subsidiaries disqualifies AIMCO from treatment as a REIT. AIMCO's indirect interests in the Partnership and other Subsidiary Partnerships are held through wholly owned corporate subsidiaries of AIMCO organized and operated as "qualified REIT subsidiaries" within the meaning of the Code. Qualified REIT subsidiaries are not treated as separate entities from their parent REIT for federal income tax purposes. Instead, all assets, liabilities and items of income, deduction and credit of each qualified REIT subsidiary are treated as assets, liabilities and items of AIMCO. Each qualified REIT subsidiary therefore is not subject to federal corporate income taxation, although it may be subject to state or local taxation. In addition, AIMCO's ownership of the voting stock of each qualified REIT subsidiary does not violate the general restriction against ownership of more than 10% of the voting securities of any issuer. Annual Distribution Requirements. AIMCO, in order to qualify as a REIT, is required to distribute dividends (other than capital gain dividends) to its stockholders in an amount at least equal to (A) the sum of (i) 95% of AIMCO's "REIT taxable income" (computed without regard to the dividends paid deduction and AIMCO's net capital gain) and (ii) 95% of the net income (after tax), if any, from foreclosure property, minus (B) the sum of certain items of noncash income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before AIMCO timely files its tax return for such year and if paid with or before the first regular dividend payment after such declaration. To the extent that AIMCO distributes at least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax thereon at ordinary corporate tax rates. AIMCO may elect to retain, rather than distribute, its net long-term capital gains and pay tax on such gains. In such a case, AIMCO's stockholders would include their proportionate share of such undistributed long-term capital gains in income and receive a credit for their share of the tax paid by AIMCO. AIMCO's stockholders would then increase the adjusted basis of their AIMCO shares by the difference between the designated amounts included in their long-term capital gains and the tax deemed paid with respect to their shares. If AIMCO should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year and (ii) 95% of its REIT capital gain net income for such year (excluding retained long-term capital gains), and (iii) any undistributed taxable income from prior periods, AIMCO would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. AIMCO believes that it has made, and intends to make, timely distributions sufficient to satisfy these annual distribution requirements. It is possible that AIMCO, from time to time, may not have sufficient cash to meet the 95% distribution requirement due to timing differences between (i) the actual receipt of cash (including receipt of distributions from the Partnership) and (ii) the inclusion of certain income by AIMCO for federal income tax purposes. In the event that such timing differences occur, in order to meet the 95% distribution requirement, AIMCO may find it necessary to arrange for short-term, or possibly long-term, borrowings or to pay dividends in the form of taxable distributions of property. Under certain circumstances, AIMCO may be able to rectify a failure to meet the distribution requirement for a year by paying "deficiency dividends" to stockholders in a later year, which may be included in AIMCO's deduction for dividends paid for the earlier year. Thus, AIMCO may be able to avoid being taxed on amounts distributed as deficiency dividends; however, AIMCO will be required to pay interest and a penalty based on the amount of any deduction taken for deficiency dividends. Distribution of Acquired Earnings and Profits. The Code provides that when a REIT acquires a corporation that is currently a C corporation (i.e., a corporation without a REIT election such as Insignia), the REIT may qualify as a REIT only if, as of the close of the year of acquisition, the REIT has no "earnings and profits" acquired from such C corporation. In the Insignia Merger, AIMCO succeeded to the earnings and profits of Insignia and, therefore, AIMCO must distribute such earnings and profits effective on or before December 31, 1998. Insignia has retained independent certified public accountants to determine Insignia's earnings and profits through the effective time of the Insignia Merger for purposes of this requirement. The determination of the independent certified public accountants will be based upon Insignia's tax returns as filed with the IRS and other assumptions and qualifications set forth in the reports issued by such accountants. Any 74 76 adjustments to Insignia's income for taxable years ending on or before the closing of the Insignia Merger, including as a result of an examination of its returns by the IRS or the receipt of certain indemnity or other payments, could affect the calculation of Insignia's earnings and profits. Furthermore, the determination of earnings and profits requires the resolution of certain technical tax issues with respect to which there is no authority directly on point and, consequently, the proper treatment of these issues for earnings and profits purposes is not free from doubt. There can be no assurance that the IRS will not examine the tax returns of Insignia and propose adjustments to increase its taxable income and therefore its earnings and profits. In this regard, the IRS can consider all taxable years of Insignia as open for review for purposes of determining the amount of such earnings and profits. Additionally, if the Special Dividend paid to holders of Class E Preferred Stock is not treated as a dividend under the Code, AIMCO may, depending upon the amount of other distributions made by AIMCO subsequent to the Insignia Merger, fail to distribute an amount equal to Insignia's earnings and profits. AIMCO's failure to distribute an amount equal to such earnings and profits effective on or before December 31, 1998, would result in AIMCO's failure to qualify as a REIT. Failure to Qualify. If AIMCO fails to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, AIMCO will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to stockholders in any year in which AIMCO fails to qualify will not be deductible by AIMCO nor will they be required to be made. In such event, to the extent of current and accumulated earnings and profits, all distributions to stockholders will be taxable as ordinary income, and, subject to certain limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Unless AIMCO is entitled to relief under specific statutory provisions, AIMCO would also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether in all circumstances AIMCO would be entitled to such statutory relief. TAX ASPECTS OF AIMCO'S INVESTMENTS IN PARTNERSHIPS General. Substantially all of AIMCO's investments are held indirectly through the Partnership. In general, partnerships are "pass-through" entities that are not subject to federal income tax. Rather, partners are allocated their proportionate shares of the items of income, gain, loss, deduction and credit of a partnership, and are potentially subject to tax thereon, without regard to whether the partners receive a distribution from the partnership. AIMCO will include in its income its proportionate share of the foregoing partnership items for purposes of the various REIT income tests and in the computation of its REIT taxable income. Moreover, for purposes of the REIT asset tests, AIMCO will include its proportionate share of assets held by the Subsidiary Partnerships. See "-- Taxation of AIMCO and AIMCO Stockholders -- General -- Ownership of Partnership Interests." Entity Classification. AIMCO's direct and indirect investment in Subsidiary Partnerships involves special tax considerations, including the possibility of a challenge by the IRS of the status of any of the Subsidiary Partnerships as a partnership (as opposed to an association taxable as a corporation) for federal income tax purposes. If any of these entities were treated as an association for federal income tax purposes, it would be subject to an entity-level tax on its income. In such a situation, the character of AIMCO's assets and items of gross income would change and could preclude AIMCO from satisfying the asset tests and the income tests (see "-- Taxation of AIMCO and AIMCO Stockholders -- Asset Tests" and "-- Taxation of AIMCO and AIMCO Stockholders -- Income Tests"), and in turn could prevent AIMCO from qualifying as a REIT. See "-- Taxation of AIMCO and AIMCO Stockholders -- Failure to Qualify" above for a discussion of the effect of AIMCO's failure to meet such tests for a taxable year. In addition, any change in the status of any of the Subsidiary Partnerships for tax purposes might be treated as a taxable event, in which case AIMCO might incur a tax liability without any related cash distributions. Tax Allocations with Respect to the Properties. As discussed above, under the Code and the Regulations, income, gain, loss and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership must be allocated in a manner such that the contributing partner is charged with, or benefits from, respectively, the unrealized gain or unrealized loss associated with the property at the time of the contribution. See "-- Taxation of the Partnership and the 75 77 Partners -- Tax Consequences Upon Contribution of Property to the Partnership." The Partnership was formed by way of contributions of appreciated property (including certain of the Owned Properties). Consequently, allocations must be made in a manner consistent with these requirements. Where a partner contributes cash to a partnership that holds appreciated property, the Regulations provide for a similar allocation of such items to the other partners. These rules apply to the contribution by AIMCO to the Partnership of the cash proceeds received in any offerings of its stock. In general, certain holders of OP Units will be allocated lower amounts of depreciation deductions for tax purposes and increased taxable income and gain on sale by the Partnership or Subsidiary Partnerships of the contributed Owned Properties. This will tend to eliminate the Book-Tax Difference over the life of these partnerships. However, the special allocations do not always entirely rectify the Book-Tax Difference on an annual basis or with respect to a specific taxable transaction such as a sale. Thus, the carryover basis of the contributed Owned Properties in the hands of the Partnership or Subsidiary Partnerships may cause AIMCO to be allocated lower depreciation and other deductions, and possibly greater amounts of taxable income in the event of a sale of such contributed assets in excess of the economic or book income allocated to it as a result of such sale. This may cause AIMCO to recognize taxable income in excess of cash proceeds, which might adversely affect AIMCO's ability to comply with the REIT distribution requirements. See "-- Taxation of AIMCO and AIMCO Stockholders -- Annual Distribution Requirements." With respect to any property purchased or to be purchased by any of the Subsidiary Partnerships (other than through the issuance of OP Units) subsequent to the formation of AIMCO, such property will initially have a tax basis equal to its fair market value and the special allocation provisions described above generally will not apply. Sale of the Properties. AIMCO's share of any gain realized by the Partnership or any Subsidiary Partnership on the sale of any property held as inventory or primarily for sale to customers in the ordinary course of business will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. See "-- Taxation of AIMCO and AIMCO Stockholders -- General -- Income Tests." Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary course of a partnership's trade or business is a question of fact that depends on all the facts and circumstances with respect to the particular transaction. The Partnership and the Subsidiary Partnerships intend to hold the Owned Properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing, owning, and operating the Owned Properties and to make such occasional sales of the Owned Properties, including peripheral land, as are consistent with AIMCO's investment objectives. TAXATION OF MANAGEMENT SUBSIDIARIES A portion of the amounts to be used to fund distributions to stockholders is expected to come from distributions made by the Management Subsidiaries to the Partnership, and interest paid by the Management Subsidiaries on certain notes held by the Partnership. In general, the Management Subsidiaries pay federal, state and local income taxes on their taxable income at normal corporate rates. Any federal, state or local income taxes that the Management Subsidiaries are required to pay will reduce AIMCO's cash flow from operating activities and its ability to make payments to holders of its securities. TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS Provided AIMCO qualifies as a REIT, distributions made to AIMCO's taxable domestic stockholders out of current or accumulated earnings and profits (and not designated as capital gain dividends) will be taken into account by them as ordinary income and will not be eligible for the dividends received deduction for corporations. Distributions (and retained long-term capital gains) that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent that they do not exceed AIMCO's actual net capital gain for the taxable year) without regard to the period for which the stockholder has held its stock. However, corporate stockholders may be required to treat up to 20% of certain capital gain dividends as ordinary income. In addition, net capital gains attributable to the sale of depreciable real property held for more than 12 months 76 78 are subject to a 25% maximum federal income tax rate to the extent of previously claimed real property depreciation deductions. Distributions in excess of current and accumulated earnings and profits will not be taxable to a stockholder to the extent that they do not exceed the adjusted basis of the stockholder's shares in respect of which the distributions are made, but rather will reduce the adjusted basis of such shares. To the extent that such distributions exceed the adjusted basis of a stockholder's shares, they will be included in income as long-term capital gain (or short-term capital gain if the shares have been held for one year or less) provided that the shares are a capital asset in the hands of the stockholder. In addition, any dividend declared by AIMCO in October, November or December of any year and payable to a stockholder of record on a specified date in any such month will be treated as both paid by AIMCO and received by the stockholder on December 31 of such year, provided that the dividend is actually paid by AIMCO during January of the following calendar year. Stockholders may not include in their individual income tax returns any net operating losses or capital losses of AIMCO. In general, any loss upon a sale or exchange of shares of AIMCO stock by a stockholder who has held such shares for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss to the extent of distributions from AIMCO required to be treated by such stockholder as long-term capital gain. TAXATION OF FOREIGN STOCKHOLDERS The following is a discussion of certain anticipated U.S. federal income and estate tax consequences of the ownership and disposition of AIMCO Stock applicable to Non-U.S. Holders of such stock. A "Non-U.S. Holder" is any person other than (i) a citizen or resident of the United States, (ii) a corporation or partnership created or organized in the United States or under the laws of the United States or of any state thereof or the District of Columbia, (iii) an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source or (iv) a trust if a United States court is able to exercise primary supervision over the administration of such trust and one or more United States fiduciaries have the authority to control all substantial decisions of such trust. The discussion is based on current law and is for general information only. The discussion addresses only certain and not all aspects of U.S. federal income and estate taxation. Ordinary Dividends. The portion of dividends received by Non-U.S. Holders payable out of AIMCO's earnings and profits which are not attributable to capital gains of AIMCO and which are not effectively connected with a U.S. trade or business of the Non-U.S. Holder will be subject to U.S. withholding tax at the rate of 30% (unless reduced by treaty). In general, Non-U.S. Holders will not be considered engaged in a U.S. trade or business solely as a result of their ownership of AIMCO Stock. In cases where the dividend income from a Non-U.S. Holder's investment in AIMCO Stock is (or is treated as) effectively connected with the Non-U.S. Holder's conduct of a U.S. trade or business, the Non-U.S. Holder generally will be subject to U.S. tax at graduated rates, in the same manner as U.S. stockholders are taxed with respect to such dividends (and may also be subject to the 30% branch profits tax in the case of a Non-U.S. Holder that is a corporation). Non-Dividend Distributions. Unless AIMCO Stock constitutes a United States Real Property Interest (a "USRPI") within the meaning of the Foreign Investment in Real Property Tax act of 1980 ("FIRPTA"), distributions by AIMCO which are not dividends out of the earnings and profits of AIMCO will not be subject to U.S. income or withholding tax. If it cannot be determined at the time a distribution is made whether or not such distribution will be in excess of current and accumulated earnings and profits, the distribution will be subject to withholding at the rate applicable to dividends. However, the Non-U.S. Holder may seek a refund of such amounts from the IRS if it is subsequently determined that such distribution was, in fact, in excess of current and accumulated earnings and profits of AIMCO. If AIMCO Stock constitutes a USRPI, such distributions will be subject to 10% withholding and may be taxed pursuant to FIRPTA at a rate of 35% to the extent such distributions exceed a stockholder's basis in his or her AIMCO Stock. 77 79 Capital Gain Dividends. Under FIRPTA, a distribution made by AIMCO to a Non-U.S. Holder, to the extent attributable to gains from dispositions of USRPIs such as the properties beneficially owned by AIMCO ("USRPI Capital Gains"), will be considered effectively connected with a U.S. trade or business of the Non-U.S. Holder and subject to U.S. income tax at the rate applicable to U.S. individuals or corporations, without regard to whether such distribution is designated as a capital gain dividend. In addition, AIMCO will be required to withhold tax equal to 35% of the amount of dividends to the extent such dividends constitute USRPI Capital Gains. Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the hands of a Non-U.S. Holder that is a corporation. Disposition of Stock of AIMCO. Unless AIMCO Stock constitutes a USRPI, a sale of such stock by a Non-U.S. Holder generally will not be subject to U.S. taxation under FIRPTA. The stock will not constitute a USRPI if AIMCO is a "domestically controlled REIT." A domestically controlled REIT is a REIT in which, at all times during a specified testing period, less than 50% in value of its shares is held directly or indirectly by Non-U.S. Holders. AIMCO believes that it is, and it expects to continue to be, a domestically controlled REIT and, therefore, the sale of AIMCO Stock should not be subject to taxation under FIRPTA. Because most AIMCO Stock is publicly traded, however, no assurance can be given that AIMCO is or will continue to be a domestically controlled REIT. If AIMCO does not constitute a domestically controlled REIT, a Non-U.S. Holder's sale of stock generally will still not be subject to tax under FIRPTA as a sale of a USRPI provided that (i) the stock is "regularly traded" (as defined by applicable Regulations) on an established securities market (e.g., the New York Stock Exchange, on which the Class A Common Stock and various other classes of AIMCO stock are listed) and (ii) the selling Non-U.S. Holder held 5% or less of AIMCO's outstanding stock at all times during a specified testing period. If gain on the sale of stock of AIMCO were subject to taxation under FIRPTA, the Non-U.S. Holder would be subject to the same treatment as a U.S. stockholder with respect to such gain (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals) and the purchaser of the stock could be required to withhold 10% of the purchase price and remit such amount to the IRS. Gain from the sale of AIMCO Stock that would not otherwise be subject to FIRPTA will nonetheless be taxable in the United States to a Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder's investment in the AIMCO Stock is effectively connected with a U.S. trade or business conducted by such Non-U.S. Holder, the Non-U.S. Holder will be subject to the same treatment as a U.S. stockholder with respect to such gain, or (ii) if the Non-U.S. Holder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a "tax home" in the United States, the nonresident alien individual will be subject to a 30% tax on the individual's capital gain. Estate Tax. AIMCO Stock owned or treated as owned by an individual who is not a citizen or resident (as specially defined for U.S. federal estate tax purposes) of the United States at the time of death will be includible in the individual's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. Such individual's estate may be subject to U.S. federal estate tax on the property includible in the estate for U.S. federal estate tax purposes. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING AIMCO will report to its U.S. stockholders and to the IRS the amount of distributions paid during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, a stockholder may be subject to backup withholding at the rate of 31% with respect to distributions paid unless such holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with the applicable requirements of the backup withholding rules. A stockholder who does not provide AIMCO with his correct taxpayer identification number also may be subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the stockholder's income tax liability. In addition, AIMCO may be required to withhold a portion of capital gain distributions to 78 80 any Non-U.S. Holders who fail to certify their non-foreign status to AIMCO. The IRS has issued final Regulations regarding the backup withholding and information reporting rules as applied to Non-U.S. Holders. Those final Regulations alter the current system of backup withholding compliance and will be effective for payments made after December 31, 1999. Prospective investors in AIMCO Stock should consult their tax advisors regarding the application of the Regulations. TAXATION OF TAX-EXEMPT STOCKHOLDERS Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts ("Exempt Organizations"), generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income ("UBTI"). While many investments in real estate generate UBTI, the IRS has ruled that dividend distributions from a REIT to an exempt employee pension trust do not constitute UBTI, provided that the shares of the REIT are not otherwise used in an unrelated trade or business of the exempt employee pension trust. Based on that ruling, amounts distributed by AIMCO to Exempt Organizations should generally not constitute UBTI. However, if an Exempt Organization finances its acquisition of the AIMCO Stock with debt, a portion of its income from AIMCO will constitute UBTI pursuant to the "debt-financed property" rules. Furthermore, social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans that are exempt from taxation under paragraphs (7), (9), (17) and (20), respectively, of Section 501(c) of the Code are subject to different UBTI rules, which generally will require them to characterize distributions from AIMCO as UBTI. In addition, in certain circumstances, a pension trust that owns more than 10% of AIMCO's stock is required to treat a percentage of the dividends from AIMCO as UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross income derived by AIMCO from an unrelated trade or business (determined as if AIMCO were a pension trust) divided by the gross income of AIMCO for the year in which the dividends are paid. The UBTI rule applies to a pension trust holding more than 10% of AIMCO's stock only if (i) the UBTI Percentage is at least 5%, (ii) AIMCO qualifies as a REIT by reason of the modification of the 5/50 Rule that allows the beneficiaries of the pension trust to be treated as holding shares of AIMCO in proportion to their actuarial interest in the pension trust, and (iii) either (A) one pension trust owns more than 25% of the value of AIMCO's stock or (B) a group of pension trusts each individually holding more than 10% of the value of AIMCO's stock collectively owns more that 50% of the value of AIMCO's stock. The restrictions on ownership and transfer of AIMCO's stock should prevent an Exempt Organization from owning more than 10% of the value of AIMCO's stock. OTHER TAX CONSEQUENCES POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING REITS The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. Changes to the federal laws and interpretations thereof could adversely affect an investment in AIMCO or the Partnership. For example, a proposal issued by President Clinton on February 2, 1998, if enacted into law, may adversely affect the ability of AIMCO to expand the present activities of its Management Subsidiaries. It cannot be predicted whether, when, in what forms, or with what effective dates, the tax laws applicable to AIMCO or the Partnership, or an investment in AIMCO or the Partnership, will be changed. STATE, LOCAL AND FOREIGN TAXES The Partnership and its partners and AIMCO and its stockholders may be subject to state, local or foreign taxation in various state, local or foreign jurisdictions, including those in which they transact business or reside. The state, local or foreign tax treatment of the Partnership and its partners and AIMCO and its stockholders may not conform to the federal income tax consequences discussed above. Consequently, prospective investors should consult their own tax advisors regarding the application and effect of state, local foreign tax laws on an investment in the Partnership or AIMCO. 79 81 ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Partnership Agreement requires the Partnership to indemnify the directors and officers of the General Partner (each an "Indemnitee") to the fullest extent authorized by applicable law against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, attorney's fees and other legal fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Partnership. Such indemnification continues after the Indemnitee ceases to be a director or officer. The right to indemnification includes the right to be paid by the Partnership the expenses incurred in defending any proceeding in advance of its final disposition upon the delivery of an undertaking by or on behalf of the Indemnitee to repay all amounts advanced if a final judicial decision is rendered that such Indemnitee did not meet the standard of conduct permitting indemnification under the Agreement or applicable law. The Partnership maintains insurance, at its expense, to protect against any liability or loss, regardless of whether any director or officer is entitled to indemnification under the Partnership Agreement or applicable law. ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following financial statements are incorporated herein by reference: (i) the Consolidated Balance Sheets of AIMCO Properties, L.P. as of December 31, 1997 and 1996 and the related consolidated statements of income, partners' capital and cash flows for the years ended December 31, 1997, 1996 and 1995, together with the Report of Independent Auditors, set forth on pages F-2 through F-33 of this Registration Statement; (ii) the consolidated financial statement schedule of real estate and accumulated depreciation as of December 31, 1997 of AIMCO Properties, L.P. set forth on pages F-34 through F-38 of this Registration Statement; (iii) The Consolidated Balance Sheets of AIMCO Properties, L.P. as of June 30, 1998 and December 31, 1997 and the related consolidated statements of income and cash flows for the three and six months ended June 30, 1998 and 1997, set forth on pages F-39 through F-55 of this Registration Statement; (iv) the Pro Forma Consolidated Balance Sheet of AIMCO Properties, L.P. (Pre-Insignia Merger) as of June 30, 1998 and the Pro Forma Consolidated Statements of Operations for the year ended December 31, 1997 and the six months ended June 30, 1998, set forth on pages F-56 through F-72 of this Registration Statement; (v) the Pro Forma Consolidated Balance Sheet of AIMCO Properties, L.P. (Insignia Merger) as of June 30, 1998 and the Pro Forma Consolidated Statements of Operations for the year ended December 31, 1997 and the six months ended June 30, 1998, set forth on pages F-73 through F-91 of this Registration Statement; (vi) the Consolidated Balance Sheets of NHP Incorporated as of December 31, 1996 and 1995 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended December 31, 1996, 1995 and 1994, together with the Report of Independent Public Accountants, included as Exhibit 99.4 to Amendment No. 3 to AIMCO's Current Report on Form 8-K, dated April 16, 1997; (vii) the Combined Balance Sheets of NHP Real Estate Companies, as of December 31, 1996 and 1995 and March 31, 1997 (unaudited), and the related combined statements of operations, changes in shareholders' equity (deficit) and partners' capital (deficit), net and cash flows for each of the three years in the period ended December 31, 1996, and for the three months ended March 31, 1997 (unaudited) and 1996 (unaudited), together with the Report of Independent Public Accountants included as Exhibit 99.5 to Amendment No. 5 to AIMCO's Current Report on Form 8-K, dated June 3, 1997; 80 82 (viii) the Balance Sheets of NHP Southwest Partners, L.P. as of December 31, 1996 and 1995 and the related combined statements of operations, changes partners' capital, net and cash flows for the year ended December 31, 1996 and for the period from January 20, 1995 (date of inception) through December 31, 1995, together with the Report of Independent Public Accountants included as Exhibit 99.6 to Amendment No. 5 to AIMCO's Current Report on Form 8-K, dated June 3, 1997; (ix) the Combined Balance Sheets of NHP New L.P. Entities as of December 31, 1996 and 1995 and the related combined statements of operations, changes partners' capital, net and cash flows for the year ended December 31, 1996 and for the period from January 20, 1995 (date of inception) through December 31, 1995, together with the Report of Independent Public Accountants included as Exhibit 99.7 to Amendment No. 1 to AIMCO's Current Report on Form 8-K, dated June 3, 1997; (x) the Combined Balance Sheets of NHP Borrower Entities as of December 31, 1996 and 1995 and the related combined statements of operations, changes partners' capital, net and cash flows for the year ended December 31, 1996 and for the period from January 20, 1995 (date of inception) through December 31, 1995, together with the Report of Independent Public Accountants included as Exhibit 99.8 to Amendment No. 1 to AIMCO's Current Report on Form 8-K, dated June 3, 1997, (xi) the Historical Summary of Gross Income and Certain Expenses of The Bay Club at Aventura for the year ended December 31, 1996 and the three months ended March 31, 1997 (unaudited), together with the Report of Independent Auditors included as Exhibit 99.9 to Amendment No. 1 to AIMCO's Current Report on Form 8-K, dated June 3, 1997; (xii) the Historical Summary of Gross Income and Direct Operating Expenses of Morton Towers for the year ended December 31, 1996 and the six months ended June 30, 1997 (unaudited), together with the Report of Independent Auditors included as Exhibit 99.1 to AIMCO's Current Report on Form 8-K, dated September 19, 1997; (xiii) the Combined Statement of Revenues and Certain Expenses of the Thirty-Five Acquisition Properties for the year ended December 31, 1996 and the six months ended June 30, 1997 (unaudited), together with the Report of Independent Auditors included as Exhibit 99.1 to AIMCO's Current Report on Form 8-K, dated October 15, 1997; (xiv) the Statements of Revenues and Certain Expenses of First Alexandria Associates, A Limited Partnership, for the years ended December 31, 1996, 1995 and 1994 and for the nine months ended September 30, 1997 (unaudited), together with the Report of Independent Public Accountants included as Exhibit 99.3 to AIMCO's Current Report on Form 8-K, dated December 1, 1997; (xv) the Statements of Revenues and Certain Expenses of Country Lakes Associates Two, A Limited Partnership, for the years ended December 31, 1996, 1995 and 1994 and for the nine months ended September 30, 1997 (unaudited), together with the Report of Independent Public Accountants included as Exhibit 99.4 to AIMCO's Current Report on Form 8-K, dated December 1, 1997; (xvi) the Statements of Revenues and Certain Expenses of Point West Limited Partnership, A Limited Partnership, for the years ended December 31, 1996, 1995 and 1994 and for the nine months ended September 30, 1997 (unaudited), together with the Report of Independent Public Accountants included as Exhibit 99.5 to AIMCO's Current Report on Form 8-K, dated December 1, 1997; (xvii) the Statements of Revenues and Certain Expenses of The Oak Park Partnership for the years ended December 31, 1996, 1995 and 1994 and for the nine months ended September 30, 1997 (unaudited), together with the Report of Independent Public Accountants included as Exhibit 99.6 to AIMCO's Current Report on Form 8-K, dated December 1, 1997; (xviii) the Consolidated Balance Sheets of Ambassador Apartments, Inc., as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997, 1996 and 1995, together with the Report of Independent Auditors included as Exhibit 99.1 to AIMCO's Current Report on Form 8-K, dated March 17, 1998; 81 83 (xix) the Consolidated Balance Sheets of Insignia Financial Group, Inc. and Subsidiaries, as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997, together with the Report of Ernst & Young LLP, Independent Auditors included as Exhibit 99.2 to AIMCO's Current Report on Form 8-K, dated March 17, 1998; and (xx) the Consolidated Balance Sheets of Insignia Financial Group, Inc. and Subsidiaries, as of March 31, 1998 (unaudited) and December 31, 1997, and the related consolidated statements of income and cash flows for the three months ended March 31, 1998 (unaudited) and 1997 (unaudited), included as Exhibit 99.3 to Amendment No. 2 to AIMCO's Current Report on Form 8-K, dated March 17, 1998. (xxi) the Consolidated Balance Sheets of Insignia Financial Group, Inc. and Subsidiaries, as of June 30, 1998 (unaudited) and December 31, 1997, and the related consolidated statements of income and cash flows for the six months ended June 30, 1998 (unaudited) and 1997 (unaudited), included as Exhibit 99.3 to Amendment No. 5 to AIMCO's current report on Form 8-K dated March 17, 1998. ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no changes in or disagreements with the Partnership's accountants regarding accounting and financial disclosure during the Partnership's two most recent fiscal years. ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS. (a) The following financial statements are filed as part of this Registration Statement: (i) The Consolidated Balance Sheets of AIMCO Properties, L.P. as of December 31, 1997 and 1996 and the related consolidated statements of income, partners' capital and cash flow for the years ended December 31, 1997, 1996 and 1995, together with the Report of Independent Auditors. (ii) The consolidated financial statement schedule of real estate and accumulated depreciation as of December 31, 1997 of AIMCO Properties, L.P. (iii) The Consolidated Balance Sheets of AIMCO Properties, L.P. as of June 30, 1998 and December 31, 1997 and the related consolidated statements of income and cash flow for the three and six months ended June 30, 1998 and 1997. (iv) The Pro Forma Consolidated Balance Sheet of AIMCO Properties, L.P. (Pre-Insignia Merger) as of June 30, 1998 and the Pro Forma Consolidated Statements of Operations for the year ended December 31, 1997 and the six months ended June 30, 1998. (v) The Pro Forma Consolidated Balance Sheet of AIMCO Properties, L.P. (Insignia Merger) as of June 30, 1998 and the Pro Forma Consolidated Statements of Operations for the year ended December 31, 1997 and the six months ended June 30, 1998. (vi) The Consolidated Balance Sheets of NHP Incorporated as of December 31, 1996 and 1995 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended December 31, 1996, 1995 and 1994, together with the Report of Independent Public Accountants. (vii) The Combined Balance Sheets of NHP Real Estate Companies, as of December 31, 1996 and 1995 and March 31, 1997 (unaudited), and the related combined statements of operations, changes in shareholders' equity (deficit) and partners' capital (deficit), net and cash flows for each of the three years in the period ended December 31, 1996, and for the three months ended March 31, 1997 (unaudited) and 1996 (unaudited), together with the Report of Independent Public Accountants. (viii) The Balance Sheets of NHP Southwest Partners, L.P. as of December 31, 1996 and 1995 and the related combined statements of operations, changes in partners' capital, net and cash flows for the year ended December 31, 1996 and for the period from January 20, 1995 (date of inception) through December 31, 1995, together with the Report of Independent Public Accountants. 82 84 (ix) The Combined Balance Sheets of NHP New L.P. Entities as of December 31, 1996 and 1995 and the related combined statements of operations, changes in partners' capital, net and cash flows for the year ended December 31, 1996 and for the period from January 20, 1995 (date of inception) through December 31, 1995, together with the Report of Independent Public Accountants. (x) The Combined Balance Sheets of NHP Borrower Entities as of December 31, 1996 and 1995 and the related combined statements of operations, changes in partners' capital, net and cash flows for the year ended December 31, 1996 and for the period from January 20, 1995 (date of inception) through December 31, 1995, together with the Report of Independent Public Accountants. (xi) The Historical Summary of Gross Income and Certain Expenses of The Bay Club at Aventura for the year ended December 31, 1996 and the three months ended March 31, 1997 (unaudited), together with the Report of Independent Auditors. (xii) The Historical Summary of Gross Income and Direct Operating Expenses of Morton Towers for the year ended December 31, 1996 and the six months ended June 30, 1997 (unaudited), together with the Report of Independent Auditors. (xiii) The Combined Statement of Revenues and Certain Expenses of the Thirty-Five Acquisition Properties for the year ended December 31, 1996 and the six months ended June 30, 1997 (unaudited), together with the Report of Independent Auditors. (xiv) The Statements of Revenues and Certain Expenses of First Alexandria Associates, A Limited Partnership, for the years ended December 31, 1996, 1995 and 1994 and for the nine months ended September 30, 1997 (unaudited), together with the Report of Independent Public Accountants. (xv) The Statements of Revenues and Certain Expenses of Country Lakes Associates Two, A Limited Partnership, for the years ended December 31, 1996, 1995 and 1994 and for the nine months ended September 30, 1997 (unaudited), together with the Report of Independent Public Accountants. (xvi) The Statements of Revenues and Certain Expenses of Point West Limited Partnership, A Limited Partnership, for the years ended December 31, 1996, 1995 and 1994 and for the nine months ended September 30, 1997 (unaudited), together with the Report of Independent Public Accountants. (xvii) The Statements of Revenues and Certain Expenses of The Oak Park Partnership for the years ended December 31, 1996, 1995 and 1994 and for the nine months ended September 30, 1997 (unaudited), together with the Report of Independent Public Accountants. (xviii) The Consolidated Balance Sheets of Ambassador Apartments, Inc., as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997, 1996 and 1995, together with the Report of Independent Auditors. (xix) The Consolidated Balance Sheets of Insignia Financial Group, Inc. and Subsidiaries, as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997, together with the Report of Ernst & Young LLP, Independent Auditors. (xx) The Consolidated Balance Sheets of Insignia Financial Group, Inc. and Subsidiaries, as of March 31, 1998 (unaudited) and December 31, 1997, and the related consolidated statements of income and cash flows the three months ended of March 31, 1998 (unaudited). (xxi) the Consolidated Balance Sheets of Insignia Financial Group, Inc. and Subsidiaries, as of June 30, 1998 (unaudited) and December 31, 1997, and the related consolidated statements of income and cash flows for the six months ended June 30, 1998 (unaudited) and 1997 (unaudited), included as Exhibit 99.3 to Amendment No. 5 to AIMCO's current report on Form 8-K dated March 17, 1998. 83 85 (b) The following exhibits are filed as part of this Registration Statement:
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 -- Amended and Restated Agreement and Plan of Merger, dated as of May 26, 1998, by and among Apartment Investment and Management Company, AIMCO Properties, L.P., Insignia Financial Group, Inc., and Insignia/ESG Holdings, Inc. (filed June 22, 1998, as Exhibit 2.1 to Amendment No. 2 to AIMCO's Current Report on Form 8-K, dated March 17, 1998 and incorporated herein by reference) 2.2 -- Agreement and Plan of Merger, dated as of April 21, 1997, by and among Apartment Investment and Management Company, AIMCO/NHP Acquisition Corp. and NHP Incorporated (filed as Exhibit 2.1 to AIMCO's Current Report on Form 8-K, dated April 16, 1997 and incorporated herein by reference) 2.3 -- Stock Purchase Agreement, dated as of April 16, 1997, by and among Apartment Investment and Management Company, Demeter Holdings Corporation and Capricorn Investors, L.P. (filed as Exhibit 2.2 to AIMCO's Current Report on Form 8-K, dated April 16, 1997 and incorporated herein by reference) 2.4 -- Agreement and Plan of Merger, dated as of December 23, 1997, by and between Apartment Investment and Management Company and Ambassador Apartments, Inc. (filed as Exhibit 2.1 to AIMCO's Current Report on Form 8-K, dated December 23, 1997 and incorporated herein by reference) 2.5 -- Agreement and Plan of Merger, dated as of October 1, 1998, by and between Apartment Investment and Management Company and Insignia Properties Trust (filed as Exhibit 2.1 to AIMCO's Current Report on Form 8-K, dated October 1, 1998 and incorporated herein by reference) 10.1 -- Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of July 29, 1994, by and among Apartment Investment and Management Company, AIMCO-GP, Inc., as general partner, AIMCO-LP, Inc., as special limited partner, and the other limited partners 10.2 -- First Amended and Restated Contribution and Management Agreement, dated as of June 15, 1998, amended and restated as of October 1, 1998, by and between Apartment Investment and Management Company and AIMCO Properties, L.P. 10.3 -- Convertible Promissory Note from AIMCO Properties, L.P. to AIMCO-LP, Inc. in the amount of $149,500,000 10.4 -- Indenture for the 6.5% Convertible Subordinated Debentures, dated as of November 1, 1996 between Insignia Financial Group, Inc., as Issuer, and First Union National Bank of South Carolina, as Trustee (filed as Exhibit 4.3 to Form S-3 of Insignia Financial Group on December 10, 1996 and incorporated herein by reference) 10.5 -- Apartment Investment and Management Company Non-Qualified Employee Stock Option Plan, adopted August 29, 1996 (filed as Exhibit 10.8 to AIMCO's Quarterly Report on Form 10-Q/A for the quarterly period ending September 30, 1996 and incorporated herein by reference) 10.6 -- Apartment Investment and Management Company 1996 Stock Award and Incentive Plan, adopted April 25, 1996 (filed as Exhibit 10.70 to AIMCO's Annual Report on Form 10-K for the fiscal year 1996 and incorporated herein by reference) 10.7 -- Summary of Arrangement for Sale of Stock to Executive Officers (filed as Exhibit 10.104 to AIMCO's Annual Report on Form 10-K for the fiscal year 1996 and incorporated herein by reference)
84 86
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.8 -- Employment Contract executed on July 29, 1994 by and between AIMCO Properties, L.P. and Peter Kompaniez (filed as Exhibit 10.44a to AIMCO's Annual Report on Form 10-K for the fiscal year 1994 and incorporated herein by reference) 10.9 -- Employment Contract executed on July 29, 1994 by and between AIMCO Properties, L.P. and Terry Considine (filed as Exhibit 10.44c to AIMCO's Annual Report on Form 10-K for the fiscal year 1994 and incorporated herein by reference) 10.10 -- Employment Contract executed on July 29, 1994 by and between AIMCO Properties, L.P. and Steven D. Ira (filed as Exhibit 10.44d to AIMCO's Annual Report on Form 10-K for the fiscal year 1994 and incorporated herein by reference) 10.11 -- Contribution Agreement, dated as of January 31, 1998, by and between Apartment Investment and Management Company and Terry Considine and Peter K. Kompaniez (filed as Exhibit 2.1 to AIMCO's Current Report on Form 8-K dated January 31, 1998 and incorporated herein by reference) 10.12 -- Amendment No. 1 to the Apartment Investment and Management Company 1997 Stock Award and Incentive Plan (filed as Exhibit 10.12 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1998 and incorporated herein by reference) 10.13 -- Apartment Investment Management Company 1998 Incentive Compensation Plan (filed as Exhibit 10.13 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1998 and incorporated herein by reference) 10.14 -- Purchase and Sale Agreement and Joint Escrow Instructions, made and entered into as of August 22, 1997, by and between AIMCO Properties, L.P., and each of the parties identified on Exhibit "A" attached thereto (collectively, the "Winthrop Sellers") (filed as Exhibit 99.3 to AIMCO's Current Report on Form 8-K, dated October 15, 1997 and incorporated herein by reference) 10.15 -- Letter Agreement, dated October 15, 1997, by and between AIMCO Properties, L.P. and the Winthrop Sellers (filed as Exhibit 99.6 to AIMCO's Current Report on Form 8-K, dated October 15, 1997 and incorporated herein by reference) 10.16 -- Contribution Agreement and Joint Escrow Instructions, dated as of January 1, 1996, by and between AIMCO Properties, L.P. and Peachtree Park 94, L.P.(6) (filed as Exhibit 10.1 to AIMCO's Current Report on Form 8-K, dated January 1, 1996 and incorporated herein by reference) 10.17 -- Acquisition Agreement, dated as of April 30, 1996, by and among the Company, AIMCO Somerset, Inc., AIMCO Properties, L.P., Somerset REIT, Inc., RJ Holdings, Ltd., Somerset PAM Partnership and RJ Equities, Inc. (filed as Exhibit 10.1 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 1996 and incorporated herein by reference) 10.18 -- Real Estate Acquisition Agreement, dated as of May 22, 1997, by and among Apartment Investment and Management Company, AIMCO Properties, L.P., Demeter Holdings Corporation, Phemus Corporation, Capricorn Investors, L.P., J. Roderick Heller, III and NHP Partners LLC (filed as Exhibit 2.1 to AIMCO's Current Report on Form 8-K dated June 3, 1997 and incorporated herein by reference) 10.19 -- Amended and Restated Credit Agreement (Unsecured Revolver-to-Term Facility), dated October 1, 1998, by and among AIMCO Properties, L.P., Bank of America National Trust and Savings Association and BankBoston, N.A. (filed as Exhibit 10.1 to AIMCO's Current Report on Form 8-K, dated October 1, 1998 and incorporated herein by reference)
85 87
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.20 -- Promissory Note, dated October 1, 1998, in the principal amount of $65,000,000, issued by AIMCO Properties, L.P. to Bank of America national Trust and Savings Association (filed as Exhibit 10.2 to AIMCO's current Report on Form 8-K, dated October 1, 1998 and incorporated herein by reference) 10.21 -- Promissory Note, dated October 1, 1998, in the principal amount of $35,000,000, issued by AIMCO Properties, L.P. to Bank of America National Trust and Savings Association (filed as Exhibit 10.3 to AIMCO's Current Report on Form 8-K, dated October 1, 1998 and incorporated herein by reference) 10.22 -- Swing Line Promissory Note, dated October 1, 1998, in the principal amount of $30,000,000, issued by AIMCO Properties, L.P. to Bank of America national Trust and Savings Association (filed as Exhibit 10.4 to AIMCO's Current Report on Form 8-K, dated October 1, 1998 and incorporated herein by reference) 10.23 -- Guaranty, dated as of February 4, 1998, by Apartment Investment and Management Company, for the benefit of Washington Mortgage Financial Group, Ltd. (filed as Exhibit 10.7 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1998 and incorporated herein by reference) 10.24 -- Payment Guaranty, dated as of May 8, 1998, by AIMCO Properties, L.P. for the benefit of Federal National Mortgage Association (filed as Exhibit 10.8 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 1998 and incorporated herein by reference) 21.1 -- Subsidiaries of AIMCO Properties, L.P. (Previously filed) 27.1 -- Financial Data Schedule -- as of and for the year ended December 31, 1997 27.2 -- Financial Data Schedule -- as of and for the six months ended June 30, 1998 27.3 -- Financial Data Schedule -- as of and for the three months ended June 30, 1998 99.1 -- Agreement re: disclosure of long-term debt instruments (Previously filed)
- --------------- (1) Schedules and supplemental materials to the exhibits have been omitted but will be provided to the Securities and Exchange Commission upon request. 86 88 AIMCO PROPERTIES, L.P. INDEX TO FINANCIAL STATEMENTS
PAGE ---- AUDITED FINANCIAL STATEMENTS: Report of Independent Auditors............................ F-2 Consolidated Balance Sheets as of December 31, 1997 and 1996................................................... F-3 Consolidated Statements of Income for the Years ended December 31, 1997, 1996 and 1995............................................... F-4 Consolidated Statements of Partners' Capital for the Years ended December 31, 1997, 1996 and 1995................. F-5 Consolidated Statements of Cash Flow for the Years ended December 31, 1997, 1996 and 1995....................... F-6 Notes to Consolidated Financial Statements................ F-9 AUDITED FINANCIAL STATEMENT SCHEDULE: Schedule III -- Real Estate and Accumulated Depreciation........................................... F-36 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto INTERIM UNAUDITED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997...................................... F-41 Consolidated Statements of Income for the Three and Six Months ended June 30, 1998, and 1997................... F-42 Consolidated Statements of Cash Flow for the Six Months ended June 30, 1998, and 1997.......................... F-43 Notes to Consolidated Financial Statements................ F-47 PRO FORMA FINANCIAL INFORMATION OF AIMCO PROPERTIES, L.P. PRO FORMA FINANCIAL INFORMATION (PRE-INSIGNIA MERGER) Pro Forma Consolidated Balance Sheet as of June 30, 1998.................................................. F-62 Pro Forma Consolidated Statement of Operations for the year ended December 31, 1997.......................... F-70 Pro Forma Consolidated Statement of Operations for the six months ended June 30, 1998........................ F-72 PRO FORMA FINANCIAL INFORMATION (INSIGNIA MERGER) Pro Forma Consolidated Balance Sheet as of June 30, 1998.................................................. F-82 Pro Forma Consolidated Statement of Operations for the year ended December 31, 1997.......................... F-83 Pro Forma Consolidated Statement of Operations for the six months ended June 30, 1998........................................ F-87
F-1 89 REPORT OF INDEPENDENT AUDITORS The Partners AIMCO Properties, L.P. We have audited the accompanying consolidated balance sheets of AIMCO Properties, L.P. (the "Partnership") as of December 31, 1997 and 1996, and the related consolidated statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15(a)(ii). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AIMCO Properties, L.P. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information set forth therein. ERNST & YOUNG LLP Dallas, Texas March 6, 1998, except for Note 21, as to which the date is June 5, 1998 F-2 90 AIMCO PROPERTIES, L.P. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996 (IN THOUSANDS)
ASSETS 1997 1996 ---------- -------- Real estate, net of accumulated depreciation of $153,285 and $120,077 (see Note 3)..................................... $1,503,922 $745,145 Property held for sale...................................... 6,284 6,769 Investments in securities (see Note 4)...................... 22,144 -- Investments in and notes receivable from unconsolidated subsidiaries (see Note 5)................................. 84,459 -- Investments in and note receivable from unconsolidated real estate partnerships (see Note 6).......................... 212,150 -- Cash and cash equivalents................................... 37,088 13,170 Restricted cash............................................. 24,229 15,831 Accounts receivable......................................... 28,656 4,344 Deferred financing costs.................................... 12,793 11,053 Goodwill.................................................... 125,239 -- Other assets................................................ 43,546 31,361 ---------- -------- Total assets...................................... $2,100,510 $827,673 ========== ======== LIABILITIES AND PARTNERS' CAPITAL Secured notes payable (see Note 7).......................... $ 681,421 $242,110 Secured tax-exempt bond financing (see Note 9).............. 74,010 75,497 Secured short-term financing (see Note 8)................... 53,099 192,039 Unsecured short-term financing (see Note 10)................ -- 12,500 ---------- -------- Total indebtedness................................ 808,530 522,146 ---------- -------- Accounts payable, accrued and other liabilities............. 88,170 16,299 Resident security deposits and prepaid rents................ 10,213 4,316 ---------- -------- Total liabilities................................. 906,913 542,761 ---------- -------- Commitments and contingencies (see Note 12)................. -- -- Minority interest (see Note 13)............................. 36,335 10,386 Redeemable Partnership Units (see Note 15).................. 197,086 96,064 Partners' capital (see Note 15) General and Special Limited Partner....................... 825,597 178,462 Preferred Units........................................... 134,579 -- ---------- -------- Total partners' capital........................... 960,176 178,462 ---------- -------- Total liabilities and partners' capital........... $2,100,510 $827,673 ========== ========
See accompanying notes to consolidated financial statements. F-3 91 AIMCO PROPERTIES, L.P. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER UNIT DATA)
1997 1996 1995 -------- -------- -------- RENTAL PROPERTY OPERATIONS Rental and other property revenues......................... $193,006 $100,516 $ 74,947 Property operating expenses................................ (76,168) (38,400) (30,150) Owned property management expenses......................... (6,620) (2,746) (2,276) Depreciation............................................... (37,741) (19,556) (15,038) -------- -------- -------- Income from property operations............................ 72,477 39,814 27,483 SERVICE COMPANY BUSINESS Management fees and other income........................... $ 13,937 $ 8,367 $ 8,132 Management and other expenses.............................. (9,910) (5,352) (4,953) Partnership overhead allocation............................ (588) (590) (581) Amortization of management company goodwill................ (948) (500) (428) Depreciation and amortization.............................. (453) (218) (168) -------- -------- -------- Income from service company business....................... 2,038 1,707 2,002 Minority interests in service company business............. (10) 10 (29) -------- -------- -------- Partnership's share of income from service company business................................................. 2,028 1,717 1,973 -------- -------- -------- General and administrative expenses........................ (5,396) (1,512) (1,804) Interest expense........................................... (51,385) (24,802) (13,322) Interest income............................................ 8,676 523 658 Minority interest.......................................... 1,008 (111) -- Equity in losses of unconsolidated partnerships............ (1,798) -- -- Equity in earnings of unconsolidated subsidiaries.......... 4,636 -- -- -------- -------- -------- Income from operations..................................... 30,246 15,629 14,988 Gain on disposition of properties.......................... 2,720 44 -- -------- -------- -------- Income before extraordinary item........................... 32,966 15,673 14,988 Extraordinary item -- early extinguishment of debt......... (269) -- -- -------- -------- -------- Net income................................................. 32,697 15,673 14,988 Net income attributable to Preferred Unitholders........... 2,315 -- 5,169 -------- -------- -------- Net income attributable to OP Unitholders.................. $ 30,382 $ 15,673 $ 9,819 ======== ======== ======== Basic earnings per OP Unit................................. $ 1.09 $ 1.05 $ 0.86 ======== ======== ======== Diluted earnings per OP Unit............................... $ 1.08 $ 1.04 $ 0.86 ======== ======== ======== Weighted average OP Units outstanding...................... 27,732 14,978 11,453 ======== ======== ======== Weighted average OP Units and OP Unit equivalents outstanding.............................................. 28,113 14,994 11,461 ======== ======== ======== Distributions paid per OP Unit............................. $ 1.85 $ 1.70 $ 1.66 ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 92 AIMCO PROPERTIES, L.P. CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
GENERAL PARTNER AND SPECIAL LIMITED PREFERRED PARTNER UNITS TOTAL --------------- --------- --------- PARTNERS' CAPITAL AT JANUARY 1, 1995........................ $137,354 $ 107,228 $ 244,582 Contributions from AIMCO related to Class A common offering.................................................. 46,874 -- 46,874 Repurchase of OP Units...................................... (10,628) -- (10,628) OP Units redeemed to Special Limited Partner................ 18 -- 18 Redemption of mandatorily redeemable 1994 Cumulative Convertible Senior Preferred Units........................ -- (107,228) (107,228) Net income.................................................. 8,206 5,169 13,375 Distributions paid to Preferred Unit holders................ -- (5,169) (5,169) Distributions paid to OP Unit holders....................... (15,757) -- (15,757) Adjustment to reflect limited partners' equity at redemption value..................................................... (5,120) -- (5,120) -------- --------- --------- PARTNERS' CAPITAL AT DECEMBER 31, 1995...................... 160,947 -- 160,947 Contributions from AIMCO related to Class A common offering.................................................. 28,136 -- 28,136 Contributions from AIMCO related to options exercised....... 58 -- 58 Contribution from AIMCO related to stock purchased by officers, net of notes receivable of $7,140............... 11,437 -- 11,437 Repurchase of OP Units...................................... (4,255) -- (4,255) OP Units redeemed to Special Limited Partner................ 3,799 -- 3,799 Acquisition of real estate or interests in real estate partnerships through issuance of OP Units................. 15,294 -- 15,294 Net income.................................................. 12,984 -- 12,984 Distributions paid to OP Unit holders....................... (20,736) -- (20,736) Adjustment to reflect limited partners' equity at redemption value..................................................... (29,202) -- (29,202) -------- --------- --------- PARTNERS' CAPITAL AT DECEMBER 31, 1996...................... 178,462 -- 178,462 Contributions from AIMCO related to Class A common offering.................................................. 510,114 -- 510,114 Contributions from AIMCO related to Class B preferred offering.................................................. -- 75,000 75,000 Contributions from AIMCO related to Class C preferred offering.................................................. -- 58,110 58,110 Contribution from AIMCO related to stock purchased by officers, net of notes receivable of $33,517.............. 1,198 -- 1,198 Contributions from AIMCO related to options and warrants exercised, net of notes receivable of $9,045.............. (327) -- (327) Acquisition of NHP through issuance of OP Units............. 180,851 -- 180,851 OP Units redeemed to Special Limited Partner................ 8,621 -- 8,621 Repayment of notes receivable from officers of AIMCO........ 14,540 -- 14,540 Net Income.................................................. 26,318 2,315 28,633 Distributions paid to OP Unit holders....................... (44,660) -- (44,660) Distributions paid to Class B Preferred Unit holders........ -- (846) (846) Adjustment to reflect limited partners' equity at redemption value..................................................... (47,837) -- (47,837) Unrealized loss on investments.............................. (1,683) -- (1,683) -------- --------- --------- PARTNERS' CAPITAL AT DECEMBER 31, 1997...................... $825,597 $ 134,579 $ 960,176 ======== ========= =========
See accompanying notes to consolidated financial statements F-5 93 AIMCO PROPERTIES, L.P. CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
1997 1996 1995 --------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income................................................ $ 32,697 $ 15,673 $ 14,988 --------- -------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 43,520 21,209 15,859 Gain on disposition of property......................... (2,720) (44) -- Minority interests...................................... (1,008) 111 -- Equity in losses of unconsolidated partnerships......... 1,798 -- -- Equity in earnings of unconsolidated subsidiaries....... (4,636) -- -- Extraordinary loss on early extinguishment of debt...... 269 -- -- (Increase) decrease in restricted cash.................. (7,421) 6,678 (6,072) Increase in other operating assets, net................. (15,799) (4,785) (1,567) Increase (decrease) in operating liabilities, net....... 26,332 (36) 2,703 --------- -------- --------- Total adjustments................................... 44,399 25,822 12,536 --------- -------- --------- Net cash provided by operating activities........... 73,032 38,806 25,911 --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of real estate......................... 21,792 17,147 -- Purchase of real estate................................... (376,315) (26,032) (52,419) Purchase of NHP common stock, notes receivable, general and limited partnership interests and other assets...... (199,146) (53,878) -- Note receivable and investment in unconsolidated subsidiary.............................................. (59,787) -- -- Advances to unconsolidated partnerships................... (42,879) -- -- Additions to property held for sale....................... (247) (5,718) -- Capital replacements...................................... (7,350) (5,133) (2,865) Initial capital expenditures.............................. (9,108) (6,194) (4,879) Construction in progress and capital enhancements......... (8,477) (7,629) (639) Proceeds from sale of property held for sale.............. 303 -- -- Purchase of NHP mortgage loans............................ (60,575) -- -- Purchase of Ambassador common stock....................... (19,881) -- -- Distributions received from unconsolidated subsidiary..... 45,791 -- -- Purchase of office equipment and leasehold improvements... (1,784) (707) (19) --------- -------- --------- Net cash used investing activities.................. (717,663) (88,144) (60,821) --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of OP Units, net of underwriting and offering costs...................................... 510,114 28,136 46,792 Principal repayments received on notes due from Officers on OP Unit purchases.................................... 25,957 -- -- Proceeds from exercises of employee stock options and warrants................................................ 871 -- -- Proceeds from issuance of Class B Preferred Units......... 75,000 -- -- Proceeds from issuance of Class C Preferred Units......... 58,110 -- -- Proceeds from secured tax-exempt bond financing........... -- 58,010 -- Proceeds from secured notes payable borrowings............ 225,436 -- 155,401 Principal paydowns on secured tax-exempt bond financing... (1,487) (48,703) -- Principal paydowns on secured notes payable............... (12,512) (28,463) (43,666) Principal paydowns on unsecured short-term note payable... (79) -- -- Net borrowings (paydowns) on Credit Facility.............. (162,008) 40,800 (17,600) Proceeds from secured short-term financing................ 19,050 30,119 25,000 Proceeds (payoff) from unsecured short-term financing..... (12,500) 12,500 -- Payment of loan costs, including proceeds and costs from interest rate hedges.................................... (6,387) (3,464) (4,703) Redemption of mandatorily redeemable 1994 Cumulative Convertible Senior Preferred Units and repurchase of unregistered OP Units................................... -- -- (107,228) Payment of distribution on mandatorily redeemable 1994 Cumulative Convertible Senior Preferred Units........... -- -- (5,169) Repurchase of OP Units.................................... -- (4,255) -- Payment of distributions to limited partners.............. (5,510) (3,815) 2,925) Payment of distributions to OP Unitholders................ (44,660) (20,736) (15,757) Payment of Class B Preferred Unit distributions........... (846) -- -- --------- -------- --------- Net cash provided by financing activities........... 668,549 60,129 30,145 --------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 23,918 10,791 (4,765) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 13,170 2,379 7,144 --------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 37,088 $ 13,170 $ 2,379 ========= ======== =========
See accompanying notes to consolidated financial statements. F-6 94 AIMCO PROPERTIES, L.P. CONSOLIDATED STATEMENTS OF CASH FLOW (IN THOUSANDS EXCEPT UNIT AND SHARE DATA) SUPPLEMENTAL CASH FLOW INFORMATION:
1997 1996 1995 -------- ------- ------- Interest paid............................................... $ 51,076 $22,869 $12,170
NON CASH INVESTING AND FINANCING ACTIVITIES PURCHASE OF REAL ESTATE, CASH COLLATERAL AND PROPERTY MANAGEMENT BUSINESSES
1997 1996 1995 -------- ------- ------- Secured notes payable assumed in connection with purchase of real estate............................................... $140,451 $31,796 $ 8,242 Secured short-term financing assumed in connection with purchase of real estate................................... 9,600 5,072 -- Real estate, restricted cash, cash collateral and property management businesses contributed in exchange for Partnership Units ("OP Units")............................ 55,906 15,279 2,626 OP Units issued in consideration for purchase of real estate.................................................... -- 15,294 -- -------- ------- ------- $205,957 $67,441 $10,868 ======== ======= =======
PURCHASE OF NHP REAL ESTATE COMPANIES In 1997, the Partnership, individually and through Apartment Investment and Management Company ("AIMCO"), the General Partner and Special Limited Partner of the Partnership, acquired NHP Partners, Inc., NHP Partners Two Limited Partners and their subsidiaries (collectively, the "NHP Real Estate Companies") and all of the common stock of NHP Incorporated ("NHP") in exchange for 6,759,148 shares of AIMCO Class A Common Stock ("Class A Common Shares") with a recorded value of $180.9 million, $141.3 million in cash and warrants to purchase 399,999 Class A Common Shares in a series of related transactions (see Notes 5 and 6). The aggregate purchase price consisted of the following: Assets purchased............................................ $638,944 Liabilities assumed......................................... 312,555 Cash paid................................................... 141,328 OP Units issued............................................. 180,851 Options issued.............................................. 4,210
PURCHASE OF ENGLISH PORTFOLIO In 1996, the Partnership issued 789,039 OP Units with a recorded value of $16,877 and assumed $1,051 in secured short-term financing in connection with the purchase of certain partnership interests, real estate and related assets (the "English Portfolio") owned by J.W. English and certain affiliated entities. The aggregate purchase price consisted of the following: Assets purchased............................................ $218,268 Liabilities assumed......................................... 172,154 Cash paid................................................... 29,237 OP Units issued............................................. 16,877
F-7 95 AIMCO PROPERTIES, L.P. CONSOLIDATED STATEMENTS OF CASH FLOW -- (CONTINUED) (IN THOUSANDS EXCEPT UNIT AND SHARE DATA) REPAYMENT OF SECURED NOTE PAYABLE In 1996, 63,152 OP Units with a recorded value of $1,168 were issued in connection with the repayment of the second deed of trust on a property purchased in 1996. RECEIPT OF NOTES RECEIVABLE DUE FROM OFFICERS In 1997, AIMCO received promissory notes from officers of AIMCO for a total of $42.6 million in connection with the sale of 1,462,735 Class A Common Shares (of which $14,664 was repaid in 1997 and an additional $5.7 million was repaid in February and March 1998). The notes receivable were contributed by AIMCO to the Partnership in exchange for 1,462,735 OP Units. In 1996, AIMCO received promissory notes due from officers of AIMCO for a total of $18,557 in connection with the sale of 895,250 Class A Common Shares (of which $11,440 was repaid in March 1997). The notes receivable were contributed by AIMCO to the Partnership in exchange for 895,250 OP Units. OTHER In 1997, the Partnership issued an additional 216,564 OP Units with a recorded value of $7,469 in connection with the purchase of certain partnership interests. F-8 96 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996, AND 1995 NOTE 1 -- ORGANIZATION AIMCO Properties, L.P. (together with its subsidiaries and other controlled entities, the "Partnership" (and together with entities in which the Partnership has a controlling financial interest, the "Company")), a Delaware limited partnership, was formed on May 16, 1994 to conduct the business of acquiring, developing, leasing, and managing multi-family apartment communities. Apartment and Investment Management Company ("AIMCO") is the General Partner and Special Limited Partner, as defined in the Second Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P. (the "Agreement"), of the Partnership. In addition, AIMCO is the holder of all Partnership Preferred Units ("Preferred Units") outstanding in the Partnership. The Limited Partners of the Partnership are individuals or entities that own limited partnership units in the Partnership ("OP Units") other than AIMCO. After holding the OP Units for one year, the Limited Partners have the right to redeem their OP Units for cash, subject to the prior right of AIMCO to elect to acquire some or all of the OP units tendered for redemption for cash or in exchange for shares of Class A Common Stock, on a one-for-one ratio. The Partnership, through its operating divisions and subsidiaries, was formed to hold and conduct substantially all of AIMCO's operations and manages the daily operations of AIMCO's business and assets. All employees of the Company are employees of the Partnership; AIMCO has no employees. According to the terms of the Agreement, the capital structure of the Partnership, in terms of the OP units owned by the General Partner, the Special Limited Partner and the Preferred Units outstanding, is required to mirror the capital structure of AIMCO, with the only difference being the Partnership has additional OP Units outstanding which are owned by the Limited Partners. Therefore, AIMCO is required to contribute to the Partnership all proceeds from offerings of its Class A Common Stock, preferred stock, or any other equity offerings. In addition, substantially all of AIMCO's assets must be owned through the Partnership; therefore, AIMCO is generally required to contribute to the Partnership all assets acquired. In exchange for the contribution of offering proceeds or assets, AIMCO receives additional interests in the Partnership with similar terms (i.e., if AIMCO contributes proceeds of a preferred stock offering, AIMCO receives Preferred Units). AIMCO frequently consummates transactions for the benefit of the Partnership. For legal, tax or other business reasons, AIMCO may hold title or ownership of certain assets until they can be transferred to the Partnership. However, the Partnership has a controlling financial interest in all of AIMCO's assets in the process of transfer to the Partnership. In December 1997, AIMCO acquired all of the outstanding stock of NHP in a purchase transaction. Subsequent to completion of the transaction, AIMCO contributed substantially all the assets and liabilities of NHP to the Partnership in exchange for OP Units. NHP provided a broad array of real estate services nationwide, including property management and asset management. As of December 31, 1997, substantially all of the Partnership's property and asset management business is conducted through PAMS, Inc., PAMS, LP and unconsolidated subsidiaries of the Partnership. At December 31, 1997, the Partnership had 45,802,097 OP Units outstanding, 750,000 Class B Preferred Units outstanding and 2,400,000 Class C Preferred Units outstanding. At December 31, 1997, the Partnership owned or controlled 40,039 units in 147 apartment properties (the "Owned Properties"), held an equity interest in 83,431 units in 515 apartment properties (the "Equity Properties") and managed 69,587 units in 374 apartment properties for third party owners and affiliates (the "Managed Properties" and, together with the Owned Properties and Equity Properties, the "AIMCO Properties"), bringing the total managed portfolio to 193,057 units in 1,036 apartment properties. The AIMCO Properties are located in 42 states, the District of Columbia and Puerto Rico. F-9 97 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Partnership and subsidiaries and limited partnerships in which the Partnership has a controlling financial interest. Pursuant to a Management and Contribution Agreement between the Partnership and AIMCO, the Partnership has acquired, in exchange for interests in the Partnership, the economic benefits of subsidiaries of AIMCO in which the Partnership does not have an interest, and AIMCO has granted the Partnership a right of first refusal to acquire such subsidiaries' assets for no additional consideration. Pursuant to the agreement, AIMCO has also granted the Partnership certain rights with respect to assets of such subsidiaries. Interests held by limited partners in real estate partnerships controlled by the Partnership are reflected as Minority Interests in Other Partnerships. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in Unconsolidated Subsidiaries The Partnership has investments in numerous subsidiaries. Investments in entities in which the Partnership does not have control, are accounted for under the equity method. Under the equity method, the Partnership's pro-rata share of the earnings or losses of the entity for the periods being presented is included in earnings (losses) from unconsolidated subsidiaries (see Note 5). Investments in and Notes Receivable from Real Estate Partnerships The Company owns general and limited partnership interests in numerous partnerships that own multi-family apartment properties. Investments in real estate partnerships in which the Company does not have control, are accounted for under the equity method. Under the equity method, the Company's pro-rata share of the earnings or losses of the entity for the periods being presented is included in earnings (losses) from unconsolidated partnerships (see Note 6). Real Estate and Depreciation Real estate is recorded at cost, less accumulated depreciation, unless considered impaired. If events or circumstances indicate that the carrying amount of a property may be impaired, the Partnership will make an assessment of its recoverability by estimating the future undiscounted cash flows, excluding interest charges, of the property. If the carrying amount exceeds the aggregate future cash flows, the Partnership would recognize an impairment loss to the extent the carrying amount exceeds the fair value of the property. As of December 31, 1997, management believes that no impairments exist based on periodic reviews. No impairment losses were recognized for the years ended December 31, 1997, 1996 and 1995. Expenditures that maintain an existing asset which has a useful life of more than one year are capitalized as capital replacement expenditures and depreciated over the estimated useful life of the asset. Depreciation is calculated on the straight-line method based on a fifteen to thirty year life for buildings and improvements and five years for furniture, fixtures and equipment. Initial capital expenditures are those costs considered necessary by the Partnership in its investment decision to correct deferred maintenance or improve a property. Capital enhancements are costs incurred that add a material new feature or increase the revenue potential of a property. Initial capital expenditures and capital enhancement costs are capitalized and depreciated over the estimated useful lives of the related assets. F-10 98 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Partnership capitalizes direct and indirect costs (including interest, taxes and other costs) in connection with the development or redevelopment of its Owned Properties and land under development. Direct costs associated with the acquisition of Owned Properties are capitalized as a cost of the assets acquired, and are depreciated over the estimated useful lives of the related assets. Expenditures for ordinary repairs, maintenance and apartment turnover costs are expensed as incurred. Property Held for Sale Property held for sale is recorded at the lower of cost, less accumulated depreciation, or estimated sales proceeds less selling costs. Upon management's determination that a property is to be sold, the Partnership ceases deprecation of the property's assets. Cash Equivalents The Partnership considers highly liquid investments with an original maturity of three months or less to be cash equivalents. Restricted Cash Restricted cash includes capital replacement reserves, completion repair reserves, bond sinking fund amounts, and tax and insurance impound accounts held by lenders. Goodwill The Partnership records goodwill in connection with purchase business combinations where the aggregate purchase price exceeds the fair value of the assets acquired. Goodwill is amortized on a straight-line basis over a period of 20 years, which represents its useful life. Deferred Financing Costs Fees and costs incurred in obtaining financing are capitalized. Such costs are amortized over the terms of the related loan agreements and are charged to interest expense. Other Assets Intangible assets are included in other assets and consist of costs associated with the purchase of property management businesses, including property management contracts, legal and other acquisition costs. These costs are amortized on a straight-line basis over terms ranging from five to twenty years. Compensated Absences The Partnership employees earn vacation time ratably throughout the calendar year. The rate at which vacation time is earned is based primarily on an employee's length of service. An employee may accrue up to the maximum number of hours for which he/she is eligible to take in any one calendar year. The Partnership's policy is to compensate employees for all vacation time earned, but not taken, upon the employee's termination. As of December 31, 1997, the Partnership has not accrued vacation pay earned, but not yet taken by its employees. Management does not believe that the accrual of earned vacation compensation would have a material effect on the consolidated financial statements. Redeemable Partnership Units The Partnership accounts for the outstanding common units not held by AIMCO as redeemable partnership units. These units are classified outside of permanent partners' capital in the accompanying F-11 99 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) balance sheet. The units are initially recorded at their fair value and subsequently adjusted based on the fair value at the balance sheet date as measured by the closing price of AIMCO's common stock on that date by the total number of units outstanding (see Note 15). Revenue Recognition The AIMCO Properties have operating leases with apartment residents with terms generally of six months or less. Rental revenues and property management and asset management fees are recognized when earned. Interest Rate Lock Agreements Interest rate lock agreements related to planned refinancings of identified variable rate indebtedness are accounted for as anticipatory hedges. Upon the refinancing of such indebtedness, any gain or loss associated with the termination of the interest rate lock agreement is deferred and recognized over the life of the refinanced indebtedness (see Note 11). In order for the interest rate lock to qualify as an anticipatory hedge, the following criteria must be met: (a) the refinance being hedged exposes the Partnership to interest rate risk; (b) the interest rate lock is designated as a hedge; (c) the significant characteristics and expected terms of the refinance are identified; and (d) it is probable that the refinance will occur. The Partnership believes that all four of the above qualifications have been met. In the event that any of the above qualifications are not met, the interest rate lock will not qualify as an anticipatory hedge, and the gain or loss on the interest rate lock will be recognized in the current period's earnings. Income Taxes Income or losses of the Partnership are allocated to the partners of the Partnership for inclusion in their respective income tax returns. Accordingly, no provision or benefit for income taxes has been made in the accompanying financial statements. AIMCO has elected to be taxed as a real estate investment trust ("REIT") as defined under the Internal Revenue Code of 1986, as amended (the "Code"). In order for AIMCO to qualify as a REIT, at least 95% of AIMCO's gross income in any year must be derived from qualifying sources. The activities of PAMS, Inc., PAMS, LP and other unconsolidated subsidiaries engaged in the service company business are not qualifying sources. As a REIT, AIMCO generally will not be subject to U.S. federal income taxes at the corporate level if it distributes at least 95% of its REIT taxable income to its shareholders. REITs are also subject to a number of other organizational and operational requirements. If AIMCO fails to qualify as a REIT in any taxable year, its taxable income will be subject to U.S. federal income tax at regular corporate rates (including any applicable alternative minimum tax). Even if AIMCO qualifies as a REIT, it may be subject to certain state and local income taxes and to U.S. federal income and excise taxes on its undistributed income. For income tax purposes, distributions paid to holders of OP Units consist of ordinary income, capital gains, return of capital or a combination thereof. Earnings and profits, which determine the taxability of distributions to shareholders, differ from net income reported for financial reporting purposes due to differences for U.S. federal tax purposes in the estimated useful lives used to compute depreciation and the carrying value (basis) of the investments in the Owned Properties. F-12 100 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For the years ended December 31, 1997, 1996 and 1995, distributions paid per OP Unit were taxable as follows:
1997 % 1996 % 1995 % ----- --- ----- --- ----- --- Ordinary income........................ $1.74 94% $1.45 85% $1.48 89% Return of capital...................... -- -- 0.25 15% 0.18 11% Capital gains.......................... 0.04 2% -- -- -- -- Depreciation recapture................. 0.07 4% -- -- -- -- ----- --- ----- --- ----- --- $1.85 100% $1.70 100% $1.66 100% ===== === ===== === ===== ===
Earnings Per OP Unit Earnings per OP Unit is calculated based on the weighted average number of OP Units, OP Unit equivalents and dilutive convertible securities outstanding during the period. Diluted earnings per OP Unit is based upon the weighted average number of OP Units outstanding during the period and includes the effect of potential issuance of additional OP Units if stock options and warrants were exercised or converted into common stock of AIMCO (see Note 17). Fair Value of Financial Instruments The estimated aggregate fair value of the Partnership's cash and cash equivalents, receivables, payables and short-term secured and unsecured financing as of December 31, 1997 is assumed to approximate their carrying value due to their relatively short terms. Management further believes that, after consideration of interest rate agreements, the fair market value of the Partnership's secured tax-exempt bond financing and secured long-term financing approximates their carrying value, based on market comparisons to similar types of debt instruments having similar maturities. In valuing its investments in securities at their quoted market price, the Partnership has recognized unrealized losses on investments of $1.7 million as of December 31, 1997, which are included as a component of partners' capital. Insurance Subsidiary Reinsurance premiums written are earned on a monthly pro rata basis over the terms of the policies. A reserve for outstanding losses and loss-related expenses of $14.8 million has been provided at December 31, 1997. The reserve includes estimates for insurance losses incurred but not reported, as well as losses pending settlement. Reserves are based on Management's estimates and are believed to be adequate. Use of Estimates The preparation of the Partnership's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts included in the financial statements and accompanying notes thereto. Actual results could differ from those estimates. F-13 101 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- REAL ESTATE Real estate at December 31 is as follows (in thousands):
1997 1996 ---------- --------- Land........................................................ $ 265,570 $ 118,031 Buildings and improvements.................................. 1,391,637 747,191 ---------- --------- 1,657,207 865,222 Accumulated depreciation.................................... (153,285) (120,077) ---------- --------- $1,503,922 $ 745,145 ========== =========
During the years ended December 31, 1997 and 1996, the Company purchased or acquired control of 59 properties (17,191 units) and 42 properties (10,484 units), respectively, and disposed of five properties (916 units) and four properties (1,265 units), respectively, as described below. The Partnership directly acquired nine apartment communities in unrelated transactions during 1997 (the "1997 Acquisitions"). The aggregate consideration paid by the Partnership of $204.3 million consisted of $75.4 million in cash, 1.9 million OP Units with a total recorded value of $55.9 million and the assumption of $73.0 million of secured long-term indebtedness. As a result of acquisition of the NHP Real Estate Companies (see Note 6) and related tender offers to limited partners, the Company acquired a controlling interest in 15 partnerships (the "Controlled NHP Partnerships"), which own 5,285 units located in 15 apartment communities. The portion of the aggregate purchase price for the NHP Real Estate Companies allocated to the Controlled NHP Partnerships was approximately $269.3 million, including the assumption of approximately $212.3 million of mortgage indebtedness. In October 1997, the Partnership acquired a portfolio of 35 residential apartment properties (the "Winthrop Portfolio"). The aggregate purchase price of $263.0 million, including transaction costs, was comprised of $115.6 million in cash, the assumption of $8.3 million in mortgage indebtedness and the creation of $139.1 million of new indebtedness secured by the properties. The Partnership has also budgeted an additional $16.0 million in initial capital expenditures related to the Winthrop Portfolio. During 1997, the Partnership sold five apartment properties containing 916 units to an unaffiliated third party (the "1997 Dispositions"). Cash proceeds from the sale of approximately $22.7 million were used to repay a portion of the Partnership outstanding indebtedness. The Partnership recognized a gain of approximately $2.8 million on the disposition on these five properties. The Partnership acquired 100% ownership in seven apartment properties in unrelated transactions in 1996 (the "1996 Acquisitions"). The aggregate consideration paid by the Partnership of $93.1 million consisted of $26.0 million in cash, 1,449,403 in OP Units with a total recorded value of $30.3 million and the assumption of $31.7 million of secured long-term indebtedness and $5.1 million of secured short-term indebtedness. Each transaction, with the exception of Peachtree Park and Somerset Village (see Note 19), was with an unaffiliated third party. In November 1996, the Partnership completed the acquisition (the "English Portfolio Acquisition") of certain partnership interests, real estate and related assets owned by J.W. English, a Houston, Texas-based real estate syndicator and developer, and certain affiliated entities (collectively, the "J.W. English Companies"). The English Portfolio Acquisition included the purchase of all of the general and some of the limited partnership interests in 22 limited partnerships which act as the general partner to 31 limited partnerships (the "English Partnerships") that own 22 multi-family apartment properties, aggregating 5,230 apartment units, and four commercial properties, primarily in Houston, Texas; title to a 104-unit apartment property in F-14 102 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Houston, Texas; certain assets of J. W. English Management Company which provided management services to the apartment properties; and other real estate interests related to the J.W. English Companies' operations. The aggregate purchase price of the English Portfolio Acquisition was $23.1 million, consisting of $15.2 million in OP Units and $7.9 million in cash. The English Partnerships are subject to approximately $95.4 million of mortgage debt. The Partnership also made separate offers (the "English Tender Offers") to the limited partners of 25 of the English Partnerships (the "Tender Offer English Partnerships") to acquire their limited partnerships interests. The various limited partners accepted tenders representing, in the aggregate, approximately 46% of all outstanding limited partnership interests in the Tender Offer English Partnerships. The Partnership paid $16.0 million in cash and $1.7 million in OP Units for the interests tendered in the English Tender Offers. The remaining limited partners elected to continue as limited partners in the Tender Offer English Partnerships. In a series of related transactions completed in November and December 1996, the Partnership acquired general partnership interests in 21 limited partnerships which own twelve multi-family apartment properties (collectively, the "Dallas Acquisition Properties") aggregating 2,839 apartment units, primarily in the Dallas, Texas metropolitan area, and loans made by the general partners and their affiliates to such partnerships, for an aggregate price of $26.7 million in cash (collectively, the "Dallas Portfolio Acquisition"). The Dallas Acquisition Properties are subject to approximately $60.7 million of mortgage debt. The existing limited partners retained their interest in such limited partnerships. During 1996, the Partnership disposed of four properties (the "1996 Dispositions"). The properties were sold to one unaffiliated third party. The cash proceeds from the disposition of approximately $17.1 million were used to pay down $9.2 million of the Partnership's outstanding indebtedness and to provide funds available for future investment purposes. The Partnership recognized a total gain of approximately $44,000 on the disposition of these four properties. In the fourth quarter of 1996, the Partnership completed construction of a 92 apartment unit expansion within the Fairways Apartments in Phoenix, Arizona for a cost of approximately $6.0 million. In 1996, the Partnership acquired Sun Katcher Apartments, a 360-unit apartment property located in Jacksonville, Florida, at a cost of $4.0 million. In 1997, the redevelopment of Sun Katcher was completed at a cost of $4.9 million. The Partnership also recently commenced the renovation and upgrading of Bay West Apartments, a 376-unit apartment property located in Tampa, Florida, for a projected cost of $4.8 million (of which $0.9 million has already been spent), to reposition the property in the marketplace. In addition, the Partnership expects to undertake a major renovation of the Morton Towers Apartments, a 1,277-unit apartment property located in Miami Beach, Florida, at an estimated cost of $35.0 million. Approximately $0.4 million has been spent on the Morton Towers redevelopment as of December 31, 1997. Interest of $1.3 million, $0.8 million and $0.1 million was capitalized for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE 4 -- INVESTMENT IN AMBASSADOR APARTMENTS, INC. In September 1997, the Partnership acquired 886,600 shares of common stock ("Ambassador Common Stock") of Ambassador Apartments, Inc. ("Ambassador"), a publicly traded REIT, for $19.9 million in cash. The shares acquired represented 8.4% of the shares of Ambassador Common Stock outstanding as of the date of the purchase. As of December 31, 1997, the fair market value of the Ambassador stock is $18.2 million. Accordingly, the Partnership has recognized an unrealized loss on the Ambassador investment of $1.7 million, which is included as a component of partners' capital. On December 23, 1997, AIMCO and Ambassador entered into an Agreement and Plan of Merger (the "Ambassador Merger Agreement") pursuant to which Ambassador will be merged with and into AIMCO, F-15 103 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) with AIMCO being the surviving corporation (the "Ambassador Merger"). The Ambassador Merger Agreement also provides that, unless otherwise agreed by the parties, Ambassador Apartments, L.P., a Delaware limited partnership (the "Ambassador Operating Partnership"), will be merged with and into the Partnership (the "Ambassador Reorganization") and all outstanding Ambassador Operating Partnership interests will be converted into OP Units at the Conversion Ratio, as defined below. Ambassador conducts substantially all of its operations through the Ambassador Operating Partnership and its subsidiaries. In the Ambassador Merger Agreement, the Ambassador Common Stock is valued at $21 per share. Holders of Ambassador Common Stock will receive for each share an amount of Class A Common Stock equal to the Conversion Ratio. The "Conversion Ratio" means the quotient determined by dividing $21 by the "AIMCO Index Price," which is the aggregate of the average of the high and low sales prices for Class A Common Stock on each of the twenty consecutive NYSE trading days ending on the fifth NYSE trading day immediately preceding the closing of the Ambassador Merger, divided by 20. If the AIMCO Index Price is less than $36 (i.e. the Conversion Ratio is greater than 0.583), then the AIMCO may elect to fix the Conversion Ratio at 0.583 and pay to each holder of Ambassador Common Stock cash sufficient to provide $21 in value for each share of Ambassador Common Stock. The Ambassador Merger Agreement provides that any outstanding options to purchase Ambassador Common Stock may be converted, at the election of the option holder, into cash or options to purchase Class A Common Stock at the Conversion Ratio. The Ambassador Merger Agreement further states that Ambassador's outstanding preferred stock, par value $0.01 per share (the "Ambassador Preferred Stock"), shall be redeemed, subject to the right of holders of shares of Ambassador Preferred Stock to convert such shares into Ambassador Common Stock, immediately prior to the Ambassador Merger. Ambassador is a self-administered and self-managed REIT engaged in the ownership and management of garden-style apartment properties leased primarily to middle income tenants. As of December 31, 1997, Ambassador owned 52 apartment communities with a total of 15,728 units located in Arizona, Colorado, Florida, Georgia, Illinois, Tennessee and Texas. In addition, Ambassador manages one property containing 252 units for an unrelated third party. Ambassador conducts substantially all of its operations through the Ambassador Operating Partnership and its subsidiaries. As of December 31, 1997, Ambassador held approximately 94% of the outstanding common units and 100% of the outstanding preferred units of the Ambassador Operating Partnership. The closing of the Ambassador Merger occurred during the second quarter of 1998 (see Note 22). NOTE 5 -- INVESTMENTS IN AND NOTES RECEIVABLE FROM UNCONSOLIDATED SUBSIDIARIES In order to satisfy certain requirements of the Internal Revenue Code (the "Code") applicable to AIMCO's status as a REIT, certain assets of the Company are held through corporations (the "Unconsolidated Subsidiaries") in which the Partnership holds non-voting preferred stock that represents a 95% economic interest, and certain officers and/or directors of AIMCO hold, directly or indirectly, all of the voting common stock, representing a 5% economic interest. As a result of the controlling ownership interest in the Unconsolidated Subsidiaries held by others, the Partnership accounts for its interest in the Unconsolidated Subsidiaries on the equity method. As of December 31, 1997, the Unconsolidated Subsidiaries included AIMCO/NHP Holdings, Inc. ("ANHI"), AIMCO/NHP Properties, Inc. ("ANPI"), NHP Property Management Company ("NHPMC"), and NHP A&R Services, Inc. ("NHPA&R"). In May and September of 1997, AIMCO acquired an aggregate of 6,930,122 shares of common stock ("NHP Common Stock") of NHP. On December 8, 1997, AIMCO acquired the remaining shares of NHP Common Stock in a merger transaction accounted for as a purchase (the "NHP Merger"). Pursuant to the NHP Merger, each outstanding share of NHP Common Stock was converted into either (i) 0.74766 shares of Class A Common Stock or (ii) at the shareholder's option, 0.37383 shares of Class A Common Stock and F-16 104 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $10.00 in cash. As a result of the NHP Merger, AIMCO issued 6,759,148 shares of Class A Common Stock, valued at $180.8 million, and paid $86.5 million in cash. The total cost of the purchase was $349.5 million. Subsequent to the NHP Merger, AIMCO contributed substantially all the assets and liabilities of NHP to the Partnership in exchange for OP Units. In connection with the NHP Merger, the Partnership recorded approximately $125 million in goodwill, which is being amortized using the straight line method over a period of 20 years. In addition, in connection with the NHP Merger, the Partnership executed a plan to close NHP's headquarters in Vienna, Virginia. Concurrent with this plan, certain employees of NHP were either terminated or relocated to the Indianapolis, Indiana office. The Partnership incurred $2.7 million in severance and relocation costs, which were capitalized as a cost of the acquisition. In connection with the purchase of NHP, the Partnership acquired NHP's property management business, as well as several other businesses, including a membership purchasing organization, home health care services, and insurance services. Immediately following the purchase, the Partnership completed a reorganization which resulted in those businesses being conducted by ANHI, ANPI, NHPMC and NHPA&R. As of December 31, 1997, the Partnership's investment in the Unconsolidated Subsidiaries totaled $84.5 million, which consisted of $50.0 million in notes receivable from, and $34.5 million in preferred stock of, the Unconsolidated Subsidiaries. See selected combined financial information for the Partnership's Unconsolidated Subsidiaries and unconsolidated partnerships at Note 6. NOTE 6 -- INVESTMENT IN AND NOTES RECEIVABLE FROM UNCONSOLIDATED REAL ESTATE PARTNERSHIPS In connection with the purchase of the NHP Real Estate Companies, the Company acquired general and limited partnership interests in partnerships that own 82,374 conventional and affordable apartment units in 519 apartment properties. The Company's ownership interests in these partnerships ranges from 1% to 100%, and the provisions of the partnership agreements give the Company varying degrees of control. Subsequent to the acquisition of the NHP Real Estate Companies, the Company contributed interests in certain of the limited partnerships which they controlled to AIMCO/NHP Partners, L.P. ("ANPLP"), a partnership in which the Partnership owns a 99% limited partnership interest. A limited liability company owned by certain directors and officers of AIMCO is the 1% general partner of ANPLP. Based on the provisions of the partnership agreement for ANPLP, the Partnership does not possess control of the partnership. At December 31, 1997, Company's investment in unconsolidated partnerships totaled $212.1 million. F-17 105 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table provides selected combined financial information for both the Company's Unconsolidated Subsidiaries and unconsolidated partnerships as of and for the year ended December 31, 1997 (in thousands): Real estate, net of accumulated depreciation................ $2,252,702 Management contracts........................................ 51,441 Goodwill.................................................... 45,494 Total assets................................................ 2,827,264 Secured notes payable....................................... 2,951,989 Stockholders' and partners' equity.......................... (767,201) Total liabilities and stockholders' and partners' equity.... $2,827,264 Rental and other property revenues.......................... $ 501,384 Property operating expenses................................. (303,547) Depreciation expense........................................ (63,384) Service company revenues.................................... 23,776 Service company expenses.................................... (11,733) Interest expense............................................ 156,929 Net loss before gain on disposition of properties and discontinued operations................................... (7,589) Net income.................................................. $ 11,536
NOTE 7 -- SECURED NOTES PAYABLE In April 1997, 23 partnerships controlled by the Partnership completed a $108.0 million refinancing of secured, short term, floating rate indebtedness with secured, 20-year, fixed rate, fully amortizing debt. The new notes are secured by 27 apartment properties owned by such partnerships. In connection with this refinancing, the Partnership received proceeds of $3.4 million from two interest rate lock agreements accounted for as hedges (see Note 11). The gain on the interest rate lock agreements was deferred and will be amortized over the life of the debt. During 1997, the Partnership assumed $220.4 million in mortgage indebtedness in connection with the purchase of 39 apartment properties. In addition, in connection with the acquisition of the NHP Real Estate Companies (see Note 6), the Partnership assumed fixed-rate indebtedness totaling approximately $209.8 million, which is secured by 15 properties held by NHP Partnerships in which the Partnership acquired controlling interests. In December 1997, the Partnership refinanced certain notes payable secured by 27 properties, of which, five are Owned Properties and are consolidated. The new notes have an aggregate outstanding principal balance of $91.5 million as of December 31, 1997 and carry fixed interest rates ranging from 6.6% to 6.8%. The new notes are fully amortizing, requiring monthly principal and interest payments, and mature in December 2012. In anticipation of the refinancing, the Partnership entered into an interest rate lock agreement with an investment banking company ("the March Hedge"). The March Hedge had a notional value of $100.0 million and fixed the interest rate of the anticipated refinancing at 7.053%. The March Hedge was settled in connection with the refinancing, at which time the Partnership realized a loss on the hedge of approximately $10.9 million. The loss on the hedge will be amortized over the life of the refinanced debt (see Note 11). F-18 106 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the Partnership's long-term secured notes payable at December 31, 1997 and 1996, all of which are non-recourse to the Partnership (in thousands):
1997 1996 -------- -------- Fixed rate, ranging from 5.0% to 10.1%, or a weighted average all-in rate of 8.10%, fully-amortizing notes maturing at various dates through 2029.................... $561,056 $165,762 Fixed rate, ranging from 7.25% to 9.5%, or a weighted average all-in rate of 8.73%, non-amortizing notes maturing at various dates through 2001.................... 106,424 57,198 Floating rate, ranging from 6.7% to 7.4% at December 31, 1997, or a weighted average all-in rate of 7.7%, non-amortizing notes maturing at various dates through 2005...................................................... 13,941 19,150 -------- -------- $681,421 $242,110 ======== ========
Real estate assets which secure the first trust deeds for these secured notes payable had a net book value of $1,117.6 million at December 31, 1997. As of December 31, 1997, the scheduled principal payments for the Partnership's secured notes payable are as follows (in thousands): 1998........................................................ $125,879 1999........................................................ 34,385 2000........................................................ 20,178 2001........................................................ 75,967 2002........................................................ 14,750 Thereafter.................................................. 410,362 -------- $681,421 ========
NOTE 8 -- SECURED SHORT-TERM FINANCING The Partnership utilizes a variety of secured short-term financing instruments to manage its working capital needs and to fund real estate investments. In 1994, the Partnership obtained a variable rate revolving credit facility (the "Credit Facility") with Bank of America National Trust and Savings Association ("Bank of America"). In August 1996, the Credit Facility was extended through August 1998, the interest rate was reduced from LIBOR plus 1.75% to LIBOR plus 1.625% and the commitment was increased from $40.0 million to $50.0 million. In May 1997, the Partnership increased its maximum amount available under the Credit Facility from $50.0 million to $100.0 million. Interest on the Credit Facility was payable monthly at the variable interest rate of LIBOR plus 1.45% unless borrowings exceed 60% of the aggregate collateral value, in which case, the interest rate was LIBOR plus 1.70%. Commitment fees of 0.125% per annum on the remaining availability were payable quarterly. The outstanding balance under the Credit Facility was $33.5 million at December 31, 1997. F-19 107 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the Partnership's secured short-term financing at December 31, 1997 and 1996 (in thousands):
1997 1996 ------- -------- Floating rate interest only note, having a stated interest rate of 7.67% at December 31, 1997........................ $19,050 $115,499 Floating rate interest only notes........................... -- 25,615 Floating rate interest only notes secured by property held for sale.................................................. -- 1,051 9.25% fixed rate, non-amortizing note....................... 549 5,074 Floating rate Credit Facility, interest at 7.33% at December 31, 1997, expiring August 1998............................ 33,500 44,800 ------- -------- $53,099 $192,039 ======= ========
Real estate assets, which secure the Partnership's short-term financing, had a net book value of $104.0 million at December 31, 1997. Secured short-term indebtedness totaling $33.5 million is guaranteed by AIMCO and certain of its affiliates and secured by an assignment of the Partnership's general partnership interests in 12 of the English Partnerships. The Partnership replaced the Credit Facility with a new $50 million unsecured revolving credit facility in January 1998, and a new $50 million secured revolving credit facility in February 1998 (see Note 21). NOTE 9 -- SECURED TAX-EXEMPT BOND FINANCING The following table summarizes the Partnership's secured tax-exempt bond financing at December 31, 1997 and 1996, which is non-recourse to the Partnership (in thousands):
1997 1996 ------- ------- 7.0% fully-amortizing bonds, effective rate of 7.3%, due July 2016................................................. $46,498 $47,674 6.9% fully-amortizing bonds due, effective rate of 7.3% July 2016...................................................... 9,529 9,773 4.2% interest only bonds, effective rate of 6.7%, due July 2016...................................................... 5,958 6,000 6.0% interest only bonds, effective rate of 6.7%, secured by a letter of credit in the amount of $5,350, due September 1998...................................................... 5,325 5,350 5.4% interest only bonds due December 2002.................. 6,700 6,700 ------- ------- $74,010 $75,497 ======= =======
Real estate assets securing the tax-exempt bond financing had a net book value of $107.5 million at December 31, 1997. As of December 31, 1997, the scheduled principal payments for the Partnership's secured tax-exempt bonds are as follows (in thousands): 1998........................................................ $ 7,031 1999........................................................ 1,827 2000........................................................ 1,956 2001........................................................ 2,096 2002........................................................ 2,244 Thereafter.................................................. 58,856 ------- $74,010 =======
F-20 108 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10 -- UNSECURED SHORT-TERM FINANCING In November 1996, the Partnership borrowed $12.5 million in conjunction with the purchase of limited partnership interests in the English Partnerships. The loan was repaid in February 1997 with proceeds from a public offering of shares of Class A Common Stock (see Note 15), which were contributed by AIMCO to the Partnership. NOTE 11 -- INTEREST RATE LOCK AGREEMENTS In 1996, in anticipation of refinancing certain indebtedness, the Partnership entered into two interest rate lock agreements with a major New York investment banking company (the "1996 Hedges"). The 1996 Hedges had an aggregate notional value of $100.0 million and fixed the interest rate of the anticipated refinancings at 6.2% and 6.3%. The 1996 Hedges were settled in April 1997 in connection with the refinancing, at which time the Partnership realized aggregate gains of approximately $3.4 million (see Note 7). In March 1997, the Partnership entered into an interest rate lock agreement with an investment banking company (the "March Hedge"). The March Hedge had a notional value of $100.0 million and fixed the interest rate of the anticipated refinancing at 7.053%. The March Hedge was settled December 1997, in connection with the refinancing, at which time the Partnership realized a loss on the hedge of approximately $10.9 million (see Note 7). In September 1997, the Partnership entered into an interest rate lock agreement (the "September Hedge") in anticipation of refinancing certain other long-term indebtedness. The September Hedge has a notional principal amount of $75.0 million, matures on March 19, 1998 and fixes the ten year treasury rate at 6.211% (see Note 21). Based on the fair value of the interest rate lock agreement at December 31, 1997, the Partnership has a potential loss of the September Hedge of approximately $2.6 million. In October 1997, the Partnership entered into an interest rate lock agreement (the "October Hedge") in anticipation of incurring indebtedness in connection with the acquisition of the Foxchase Apartments. The October Hedge had a notional value of $70.0 million and fixed the interest rate of the anticipated indebtedness at 6.13%. The October Hedge was settled in December 1997 when the Foxchase acquisition was completed, at which time the Partnership realized a loss of $1.4 million. The Partnership is exposed to credit risk in the event of nonperformance by the other parties to the interest rate lock agreements. However, the Partnership does not anticipate nonperformance by the counterparties. In addition, since the variable rate in the interest rate lock agreements is not on the same basis as the variable rate indebtedness, the Partnership is exposed to losses to the extent that the LIBOR rate and the Treasury rate change independently of each other. The Partnership does not anticipate that inconsistent changes in the LIBOR rate and the Treasury rate will have a material effect. NOTE 12 -- COMMITMENTS AND CONTINGENCIES Legal In November 1996, purported limited partners of certain of the Tender Offer English Partnerships filed a class action lawsuit against the Partnership, the General Partner, AIMCO and AIMCO/PAM Properties L.P. (collectively, the "AIMCO Parties") and J.W. English in the U.S. District Court for the Northern District of California (the "Federal Action"), alleging among other things, that the AIMCO Parties conspired with J.W. English to breach his fiduciary duty to the plaintiffs, and that the offering materials used by the AIMCO Parties in connection with the English Tender Offers contained misleading statements or omissions. The Federal Action was voluntarily dismissed, without prejudice, in favor of another purported class action filed in May 1997 by limited partners of certain of the Tender Offer English Partnerships and six additional English Partnerships. Two complaints were filed in Superior Court of the State of California (the "California F-21 109 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Actions") against the AIMCO Parties and the J.W. English Companies, alleging, among other things, that the consideration the AIMCO Parties offered in the English Tender Offers was inadequate and designed to benefit the J.W. English Companies at the expense of the limited partners, that certain misrepresentations and omissions were made in connection with the English Tender Offers, that the AIMCO Parties receive excessive fees in connection with their management of the properties owned by the English Partnerships, that the AIMCO Parties continue to refuse to liquidate the English Partnerships and that the English Acquisition violated the partnership agreements governing the English Partnerships and constituted a breach of fiduciary duty. In addition to unspecified compensation and exemplary damages, the original complaints in the California Actions sought an accounting, a constructive trust on the assets and monies acquired by the English defendants in connection with the English Acquisition, a court order removing the AIMCO Parties from management of the English Partnerships and/or ordering disposition of the properties and attorneys fees, expert fees and other costs. The AIMCO Parties intend to vigorously defend themselves in connection with these actions. The AIMCO Parties believe they are entitled to indemnity from the J.W. English Companies, subject to certain exceptions. Failure by the AIMCO Parties to prevail in the California Actions or to receive indemnification could have a material adverse effect on the Partnership's financial condition and results of operations. On August 4, 1997, the AIMCO Parties filed demurrers to both complaints in the California Actions. At a hearing on the demurrers on January 9, 1998, the court granted the AIMCO Parties demurrers to each of the three causes of action against it in the two complaints, with leave to amend. On February 25, 1998, the plaintiffs filed a consolidated amended class and derivative complaint for damages (the "Consolidated Amended Complaint"). The AIMCO Parties have until March 27, 1998 to file a demurrer on behalf of the AIMCO Parties defendants. See Note 21. The Partnership is a party to various legal actions resulting from its operating activities. These actions are routine litigation and administrative proceedings arising in the ordinary course of business, some of which are covered by liability insurance, and none of which are expected to have a material adverse effect on the consolidated financial condition or results of operations of the Partnership. HUD Enforcement and Limited Denials A significant number of the affordable units included in the AIMCO Properties are subject to regulation by the U.S. Department of Housing and Urban Development ("HUD"). HUD has the authority to suspend or deny property owners and managers from participation in HUD programs with respect to additional assistance within a geographic region through imposition of a limited denial of participation ("LDP") by any HUD office or nationwide for violations of HUD regulatory requirements. In March 1997, HUD announced its intention to step up enforcement against property owners and managers who violate their agreements with HUD, and in July 1997, HUD announced the creation of a new department-wide enforcement division. Three HUD field offices have recently issued LDPs to NHP as a result of physical inspections and mortgage defaults at four NHP Properties, two of which are managed by the Partnership. One LDP was subsequently withdrawn and another was terminated in December 1997 after a reinspection of the property. The one remaining LDP, unless lifted, suspends the Partnership's ability to manage or acquire additional HUD-assisted properties in eastern Missouri until June 24, 1998. AIMCO has requested that HUD terminate the one remaining LDP, but HUD has so far refused to do so, and the Partnership cannot determine whether HUD will reverse that decision with respect to the affected region. Because an LDP is prospective, existing HUD agreements are not affected, so an LDP is not expected to result in the loss of management service revenue from or otherwise to affect properties that the Partnership currently manages in the subject regions. If HUD were to disapprove the Partnership as property manager for one or more affordable properties, the Partnership's ability to obtain property management revenues from new affordable properties may be impaired. F-22 110 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) HUD monitors the performance of properties with HUD-insured mortgage loans. HUD also monitors compliance with applicable regulations, and takes performance and compliance into account in approving management of HUD-assisted properties. In this regard, since July 1988, 29 HUD-assisted properties owned or managed by the NHP Real Estate Companies or NHP have defaulted on non-recourse HUD-insured mortgage loans. Eight of these 29 properties are also currently managed by the Partnership. An additional six properties owned or managed by the Partnership have received unsatisfactory performance ratings. As a result of the defaults and unsatisfactory ratings, a national HUD office must review any field office approval of the Partnership to act as property manager for a HUD-assisted property. The national HUD office has consistently approved NHP's applications to manage new properties, and the Partnership received HUD clearance to acquire NHP and the NHP Real Estate Companies. The Partnership believes that it enjoys a good working relationship with HUD and that the national office will continue to apply the clearance process to large management portfolios such as the Partnership, including the NHP Properties, with discretion and flexibility. While there can be no assurance, the Partnership believes that the unsatisfactory reviews and the mortgage defaults will not unsatisfactory have a material impact on its results of operations or financial condition. In October 1997, NHP received a subpoena from the Inspector General of HUD (the "Inspector General") requesting documents relating to any arrangement whereby NHP or any of its affiliates provides or has provided compensation to owners of HUD multi-family projects in exchange for or in connection with management of a HUD project. The Partnership believes that other owners and managers of HUD projects have received similar subpoenas. Documents relating to certain of the Partnership's acquisitions of property management rights for HUD projects may be responsive to the subpoena. The Partnership is in the process of complying with the subpoena and has provided certain documents to the Inspector General, without conceding that they are responsive to the subpoena. The Partnership believes that its operations are in compliance, in all material respects, with all laws, rules and regulations relating to HUD-assisted or HUD-insured properties. Although the Inspector General has not initiated any action against the Partnership or, to the Partnership's knowledge, any owner of a HUD property managed by the Partnership, if any such action is taken in the future, it could ultimately affect existing arrangements with respect to HUD projects or otherwise have a material adverse effect on the results of operations of the Partnership. Environmental Certain of the Owned Properties, and some of the other AIMCO Properties, are located on or near properties that contain or have contained underground storage tanks or on which activities have occurred which could have released hazardous substances into the soil or groundwater. There can be no assurance that such hazardous substances have not been released or have not migrated, or in the future will not be released or will not migrate, onto the AIMCO Properties. Such hazardous substances have been released at certain Owned Properties and, in at least one case, have migrated from an off-site location onto an Owned Property. In addition, the Partnership's Montecito property in Austin, Texas, is located adjacent to, and may be partially on, land that was used as a landfill. Low levels of methane and other landfill gas have been detected at Montecito. The City of Austin (the "City"), the former landfill operator, has assumed responsibility for conducting all investigation and remedial activities to date associated with the methane and other landfill gas. The remediation of the landfill gas is now substantially complete and the Texas Natural Resources Conservation Commission ("TNRCC") has preliminarily approved the methane gas remediation efforts. Final approval of the site and the remediation process is contingent upon the results of continued methane gas monitors to confirm the effectiveness of the remediation efforts. Should further actionable levels of methane gas be detected, a proposed contingency plan of passive methane gas venting may be implemented by the City. The City has also conducted testing at Montecito to determine whether, and to what extent, groundwater has been impacted. Based on test reports received to date by the Partnership, the groundwater does not appear to be contaminated at actionable levels. The Partnership has not incurred, and does not expect to incur, liability for the landfill investigation and remediation; however, the Partnership has relocated some of its tenants and F-23 111 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) has installed a venting system according to the TNRCC's specifications under the buildings slabs, in connection with the present raising of four of its buildings in order to install stabilizing piers thereunder, at a total cost of approximately $550,000, which is primarily the cost for the restabilization. The restabilization was substantially completed in January 1998. The City will be responsible for monitoring the conditions of Montecito. All of the Owned Properties were subject to Phase I or similar environmental audits by independent environmental consultants prior to acquisition. The audits did not reveal, nor is the Partnership aware of, any environmental liability relating to such properties that would have a material adverse effect on the Partnership's business, assets or results of operations. The Managed Properties may not have been subject to Phase I or similar environmental audits by independent environmental consultants. However, the Partnership is not aware of any environmental liability that would have a material adverse effect on its business, financial condition or results of operations relating to the Managed Properties. In October 1997, NHP received a letter ("the EPA Letter") from the U.S. Department of Justice ("DOJ") which stated that the U.S. Environmental Protection Agency ("EPA") has requested that the DOJ file a lawsuit against NHP alleging, among other things, that NHP violated the Clean Air Act, the National Recycling and Emissions Reduction Programs and associated regulations in connection with the employment of certain unlicensed personnel, maintenance and disposal of certain refrigerants, and record-keeping practices at two properties. A settlement in principle between NHP and EPA has been reached, whereby NHP has agreed to pay a fine of less than $0.1 million, permit the EPA to audit 40 NHP with respect to their use and disposal of such refrigerants, and continue to provide training to all maintenance workers with respect to the disposal of such refrigerants. A formal settlement agreement is expected to be executed in 1998. It is possible that the future EPA audits agreed to in the settlement could result in additional allegations by EPA of violations at such properties; however, based on the terms of the settlement agreement with DOJ, the Company anticipates that the fines, if any, resulting from such audits will be nominal. Lease Commitments Minimum payments under the terms of all noncancellable operating leases in which the Partnership is the lessee, principally for office space, at December 31, 1997 are as follows (in thousands): 1998........................................................ $ 541 1999........................................................ 376 2000........................................................ 211 2001........................................................ 170 2002........................................................ 127 ------ $1,425 ======
Total rent expense for the years ended December 31, 1997, 1996 and 1995 was $0.7 million, $0.6 million and $0.6 million, respectively. NOTE 13 -- MINORITY INTERESTS IN OTHER PARTNERSHIPS Interests held by limited partners (other than the Company) in real estate partnerships controlled by the Company are reflected as Minority Interests in Other Partnerships. Net income is allocated based on the percentage interest owned by these limited partners in each respective real estate partnership. NOTE 14 -- AIMCO REGISTRATION STATEMENTS In April 1997, AIMCO filed a shelf registration statement with the Securities and Exchange Commission which provides for the offering of, on a delayed or continuous basis, debt securities, Class A Common Stock, preferred stock and warrants with an aggregate value of up to $1.0 billion. The shelf registration statement was F-24 112 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) declared effective in May 1997. As of December 31, 1997, AIMCO has issued 12,052,418 shares of Class A Common Stock and 3,150,000 shares of preferred stock under the shelf registration, the aggregate gross proceeds of which was $475.6 million. The proceeds from such offerings were contributed by AIMCO to the Partnership for 12,052,418 OP Units and 3,150,000 Preferred Units. As of December 31, 1997, up to $524.4 million of additional securities may be sold under the shelf registration. In February 1998, AIMCO issued 4,200,000 shares of newly created AIMCO Class D Cumulative Preferred Stock ("Class D Preferred Stock") for gross proceeds of $105.0 million (see Note 22). The proceeds from such offering were contributed by AIMCO to the Partnership for 4,200,000 Preferred Units. After giving effect to the sale of the Class D Preferred Stock, up to $419.4 million of additional securities may be sold under the shelf registration. NOTE 15 -- PARTNERS' CAPITAL During 1996 AIMCO issued 895,250 shares of Class A Common Stock to certain executive officers (or entities controlled by them) at $20.75 per share, pursuant to the exercise of stock options issued under the Apartment Investment and Management Company 1996 Stock Award and Incentive Plan. In exchange for the shares purchased, the executive officers (or entities controlled by them) executed notes payable totaling $18.6 million to AIMCO of which $11.9 million was repaid during 1997. The notes receivable were contributed by AIMCO to the Partnership in exchange for 895,250 OP Units. In September 1996, AIMCO's Board of Directors authorized the repurchase of up to 500,000 shares of Class A Common Stock in open market and privately negotiated purchase transactions. The stock may be purchased from time to time as market conditions warrant. In February 1997, AIMCO completed a public offering of 2,015,000 shares of Class A Common Stock at a public offering price of $26.75 per share. The net proceeds of approximately $51.0 million were contributed by AIMCO to the Partnership for 2,015,000 OP Units and were used to repay a portion of the Partnership's indebtedness incurred in connection with 1996 acquisitions. In May 1997, AIMCO sold 2,300,000 shares of Class A Common Stock at an average price of $28 per share in two public offerings. The net proceeds of approximately $63.0 million were contributed by AIMCO to the Partnership for 2,300,000 OP Units and were used to repay $56.0 million of outstanding indebtedness under the Credit Facility and to provide working capital of $7.0 million. In addition, AIMCO issued 2,142,857 shares of Class A Common Stock in connection with the acquisition of 2,866,073 shares of NHP Common Stock (see Note 5). In July 1997, AIMCO sold 1,100,000 shares of Class A Common Stock to certain members of AIMCO's senior management at a price of $30 per share, the closing price of the stock on the date of purchase. In exchange for the shares purchased, such members of senior management executed notes payable to AIMCO totaling $33.0 million, of which $15.8 million has been repaid as of February 28, 1998. The notes bear interest at 7.25% per annum, payable quarterly, and mature in 2007. The notes are secured by the stock purchased and are recourse as to 25% of the original amount borrowed. The notes receivable were contributed by AIMCO to the Partnership in exchange for 1,100,000 OP Units. In August 1997, AIMCO sold 750,000 shares of newly created Class B Cumulative Convertible Preferred Stock ("Class B Preferred Stock") for gross proceeds of $75.0 million in cash to an institutional investor in a private transaction. The proceeds from the offering were contributed by AIMCO to the Partnership in exchange for 750,000 Class B Preferred Units and were used by the Partnership to repay outstanding indebtedness under the Credit Facility and to provide working capital. Holders of the Class B Preferred Stock (which mirror those of the Class B Preferred Units) are entitled to receive, when, as and if declared by the Board of Directors, quarterly cash distributions per share equal to the greater of $1.78125 or the cash distributions declared on the number of shares of Class A Common Stock into which one share of Class B F-25 113 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Preferred Stock is convertible. Each share of Class B Preferred Stock is convertible at the option of the holder, beginning in August 1998, into 3.28407 shares of Class A Common Stock, subject to certain anti-dilution adjustments. The agreement pursuant to which AIMCO issued the Class B Preferred Stock provides that the holders of such stock may require AIMCO to repurchase the Class B Preferred Stock at a price of $105 per share, plus accrued and unpaid distributions, if (i) at any time AIMCO fails to qualify as a REIT; or (ii) upon the occurrence of a change of control of AIMCO, as defined by the aforementioned agreement. The Class B Preferred Stock is senior to the Class A Common Stock as to distributions and liquidation, and is non-voting. In August and September 1997, AIMCO issued an aggregate of 5,052,418 shares of Class A Common Stock to institutional investors for aggregate net proceeds of $156.9 million. AIMCO used $114.4 million of such proceeds to purchase 5,717,000 shares of NHP Common Stock from ANHI, used $7.0 million to purchase 351,974 additional shares of NHP Common Stock from a third party pursuant to a stock purchase agreement, and contributed the remaining $35.5 million to the Partnership (see Note 5). An additional 61,364 shares of Class A Common Stock were subsequently issued in exchange for 82,074 shares of NHP Common Stock. In December 1997, AIMCO issued 4,554,873 shares of Class A Common Stock in connection with the NHP Merger (see Note 5). Substantially all the assets and liabilities of NHP were contributed by AIMCO to the Partnership. In October 1997, AIMCO issued 7,000,000 shares of Class A Common Stock. The net proceeds were contributed by AIMCO to the Partnership in exchange for 7,000,000 OP Units. Net proceeds from the sale of approximately $242.5 million were used to fund certain property acquisitions, repay outstanding indebtedness under the Credit Facility and provide working capital. In December 1997, AIMCO issued 2,400,000 shares of newly created Class C Cumulative Preferred Stock ("Class C Preferred Stock") for net proceeds of $58.1 million. The proceeds from the offering were contributed to the Partnership in exchange for 2,400,000 Class C Preferred Units and were used by the Partnership to repay indebtedness outstanding under the Credit Facility and to provide working capital. Holders of the Class C Preferred Stock (which mirror those of the Class C Preferred Units) are entitled to receive, when, as and if declared by the Board of Directors, annual cash distributions equal to $2.25 per share. The Class C Preferred Stock is senior to the Class A Common Stock as to distributions and liquidation, and is non-voting. Upon any liquidation, dissolution or winding up of AIMCO, before payment or distributions by AIMCO shall be made to any holders of Class A Common Stock, the holders of the Class C Preferred Stock shall be entitled to receive a liquidation preference of $25 per share, plus accrued and unpaid distributions. In February 1998, AIMCO issued 4,200,000 shares of Class D Cumulative Preferred Stock in a public offering. The proceeds from the offering were contributed by AIMCO to the Partnership in exchange for 4,200,000 Class D Preferred Units. (see Note 21). The outstanding common limited partnership units, excluding those common units held by AIMCO, have been classified as redeemable partnership units outside of permanent partners' capital in the accompanying balance sheet of the Partnership. The units are initially recorded at fair value and subsequently adjusted based on fair value at the balance sheet date as measured by the closing price of AIMCO's common stock on that date multiplied by the total number of units outstanding. Certain individuals and entities own common units in the Partnership. A common unit and a share of common stock of AIMCO have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the Partnership. Common units are redeemable by common unitholders (other than the General Partner) at their option, subject to certain restrictions, on the basis of one common unit for either one share of common stock or cash equal to the fair value of a share at the time of redemption. AIMCO has the option to deliver shares of common stock in exchange for all or any portion of the cash requested. When a unitholder redeems a common F-26 114 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) unit, limited partner's capital is reduced and the general partner's capital is increased. Common units held by AIMCO are not redeemable. The following table sets forth the changes in redeemable units for the period presented.
LIMITED PARTNERS -------- Redeemable Units at January 1, 1995......................... 32,047 OP Units redeemed in exchange for AIMCO Common Stock...... (18) Acquisition of real estate through issuance of OP Units... 2,626 Net income................................................ 1,613 Distributions paid to OP Unit holders..................... (2,925) Adjustment to reflect limited partners' equity at redemption value....................................... 5,120 ------- Redeemable Units at December 31, 1995....................... 38,463 OP Units redeemed in exchange for AIMCO Common Stock...... (3,799) Acquisition of real estate or interests in real estate partnerships through issuance of OP Units.............. 32,156 Repayment of secured note payable through issuance of OP Units.................................................. 1,168 Net income................................................ 2,689 Distributions paid to OP Unit holders..................... (3,815) Adjustment to reflect limited partners' equity at redemption value....................................... 29,202 ------- Redeemable Units at December 31, 1996....................... 96,064 OP Units redeemed in exchange for AIMCO Common Stock...... (8,621) Acquisition of real estate or interests in real estate partnerships through issuance of OP Units.............. 63,375 OP Units issued in accordance with partnership amendment.............................................. (123) Net income................................................ 4,064 Distributions paid to OP Unit holders..................... (5,510) Adjustment to reflect limited partners' equity at redemption value....................................... 47,837 ------- Redeemable Units at December 31, 1997....................... 197,086
NOTE 16 -- STOCK OPTION PLANS AND STOCK WARRANTS AIMCO, from time to time, will issue stock options and stock warrants. Upon exercise of the stock options or stock warrants, AIMCO must contribute the proceeds received to the Partnership in exchange for OP Units in the same number as Class A Common Stock issued in connection with the exercised stock options or stock warrants. Therefore, the following disclosures are made pertaining to AIMCO's stock options and stock warrants. AIMCO has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the AIMCO's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. AIMCO's Board of Directors has adopted the 1994 Stock Option Plan of Apartment Investment and Management Company (the "1994 Plan"), the Apartment Investment and Management Company 1996 Stock Award and Incentive Plan (the "1996 Plan"), the Apartment Investment and Management Company 1997 Stock Award and Incentive Plan (the "1997 Plan") and the Apartment Investment and Management F-27 115 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company Non-Qualified Employee Stock Option Plan (the "Non-Qualified Plan") to attract and retain officers, key employees and independent directors. The 1994 Plan provides for the granting of a maximum of 150,000 options to purchase common shares. The 1996 Plan provides for the granting of a maximum of 500,000 options to purchase common shares. The 1997 Plan provides for the granting of a maximum of 20,000,000 options to purchase common shares. The Non-Qualified Plan provides for the granting of a maximum of 500,000 options to purchase common shares. The 1994 Plan, the 1996 Plan, the 1997 Plan and the Non-Qualified Plan allow for the grant of incentive and non-qualified stock options, and are administered by the Compensation Committee of the Board of Directors. The 1994 Plan also provides for a formula grant of the non-qualified stock options to the independent directors to be administered by the Board of Directors to the extent necessary. The exercise price of the options granted may not be less than the fair market value of the common stock at the date of grant. The term of the incentive and non-qualified options is ten years from the date of grant. The non-qualified options vest 20% per year over a five-year period with initial vesting one year from the date of grant. Terms may be modified at the discretion of the Compensation Committee of the Board of Directors. Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if AIMCO had accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
1997 1996 1995 ------------ ------------ ------------ Range of risk free interest rates.......... 5.2% to 7.5% 5.2% to 7.5% 5.2% to 7.5% Expected distribution yield................ 6.0% 7.8% 7.8% Volatility factor of the expected market 0.175 0.194 0.194 price of AIMCO's common stock............ Weighted average expected life of 4.5 years 4.5 years 4.5 years options..................................
The Black-Scholes option valuation model was developed for use in estimating fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because AIMCO's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options' vesting period. AIMCO's pro forma information for the options is as follows (in thousands except per share information):
1997 1996 1995 ------- ------- ------ Pro forma income attributable to OP Unitholders.......... $30,160 $14,890 $9,804 Pro forma basic earnings per OP Unit..................... $ 1.07 $ 0.99 $ 0.86
The effects of applying SFAS 123 in calculating pro forma income attributable to common shareholders and pro forma basic earnings per share may not necessarily be indicative of the effects of applying SFAS 123 to future years' earnings. F-28 116 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the option activity for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ------------- ------------- ------------- Outstanding at beginning of year........ 505,000 108,000 86,000 AIMCO options granted................... 127,000 803,000 27,000 AIMCO options exercised................. (342,000) (383,000) -- AIMCO options forfeited................. (6,000) (23,000) (5,000) NHP options assumed..................... 595,000 -- -- NHP options exercised................... (95,000) -- -- ------------- ------------- ------------- Outstanding at end of year.............. 784,000 505,000 108,000 ============= ============= ============= Stock options exercisable at the end of year.................................. 690,000 425,000 26,000 ============= ============= ============= Weighted average fair value of options granted during the year............... $3.24 $1.01 $1.75 Weighted average exercise price......... $30.01 $20.74 $17.69 Exercise prices......................... $12.36-$35.00 $20.25-$20.75 $17.12-$18.37 Weighted average remaining contractual life.................................. 8.12 years 9.57 years 9.21 years
At December 31, 1997, the outstanding options consisted of: (i) 500,000 NHP options assumed, with exercise prices ranging from $12.36 to $22.74 and a weighted average exercise price of $17.79, all immediately exercisable; (ii) 234,000 AIMCO options (190,000 exercisable) with exercise prices ranging from $17.125 to $27.75, a weighted average exercise price of $22.13 and a weighted average life of 8.0 years; and (iii) 50,000 AIMCO options (none exercisable) with an exercise price of $35.00 and remaining life of 9.7 years. On June 3, 1997, AIMCO issued warrants (the "NHP Warrants") exercisable to purchase an aggregate of 399,999 shares of Class A Common Stock at $36 per share at any time prior to June 3, 2002. The NHP Warrants were issued as part of the consideration for the NHP Real Estate Companies in a private transaction exempt from registration under the Securities Act pursuant to Section 4(2) thereof. When the NHP Warrants are exercised, the proceeds will be contributed to the Partnership for an equal number of OP Units. On December 2, 1997, AIMCO issued warrants (the "Oxford Warrants") exercisable to purchase up to an aggregate of 500,000 shares of Class A Common Stock at $41 per share. The Oxford Warrants were issued to affiliates of Oxford Realty Financial Group, Inc., a Maryland corporation ("Oxford"), in connection with the amendment of certain agreements pursuant to which the Partnership manages properties controlled by Oxford or its affiliates. The actual number of shares of Class A Common Stock for which the Oxford Warrants will be exercisable is based on certain performance criteria with respect to the Partnership's management arrangements with Oxford for each of the five years ending December 31, 2001. The Oxford Warrants are exercisable for six years after the determination of such criteria for each of the five years. The Oxford Warrants were issued in a private transaction exempt from registration under the Securities Act pursuant to Section 4(2) thereof. When the Oxford Warrants are exercised, the proceeds will be contributed to the Partnership for an equal number of OP Units. NOTE 17 -- EARNINGS PER OP UNIT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128") which replaced Accounting Principles Board Opinion No. 15 ("APB 15"). Since each OP Unit may be redeemed by the holder thereof for either one share of AIMCO common stock or cash equal to the fair market value thereof at the time of such redemption, at the option of AIMCO, the Partnership applies the requirements of SFAS 128 to its calculations of its per OP Unit information. As required, the Partnership adopted SFAS 128 as of December 31, 1997. F-29 117 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Class B Preferred Units are convertible (see Note 15). The Class C Preferred Units are not convertible. The following table illustrates the calculation of basic and diluted earnings per unit for the years ended December 31, 1997, 1996 and 1995 (in thousands, except per unit data):
1997 1996 1995 ------- ------- ------- Numerator: Net income.......................................... $32,697 $15,673 $14,988 Preferred Unit distributions........................ (2,315) -- (5,169) ------- ------- ------- Numerator for basic and diluted earnings per OP Unit-- income attributable to OP Unitholders............... $30,382 $15,673 $ 9,819 ======= ======= ======= Denominator: Denominator for basic earnings per OP Unit -- weighted average number of OP Units outstanding...................................... 27,732 14,978 11,453 Effect of dilutive securities: Employee options................................. 381 14 6 Warrants......................................... -- 2 2 ------- ------- ------- Dilutive potential OP Units........................... 381 16 8 ------- ------- ------- Denominator for diluted earnings per OP Unit.......... 28,113 14,994 11,461 ======= ======= ======= Basic earnings per common OP Unit: Operations.......................................... $ 0.99 $ 1.05 $ 0.86 Gain on disposition of properties................... 0.11 -- -- Extraordinary item.................................... (0.01) -- -- ------- ------- ------- Total....................................... $ 1.09 $ 1.05 $ 0.86 ======= ======= ======= Diluted earnings per OP Unit: Operations.......................................... $ 0.98 $ 1.04 $ 0.86 Gain on dispositions of properties.................. 0.11 -- -- Extraordinary item.................................. (0.01) -- -- ------- ------- ------- Total....................................... $ 1.08 $ 1.04 $ 0.86 ======= ======= =======
NOTE 18 -- RECENT ACCOUNTING DEVELOPMENTS In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130") which provides guidance with respect to the calculation and presentation of comprehensive income. Comprehensive income includes all transactions affecting partners' capital, including the traditional measure of net income, and excluding contributions from and distributions to OP Unitholders. Under SFAS 130, companies will be required to present comprehensive income and its components on the face of the income statement or in a separate financial statement that is displayed with the same prominence. The Partnership has elected not to adopt the provisions of SFAS 130 as of December 31, 1997. In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131") which redefines how business segments are identified and stipulates the content and nature of segment information to be presented in the financial statements. The Partnership has elected not to adopt the provisions of SFAS 131 as of December 31, 1997. F-30 118 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 19 -- TRANSACTIONS WITH AFFILIATES The Partnership serves as property manager for certain apartment properties owned by entities in which certain officers of AIMCO have an ownership interest. Compensation for these services is 3% to 6% of gross receipts from the properties and were $5.4 million, $0.6 million and $1.3 million for the years ending December 31, 1997, 1996 and 1995, respectively. In addition, the Partnership received consulting fees from affiliates of $0.1 million for the year ended December 31, 1995. No consulting fees from affiliates were received for 1997 or 1996. In 1996, the Partnership acquired the Peachtree Park Apartments in Atlanta, Georgia and the Somerset Village Apartments in Salt Lake City, Utah from entities controlled by officers of AIMCO. The aggregate consideration paid of $39.6 million consisted of $3.8 million in cash, 494,125 OP with a total recorded value of $9.9 million, and the assumption of $25.9 million of secured short-term indebtedness. In addition, the Partnership acquired the cable equipment at the Peachtree Park Apartments from an entity controlled by an officer of AIMCO in exchange for 8,243 OP Units with a recorded value $0.2 million. On December 1, 1997, the Partnership purchased the Foxchase Apartments for approximately $107.7 million from First Alexandria Associates, Limited Partnership. The purchase price consisted of approximately $70.0 million in assumed mortgage obligations and the remainder in OP Units. The Company serves as the general partner and a limited partner in First Alexandria Associates, Limited Partnership and has a 54% interest in the partnership. During 1997, in order to preserve AIMCO's REIT status, AIMCO contributed the following assets to the Partnership for OP Units. The Partnership, in turn, contributed the assets to the Unconsolidated Subsidiaries: (i) partnership interests with an estimated value of approximately $0.4 million; (ii) partnership interests, a $50.0 million promissory note and certain management agreements with an aggregate estimated value of approximately $53.7 million; and (iii) the stock of certain corporations with an estimated value of $25.0 million. During July 1997, AIMCO sold 1,100,000 shares of Class A Common Stock to certain members of AIMCO's senior management at a price of $30.00 per share, the closing price of the stock on the date of the purchase. In exchange for the shares purchased, such members of senior management executed notes payable to AIMCO totaling $33.0 million, of which approximately $10.1 million has been repaid as of December 31, 1997 (see Note 15). The notes receivable were contributed by AIMCO to the Partnership in exchange for 1,100,000 OP Units. On August 15, 1997, the Partnership contributed stock of a captive insurance subsidiary to PAMS Inc. Certain members of AIMCO's senior management are shareholders in PAMS Inc. In order to maintain their aggregate 5% ownership interest in PAMS Inc., these individuals contributed an aggregate of $0.2 million to PAMS Inc. On January 21, 1998, the Partnerships sold an aggregate of 15,000 High Performance Units to a limited liability company formed by certain members of AIMCO's senior management and to AIMCO's non-employee directors, for $2.1 million in cash (see Note 21). On January 31, 1998, AIMCO entered into a Contribution Agreement with CK Services, Inc. ("CK") and the stockholders of CK to cause certain assets to be transferred to CK and to distribute all outstanding stock of CK to the stockholders of AIMCO. CK is a corporation wholly-owned by Terry Considine, AIMCO's Chairman and Chief Executive Officer, and by Peter Kompaniez, AIMCO's President and Vice Chairman (see Note 21). F-31 119 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 20 -- EMPLOYEE BENEFIT PLANS The Partnership offers medical, dental, life and long-term disability benefits to employees of the Partnership through insurance coverage of company-sponsored plans. The medical and dental plans are self-funded and are administered by independent third parties. In addition, the Partnership also participates in a 401(k) defined-contribution employee savings plan. Employees who have completed six months of service are eligible to participate. The Partnership matches 50% of the participant's contributions to the plan up to a maximum of 6% of the participant's prior year compensation. NOTE 21 -- SUBSEQUENT EVENTS Distribution Declared On January 22, 1998, AIMCO's Board of Directors, and AIMCO, as the General Partner, declared a cash distribution of $0.5625 per OP Unit (equivalent to $2.25 on an annualized basis, an increase of 21.6% per OP Unit from the 1997 annualized distribution rate) for the quarter ended December 31, 1997, payable on February 13, 1998 to OP Unitholders of record on February 6, 1998. Creation of New Credit Facility In January 1998, the Partnership replaced the existing Credit Facility with a new $50 million unsecured revolving credit facility (the "BOA Credit Facility") with Bank of America and BankBoston, N.A. The Partnership is the borrower under the BOA Credit Facility, but all obligations thereunder are guaranteed by AIMCO and certain of its subsidiaries. The interest rate under the BOA Credit Facility is based on either LIBOR or Bank of America's reference rate, at the election of the Partnership, plus an applicable margin (the "Margin"). The Margin ranges between 0.6% and 1.0% in the case of LIBOR based loans and between 0% and 0.5% in the case of loans based on Bank of America's reference rate, depending upon the credit rating of the Partnership's senior unsubordinated unsecured long-term indebtedness. The BOA Credit Facility expires on January 26, 2000 unless extended for successive one-year periods at the discretion of the lenders. The BOA Credit Facility provides for the conversion of the revolving facility into a three-year term loan. The financial covenants contained in the BOA Credit Facility require the Partnership to maintain a ratio of debt to gross asset value of no more than 0.55 to 1.0, an interest coverage ratio of 2.25 to 1.0 and a debt service coverage ratio of at least 2.0 to 1.0. In addition, the BOA Credit Facility limits the Partnership from distributing more than 80% of its Funds From Operations (as defined) to OP Unitholders, imposes minimum net worth requirements and provides other financial covenants related to certain unencumbered assets. In February 1998, the Partnership, as borrower, and AIMCO and certain single asset wholly-owned subsidiaries of the Partnership (the "Owners"), as guarantors, entered into a five year secured credit facility agreement (the "WMF Credit Facility") with Washington Mortgage Financial Group, Ltd. ("Washington Mortgage"), which provides for a $50 million revolving credit facility and conversion of all or a portion of such revolving credit facility to a base loan facility. The WMF Credit Facility provides that all the rights of Washington Mortgage are assigned to the Federal National Mortgage Association ("FNMA"), but FNMA does not assume Washington Mortgage's obligations under the WMF Credit Facility. At the Partnership's request, the commitment amount may be increased to an amount not to exceed $250 million, subject to consent of Washington Mortgage and FNMA in their sole and absolute discretion. The Partnership and affiliates have pledged their ownership interests in the Owners as security for its obligations under the WMF Credit Facility. The guarantees of the Owners are secured by assets of the Owners, including four apartment properties and two mortgage notes. Advances to the Partnership under the WMF Credit Facility are funded with the proceeds of the sale to investors of FNMA mortgage backed securities that are secured by the advance and an interest in the collateral. The interest rate on each advance is determined by investor bids for such mortgage backed securities plus a fee spread presently equal to 0.5%. The maturity date of each advance F-32 120 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) under the revolving portion of the WMF Credit Facility is a date between three and nine months from the closing date of the advance as selected by the Partnership. Advances under the base facility mature at a date, selected by the Partnership, between ten and twenty years from the date of the advance. Subject to certain conditions, the Partnership has the right to add or substitute collateral. The WMF Credit Facility requires the Partnership to maintain a ratio of debt to gross asset value of no more than 0.55 to 1.0, an interest coverage ratio of at least 2.25 to 1.0, and a debt service coverage ratio of at least 2.0 to 1.0, imposes minimum net worth requirements and also provides other financial covenants and interest coverage ratios that are specifically related to the collateral. Contribution Agreement On January 31, 1998, AIMCO entered into a Contribution Agreement with CK Services, Inc. ("CK") and the stockholders of CK to cause certain assets to be transferred to CK and to distribute all outstanding stock of CK to the stockholders of AIMCO. CK is a corporation wholly-owned by Terry Considine, AIMCO's Chairman and Chief Executive Officer, and by Peter Kompaniez, AIMCO's President and Vice Chairman. CK was created as a vehicle for holding property and performing services that AIMCO is limited or prohibited from holding or providing due to its election to be taxed as a REIT. AIMCO is finalizing which assets will be contributed to CK. Any transfer of assets or services to CK will be at market rates and approved by the independent members of AIMCO's Board of Directors, and if market rates are difficult to ascertain, there is no guarantee that the pricing will favor AIMCO. Pursuant to the Contribution Agreement, AIMCO will contribute certain assets to CK and, in return, the stock of CK will be contributed to AIMCO or one of its subsidiaries. Following the contribution of CK stock, AIMCO will agree to contribute additional assets to CK with the intent of creating a stand-alone entity meeting the requirements for listing on the NYSE or NASDAQ National Market, and if AIMCO is successful in doing so, the stock of CK will be distributed to the stockholders of AIMCO. If AIMCO is unable to list the CK stock on the NYSE or NASDAQ National Market, CK will remain a direct or indirect subsidiary of AIMCO and AIMCO will pay to the former stockholders of CK an amount necessary to compensate the former CK stockholders for the value of such stock on January 31, 1998. Consummation of the transaction is subject to the approval of the independent members of AIMCO's board of directors. Stock Offering On February 19, 1998, AIMCO issued 4,200,000 shares of Class D Preferred Stock in a public offering. The net proceeds of $101.7 million from the offering were contributed by AIMCO to the Partnership in exchange for 4,200,000 Class D Preferred Units and were used to repay indebtedness under the BOA Credit Facility and to fund working capital requirements. Holders of the Class D Preferred Stock (which mirror those of the Class D Preferred Units) are entitled to receive, when, as and if declared by the Board of Directors, annual cash distributions equal to $2.1875 per share. The Class D Preferred Stock are senior to the Class A Common Shares as to distributions and liquidation. Upon any liquidation, dissolution or winding up of AIMCO, before payment or distributions by AIMCO shall be made to any holders of Class A Common Shares, the holders of the Class D Preferred Stock shall be entitled to receive a liquidation preference of $25 per share, plus accrued and unpaid distributions. Property Acquisitions On February 4, 1998, the Partnership purchased Steeplechase Apartments, an apartment community containing 484 units, located in Tyler, Texas, for $9.8 million plus closing costs. The acquisition was funded with short-term borrowings under the BOA Credit Facility. F-33 121 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Issuance of High Performance Units On January 21, 1998, the Partnership sold an aggregate of 15,000 High Performance Units to a limited liability company formed by certain members of AIMCO's senior management and to AIMCO's non-employee directors, for $2.1 million in cash. Pending Acquisition On March 17, 1998, AIMCO entered into a definitive merger agreement to acquire the multi-family apartment management operations, and certain property holdings, of Insignia Financial Group, Inc. ("Insignia") for approximately $910 million, including the assumption of debt. Insignia is one of the largest managers of multi-family residential properties in the United States, having a management portfolio consisting of approximately 191,000 units as of December 31, 1997. Arbor Station Acquisition On April 15, 1998, the Partnership purchased Arbor Station, a 264-unit apartment community located in Montgomery, Alabama. Total consideration paid of $11.4 million was comprised of $9.9 million in cash, and 38,237 OP units valued at $1.5 million. Distribution Declared On April 16, 1998, AIMCO's Board of Directors, and AIMCO, as the General Partner, declared a cash distribution of $0.5625 per OP Unit for the quarter ended March 31, 1998, payable on May 14, 1998 to OP Unitholders of record on May 7, 1998. Heather Ridge Acquisition On April 30, 1998, the Partnership purchased Heather Ridge II, a 72-unit apartment community located in Arlington, Texas. Total consideration paid of $2.0 million was comprised of $0.8 million in cash and the assumption of $1.2 million in mortgage indebtedness. Increase in Unsecured Revolving Credit Facility In May 1998, the Partnership increased its borrowing capacity under the BOA Credit Facility to $155.0 million for a six-month period. At the conclusion of the six-month period, the maximum borrowing capacity returns to its original $50.0 million. The interest rate to be applied to the incremental borrowings is based on either LIBOR plus a margin of 0.9% or the aforementioned Bank of America reference rate. The additional borrowing capacity will be used to facilitate the closing of the Ambassador and Insignia mergers. Ambassador Merger On May 8, 1998, the Ambassador Merger was completed. Pursuant to the Ambassador Merger Agreement, all outstanding shares of Ambassador Common Stock were converted into AIMCO Class A Common Stock, at a conversion ratio of 0.553, resulting in the issuance of up to 6,578,833 shares of AIMCO Class A Common Stock. Concurrently, all outstanding options to purchase Ambassador Common Stock were converted into options to purchase AIMCO Class A Common Stock, at the same conversion ratio, or cash. Contemporaneously, with the consummation of the Ambassador Merger, the OP Merger was consummated. Each outstanding unit of limited partnership interest in the Ambassador Operating Partnership was converted into the right to receive 0.553 OP Units, and as a result, the Ambassador Operating Partnership became a 99.9% owned subsidiary partnership of the Partnership. F-34 122 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Landmark Acquisition On May 22, 1998, the Partnership purchased Landmark Apartments, a 101-unit apartment community located in Albuquerque, New Mexico. Total consideration paid of $5.2 million was comprised of $1.8 million in cash and 89,964 OP Units valued at $3.4 million. Citrus Grove Acquisition On June 5, 1998, the Partnership purchased Citrus Grove Apartments, a 198-unit apartment community located in Redlands, California for $7.5 million in cash. Villa La Paz Acquisition On June 5, 1998, the Partnership purchased Villa la Paz Apartments, a 96-unit apartment community located in Sun City, California for $3.8 million in cash. Interest Rate Lock Agreements Subsequent to March 31, 1998, the Partnership refinanced certain mortgage indebtedness relating to ten real estate partnerships, and realized losses under the September Hedge of approximately $3.9 million, which have been deferred and will be amortized over the life of refinanced debt. Legal In regards to the California Actions (see Note 12), at a hearing on the demurrers on January 9, 1998, the court sustained the AIMCO Parties' demurrers to each of the three causes of action in the two complaints, with leave to amend. On February 25, 1998, the plaintiffs filed a consolidated amended class and derivative complaint for damages (the "Consolidated Amended Complaint"). The Consolidated Amended Complaint has added as defendants the general partners of the English Partnerships and dropped certain defendants, including AIMCO/PAM Properties, L.P. The Consolidated Amended Complaint seeks compensatory and punitive damages and alleges six causes of action for breach of fiduciary duty (two separate causes of action), for an accounting, breach of the implied covenant of good faith and fair dealing, and for inducing breach of contract. Plaintiffs have also added allegations of alleged wrongful conduct in connection with the Partnership's second group of tender offers commenced in late 1997. On March 27, 1998, the remaining AIMCO defendants and the general partners of the English Partnerships filed demurrers to the Consolidated Amended Complaint. On May 22, 1998, the Court overruled the demurrers. Trial is scheduled to begin on October 5, 1998. F-35 123 SCHEDULE III AIMCO PROPERTIES, L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (IN THOUSANDS EXCEPT UNIT DATA)
INITIAL COST COST ------------------------ CAPITALIZED DATE YEAR NUMBER BUILDINGS AND SUBSEQUENT TO PROPERTY NAME ACQUIRED LOCATION BUILT OF UNITS LAND IMPROVEMENTS ACQUISITION - ------------- -------- -------- --------- -------- -------- ------------- ------------- 100 Forest Place......... 10/97 Oak Park, IL 1986 234 $ 3,463 $ 19,624 35 40th North............... 07/94 Phoenix, AZ 1970 556 2,546 14,437 1,198 Anchorage................ 11/96 League City, TX 1985 264 523 9,097 123 Arbor Crossing........... 05/97 Atlanta, GA 1988 240 1,879 10,647 36 Arbors................... 10/97 Tempe, AZ 1971 200 1,092 6,189 23 Ashford Plantation....... 12/95 Atlanta, GA 1975 211 2,770 9,956 464 Bay Club................. 04/97 Aventura, FL 1990 702 10,530 60,830 1,060 Bay West................. 12/96 Tampa, FL 1975 376 1,500 7,085 1,063 Beacon Hill.............. 10/97 Chamblee, GA 1978 120 928 5,261 20 Blossomtree.............. 10/97 Scottsdale, AZ 1970 125 535 3,029 16 Bluffs................... 09/83 Boulder, CO 1971 232 696 7,779 364 Boardwalk................ 12/95 Tamarac, FL 1986 291 3,350 8,196 886 Brandywine............... 04/83 St. Petersburg, FL 1971 477 1,423 11,336 1,436 Brant Rock............... 10/97 Houston, TX 1984 84 337 1,908 11 Brentwood................ 11/96 Lake Jackson, TX 1980 104 200 3,092 210 Bridgewater.............. 11/96 Tomball, TX 1978 206 333 4,033 155 Brookside Village........ 04/96 Tustin, CA 1970 336 2,498 14,180 1,051 Cambridge Heights........ 05/97 Natchez, MS 1979 94 249 1,413 14 Chesapeake............... 12/96 Houston, TX 1983 320 775 7,317 668 Colonnade Gardens........ 10/97 Phoenix, AZ 1973 196 765 4,337 16 Copperfield.............. 11/96 Houston, TX 1983 196 702 7,003 275 Copper Chase............. 12/96 Katy, TX 1982 316 1,484 11,530 514 Coral Gardens............ 04/93 Las Vegas, NV 1983 670 3,190 12,745 1,594 Country Club............. 07/94 Amarillo, TX 1984 282 1,049 5,951 535 Coventry Square.......... 11/96 Houston, TX 1983 270 975 6,355 127 Crows Nest............... 11/96 League City, TX 1984 176 795 5,400 22 Cypress Landing.......... 12/96 Savannah, GA 1984 200 386 7,911 880 Dolphin's Landing........ 12/96 Corpus Cristi, TX 1980 218 1,740 5,589 2,943 Dunwoody................. 07/94 Atlanta, GA 1980 318 1,838 10,538 678 Easton Village........... 11/96 Houston, TX 1983 146 440 6,584 377 Eden Crossing............ 11/94 Pensacola, FL 1985 200 1,111 6,332 400 Elm Creek................ 05/97 Chicago, IL 1986 372 5,339 30,253 56 Fairways................. 07/94 Phoenix, AZ 1986 260 1,830 10,403 6,592 Fairways II.............. 09/96 Phoenix, AZ 1996 92 -- -- 5,952 Fisherman's Landing...... 12/97 Bradenton, FL 1984 200 1,275 7,225 -- Fishermans Wharf......... 11/96 Clute, TX 1981 360 830 9,969 131 DECEMBER 31, 1997 ---------------------------------------------------------------------------------- TOTAL COST TOTAL COST ------------------------------------- NET OF BUILDINGS AND ACCUMULATED ACCUMULATED PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION DEPRECIATION ENCUMBRANCES - ------------- -------- ------------- ---------- ------------ ------------ ------------ 100 Forest Place......... $ 3,463 $ 19,659 $ 23,122 $ 232 $ 22,890 $ 15,600 40th North............... 2,546 15,635 18,181 2,250 15,931 10,818 Anchorage................ 523 9,220 9,743 2,951 6,792 4,923 Arbor Crossing........... 1,879 10,683 12,562 287 12,275 5,410 Arbors................... 1,092 6,212 7,304 40 7,264 3,909 Ashford Plantation....... 2,770 10,420 13,190 865 12,325 7,463 Bay Club................. 10,530 61,890 72,420 1,493 70,927 49,000 Bay West................. 1,500 8,148 9,648 241 9,407 (A) Beacon Hill.............. 928 5,281 6,209 34 6,175 3,678 Blossomtree.............. 535 3,045 3,580 19 3,561 2,143 Bluffs................... 696 8,143 8,839 4,919 3,920 6,192 Boardwalk................ 3,350 9,082 12,432 779 11,653 9,529 Brandywine............... 1,423 12,772 14,195 4,547 9,648 6,584 Brant Rock............... 337 1,919 2,256 12 2,244 1,239 Brentwood................ 200 3,302 3,502 87 3,415 1,827 Bridgewater.............. 333 4,188 4,521 1,112 3,409 -- Brookside Village........ 2,498 15,231 17,729 250 17,479 -- Cambridge Heights........ 249 1,427 1,676 35 1,641 1,589 Chesapeake............... 775 7,985 8,760 285 8,475 (A) Colonnade Gardens........ 765 4,353 5,118 28 5,090 2,893 Copperfield.............. 702 7,278 7,980 1,090 6,890 3,533 Copper Chase............. 1,484 12,044 13,528 6,124 7,404 5,666 Coral Gardens............ 3,190 14,339 17,529 3,092 14,437 11,306 Country Club............. 1,049 6,486 7,535 883 6,652 4,064 Coventry Square.......... 975 6,482 7,457 2,466 4,991 3,077 Crows Nest............... 795 5,422 6,217 1,527 4,690 2,922 Cypress Landing.......... 386 8,791 9,177 2,472 6,705 4,377 Dolphin's Landing........ 1,740 8,532 10,272 255 10,017 (A) Dunwoody................. 1,838 11,216 13,054 1,545 11,509 7,545 Easton Village........... 690 6,711 7,401 1,266 6,135 2,931 Eden Crossing............ 1,111 6,732 7,843 858 6,985 5,959 Elm Creek................ 5,339 30,309 35,648 836 34,812 (C) Fairways................. 1,830 16,995 18,825 1,565 17,260 6,405 Fairways II.............. -- 5,952 5,952 -- 5,952 -- Fisherman's Landing...... 1,275 7,225 8,500 -- 8,500 -- Fishermans Wharf......... 830 10,100 10,930 3,482 7,448 3,575
See Report of Independent Auditors and accompanying notes to the consolidated financial statements. F-36 124
INITIAL COST COST ------------------------ CAPITALIZED DATE YEAR NUMBER BUILDINGS AND SUBSEQUENT TO PROPERTY NAME ACQUIRED LOCATION BUILT OF UNITS LAND IMPROVEMENTS ACQUISITION - ------------- -------- -------- --------- -------- -------- ------------- ------------- Fondren Court............ 11/96 Houston, TX 1979 429 1,349 9,355 423 Foothills................ 10/97 Tucson, AZ 1982 270 1,203 6,817 19 Foxbay................... 10/97 Tucson, AZ 1983 232 700 3,966 22 Foxchase................. 05/97 Alexandria, VA 1947 2,113 39,390 68,354 890 Foxtree.................. 10/97 Tempe, AZ 1976 487 2,505 14,194 30 Frankford Place.......... 07/94 Dallas, TX 1982 274 1,125 6,382 673 Freedom Place Club....... 10/97 Jacksonville, FL 1988 352 2,289 12,970 24 Garden Terrace........... 07/94 Bowie, TX 1978 20 49 280 23 Greens of Naperville..... 05/97 Naperville, IL 1986 400 3,756 21,284 60 Green Tree............... 12/96 Carrollton, TX 1983 365 1,909 14,842 398 Hampton Hill............. 11/96 Houston, TX 1984 332 1,574 8,408 773 Hastings Place........... 11/96 Houston, TX 1984 176 734 3,382 312 Hazeltree................ 10/97 Phoenix, AZ 1970 310 997 5,650 18 Heather Ridge............ 12/96 Arlington, TX 1983 180 655 5,455 (4) Hiddentree............... 10/97 East Lansing, MI 1966 261 1,470 8,330 16 Highland Park............ 12/96 Ft. Worth, TX 1985 500 3,234 19,536 261 Hillmeade................ 11/94 Nashville, TN 1985 288 2,872 16,066 1,214 Hills.................... 10/97 Austin, TX 1983 329 1,367 7,747 22 Islandtree............... 10/97 Whitemarsh Island, GA 1985 216 1,267 7,181 18 Jefferson Place.......... 11/94 Baton Rouge, LA 1985 234 2,696 15,115 1,215 Lake Crossing............ 05/97 Atlanta, GA 1988 300 2,046 11,596 45 Lakehaven I.............. 05/97 Carol Stream, IL 1984 144 1,071 6,069 21 Lakehaven II............. 05/97 Carol Stream, IL 1985 348 2,680 15,189 53 Las Brisas............... 07/94 Casa Grande, AZ 1985 132 573 3,260 131 Las Brisas............... 12/95 San Antonio, TX 1983 176 1,100 5,454 311 Lexington................ 07/94 San Antonio, TX 1981 72 311 1,764 75 Los Arboles.............. 09/97 Chandler, AZ 1985 432 1,662 9,418 67 Meadowcreek.............. 04/85 Boulder, CO 1972 332 1,387 10,027 692 Meadows.................. 12/96 Austin, TX 1983 100 417 4,563 151 Montecito................ 07/94 Austin, TX 1985 268 1,268 7,194 1,180 Morton Towers............ 09/97 Miami Beach, FL 1960 1,277 8,736 49,774 285 Newberry Park............ 05/97 Chicago, IL 1985 84 181 1,027 13 Newport.................. 07/94 Phoenix, AZ 1986 204 800 4,554 394 Oak Falls................ 11/96 Spring, TX 1983 144 514 3,585 201 Olmos Club............... 10/97 San Antonio, TX 1983 134 322 1,825 13 Olympiad................. 11/94 Montgomery, AL 1986 176 1,046 5,958 415 Orchidtree............... 10/97 Scottsdale, AZ 1971 278 2,314 13,112 20 Paradise Palms........... 07/94 Phoenix, AZ 1970 130 647 3,684 300 Park at Cedar Lawn....... 11/96 Galveston, TX 1985 192 769 5,073 (15) Parliament Bend.......... 07/94 San Antonio, TX 1980 232 765 4,342 405 Peachtree Park........... 1/96 Atlanta, GA 1962/1995 295 4,681 12,957 1,355 Penn Square.............. 12/94 Albuquerque, NM 1982 210 1,128 6,478 488 Peppermill Place......... 11/96 Houston, TX 1983 224 406 3,957 208 Pine Creek............... 10/97 Clio, MI 1978 233 852 4,830 14 Pleasant Ridge........... 11/94 Little Rock, AR 1982 200 1,660 9,464 580 DECEMBER 31, 1997 ---------------------------------------------------------------------------------- TOTAL COST TOTAL COST ------------------------------------- NET OF BUILDINGS AND ACCUMULATED ACCUMULATED PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION DEPRECIATION ENCUMBRANCES - ------------- -------- ------------- ---------- ------------ ------------ ------------ Fondren Court............ 1,349 9,778 11,127 5,044 6,083 5,528 Foothills................ 1,203 6,836 8,039 44 7,995 3,929 Foxbay................... 700 3,988 4,688 25 4,663 3,254 Foxchase................. 39,390 69,244 108,634 1,169 107,465 68,796 Foxtree.................. 2,505 14,224 16,729 91 16,638 9,062 Frankford Place.......... 1,125 7,055 8,180 967 7,213 4,003 Freedom Place Club....... 2,289 12,994 15,283 83 15,200 7,104 Garden Terrace........... 49 303 352 41 311 -- Greens of Naperville..... 3,756 21,344 25,100 249 24,851 16,182 Green Tree............... 1,909 15,240 17,149 4,524 12,625 7,534 Hampton Hill............. 2,130 8,625 10,755 3,840 6,915 4,188 Hastings Place........... 734 3,694 4,428 1,068 3,360 2,689 Hazeltree................ 997 5,668 6,665 36 6,629 4,133 Heather Ridge............ 655 5,451 6,106 1,994 4,112 2,630 Hiddentree............... 1,470 8,346 9,816 53 9,763 4,497 Highland Park............ 3,234 19,797 23,031 8,089 14,942 9,492 Hillmeade................ 2,872 17,280 20,152 2,151 18,001 11,091 Hills.................... 1,367 7,769 9,136 50 9,086 8,247 Islandtree............... 1,267 7,199 8,466 46 8,420 4,293 Jefferson Place.......... 2,696 16,330 19,026 2,023 17,003 9,543 Lake Crossing............ 2,046 11,641 13,687 312 13,375 11,628 Lakehaven I.............. 1,071 6,090 7,161 69 7,092 (C) Lakehaven II............. 2,680 15,242 17,922 172 17,750 (C) Las Brisas............... 573 3,391 3,964 468 3,496 (B) Las Brisas............... 1,100 5,765 6,865 480 6,385 3,382 Lexington................ 311 1,839 2,150 260 1,890 1,067 Los Arboles.............. 1,662 9,485 11,147 95 11,052 -- Meadowcreek.............. 1,387 10,719 12,106 3,458 8,648 7,928 Meadows.................. 417 4,714 5,131 1,273 3,858 2,111 Montecito................ 1,268 8,374 9,642 1,064 8,578 5,030 Morton Towers............ 8,736 50,059 58,795 670 58,125 -- Newberry Park............ 181 1,040 1,221 26 1,195 8,621 Newport.................. 800 4,948 5,748 680 5,068 2,601 Oak Falls................ 514 3,786 4,300 1,097 3,203 2,767 Olmos Club............... 322 1,838 2,160 12 2,148 1,272 Olympiad................. 1,046 6,373 7,419 802 6,617 5,325 Orchidtree............... 2,314 13,132 15,446 84 15,362 7,404 Paradise Palms........... 647 3,984 4,631 550 4,081 2,335 Park at Cedar Lawn....... 769 5,058 5,827 1,227 4,600 2,781 Parliament Bend.......... 765 4,747 5,512 655 4,857 (B) Peachtree Park........... 4,684 14,309 18,993 1,065 17,928 (A) Penn Square.............. 1,128 6,966 8,094 854 7,240 4,224 Peppermill Place......... 406 4,165 4,571 1,063 3,508 3,615 Pine Creek............... 852 4,844 5,696 31 5,665 2,438 Pleasant Ridge........... 1,660 10,044 11,704 1,265 10,439 6,700
See Report of Independent Auditors and accompanying notes to the consolidated financial statements. F-37 125
INITIAL COST COST ------------------------ CAPITALIZED DATE YEAR NUMBER BUILDINGS AND SUBSEQUENT TO PROPERTY NAME ACQUIRED LOCATION BUILT OF UNITS LAND IMPROVEMENTS ACQUISITION - ------------- -------- -------- --------- -------- -------- ------------- ------------- Pleasant Valley.......... 11/94 Little Rock, AR 1985 112 907 5,069 708 Point West............... 05/97 Lenexa, KS 1985 172 979 5,548 26 Polo Park................ 10/97 Midland, TX 1983 184 800 4,532 17 Prairie Hills............ 07/94 Albuquerque, NM 1985 260 1,680 9,633 391 Pride Gardens............ 05/97 Jackson, MS 1975 76 265 1,502 12 Quailtree................ 10/97 Phoenix, AZ 1978 184 659 3,735 17 Randol Crossing.......... 12/96 Ft. Worth, TX 1984 160 782 5,742 18 Ridge Crest.............. 12/96 Denton, TX 1983 152 612 5,642 159 Rillito Village.......... 07/94 Tucson, AZ 1985 272 1,220 6,947 225 Rivercrest............... 10/97 Tucson, AZ 1984 210 751 4,253 10 Riverside................ 07/94 Denver, CO 1987 248 1,553 8,828 752 Riverwalk................ 12/95 Little Rock, AR 1988 262 1,075 9,295 333 Royal Palms.............. 07/94 Phoenix, AZ 1985 152 832 4,730 165 Sand Castles............. 10/97 League City, TX 1987 138 978 5,541 16 Sand Pebble.............. 10/97 El Paso, TX 1983 208 861 4,879 25 Sandpiper Cove........... 05/97 West Palm Beach, FL 1987 416 4,006 22,701 63 Sawgrass................. 07/97 Orlando, FL 1986 208 1,443 8,157 73 Seaside Point............ 11/96 Galveston, TX 1985 102 295 2,994 188 Seasons.................. 10/95 San Antonio, TX 1976 280 974 5,749 453 Shadetree................ 10/97 Tempe, AZ 1965 123 591 3,349 18 Shadow Lake.............. 10/97 Greensboro, NC 1988 136 1,054 5,972 19 Signature Point.......... 11/96 League City, TX 1994 304 2,160 13,627 53 Silktree................. 10/97 Phoenix, AZ 1979 86 421 2,383 16 Snug Harbor.............. 12/95 Las Vegas, NV 1990 64 750 2,966 253 Somerset Village......... 5/96 Salt Lake City, UT 1985 486 4,375 17,600 526 South Willow............. 07/94 Salt Lake City, UT 1987 440 2,218 12,612 783 Southridge............... 12/96 Greenville, TX 1984 160 565 5,787 70 Spectrum Pointe.......... 07/94 Atlanta, GA 1984 196 1,029 5,903 356 Stirling Court........... 11/96 Houston, TX 1984 228 946 5,958 283 Stonebrook............... 06/97 Orlando, FL 1991 244 1,583 9,046 147 Stonehaven............... 11/96 Houston, TX 1972 337 1,197 11,236 (2,550) Stoney Brook............. 11/96 Houston, TX 1972 113 579 3,871 279 Summer Chase............. 05/97 Fort Smith, AR 1974 72 170 962 11 Sun Grove................ 07/94 Phoenix, AZ 1986 86 659 3,749 132 Sun Katcher.............. 12/95 Jacksonville, FL 1972 360 578 3,440 5,620 Sun Valley............... 07/94 Salt Lake City, UT 1985 430 1,306 7,434 328 Sunbury Downs............ 11/96 Houston, TX 1982 240 565 4,380 183 Sunchase-Clearwater...... 11/94 Clearwater, FL 1985 461 2,177 19,641 845 Sunchase-East............ 11/94 Orlando, FL 1985 296 927 8,361 679 Sunchase-North........... 11/94 Orlando, FL 1985 324 1,013 9,142 610 Sunchase-Tampa........... 11/94 Tampa, FL 1985 216 757 6,831 523 Surry Oaks............... 10/97 Bedford, TX 1983 152 628 3,560 18 Swiss Village............ 11/96 Houston, TX 1972 360 1,011 11,310 (941) Tall Timbers............. 10/97 Houston, TX 1982 256 1,238 7,016 17 Tara Bridge.............. 05/97 Atlanta, GA 1988 220 1,610 9,124 33 DECEMBER 31, 1997 ---------------------------------------------------------------------------------- TOTAL COST TOTAL COST ------------------------------------- NET OF BUILDINGS AND ACCUMULATED ACCUMULATED PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION DEPRECIATION ENCUMBRANCES - ------------- -------- ------------- ---------- ------------ ------------ ------------ Pleasant Valley.......... 907 5,777 6,684 709 5,975 3,465 Point West............... 979 5,574 6,553 64 6,489 5,650 Polo Park................ 800 4,549 5,349 29 5,320 2,324 Prairie Hills............ 1,680 10,024 11,704 1,379 10,325 7,333 Pride Gardens............ 265 1,514 1,779 38 1,741 912 Quailtree................ 659 3,752 4,411 24 4,387 2,252 Randol Crossing.......... 782 5,760 6,542 1,878 4,664 2,485 Ridge Crest.............. 612 5,801 6,413 1,906 4,507 2,507 Rillito Village.......... 1,220 7,172 8,392 995 7,397 4,062 Rivercrest............... 751 4,263 5,014 27 4,987 2,869 Riverside................ 1,553 9,580 11,133 1,308 9,825 6,046 Riverwalk................ 1,075 9,628 10,703 841 9,862 5,688 Royal Palms.............. 832 4,895 5,727 687 5,040 3,561 Sand Castles............. 978 5,557 6,535 36 6,499 3,156 Sand Pebble.............. 861 4,904 5,765 31 5,734 2,756 Sandpiper Cove........... 4,006 22,764 26,770 627 26,143 16,068 Sawgrass................. 1,443 8,230 9,673 160 9,513 4,980 Seaside Point............ 295 3,182 3,477 793 2,684 -- Seasons.................. 982 6,194 7,176 512 6,664 4,534 Shadetree................ 591 3,367 3,958 21 3,937 2,098 Shadow Lake.............. 1,054 5,991 7,045 38 7,007 3,295 Signature Point.......... 2,160 13,680 15,840 1,671 14,169 7,472 Silktree................. 421 2,399 2,820 15 2,805 1,585 Snug Harbor.............. 750 3,219 3,969 268 3,701 2,076 Somerset Village......... 4,375 18,126 22,501 1,104 21,397 8,537 South Willow............. 2,218 13,395 15,613 1,827 13,786 8,379 Southridge............... 565 5,857 6,422 2,212 4,210 2,132 Spectrum Pointe.......... 1,029 6,259 7,288 816 6,472 4,357 Stirling Court........... 946 6,241 7,187 2,709 4,478 3,598 Stonebrook............... 1,583 9,193 10,776 225 10,551 6,374 Stonehaven............... 1,197 8,686 9,883 675 9,208 4,160 Stoney Brook............. 579 4,150 4,729 953 3,776 741 Summer Chase............. 170 973 1,143 23 1,120 694 Sun Grove................ 659 3,881 4,540 546 3,994 (B) Sun Katcher.............. 578 9,060 9,638 142 9,496 (A) Sun Valley............... 1,306 7,762 9,068 939 8,129 5,600 Sunbury Downs............ 565 4,563 5,128 1,001 4,127 2,491 Sunchase-Clearwater...... 2,177 20,486 22,663 1,377 21,286 17,550 Sunchase-East............ 927 9,040 9,967 1,126 8,841 9,210 Sunchase-North........... 1,013 9,752 10,765 1,218 9,547 12,354 Sunchase-Tampa........... 757 7,354 8,111 945 7,166 7,384 Surry Oaks............... 628 3,578 4,206 23 4,183 2,346 Swiss Village............ 1,011 10,369 11,380 3,655 7,725 4,596 Tall Timbers............. 1,238 7,033 8,271 45 8,226 4,180 Tara Bridge.............. 1,610 9,157 10,767 246 10,521 7,694
See Report of Independent Auditors and accompanying notes to the consolidated financial statements. F-38 126
INITIAL COST COST ------------------------ CAPITALIZED DATE YEAR NUMBER BUILDINGS AND SUBSEQUENT TO PROPERTY NAME ACQUIRED LOCATION BUILT OF UNITS LAND IMPROVEMENTS ACQUISITION - ------------- -------- -------- --------- -------- -------- ------------- ------------- Timbermill............... 10/95 San Antonio, TX 1982 296 778 4,674 501 Timbertree............... 10/97 Phoenix, AZ 1980 387 2,334 13,229 25 Township at Highlands.... 11/96 Denver, CO 1986 119 1,058 11,166 418 Tustin Woods............. 06/97 Tustin, CA 1971 292 6,279 15,373 1,614 Twinbridge............... 10/97 Tucson, AZ 1982 104 310 1,757 11 Villa Ladera............. 1/96 Albuquerque, NM 1985 280 1,765 10,013 738 Village Creek............ 07/94 Denver, CO 1987 324 2,446 13,901 843 Village Park Towers...... 10/97 North Miami, FL 1979 871 3,173 17,978 38 Vinings.................. 06/97 Aventura, FL 1991 180 4,504 11,702 97 Walnut Springs........... 12/96 San Antonio, TX 1983 224 851 8,076 176 Waterford................ 11/96 Houston, TX 1984 312 533 5,692 127 Wickertree............... 10/97 Phoenix, AZ 1983 226 1,225 6,944 25 Wildflower............... 10/97 Midland, TX 1982 264 705 3,996 25 Williams Cove............ 07/94 Dallas, TX 1984 260 1,227 6,972 409 Windsor Landing.......... 10/97 Morrow, GA 1991 200 1,641 9,298 20 Windward at the Village................. 10/97 West Palm Beach, FL 1988 196 1,595 9,037 15 Woodhill................. 12/96 Denton, TX 1985 352 1,578 13,199 408 Woodhollow............... 10/97 Austin, TX 1974 108 658 3,728 12 Woodland Ridge........... 12/96 Irving, TX 1984 130 1,021 4,507 78 Woodlands-Odessa......... 07/94 Odessa, TX 1982 232 676 3,835 532 Woodlands-Tyler.......... 07/94 Tyler, TX 1984 256 1,029 5,845 405 Wydewood................. 10/97 Midland, TX 1982 218 519 2,943 15 Yorktree................. 10/97 Carol Stream, IL 1972 293 1,968 11,151 23 1,029 ------ -------- ---------- ------- Sub-total............... 40,039 257,534 1,329,755 62,251 ------ -------- ---------- ------- Properties under development or held for development: Fairways III land....... 07/94 2,303 -- -- Morton Towers land...... 9/97 4,446 -- 401 Villa Ladera land....... 03/96 470 9 38 ------ -------- ---------- ------- Total............. 40,039 $264,753 $1,329,764 $62,690 ====== ======== ========== ======= DECEMBER 31, 1997 ---------------------------------------------------------------------------------- TOTAL COST TOTAL COST ------------------------------------- NET OF BUILDINGS AND ACCUMULATED ACCUMULATED PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION DEPRECIATION ENCUMBRANCES - ------------- -------- ------------- ---------- ------------ ------------ ------------ Timbermill............... 778 5,175 5,953 431 5,522 (A) Timbertree............... 2,334 13,254 15,588 85 15,503 8,035 Township at Highlands.... 1,058 11,584 12,642 2,187 10,455 9,019 Tustin Woods............. 6,279 16,987 23,266 1,251 22,015 (A) Twinbridge............... 310 1,768 2,078 11 2,067 1,159 Villa Ladera............. 1,765 10,751 12,516 855 11,661 5,646 Village Creek............ 2,446 14,744 17,190 2,014 15,176 (B) Village Park Towers...... 3,173 18,016 21,189 -- 21,189 (A) Vinings.................. 4,504 11,799 16,303 275 16,028 7,956 Walnut Springs........... 851 8,252 9,103 2,329 6,774 4,859 Waterford................ 533 5,819 6,352 1,582 4,770 4,068 Wickertree............... 1,225 6,969 8,194 45 8,149 4,224 Wildflower............... 705 4,021 4,726 26 4,700 2,116 Williams Cove............ 1,227 7,381 8,608 1,052 7,556 3,928 Windsor Landing.......... 1,641 9,318 10,959 60 10,899 5,554 Windward at the Village................. 1,595 9,052 10,647 91 10,556 4,810 Woodhill................. 1,578 13,607 15,185 4,782 10,403 5,903 Woodhollow............... 658 3,740 4,398 24 4,374 2,133 Woodland Ridge........... 1,021 4,585 5,606 1,542 4,064 2,109 Woodlands-Odessa......... 676 4,367 5,043 574 4,469 (B) Woodlands-Tyler.......... 1,029 6,250 7,279 868 6,411 4,255 Wydewood................. 519 2,958 3,477 19 3,458 1,671 Yorktree................. 1,968 11,174 13,142 72 13,070 6,766 1,029 1,029 1,029 88 -------- ---------- ---------- -------- ---------- -------- Sub-total............... 258,351 1,391,189 1,649,540 153,285 1,496,255 755,431 -------- ---------- ---------- -------- ---------- -------- Properties under development or held for development: Fairways III land....... 2,303 2,303 2,303 Morton Towers land...... 4,446 401 4,847 4,847 Villa Ladera land....... 470 47 517 517 -------- ---------- ---------- -------- ---------- -------- Total............. $265,570 $1,391,637 $1,657,207 $153,285 $1,503,922 $755,431 ======== ========== ========== ======== ========== ========
- --------------- (A) Pledged as security for the Credit Facility. (B) Pledges as additional collateral for secured tax-exempt financing. (C) Debt is owned by AIMCO and is therefore eliminated in consolidation. See Report of Independent Auditors and accompanying notes to the consolidated financial statements. F-39 127 AIMCO PROPERTIES, L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
1997 1996 1995 ---------- -------- -------- REAL ESTATE Balance at beginning of year............................ $ 865,222 $477,162 $406,067 Additions during the year: Real estate acquisitions............................. 786,571 388,574 63,351 Additions............................................ 26,808 17,993 7,744 Dispositions......................................... (21,394) (18,507) -- ---------- -------- -------- Balance at end of year.................................. $1,657,207 $865,222 $477,162 ========== ======== ======== ACCUMULATED DEPRECIATION Balance at beginning of year............................ $ 120,077 $ 28,737 $ 13,699 Additions during the year: Depreciation......................................... 37,741 19,556 15,038 Additions............................................ -- 73,189 -- Dispositions......................................... (4,533) (1,405) -- ---------- -------- -------- Balance at end of year.................................. $ 153,285 $120,077 $ 28,737 ========== ======== ========
See Report of Independent Auditors and accompanying notes to consolidated financial statements. F-40 128 AIMCO PROPERTIES, L.P. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
JUNE 30, DECEMBER 31, 1998 1997 ----------- ------------ (UNAUDITED) Real Estate, net of accumulated depreciation of $297,895 and $153,285 (See Note 3)..................................... $2,287,309 $1,503,922 Property held for sale...................................... 35,695 6,284 Investments in securities (see Note 4)...................... 5,767 22,144 Investments in and notes receivable from unconsolidated subsidiaries (see Note 5)................................. 108,105 84,459 Investments in and notes receivable from unconsolidated real estate partnerships (see Note 6).......................... 243,799 212,150 Cash and cash equivalents................................... 49,320 37,088 Restricted cash............................................. 75,123 24,229 Accounts receivable......................................... 26,201 28,656 Deferred financing costs.................................... 22,629 12,793 Goodwill, net of accumulated amortization of $3,171 and $522...................................................... 122,068 125,239 Other assets................................................ 78,725 43,546 ---------- ---------- Total assets...................................... $3,054,741 $2,100,510 ========== ========== LIABILITIES AND PARTNERS' CAPITAL Secured notes payable (see Note 7).......................... $ 751,337 $ 681,421 Secured tax-exempt bond financing (see Note 8).............. 394,662 74,010 Unsecured short-term financing (see Note 9)................. 118,476 -- Secured short-term financing................................ 50,000 53,099 ---------- ---------- Total indebtedness.......................................... 1,314,475 808,530 ---------- ---------- Accounts payable, accrued and other liabilities............. 155,129 88,170 Resident security deposits and prepaid rents................ 12,882 10,213 ---------- ---------- Total liabilities................................. 1,482,486 906,913 ---------- ---------- Commitments and contingencies (see Note 12)................. -- -- Minority interest (see Note 13)............................. 43,167 36,335 Redeemable Partnership Units (see Note 14).................. 238,369 197,086 Partners' Capital (see Note 14) General and Special Limited Partner....................... 1,032,073 827,280 Preferred Units........................................... 258,863 134,579 Accumulated other comprehensive income.................... (217) (1,683) ---------- ---------- Total partners' capital........................... 1,290,719 960,176 ---------- ---------- Total liabilities and partners' capital........... $3,054,741 $2,100,510 ========== ==========
See accompanying notes to consolidated financial statements. F-41 129 AIMCO PROPERTIES, L.P. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER UNIT DATA) (UNAUDITED)
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED -------------------- -------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1998 1997 1998 1997 -------- -------- -------- -------- RENTAL PROPERTY OPERATIONS Rental and other property revenues....................... $ 89,928 $ 41,679 $161,264 $ 79,719 Property operating expenses.............................. (33,334) (16,704) (59,643) (31,160) Owned property management expenses....................... (2,581) (1,413) (4,713) (2,734) Depreciation............................................. (20,312) (7,591) (34,289) (15,046) -------- -------- -------- -------- Income from property operations.......................... 33,701 15,971 62,619 30,779 -------- -------- -------- -------- SERVICE COMPANY BUSINESS Management fees and other income......................... 4,741 3,161 9,562 5,605 Management and other expenses............................ (3,509) (1,223) (5,470) (2,643) Partnership overhead allocation.......................... (49) (147) (196) (294) Other assets and depreciation............................ -- (73) (3) (161) -------- -------- -------- -------- Income from service company business..................... 1,183 1,718 3,893 2,507 Minority interests in service company business........... -- (1) (1) (2) -------- -------- -------- -------- Partnership's share of income from service company business............................................... 1,183 1,717 3,892 2,505 -------- -------- -------- -------- General and administrative expenses...................... (2,129) (433) (4,103) (784) Interest expense......................................... (19,337) (11,152) (34,778) (20,604) Interest income.......................................... 5,274 834 11,350 1,341 Minority interest in other partnerships.................. 66 (196) (516) (565) Equity in losses of unconsolidated partnerships.......... (4,028) (379) (4,681) (379) Equity in earnings of unconsolidated subsidiaries........ 1,541 (86) 5,609 (86) Amortization of goodwill................................. (1,677) (237) (3,394) (474) -------- -------- -------- -------- Income from operations................................... 14,594 6,039 35,998 11,733 Gain on disposition of properties........................ -- -- 2,526 -- -------- -------- -------- -------- Income before extraordinary item......................... 14,594 6,039 38,524 11,733 Extraordinary item -- early extinguishment of debt....... -- -- -- (269) -------- -------- -------- -------- Net income............................................... $ 14,594 $ 6,039 $ 38,524 $ 11,464 ======== ======== ======== ======== Net income attributable to Preferred Unitholders......... $ 4,969 $ -- $ 8,650 $ -- -------- -------- -------- -------- Net income attributable to OP Unitholders................ $ 9,625 $ 6,039 $ 29,874 $ 11,464 ======== ======== ======== ======== Net income............................................... $ 14,594 $ 6,039 $ 38,524 $ 11,464 Other comprehensive income: Unrealized loss on investment in securities............ 1,626 -- 1,466 -- -------- -------- -------- -------- Comprehensive income..................................... $ 16,220 $ 6,039 $ 39,990 $ 11,464 ======== ======== ======== ======== Basic earnings per OP Unit............................... $ 0.19 $ 0.26 $ 0.61 $ 0.53 ======== ======== ======== ======== Diluted earnings per OP Unit............................. $ 0.19 $ 0.26 $ 0.61 $ 0.53 ======== ======== ======== ======== Weighted average OP Units outstanding.................... 51,159 23,387 48,812 21,455 ======== ======== ======== ======== Weighted average OP Units and OP Unit equivalents outstanding............................................ 51,400 23,525 49,015 21,590 ======== ======== ======== ======== Distributions paid per OP Unit........................... $ 0.5625 $ 0.4625 $ 1.125 $ 0.925 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. F-42 130 AIMCO PROPERTIES, L.P. CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (IN THOUSANDS) (UNAUDITED)
1998 1997 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income................................................ $ 38,524 $ 11,464 --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 38,666 17,067 Gain on disposition of property......................... (2,526) -- Minority interests...................................... 516 565 Equity in losses of unconsolidated partnerships......... 4,681 379 Equity in earnings of unconsolidated subsidiaries....... (5,609) 86 Extraordinary loss on early extinguishment of debt...... -- 269 (Increase) decrease in restricted cash.................. (15,375) 814 Decrease (increase) in accounts receivable.............. 12,310 (1,742) (Increase) decrease in other assets..................... (22,735) (8,707) Decrease in accounts payable, accrued and other liabilities........................................... (36,385) 3,219 (Decrease) increase in resident security deposits and prepaid rents......................................... (6,229) 1,621 --------- --------- Total adjustments.................................. (32,686) 13,571 --------- --------- Net cash provided by operating activities.......... 5,838 25,035 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of real estate......................... 11,206 -- Purchase of real estate................................... (30,405) (52,195) Purchase of or advances on notes receivable............... (64,914) -- Cash received in connection with Ambassador Merger........ 4,492 -- Proceeds from repayments of notes receivable.............. 18,087 -- Purchase of general and limited partnership interests..... (10,894) (45,426) Additions to property held for sale....................... (1,886) (354) Capital replacements...................................... (13,538) (2,915) Initial capital expenditures.............................. (7,965) (2,716) Construction in progress and capital enhancements......... (5,263) (3,766) Purchase of office equipment and leasehold improvements... -- (762) Proceeds from sale of property held for sale.............. 411 -- --------- --------- Net cash used in investing activities.............. (100,669) (108,134) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of OP Units, net of underwriting and offering costs...................................... 9,004 114,335 Proceeds from issuance of Class D Preferred Units, net of underwriting and offering costs......................... 100,294 -- Proceeds from issuance of High Performance Units.......... 1,978 -- Principal repayments received on notes due from Officers on OP Unit purchases.................................... 5,730 11,619 Repurchase of OP Units.................................... (5,982) -- Proceeds from secured notes payable borrowings............ 32,284 86,111 Net Proceeds from unsecured short-term financing.......... -- 20,500 Net borrowings on the Partnership's revolving credit facilities.............................................. 100,913 26,100 Principal repayments on secured notes payable............. (51,582) (2,554) Principal repayments on secured tax-exempt bond financing............................................... (979) (698) Repayments on secured short-term financing................ (19,099) (146,261) Payment of loan costs, net of proceeds from interest rate hedge................................................... (6,659) 2,214 Payment of distributions to limited partners.............. (6,283) (2,492) Payment of distributions to OP Unitholders................ (46,672) (17,424) Payment of Preferred Unit distributions................... (5,884) -- --------- --------- Net cash provided by financing activities.......... 107,063 91,450 --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS................... 12,232 8,351 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 37,088 13,170 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 49,320 $ 21,521 ========= =========
See accompanying notes to consolidated financial statements. F-43 131 AIMCO PROPERTIES L.P. CONSOLIDATED STATEMENTS OF CASH FLOW (IN THOUSANDS EXCEPT SHARE AND OPERATING PARTNERSHIP UNIT DATA) 1998 NON CASH INVESTING AND FINANCING ACTIVITIES PURCHASE OF REAL ESTATE Secured notes payable assumed in connection with purchase of real estate............................................... $48,157 Real estate purchased in exchange for 794,210 OP Units...... 26,767 ------- $74,924 =======
PURCHASE OF AMBASSADOR APARTMENTS, INC. In May 1998, the Company acquired all of the common stock of Ambassador Apartments, Inc., ("Ambassador"), in exchange for 6,578,833 shares of AIMCO Class A Common Stock with a recorded value of $251.3 million (see Note 4). The aggregate purchase price consisted of the following: Real estate................................................. $713,596 Investment in real estate partnerships...................... 2,290 Restricted cash............................................. 35,523 Accounts receivable......................................... 7,953 Deferred financing costs.................................... 4,359 Other assets................................................ 2,319 Secured notes payable....................................... 37,162 Secured tax-exempt bond financing........................... 334,881 Unsecured short-term financing.............................. 31,550 Accounts payable, accrued and other liabilities............. 2,513 Resident security deposits and prepaid rents................ 8,898 Minority interests in other partnerships.................... 5,752 Partners' Capital........................................... 251,420
PROPERTY HELD FOR SALE During the six months ended June 30, 1998, the Company entered into contracts to sell two multifamily properties with a net book value of $27.9 million. These assets were reclassified to property held for sale. RECEIPT OF NOTES PAYABLE FROM OFFICERS During the six months ended June 30, 1998, the Company issued notes receivable from officers for a total of $16.1 million in connection with their purchase of 437,653 shares of Class A Common Stock. The notes receivable were contributed to the Partnership in exchange for 437,653 OP Units. OTHER During the six months ended June 30, 1998, the Partnership issued an additional 108,528 OP Units with a recorded value of $3,041 in connection with the purchase of certain partnership interests. During the six months ended June 30, 1998, the Company obtained control of real estate partnerships which became consolidated. The non-cash effects are as follows: Real estate................................................. $3,802 Secured notes payable....................................... 3,395 Accounts payable, accrued and other liabilities............. 407
F-44 132 During the six months ended June 30, 1998, AIMCO contributed certain assets and liabilities to unconsolidated subsidiaries and unconsolidated partnerships as follows: Investment in unconsolidated subsidiaries................... $ 18,925 Investment in unconsolidated partnerships................... 1,989 Accounts receivable......................................... 966 Accounts payable, accrued and other liabilities............. 21,880
1997 NON CASH INVESTING AND FINANCING ACTIVITIES PURCHASE OF REAL ESTATE Secured notes payable assumed in connection with purchase of real estate............................................... $ 55,446 Real estate purchased in exchange for 497,794 OP Units...... 13,876 -------- $ 69,322 ========
PURCHASE OF 51.3% INTEREST IN NHP INCORPORATED In May 1997, the Company acquired 2,866,071 shares of NHP Incorporated ("NHP") common stock in exchange for 2,142,857 shares of AIMCO Class A Common Stock with a recorded value of $57,321. Subsequent to the purchase, the Company contributed the NHP common stock to AIMCO/NHP Holdings, Inc. ("ANHI"), an unconsolidated subsidiary formed in April 1997, in exchange for all of the shares of ANHI's nonvoting preferred stock, representing a 95% economic interest in ANHI. Concurrent with this contribution, ANHI obtained a loan in the amount of $72,600, and used the proceeds from the loan to purchase 3,630,002 additional shares of NHP common stock. Upon the completion of these transactions, AIMCO and ANHI owned a combined total of 6,496,073 shares of NHP common stock, representing 51.3% of NHP's outstanding common stock as of May 31, 1997. PURCHASE OF GENERAL AND LIMITED PARTNERSHIP INTERESTS, CAPTIVE INSURANCE SUBSIDIARY AND OTHER ASSETS The historical cost of the assets and the liabilities assumed in connection with the purchase of NHP Partners, Inc., NHP Partners Two Limited Partners and their subsidiaries (the "NHP Real Estate Companies") were as follows: Real estate, net............................................ $102,455 Investment in real estate partnerships...................... 96,119 Restricted cash............................................. 2,946 Accounts receivable......................................... 12,784 Other assets................................................ 3,495 Secured notes payable....................................... (83,667) Accounts payable, accrued and other liabilities............. (37,482) Accrued management contract liability....................... 106,615 Resident security deposits and prepaid rent................. (416)
PROPERTY HELD FOR SALE In the second quarter of 1997, the Company entered into contracts to sell multifamily properties with a net book value of $19,072. These assets were reclassified to property held for sale. ISSUANCE OF NOTES RECEIVABLE DUE FROM OFFICERS During the six months ended June 30, 1997, AIMCO issued notes receivable from officers for a total of $665 in connection with their purchase of 25,000 shares of Class A Common Stock. The notes receivable were contributed to the Partnership in exchange for 25,000 OP Units. F-45 133 OTHER During the six months ended June 30, 1997, the Company reclassified $1,323 of other assets to real estate as a purchase price allocation adjustment. In addition, the Company wrote off $4,065 of other assets allocable to limited partners in partnerships controlled by the Company, to minority interest. During the six months ended June 30, 1997, the Partnership issued an additional 1,333 OP Units with a recorded value of $36 in connection with the purchase of certain partnership interests in 1996. F-46 134 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) NOTE 1 -- ORGANIZATION AIMCO Properties, L.P. (together with its subsidiaries and other controlled entities, the "Partnership" (and together with entities in which the Partnership has a controlling financial interest, the "Company")), a Delaware limited partnership, was formed on May 16, 1994 to conduct the business of acquiring, developing, leasing, and managing multi-family apartment communities. Apartment and Investment Management Company ("AIMCO") is the General Partner and Special Limited Partner, as defined in the Second Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P. (the "Agreement"), of the Partnership. In addition, AIMCO is the holder of all Partnership Preferred Units ("Preferred Units") outstanding in the Partnership. The Limited Partners of the Partnership are individuals or entities that own limited partnership units in the Partnership ("OP Units"). After holding the OP Units for one year, the Limited Partners have the right to redeem their OP Units for cash, subject to the prior right of AIMCO to elect to acquire some or all of the OP Units tendered for redemption in exchange for shares of Class A Common Stock, on a one-for-one ratio. The Partnership, through its operating divisions and subsidiaries, was formed to hold and conduct substantially all of AIMCO's operations and manages the daily operations of AIMCO's business and assets. All employees of the Company are employees of the Partnership; AIMCO has no employees. According to the terms of the Agreement, the capital structure of the Partnership, in terms of the OP Units owned by the General Partner, the Special Limited Partner and the Preferred Units outstanding, is required to mirror the capital structure of AIMCO, with the only difference being the Partnership has additional OP Units outstanding which are owned by the Limited Partners. Therefore, AIMCO is required to contribute to the Partnership all proceeds from offerings of its Class A Common Stock, preferred stock, or any other equity offerings. In addition, substantially all of AIMCO's assets must be owned through the Partnership; therefore, AIMCO is generally required to contribute to the Partnership all assets acquired. In exchange for the contribution of offering proceeds or assets, AIMCO receives additional interest in the Partners with similar terms (i.e., if AIMCO contributes proceeds of a preferred stock offering, AIMCO receives Preferred Units). AIMCO frequently consummates transactions for the benefit of the Partnership. For legal, tax or other business reasons, AIMCO may hold title or ownership of certain assets until they can be transferred to the Partnership. However, the Partnership has a controlling financial interest in all of AIMCO's assets in the process of transfer to the Partnership. At June 30, 1998, the Partnership had 54,113,390 OP Units outstanding, 750,000 Class B Preferred Units outstanding, 2,400,000 Class C Preferred Units outstanding, and 4,200,000 Class D Preferred Units outstanding. At June 30, 1998, the Partnership, owned or controlled 58,345 units in 210 apartment properties (the "Owned Properties"), held an equity interest in 74,318 units in 478 apartment properties (the "Equity Properties") and managed 68,248 units in 357 apartment properties for third party owners and affiliates (the "Managed Properties" and, together with the Owned Properties and Equity Properties, the "AIMCO Properties"), bringing the total managed portfolio to 200,911 units in 1,045 apartment properties. The AIMCO Properties are located in 42 states, the District of Columbia and Puerto Rico. NOTE 2 -- BASIS OF PRESENTATION Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Partnership and subsidiaries and limited partnerships in which the Partnership has a controlling financial interest. Interests F-47 135 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) held by limited partners in real estate partnerships controlled by the Partnership are reflected as Minority Interests in Other Partnerships. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in Unconsolidated Subsidiaries The Partnership has investments in numerous subsidiaries. Investments in entities in which the Partnership does not have control, are accounted for under the equity method. Under the equity method, the Partnership's pro-rata share of the earnings or losses of the entity for the periods being presented is included in earnings (losses) from unconsolidated subsidiaries (see Note 5). Investments in and Notes Receivable from Real Estate Partnerships The Company owns general and limited partnership interests in numerous partnerships that own multi-family apartment properties. Investments in real estate partnerships in which the Partnership does not have control, are accounted for under the equity method. Under the equity method, the Company's pro-rata share of the earnings or losses of the entity for the periods being presented is included in earnings (losses) from unconsolidated partnerships (see Note 6). Redeemable Partnership Units The Partnership accounts for the outstanding common units not held by AIMCO as redeemable partnership units. These units are classified outside of permanent partners' capital in the accompanying balance sheet. The units are initially recorded at their fair value and subsequently adjusted based on the fair value at the balance sheet date as measured by the closing price of AIMCO's common stock on that date by the total number of units outstanding (see Note 14). Comprehensive Income In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130") which provides guidance with respect to the calculation and presentation of comprehensive income. Comprehensive income includes all transactions affecting partners' capital, including the traditional measure of net income, and excluding contributions from and distributions to OP Unitholders. Under SFAS 130, companies will be required to present comprehensive income and its components on the face of the income statement and as a component of partners' capital on the face of the balance sheet. As required, the Partnership adopted SFAS 130 as of January 1, 1998 and restated the components of partners' capital for prior period. Earnings per Share Earnings per share for the three and six months ended June 30, 1997, have been restated to comply with Statement on Financial Accounting Standard No. 128, Earnings Per Share (see Note 15). Interim Information The accompanying unaudited consolidated financial statements of the Partnership as of June 30, 1998 and for the three and six months ended June 30, 1998 and 1997 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and all such adjustments are of a recurring nature. F-48 136 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included elsewhere herein for the year ended December 31, 1997. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year. NOTE 3 -- REAL ESTATE During the six months ended June 30, 1998, in addition to the merger with Ambassador Apartments, Inc. (see Note 4), the Partnership purchased 12 apartment communities containing 3,008 apartment units, as described below:
DATE ACQUIRED PROPERTY LOCATION NUMBER OF UNITS - ------------- -------- -------- --------------- 1/98............................ Crossings at Bell Amarillo, TX 160 2/98............................ Steeplechase Tyler, TX 484 3/98............................ Casa Anita Phoenix, AZ 224 3/98............................ San Marina Phoenix, AZ 399 3/98............................ Cobble Creek Tucson, AZ 301 3/98............................ Rio Cancion Tucson, AZ 379 3/98............................ Sundown Village Tucson, AZ 330 4/98............................ Arbor Station Montgomery, AL 264 4/98............................ Heather Ridge Arlington, TX 72 5/98............................ Landmark Albuquerque, NM 101 6/98............................ Citrus Grove Redlands, CA 198 6/98............................ Villa La Paz Sun City, CA 96 ----- 3,008 =====
The aggregate consideration paid by the Partnership of $105.4 million consisted of $30.4 million in cash, 794,210 OP Units valued at $26.8 million and the assumption of $48.2 million of secured long-term indebtedness. The cash portions of the acquisitions were funded with borrowings under the Partnership's revolving credit facilities. In January 1998, the Partnership sold the Sun Valley Apartments, an apartment community containing 430 apartment units located in Salt Lake City, Utah, for $11.5 million, less selling costs of $0.3 million. The Partnership recognized a $3.3 million gain on the sale. As of June 30, 1998, the Partnership's management has indicated its intent to sell the Rillito Village and Village Park properties. Accordingly, the underlying assets of these properties have been reclassified from real estate to property held for sale on the consolidated balance sheet. NOTE 4 -- INVESTMENT IN AMBASSADOR APARTMENTS, INC. In September 1997, the Partnership acquired 886,600 shares of common stock ("Ambassador Common Stock") of Ambassador Apartments, Inc. ("Ambassador") for $19.9 million in cash. The shares acquired represented 8.4% of the shares of Ambassador Common Stock outstanding as of the date of the purchase. Ambassador was a self-administered and self-managed real estate investment trust ("REIT") engaged in the ownership and management of garden-style apartment properties leased primarily to middle income tenants. Ambassador owned 52 apartment communities with a total of 15,728 units located in Arizona, Colorado, Florida, Georgia, Illinois, Tennessee and Texas, and managed one property containing 252 units for an unrelated third party. F-49 137 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On December 23, 1997, AIMCO and Ambassador entered into an Agreement and Plan of Merger (the "Ambassador Merger Agreement") providing for the merger of Ambassador with and into AIMCO, with AIMCO being the surviving corporation (the "Ambassador Merger"), and that, unless otherwise agreed, the parties would use their reasonable best efforts to effect a business combination of Ambassador Apartments, L.P., a Delaware limited partnership (the "Ambassador Operating Partnership"), and the Partnership. Subsequent to the execution of the Ambassador Merger Agreement, the Partnership and Ambassador Operating Partnership entered into an Agreement and Plan of Merger (the "OP Merger Agreement") with AIMCO MergerSub, L.P., a Delaware limited partnership, a 99.9% owned subsidiary partnership of the Partnership ("MergerSub"), providing for MergerSub to be merged with and into the Ambassador Operating Partnership, with the Ambassador Operating Partnership surviving (the "OP Merger"). On May 8, 1998, holders of a majority of the outstanding shares of Ambassador Common Stock voted to approve the merger with AIMCO. The Ambassador Merger was completed the same day. Pursuant to the Ambassador Merger Agreement, all outstanding shares of Ambassador Common Stock were converted into the right to receive AIMCO Class A Common Stock, at a conversion ratio of 0.553, resulting in the issuance of up to 6,578,833 shares of AIMCO Class A Common Stock. Concurrently, all outstanding options to purchase Ambassador Common Stock were converted into options to purchase AIMCO Class A Common Stock, at the same conversion ratio, or cash. Contemporaneously with the consummation of the Ambassador Merger, the OP Merger was consummated and each outstanding unit of limited partnership interest in the Ambassador Operating Partnership was converted into the right to receive 0.553 OP Units. As a result, the Ambassador Operating Partnership became a 99.9% owned subsidiary partnership of the Partnership. NOTE 5 -- INVESTMENTS IN AND NOTES RECEIVABLE FROM UNCONSOLIDATED SUBSIDIARIES In order to satisfy certain requirements of the Internal Revenue Code ("Code") applicable to AIMCO's status as a REIT, certain assets of the Partnership are held through corporations (the "Unconsolidated Subsidiaries") in which the Partnership holds non-voting preferred stock that represents a 95% economic interest, and certain officers and/or directors of AIMCO hold, directly or indirectly, all of the voting common stock, representing a 5% economic interest. As a result of the controlling ownership interest in the Unconsolidated Subsidiaries held by others, the Partnership accounts for its interest in the Unconsolidated Subsidiaries on the equity method. As of June 30, 1998, the Unconsolidated Subsidiaries included AIMCO/ NHP Holdings, Inc. ("ANHI"), AIMCO/NHP Properties, Inc. ("ANPI"), NHP Property Management Company ("NHPMC"), and NHP A&R Services, Inc. ("NHPA&R"). As of June 30, 1998, the Partnership's investment in the unconsolidated subsidiaries totaled $108.1 million, which consisted of $50.0 million in notes receivable from, $18.9 million in advances to, and $39.2 million in preferred stock of, the Unconsolidated Subsidiaries. See selected combined financial information for the Partnership's Unconsolidated Subsidiaries and unconsolidated partnerships at Note 6. NOTE 6 -- INVESTMENT IN AND NOTES RECEIVABLE FROM UNCONSOLIDATED REAL ESTATE PARTNERSHIPS AIMCO/NHP Partners, L.P. ("ANPLP") owns general and limited partnership interests that own conventional and affordable apartment units. ANPLP's ownership interests in these partnerships range from 1% to 100%, and the provisions of the partnership agreements give ANPLP varying degrees of control. The Partnership owns a 99% limited partnership interest in ANPLP. A limited liability company owned by certain directors and officers of AIMCO is the 1% general partner of ANPLP. Based on the provisions of the partnership agreement for ANPLP, the Partnership does not possess control of the partnership. As of June 30, 1998, the Partnership's investment in unconsolidated partnerships, including ANPLP, totaled $243.8 million. F-50 138 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table provides selected combined financial information for both the Company's Unconsolidated Subsidiaries and unconsolidated partnerships as of June 30, 1998 and for the three and six months ended June 30, 1998 (in thousands):
JUNE 30, 1998 ------------- BALANCE SHEET DATA Real estate, net of accumulated depreciation.............................. $2,017,854 Management contracts...................................................... 50,320 Goodwill.................................................................. 44,252 Other Assets.............................................................. 449,657 Total assets.............................................................. 2,564,450 Accounts payable and accrued liabilities.................................. 666,410 Secured notes payable..................................................... 2,749,673 Stockholders' and partners' equity (deficit).............................. (851,633) Total liabilities and stockholders' equity (deficit)...................... 2,564,450
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1998 JUNE 30, 1998 -------------- ------------- INCOME STATEMENT DATA Rental and other property revenues...................... $ 182,784 $ 369,549 Property operating expenses............................. (122,173) (229,947) Depreciation expense.................................... (29,472) (55,682) Service company revenues................................ 16,806 37,585 Service company expenses................................ (11,338) (23,673) Interest expense, net................................... (46,778) (99,515) Net loss................................................ (11,421) (4,803)
NOTE 7 -- SECURED NOTES PAYABLE The following table summarizes the Partnership's secured notes payable, all of which are non-recourse to the Partnership (dollars in thousands):
JUNE 30, DECEMBER 31, 1998 1997 -------- ------------ Fixed rate, fully-amortizing notes.......................... $653,423 $561,056 Fixed rate, non-amortizing notes............................ 84,096 106,424 Floating rate, non-amortizing notes......................... 13,818 13,941 -------- -------- Total............................................. $751,337 $681,421 ======== ========
NOTE 8 -- SECURED TAX-EXEMPT BOND FINANCING The following table summarizes the Partnership's secured tax-exempt bond financing at June 30, 1998 and December 31, 1997 (dollars in thousands):
JUNE 30, DECEMBER 31, 1998 1997 -------- ------------ Fixed rate, fully-amortizing bonds.......................... $ 55,302 $56,027 Fixed rate, non-amortizing bonds............................ 17,823 17,983 Floating rate, fully-amortizing bonds....................... 289,824 -- Floating rate, non-amortizing bonds......................... 31,713 -- -------- ------- Total............................................. $394,662 $74,010 ======== =======
F-51 139 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 9 -- SECURED AND UNSECURED SHORT-TERM FINANCING The Partnership utilizes a variety of secured short-term financing instruments to manage its working capital needs and to fund real estate investments, including variable rate revolving credit facilities, as well as various fixed and floating rate term loans. In January 1998, the Partnership replaced its previous revolving credit facility with a new $50 million unsecured revolving credit facility with Bank of AmericaNational Trust and Savings Association ("Bank of America") and BankBoston, N.A. (the "BOA Credit Facility"). The Partnership is the borrower under the BOA Credit Facility, but all obligations thereunder are guaranteed by AIMCO and certain subsidiaries. In May 1998, the Partnership amended the BOA Credit Facility to increase its borrowing capacity thereunder to $155.0 million for a six-month period. At the conclusion of the six-month period, the maximum borrowing capacity returns to its original $50.0 million. The additional borrowing capacity was used to facilitate the closing of the Ambassador Merger (see Note 4) and will be further utilized to complete the Insignia Merger (see Note 12). The interest rate under the BOA Credit Facility is based on either LIBOR or Bank of America's reference rate, at the election of the Partnership, plus an applicable margin (the "Margin"). The Margin ranges between 0.6% and 1.0% in the case of LIBOR-based loans, and between 0% and 0.5% in the case of loans based on Bank of America's reference rate, depending upon the credit rating of the Partnership's senior unsubordinated unsecured long-term indebtedness. The BOA Credit Facility expires on January 26, 2000 unless extended for successive one-year periods, at the discretion of the lenders. The BOA Credit Facility provides for the conversion of the revolving facility into a three-year term loan. The availability of funds to the Partnership under the BOA Credit Facility is subject to certain borrowing base restrictions and other customary restrictions, including compliance with financial and other covenants thereunder. The Partnership had outstanding borrowings under the BOA Credit Facility of $118.5 million as of June 30, 1998. In February 1998, the Partnership, as borrower, and AIMCO and certain single asset wholly-owned subsidiaries of the Partnership (the "Owners"), as guarantors, entered into a five-year $50 million secured credit facility agreement (the "WMF Credit Facility") with Washington Mortgage Financial Group, Ltd. ("Washington Mortgage"), which provides for the conversion of all or a portion of such revolving credit facility to a term facility. The WMF Credit Facility provides that all of the rights of Washington Mortgage are assigned to Federal National Mortgage Association ("FNMA"), but FNMA does not assume Washington Mortgage's obligations under the WMF Credit Facility. At the Partnership's request, the commitment amount may be increased to an amount not to exceed $250 million, subject to the consent of Washington Mortgage and FNMA in their sole and absolute discretion. The Partnership and affiliates have pledged their ownership interests in the Owners as security for its obligations under the WMF Credit Facility. The guarantees of the Owners are secured by assets of the Owners, including four apartment properties and two mortgage notes. The interest rate on each advance is determined by the investor bids for FNMA mortgage-backed securities, plus a margin presently equal to 0.5%. The maturity date of each advance under the revolving portion of the WMF Credit Facility is a date between three and nine months from the closing date of the advance, as selected by the Partnership. Advances under the term facility mature at a date, selected by the Partnership, between ten and twenty years from the date of the advance. The WMF Credit Facility was fully utilized at June 30, 1998. NOTE 10 -- INTEREST RATE LOCK AGREEMENTS From time to time, the Company enters into interest rate lock agreements with major investment banking firms, in anticipation of refinancing debt. Interest rate lock agreements related to planned refinancing of identified variable rate indebtedness are accounted for as anticipatory hedges. Upon the refinancing of such indebtedness, any gain or loss associated with the termination of the interest rate lock agreement is deferred and recognized over the life of the refinanced indebtedness. In order for the interest rate lock to qualify as an anticipatory hedge, the following criteria must be met: (a) the refinance being hedged exposes the Company to interest rate risk; (b) the interest rate lock is designated as a hedge; (c) the significant characteristics and F-52 140 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) expected terms of the refinance are identified; and (d) it is probable that the refinance will occur. The Company believes that all four of the above qualifications have been met for interest rate lock agreements previously entered into. In the event that any of the above qualifications are not met, the interest rate lock agreement will not qualify as an anticipatory hedge, and any gain or loss realized on the interest rate lock agreement will be recognized in the current period's earnings. In September 1997, the Partnership entered into an interest rate lock agreement with a major investment banking company, having a notional principal amount of $75.0 million, in anticipation of refinancing certain floating rate indebtedness. The interest rate lock agreement fixed the ten-year treasury rate at 6.32%. During 1998, the Company refinanced certain mortgage indebtedness relating to ten real estate partnerships and realized losses of approximately $3.9 million, which have been deferred and will be amortized over the life of the refinanced debt. These losses, when amortized, will result in effective interest rates of 7.7% over the life of the refinanced debt. NOTE 11 -- INTEREST RATE SWAP AGREEMENTS On May 8, 1998, in connection with the consummation of the merger with Ambassador, the Company assumed six interest rate swap agreements, having termination dates between October 3, 2003, and March 3, 2004, with several major investment banking firms. The swap agreements modify the interest characteristics of a portion of the Company's outstanding debt. Each interest rate swap agreement is designated with all or a portion of the principal balance and term of a specific debt obligation. These agreements involve the exchange of amounts based on a fixed interest rate for amounts based on variable interest rates over the life of the agreement without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued and recognized as adjustment of interest expense related to the debt. The related interest amount payable to or receivable from counterparties is included in other liabilities or assets. The fair value of the swap agreements and changes in the fair value as a result of changes in market interest rates are not recognized in the financial statements. Gains and losses on the termination of interest-rate swap agreements are deferred as an adjustment to the carrying amount of the outstanding debt and amortized as an adjustment to interest expense related to the debt over the remaining term of the original contract life of the terminated swap agreement. In the event of the early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in income coincident with the extinguishment gain or loss. Pursuant to the terms of the swap and related credit support agreements, the Company is required to post collateral to the swap providers for an amount equal to their exposure, as defined, in each case to the extent that a specified threshold is exceeded. The collateral posted by the Company may be in the form of cash or governmental securities, as determined by the Company. At June 30, 1998, the Company had posted approximately $6.6 million in cash collateral under its swap agreements. The Company estimates that for every 0.25% decrease in the LIBOR interest rate yield, it will be required to post approximately $2 million of additional collateral with the swap providers. If interest rates rise, the Company estimates that for every 0.25% increase in the LIBOR interest rate yield curve, recovery of the posted collateral of a similar amount will be received up to the outstanding collateral balances. On June 2, 1998, the Company settled one of the swap agreements. It is the intent of the Company to terminate the remaining swap agreements in December 1998. Based on the market value of the outstanding swap agreements at June 30, 1998, the Company had an unrealized loss of $1.9 million. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement Of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. As the Company has only minimal use of F-53 141 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) derivatives, management does not anticipate that this new statement will have a material effect on its financial statements. NOTE 12 -- COMMITMENTS High Performance Units In January 1998, the Partnership agreed to sell 15,000 Class I High Performance Partnership Units (the "High Performance Units") to a partnership owned by fourteen members of AIMCO's senior management, and to three of its non-employee directors for $2.1 million in cash. The High Performance Units have nominal value unless the Company's total return, defined as distribution income plus share price appreciation, over the three year period ending December 31, 2000, is at least 30% and exceeds the industry average, as determined by a peer group index, by at least 15% (the "Total Return"). At the conclusion of the three year period, if the Company's Total Return satisfies these criteria, the holders of the High Performance Units will receive distributions and allocations of income and loss from the Partnership in the same amounts and at the same times as would holders of a number of OP Units equal to the quotient obtained by dividing (i) the products of (a) 15% of the amount by which the Company's cumulative Total Return over the three year period exceeds the greater of 115% of a peer group index or 30% (such excess being the "Excess Return"), multiplied by (b) the weighted average market value of the Company's outstanding OP Units, by (ii) the market value of one share of Class A Common Stock at the end of the three year period. The three year measurement period will be shortened in the event of a change of control of the Company. Unlike OP Units, the High Performance Units are not redeemable or convertible into Class A Common Stock. Because there is substantial uncertainty that the High Performance Units will have more than nominal value due to the required Total Return over the three year term, the Partnership has not recorded any value to the High Performance Units. If, however, the measurement period would have ended June 30, 1998, the Excess Return would have been $114.9 million and the value of the High Performance Units would have been $17.2 million, and such High Performance Units would represent no dilutive effect on net income per share. Insignia Merger On March 17, 1998, AIMCO, the Partnership and Insignia Financial Group, Inc. ("Insignia") and its subsidiary, Insignia/ESG, Inc. entered into a definitive merger agreement as amended and restated as of May 26, 1998, (the "Insignia Merger Agreement"), which provides for the merger (the "Insignia Merger") of Insignia with and into AIMCO, with AIMCO being the surviving corporation. Upon the completion of the Insignia Merger, the Partnership will assume property management of approximately 185,000 apartment units, consisting of 113,000 units owned by partnerships which will be controlled by the Partnership and 72,000 units owned by third parties. In addition, the Partnership will acquire an ownership interest of approximately 61% in Insignia Properties Trust ("IPT"), which owns general and limited partnership interests of approximately 32% (on a weighted average basis) in approximately 51,000 apartment units. The total transaction value of the Insignia Merger is approximately $811.0 million, which includes the issuance of approximately $303.0 million of AIMCO preferred stock, the assumption of approximately $308.0 million of mortgage indebtedness and the assumption of approximately $149.5 million of indebtedness represented by preferred convertible securities of an Insignia subsidiary. The AIMCO preferred stock issued in the Insignia Merger will generally (i) entitle the holders thereof to receive a special cash dividend (the "Special Dividend"), when and if declared by AIMCO's Board of Directors, of approximately $50.0 million in the aggregate (which is expected to be paid prior to January 15, 1999), and (ii) automatically convert into shares of AIMCO's Class A Common Stock upon payment in full of the Special Dividend. The Partnership has agreed to offer to acquire the outstanding shares of beneficial interest in IPT not held by Insignia at a price of at least $13.25 per IPT share, or approximately $100.0 million. In addition, IPT is party to a merger agreement with Angeles Mortgage Investment Trust ("AMIT"), which, if approved by AMIT's stockholders and consummated, will result in F-54 142 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the issuance of additional IPT shares and, therefore, the payment by the Partnership in a merger with IPT of an additional approximate $51.2 million at an assumed price of $13.25 per IPT share. Consummation of the Insignia Merger is subject to the affirmative vote of the holders of a majority of the outstanding shares of Insignia common stock, the approval of all appropriate governmental and regulatory authorities and other customary conditions. NOTE 13 -- MINORITY INTERESTS Interests held by limited partners (other than the Company) in real estate partnerships controlled by the Company are reflected as Minority Interests. Net income is allocated based on the percentage interest owned by these limited partners in each respective real estate partnership. NOTE 14 -- PARTNERS' CAPITAL In February 1998, AIMCO issued 4,200,000 shares of Class D Cumulative Preferred Stock in a public offering. Holders of the Class D Preferred Stock (which mirror those of the Class D Preferred Units) are entitled to receive, when, as and if declared by the Board of Directors, annual cash distributions equal to $2.1875 per share. The Class D Preferred Stock is senior to the Class A Common Stock, and ranks on a parity with the Class B Preferred Stock, Class C Preferred Stock, the Class G Cumulative Preferred Stock (see Note 16) and the Class H Cumulative Preferred Stock (see Note 16) as to distributions upon liquidation. Upon any liquidation, dissolution or winding up of AIMCO, before payment or distributions by AIMCO shall be made to any holders of Class A Common Stock, the holders of the Class D Preferred Stock are entitled to receive a liquidation preference of $25 per share, plus accrued and unpaid distributions. The net proceeds of $100.3 million were used to repay indebtedness under the BOA Credit Facility. On December 2, 1997, AIMCO issued warrants (the "Oxford Warrants") exercisable to purchase up to an aggregate of 500,000 shares of Class A Common Stock at $41 per share. The Oxford Warrants were issued to affiliates of Oxford Realty Financial Group, Inc., a Maryland corporation ("Oxford"), in connection with the amendment of certain agreements pursuant to which the Company manages properties controlled by Oxford or its affiliates. The actual number of shares of Class A Common Stock for which the Oxford Warrants will be exercisable is based on certain performance criteria with respect to the Company's management arrangement with Oxford for each of the five years ending December 31, 2001. The Oxford Warrants are exercisable for six years after the determination of such criteria for each of the five years. The Oxford Warrants were valued at $1.2 million using the "Black-Scholes" model and are being amortized over the vesting period. The Oxford Warrants were issued in a private transaction exempt from registration under the Securities Act pursuant to Section 4(2). During the six months ended June 30, 1998, the AIMCO sold 437,653 shares of Class A Common Stock to certain members of AIMCO's management, at an average price of $36.77 per share. In payment for the stock, such members of management executed notes payable to AIMCO totaling $16.1 million, which bear interest at a fixed rate of 7.0% per annum, payable quarterly, and are due in ten years. The notes are secured by the stock purchased and are recourse as to 25% of the original amount borrowed. The notes receivable were contributed by AIMCO to the Partnership in exchange for 437,653 OP Units. In March 1998, the Partnership repurchased 163,600 OP Units from AIMCO and, in turn, AIMCO repurchased 163,600 shares of Class A Common Stock on the open market, for $6.0 million, or an average price of $36.55 per share. In July 1998, AIMCO issued 4,050,000 shares of 9 3/8% Class G Cumulative Preferred Stock, par value $0.01 per share ("Class G Preferred Stock"), in a public offering (see Note 16). The net proceeds were contributed by AIMCO to the Partnership in exchange for 4,050,000 Class G Preferred Units. F-55 143 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In August 1998, AIMCO issued 2,000,000 shares of 9 1/2% Class H Cumulative Preferred Stock, par value $0.01 per share ("Class H Preferred Stock"), in a public offering (see Note 16). The net proceeds were contributed by AIMCO to the Partnership in exchange for 2,000,000 Class H Preferred Units. The outstanding common limited partnership units, excluding those common units held by AIMCO, have been classified as redeemable partnership units outside of permanent partners' capital in the accompanying balance sheet of the Partnership. The units are initially recorded at fair values and subsequently adjusted based on fair value at the balance sheet date as measured by the closing price of AIMCO's common stock on that date multiplied by the total number of units outstanding. Certain individuals and entities own common units on the Partnership. A common unit and a share of common stock of AIMCO have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the Partnership. Common units are redeemable by common unitholders (other than the General Partner) at their option, subject to certain restrictions, on the basis of one common unit for either one share of common stock or cash equal to the fair market value of a share at the time of redemption. AIMCO has the option to deliver shares of common stock in exchange for all or any portion of the cash requested. When a unitholder redeems a common unit, limited partner's capital is reduced and the general partner's capital is increased. Common units held by AIMCO are not redeemable. F-56 144 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 15 -- EARNINGS PER OP UNIT The following table illustrates the calculation of basic and diluted earnings per OP Unit for the three and six months ended June 30, 1998 and 1997 (in thousands, except per unit data):
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, 1998 1997 1998 1997 -------------- -------------- -------------- -------------- Numerator: Net Income.................. $14,594 $ 6,039 $38,524 $11,464 Preferred unit distributions............ (4,969) -- (8,650) -- ------- ------- ------- ------- Numerator for basic and diluted earnings per OP Unit -- income attributable to OP Unitholders.............. $ 9,625 $ 6,039 $29,874 $11,464 ======= ======= ======= ======= Denominator: Denominator for basic earnings per OP Unit -- weighted average number of OP Units outstanding.............. 51,159 23,387 48,812 21,455 Effect of dilutive securities............... 241 138 203 135 ------- ------- ------- ------- Denominator for dilutive earnings per OP Unit........ 51,400 23,525 49,015 21,590 ======= ======= ======= ======= Basic earnings per OP Unit: Operations.................. $ 0.19 $ 0.26 $ 0.56 $ 0.54 Gain on disposition of properties............... -- -- 0.05 -- Extraordinary item.......... -- -- -- (0.01) ------- ------- ------- ------- Total............... $ 0.19 $ 0.26 $ 0.61 $ 0.53 ======= ======= ======= ======= Diluted earnings per OP Unit: Operations.................. $ 0.19 $ 0.26 $ 0.56 $ 0.54 Gain on disposition of properties............... -- -- 0.05 -- Extraordinary item.......... -- -- -- (0.01) ------- ------- ------- ------- Total............... $ 0.19 $ 0.26 $ 0.61 $ 0.53 ======= ======= ======= =======
NOTE 16 -- SUBSEQUENT EVENTS Sunset Village Acquisition On July 2, 1998, the Partnership purchased Sunset Village Apartments, a 114-unit apartment community located in Oceanside, California. Total consideration paid of $7.5 million was comprised of $1.8 million in cash, the issuance of 1,985 OP Units valued at $0.1 million, and the assumption of $5.6 million of mortgage indebtedness. Sunset Citrus Acquisition On July 2, 1998, the Partnership purchased Sunset Citrus Apartments, a 97-unit apartment community located in Vista, California. Total consideration paid of $4.4 million was comprised of $0.7 million in cash, the issuance of 1,110 OP Units valued at $0.04 million, and the assumption of $3.6 million of mortgage indebtedness. F-57 145 AIMCO PROPERTIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Rancho Escondido Acquisition Also on July 2, 1998, the Partnership purchased Rancho Escondido Apartments, a 334-unit apartment community located in Escondido, California. Total consideration paid of $20.7 million was comprised of $6.6 million in cash, the issuance of 5,491 OP Units valued at $0.3 million, and the assumption of $13.8 million of mortgage indebtedness. Distribution Declared On July 23, 1998, the AIMCO Board of Directors and AIMCO, as the General Partner, declared a cash distribution of $0.5625 per OP Unit for the quarter ended June 30, 1998, payable on August 14, 1998 to OP Unitholders of record on August 7, 1998. Issuance of Preferred Units In July 1998, AIMCO issued 4,050,000 shares of Class G Preferred Stock in a public offering. The net proceeds were contributed by AIMCO to the Partnership in exchange for 4,050,000 Class G Preferred Units. Holders of the Class G Preferred Stock (which mirror those of the Class G Preferred Units) are entitled to receive, when, as and if declared by the Board of Directors, annual cash dividends equal to $2.34375 per share. The Class G Preferred Stock is senior to the Class A Common Stock, and ranks on a parity with the Class B Cumulative Convertible Preferred Stock, Class C Cumulative Preferred Stock, Class D Cumulative Preferred Stock and Class H Preferred Stock as to dividends and upon liquidation. Upon any liquidation, dissolution or winding up of AIMCO, before payments or distributions are made by AIMCO to any holders of Class A Common Stock, the holders of the Class G Preferred Stock are entitled to receive a liquidation preference of $25 per share, plus accumulated, accrued and unpaid dividends. The net proceeds of approximately $98.0 million were used to repay $83.0 million of outstanding indebtedness under the BOA Credit Facility, to fund acquisitions and for general corporate purposes. In August 1998, AIMCO issued 2,000,000 shares of Class H Preferred Stock in a public offering. The net proceeds were contributed by AIMCO to the Partnership in exchange for 2,000,000 Class H Preferred Units. Holders of the Class H Preferred Stock (which mirror those of the Class H Preferred Units) are entitled to receive, when, as and if declared by the Board of Directors, annual cash dividends equal to $2.375 per share. The Class G Preferred Stock is senior to the Class A Common Stock, and ranks on a parity with the Class B Cumulative Convertible Preferred Stock, Class C Cumulative Preferred Stock, Class D Preferred Stock and Class G Preferred Stock as to dividends and upon liquidation. Upon any liquidation, dissolution or winding up of AIMCO, before payments or distributions are made by AIMCO to any holders of Class A Common Stock, the holders of the Class H Preferred Stock are entitled to receive a liquidation preference of $25 per share, plus accumulated, accrued and unpaid dividends. The net proceeds of approximately $48.1 million were used to repay indebtedness under the BOA Credit Facility. Redeemable Partnership Units Effective October 1, 1998, pursuant to an amendment to the Partnership agreement in which the Partnership obtained control over the redemption rights of the units, these units will be reclassified as a component of permanent partners' capital. F-58 146 PRO FORMA FINANCIAL INFORMATION OF AIMCO PROPERTIES, L.P. (PRE-INSIGNIA MERGER) INTRODUCTION In May and September of 1997, Apartment Investment and Management Company, a Maryland Corporation ("AIMCO"), directly or indirectly through a subsidiary, acquired (the "NHP Stock Purchase") an aggregate of 6,930,122 shares of common stock ("NHP Common Stock") of NHP Incorporated ("NHP"). On December 8, 1997, AIMCO acquired the remaining shares of NHP Common Stock in a merger transaction accounted for as a purchase (the "NHP Merger"). As a result of the NHP Merger, AIMCO issued 6,759,148 shares of AIMCO Class A Common Stock, par value $0.01 per share (the "AIMCO Common Stock"), valued at $180.8 million, and paid $86.5 million in cash. The total cost of the purchase of NHP was $349.5 million. Substantially all assets and liabilities of NHP were contributed by AIMCO to AIMCO Properties, L.P. (together with its subsidiaries and other controlled entities, the "Partnership" (and together with entities in which the Partnership has a controlling financial interest, the "Company")). In June 1997, the Company purchased a group of companies (the "NHP Real Estate Companies") affiliated with NHP that hold general and limited partnership interests in partnerships (the "NHP Partnerships") that own 534 conventional and affordable multifamily apartment properties (the "NHP Properties") containing 87,659 units, a captive insurance subsidiary and certain related assets (the "NHP Real Estate Acquisition"). The Company paid aggregate consideration of $54.8 million in cash and warrants to purchase 399,999 shares of AIMCO Common Stock at an exercise price of $36.00 per share. The Company engaged in a reorganization (the "NHP Real Estate Reorganization") of its interests in the NHP Real Estate Companies, which will result in certain of the assets of the NHP Real Estate Companies being owned by a limited partnership (the "Unconsolidated Partnership") in which the Partnership holds a 99% limited partner interest and certain directors and officers of AIMCO, directly or indirectly, hold a 1% general partner interest. Immediately following the NHP Merger, in order to satisfy certain requirements of the Internal Revenue Code (the "Code") applicable to AIMCO's status as a REIT, the Company engaged in a reorganization (the "NHP Reorganization") of the assets and operations of NHP that resulted in the Master Property Management Agreement being terminated and NHP's operations being conducted through corporations (the "Unconsolidated Subsidiaries") in which the Partnership holds non-voting preferred stock that represents a 95% economic interest, and certain officers and/or directors of AIMCO hold, directly or indirectly, all of the voting common stock, representing a 5% economic interest. As a result of the controlling ownership interest in the Unconsolidated Subsidiaries held by others, the Partnership accounts for its interest in the Unconsolidated Subsidiaries on the equity method. On May 8, 1998, AIMCO completed a merger with Ambassador, pursuant to which Ambassador Apartments, Inc. ("Ambassador") was merged into AIMCO (the "Ambassador Merger"). Each outstanding share of Ambassador Common Stock, other than those shares held by the Partnership or Ambassador, were converted into 0.553 shares of AIMCO Common Stock. Any outstanding options to purchase Ambassador Common Stock were converted, at the election of the option holder, into cash or options to purchase AIMCO Common Stock at their current exercise price divided by the Conversion Ratio. In accordance with the Agreement and Plan of Merger, dated December 23, 1997 and supplemented by letter dated as of March 11, 1998 (the "Ambassador Merger Agreement"), the outstanding shares of Class A Senior Cumulative Preferred Stock of Ambassador (the "Ambassador Preferred Stock") were redeemed and converted into Ambassador Common Stock prior to the Ambassador Merger. Following the consummation of the Ambassador Merger, a subsidiary of the Partnership was merged with and into the Ambassador Operating Partnership (the "Ambassador OP Merger"). Each outstanding unit of limited partnership interest in the Ambassador Operating Partnership was converted into the right to receive 0.553 limited partnership units in the Partnership ("OP Units"), and as a result, the Ambassador Operating Partnership became a 99.9% owned subsidiary partnership of the Partnership. F-59 147 Also during 1997; (i) the Partnership acquired (a) 44 properties for aggregate purchase consideration of $467.4 million, of which $56.0 million was paid in the form of 1.9 million OP Units, (b) paid $34.2 million in cash and issued OP Units valued at $7.3 million in connection with the acquisition of partnership interests through tender offers in certain partnerships ((a) and (b) together are the "1997 Property Acquisitions") and (c) paid $19.9 million to acquire 886,600 shares of Ambassador Common Stock (together with the 1997 Property Acquisitions, the "1997 Acquisitions"); (ii) AIMCO sold (a) approximately 16,367,000 shares of AIMCO Common Stock for aggregate net proceeds of $513.4 million; (b) 750,000 shares of Class B Cumulative Convertible Preferred Stock for net proceeds of $75 million; and (c) 2,400,000 shares of Class C 9% Cumulative Preferred Stock for net proceeds of $58.1 million; of which all proceeds were contributed by AIMCO to the Partnership in exchange for 16,367,000 OP Units, 750,000 Class B Preferred Units, and 2,400,000 Class C Preferred Units (collectively, the "1997 Stock Offerings"); and (iii) the Partnership sold five real estate properties (the "1997 Dispositions"). During 1998, (i) (a) AIMCO sold 4,200,000 shares of its Class D Cumulative Preferred Stock for net proceeds of $101.5 million; (b) sold 4,050,000 shares of its Class G Cumulative Preferred Stock for net proceeds of $98.0 million (the "Class G Preferred Stock Offering"); and (c) sold 2,000,000 shares of its Class H Cumulative Preferred Stock for net proceeds of $48.1 million (the "Class H Preferred Stock Offering"); of which all proceeds were contributed by AIMCO to the Partnership in exchange for 4,200,000 Class D Preferred Units, 4,050,000 Class G Preferred Units, and 2,000,000 Class H Preferred Units, respectively (collectively, the "1998 Stock Offerings"); (ii) the Partnership purchased 15 properties for aggregate purchase consideration of $138.0 million, of which $27.3 million was paid in the form of 0.7 million OP Units (the "1998 Acquisitions"); (iii) the Partnership sold one real estate property (the "1998 Disposition"); and (iv) the Company completed the Ambassador Merger. PRO FORMA FINANCIAL INFORMATION (PRE-INSIGNIA MERGER) The following Pro Forma Consolidated Balance Sheet (Pre-Insignia Merger) of the Partnership as of June 30, 1998 has been prepared as if each of the following transactions had occurred as of June 30, 1998: (i) the purchase of three properties for an aggregate purchase price of $32.6 million; (ii) the Class G Preferred Stock Offering; and (iii) the Class H Preferred Stock Offering. The following Pro Forma Consolidated Statement of Operations (Pre-Insignia Merger) of the Partnership for the year ended December 31, 1997 has been prepared as if each of the following transactions had occurred as of January 1, 1997: (i) the 1997 Acquisitions; (ii) the 1997 Stock Offerings; (iii) the 1997 Dispositions; (iv) the NHP Real Estate Acquisition; (v) the NHP Real Estate Reorganization; (vi) the NHP Stock Purchase; (vii) the NHP Merger; (viii) the NHP Reorganization; (ix) the 1998 Stock Offerings; (x) the 1998 Acquisitions; (xi) the 1998 Disposition; and (xii) the Ambassador Merger. The following Pro Forma Consolidated Statement of Operations (Pre-Insignia Merger) of the Partnership for the six months ended June 30, 1998 has been prepared as if each of the following transactions had occurred as of January 1, 1997: (i) the 1998 Stock Offerings; (ii) the 1998 Acquisitions; (iii) the 1998 Disposition; and (iv) the Ambassador Merger. The following Pro Forma Financial Information (Pre-Insignia Merger) is based, in part, on the following historical financial statements, which are included or incorporated by reference elsewhere herein: (i) the audited Consolidated Financial Statements of the Partnership for the year ended December 31, 1997; (ii) the unaudited Consolidated Financial Statements of the Partnership for the six months ended June 30, 1998; (iii) the audited Consolidated Financial Statements of Ambassador for the year ended December 31, 1997; (iv) the unaudited Consolidated Financial Statements of Ambassador for the four months ended April 30, 1998; (v) the unaudited Consolidated Financial Statements of NHP for the nine months ended September 30, 1997; (vi) the unaudited Combined Financial Statements of the NHP Real Estate Companies for the three months ended March 31, 1997; (vii) the unaudited Financial Statements of NHP Southwest Partners, L.P. for the three months ended March 31, 1997; (viii) the unaudited Combined Financial Statements of the NHP New LP Entities for the three months ended March 31, 1997; (ix) the unaudited Combined Financial Statements of the NHP Borrower Entities for the three months ended March 31, 1997; (x) the unaudited F-60 148 Historical Summaries of Gross Income and Certain Expenses of The Bay Club at Aventura for the three months ended March 31, 1997; (xi) the unaudited Historical Summary of Gross Income and Direct Operating Expenses of Morton Towers for the six months ended June 30, 1997; (xii) the unaudited Combined Statement of Revenues and Certain Expenses of the Thirty-Five Acquisition Properties for the six months ended June 30, 1997; (xiii) the unaudited Statement of Revenues and Certain Expenses of First Alexandria Associates, a Limited Partnership for the nine months ended September 30, 1997; (xiv) the unaudited Statement of Revenues and Certain Expenses of Country Lakes Associates Two, A Limited Partnership, for the nine months ended September 30, 1997; (xv) the unaudited Statement of Revenues and Certain Expenses Point West Limited Partnership, A Limited Partnership, for the nine months ended September 30, 1997; and (xvi) the unaudited Statement of Revenues and Certain Expenses of The Oak Park Partnership, for the nine months ended September 30, 1997. The following Pro Forma Financial Information (Pre-Insignia Merger) should be read in conjunction with such financial statements and the notes thereto. The unaudited Pro Forma Financial Information (Pre-Insignia Merger) has been prepared using the purchase method of accounting whereby the assets and liabilities of NHP, the NHP Real Estate Companies, Ambassador, the 1997 Acquisitions, and the 1998 Acquisitions are adjusted to estimated fair market value, based upon preliminary estimates, which are subject to change as additional information is obtained. The allocations of purchase costs are subject to final determination based upon estimates and other evaluations of fair market value. Therefore, the allocations reflected in the following unaudited Pro Forma Financial Information (Pre-Insignia Merger) may differ from the amounts ultimately determined. The following unaudited Pro Forma Financial Information (Pre-Insignia Merger) is presented for informational purposes only and is not necessarily indicative of the financial position or results of operations of the Partnership that would have occurred if such transactions had been completed on the dates indicated, nor does it purport to be indicative of future financial positions or results of operations. In the opinion of the Partnership's management, all material adjustments necessary to reflect the effects of these transactions have been made. F-61 149 AIMCO PROPERTIES, L.P. PRO FORMA CONSOLIDATED BALANCE SHEET (PRE-MERGER) AS OF JUNE 30, 1998 IN THOUSANDS, EXCEPT UNIT DATA
COMPLETED PRO HISTORICAL(A) TRANSACTIONS(B) FORMA ------------- --------------- ---------- Real estate..................................... $2,287,309 $ 32,624 $2,319,933 Property held for sale.......................... 35,695 -- 35,695 Investments in securities....................... 5,767 -- 5,767 Investments in and notes receivable from unconsolidated subsidiaries................... 108,105 -- 108,105(C) Investments in and notes receivable from unconsolidated real estate partnerships....... 243,799 -- 243,799 Cash and cash equivalents....................... 49,320 -- 49,320 Restricted cash................................. 75,123 -- 75,123 Accounts receivable............................. 26,201 -- 26,201 Deferred financing costs........................ 22,629 -- 22,629 Goodwill........................................ 122,068 -- 122,068 Other assets.................................... 78,725 -- 78,725 ---------- --------- ---------- $3,054,741 $ 32,624 $3,087,365 ========== ========= ========== Secured notes payable........................... $ 751,337 $ 23,031 $ 774,368 Secured tax-exempt bond financing............... 394,662 -- 394,662 Secured short term financing.................... 50,000 (38,532) 11,468 Unsecured short-term financing.................. 118,476 (97,987) 20,489 Accounts payable, accrued and other liabilities................................... 155,129 -- 155,129 Security deposits and prepaid rents............. 12,882 -- 12,882 ---------- --------- ---------- 1,482,486 (113,488) 1,368,998 Minority interest............................... 43,167 -- 43,167 Redeemable Partnership Units.................... 238,369 -- 238,369 Partners' capital General and Special Limited Partner........... 1,032,073 -- 1,032,073 Preferred Units............................... 258,863 146,112 404,975 Accumulated other comprehensive losses........ (217) -- (217) ---------- --------- ---------- 1,290,719 146,112 1,436,831 ---------- --------- ---------- $3,054,741 $ 32,624 $3,087,365 ========== ========= ==========
- --------------- (A) Represents the unaudited historical consolidated financial position of the Partnership as of June 30, 1998, included elsewhere herein. (B) Represents adjustments to reflect the purchase of three properties for an aggregate purchase price of $32.6 million; the sale of 4,050,000 shares of AIMCO Class G Preferred Stock for net proceeds of $98.0 million; and the sale of 2,000,000 shares of AIMCO Class H Preferred Stock for net proceeds of $48.1 million. (C) Represents notes receivable from the Unconsolidated Subsidiaries of $50,000; advances to the Unconsolidated Subsidiaries of $18,933; and equity in the Unconsolidated Subsidiaries of $39,172. The combined historical balance sheet of the Unconsolidated Subsidiaries as of June 30, 1998 is presented below. There were no pro forma adjustments to the balance sheet as of June 30, 1998. F-62 150 UNCONSOLIDATED SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET (PRE-INSIGNIA MERGER) AS OF JUNE 30, 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
HISTORICAL ---------- Real estate................................................. $ 21,727 Cash and cash equivalents................................... 5,627 Restricted cash............................................. 5,010 Management contracts........................................ 50,320 Deferred financing costs.................................... 3,217 Goodwill.................................................... 44,252 Other assets................................................ 21,020 -------- Total assets...................................... $151,173 ======== Secured notes payable....................................... $ 72,037 Accounts payable, accrued and other liabilities............. 41,761 Security deposits and prepaid rents......................... 316 -------- 114,114 Common stock................................................ 2,319 Preferred stock............................................. 39,172 Retained earnings........................................... (4,174) Notes receivable on common stock purchases.................. (258) -------- 37,059 -------- Total liabilities and equity...................... $151,173 ========
F-63 151 AIMCO PROPERTIES, L.P. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (PRE-INSIGNIA MERGER) FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT PER UNIT DATA)
AMBASSADOR COMPLETED NHP AMBASSADOR PURCHASE PRICE PRO HISTORICAL(A) TRANSACTIONS(B) TRANSACTIONS(C) HISTORICAL(D) ADJUSTMENTS(E) FORMA ------------- --------------- --------------- ------------- -------------- --------- Rental and other property revenues.................... $193,006 $102,295(F) $ 6,660 $ 93,329 $ -- $ 395,290 Property operating expenses... (76,168) (50,662)(F) (2,941) (36,088) -- (165,859) Owned property management expense..................... (6,620) (3,510)(F) (282) -- -- (10,412) Depreciation.................. (37,741) (20,828)(F) (1,414) (18,979) (5,997)(J) (84,959) -------- -------- ------- -------- -------- --------- Income from property operations.................. 72,477 27,295 2,023 38,262 (5,997) 134,060 -------- -------- ------- -------- -------- --------- Management fees and other income...................... 13,937 -- 7,813 -- -- 21,750 Management and other expenses.................... (9,910) -- (5,394) -- -- (15,304) Corporate overhead allocation.................. (588) -- -- -- -- (588) Amortization.................. (1,401) -- (5,800) -- -- (7,201) -------- -------- ------- -------- -------- --------- Income from service company business.................... 2,038 -- (3,381) -- -- (1,343) Minority interest in service company business............ (10) -- -- -- -- (10) -------- -------- ------- -------- -------- --------- Partnership's share of income from service company business.................... 2,028 -- (3,381) -- -- (1,353) -------- -------- ------- -------- -------- --------- General and administrative expenses.................... (5,396) -- (1,025) (7,392) 7,392(K) (6,421) Interest expense.............. (51,385) (1,626)(G) (5,462) (26,987) (221)(L) (85,681)(O) Interest income............... 8,676 -- 1,900 -- -- 10,576 Minority interest............. 1,008 779(H) 16 (851) 705(M) 1,657 Equity in losses of unconsolidated partnerships................ (1,798) (122)(I) (8,542) 405 -- (10,057) Equity in earnings of unconsolidated subsidiaries................ 4,636 -- 5,790 -- -- 10,426(Q) -------- -------- ------- -------- -------- --------- Income from operations........ 30,246 26,326 (8,681) 3,437 1,879 53,207 Gain on dispositions of property.................... 2,720 (2,720) -- -- -- -- -------- -------- ------- -------- -------- --------- Income before extraordinary item........................ 32,966 23,606 (8,681) 3,437 1,879 53,207 Extraordinary item -- early extinguishment of debt...... (269) 269 -- -- -- -- -------- -------- ------- -------- -------- --------- Net income.................... 32,697 23,875 (8,681) 3,437 1,879 53,207 Income attributable to Preferred Unitholders....... 2,315 31,859 -- 2,296 (2,296)(N) 34,174(P) -------- -------- ------- -------- -------- --------- Income attributable to OP Unitholders................. $ 30,382 $ (7,984) $(8,681) $ 1,141 $ 4,175 $ 19,033(O) ======== ======== ======= ======== ======== ========= Basic earnings OP Unit........ $ 1.09 $ 0.36(O) ======== ========= Diluted earnings OP Unit...... $ 1.08 $ 0.35(O) ======== ========= Weighted average OP Units outstanding................. 27,732 53,307 ======== ========= Weighted average OP Units and equivalents outstanding..... 28,113 53,688 ======== =========
- --------------- (A) Represents the Partnership's audited consolidated results of operations for the year ended December 31, 1997, included elsewhere herein. (B) Represents adjustments to reflect the following as if they had occurred on January 1, 1997: (i) the 1997 Acquisitions; (ii) the 1997 Stock Offerings; (iii) the 1997 Dispositions; (iv) the 1998 Stock Offerings; (v) the 1998 Acquisitions; and (vi) the 1998 Disposition. (C) Represents adjustments to reflect the purchase of the NHP Real Estate Companies, the NHP Merger, and the NHP Reorganization, as if the transactions had taken place on January 1, 1997. These adjustments are detailed, as follows: F-64 152
NHP REAL ESTATE NHP NHP NHP NHP PURCHASE(i) HISTORICAL(ii) ADJUSTMENTS(iii) REORGANIZATION(iv) TRANSACTIONS ----------- -------------- ---------------- ------------------ ------------ Rental and other property revenues........................ $ 6,660(v) $ 16,842 $ -- $(16,842)(xvii) $ 6,660 Property operating expenses....... (2,941)(v) (8,411) -- 8,411(xvii) (2,941) Owned property management expense......................... (282)(v) (862) -- 862(xvii) (282) Depreciation...................... (1,414)(vi) (2,527) (693)(xi) 3,220(xvii) (1,414) ------- -------- ------- -------- ------- Income from property operations... 2,023 5,042 (693) (4,349) 2,023 ------- -------- ------- -------- ------- Management fees and other income.......................... 1,405(vii) 72,176 -- (65,768)(xviii) 7,813 Management and other expenses..... (2,263)(viii) (35,267) -- 32,136(xviii) (5,394) Corporate overhead allocation..... -- -- -- -- -- Amortization...................... -- (9,111) (4,432)(xii) 7,743(xix) (5,800) ------- -------- ------- -------- ------- Income from service company business........................ (858) 27,798 (4,432) (25,889) (3,381) Minority interest in service company business................ -- -- -- -- -- ------- -------- ------- -------- ------- Partnership's share of income from service company business........ (858) 27,798 (4,432) (25,889) (3,381) ------- -------- ------- -------- ------- General and administrative expenses........................ -- (16,266) 8,668(xiii) 6,573(xviii) (1,025) Interest expense.................. (5,082)(ix) (10,685) -- 10,305(xx) (5,462) Interest income................... 540(v) 1,963 -- (603)(xxi) 1,900 Minority interest................. 16(v) -- -- -- 16 Equity in losses of unconsolidated partnerships.................... (3,905)(x) -- (4,631)(xiv) (6) (8,542) Equity in earnings of unconsolidated subsidiaries..... -- -- (4,636)(xv) 10,426(xxii) 5,790 ------- -------- ------- -------- ------- Income (loss) from operations..... (7,266) 7,852 (5,724) (3,543) (8,681) Income tax provision.............. -- (3,502) 3,502(xvi) -- -- ------- -------- ------- -------- ------- Net income (loss)................. (7,266) 4,350 (2,222) (3,543) (8,681) Income attributable to Preferred Unitholders..................... -- -- -- -- -- ------- -------- ------- -------- ------- Income (loss) attributable to OP Unitholders..................... $(7,266) $ 4,350 $(2,222) $ (3,543) $(8,681) ======= ======== ======= ======== =======
- --------------- (i) Represents the adjustment to record activity from January 1, 1997 to the date of acquisition, as if the acquisition of the NHP Real Estate Companies had occurred on January 1, 1997. The historical financial statements of the NHP Real Estate Companies consolidate certain real estate partnerships in which they have an interest that will be presented on the equity method by the Company as a result of the NHP Real Estate Reorganization. In addition, represents adjustments to record additional depreciation and amortization related to the increased basis in the assets of the NHP Real Estate Companies as a result of the allocation of the purchase price of the NHP Real Estate Companies and additional interest expense incurred in connection with borrowings incurred by the Company to consummate the NHP Real Estate Acquisition. (ii) Represents the unaudited consolidated results of operations of NHP for the period from January 1, 1997 through December 8, 1997 (date of NHP Merger). (iii) Represents the following adjustments occurring as a result of the NHP Merger: (i) the reduction in personnel costs, primarily severance costs, pursuant to a restructuring plan; (ii) the incremental depreciation of the purchase price adjustment related to real estate; (iii) the incremental amortization of the purchase price adjustment related to the management contracts, furniture, fixtures and equipment, and goodwill; (iv) the reversal of equity in earnings of NHP during the pre-merger period when AIMCO held a 47.62% interest in NHP; and (v) the amortization of the increased basis in investments in real estate partnerships based on the purchase price adjustment related to real estate and an estimated average life of 20 years. (iv) Represents adjustments related to the NHP Reorganization, whereby the Company will contribute or sell to the Unconsolidated Subsidiaries and the Unconsolidated Partnership: (i) certain assets and liabilities of NHP, F-65 153 primarily related to the management operations and other businesses owned by NHP and (ii) 12 real estate properties containing 2,905 apartment units. The adjustments represent (i) the related revenues and expenses primarily related to the management operations and other businesses owned by NHP and (ii) the historical results of operations of such real estate partnerships contributed, with additional depreciation and amortization recorded related to the Company's new basis resulting from the allocation of the combined purchase price of NHP and the NHP Real Estate Companies. (v) Represents adjustments to reflect the acquisition of the NHP Real Estate Companies and the corresponding historical results of operations as if they had occurred on January 1, 1997. (vi) Represents incremental depreciation related to the consolidated real estate assets purchased from the NHP Real Estate Companies. Buildings and improvements are depreciated on the straight-line method over a period of 30 years, and furniture and fixtures are depreciated on the straight-line method over a period of 5 years. (vii) Represents the adjustment to record the revenues from ancillary businesses purchased from the NHP Real Estate Companies as if the acquisition had occurred on January 1, 1997. (viii) Represents $4,878 related to the adjustment to record the expenses from ancillary businesses purchased from the NHP Real Estate Companies as if the acquisition had occurred on January 1, 1997, less $2,615 related to a reduction in personnel costs pursuant to a restructuring plan, approved by the Company's senior management, assuming that the acquisition of the NHP Real Estate Companies had occurred on January 1, 1997 and that the restructuring plan was completed on January 1, 1997. The restructuring plan specifically identifies all significant actions to be taken to complete the restructuring plan, including the reduction of personnel, job functions, location and the date of completion. (ix) Represents adjustments in the amount of $3,391 to reflect the acquisition of the NHP Real Estate Companies and the corresponding historical results of operations as if they had occurred on January 1, 1997, as well as the increase in interest expense in the amount of $1,691 related to borrowings on the Partnership's Credit Facility of $55,807 to finance the NHP Real Estate Acquisition (x) Represents adjustments in the amount of $2,432 to reflect the acquisition of the NHP Real Estate Companies and the corresponding historical results of operations as if they had occurred on January 1, 1997, as well as amortization of $1,473 related to the increased basis in investment in real estate partnerships, as a result of the allocation of the purchase price of the NHP Real Estate Companies, based on an estimated average life of 20 years. (xi) Represents incremental depreciation related to the real estate assets purchased from NHP. Buildings and improvements are depreciated on the straight-line method over a period of 20 years, and furniture and fixtures are depreciated on the straight-line method over a period of 5 years. (xii) Represents incremental depreciation and amortization of the tangible and intangible assets related to the property management and other business operated by the Unconsolidated Subsidiaries, based on the Company's new basis as adjusted by the allocation of the combined purchase price of NHP including amortization of management contracts of $3,782, depreciation of furniture, fixtures and equipment of $2,018 and amortization of goodwill of $7,743, less NHP's historical depreciation and amortization of $9,111. Management contracts are amortized using the straight-line method over the weighted average life of the contracts estimated to be approximately 15 years. Furniture, fixtures and equipment are depreciated using the straight-line method over the estimated life of 3 years. Goodwill is amortized using the straight-line method over 20 years. (xiii) Represents a reduction in personnel costs, primarily severance costs, pursuant to a restructuring plan, approved by the Company's senior management, specifically identifying all significant actions to be taken to complete the restructuring plan, assuming that the Merger had occurred on January 1, 1997 and that the restructuring plan was completed on January 1, 1997. (xiv) Represents adjustment for amortization of the increased basis in investments in real estate partnerships, as a result of the allocation of the combined purchase price of NHP and the NHP Real Estate Companies, based on an estimated average life of 20 years. F-66 154 (xv) Represents the reversal of equity in earnings in NHP during the pre-merger period when AIMCO held a 47.62% interest in NHP, as a result of AIMCO's acquisition of 100% of the NHP Common Stock. (xvi) Represents the reversal of NHP's income tax provision due to the restructuring of the management business to the Unconsolidated Subsidiaries. (xvii) Represents the contribution of NHP's 12 real estate properties containing 2,905 apartment units to the Unconsolidated Partnership pursuant to the NHP Reorganization. (xviii)Represents the historical income and expenses associated with certain assets and liabilities of NHP that were contributed or sold to the Unconsolidated Subsidiaries, primarily related to the management operations and other businesses owned by NHP. (xix) Represents the amortization and depreciation of certain management contracts and other assets of NHP, based on the Company's new basis resulting from the allocation of the purchase price of NHP, that will be contributed or sold to the Unconsolidated Subsidiaries, primarily related to the management operations and other businesses owned by NHP. (xx) Represents interest expense of $6,020 related to the contribution of NHP's 12 real estate properties containing 2,905 apartment units to the Unconsolidated Partnership and interest expense of $4,285 related to the certain assets and liabilities that will be contributed or sold to the Unconsolidated Subsidiaries pursuant to the NHP Reorganization. (xxi) Represents the interest income of $5,000 earned on notes payable of $50,000 to the Partnership issued as consideration for certain assets and liabilities sold to the Unconsolidated Subsidiaries by the Partnership, net of the elimination the Partnership's share of the related interest expense of $4,750 reflected in the equity in earnings of the Unconsolidated Subsidiaries operating results, offset by $853 in interest income primarily related to the management operations and other businesses owned by NHP contributed or sold to the Unconsolidated Subsidiaries pursuant to the NHP Reorganization. (xxii) Represents the Partnership's equity in earnings of the Unconsolidated Subsidiaries. (D) Represents the audited historical statement of operations of Ambassador for the year ended December 31, 1997. Certain reclassifications have been made to Ambassador's historical Statement of Operations to conform to the Partnership's Statement of Operations presentation. The Ambassador historical Statement of Operations excludes extraordinary loss of $1,384 and a loss on sale of an interest rate cap of $509. (E) Represents the following adjustments occurring as a result of the Ambassador Merger: (i) the incremental depreciation of the purchase price adjustment related to real estate; (ii) the reduction in personnel costs, primarily severance costs, pursuant to a restructuring plan; (iii) the reduction of interest expense resulting from the net reduction of debt; and (iv) the elimination of the minority interest associated with Jupiter I, L.P. (F) Represents adjustments to reflect the 1997 Property Acquisitions and the 1998 Acquisitions, less the 1997 Dispositions and the 1998 Disposition as if they had occurred on January 1, 1997. These pro forma operating results are based on historical results of the properties, except for depreciation, which is based on the Partnership's investment in the properties. These adjustments are as follows:
1997 PROPERTY 1997 1998 1998 ACQUISITIONS DISPOSITIONS ACQUISITIONS DISPOSITION TOTAL ------------- ------------ ------------ ----------- -------- Rental and other property revenues.... $ 88,589 $(4,081) $19,892 $(2,105) $102,295 Property operating expense............ (44,109) 1,944 (9,280) 783 (50,662) Owned property management expense..... (3,233) 133 (485) 75 (3,510) Depreciation.......................... (16,839) 452 (4,795) 354 (20,828)
F-67 155 (G) Represents adjustments to interest expense for the following: Borrowings on the Partnership's Credit Facility and other loans and mortgages assumed in connection with the 1997 Property Acquisitions..................................... $(29,427) Repayments on the Partnership's Credit Facility and other indebtedness with proceeds from the 1997 Dispositions and the 1997 Stock Offerings.................................. 19,505 Repayments on the Partnership's Credit Facility with proceeds from a distribution received from one of the Unconsolidated Subsidiaries............................... 1,889 Borrowings on the Partnership's Credit Facility and other loans and mortgages assumed in connection with the 1998 Acquisitions.............................................. (8,270) Repayments on the Partnership's Credit Facility and other indebtedness with proceeds from the 1998 Disposition and the 1998 Stock Offerings.................................. 14,677 -------- $ (1,626) ========
(H) Represents income related to limited partners in consolidated partnerships acquired in connection with the 1997 Property Acquisitions. (I) Represents the reduction in the Partnership's earnings in unconsolidated partnerships as a result of the consolidation of additional partnerships resulting from additional ownership acquired through tender offers. (J) Represents incremental depreciation related to the real estate assets purchased in connection with the Ambassador Merger. Buildings and improvements are depreciated on the straight-line method over a period of 30 years, and furniture and fixtures are depreciated on the straight-line method over a period of 5 years. (K) Decrease results from identified historical costs of certain items which will be eliminated or reduced as a result of the Ambassador Merger, as follows: Duplication of public company expenses...................... $ 724 Reduction in salaries and benefits.......................... 4,197 Merger related costs........................................ 524 Other....................................................... 1,947 ------ $7,392 ======
The reduction in salaries and benefits is pursuant to a restructuring plan, approved by the Company's senior management, assuming that the Ambassador Merger had occurred on January 1, 1997 and that the restructuring plan was completed on January 1, 1997. The restructuring plan specifically identifies all significant actions to be taken to complete the restructuring plan, including the reduction of personnel, job functions, location and date of completion. (L) Represents the decrease in interest expense of $3,612 related to the repayment of the Ambassador revolving lines of credit upon consummation of the Ambassador Merger, offset by an increase in interest expense of $3,833 related to borrowings under the Partnership's line of credit. (M) Represents elimination of minority interest in Jupiter-I, L.P. resulting from the redemption of limited partnership interests not owned by Ambassador in connection with the Ambassador Merger. (N) Represents the elimination of the preferred stock distributions of Ambassador upon the conversion of the Ambassador Preferred Stock to AIMCO Common Stock. F-68 156 (O) The following table presents the net impact to pro forma net income applicable to holders of OP Units and net income per OP Unit assuming the interest rate per annum increases by 0.25%: Increase in interest expense................................ $ 114 ======= Net income.................................................. $53,093 ======= Net income attributable to OP Unitholders................... $18,919 ======= Basic income per OP Unit.................................... $ 0.36 ======= Diluted income per OP Unit.................................. $ 0.36 =======
(P) Represents the net income attributable to holders of the Class B Preferred Units, the Class C Preferred Units, the Class D Preferred Units, the Class G Preferred Units, and the Class H Preferred Units as if these Preferred Unit issuances had occurred as of January 1, 1997. (Q) Represents the Partnership's equity in earnings in the Unconsolidated Subsidiaries of $5,676, plus the elimination of intercompany interest expense of $4,750. The combined Pro Forma Statement of Operations (Pre-Insignia Merger) of the Unconsolidated Subsidiaries for the year ended December 31, 1997 is presented below, which represents the effects of the Ambassador Merger, the NHP Merger and the NHP Reorganization as if these transactions had occurred as of January 1, 1997. F-69 157 UNCONSOLIDATED SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (PRE-INSIGNIA MERGER) FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
REORGANIZATION HISTORICAL(i) ADJUSTMENTS(ii) PRO FORMA ------------- --------------- --------- Rental and other property revenues.................... $ 6,194 $ 6,371(iii) $ 12,565 Property operating expenses........................... (3,355) (3,531)(iii) (6,886) Owned property management expense..................... (147) (478)(iii) (625) Depreciation expense.................................. (1,038) (767)(iii) (1,805) -------- --------- -------- Income from property operations....................... 1,654 1,595 3,249 -------- --------- -------- Management fees and other income...................... 23,776 41,992(iv) 65,768 Management and other expenses......................... (11,733) (20,403)(iv) (32,136) Amortization.......................................... (3,726) (4,017)(iv) (7,743) -------- --------- -------- Income from service company........................... 8,317 17,572 25,889 -------- --------- -------- General and administrative expense.................... -- (6,573)(iv) (6,573) Interest expense...................................... (6,058) (5,849)(v) (11,907) Interest income....................................... 1,001 (148)(iv) 853 Minority interest..................................... (2,819) 2,198(vii) (621) Equity in losses of unconsolidated partnerships....... (1,028) 1,028(iii) -- Equity in earnings of Unconsolidated Subsidiaries..... 2,943 (2,943)(vi) -- -------- --------- -------- Income from operations................................ 4,010 6,880 10,890 Income tax provision.................................. (1,902) (3,013)(viii) (4,915) -------- --------- -------- Net income............................................ $ 2,108 $ 3,867 $ 5,975 ======== ========= ======== Income attributable to preferred stockholders......... $ 2,003 $ 3,673 $ 5,676 ======== ========= ======== Income attributable to common stockholders............ $ 105 $ 194 $ 299 ======== ========= ========
- --------------- (i) Represents the historical results of operations of the Unconsolidated Subsidiaries for the year ended December 31, 1997. (ii) Represents adjustments related to the NHP Reorganization, which includes the sale or contribution of 14 properties containing 2,725 apartment units from the unconsolidated partnerships to the Unconsolidated Subsidiaries, as well as the sale or contribution of 12 properties containing 2,905 apartment units from the Unconsolidated Subsidiaries to the Unconsolidated Partnership. (iii) Represents adjustments for the historical results of operations of the 14 real estate properties contributed or sold to the Unconsolidated Subsidiaries, offset by the historical results of operations of the 12 real estate properties contributed or sold to the Unconsolidated Partnership, with additional depreciation recorded related to the Company's new basis resulting from the allocation of purchase price of NHP and the NHP Real Estate Companies. (iv) Represents adjustments to reflect income and expenses associated with certain assets and liabilities of NHP contributed or sold to the Unconsolidated Subsidiaries. (v) Represents adjustments of $6,058 to reverse the historical interest expense of the Unconsolidated Subsidiaries, which resulted from its original purchase of NHP Common Stock, offset by $2,622 related to the contribution or sale of the 14 real estate properties, $4,285 related to assets and liabilities transferred from the Partnership to the Unconsolidated Subsidiaries and $5,000 related to a note payable to the Partnership. F-70 158 (vi) Represents the reversal of the historical equity in earnings of NHP for the period in which NHP was not consolidated by the Unconsolidated Subsidiaries. (vii) Represents the minority interest in the operations of the 14 real estate properties. (viii)Represents the estimated Federal and state tax provisions, which are calculated on the pro forma operating results of the Unconsolidated Subsidiaries, excluding amortization of goodwill which is not deductible for tax purposes. F-71 159 AIMCO PROPERTIES, L.P. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (PRE-INSIGNIA MERGER) FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS, EXCEPT PER UNIT DATA)
AMBASSADOR COMPLETED AMBASSADOR PURCHASE PRICE HISTORICAL(A) TRANSACTIONS(B) HISTORICAL(C) ADJUSTMENTS(D) PRO FORMA ------------- --------------- ------------- --------------- --------- Rental and other property revenues.......................... $ 161,264 $ 6,199(E) $ 35,480 $ -- $ 202,943 Property operating expenses......... (59,643) (2,534)(E) (14,912) -- (77,089) Owned property management expense... (4,713) (167)(E) -- -- (4,880) Depreciation........................ (34,289) (1,489)(E) (7,270) (1,420)(G) (44,468) ------------- --------------- ------------- --------------- --------- Income from property operations..... 62,619 2,009 13,298 (1,420) 76,506 ------------- --------------- ------------- --------------- --------- Management fees and other income.... 9,562 -- -- -- 9,562 Management and other expenses....... (5,470) -- -- -- (5,470) Corporate overhead allocation....... (196) -- -- -- (196) Amortization........................ (3) -- -- -- (3) ------------- --------------- ------------- --------------- --------- Income from service company business.......................... 3,893 -- -- -- 3,893 Minority interest in service company business.......................... (1) -- -- -- (1) ------------- --------------- ------------- --------------- --------- Partnership's share of income from service company business.......... 3,892 -- -- -- 3,892 ------------- --------------- ------------- --------------- --------- General and administrative expenses.......................... (4,103) -- (5,278) 5,278(H) (4,103) Interest expense.................... (34,778) 2,982(F) (10,079) 145(I) (41,730)(K) Interest income..................... 11,350 -- -- -- 11,350 Minority interest................... (516) -- (252) 252(J) (516) Equity in losses of unconsolidated partnerships...................... (4,681) -- (71) -- (4,752) Equity in earnings of Unconsolidated Subsidiaries...................... 5,609 -- -- -- 5,609(M) Amortization of goodwill............ (3,394) -- -- -- (3,394) ------------- --------------- ------------- --------------- --------- Income from operations.............. 35,998 4,991 (2,382) 4,255 42,862 Gain on dispositions of property.... 2,526 (2,526) -- -- -- ------------- --------------- ------------- --------------- --------- Net income.......................... 38,524 2,465 (2,382) 4,255 42,862(K) Income attributable to Preferred Unitholders....................... 8,650 8,354 -- -- 17,004(L) ------------- --------------- ------------- --------------- --------- Income attributable to OP Unitholders....................... $ 29,874 $ (5,889) $ (2,382) $ 4,255 $ 25,858(K) ============= =============== ============= =============== ========= Basic earnings per OP Unit.......... $ 0.61 $ 0.48(K) ============= ========= Diluted earnings per OP Unit........ $ 0.61 $ 0.48(K) ============= ========= Weighted average OP Units outstanding....................... 48,812 53,922 ============= ========= Weighted average OP Units and equivalents outstanding........... 49,015 54,125 ============= =========
- --------------- (A) Represents the Partnership's unaudited consolidated results of operations for the six months ended June 30, 1998, included elsewhere herein. (B) Represents adjustments to reflect the following as if they had occurred on January 1, 1998: (i) the 1998 Stock Offerings; (ii) the 1998 Acquisitions; and (iii) the 1998 Disposition. (C) Represents the unaudited historical statement of operations of Ambassador for the four months ended April 30, 1998. Certain reclassifications have been made to Ambassador's historical Statement of Operations to conform to the Partnership's Statement of Operations presentation. (D) Represents the following adjustments occurring as a result of the Ambassador Merger: (i) the incremental depreciation of the purchase price adjustment related to real estate; (ii) the reduction in personnel costs, primarily severance costs, pursuant to a restructuring plan; (iii) the reduction of interest F-72 160 expense resulting from the net reduction of debt; and (iv) the elimination of the minority interest associated with Jupiter I, L.P. (E) Represents adjustments to reflect the 1998 Acquisitions, less the 1998 Disposition as if they had occurred on January 1, 1998. These pro forma operating results are based on historical results of the properties, except for depreciation, which is based on the Partnership's investment in the properties. These adjustments are as follows:
1998 1998 ACQUISITIONS DISPOSITION TOTAL ------------ ----------- ------- Rental and other property revenues........... $ 6,297 $(98) $ 6,199 Property operating expense................... (2,625) 91 (2,534) Owned property management expense............ (173) 6 (167) Depreciation................................. (1,507) 18 (1,489)
(F) Represents adjustments to interest expense for the following: Borrowings on the Partnership's Credit Facility and other loans and mortgages assumed in connection with the 1998 Acquisitions.............................................. $(2,760) Repayments on the Partnership's Credit Facility and other indebtedness with proceeds from the 1998 Disposition and the 1998 Stock Offerings.................................. 5,742 ------- $ 2,982 =======
(G) Represents incremental depreciation related to the real estate assets purchased in connection with the Ambassador Merger. Buildings and improvements are depreciated on the straight-line method over a period of 30 years, and furniture and fixtures are depreciated on the straight-line method over a period of 5 years. (H) Decrease results from identified historical costs of certain items which will be eliminated or reduced as a result of the Ambassador Merger, as follows: Duplication of public company expenses...................... $ 355 Reduction in salaries and benefits.......................... 2,482 Merger related costs........................................ 1,212 Other....................................................... 1,229 ------ $5,278 ======
The reduction in salaries and benefits is pursuant to a restructuring plan, approved by the Company's senior management, assuming that the Ambassador Merger had occurred on January 1, 1998 and that the restructuring plan was completed on January 1, 1998. The restructuring plan specifically identifies all significant actions to be taken to complete the restructuring plan, including the reduction of personnel, job functions, location and date of completion. (I) Represents the decrease in interest expense of $1,480 related to the repayment of the Ambassador revolving lines of credit upon consummation of the Ambassador Merger, offset by an increase in interest expense of $1,335 related to borrowings under the Partnership's line of credit. (J) Represents elimination of minority interest in Jupiter-I, L.P. resulting from the redemption of limited partnership interests not owned by Ambassador in connection with the Ambassador Merger. F-73 161 (K) The following table presents the net impact to pro forma net income applicable to holders of OP Units and net income per OP Unit assuming the interest rate per annum increases by 0.25%: Increase in interest expense................................ $ 57 ======= Net income.................................................. $42,805 ======= Net income attributable to OP Unitholders................... $25,801 ======= Basic income per OP Unit.................................... $ 0.48 ======= Diluted income per OP Unit.................................. $ 0.48 =======
(L) Represents the net income attributable to holders of the Class B Preferred Units, the Class C Preferred Units, the Class D Preferred Units, the Class G Preferred Units, and the Class H Preferred Units as if these Preferred Unit issuances had occurred as of January 1, 1998. (M) Represents the Partnership's equity in earnings in the Unconsolidated Subsidiaries of $5,609. The combined historical statement of operations of the unconsolidated subsidiaries for the six months ended June 30, 1998 is presented below. There were no pro forma adjustments to the statement of operations for the six months ended June 30, 1998. F-74 162 UNCONSOLIDATED SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (PRE-INSIGNIA MERGER) FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS)
HISTORICAL ---------- Rental and other property revenues.......................... $ 6,550 Property operating expenses................................. (3,390) Owned property management expense .......................... (230) Depreciation expense........................................ (650) -------- Income from property operations............................. 2,280 -------- Management fees and other income............................ 37,585 Management and other expenses............................... (23,673) Amortization................................................ (1,390) -------- Income from service company................................. 12,522 -------- Interest expense............................................ (3,878) Interest income............................................. 425 Minority interest........................................... (250) -------- Income from operations...................................... 11,099 Income tax provision........................................ (5,195) -------- Net income.................................................. $ 5,904 ======== Income attributable to preferred stockholders............... $ 5,609 ======== Income attributable to common stockholders.................. $ 295 ========
F-75 163 PRO FORMA FINANCIAL INFORMATION OF AIMCO PROPERTIES, L.P. (INSIGNIA MERGER) INTRODUCTION On March 17, 1998, AIMCO entered into an Agreement and Plan of Merger (the "Insignia Merger Agreement") with Insignia Financial Group, Inc.("Insignia") pursuant to which Insignia will be merged with and into AIMCO with AIMCO as the survivor (with the spin-off and merger with Insignia Properties Trust ("IPT") as discussed below, the "Insignia Merger"). The Insignia Merger Agreement provides that prior to the Insignia Merger, Insignia will spin-off (the "Distribution") to its stockholders all assets related to its U.S. and international commercial real estate business, its New York-based cooperative and condominium management company, its single-family home brokerage operations and other select holdings. Pursuant to the Indemnification Agreement entered into in connection with the Insignia Merger Agreement (as amended and restated as of May 26, 1998, the "Insignia Indemnification Agreement"), the spun off company ("Holdings") will provide indemnification for certain liabilities arising under the Insignia Merger Agreement. In the Insignia Merger the common stock, par value $0.01 per share, of Insignia ("Insignia Common Stock") will be converted, assuming the stockholders of AIMCO and Insignia approve the Insignia Merger, into the right to receive an aggregate number of shares of Class E Preferred Stock, par value $0.01 per share, of AIMCO ("Class E Preferred Stock") approximately equal to $303 million divided by the AIMCO Index Price, which is defined as the aggregate of the daily average price of AIMCO Common Stock (computed based on the sum of the high and low sales prices of AIMCO Common Stock (as reported on the NYSE Composite Transactions reporting system as published in The Wall Street Journal or, if not published therein, in another authoritative source) divided by two) on each of the 20 consecutive NYSE trading days ending on the fifth NYSE trading day immediately preceding the Effective Time, divided by 20; provided, however, that if the AIMCO Index Price is greater than $38.00, then the AIMCO Index Price will be deemed to be $38.00. In addition to receiving the same dividends as holders of AIMCO Common Stock, holders of Class E Preferred Stock on the record date for payment to be set by the AIMCO Board of Directors will be entitled to the Special Dividend of $50 million in the aggregate, and when the Special Dividend is paid, the Class E Preferred stock will automatically convert into AIMCO Common Stock on a one-for-one basis, subject to antidilution adjustments, if any. In addition, there will remain outstanding approximately $308 million in indebtedness and other liabilities of Insignia and its subsidiaries and subsidiaries of the Partnership will assume approximately $149.5 million of 6 1/2% Trust Convertible Preferred Securities issued by Insignia Financing I, a subsidiary of Insignia (the "Convertible Securities"), for a total transaction value of approximately $811 million. Also, the Insignia Merger Agreement provides that AIMCO is required to propose to acquire (by merger) the outstanding shares of beneficial interest in IPT (the "IPT Merger"), at a price of at least $13.25 per IPT share and use its reasonable best efforts to consummate the IPT Merger after the closing of the Insignia Merger, but not earlier than August 15, 1998. IPT is an approximately 61% owned subsidiary of Insignia; the 39% of the shares of IPT not owned by Insignia are valued at an aggregate of approximately $152 million, after considering the effect of the proposed merger of IPT and Angeles Mortgage Investment Trust ("AMIT") (the "IPT-AMIT Merger"), assuming a value of $13.25 per share. AIMCO will contribute substantially all the assets and liabilities of Insignia acquired in the Insignia Merger to the Partnership in exchange for approximately $303 million of Class E Preferred Units. The Class E Preferred Units have terms substantially the same as the Class E Preferred Stock. If the Insignia Merger is consummated, the Partnership will assume property management of approximately 192,000 multifamily units which consist of general and limited partnership investments in 115,000 units and third party management of 77,000 units. IPT owns a 32% weighted average general and limited partnership interest in approximately 51,000 units. The following Pro Forma Consolidated Balance Sheet (Insignia Merger) of the Partnership as of June 30, 1998 has been prepared as if each of the following transactions had occurred as of June 30, 1998: (i) all the transactions discussed in the Pro Forma Financial Statements (Pre-Insignia Merger) appearing elsewhere herein; (ii) the Insignia Merger; (iii) the Distribution; (iv) the IPT-AMIT Merger; (v) the IPT F-76 164 Merger; and (vi) the transfer of certain assets and liabilities of Insignia to the Unconsolidated Subsidiaries following the Insignia Merger (the "Insignia Reorganization"). The following Pro Forma Consolidated Statement of Operations (Insignia Merger) of the Partnership for the year ended December 31, 1997 has been prepared as if each of the following transactions had occurred as of January 1, 1997: (i) all the transactions discussed in the Pro Forma Financial Statements (Pre-Insignia Merger) appearing elsewhere herein; (ii) the Insignia Merger; (iii) the Distribution; (iv) the IPT-AMIT Merger; (v) the IPT Merger; and (vi) the Insignia Reorganization. The following Pro Forma Consolidated Statement of Operations (Insignia Merger) of the Partnership for the six months ended June 30, 1998 has been prepared as if each of the following transactions had occurred as of January 1, 1997: (i) all the transactions discussed in the Pro Forma Financial Statements (Pre-Insignia Merger) appearing elsewhere herein; (ii) the Insignia Merger; (iii) the Distribution; (iv) the IPT-AMIT Merger; (v) the IPT Merger; and (vi) the Insignia Reorganization. The following Pro Forma Financial Information (Insignia Merger) is based, in part, on: (i) the audited Consolidated Financial Statements of Insignia for the year ended December 31, 1997; (ii) the audited Consolidated Financial Statements of AMIT for the year ended December 31, 1997; (iii) the unaudited Consolidated Financial Statements of Insignia for the six months ended June 30, 1998; and (iv) the unaudited Consolidated Financial Statements of AMIT for the six months ended June 30, 1998. The following Pro Forma Financial Information (Insignia Merger) is also based, in part, on the Pro Forma Financial Information (Pre-Insignia Merger) of the Partnership included elsewhere herein. Such pro forma information is based in part upon: (i) the audited Consolidated Financial Statements of Ambassador for the year ended December 31, 1997; (ii) the audited Consolidated Financial Statements of the Partnership for the year ended December 31, 1997; (iii) the unaudited Consolidated Financial Statements of Ambassador for the four months ended April 30, 1998; (iv) the unaudited Consolidated Financial Statements of the Partnership for the six months ended June 30, 1998; and (v) the historical financial statements of certain properties and companies acquired by AIMCO filed in AIMCO's Current Reports on Form 8-K, dated April 16, 1997, May 5, 1997, June 3, 1997, September 19, 1997, October 15, 1997, and December 1, 1997, incorporated by reference herein. The following Pro Forma Financial Information (Insignia Merger) should be read in conjunction with such financial statements and notes thereto. The unaudited Pro Forma Financial Information (Insignia Merger) has been prepared using the purchase method of accounting whereby the assets and liabilities of Insignia are adjusted to estimated fair market value, based upon preliminary estimates, which are subject to change as additional information is obtained. The allocations of purchase costs are subject to final determination based upon estimates and other evaluations of fair market value. Therefore, the allocations reflected in the following unaudited Pro Forma Financial Information (Insignia Merger) may differ from the amounts ultimately determined. The unaudited Pro Forma Financial Information (Insignia Merger) has been prepared under the assumption that the AIMCO stockholders approved the Insignia Merger, the Class E Preferred Units have been converted to OP Units, the IPT-AMIT Merger occurs, and the IPT Merger was consummated. The following unaudited Pro Forma Financial Information (Insignia Merger) is presented for informational purposes only and is not necessarily indicative of the financial position or results of operations of the Partnership that would have occurred if such transactions had been completed on the dates indicated, nor does it purport to be indicative of future financial positions or results of operations. In the opinion of the Partnership's management, all material adjustments necessary to reflect the effects of these transactions have been made. F-77 165 AIMCO PROPERTIES, L.P. PRO FORMA CONSOLIDATED BALANCE SHEET (INSIGNIA MERGER) AS OF JUNE 30, 1998 (IN THOUSANDS, EXCEPT UNIT DATA)
INSIGNIA THE PARTNERSHIP INSIGNIA PRE-MERGER INSIGNIA MERGER BEFORE INSIGNIA REORGANIZATION AIMCO PRO FORMA(A) AS ADJUSTED(B) ALLOCATIONS(C) REORGANIZATION(D) ADJUSTMENTS(E) PRO FORMA ------------ -------------- -------------- ----------------- -------------- ---------- ASSETS Real estate.................... $2,319,933 $ 30,600 $ 21,348(F) $2,371,881 $ -- $2,371,881 Property held for sale......... 35,695 -- -- 35,695 -- 35,695 Investments in securities...... 5,767 -- 310,048(F) (310,048)(G) 5,767 -- 5,767 Investments in and notes receivable from unconsolidated subsidiaries................. 108,105 -- -- 108,105 14,561(H) 122,666(J) Investments in and notes receivable from unconsolidated partnerships................. 243,799 242,457 424,756(F) 911,012 -- 911,012 Mortgage notes receivable...... -- 35,316 -- 35,316 -- 35,316 Cash and cash equivalents...... 49,320 42,585 -- 91,905 (15,102)(I) 76,803 Restricted cash................ 75,123 -- -- 75,123 -- 75,123 Accounts receivable............ 26,201 24,385 -- 50,586 (23,773)(I) 26,813 Deferred financing costs....... 22,629 7,158 -- 29,787 -- 29,787 Goodwill....................... 122,068 19,836 36,704(F) 178,608 -- 178,608 Property management contracts.................... -- 89,838 22,211(F) 112,049 (77,410)(H) 34,639 Other assets................... 78,725 22,780 (632)(F) 100,873 (8,954)(I) 91,919 ---------- -------- --------- ---------- --------- ---------- $3,087,365 $514,955 $ 504,387 $4,106,707 $(110,678) $3,996,029 ========== ======== ========= ========== ========= ========== LIABILITIES AND PARTNERS' CAPITAL Secured notes payable.......... $ 774,368 $ 26,476 $ -- $ 800,844 $ -- $ 800,844 Secured tax-exempt bond financing.................... 394,662 -- -- 394,662 -- 394,662 Secured short-term financing... 11,468 233,310 (297,000)(F) 50,000(F) 325,381(F) 323,159 (50,000) 273,159 Unsecured short-term financing.................... 20,489 1,647 -- 22,136 -- 22,136 Accounts payable, accrued and other liabilities............ 155,129 32,669 20,000(F) 207,798 (44,931) 162,867 Deferred tax liability......... -- 18,802 (18,802)(F) (12,849) -- 12,849(F) 12,849 Security deposits and deferred income....................... 12,882 2,898 -- 15,780 (2,898) 12,882 ---------- -------- --------- ---------- --------- ---------- 1,368,998 315,802 92,428 1,777,228 (110,678) 1,666,550 Minority interest.............. 43,167 66,216 (66,216)(F) 43,167 -- 43,167 Company-obligated mandatorily redeemable convertible securities of a subsidiary trust........................ -- 144,210 5,290(F) 149,500 -- 149,500 Redeemable Partnership Units... 238,369 -- -- 238,369 -- 238,369 Partners' capital and shareholders' equity Common stock................. -- 358 (358)(F) -- -- -- Additional paid-in capital... -- (37,595) 37,595(F) -- -- -- Retained earnings............ -- 25,964 (25,964)(F) -- -- -- General and Special Limited Partner.................... 1,032,073 -- 310,048(G) 151,564(F) 1,493,685 1,493,685 Preferred Units.............. 404,975 -- -- 404,975 -- 404,975 Accumulated and other comprehensive income....... (217) -- -- (217) -- (217) ---------- -------- --------- ---------- --------- ---------- 1,436,831 (11,273) 472,885 1,898,443 -- 1,898,443 ---------- -------- --------- ---------- --------- ---------- $3,087,365 $514,955 $ 504,387 $4,106,707 $(110,678) $3,996,029 ========== ======== ========= ========== ========= ==========
- --------------- (A) Represents the Partnership's pro forma consolidated financial position as of June 30, 1998, which gives effect to the purchase of three properties for an aggregate purchase price of $32.6 million, the Ambassador Merger, the Class G Preferred Stock Offering and the Class H Preferred Stock Offering. See "Pro Forma Financial Information (Pre-Insignia Merger)." F-78 166 (B) Represents adjustments to reflect the Insignia Merger, including the IPT-AMIT Merger, and the Distribution, as if these transactions had occurred on June 30, 1998. These adjustments are detailed, as follows:
INSIGNIA IPT-AMIT HOLDINGS INSIGNIA AS HISTORICAL(i) MERGER(ii) DISTRIBUTION(iii) ADJUSTED ------------- ---------- ----------------- ----------- ASSETS Real estate.................................... $ 25,808 $ 4,792 $ -- $ 30,600 Property held for sale......................... -- -- -- -- Investments in securities...................... -- -- -- -- Investments in and notes receivable from unconsolidated subsidiaries.................. -- -- -- -- Investments in and notes receivable from unconsolidated partnerships.................. 282,599 -- (40,142) 242,457 Mortgage notes receivable...................... -- 35,316 -- 35,316 Cash and cash equivalents...................... 57,807 6,248 (21,470) 42,585 Restricted cash................................ -- -- -- -- Accounts receivable............................ 147,569 604 (123,788) 24,385 Deferred financing costs....................... 7,158 -- -- 7,158 Goodwill....................................... 245,391 -- (225,555) 19,836 Property management contracts.................. 134,344 -- (44,506) 89,838 Other assets................................... 53,513 (258) (30,475) 22,780 -------- ------- --------- -------- $954,189 $46,702 $(485,936) $514,955 ======== ======= ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Secured notes payable.......................... $ 21,951 $ 4,525 $ -- $ 26,476 Secured tax-exempt bond financing.............. -- -- -- -- Secured short-term financing................... 265,737 -- (32,427) 233,310 Unsecured short-term financing................. 1,647 -- -- 1,647 Accounts payable, accrued and other liabilities.................................. 147,116 1,629 (116,076) 32,669 Deferred tax liability......................... 24,865 -- (6,063) 18,802 Security deposits and deferred income.......... 4,349 -- (1,451) 2,898 -------- ------- --------- -------- 465,665 6,154 (156,017) 315,802 Minority interest.............................. 66,484 -- (268) 66,216 Company-obligated mandatorily redeemable convertible securities of a subsidiary trust........................................ 144,210 -- -- 144,210 Common stock................................... 318 40 -- 358 Additional paid-in capital..................... 234,819 40,508 (312,922) (37,595) Retained earnings.............................. 42,693 -- (16,729) 25,964 -------- ------- --------- -------- 277,830 40,548 (329,651) (11,273) -------- ------- --------- -------- $954,189 $46,702 $(485,936) $514,955 ======== ======= ========= ========
- --------------- (i) Represents the unaudited consolidated financial position of Insignia as of June 30, 1998, as reported on Insignia's Quarterly Report on Form 10-Q. Certain reclassifications have been made to Insignia's historical balance sheet to conform to the Partnership's balance sheet presentation. (ii) Represents the historical balance sheet of AMIT, as well as pro forma adjustments related to the IPT-AMIT Merger. The IPT-AMIT merger is expected to close prior to the Insignia Merger. (iii)Represents the distribution of two shares of Holdings Common Stock for each three shares of Insignia Common Stock to holders of Insignia Common Stock. (C) Represents the following adjustments occurring as a result of the Insignia Merger: (i) the issuance of 8,945,921 shares of AIMCO Common Stock, based on an AIMCO Index Price of $34.658 per share, as consideration to holders of Insignia Common Stock outstanding as of the date of the Insignia Merger; (ii) the IPT Merger; (iii) the payment of the Special Dividend of $50,000; (iv) the assumption of $149,500 of the Convertible Debentures; (v) the allocation of the combined purchase price of Insignia based on the preliminary estimates of relative fair market value of the assets and liabilities of Insignia; and (vi) the contribution by AIMCO of substantially all the assets and liabilities of Insignia to the Partnership in exchange for OP Units. F-79 167 (D) Represents the effects of the Company's acquisition of Insignia immediately after the Insignia Merger. These amounts do not give effect to the Insignia Reorganization, which includes the transfers of certain asset and liabilities of Insignia to the Unconsolidated Subsidiaries. The Insignia Reorganization must occur immediately after the Insignia Merger in order for AIMCO to maintain its qualification as a REIT. This column is included as an intermediate step to assist the reader in understanding the entire nature of the Insignia Merger and related transactions. (E) Represents adjustments related to the Insignia Reorganization, whereby, following the Insignia Merger, the Partnership will contribute to the Unconsolidated Subsidiaries certain assets and liabilities of Insignia, primarily management contracts and related working capital assets and liabilities related to Insignia's third-party property management operations. The adjustments reflect the transfer of assets valued at the Partnership's new basis resulting from the allocation of the purchase price of Insignia. the Partnership will receive non-voting preferred stock as consideration in exchange for the net assets contributed. The net deferred tax liability is assumed by the Unconsolidated Subsidiaries as it resulted from the assets and liabilities transferred to the Unconsolidated Subsidiaries. (F) In connection with the Insignia Merger, AIMCO will issue 8,945,921 shares of AIMCO Common Stock based on an AIMCO Index Price of $34.658 per share, to acquire the shares of Insignia Common Stock owned by the Insignia stockholders. The total purchase price of Insignia is $1,019,342, as follows: Issuance of 8,945,921 shares of AIMCO Common Stock in the Merger, at $34.658 per share........................... $ 310,048 Issuance of 4,811,568 shares of AIMCO Common Stock in the IPT Merger, at $31.50 a share.......................... 151,564 Assumption of Convertible Debentures..................... 149,500 Assumption of Insignia liabilities as indicated in the Insignia Merger Agreement.............................. 325,381 Transaction costs........................................ 20,000 Generation of deferred tax liability..................... 12,849 Special Dividend......................................... 50,000 ---------- Total.......................................... $1,019,342 ==========
The purchase price was allocated to the various assets of Insignia acquired in the Insignia Merger, as follows: Purchase price........................................... $1,019,342 Historical basis of Insignia's assets acquired, adjusted for the IPT -- AMIT Merger and the Distribution........ (514,955) ---------- Step-up to record the fair value of Insignia's assets acquired............................................... $ 504,387 ==========
This step-up was applied to Insignia's assets as follows: Real estate.............................................. $ 21,348 Investment in real estate partnerships................... 424,756 Management contracts..................................... 22,211 Goodwill................................................. 36,704 Reduction in value of other assets....................... (632) ---------- Total.......................................... $ 504,387 ==========
The fair value of Insignia's assets, primarily the real estate and management contracts, was calculated based on estimated future cash flows of the underlying assets. F-80 168 As of June 30, 1998, Insignia's stockholder's deficit, as adjusted for the IPT -- AMIT Merger and the Distribution, was $11,273, which is detailed as follows: Common stock.............................................. $ 358 Additional paid-in capital................................ (37,595) Retained earnings......................................... 25,964 -------- Total........................................... $(11,273) ========
Upon completion of the Insignia Merger, the entire amount of the stockholder's deficit is eliminated. The increase of $5,290 in Convertible Debentures relates to the elimination of unamortized issuance discount. In addition, the minority interest in other partnerships of Insignia of $66,216 will be eliminated upon the IPT Merger. (G) Represents the issuance of 8,945,921 OP Units to AIMCO and the concurrent issuance of 8,945,921 shares of AIMCO Common Stock to Insignia stockholders, in exchange for all the shares of Insignia Common Stock. In accordance with the Merger Agreement, AIMCO will issue a number of shares of AIMCO Class E Preferred Stock approximately equal to $310 million divided by the AIMCO Index Price, provided that the AIMCO stockholders approve the Merger. Each share of AIMCO Class E Preferred Stock will automatically convert to one share of AIMCO Common Stock upon the payment of the Special Dividend. As such, for the purpose of preparing the pro forma financial statements, AIMCO's management believes that the AIMCO Class E Preferred Stock is substantially the same as AIMCO Common Stock, and that the fair value of the AIMCO Class E Preferred Stock approximates the fair value of the AIMCO Common Stock. Upon the payment of the Special Dividend and the conversion of the AIMCO Class E Preferred Stock to AIMCO Common Stock, the former Insignia stockholders will own approximately 15.7% of the AIMCO Common Stock. The Special Dividend is intended to represent a distribution in an amount at least equal to the earnings and profits of Insignia at the time of the Insignia Merger, to which AIMCO succeeds. Concurrent with the issuance of Class E Preferred Stock, the Partnership will issue comparable Class E Preferred Units to AIMCO. The Class E Preferred Units will have terms substantially the same as Class E Preferred Stock. (H) Represents the increase in the Partnership's investment in Unconsolidated Subsidiaries to reflect the contribution of property management contracts, including the related deferred tax liability, and notes payable to the Unconsolidated Subsidiaries. These assets and liabilities are valued at the Partnership's new basis resulting from the allocation of the purchase price of Insignia. (I) Represents certain assets and liabilities of Insignia, primarily related to the management operations of Insignia, contributed by the Partnership to the Unconsolidated Subsidiaries, valued at the Partnership's new basis resulting from the allocation of the purchase price of Insignia. (J) Amount represents notes receivable from the Unconsolidated Subsidiaries of $50,000, advances to the Unconsolidated Subsidiaries of $18,933, and equity in the Unconsolidated Subsidiaries of $53,733. The combined pro forma balance sheet (Insignia Merger) of the Unconsolidated Subsidiaries as of June 30, 1998 is presented below, which reflects the effects of the Insignia Merger, the IPT Merger and the Insignia Reorganization as if such transactions had occurred as of June 30, 1998. F-81 169 UNCONSOLIDATED SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET (INSIGNIA MERGER) AS OF JUNE 30, 1998 (IN THOUSANDS)
PRE-MERGER INSIGNIA AIMCO PRO FORMA(i) REORGANIZATION(ii) PRO FORMA ------------ ------------------ --------- ASSETS Real estate........................................... $ 21,727 $ -- $ 21,727 Cash and cash equivalents............................. 5,627 15,102(iii) 20,729 Restricted cash....................................... 5,010 -- 5,010 Management contracts.................................. 50,320 77,410(iv) 127,730 Accounts receivable................................... -- 23,773(iii) 23,773 Deferred financing costs.............................. 3,217 -- 3,217 Goodwill.............................................. 44,252 -- 44,252 Other assets.......................................... 21,020 8,954(iii) 29,974 -------- -------- -------- $151,173 $125,239 $276,412 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Secured notes payable................................. $ 72,037 $ -- $ 72,037 Secured short-term financing.......................... -- 50,000(iv) 50,000 Accounts payable, accrued and other liabilities....... 41,761 44,931(iii) 86,692 Security deposits and deferred income................. 316 2,898(iii) 3,214 Deferred tax liability................................ -- 12,849(iv) 12,849 -------- -------- -------- 114,114 110,678 224,792 Common stock.......................................... 2,319 766(v) 3,085 Preferred stock....................................... 39,172 14,561(iv) 53,733 Retained earnings..................................... (4,174) -- (4,174) Notes receivable on common stock purchases............ (258) (766)(v) (1,024) -------- -------- -------- 37,059 14,561 51,620 -------- -------- -------- $151,173 $125,239 $276,412 ======== ======== ========
- --------------- (i) Represents the Unconsolidated Subsidiaries pro forma consolidated financial position after giving effect to the Ambassador Merger. See "Pro Forma Financial Information (Pre-Insignia Merger)." (ii) Represents adjustments related to the Insignia Reorganization, whereby, following the Insignia Merger, the Partnership will contribute to the combined Unconsolidated Subsidiaries certain assets and liabilities of Insignia, primarily related to the management operations owned by Insignia. The adjustments reflect the transfer of assets valued at the Partnership's new basis resulting from the allocation of the purchase price of Insignia. The Partnership will receive non-voting preferred stock as consideration in exchange for the net assets contributed. The net deferred tax liability is assumed by the Unconsolidated Subsidiaries as it resulted from the assets and liabilities transferred to the Unconsolidated Subsidiaries. (iii)Represents certain assets and liabilities of Insignia, primarily related to the management operations of Insignia, contributed by the Partnership to the Unconsolidated Subsidiaries, valued at the Partnership's new basis resulting from the allocation of the purchase price of Insignia. (iv) Represents the transfer of management contracts, and the establishment of the related estimated net deferred Federal and state tax liabilities at a combined rate of 40% for the estimated difference between the book and tax basis of the net assets of the Unconsolidated Subsidiaries. The primary component of the deferred tax liability is the difference between the new basis of the property management contracts, as a result of the allocation of the purchase price of Insignia, and the historical tax basis. (v) Represents the issuance of common stock to the common stockholders of the Unconsolidated Subsidiaries in exchange for notes receivable, in order for the common stockholders to maintain their respective ownership interest in the Unconsolidated Subsidiaries. F-82 170 AIMCO PROPERTIES, L.P. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (INSIGNIA MERGER) FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT PER UNIT DATA)
INSIGNIA PRE-MERGER INSIGNIA AS MERGER INSIGNIA PRO FORMA ADJUSTED ADJUSTMENTS REORGANIZATION INSIGNIA (A) (B) (C) ADJUSTMENTS(D) PRO FORMA ---------- ----------- ----------- -------------- --------- Rental and other property revenues..................... $ 395,290 $ 6,912 $ -- $ -- $ 402,202 Property operating expenses............................ (165,859) (3,307) -- -- (169,166) Owned property management expense...................... (10,412) -- -- -- (10,412) Depreciation........................................... (84,959) (966) (1,321)(E) -- (87,246) --------- -------- -------- -------- --------- Income from property operations........................ 134,060 2,639 (1,321) -- 135,378 --------- -------- -------- -------- --------- Management fees and other income....................... 21,750 94,330 -- (74,404)(K) 41,676 Management and other expenses.......................... (15,304) (57,615) -- 49,236(K) (23,683) Corporate overhead allocation.......................... (588) -- -- -- (588) Amortization........................................... (7,201) (16,768) (26,794)(F) 28,922(L) (21,841) --------- -------- -------- -------- --------- Income from service company business................... (1,343) 19,947 (26,794) 3,754 (4,436) Minority interest in service company business.......... (10) -- -- -- (10) --------- -------- -------- -------- --------- Partnership's share of income from service company business............................................. (1,353) 19,947 (26,794) 3,754 (4,446) --------- -------- -------- -------- --------- General and administrative expenses.................... (6,421) (21,199) -- 6,392(K) (21,228) Interest expense....................................... (85,681) (9,035) (5,839)(G) 3,725(K) (96,830)(N) Interest income........................................ 10,576 10,967 -- -- 21,543 Minority interest...................................... 1,657 (12,871) 1,552(H) -- (9,662) Equity in income (losses) of unconsolidated partnerships......................................... (10,057) 12,515 (25,357)(I) -- (22,899) Equity in earnings of Unconsolidated Subsidiaries...... 10,426 -- -- (8,082)(M) 2,344(P) --------- -------- -------- -------- --------- Income (loss) from operations.......................... 53,207 2,963 (57,759) 5,789 4,200 Gain on sale of property............................... -- 80 (80) -- -- Income tax provision................................... -- 1,701 (1,701)(J) -- -- --------- -------- -------- -------- --------- Net income (loss)...................................... 53,207 4,744 (59,540) 5,789 4,200 Income (loss) allocable to Preferred Unitholders....... 34,174 -- -- -- 34,174(O) --------- -------- -------- -------- --------- Income (loss) allocable to OP Unitholders.............. $ 19,033 $ 4,744 $(59,540) $ 5,789 $ (29,974)(N) ========= ======== ======== ======== ========= Basic earnings (loss) per Op Unit...................... $ 0.36 $ (0.45)(N) ========= ========= Diluted earnings (loss) per Op Unit.................... $ 0.35 $ (0.45)(N) ========= ========= Weighted average OP Units outstanding.................. 53,307 66,664 ========= ========= Weighted average OP Units and equivalents outstanding.......................................... 53,688 67,508 ========= =========
- --------------- (A) Represents the Partnership's pro forma consolidated statement of operations for the year ended December 31, 1997, which gives effect to (i) the 1997 Acquisitions; (ii) the 1997 Stock Offerings; (iii) the 1997 Dispositions; (iv) the 1998 Stock Offerings; (v) the 1998 Acquisitions; (vi) the 1998 Disposition; (vii) the NHP Real Estate Companies Purchase; (viii) the NHP Merger; (ix) the NHP Reorganization; and (x) the Ambassador Merger, as if these transactions had occurred on January 1, 1997. See "Pro Forma Financial Information (Pre-Insignia Merger)." F-83 171 (B) Represents adjustments to reflect the operations of Insignia, the IPT-AMIT Merger, and the Distribution, as if these transactions had occurred on January 1, 1997. These adjustments are detailed, as follows:
INSIGNIA IPT-AMIT HOLDINGS INSIGNIA HISTORICAL(i) MERGER(ii) DISTRIBUTION(iii) AS ADJUSTED ------------- ---------- ----------------- ----------- Rental and other property revenues......................... $ 6,646 $ 266 $ -- $ 6,912 Property operating expenses................................ (3,251) (56) -- (3,307) Owned property management expense.......................... -- -- -- -- Depreciation............................................... (966) -- -- (966) --------- ------- --------- -------- Income from property operations............................ 2,429 210 -- 2,639 --------- ------- --------- -------- Management fees and other income........................... 389,626 -- (295,296) 94,330 Management and other expenses.............................. (315,653) -- 258,038 (57,615) Corporate overhead allocation.............................. -- -- -- -- Amortization............................................... (31,709) (303) 15,244 (16,768) --------- ------- --------- -------- Income from service company business....................... 42,264 (303) (22,014) 19,947 Minority interest in service company business.............. -- -- -- -- --------- ------- --------- -------- Company's share of income from service company business.... 42,264 (303) (22,014) 19,947 --------- ------- --------- -------- General and administrative expenses........................ (20,435) (1,351) 587 (21,199) Interest expense........................................... (9,353) -- 318 (9,035) Interest income............................................ 4,571 6,853 (457) 10,967 Minority interest.......................................... (12,448) (382) (41) (12,871) Equity in income (losses) of unconsolidated partnership.... 10,027 2,639 (151) 12,515 --------- ------- --------- -------- Income (loss) from operations.............................. 17,055 7,666 (21,758) 2,963 Gain on sale of property................................... -- 80 -- 80 Income tax provision....................................... (6,822) (180) 8,703 1,701 --------- ------- --------- -------- Net income (loss).......................................... 10,233 7,566 (13,055) 4,744 Income (loss) allocable to Preferred Unitholders........... -- -- -- -- --------- ------- --------- -------- Income (loss)allocable to OP Unitholders................... $ 10,233 $ 7,566 $ (13,055) $ 4,744 ========= ======= ========= ========
- --------------- (i) Represents the audited consolidated results of operations of Insignia for the year ended December 31, 1997, as reported in Insignia's Annual Report on Form 10-K. Certain reclassifications have been made to Insignia's historical statement of operations to conform to the Partnership's statement of operations presentation. (ii) Represents the historical statement of operations of AMIT, as well as pro forma adjustments related to the IPT-AMIT Merger. The IPT-AMIT Merger is expected to close prior to the Insignia Merger. (iii)Represents the distribution of two shares of Holdings Common Stock for each three shares of Insignia Common Stock to holders of Insignia Common Stock. (C) Represents the following adjustments occurring as a result of the Insignia Merger: (i) the incremental depreciation of the purchase price adjustment related to consolidated real estate and investments in real estate partnerships; (ii) the amortization of goodwill and property management contracts resulting from the Insignia Merger; (iii) the increase in interest expense resulting from the net increase in debt; (iv) the elimination of the income tax provision; and (v) the elimination of the minority interest associated with IPT. (D) Represents adjustments related to the Insignia Reorganization, whereby, following the Insignia Merger, the Partnership will contribute to the Unconsolidated Subsidiaries certain assets and liabilities of Insignia, primarily management contracts and related working capital assets and liabilities related to Insignia's third-party management operations. The adjustments reflect the related revenues and expenses primarily related to the management operations owned by Insignia, with additional amortization recorded related to the Partnership's new basis resulting from the allocation of the purchase price of Insignia. (E) Represents incremental depreciation related to the consolidated real estate assets purchased in connection with the Insignia Merger, based on the Partnership's new basis resulting from the allocation F-84 172 of the purchase price of Insignia. Buildings and improvements are depreciated on the straight-line method over a period of 20 years, and furniture and fixtures are depreciated on the straight-line method over a period of 5 years. (F) Represents incremental depreciation and amortization of the tangible and intangible assets related to the property management business of Insignia, based on the Partnership's new basis resulting from the allocation of the purchase price of Insignia, including amortization of property management contracts of $37,350, amortization of goodwill of $2,790 and depreciation of furniture, fixtures, and equipment of $3,119, less Insignia's historical depreciation and amortization of $16,465. Property management contracts are amortized using the straight-line method over a period of three years. Furniture, fixtures, and equipment are depreciated using the straight-line method over a period of three years. Goodwill is amortized using the straight-line method over 20 years. The allocation of the purchase price of Insignia is preliminary; therefore the amount and life of goodwill are subject to change as additional information is obtained and the purchase price allocation is finalized. (G) Represents the increase in interest expense of $3,725 related to borrowings to pay a distribution equal to the Special Dividend to holders of the Class E Preferred Units; and $2,114 related to borrowings of $28,381 for the additional liabilities of Insignia assumed by the Partnership. The interest rate used in the calculation of interest expense was LIBOR plus 1.75%. (H) Represents elimination of minority interest in IPT resulting from the IPT Merger. (I) Represents amortization related to the increased basis in investment in real estate partnerships, as a result of the allocation of the purchase price of Insignia, based on an estimated average life of 20 years, and based on the Partnership's new basis resulting from the allocation of the purchase price of Insignia. (J) Represents the reversal of Insignia's income tax provision. (K) Represents the historical income and expenses associated with certain assets and liabilities of Insignia that will be contributed to the Unconsolidated Subsidiaries, primarily related to the management operations of Insignia. (L) Represents the depreciation and amortization of certain management contracts and furniture, fixtures, and equipment that will be contributed to the Unconsolidated Subsidiaries, primarily related to the management operations of Insignia, based on the Partnership's new basis resulting from the allocation of the purchase price of Insignia. (M) Represents the Partnership's equity in earnings of the Unconsolidated Subsidiaries. (N) The following table presents the net impact to pro forma net loss applicable to holders of OP Units and net loss per OP Unit assuming the interest rate per annum increases by 0.25%: Increase in interest expense.............................. $ 894 ======== Net income................................................ $ (3,306) ======== Net loss attributable to OP Unitholders................... $(30,868) ======== Basic loss per OP Unit.................................... $ (0.46) ======== Diluted loss per OP Unit.................................. $ (0.46) ========
(O) Represents the net income attributable to holders of the Class B Preferred Units, the Class C Preferred Units, Class D Preferred Units, the Class G Preferred Units, and the Class H Preferred Units as if these Preferred Units had been issued as of January 1, 1997. (P) Represents the Partnership's equity in losses in the Unconsolidated Subsidiaries of $(2,406), offset by the elimination of intercompany interest expense of $4,750. The combined Pro Forma Statement of Operations of the Unconsolidated Subsidiaries for the year ended December 31, 1997 is presented below, which represents the effects of the NHP Merger, the NHP Reorganization, the Ambassador Merger, the Insignia Merger, the IPT Merger and the Insignia Reorganization as if these transactions had occurred as of January 1, 1997. F-85 173 UNCONSOLIDATED SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (INSIGNIA MERGER) FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT PER UNIT DATA)
PRE-MERGER INSIGNIA AIMCO PRO FORMA(i) REORGANIZATION(ii) PRO FORMA ------------ ------------------ --------- Rental and other property revenues................ $ 12,565 $ -- $ 12,565 Property operating expenses....................... (6,886) -- (6,886) Owned property management expense................. (625) -- (625) Depreciation...................................... (1,805) -- (1,805) -------- -------- -------- Income from property operations................... 3,249 -- 3,249 -------- -------- -------- Management fees and other income.................. 65,768 74,404(iii) 140,172 Management and other expenses..................... (32,136) (49,236)(iii) (81,372) Amortization...................................... (7,743) (28,922)(iv) (36,665) -------- -------- -------- Income from service company business.............. 25,889 (3,754) 22,135 -------- -------- -------- General and administrative expenses............... (6,573) (6,392)(iii) (12,965) Interest expense.................................. (11,907) (3,725)(iii) (15,632) Interest income................................... 853 -- 853 Minority interest................................. (621) -- (621) -------- -------- -------- Income (loss) from operations..................... 10,890 (13,871) (2,981) Income tax provision.............................. (4,915) 5,364(v) 449 -------- -------- -------- Net income (loss)................................. $ 5,975 $ (8,507) $ (2,532) ======== ======== ======== Income (loss) allocable to preferred stockholders.................................... $ 5,676 $ (8,082) $ (2,406) ======== ======== ======== Income (loss) allocable to common stockholders.... $ 299 $ (425) $ (126) ======== ======== ========
- --------------- (i) Represents the Unconsolidated Subsidiaries pro forma consolidated results of operations after giving effect to the Ambassador Merger. See "Pro Forma Financial Information (Pre-Insignia Merger)." (ii) Represents adjustments related to the Insignia Reorganization, whereby, following the Insignia Merger, the Partnership will contribute to the Unconsolidated Subsidiaries certain assets and liabilities of Insignia, primarily related to the management operations owned by Insignia. The adjustments reflect the related revenues and expenses primarily related to the management operations owned by Insignia, with additional amortization recorded related to the Partnership's new basis resulting from the allocation of the purchase price of Insignia. (iii)Represents the historical income and expenses associated with certain assets and liabilities of Insignia that were contributed to the Unconsolidated Subsidiaries, primarily related to the management operations of Insignia. (iv) Represents the depreciation and amortization of certain management contracts and furniture, fixtures, and equipment that will be contributed to the Unconsolidated Subsidiaries, primarily related to the management operations of Insignia, based on the Partnership's new basis resulting from the allocation of the purchase price of Insignia. (v) Represents the estimated Federal and state tax provisions, which are calculated on the pro forma operating results of the Unconsolidated Subsidiaries, excluding amortization of goodwill, which is not deductible for tax purposes. F-86 174 AIMCO PROPERTIES, L.P. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (INSIGNIA MERGER) FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
INSIGNIA INSIGNIA PRE-MERGER INSIGNIA MERGER REORGANIZATION AIMCO PRO FORMAS(A) AS ADJUSTED(B) ADJUSTMENTS(C) ADJUSTMENTS(D) PRO FORMA ------------- -------------- -------------- -------------- --------- Rental and other property revenues... $202,943 $ 3,988 $ -- $ -- $ 206,931 Property operating expenses.......... (77,089) (1,736) -- -- (78,825) Owned property management expense.... (4,880) -- -- -- (4,880) Depreciation......................... (44,468) (600) (660)(E) -- (45,728) -------- -------- -------- -------- --------- Income from property operations...... 76,506 1,652 (660) -- 77,498 -------- -------- -------- -------- --------- Management fees and other income..... 9,562 47,635 -- (37,672)(L) 19,525 Management and other expenses........ (5,470) (27,585) -- 23,395(L) (9,660) Corporate overhead allocation........ (196) -- -- -- (196) Amortization......................... (3) (8,928) (12,753)(F) 14,461(M) (7,223) -------- -------- -------- -------- --------- Income from service company business........................... 3,893 11,122 (12,753) 184 2,446 Minority interest in service company business........................... (1) -- -- -- (1) -------- -------- -------- -------- --------- Partnership's share of income from service company business........... 3,892 11,122 (12,753) 184 2,445 -------- -------- -------- -------- --------- General and administrative expenses........................... (4,103) (10,272) 4,937(G) 4,760(L) (4,678) Interest expense..................... (41,730) (9,614) (2,896)(H) 1,847(L) (52,393)(O) Interest income...................... 11,350 4,431 -- -- 15,781 Minority interest in other partnerships....................... (516) (8,643) 3,056(I) -- (6,103) Equity in losses of unconsolidated partnerships....................... (4,752) 14,482 (9,295)(J) -- 435 Equity in earnings of unconsolidated subsidiaries....................... 5,609 -- -- (3,613)(N) 1,996(Q) Amortization of goodwill............. (3,394) -- -- -- (3,394) -------- -------- -------- -------- --------- Income (loss) from operations........ 42,862 3,158 (17,611) 3,178 31,587 Income tax provision................. -- (231) 231(K) -- -- -------- -------- -------- -------- --------- Net income (loss).................... 42,862 2,927 (17,380) 3,178 31,587 Income attributable to Preferred Unitholders........................ 17,004 -- -- 17,004(P) -------- -------- -------- -------- --------- Income attributable to OP Unitholders........................ $ 25,858 $ 2,927 $(17,380) $ 3,178 $ 14,583(O) ======== ======== ======== ======== ========= Basic earnings per OP Unit........... $ 0.48 $ 0.22(O) ======== ========= Diluted earnings per OP Unit......... $ 0.48 $ 0.21(O) ======== ========= Weighted average OP Units outstanding........................ 53,922 67,635 ======== ========= Weighted average OP Units and equivalents outstanding............ 54,125 68,405 ======== =========
- --------------- (A) Represents the Partnership's pro forma consolidated statement of operations for the six months ended June 30, 1998, which gives effect to (i) the 1998 Stock Offerings; (ii) the 1998 Acquisitions; (iii) the 1998 Disposition; and (iv) the Ambassador Merger, as if these transactions had occurred on January 1, 1998. See "Pro Forma Financial Information (Pre-Insignia Merger)." F-87 175 (B) Represents adjustments to reflect the operations of Insignia, including the IPT-AMIT Merger, and the Distribution, as if these transactions had occurred on January 1, 1997. These adjustments are detailed, as follows:
INSIGNIA IPT-AMIT HOLDINGS INSIGNIA HISTORICAL(i) MERGER(ii) DISTRIBUTION(iii) AS ADJUSTED ------------- ---------- ----------------- ----------- Rental and other property revenues.......................... $ 3,627 $ 361 $ -- $ 3,988 Property operating expenses................................. (1,736) -- -- (1,736) Owned property management expense........................... -- -- -- -- Depreciation................................................ (600) -- -- (600) --------- ------ --------- -------- Income from property operations............................. 1,291 361 -- 1,652 --------- ------ --------- -------- Management fees and other income............................ 274,749 -- (227,114) 47,635 Management and other expenses............................... (228,454) -- 200,869 (27,585) Corporate overhead allocation............................... -- -- -- -- Amortization................................................ (20,021) (33) 11,126 (8,928) --------- ------ --------- -------- Income from service company business........................ 26,274 (33) (15,119) 11,122 Minority interest in service company business............... -- -- -- -- --------- ------ --------- -------- Partnership's share of income from service company business.................................................. 26,274 (33) (15,119) 11,122 --------- ------ --------- -------- General and administrative expenses......................... (13,116) (302) 3,146 (10,272) Interest expense............................................ (10,320) -- 706 (9,614) Interest income............................................. 2,878 2,618 (1,065) 4,431 Minority interest in other partnerships..................... (8,497) -- (146) (8,643) Equity in losses of unconsolidated partnerships............. 13,624 -- 858 14,482 Equity in earnings of Unconsolidated Subsidiaries........... -- -- -- -- Amortization of goodwill.................................... -- -- -- -- --------- ------ --------- -------- Income (loss) from operations............................... 12,134 2,644 (11,620) 3,158 Income tax provision........................................ (5,460) -- 5,229 (231) --------- ------ --------- -------- Net income (loss)........................................... 6,674 2,644 (6,391) 2,927 Income attributable to Preferred Unitholders................ -- -- -- --------- ------ --------- -------- Income attributable to OP Unitholders....................... $ 6,674 $2,644 $ (6,391) $ 2,927 ========= ====== ========= ========
- --------------- (i) Represents the unaudited consolidated results of operations of Insignia for the six months ended June 30, 1998, as reported in Insignia's Quarterly Report on Form 10-Q. Certain reclassifications have been made to Insignia's historical statement of operations to conform to the Partnership's statement of operations presentation. (ii) Represents the historical statement of operations of AMIT, as well as pro forma adjustments related to the IPT-AMIT Merger. The IPT-AMIT Merger is expected to close prior to the Insignia Merger. (iii)Represents the distribution of two shares of Holdings Common Stock for each three shares of Insignia Common Stock to holders of Insignia Common Stock. Holdings will own all of Insignia's commercial real estate services, Insignia's residential brokerage business, and Insignia's cooperative and condominium management business. (C) Represents the following adjustments occurring as a result of the Insignia Merger: (i) the incremental depreciation of the purchase price adjustment related to consolidated real estate and investments in real estate partnerships; (ii) the amortization of goodwill and property management contracts resulting from the Insignia Merger; (iii) the increase in interest expense resulting from the net increase in debt; (iv) the elimination of the income tax provision; and (v) the elimination of the minority interest associated with IPT. (D) Represents adjustments related to the Insignia Reorganization, whereby, following the Insignia Merger, the Partnership will contribute to the Unconsolidated Subsidiaries certain assets and liabilities of Insignia, primarily management contracts and related working capital assets and liabilities related to Insignia's third-party management operations. The adjustments reflect the related revenues and expenses primarily related to the management operations owned by Insignia, with additional amortization recorded related to the Partnership's new basis resulting from the allocation of the purchase price of Insignia. F-88 176 (E) Represents incremental depreciation related to the consolidated real estate assets purchased in connection with the Insignia Merger, based on the Partnership's new basis resulting from the allocation of the purchase price of Insignia. Buildings and improvements are depreciated on the straight-line method over a period of 20 years, and furniture and fixtures are depreciated on the straight-line method over a period of 5 years. (F) Represents incremental depreciation and amortization of the tangible and intangible assets related to the property management business of Insignia, based on the Partnership's new basis resulting from the allocation of the purchase price of Insignia, including amortization of property management contracts of $18,674, amortization of goodwill of $1,415 and depreciation of furniture, fixtures, and equipment of $1,559, less Insignia's historical depreciation and amortization of $8,895. Property management contracts are amortized using the straight-line method over a period of three years. Furniture, fixtures, and equipment are depreciated using the straight-line method over a period of three years. Goodwill is amortized using the straight-line method over 20 years. The allocation of the purchase price of Insignia is preliminary; therefore the amount and life of goodwill are subject to change as additional information is obtained and the purchase price allocation is finalized. (G) Represents the elimination of merger related expenses recorded by Insignia during the six months ended June 30, 1998. In connection with the Insignia Merger, certain Insignia executives will receive one-time lump-sum payments in connection with the termination of their employment and option agreements. The total of these lump sum payments is estimated to be approximately $50,000. (H) Represents the increase in interest expense of $1,847 related to borrowings to pay a distribution equal to the Special Dividend to holders of the Class E Preferred Units; and $1,049 related to borrowings of $28,381 for the additional liabilities of Insignia assumed by the Partnership. The interest rate used in the calculation of interest expense was LIBOR plus 1.75%. (I) Represents elimination of minority interest in IPT resulting from the IPT Merger. (J) Represents amortization related to the increased basis in investment in real estate partnerships, as a result of the allocation of the purchase price of Insignia, based on an estimated average life of 20 years, and based on the Partnership's new basis resulting from the allocation of the purchase price of Insignia. (K) Represents the reversal of Insignia's income tax provision. (L) Represents the historical income and expenses associated with certain assets and liabilities of Insignia that will be contributed to the Unconsolidated Subsidiaries, primarily related to the management operations of Insignia. (M) Represents the depreciation and amortization of certain management contracts and furniture, fixtures, and equipment that will be contributed to the Unconsolidated Subsidiaries, primarily related to the management operations of Insignia, based on the Partnership's new basis resulting from the allocation of the purchase price of Insignia. (N) Represents the Partnership's equity in earnings of the Unconsolidated Subsidiaries. (O) The following table presents the net impact to pro forma net income applicable to holders of OP Units and net income per OP Units assuming the interest rate per annum increases by 0.25%: Increase in interest expense............................... $ 444 ======= Net income................................................. $31,143 ======= Net income attributable to OP Unitholders.................. $14,139 ======= Basic income per OP Unit................................... $ 0.21 ======= Diluted income per OP Unit................................. $ 0.21 =======
(P) Represents the net income attributable to holders of the Class B Preferred Units, the Class C Preferred Units, the Class D Preferred Units, the Class G Preferred Units and the Class H Preferred Units as if these Preferred Units had been issued as of January 1, 1997. F-89 177 (Q) Represents the Partnership's equity in losses in the Unconsolidated Subsidiaries of $(3,613). The combined Pro Forma Statement of Operations of the Unconsolidated Subsidiaries for the six months ended June 30, 1998 is presented below, which represents the effects of the Ambassador Merger, the Insignia Merger, the IPT Merger and the Insignia Reorganization as if these transactions had occurred as of January 1, 1997. F-90 178 UNCONSOLIDATED SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (INSIGNIA MERGER) FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS)
PRE-MERGER INSIGNIA AIMCO PRO FORMA(i) REORGANIZATION(ii) PRO FORMA ------------ ------------------ --------- Rental and other property revenues.................... $ 6,550 $ -- $ 6,550 Property operating expenses........................... (3,390) -- (3,390) Owned property management expense .................... (230) -- (230) Depreciation expense.................................. (650) -- (650) -------- -------- -------- Income from property operations....................... 2,280 -- 2,280 -------- -------- -------- Management fees and other income...................... 37,585 37,672(iii) 75,257 Management and other expenses......................... (23,673) (23,395)(iii) (47,068) Amortization.......................................... (1,390) (14,461)(iv) (15,851) -------- -------- -------- Income from service company........................... 12,522 (184) 12,338 -------- -------- -------- General and administrative expense.................... -- (4,760)(iii) (4,760) Interest expense...................................... (3,878) (1,847)(iii) (5,725) Interest income....................................... 425 -- 425 Minority interest in other partnerships............... (250) -- (250) -------- -------- -------- Income from operations................................ 11,099 (6,791) 4,308 Income tax provision.................................. (5,195) 2,988 (2,207) -------- -------- -------- Net income............................................ $ 5,904 $ (3,803) $ 2,101 ======== ======== ======== Income attributable to preferred stockholders......... $ 5,609 $ (3,613) $ 1,996 ======== ======== ======== Income attributable to common stockholders............ $ 295 $ (190) $ 105 ======== ======== ========
- --------------- (i) Represents the Unconsolidated Subsidiaries pro forma consolidated results of operations after giving effect to the Ambassador Merger. See "Pro Forma Financial Information (Pre-Insignia Merger)." (ii) Represents adjustments related to the Insignia Reorganization, whereby, following the Insignia Merger, the Partnership will contribute to the Unconsolidated Subsidiaries certain assets and liabilities of Insignia, primarily related to the management operations owned by Insignia. The adjustments reflect the related revenues and expenses primarily related to the management operations owned by Insignia, with additional amortization recorded related to the Partnership's new basis resulting from the allocation of the purchase price of Insignia. (iii)Represents the historical income and expenses associated with certain assets and liabilities of Insignia that were contributed to the Unconsolidated Subsidiaries, primarily related to the management operations of Insignia. (iv) Represents the depreciation and amortization of certain management contracts and furniture, fixtures, and equipment that will be contributed to the Unconsolidated Subsidiaries, primarily related to the management operations of Insignia, based on the Partnership's new basis resulting from the allocation of the purchase price of Insignia. (v) Represents the estimated Federal and state tax provisions, which are calculated on the pro forma operating results of the Unconsolidated Subsidiaries, excluding amortization of goodwill, which is not deductible for tax purposes. F-91 179 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. AIMCO Properties, L.P. By: AIMCO-GP, Inc. its General Partner /s/ PETER K. KOMPANIEZ ------------------------------------ Date: October 16, 1998 By: Peter K. Kompaniez Title: Vice Chairman and President 180 EXHIBIT INDEX(1)
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 -- Amended and Restated Agreement and Plan of Merger, dated as of May 26, 1998, by and among Apartment Investment and Management Company, AIMCO Properties, L.P., Insignia Financial Group, Inc., and Insignia/ESG Holdings, Inc. (filed June 22, 1998, as Exhibit 2.1 to Amendment No. 2 to AIMCO's Current Report on Form 8-K, dated March 17, 1998 and incorporated herein by reference) 2.2 -- Agreement and Plan of Merger, dated as of April 21, 1997, by and among Apartment Investment and Management Company, AIMCO/NHP Acquisition Corp. and NHP Incorporated (filed as Exhibit 2.1 to AIMCO's Current Report on Form 8-K, dated April 16, 1997 and incorporated herein by reference) 2.3 -- Stock Purchase Agreement, dated as of April 16, 1997, by and among Apartment Investment and Management Company, Demeter Holdings Corporation and Capricorn Investors, L.P. (filed as Exhibit 2.2 to AIMCO's Current Report on Form 8-K, dated April 16, 1997 and incorporated herein by reference) 2.4 -- Agreement and Plan of Merger, dated as of December 23, 1997, by and between Apartment Investment and Management Company and Ambassador Apartments, Inc. (filed as Exhibit 2.1 to AIMCO's Current Report on Form 8-K, dated December 23, 1997 and incorporated herein by reference) 2.5 -- Agreement and Plan of Merger, dated as of October 1, 1998, by and between Apartment Investment and Management Company and Insignia Properties Trust (filed as Exhibit 2.1 to AIMCO's Current Report on Form 8-K, dated October 1, 1998 and incorporated herein by reference) 10.1 -- Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of July 29, 1994, by and among Apartment Investment and Management Company, AIMCO-GP, Inc., as general partner, AIMCO-LP, Inc., as special limited partner, and the other limited partners 10.2 -- First Amended and Restated Contribution and Management Agreement, dated as of June 15, 1998, amended and restated as of October 1, 1998, by and between Apartment Investment and Management Company and AIMCO Properties, L.P. 10.3 -- Convertible Promissory Note from AIMCO Properties, L.P. to AIMCO-LP, Inc. in the amount of $149,500,000 10.4 -- Indenture for the 6.5% Convertible Subordinated Debentures, dated as of November 1, 1996 between Insignia Financial Group, Inc., as Issuer, and First Union National Bank of South Carolina, as Trustee (filed as Exhibit 4.3 to Form S-3 of Insignia Financial Group on December 10, 1996 and incorporated herein by reference) 10.5 -- Apartment Investment and Management Company Non-Qualified Employee Stock Option Plan, adopted August 29, 1996 (filed as Exhibit 10.8 to AIMCO's Quarterly Report on Form 10-Q/A for the quarterly period ending September 30, 1996 and incorporated herein by reference) 10.6 -- Apartment Investment and Management Company 1996 Stock Award and Incentive Plan, adopted April 25, 1996 (filed as Exhibit 10.70 to AIMCO's Annual Report on Form 10-K for the fiscal year 1996 and incorporated herein by reference) 10.7 -- Summary of Arrangement for Sale of Stock to Executive Officers (filed as Exhibit 10.104 to AIMCO's Annual Report on Form 10-K for the fiscal year 1996 and incorporated herein by reference)
181
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.8 -- Employment Contract executed on July 29, 1994 by and between AIMCO Properties, L.P. and Peter Kompaniez (filed as Exhibit 10.44a to AIMCO's Annual Report on Form 10-K for the fiscal year 1994 and incorporated herein by reference) 10.9 -- Employment Contract executed on July 29, 1994 by and between AIMCO Properties, L.P. and Terry Considine (filed as Exhibit 10.44c to AIMCO's Annual Report on Form 10-K for the fiscal year 1994 and incorporated herein by reference) 10.10 -- Employment Contract executed on July 29, 1994 by and between AIMCO Properties, L.P. and Steven D. Ira (filed as Exhibit 10.44d to AIMCO's Annual Report on Form 10-K for the fiscal year 1994 and incorporated herein by reference) 10.11 -- Contribution Agreement, dated as of January 31, 1998, by and between Apartment Investment and Management Company and Terry Considine and Peter K. Kompaniez (filed as Exhibit 2.1 to AIMCO's Current Report on Form 8-K dated January 31, 1998 and incorporated herein by reference) 10.12 -- Amendment No. 1 to the Apartment Investment and Management Company 1997 Stock Award and Incentive Plan (filed as Exhibit 10.12 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1998 and incorporated herein by reference) 10.13 -- Apartment Investment Management Company 1998 Incentive Compensation Plan (filed as Exhibit 10.13 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1998 and incorporated herein by reference) 10.14 -- Purchase and Sale Agreement and Joint Escrow Instructions, made and entered into as of August 22, 1997, by and between AIMCO Properties, L.P., and each of the parties identified on Exhibit "A" attached thereto (collectively, the "Winthrop Sellers") (filed as Exhibit 99.3 to AIMCO's Current Report on Form 8-K, dated October 15, 1997 and incorporated herein by reference) 10.15 -- Letter Agreement, dated October 15, 1997, by and between AIMCO Properties, L.P. and the Winthrop Sellers (filed as Exhibit 99.6 to AIMCO's Current Report on Form 8-K, dated October 15, 1997 and incorporated herein by reference) 10.16 -- Contribution Agreement and Joint Escrow Instructions, dated as of January 1, 1996, by and between AIMCO Properties, L.P. and Peachtree Park 94, L.P.(6) (filed as Exhibit 10.1 to AIMCO's Current Report on Form 8-K, dated January 1, 1996 and incorporated herein by reference) 10.17 -- Acquisition Agreement, dated as of April 30, 1996, by and among the Company, AIMCO Somerset, Inc., AIMCO Properties, L.P., Somerset REIT, Inc., RJ Holdings, Ltd., Somerset PAM Partnership and RJ Equities, Inc. (filed as Exhibit 10.1 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 1996 and incorporated herein by reference) 10.18 -- Real Estate Acquisition Agreement, dated as of May 22, 1997, by and among Apartment Investment and Management Company, AIMCO Properties, L.P., Demeter Holdings Corporation, Phemus Corporation, Capricorn Investors, L.P., J. Roderick Heller, III and NHP Partners LLC (filed as Exhibit 2.1 to AIMCO's Current Report on Form 8-K dated June 3, 1997 and incorporated herein by reference) 10.19 -- Amended and Restated Credit Agreement (Unsecured Revolver-to-Term Facility), dated October 1, 1998, by and among AIMCO Properties, L.P., Bank of America National Trust and Savings Association and BankBoston, N.A. (filed as Exhibit 10.1 to AIMCO's Current Report on Form 8-K, dated October 1, 1998 and incorporated herein by reference)
182
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.20 -- Promissory Note, dated October 1, 1998, in the principal amount of $65,000,000, issued by AIMCO Properties, L.P. to Bank of America national Trust and Savings Association (filed as Exhibit 10.2 to AIMCO's current Report on Form 8-K, dated October 1, 1998 and incorporated herein by reference) 10.21 -- Promissory Note, dated October 1, 1998, in the principal amount of $35,000,000, issued by AIMCO Properties, L.P. to Bank of America National Trust and Savings Association (filed as Exhibit 10.3 to AIMCO's Current Report on Form 8-K, dated October 1, 1998 and incorporated herein by reference) 10.22 -- Swing Line Promissory Note, dated October 1, 1998, in the principal amount of $30,000,000, issued by AIMCO Properties, L.P. to Bank of America national Trust and Savings Association (filed as Exhibit 10.4 to AIMCO's Current Report on Form 8-K, dated October 1, 1998 and incorporated herein by reference) 10.23 -- Guaranty, dated as of February 4, 1998, by Apartment Investment and Management Company, for the benefit of Washington Mortgage Financial Group, Ltd. (filed as Exhibit 10.7 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1998 and incorporated herein by reference) 10.24 -- Payment Guaranty, dated as of May 8, 1998, by AIMCO Properties, L.P. for the benefit of Federal National Mortgage Association (filed as Exhibit 10.8 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 1998 and incorporated herein by reference) 21.1 -- Subsidiaries of AIMCO Properties, L.P. (Previously filed) 27.1 -- Financial Data Schedule -- as of and for the year ended December 31, 1997 27.2 -- Financial Data Schedule -- as of and for the six months ended June 30, 1998 27.3 -- Financial Data Schedule -- as of and for the three months ended June 30, 1998 99.1 -- Agreement re: disclosure of long-term debt instruments (Previously filed)
- --------------- (1) Schedules and supplemental materials to the exhibits have been omitted but will be provided to the Securities and Exchange Commission upon request. EX-10.1 2 3RD AMENDED & RESTATED AGREEMENT OF LP 1 EXHIBIT 10.1 - -------------------------------------------------------------------------------- THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIMCO PROPERTIES, L.P. a Delaware limited partnership ---------------------- THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE PARTNERSHIP AN OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP, IN FORM AND SUBSTANCE SATISFACTORY TO THE PARTNERSHIP, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUESKY" LAWS. dated as of July 29, 1994 - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINED TERMS.................................................................................. 1 ARTICLE 2 ORGANIZATIONAL MATTERS......................................................................... 17 Section 2.1 Organization................................................................. 17 Section 2.2 Name......................................................................... 17 Section 2.3 Registered Office and Agent; Principal Office................................ 17 Section 2.4 Power of Attorney............................................................ 17 Section 2.5 Term......................................................................... 18 ARTICLE 3 PURPOSE........................................................................................ 18 Section 3.1 Purpose and Business......................................................... 19 Section 3.2 Powers....................................................................... 19 Section 3.3 Partnership Only for Purposes Specified...................................... 19 Section 3.4 Representations and Warranties by the Parties................................ 19 ARTICLE 4 CAPITAL CONTRIBUTIONS.......................................................................... 21 Section 4.1 Capital Contributions of the Partners........................................ 21 Section 4.2 Issuances of Additional Partnership Interests................................ 21 Section 4.3 Additional Funds............................................................. 22 Section 4.4 Stock Option Plans........................................................... 23 Section 4.5 No Interest; No Return....................................................... 25 Section 4.6 Conversion of Junior Shares.................................................. 25 ARTICLE 5 DISTRIBUTIONS...................................................................................25 Section 5.1 Requirement and Characterization of Distributions............................ 25 Section 5.2 Distributions in Kind........................................................ 25 Section 5.3 Amounts Withheld............................................................. 25 Section 5.4 Distributions Upon Liquidation............................................... 25 Section 5.5 Restricted Distributions..................................................... 26 ARTICLE 6 ALLOCATIONS.................................................................................... 26 Section 6.1 Timing and Amount of Allocations of Net Income and Net Loss.................. 26 Section 6.2 General Allocations.......................................................... 26 Section 6.3 Additional Allocation Provisions............................................. 26 Section 6.4 Tax Allocations.............................................................. 28
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Page ---- ARTICLE 7 MANAGEMENT AND OPERATIONS OF BUSINESS.......................................................... 29 Section 7.1 Management................................................................... 29 Section 7.2 Certificate of Limited Partnership........................................... 32 Section 7.3 Restrictions on General Partner's Authority.................................. 32 Section 7.4 Reimbursement of the General Partner......................................... 34 Section 7.5 Outside Activities of the Previous General Partner and the General Partner...................................................................... 35 Section 7.6 Contracts with Affiliates.................................................... 35 Section 7.7 Indemnification.............................................................. 36 Section 7.8 Liability of the General Partner............................................. 38 Section 7.9 Other Matters Concerning the General Partner................................. 39 Section 7.10 Title to Partnership Assets.................................................. 39 Section 7.11 Reliance by Third Parties.................................................... 39 ARTICLE 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS..................................................... 40 Section 8.1 Limitation of Liability...................................................... 40 Section 8.2 Management of Business....................................................... 40 Section 8.3 Outside Activities of Limited Partners....................................... 40 Section 8.4 Return of Capital............................................................ 40 Section 8.5 Rights of Limited Partners Relating to the Partnership....................... 41 Section 8.6 Redemption Rights of Qualifying Parties...................................... 41 Section 8.7 Partnership Right to Call Limited Partner Interests.......................... 45 ARTICLE 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS......................................................... 46 Section 9.1 Records and Accounting....................................................... 46 Section 9.2 Fiscal Year.................................................................. 46 Section 9.3 Reports...................................................................... 46 ARTICLE 10 TAX MATTERS.................................................................................... 46 Section 10.1 Preparation of Tax Returns................................................... 46 Section 10.2 Tax Elections................................................................ 47 Section 10.3 Tax Matters Partner.......................................................... 47 Section 10.4 Withholding.................................................................. 48 ARTICLE 11 TRANSFERS AND WITHDRAWALS...................................................................... 49 Section 11.1 Transfer..................................................................... 49 Section 11.2 Transfer of General Partner's Partnership Interest........................... 49 Section 11.3 Limited Partners' Rights to Transfer......................................... 50 Section 11.4 Substituted Limited Partners................................................. 52
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Page ---- Section 11.5 Assignees.................................................................... 52 Section 11.6 General Provisions........................................................... 53 ARTICLE 12 ADMISSION OF PARTNERS.......................................................................... 54 Section 12.1 Admission of Successor General Partner....................................... 54 Section 12.2 Admission of Additional Limited Partners..................................... 54 Section 12.3 Amendment of Agreement and Certificate of Limited Partnership................ 55 Section 12.4 Admission of Initial Limited Partners........................................ 55 Section 12.5 Limit on Number of Partners.................................................. 55 ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION....................................................... 55 Section 13.1 Dissolution.................................................................. 55 Section 13.2 Winding Up................................................................... 56 Section 13.3 Deemed Distribution and Recontribution....................................... 57 Section 13.4 Rights of Limited Partners................................................... 57 Section 13.5 Notice of Dissolution........................................................ 57 Section 13.6 Cancellation of Certificate of Limited Partnership........................... 57 Section 13.7 Reasonable Time for Winding-Up............................................... 58 ARTICLE 14 PROCEDURES FOR ACTIONS AND CONSENTS OF PARTNERS; AMENDMENTS; MEETINGS....................................................................................... 58 Section 14.1 Procedures for Actions and Consents of Partners.............................. 58 Section 14.2 Amendments................................................................... 58 Section 14.3 Meetings of the Partners..................................................... 58 ARTICLE 15 GENERAL PROVISIONS............................................................................. 59 Section 15.1 Addresses and Notice......................................................... 59 Section 15.2 Titles and Captions.......................................................... 59 Section 15.3 Pronouns and Plurals......................................................... 59 Section 15.4 Further Action............................................................... 59 Section 15.5 Binding Effect............................................................... 59 Section 15.6 Waiver....................................................................... 59 Section 15.7 Counterparts................................................................. 60 Section 15.8 Applicable Law............................................................... 60 Section 15.9 Entire Agreement............................................................. 60 Section 15.10 Invalidity of Provisions..................................................... 60 Section 15.11 Limitation to Preserve REIT Status........................................... 60 Section 15.12 No Partition................................................................. 61 Section 15.13 No Third-Party Rights Created Hereby......................................... 61
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Page ---- EXHIBIT A PARTNERS AND PARTNERSHIP UNITS.................................................................A-1 EXHIBIT B EXAMPLES REGARDING ADJUSTMENT FACTOR...........................................................B-1 EXHIBIT C LIST OF DESIGNATED PARTIES.....................................................................C-1 EXHIBIT D INTENTIONALLY OMITTED..........................................................................D-1 EXHIBIT E NOTICE OF REDEMPTION...........................................................................E-1 EXHIBIT F FORM OF UNIT CERTIFICATE.......................................................................F-1 EXHIBIT G PARTNERSHIP UNIT DESIGNATION OF THE CLASS B PARTNERSHIP PREFERRED UNITS................................................................................G-1 EXHIBIT H PARTNERSHIP UNIT DESIGNATION OF THE CLASS C PARTNERSHIP PREFERRED UNITS................................................................................H-1 EXHIBIT I PARTNERSHIP UNIT DESIGNATION OF THE CLASS D PARTNERSHIP PREFERRED UNITS................................................................................I-1 EXHIBIT J PARTNERSHIP UNIT DESIGNATION OF THE CLASS E PARTNERSHIP PREFERRED UNITS................................................................................J-1 EXHIBIT K PARTNERSHIP UNIT DESIGNATION OF THE CLASS I HIGH PERFORMANCE PARTNERSHIP UNITS..................................................................K-1 EXHIBIT L PARTNERSHIP UNIT DESIGNATION OF THE CLASS G PARTNERSHIP PREFERRED UNITS................................................................................L-1 EXHIBIT M PARTNERSHIP UNIT DESIGNATION OF THE CLASS H PARTNERSHIP PREFERRED UNITS................................................................................M-1
iv 6 THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIMCO PROPERTIES, L.P. THIS THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIMCO PROPERTIES, L.P., dated as of July 29, 1994, and amended and restated as of October 1, 1998, is entered into by and among Apartment Investment and Management Company, a Maryland corporation (the "Previous General Partner"), AIMCO-GP, Inc., a Delaware corporation (the "General Partner"), AIMCO-LP, Inc., a Delaware corporation (the "Special Limited Partner"), and the other Limited Partners (as defined below). WHEREAS, the General Partner has submitted, and the Limited Partners have approved, an amendment and restatement of the Agreement of Limited Partnership of AIMCO Properties, L.P. on the terms set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINED TERMS The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement. "Act" means the Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time, and any successor to such statute. "Actions" has the meaning set forth in Section 7.7 hereof. "Additional Funds" has the meaning set forth in Section 4.3.A hereof. "Additional Limited Partner" means a Person who is admitted to the Partnership as a Limited Partner pursuant to Section 4.2 and Section 12.2 hereof and who is shown as such on the books and records of the Partnership. "Adjusted Capital Account Deficit" means, with respect to any Partner, the deficit balance, if any, in such Partner's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments: (i) decrease such deficit by any amounts that such Partner is obligated to restore pursuant to this Agreement or by operation of law upon liquidation of such Partner's Partnership Interest or is deemed to be obligated to restore pursuant to the penultimate sentence of each of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) increase such deficit by the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6). 1 7 The foregoing definition of "Adjusted Capital Account Deficit" is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. "Adjustment Factor" means 1.0; provided, however, that in the event that: (i) the Previous General Partner (a) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a distribution to all holders of its outstanding REIT Shares in REIT Shares, (b) splits or subdivides its outstanding REIT Shares or (c) effects a reverse stock split or otherwise combines its outstanding REIT Shares into a smaller number of REIT Shares, the Adjustment Factor shall be adjusted by multiplying the Adjustment Factor previously in effect by a fraction, (i) the numerator of which shall be the number of REIT Shares issued and outstanding on the record date for such dividend, distribution, split, subdivision, reverse split or combination (assuming for such purposes that such dividend, distribution, split, subdivision, reverse split or combination has occurred as of such time) and (ii) the denominator of which shall be the actual number of REIT Shares (determined without the above assumption) issued and outstanding on the record date for such dividend, distribution, split, subdivision, reverse split or combination; (ii) the Previous General Partner distributes any rights, options or warrants to all holders of its REIT Shares to subscribe for or to purchase or to otherwise acquire REIT Shares (or other securities or rights convertible into, exchangeable for or exercisable for REIT Shares) at a price per share less than the Value of a REIT Share on the record date for such distribution (each a "Distributed Right"), then the Adjustment Factor shall be adjusted by multiplying the Adjustment Factor previously in effect by a fraction (a) the numerator of which shall be the number of REIT Shares issued and outstanding on the record date plus the maximum number of REIT Shares purchasable under such Distributed Rights and (b) the denominator of which shall be the number of REIT Shares issued and outstanding on the record date plus a fraction (1) the numerator of which is the maximum number of REIT Shares purchasable under such Distributed Rights times the minimum purchase price per REIT Share under such Distributed Rights and (2) the denominator of which is the Value of a REIT Share as of the record date; provided, however, that, if any such Distributed Rights expire or become no longer exercisable, then the Adjustment Factor shall be adjusted, effective retroactive to the date of distribution of the Distributed Rights, to reflect a reduced maximum number of REIT Shares or any change in the minimum purchase price for the purposes of the above fraction; and (iii) the Previous General Partner shall, by dividend or otherwise, distribute to all holders of its REIT Shares evidences of its indebtedness or assets (including securities, but excluding any dividend or distribution referred to in subsection (i) above), which evidences of indebtedness or assets relate to assets not received by the Previous General Partner, the General Partner and/or the Special Limited Partner pursuant to a pro rata distribution by the Partner ship, then the Adjustment Factor shall be adjusted to equal the amount determined by multiplying the Adjustment Factor in effect immediately prior to the close of business on the date fixed for determination of shareholders entitled to receive such distribution by a fraction (i) the numerator shall be such Value of a REIT Share on the date fixed for such determination and (ii) the denomina tor shall be the Value of a REIT Share on the dates fixed for such determination less the then fair market value (as determined by the General Partner, whose determination shall be conclusive) of the portion of the evidences of indebted ness or assets so distributed applicable to one REIT Share. 2 8 Any adjustments to the Adjustment Factor shall become effective immediately after the effective date of such event, retroactive to the record date, if any, for such event, provided, however, that any Limited Partner may waive, by written notice to the General Partner, the effect of any adjustment to the Adjustment Factor applicable to the Partnership Common Units held by such Limited Partner, and, thereafter, such adjustment will not be effective as to such Partnership Common Units. For illustrative purposes, examples of adjustments to the Adjustment Factor are set forth on Exhibit B attached hereto. "Affiliate" means, with respect to any Person, any Person directly or indirectly controlling or controlled by or under common control with such Person. For the purposes of this definition, "control" when used with respect to any Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreement" means this Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., as it may be amended, supplemented or restated from time to time. "Applicable Percentage" has the meaning set forth in Section 8.6.B hereof. "Appraisal" means, with respect to any assets, the written opinion of an independent third party experienced in the valuation of similar assets, selected by the General Partner in good faith. Such opinion may be in the form of an opinion by such independent third party that the value for such property or asset as set by the General Partner is fair, from a financial point of view, to the Partnership. "Assignee" means a Person to whom one or more Partnership Common Units have been Transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5 hereof. "Available Cash" means, with respect to any period for which such calculation is being made, (i) the sum, without duplication, of: (1) the Partnership's Net Income or Net Loss (as the case may be) for such period, (2) Depreciation and all other noncash charges to the extent deducted in determining Net Income or Net Loss for such period, (3) the amount of any reduction in reserves of the Partnership referred to in clause (ii)(6) below (including, without limitation, reductions resulting because the General Partner determines such amounts are no longer necessary), (4) the excess, if any, of the net cash proceeds from the sale, exchange, disposition, financing or refinancing of Partnership property for such period over the gain (or loss, as the case may be) recognized from such sale, exchange, disposition, financing or refinancing during such period (excluding Terminating Capital Transactions), and 3 9 (5) all other cash received (including amounts previously accrued as Net Income and amounts of deferred income) or any net amounts borrowed by the Partnership for such period that was not included in determining Net Income or Net Loss for such period; (ii) less the sum, without duplication, of: (1) all principal debt payments made during such period by the Partnership, (2) capital expenditures made by the Partnership during such period, (3) investments in any entity (including loans made thereto) to the extent that such investments are not otherwise described in clause (ii)(1) or clause (ii)(2) above, (4) all other expenditures and payments not deducted in determining Net Income or Net Loss for such period (including amounts paid in respect of expenses previously accrued), (5) any amount included in determining Net Income or Net Loss for such period that was not received by the Partnership during such period, (6) the amount of any increase in reserves (including, without limitation, working capital reserves) established during such period that the General Partner determines are necessary or appropriate in its sole and absolute discretion, and (7) any amount distributed or paid in redemption of any Limited Partner Interest or Partnership Units including, without limitation, any Cash Amount paid. Notwithstanding the foregoing, Available Cash shall not include (a) any cash received or reductions in reserves, or take into account any disbursements made, or reserves established, after dissolution and the commencement of the liquidation and winding up of the Partnership or (b) any Capital Contributions, whenever received. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Denver, Colorado, Los Angeles, California or New York, New York are authorized or required by law to close. "Capital Account" means, with respect to any Partner, the Capital Account maintained by the General Partner for such Partner on the Partnership's books and records in accordance with the following provisions: (a) To each Partner's Capital Account, there shall be added such Partner's Capital Contributions, such Partner's distributive share of Net Income and any items in the nature of income or gain that are specially allocated pursuant to Section 6.3 hereof, and the principal amount of any Partnership liabilities assumed by such Partner or that are secured by any property distributed to such Partner. 4 10 (b) From each Partner's Capital Account, there shall be subtracted the amount of cash and the Gross Asset Value of any property distributed to such Partner pursuant to any provision of this Agreement, such Partner's distributive share of Net Losses and any items in the nature of expenses or losses that are specially allocated pursuant to Section 6.3 hereof, and the principal amount of any liabilities of such Partner assumed by the Partnership or that are secured by any property contributed by such Partner to the Partnership. (c) In the event any interest in the Partnership is Transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent that it relates to the Transferred interest. (d) In determining the principal amount of any liability for purposes of subsections (a) and (b) hereof, there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations. (e) The provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Sections 1.704-1(b) and 1.704-2, and shall be interpreted and applied in a manner consistent with such Regulations. If the General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts are maintained in order to comply with such Regulations, the General Partner may make such modification provided that such modification will not have a material effect on the amounts distributable to any Partner without such Partner's Consent. The General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership's balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(q) and (ii) make any appropriate modifications in the event that unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b) or Section 1.704-2. "Capital Contribution" means, with respect to any Partner, the amount of money and the initial Gross Asset Value of any Contributed Property that such Partner contributes to the Partnership pursuant to Section 4.1, 4.2 or 4.3 hereof or is deemed to contribute pursuant to Section 4.4 hereof. "Cash Amount" means the lesser of (a) an amount of cash equal to the product of (i) the Value of a REIT Share and (ii) the REIT Shares Amount determined as of the applicable Valuation Date or (b) in the case of a Declination followed by a Public Offering Funding, the Public Offering Funding Amount. "Certificate" means the Certificate of Limited Partnership of the Partnership filed in the office of the Secretary of State of the State of Delaware, as amended from time to time in accordance with the terms hereof and the Act. "Charter" means the Articles of Amendment and Restatement of the Previous General Partner filed with the Maryland State Department of Assessments and Taxation on July 19, 1994, as amended, supplemented or restated from time to time. "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time or any successor statute thereto, as interpreted by the applicable Regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law. 5 11 "Company Employee" has the meaning ascribed thereto in the Previous General Partner's 1994 Stock Option Plan. "Consent" means the consent to, approval of, or vote in favor of a proposed action by a Partner given in accordance with Article 14 hereof. "Consent of the Limited Partners" means the Consent of a Majority in Interest of the Limited Partners, which Consent shall be obtained prior to the taking of any action for which it is required by this Agreement and, except as otherwise provided in this Agreement, may be given or withheld by a Majority in Interest of the Limited Partners, in their reasonable discretion. "Contributed Property" means each Property or other asset, in such form as may be permitted by the Act, but excluding cash, contributed or deemed contributed to the Partnership (or deemed contributed to the Partnership on termination and reconstitution thereof pursuant to Code Section 708). "Controlled Entity" means, as to any Limited Partner, (a) any corporation more than fifty percent (50%) of the outstanding voting stock of which is owned by such Limited Partner or such Limited Partner's Family Members, (b) any trust, whether or not revocable, of which such Limited Partner or such Limited Partner's Family Members are the sole beneficiaries, (c) any partnership of which such Limited Partner is the managing partner and in which such Limited Partner or such Limited Partner's Family Members hold partnership interests representing at least twenty-five percent (25%) of such partnership's capital and profits and (d) any limited liability company of which such Limited Partner is the manager and in which such Limited Partner or such Limited Partner's Family Members hold membership interests representing at least twenty-five percent (25%) of such limited liability company's capital and profits. "Controlling Person" means any Person, whatever his or her title, who performs executive or senior management functions for the General Partner or its Affiliates similar to those of directors, executive management and senior management, or any Person who either holds a two percent (2%) or more equity interest in the General Partner or its Affiliates, or has the power to direct or cause the direction of the General Partner or its Affiliates, whether through the ownership of voting securities, by contract or otherwise, or, in the absence of a specific role or title, any Person having the power to direct or cause the direction of the management-level employees and policies of the General Partner or its Affiliates. It is not intended that every Person who carries a title such as vice president, senior vice president, secretary or treasurer be included in the definition of "Controlling Person." "Cut-Off Date" means the fifth (5th) Business Day after the General Partner's receipt of a Notice of Redemption. "Debt" means, as to any Person, as of any date of determination, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services; (ii) all amounts owed by such Person to banks or other Persons in respect of reimbursement obligations under letters of credit, surety bonds and other similar instruments guaranteeing payment or other performance of obligations by such Person; (iii) all indebtedness for borrowed money or for the deferred purchase price of property or services secured by any lien on any property owned by such Person, to the extent attributable to such Person's interest in such property, even though such Person has not assumed or become liable for the payment thereof; and (iv) lease obligations of such Person that, in accordance with generally accepted accounting principles, should be capitalized. "Declination" has the meaning set forth in Section 8.6.D hereof. 6 12 "Depreciation" means, for each Fiscal Year or other applicable period, an amount equal to the federal income tax depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or period, Depreciation shall be in an amount that bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization or other cost recovery deduction for such year or period is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the General Partner. "Designated Parties" means the Persons designated on Exhibit C attached hereto. The General Partner may, in its sole and absolute discretion, amend Exhibit C to add Persons to be designated as Designated Parties. "Distributed Right" has the meaning set forth in the definition of "Adjustment Factor." "Effective Date" means July 29, 1994. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder. "Family Members" means, as to a Person that is an individual, such Person's spouse, ancestors, descendants (whether by blood or by adoption), brothers, sisters and inter vivos or testamentary trusts of which only such Person and his spouse, ancestors, descendants (whether by blood or by adoption), brothers and sisters are beneficiaries. "Fiscal Year" means the fiscal year of the Partnership, which shall be the calendar year. "Funding Debt" means any Debt incurred by or on behalf of the Previous General Partner, the General Partner or the Special Limited Partner for the purpose of providing funds to the Partnership. "General Partner" means AIMCO-GP, Inc., a Delaware corporation, and its successors and assigns, as the general partner of the Partnership in their capacities as general partner of the Partnership. "General Partner Interest" means the Partnership Interest held by the General Partner, which Partnership Interest is an interest as a general partner under the Act. A General Partner Interest may be expressed as a number of Partnership Common Units, Partnership Preferred Units or any other Partnership Units. "General Partner Loan" has the meaning set forth in Section 4.3.D hereof. "Gross Asset Value" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (a) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market values of such assets as determined by the General Partner and agreed to by the contributing Partner. In any case in which the General Partner and the contributing Partner are unable to agree as to the gross fair market value of any contributed asset or assets, such gross fair market value shall be determined by Appraisal. 7 13 (b) The Gross Asset Values of all Partnership assets immediately prior to the occurrence of any event described in clause (i), clause (ii), clause (iii), clause (iv) or clause (v) hereof shall be adjusted to equal their respective gross fair market values, as determined by the General Partner using such reasonable method of valuation as it may adopt, as of the following times: (i) the acquisition of an additional interest in the Partnership (other than in connection with the execution of this Agreement but including, without limitation, acquisitions pursuant to Section 4.2 hereof or contributions or deemed contributions by the General Partner pursuant to Section 4.2 hereof) by a new or existing Partner in exchange for more than a de minimis Capital Contribution, if the General Partner reasonably determines that such adjustment is necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership; (ii) the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership property as consideration for an interest in the Partnership, if the General Partner reasonably determines that such adjustment is necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership; (iii) the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); (iv) upon the admission of a successor General Partner pursuant to Section 12.1 hereof; and (v) at such other times as the General Partner shall reasonably determine necessary or advisable in order to comply with Regulations Sections 1.704-1(b) and 1.704-2. (c) The Gross Asset Value of any Partnership asset distributed to a Partner shall be the gross fair market value of such asset on the date of distribution as determined by the distributee and the General Partner provided that, if the distributee is the General Partner or if the distributee and the General Partner cannot agree on such a determination, such gross fair market value shall be determined by Appraisal. (d) The Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be adjusted pursuant to this subsection (d) to the extent that the General Partner reasonably determines that an adjustment pursuant to subsection (b) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this subsection (d). (e) If the Gross Asset Value of a Partnership asset has been determined or adjusted pursuant to subsection (a), subsection (b) or subsection (d) above, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Net Income and Net Losses. 8 14 "Holder" means either (a) a Partner or (b) an Assignee, owning a Partnership Unit, that is treated as a member of the Partnership for federal income tax purposes. "Incapacity" or "Incapacitated" means, (i) as to any Partner who is an individual, death, total physical disability or entry by a court of competent jurisdiction adjudicating such Partner incompetent to manage his or her person or his or her estate; (ii) as to any Partner that is a corporation or limited liability company, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; (iii) as to any Partner that is a partnership, the dissolution and commencement of winding up of the partnership; (iv) as to any Partner that is an estate, the distribution by the fiduciary of the estate's entire interest in the Partnership; (v) as to any trustee of a trust that is a Partner, the termination of the trust (but not the substitution of a new trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief of or against such Partner under any bankruptcy, insolvency or other similar law now or hereafter in effect, (b) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner, (c) the Partner executes and delivers a general assignment for the benefit of the Partner's creditors, (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause (b) above, (e) the Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for the Partner or for all or any substantial part of the Partner's properties, (f) any proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within one hundred twenty (120) days after the commencement thereof, (g) the appointment without the Partner's consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within ninety (90) days of such appointment, or (h) an appointment referred to in clause (g) above is not vacated within ninety (90) days after the expiration of any such stay. "Indemnitee" means (i) any Person made a party to a proceeding by reason of its status as (A) the Previous General Partner or the General Partner or (B) a director of the Previous General Partner or the General Partner or an officer or employee of the Partnership or the Previous General Partner or the General Partner and (ii) such other Persons (including Affiliates of the General Partner or the Partnership) as the General Partner may designate from time to time (whether before or after the event giving rise to potential liability), in its sole and absolute discretion. "Independent Director" has the meaning ascribed thereto in the Previous General Partner's 1994 Stock Option Plan. "Interest" means interest, original issue discount and other similar payments or amounts paid by the Partnership for the use or forbearance of money. "IRS" means the Internal Revenue Service, which administers the internal revenue laws of the United States. "Junior Share" means a share of the Previous General Partner's Class B Common Stock, par value $.01 per share. "Limited Partner" means the Special Limited Partner and any Person named as a Limited Partner in Exhibit A attached hereto, as such Exhibit A may be amended from time to time, or any Substituted Limited Partner or Additional Limited Partner, in such Person's capacity as a Limited Partner in the Partnership. 9 15 "Limited Partner Interest" means a Partnership Interest of a Limited Partner in the Partnership representing a fractional part of the Partnership Interests of all Limited Partners and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest may be expressed as a number of Partnership Common Units, Partnership Preferred Units or other Partnership Units. "Liquidating Event" has the meaning set forth in Section 13.1 hereof. "Liquidator" has the meaning set forth in Section 13.2.A hereof. "Majority in Interest of the Limited Partners" means Limited Partners (other than (i) the Special Limited Partner and (ii) any Limited Partner fifty percent (50%) or more of whose equity is owned, directly or indirectly, by the (a) General Partner or (b) any REIT as to which the General Partner is a "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2))) holding more than fifty percent (50%) of the outstanding Partnership Common Units and Class I High Performance Partnership Units held by all Limited Partners (other than (i) the Special Limited Partner and (ii) any Limited Partner fifty percent (50%) or more of whose equity is owned, directly or indirectly, by (a) the General Partner or (b) any REIT as to which the General Partner is a "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2))). "Net Income" or "Net Loss" means, for each Fiscal Year of the Partnership, an amount equal to the Partnership's taxable income or loss for such year, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (a) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Net Income (or Net Loss) pursuant to this definition of "Net Income" or "Net Loss" shall be added to (or subtracted from, as the case may be) such taxable income (or loss); (b) Any expenditure of the Partnership described in Code Section 705(a)(2)(B) or treated as a Code Section 705(a)(2)(B) expenditure pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Net Income (or Net Loss) pursuant to this definition of "Net Income" or "Net Loss," shall be subtracted from (or added to, as the case may be) such taxable income (or loss); (c) In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to subsection (b) or subsection (c) of the definition of "Gross Asset Value," the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Income or Net Loss; (d) Gain or loss resulting from any disposition of property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (e) In lieu of the depreciation, amortization and other cost recovery deductions that would otherwise be taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year; (f) To the extent that an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) 10 16 to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Partner's interest in the Partnership, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Net Income or Net Loss; and (g) Notwithstanding any other provision of this definition of "Net Income" or "Net Loss," any item that is specially allocated pursuant to Section 6.3 hereof shall not be taken into account in computing Net Income or Net Loss. The amounts of the items of Partnership income, gain, loss or deduction available to be specially allocated pursuant to Section 6.3 hereof shall be determined by applying rules analogous to those set forth in this definition of "Net Income" or "Net Loss." "New Securities" means (i) any rights, options, warrants or convertible or exchangeable securities having the right to subscribe for or purchase REIT Shares or Preferred Shares, excluding Junior Shares, Preferred Shares and grants under the Previous General Partner's Stock Option Plans, or (ii) any Debt issued by the Previous General Partner that provides any of the rights described in clause (i). "Nonrecourse Deductions" has the meaning set forth in Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Fiscal Year shall be determined in accordance with the rules of Regulations Section 1.704-2(c). "Nonrecourse Liability" has the meaning set forth in Regulations Section 1.752-1(a)(2). "Notice of Redemption" means the Notice of Redemption substantially in the form of Exhibit E attached to this Agreement. "Optionee" means a Company Employee, Partnership Employee or Independent Director to whom a stock option is granted under the Previous General Partner's Stock Option Plans. "Original Limited Partners" means the Persons listed as the Limited Partners on Exhibit A originally attached to this Agreement, without regard to any amendment thereto, and does not include any Assignee or other transferee, including, without limitation, any Substituted Limited Partner succeeding to all or any part of the Partnership Interest of any such Person. "Ownership Limit" means the applicable restriction on ownership of shares of the Previous General Partner imposed under the Charter. "Partner" means the General Partner or a Limited Partner, and "Partners" means the General Partner and the Limited Partners. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3). "Partner Nonrecourse Debt" has the meaning set forth in Regulations Section 1.704-2(b)(4). 11 17 "Partner Nonrecourse Deductions" has the meaning set forth in Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Fiscal Year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2). "Partnership" means the limited partnership formed under the Act and pursuant to this Agreement, and any successor thereto. "Partnership Common Unit" means a fractional share of the Partnership Interests of all Partners issued pursuant to Sections 4.1 and 4.2 hereof, but does not include any Partnership Preferred Unit or any other Partnership Unit specified in a Partnership Unit Designation as being other than a Partnership Common Unit; provided, however, that the General Partner Interest and the Limited Partner Interests shall have the differences in rights and privileges as specified in this Agreement. The ownership of Partnership Common Units may (but need not, in the sole and absolute discretion of the General Partner) be evidenced by the form of certificate for Partnership Common Units attached hereto as Exhibit F. "Partnership Employee" has the meaning ascribed thereto in the Previous General Partner's 1994 Stock Option Plan. "Partnership Interest" means an ownership interest in the Partnership held by either a Limited Partner or the General Partner and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest may be expressed as a number of Partnership Common Units, Partnership Preferred Units or other Partnership Units. "Partnership Minimum Gain" has the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Fiscal Year shall be determined in accordance with the rules of Regulations Section 1.704-2(d). "Partnership Preferred Unit" means a fractional share of the Partnership Interests that the General Partner has authorized pursuant to Section 4.2 hereof that has distribution rights, or rights upon liquidation, winding up and dissolution, that are superior or prior to the Partnership Common Units. "Partnership Record Date" means the record date established by the General Partner for the distribution of Available Cash pursuant to Section 5.1 hereof, which record date shall generally be the same as the record date established by the Previous General Partner for a distribution to its shareholders of some or all of its portion of such distribution. "Partnership Subsidiary" has the meaning ascribed thereto in the Apartment Investment and Management Company 1997 Stock Award and Incentive Plan. "Partnership Unit" shall mean a Partnership Common Unit, a Partnership Preferred Unit or any other fractional share of the Partnership Interests that the General Partner has authorized pursuant to Section 4.2 hereof. "Partnership Unit Designation" shall have the meaning set forth in Section 4.2 hereof. "Percentage Interest" means, as to each Partner, its interest in the Partnership Units as determined by dividing the Partnership Units owned by such Partner by the total number of Partnership Units then outstanding. 13 18 "Permitted Transfer" has the meaning set forth in Section 11.3.A hereof. "Person" means an individual or a corporation, partnership, trust, unincorporated organization, association, limited liability company or other entity. "Pledge" has the meaning set forth in Section 11.3.A hereof. "Preferred Share" means a share of capital stock of the Previous General Partner now or hereafter authorized or reclassified that has dividend rights, or rights upon liquidation, winding up and dissolution, that are superior or prior to the REIT Shares. "Previous General Partner" means Apartment Investment and Management Company, a Maryland corporation. "Previous General Partner's 1994 Stock Option Plan" means the 1994 Stock Option Plan of Apartment Investment and Management Company and Affiliates. "Previous General Partner's Stock Option Plans" means the Previous General Partner's 1994 Stock Option Plan, the Apartment Investment and Management Company 1996 Stock Award and Incentive Plan, the Amended and Restated Apartment Investment and Management Company Non-Qualified Employee Stock Option Plan, the Apartment Investment and Management Company 1997 Stock Award and Incentive Plan and any other stock option plan adopted by the Previous General Partner. "Primary Offering Notice" has the meaning set forth in Section 8.6.F(4) hereof. "Properties" means any assets and property of the Partnership such as, but not limited to, interests in real property and personal property, including, without limitation, fee interests, interests in ground leases, interests in limited liability companies, joint ventures or partnerships, interests in mortgages, and Debt instruments as the Partnership may hold from time to time. "Public Offering Funding" has the meaning set forth in Section 8.6.D(2) hereof. "Public Offering Funding Amount" means the dollar amount equal to (i) the product of (x) the number of Registrable Shares sold in a Public Offering Funding and (y) the public offering price per share of such Registrable Shares in such Public Offering Funding, less (ii) the aggregate underwriting discounts and commissions in such Public Offering Funding. "Qualified Transferee" means an "accredited investor" as defined in Rule 501 promulgated under the Securities Act. "Qualifying Party" means (a) an Original Limited Partner, (b) an Additional Limited Partner, (c) a Designated Party that is either a Substituted Limited Partner or an Assignee, (d) a Family Member, or a lending institution as the pledgee of a Pledge, who is the transferee in a Permitted Transfer or (e) with respect to any Notice of Redemption delivered to the General Partner within the time period set forth in Section 11.3.A(4) hereof, a Substituted Limited Partner succeeding to all or part of the Limited Partner Interest of (i) an Original Limited Partner, (ii) an Additional Limited Partner, (iii) a Designated Party that is either a Substituted Limited Partner or an Assignee or (iv) a Family Member, or a lending institution who is the pledgee of a Pledge, who is the transferee in a Permitted Transfer. 13 19 "Redeemable Units" means those Partnership Common Units issued to the Original Limited Partners as of the Effective Date together with such additional Partnership Common Units that, after the Effective Date, may be issued to Additional Limited Partners pursuant to Section 4.2 hereof. "Redemption" has the meaning set forth in Section 8.6.A hereof. "Registrable Shares" has the meaning set forth in Section 8.6.D(2) hereof. "Regulations" means the applicable income tax regulations under the Code, whether such regulations are in proposed, temporary or final form, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "Regulatory Allocations" has the meaning set forth in Section 6.3.B(viii) hereof. "REIT" means a real estate investment trust qualifying under Code Section 856. "REIT Partner" means (a) a Partner that is, or has made an election to qualify as, a REIT, (b) any "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2)) of any Partner that is, or has made an election to qualify as, a REIT and (c) any Partner, including, without limitation, the General Partner and the Special Limited Partner, that is a "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2)) of a REIT. "REIT Payment" has the meaning set forth in Section 15.11 hereof. "REIT Requirements" has the meaning set forth in Section 5.1.A hereof. "REIT Share" means a share of the Previous General Partner's Class A Common Stock, par value $.01 per share. Where relevant in this Agreement, "REIT Shares" includes shares of the Previous General Partner's Class A Common Stock, par value $.01 per share, issued upon conversion of Preferred Shares or Junior Shares. "REIT Shares Amount" means a number of REIT Shares equal to the product of (a) the number of Tendered Units and (b) the Adjustment Factor; provided, however, that, in the event that the Previous General Partner issues to all holders of REIT Shares as of a certain record date rights, options, warrants or convertible or exchangeable securities entitling the Previous General Partner's shareholders to subscribe for or purchase REIT Shares, or any other securities or property (collectively, the "Rights"), with the record date for such Rights issuance falling within the period starting on the date of the Notice of Redemption and ending on the day immediately preceding the Specified Redemption Date, which Rights will not be distributed before the relevant Specified Redemption Date, then the REIT Shares Amount shall also include such Rights that a holder of that number of REIT Shares would be entitled to receive, expressed, where relevant hereunder, in a number of REIT Shares determined by the Previous General Partner in good faith. "Related Party" means, with respect to any Person, any other Person whose ownership of shares of the Previous General Partner's capital stock would be attributed to the first such Person under Code Section 544 (as modified by Code Section 856(h)(1)(B)). 14 20 "Rights" has the meaning set forth in the definition of "REIT Shares Amount." "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. "Single Funding Notice" has the meaning set forth in Section 8.6.D(3) hereof. "Special Limited Partner" means AIMCO-LP, Inc., a Delaware corporation. "Specified Redemption Date" means the later of (a) the tenth (10th) Business Day after the receipt by the General Partner of a Notice of Redemption or (b) in the case of a Declination followed by a Public Offering Funding, the Business Day next following the date of the closing of the Public Offering Funding; provided, however, that no Specified Redemption Date shall occur during the first Twelve-Month Period; provided, further, that the Specified Redemption Date, as well as the closing of a Redemption, or an acquisition of Tendered Units by the Previous General Partner pursuant to Section 8.6.B hereof, on any Specified Redemption Date, may be deferred, in the General Partner's sole and absolute discretion, for such time (but in any event not more than one hundred fifty (150) days in the aggregate) as may reasonably be required to effect, as applicable, (i) a Public Offering Funding or other necessary funding arrangements, (ii) compliance with the Securities Act or other law (including, but not limited to, (a) state "blue sky" or other securities laws and (b) the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and (iii) satisfaction or waiver of other commercially reasonable and customary closing conditions and requirements for a transaction of such nature. "Subsidiary" means, with respect to any Person, any corporation or other entity of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding equity interests is owned, directly or indirectly, by such Person; provided, however, that, with respect to the Partnership, "Subsidiary" means solely a partnership or limited liability company (taxed, for federal income tax purposes, as a partnership and not as an association or publicly traded partnership taxable as a corporation) of which the Partnership is a member unless the General Partner has received an unqualified opinion from independent counsel of recognized standing, or a ruling from the IRS, that the ownership of shares of stock of a corporation or other entity will not jeopardize the Previous General Partner's status as a REIT or the General Partner's or the Special Limited Partner's status as a "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2)), in which event the term "Subsidiary" shall include the corporation or other entity which is the subject of such opinion or ruling. "Substituted Limited Partner" means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 11.4 hereof. "Tax Items" has the meaning set forth in Section 6.4.A hereof. "Tendered Units" has the meaning set forth in Section 8.6.A hereof. "Tendering Party" has the meaning set forth in Section 8.6.A hereof. "Terminating Capital Transaction" means any sale or other disposition of all or substantially all of the assets of the Partnership or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the assets of the Partnership. 15 21 "Transfer," when used with respect to a Partnership Unit, or all or any portion of a Partnership Interest, means any sale, assignment, bequest, conveyance, devise, gift (outright or in trust), Pledge, encumbrance, hypothecation, mortgage, exchange, transfer or other disposition or act of alienation, whether voluntary or involuntary or by operation of law; provided, however, that when the term is used in Article 11 hereof, "Transfer" does not include (a) any Redemption of Partnership Common Units by the Partnership, or acquisition of Tendered Units by the Previous General Partner, pursuant to Section 8.6 hereof or (b) any redemption of Partnership Units pursuant to any Partnership Unit Designation. The terms "Transferred" and "Transferring" have correlative meanings. "Twelve-Month Period" means (a) as to an Original Limited Partner or any successor-in-interest that is a Qualifying Party, a twelve-month period ending on the day before the first (1st) anniversary of the Effective Date or on the day before a subsequent anniversary thereof and (b) as to any other Qualifying Party, a twelve-month period ending on the day before the first (1st) anniversary of such Qualifying Party's becoming a Holder of Partnership Common Units or on the day before a subsequent anniversary thereof; provided, however, that the General Partner may, in its sole and absolute discretion, by written agreement with a Qualifying Party, shorten the first Twelve-Month Period to a period of less than twelve (12) months with respect to a Qualifying Party other than an Original Limited Partner or successor-in-interest. "Unitholder" means the General Partner or any Holder of Partnership Units. "Valuation Date" means the date of receipt by the General Partner of a Notice of Redemption or, if such date is not a Business Day, the immediately preceding Business Day. "Value" means, on any Valuation Date with respect to a REIT Share, the average of the daily market prices for ten (10) consecutive trading days immediately preceding the Valuation Date (except that, as provided in Section 4.4.C. hereof, the market price for the trading day immediately preceding the date of exercise of a stock option under the Previous General Partner's Stock Option Plans shall be substituted for such average of daily market prices for purposes of Section 4.4 hereof). The market price for any such trading day shall be: (i) if the REIT Shares are listed or admitted to trading on any securities exchange or The Nasdaq Stock Market's National Market System, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, in either case as reported in the principal consolidated transaction reporting system, (ii) if the REIT Shares are not listed or admitted to trading on any securities exchange or The Nasdaq Stock Market's National Market System, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or (iii) if the REIT Shares are not listed or admitted to trading on any securities exchange or The Nasdaq Stock Market's National Market System and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than ten (10) days prior to the date in question) for which prices have been so reported; provided, however, that, if there are no bid and asked prices reported during the ten (10) days prior to the date in question, the Value of the REIT Shares shall be determined by the General Partner acting in good faith on the basis 16 22 of such quotations and other information as it considers, in its reasonable judgment, appropriate. In the event that the REIT Shares Amount includes Rights (as defined in the definition of "REIT Shares Amount") that a holder of REIT Shares would be entitled to receive, then the Value of such Rights shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. ARTICLE 2 ORGANIZATIONAL MATTERS Section 2.1 Organization. The Partnership is a limited partnership organized pursuant to the provisions of the Act and upon the terms and subject to the conditions set forth in this Agreement. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes. Section 2.2 Name. The name of the Partnership is "AIMCO Properties, L.P." The Partnership's business may be conducted under any other name or names deemed advisable by the General Partner, including the name of the General Partner or any Affiliate thereof. The words "Limited Partnership," "L.P.," "Ltd." or similar words or letters shall be included in the Partnership's name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. The General Partner in its sole and absolute discretion may change the name of the Partnership at any time and from time to time and shall notify the Partners of such change in the next regular communication to the Partners. Section 2.3 Registered Office and Agent; Principal Office. The address of the registered office of the Partnership in the State of Delaware is located at 32 Lockerman Square, Suite L-100, Dover, Delaware 19901, and the registered agent for service of process on the Partnership in the State of Delaware at such registered office is The PrenticeHall Corporation System, Inc. The principal office of the Partnership is located at 1873 South Bellaire Street, Denver, Colorado 80222, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems advisable. Section 2.4 Power of Attorney. A. Each Limited Partner and each Assignee hereby irrevocably constitutes and appoints the General Partner, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to: (1) execute, swear to, seal, acknowledge, deliver, file and record in the appropriate public offices (a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments, supplements or restatements thereof) that the General Partner or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability to the extent provided by applicable law) in the State of Delaware and in all other jurisdictions in which the Partnership may conduct business or own property; (b) all instruments that the General Partner deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement 17 23 in accordance with its terms; (c) all conveyances and other instruments or documents that the General Partner or the Liquidator deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all conveyances and other instruments or documents that the General Partner or the Liquidator deems appropriate or necessary to reflect the distribution or exchange of assets of the Partnership pursuant to the terms of this Agreement; (e) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article 11, Article 12 or Article 13 hereof or the Capital Contribution of any Partner; and (f) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges relating to Partnership Interests; and (2) execute, swear to, acknowledge and file all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole and absolute discretion of the General Partner, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action that is made or given by the Partners hereunder or is consistent with the terms of this Agreement or appropriate or necessary, in the sole and absolute discretion of the General Partner, to effectuate the terms or intent of this Agreement. Nothing contained herein shall be construed as authorizing the General Partner to amend this Agreement except in accordance with Article 14 hereof or as may be otherwise expressly provided for in this Agreement. B. The foregoing power of attorney is hereby declared to be irrevocable and a special power coupled with an interest, in recognition of the fact that each of the Limited Partners and Assignees will be relying upon the power of the General Partner or the Liquidator to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be affected by the subsequent Incapacity of any Limited Partner or Assignee and the Transfer of all or any portion of such Limited Partner's or Assignee's Partnership Units or Partnership Interest and shall extend to such Limited Partner's or Assignee's heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or the Liquidator, acting in good faith pursuant to such power of attorney; and each such Limited Partner or Assignee hereby waives any and all defenses that may be available to contest, negate or disaffirm the action of the General Partner or the Liquidator, taken in good faith under such power of attorney. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within fifteen (15) days after receipt of the General Partner's or the Liquidator's request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership. Section 2.5 Term. The term of the Partnership commenced on May 16, 1994, the date that the original Certificate was filed in the office of the Secretary of State of Delaware in accordance with the Act, and shall continue until December 31, 2093 unless the Partnership is dissolved sooner pursuant to the provisions of Article 13 hereof or as otherwise provided by law. ARTICLE 3 PURPOSE Section 3.1 Purpose and Business. The purpose and nature of the Partnership is to conduct any business, enterprise or activity permitted by or under the Act, including, but not limited to, (i) to conduct the business of ownership, construction, development and operation of multifamily rental apartment communities, (ii) to enter into 18 24 any partnership, joint venture, business trust arrangement, limited liability company or other similar arrangement to engage in any business permitted by or under the Act, or to own interests in any entity engaged in any business permitted by or under the Act, (iii) to conduct the business of providing property and asset management and brokerage services, whether directly or through one or more partnerships, joint ventures, subsidiaries, business trusts, limited liability companies or other similar arrangements, and (iv) to do anything necessary or incidental to the foregoing; provided, however, such business and arrangements and interests may be limited to and conducted in such a manner as to permit the Previous General Partner, in the sole and absolute discretion of the General Partner, at all times to be classified as a REIT. Section 3.2 Powers. A. The Partnership shall be empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partnership. B. Notwithstanding any other provision in this Agreement, the General Partner may cause the Partnership not to take, or to refrain from taking, any action that, in the judgment of the General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of the Previous General Partner to continue to qualify as a REIT, (ii) could subject the Previous General Partner to any additional taxes under Code Section 857 or Code Section 4981 or (iii) could violate any law or regulation of any governmental body or agency having jurisdiction over the Previous General Partner, the General Partner, their securities or the Partnership, unless such action (or inaction) under clause (i), clause (ii) or clause (iii) above shall have been specifically consented to by the Previous General Partner and the General Partner in writing. Section 3.3 Partnership Only for Purposes Specified. The Partnership shall be a limited partnership only for the purposes specified in Section 3.1 hereof, and this Agreement shall not be deemed to create a company, venture or partnership between or among the Partners with respect to any activities whatsoever other than the activities within the purposes of the Partnership as specified in Section 3.1 hereof. Except as otherwise provided in this Agreement, no Partner shall have any authority to act for, bind, commit or assume any obligation or responsibility on behalf of the Partnership, its properties or any other Partner. No Partner, in its capacity as a Partner under this Agreement, shall be responsible or liable for any indebtedness or obligation of another Partner, nor shall the Partnership be responsible or liable for any indebtedness or obligation of any Partner, incurred either before or after the execution and delivery of this Agreement by such Partner, except as to those responsibilities, liabilities, indebtedness or obligations incurred pursuant to and as limited by the terms of this Agreement and the Act. Section 3.4 Representations and Warranties by the Parties. A. Each Partner that is an individual (including, without limitation, each Additional Limited Partner or Substituted Limited Partner as a condition to becoming an Additional Limited Partner or a Substituted Limited Partner) represents and warrants to each other Partner(s) that (i) the consummation of the transactions contemplated by this Agreement to be performed by such Partner will not result in a breach or violation of, or a default under, any material agreement by which such Partner or any of such Partner's property is bound, or any statute, regulation, order or other law to which such Partner is subject, (ii) such Partner is neither a "foreign person" within the meaning of Code Section 1445(f) nor a "foreign partner" within the meaning of Code Section 1446(e), (iii) such Partner does not own, directly or indirectly, (a) five percent (5%) or more of the total combined voting power of all classes of stock entitled to vote, or five percent (5%) or more of the total number of shares of all classes of stock, of any corporation that is a tenant of either (I) the Previous General Partner, the General Partner, the Special Limited Partner or any "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2)) with respect to the Previous General Partner, (II) the Partnership or (III) any partnership, venture or limited liability company of which the Previous General Partner, the General Partner, the Special Limited Partner, any "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2)) with respect to the Previous General Partner or the Partnership is a member or (b) an interest of five percent (5%) or more in the assets or net profits of any tenant of either (I) the Previous General Partner, the General Partner, the Special Limited 19 25 Partner or any "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2)) with respect to the Previous General Partner, (II) the Partnership or (III) any partnership, venture, or limited liability company of which the Previous General Partner, the General Partner, the Special Limited Partner, any "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2)) with respect to the Previous General Partner or the Partnership is a member and (iv) this Agreement is binding upon, and enforceable against, such Partner in accordance with its terms. B. Each Partner that is not an individual (including, without limitation, each Additional Limited Partner or Substituted Limited Partner as a condition to becoming an Additional Limited Partner or a Substituted Limited Partner) represents and warrants to each other Partner(s) that (i) all transactions contemplated by this Agreement to be performed by it have been duly authorized by all necessary action, including, without limitation, that of its general partner(s), committee(s), trustee(s), beneficiaries, directors and/or shareholder(s), as the case may be, as required, (ii) the consummation of such transactions shall not result in a breach or violation of, or a default under, its partnership or operating agreement, trust agreement, charter or bylaws, as the case may be, any material agreement by which such Partner or any of such Partner's properties or any of its partners, members, beneficiaries, trustees or shareholders, as the case may be, is or are bound, or any statute, regulation, order or other law to which such Partner or any of its partners, members, trustees, beneficiaries or shareholders, as the case may be, is or are subject, (iii) such Partner is neither a "foreign person" within the meaning of Code Section 1445(f) nor a "foreign partner" within the meaning of Code Section 1446(e), (iv) such Partner does not own, directly or indirectly, (a) five percent (5%) or more of the total combined voting power of all classes of stock entitled to vote, or five percent (5%) or more of the total number of shares of all classes of stock, of any corporation that is a tenant of either (I) the Previous General Partner, the General Partner, the Special Limited Partner or any "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2)) with respect to the Previous General Partner, (II) the Partnership or (III) any partnership, venture or limited liability company of which the Previous General Partner, the General Partner, the Special Limited Partner, any "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2)) with respect to the Previous General Partner or the Partnership is a member or (b) an interest of five percent (5%) or more in the assets or net profits of any tenant of either (I) the Previous General Partner, the General Partner the Special Limited Partner or any "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2)) with respect to the Previous General Partner, (II) the Partnership or (III) any partnership, venture or limited liability company for which the Previous General Partner, the General Partner, the Special Limited Partner, any "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2)) with respect to the Previous General Partner or the Partnership is a member and (v) this Agreement is binding upon, and enforceable against, such Partner in accordance with its terms. C. Each Partner (including, without limitation, each Substituted Limited Partner as a condition to becoming a Substituted Limited Partner) represents, warrants and agrees that it has acquired and continues to hold its interest in the Partnership for its own account for investment only and not for the purpose of, or with a view toward, the resale or distribution of all or any part thereof, nor with a view toward selling or otherwise distributing such interest or any part thereof at any particular time or under any predetermined circumstances. Each Partner further represents and warrants that it is a sophisticated investor, able and accustomed to handling sophisticated financial matters for itself, particularly real estate investments, and that it has a sufficiently high net worth that it does not anticipate a need for the funds that it has invested in the Partnership in what it understands to be a highly speculative and illiquid investment. 20 26 D. The representations and warranties contained in Sections 3.4.A, 3.4.B and 3.4.C hereof shall survive the execution and delivery of this Agreement by each Partner (and, in the case of an Additional Limited Partner or a Substituted Limited Partner, the admission of such Additional Limited Partner or Substituted Limited Partner as a Limited Partner in the Partnership) and the dissolution, liquidation and termination of the Partnership. E. Each Partner (including, without limitation, each Substituted Limited Partner as a condition to becoming a Substituted Limited Partner) hereby acknowledges that no representations as to potential profit, cash flows, funds from operations or yield, if any, in respect of the Partnership or the General Partner have been made by any Partner or any employee or representative or Affiliate of any Partner, and that projections and any other information, including, without limitation, financial and descriptive information and documentation, that may have been in any manner submitted to such Partner shall not constitute any representation or warranty of any kind or nature, express or implied. ARTICLE 4 CAPITAL CONTRIBUTIONS Section 4.1 Capital Contributions of the Partners. The Partners have heretofore made Capital Contributions to the Partnership. Each Partner owns Partnership Units in the amount set forth for such Partner on Exhibit A, as the same may be amended from time to time by the General Partner to the extent necessary to reflect accurately sales, exchanges or other Transfers, redemptions, Capital Contributions, the issuance of additional Partnership Units, or similar events having an effect on a Partner's ownership of Partnership Units. Except as provided by law or in Section 4.2, 4.3 or 10.4 hereof, the Partners shall have no obligation or right to make any additional Capital Contributions or loans to the Partnership. Section 4.2 Issuances of Additional Partnership Interests. A. General. The General Partner is hereby authorized to cause the Partnership to issue additional Partnership Interests, in the form of Partnership Units, for any Partnership purpose, at any time or from time to time, to the Partners (including the General Partner and the Special Limited Partner) or to other Persons, and to admit such Persons as Additional Limited Partners, for such consideration and on such terms and conditions as shall be established by the General Partner in its sole and absolute discretion, all without the approval of any Limited Partners. Without limiting the foregoing, the General Partner is expressly authorized to cause the Partnership to issue Partnership Units (i) upon the conversion, redemption or exchange of any Debt, Partnership Units or other securities issued by the Partnership, (ii) for less than fair market value, so long as the General Partner concludes in good faith that such issuance is in the best interests of the General Partner and the Partnership, and (iii) in connection with any merger of any other Person into the Partnership if the applicable merger agreement provides that Persons are to receive Partnership Units in exchange for their interests in the Person merging into the Partnership. Subject to Delaware law, any additional Partnership Interests may be issued in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties as shall be determined by the General Partner, in its sole and absolute discretion without the approval of any Limited Partner, and set forth in a written document thereafter attached to and made an exhibit to this Agreement (each, a "Partnership Unit Designation"). Without limiting the generality of the foregoing, the General Partner shall have authority to specify (a) the allocations of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Interests; (b) the right of each such class or series of Partnership Interests to share in Partnership distributions; (c) the rights of each such class or series of Partnership Interests upon dissolution and liquidation of the Partnership; (d) the voting rights, if any, of each such class or series of Partnership Interests; and 21 27 (e) the conversion, redemption or exchange rights applicable to each such class or series of Partnership Interests. Upon the issuance of any additional Partnership Interest, the General Partner shall amend Exhibit A as appropriate to reflect such issuance. B. Issuances to the General Partner or Special Limited Partner. No additional Partnership Units shall be issued to the General Partner or the Special Limited Partner unless (i) the additional Partnership Units are issued to all Partners in proportion to their respective Percentage Interests, (ii) (a) the additional Partnership Units are (x) Partnership Common Units issued in connection with an issuance of REIT Shares, or (y) Partnership Units (other than Partnership Common Units) issued in connection with an issuance of Preferred Shares, New Securities or other interests in the Previous General Partner (other than REIT Shares), which Preferred Shares, New Securities or other interests have designations, preferences and other rights, terms and provisions that are substantially the same as the designations, preferences and other rights, terms and provisions of the additional Partnership Units issued to the General Partner or the Special Limited Partner, and (b) the General Partner or the Special Limited Partner, as the case may be, contributes to the Partnership the cash proceeds or other consideration received in connection with the issuance of such REIT Shares, Preferred Shares, New Securities or other interests in the Previous General Partner, (iii) the additional Partnership Units are issued upon the conversion, redemption or exchange of Debt, Partnership Units or other securities issued by the Partnership, or (iv) the additional Partnership Units are issued pursuant to Section 4.6. C. No Preemptive Rights. No Person, including, without limitation, any Partner or Assignee, shall have any preemptive, preferential, participation or similar right or rights to subscribe for or acquire any Partnership Interest. Section 4.3 Additional Funds. A. General. The General Partner may, at any time and from time to time, determine that the Partnership requires additional funds ("Additional Funds") for the acquisition or development of additional Properties, for the redemption of Partnership Units or for such other purposes as the General Partner may determine. Additional Funds may be obtained by the Partnership, at the election of the General Partner, in any manner provided in, and in accordance with, the terms of this Section 4.3 without the approval of any Limited Partners. B. Additional Capital Contributions. The General Partner, on behalf of the Partnership, may obtain any Additional Funds by accepting Capital Contributions from any Partners or other Persons and issuing additional Partnership Units in consideration therefor. C. Loans by Third Parties. The General Partner, on behalf of the Partnership, may obtain any Additional Funds by causing the Partnership to incur Debt to any Person (other than the Previous General Partner, the General Partner or the Special Limited Partner) upon such terms as the General Partner determines appropriate, including making such Debt convertible, redeemable or exchangeable for Partnership Units; provided, however, that the Partnership shall not incur any such Debt if (i) a breach, violation or default of such Debt would be deemed to occur by virtue of the Transfer of any Partnership Interest, or (ii) such Debt is recourse to any Partner (unless the Partner otherwise agrees). D. General Partner Loans. The General Partner, on behalf of the Partnership, may obtain any Additional Funds by causing the Partnership to incur Debt with the Previous General Partner, the General Partner or the Special Limited Partner (each, a "General Partner Loan") if (i) such Debt is, to the extent permitted by law, on substantially the same terms and conditions (including interest rate, repayment schedule, and conversion, redemption, repurchase and exchange rights) as Funding Debt incurred by the Previous General Partner, the General Partner or the 22 28 Special Limited Partner, the net proceeds of which are loaned to the Partnership to provide such Additional Funds, or (ii) such Debt is on terms and conditions no less favorable to the Partnership than would be available to the Partnership from any third party; provided, however, that the Partnership shall not incur any such Debt if (a) a breach, violation or default of such Debt would be deemed to occur by virtue of the Transfer of any Partnership Interest, or (b) such Debt is recourse to any Partner (unless the Partner otherwise agrees). E. Issuance of Securities by the Previous General Partner. The Previous General Partner shall not issue any additional REIT Shares, Preferred Shares, Junior Shares or New Securities unless (i) the Previous General Partner contributes the cash proceeds or other consideration received from the issuance of such additional REIT Shares, Preferred Shares, Junior Shares or New Securities, as the case may be, and from the exercise of the rights contained in any such additional New Securities, to either or both of the General Partner and the Special Limited Partner, and (ii) it or they, as the case may be, contribute such cash proceeds or other consideration to the Partnership in exchange for (x) in the case of an issuance of REIT Shares, Partnership Common Units, or (y) in the case of an issuance of Preferred Shares, Junior Shares or New Securities, Partnership Units with designations, preferences and other rights, terms and provisions that are substantially the same as the designations, preferences and other rights, terms and provisions of such Preferred Shares, Junior Shares or New Securities; provided, however, that notwithstanding the foregoing, the Previous General Partner may issue REIT Shares, Preferred Shares, Junior Shares or New Securities (a) pursuant to Section 4.4 or Section 8.6.B hereof, (b) pursuant to a dividend or distribution (including any stock split) of REIT Shares, Preferred Shares, Junior Shares or New Securities to all of the holders of REIT Shares, Preferred Shares, Junior Shares or New Securities, as the case may be, (c) upon a conversion, redemption or exchange of Preferred Shares, (d) upon a conversion of Junior Shares into REIT Shares, (e) upon a conversion, redemption, exchange or exercise of New Securities, or (f) in connection with an acquisition of a property or other asset to be owned, directly or indirectly, by the Previous General Partner if the General Partner determines that such acquisition is in the best interests of the Partnership. In the event of any issuance of additional REIT Shares, Preferred Shares, Junior Shares or New Securities by the Previous General Partner, and the contribution to the Partnership, by the General Partner or the Special Limited Partner, of the cash proceeds or other consideration received from such issuance, the Partnership shall pay the Previous General Partner's expenses associated with such issuance, including any underwriting discounts or commissions. Section 4.4 Stock Option Plans. A. Options Granted to Company Employees and Independent Directors. If at any time or from time to time, in connection with the Previous General Partner's Stock Option Plans, a stock option granted to a Company Employee or Independent Director is duly exercised: (1) The Special Limited Partner shall, as soon as practicable after such exercise, make a Capital Contribution to the Partnership in an amount equal to the exercise price paid to the Previous General Partner by such exercising party in connection with the exercise of such stock option. (2) Notwithstanding the amount of the Capital Contribution actually made pursuant to Section 4.4.A(1) hereof, the Special Limited Partner shall be deemed to have contributed to the Partnership as a Capital Contribution, in consideration of an additional Limited Partner Interest (expressed in and as additional Partnership Common Units), an amount equal to the Value of a REIT Share as of the date of exercise multiplied by the number of REIT Shares then being issued in connection with the exercise of such stock option. 23 29 (3) An equitable Percentage Interest adjustment shall be made in which the Special Limited Partner shall be treated as having made a cash contribution equal to the amount described in Section 4.4.A(2) hereof. B. Options Granted to Partnership Employees. If at any time or from time to time, in connection with the Previous General Partner's Stock Option Plans, a stock option granted to a Partnership Employee is duly exercised: (1) The General Partner shall cause the Previous General Partner to sell to the Partnership, and the Partnership shall purchase from the Previous General Partner, the number of REIT Shares as to which such stock option is being exercised. The purchase price per REIT Share for such sale of REIT Shares to the Partnership shall be the Value of a REIT Share as of the date of exercise of such stock option. (2) The Partnership shall sell to the Optionee (or if the Optionee is an employee of a Partnership Subsidiary, the Partnership shall sell to such Partnership Subsidiary, which in turn shall sell to the Optionee), for a cash price per share equal to the Value of a REIT Share at the time of the exercise, the number of REIT Shares equal to (a) the exercise price paid to the Previous General Partner by the exercising party in connection with the exercise of such stock option divided by (b) the Value of a REIT Share at the time of such exercise. (3) The Partnership shall transfer to the Optionee (or if the Optionee is an employee of a Partnership Subsidiary, the Partnership shall transfer to such Partnership Subsidiary, which in turn shall transfer to the Optionee) at no additional cost, as additional compensation, the number of REIT Shares equal to the number of REIT Shares described in Section 4.4.B(1) hereof less the number of REIT Shares described in Section 4.4.B(2) hereof. (4) The Special Limited Partner shall, as soon as practicable after such exercise, make a Capital Contribution to the Partnership of an amount equal to all proceeds received (from whatever source, but excluding any payment in respect of payroll taxes or other withholdings) by the Previous General Partner, the General Partner or the Special Limited Partner in connection with the exercise of such stock option. An equitable Percentage Interest adjustment shall be made in which the Special Limited Partner shall be treated as having made a cash contribution equal to the amount described in Section 4.4.B(1) hereof. C. Special Valuation Rule. For purposes of this Section 4.4, in determining the Value of a REIT Share, only the trading date immediately preceding the exercise of the relevant stock option under the Previous General Partner's Stock Option Plans shall be considered. D. Future Stock Incentive Plans. Nothing in this Agreement shall be construed or applied to preclude or restrain the Previous General Partner, the General Partner or the Special Limited Partner from adopting, modifying or terminating stock incentive plans, in addition to the Previous General Partner's Stock Option Plans, for the benefit of employees, directors or other business associates of the Previous General Partner, the General Partner, the Special Limited Partner, the Partnership or any of their Affiliates. The Limited Partners acknowledge and agree that, in the event that any such plan is adopted, modified or terminated by the Previous General Partner, the General Partner or the Special Limited Partner amendments to this Section 4.4 may become necessary or advisable and that any approval or consent to any such amendments requested by the Previous General Partner, the General Partner or the Special Limited Partner shall not be unreasonably withheld or delayed. 24 30 Section 4.5 No Interest; No Return. No Partner shall be entitled to interest on its Capital Contribution or on such Partner's Capital Account. Except as provided herein or by law, no Partner shall have any right to demand or receive the return of its Capital Contribution from the Partnership. Section 4.6 Conversion of Junior Shares. If, at any time, any of the Junior Shares are converted into REIT Shares, in whole or in part, then a number of Partnership Common Units equal to (i) the number of REIT Shares issued upon such conversion divided by (ii) the Adjustment Factor then in effect shall be issued to the General Partner and the Special Limited Partner (and between the General Partner and the Special Limited Partner in proportion to their ownership of Partnership Common Units immediately preceding such conversion), and the Percentage Interests of the General Partner and the Limited Partners (including the Special Limited Partner) shall be adjusted to reflect such conversion. ARTICLE 5 DISTRIBUTIONS Section 5.1 Requirement and Characterization of Distributions. Subject to the terms of any Partnership Unit Designation, the General Partner shall cause the Partnership to distribute quarterly all, or such portion as the General Partner may in its sole and absolute discretion determine, of Available Cash generated by the Partnership during such quarter to the Holders of Partnership Common Units in accordance with their respective Partnership Common Units held on such Partnership Record Date. Except as otherwise provided in the terms of any Partnership Unit Designation, distributions payable with respect to any Partnership Units (other than Partnership Units held by the General Partner or the Special Limited Partner) that were not outstanding during the entire quarterly period in respect of which any distribution is made shall be prorated based on the portion of the period that such units were outstanding. The General Partner in its sole and absolute discretion may distribute to the Unitholders Available Cash on a more frequent basis and provide for an appropriate record date. The General Partner shall take such reasonable efforts, as determined by it in its sole and absolute discretion and consistent with the Previous General Partner's qualification as a REIT, to cause the Partnership to distribute sufficient amounts to enable (i) the General Partner and the Special Limited Partner to transfer funds to the Previous General Partner and (ii) the Previous General Partner to pay shareholder dividends that will (a) satisfy the requirements for qualifying as a REIT under the Code and Regulations (the "REIT Requirements") and (b) avoid any federal income or excise tax liability of the Previous General Partner. Section 5.2 Distributions in Kind. No right is given to any Unitholder to demand and receive property other than cash as provided in this Agreement. The General Partner may determine, in its sole and absolute discretion, to make a distribution in kind of Partnership assets to the Unitholders, and such assets shall be distributed in such a fashion as to ensure that the fair market value is distributed and allocated in accordance with Articles 5, 6 and 10 hereof. Section 5.3 Amounts Withheld. All amounts withheld pursuant to the Code or any provisions of any state or local tax law and Section 10.4 hereof with respect to any allocation, payment or distribution to any Unitholder shall be treated as amounts paid or distributed to such Unitholder pursuant to Section 5.1 hereof for all purposes under this Agreement. Section 5.4 Distributions Upon Liquidation. Notwithstanding the other provisions of this Article 5, net proceeds from a Terminating Capital Transaction, and any other cash received or reductions in reserves made after commencement of the liquidation of the Partnership, shall be distributed to the Unitholders in accordance with Section 13.2 hereof. 25 31 Section 5.5 Restricted Distributions. Notwithstanding any provision to the contrary contained in this Agreement, neither the Partnership nor the General Partner, on behalf of the Partnership, shall make a distribution to any Unitholder on account of its Partnership Interest or interest in Partnership Units if such distribution would violate Section 17-607 of the Act or other applicable law. ARTICLE 6 ALLOCATIONS Section 6.1 Timing and Amount of Allocations of Net Income and Net Loss. Net Income and Net Loss of the Partnership shall be determined and allocated with respect to each Fiscal Year of the Partnership as of the end of each such year. Except as otherwise provided in this Article 6, and subject to Section 11.6.C hereof, an allocation to a Unitholder of a share of Net Income or Net Loss shall be treated as an allocation of the same share of each item of income, gain, loss or deduction that is taken into account in computing Net Income or Net Loss. Section 6.2 General Allocations. Subject to the terms of any Partnership Unit Designation, except as otherwise provided in this Article 6 and subject to Section 11.6.C hereof, Net Income and Net Loss shall be allocated to each of the Holders of Partnership Common Units in accordance with their respective Partnership Common Units at the end of each Fiscal Year. Section 6.3 Additional Allocation Provisions. Notwithstanding the foregoing provisions of this Article 6: A. Intentionally Omitted. B. Regulatory Allocations. (i) Minimum Gain Chargeback. Except as otherwise provided in Regulations Section 1.704-2(f), notwithstanding the provisions of Section 6.2 hereof, or any other provision of this Article 6, if there is a net decrease in Partnership Minimum Gain during any Fiscal Year, each Holder of Partnership Common Units shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Holder's share of the net decrease in Partnership Minimum Gain, as determined under Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Holder pursuant thereto. The items to be allocated shall be determined in accordance with Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section 6.3.B(i) is intended to qualify as a "minimum gain chargeback" within the meaning of Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. (ii) Partner Minimum Gain Chargeback. Except as otherwise provided in Regulations Section 1.704-2(i)(4) or in Section 6.3.B(i) hereof, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Fiscal Year, each Holder of Partnership Common Units who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Holder's share of the net decrease in Partner Minimum 26 32 Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.7042(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each General Partner, Limited Partner and other Holder pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2). This Section 6.3.B(ii) is intended to qualify as a "chargeback of partner nonrecourse debt minimum gain" within the meaning of Regulations Section 1.704-2(i) and shall be interpreted consistently therewith. (iii) Nonrecourse Deductions and Partner Nonrecourse Deductions. Any Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Holders of Partnership Common Units in accordance with their Partnership Common Units. Any Partner Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Holder(s) who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable, in accordance with Regulations Section 1.704-2(i). (iv) Qualified Income Offset. If any Holder of Partnership Common Units unexpectedly receives an adjustment, allocation or distribution described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Partnership income and gain shall be allocated, in accordance with Regulations Section 1.704- 1(b)(2)(ii)(d), to such Holder in an amount and manner sufficient to eliminate, to the extent required by such Regulations, the Adjusted Capital Account Deficit of such Holder as quickly as possible, provided that an allocation pursuant to this Section 6.3.B(iv) shall be made if and only to the extent that such Holder would have an Adjusted Capital Account Deficit after all other allocations provided in this Article 6 have been tentatively made as if this Section 6.3.B(iv) were not in the Agreement. It is intended that this Section 6.3.B(iv) qualify and be construed as a "qualified income offset" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. (v) Gross Income Allocation. In the event that any Holder of Partnership Common Units has a deficit Capital Account at the end of any Fiscal Year that is in excess of the sum of (1) the amount (if any) that such Holder is obligated to restore to the Partnership upon complete liquidation of such Holder's Partnership Interest (including, the Holder's interest in outstanding Partnership Preferred Units and other Partnership Units) and (2) the amount that such Holder is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Holder shall be specially allocated items of Partnership income and gain in the amount of such excess to eliminate such deficit as quickly as possible, provided that an allocation pursuant to this Section 6.3.B(v) shall be made if and only to the extent that such Holder would have a deficit Capital Account in excess of such sum after all other allocations provided in this Article 6 have been tentatively made as if this Section 6.3.B(v) and Section 6.3.B(iv) hereof were not in the Agreement. (vi) Limitation on Allocation of Net Loss. To the extent that any allocation of Net Loss would cause or increase an Adjusted Capital Account Deficit as to any Holder of Partnership Common Units, such allocation of Net Loss shall be reallocated among the other Holders of Partnership Common Units in accordance with their respective Partnership Common Units, subject to the limitations of this Section 6.3.B(vi). 27 33 (vii) Section 754 Adjustment. To the extent that an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2) (iv)(m)(2) or Regulations Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as the result of a distribution to a Holder of Partnership Common Units in complete liquidation of its interest in the Partnership, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such gain or loss shall be specially allocated to the Holders in accordance with their Partnership Common Units in the event that Regulations Section 1.704- 1(b)(2)(iv)(m)(2) applies, or to the Holders to whom such distribution was made in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies. (viii) Curative Allocations. The allocations set forth in Sections 6.3.B(i), (ii), (iii), (iv), (v), (vi) and (vii) hereof (the "Regulatory Allocations") are intended to comply with certain regulatory requirements, including the requirements of Regulations Sections 1.704-1(b) and 1.704-2. Notwithstanding the provisions of Section 6.1 hereof, the Regulatory Allocations shall be taken into account in allocating other items of income, gain, loss and deduction among the Holders of Partnership Common Units so that to the extent possible without violating the requirements giving rise to the Regulatory Allocations, the net amount of such allocations of other items and the Regulatory Allocations to each Holder of a Partnership Common Unit shall be equal to the net amount that would have been allocated to each such Holder if the Regulatory Allocations had not occurred. C. Special Allocations Upon Liquidation. Notwithstanding any provision in this Article VI to the contrary, in the event that the Partnership disposes of all or substantially all of its assets in a transaction that will lead to a liquidation of the Partnership pursuant to Article XIII hereof, then any Net Income or Net Loss realized in connection with such transaction and thereafter (and, if necessary, constituent items of income, gain, loss and deduction) shall be specially allocated among the Partners as required so as to cause liquidating distributions pursuant to Section 13.2.A(4) hereof to be made in the same amounts and proportions as would have resulted had such distributions instead been made pursuant to Section 5.1 hereof. D. Allocation of Excess Nonrecourse Liabilities. For purposes of determining a Holder's proportional share of the "excess nonrecourse liabilities" of the Partnership within the meaning of Regulations Section 1.752-3(a)(3), each Holder's interest in Partnership profits shall be such Holder's share of Partnership Common Units. Section 6.4 Tax Allocations. A. In General. Except as otherwise provided in this Section 6.4, for income tax purposes under the Code and the Regulations each Partnership item of income, gain, loss and deduction (collectively, "Tax Items") shall be allocated among the Holders of Partnership Common Units in the same manner as its correlative item of "book" income, gain, loss or deduction is allocated pursuant to Sections 6.2 and 6.3 hereof. B. Allocations Respecting Section 704(c) Revaluations. Notwithstanding Section 6.4.A hereof, Tax Items with respect to Property that is contributed to the Partnership with a Gross Asset Value that varies from its basis in the hands of the contributing Partner immediately preceding the date of contribution shall be allocated among the Holders of Partnership Common Units for income tax purposes pursuant to Regulations promulgated under Code Section 704(c) so as to take into account such variation. The Partnership shall account for such variation under any 28 34 method approved under Code Section 704(c) and the applicable Regulations as chosen by the General Partner, including, without limitation, the "traditional method" as described in Regulations Section 1.704-3(b). In the event that the Gross Asset Value of any partnership asset is adjusted pursuant to subsection (b) of the definition of "Gross Asset Value" (provided in Article 1 hereof), subsequent allocations of Tax Items with respect to such asset shall take account of the variation, if any, between the adjusted basis of such asset and its Gross Asset Value in the same manner as under Code Section 704(c) and the applicable Regulations. ARTICLE 7 MANAGEMENT AND OPERATIONS OF BUSINESS Section 7.1 Management. A. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership are and shall be exclusively vested in the General Partner, and no Limited Partner shall have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may not be removed by the Partners with or without cause, except with the Consent of the General Partner. In addition to the powers now or hereafter granted a general partner of a limited partnership under applicable law or that are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to the other provisions hereof including Section 7.3, shall have full power and authority to do all things deemed necessary or desirable by it to conduct the business of the Partnership, to exercise all powers set forth in Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1 hereof, including, without limitation: (1) the making of any expenditures, the lending or borrowing of money (including, without limitation, making prepayments on loans and borrowing money to permit the Partnership to make distributions to its Partners in such amounts as will permit the Previous General Partner (so long as the Previous General Partner qualifies as a REIT) to avoid the payment of any federal income tax (including, for this purpose, any excise tax pursuant to Code Section 4981) and to make distributions to its shareholders sufficient to permit the Previous General Partner to maintain REIT status or otherwise to satisfy the REIT Requirements), the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness (including the securing of same by deed to secure debt, mortgage, deed of trust or other lien or encumbrance on the Partnership's assets) and the incurring of any obligations that it deems necessary for the conduct of the activities of the Partnership; (2) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership; (3) the acquisition, sale, transfer, exchange or other disposition of any assets of the Partnership (including, but not limited to, the exercise or grant of any conversion, option, privilege or subscription right or any other right available in connection with any assets at any time held by the Partnership) or the merger, consolidation, reorganization or other combination of the Partnership with or into another entity; 29 35 (4) the mortgage, pledge, encumbrance or hypothecation of any assets of the Partnership, the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms that it sees fit, including, without limitation, the financing of the operations and activities of the General Partner, the Partnership or any of the Partnership's Subsidiaries, the lending of funds to other Persons (including, without limitation, the Partnership's Subsidiaries) and the repayment of obligations of the Partnership, its Subsidiaries and any other Person in which it has an equity investment, and the making of capital contributions to and equity investments in the Partnership's Subsidiaries; (5) the management, operation, leasing, landscaping, repair, alteration, demolition, replacement or improvement of any Property, including, without limitation, any Contributed Property, or other asset of the Partnership or any Subsidiary; (6) the negotiation, execution and performance of any contracts, leases, conveyances or other instruments that the General Partner considers useful or necessary to the conduct of the Partnership's operations or the implementation of the General Partner's powers under this Agreement, including contracting with contractors, developers, consultants, accountants, legal counsel, other professional advisors and other agents and the payment of their expenses and compensation out of the Partner ship's assets; (7) the distribution of Partnership cash or other Partnership assets in accordance with this Agreement, the holding, management, investment and reinvestment of cash and other assets of the Partnership, and the collection and receipt of revenues, rents and income of the Partnership; (8) the selection and dismissal of employees of the Partnership or the General Partner (including, without limitation, employees having titles or offices such as "president," "vice president," "secretary" and "treasurer"), and agents, outside attorneys, accountants, consultants and contractors of the Partnership or the General Partner and the determination of their compensation and other terms of employment or hiring; (9) the maintenance of such insurance for the benefit of the Partnership and the Partners as it deems necessary or appropriate; (10) the formation of, or acquisition of an interest in, and the contribution of property to, any further limited or general partnerships, limited liability companies, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property to, any Subsidiary and any other Person in which it has an equity investment from time to time); provided, however, that, as long as the Previous General Partner has determined to continue to qualify as a REIT, the General Partner may not engage in any such formation, acquisition or contribution that would cause the Previous General Partner to fail to qualify as a REIT or the General Partner to fail to qualify as a "qualified REIT subsidiary" within the meaning of Code Section 856(i)(2); (11) the control of any matters affecting the rights and obligations of the Partnership, including the settlement, compromise, submission to arbitration or any other form of dispute resolution, or abandonment, of any claim, cause of action, liability, debt or damages, due 30 36 or owing to or from the Partnership, the commencement or defense of suits, legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, and the representation of the Partnership in all suits or legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, the incurring of legal expense, and the indemnification of any Person against liabilities and contingencies to the extent permitted by law; (12) the undertaking of any action in connection with the Partnership's direct or indirect investment in any Subsidiary or any other Person (including, without limitation, the contribution or loan of funds by the Partnership to such Persons); (13) the determination of the fair market value of any Partnership property distributed in kind using such reasonable method of valuation as it may adopt; provided that such methods are otherwise consistent with the requirements of this Agreement; (14) the enforcement of any rights against any Partner pursuant to representations, warranties, covenants and indemnities relating to such Partner's contribution of property or assets to the Partnership; (15) the exercise, directly or indirectly, through any attorney- in-fact acting under a general or limited power of attorney, of any right, including the right to vote, appurtenant to any asset or investment held by the Partnership; (16) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of or in connection with any Subsidiary of the Partnership or any other Person in which the Partnership has a direct or indirect interest, or jointly with any such Subsidiary or other Person; (17) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of any Person in which the Partnership does not have an interest, pursuant to contractual or other arrangements with such Person; (18) the making, execution and delivery of any and all deeds, leases, notes, deeds to secure debt, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or legal instruments or agreements in writing necessary or appropriate in the judgment of the General Partner for the accomplishment of any of the powers of the General Partner enumerated in this Agreement; (19) the issuance of additional Partnership Units, as appropriate and in the General Partner's sole and absolute discretion, in connection with Capital Contributions by Additional Limited Partners and additional Capital Contributions by Partners pursuant to Article 4 hereof; and (20) an election to dissolve the Partnership pursuant to Section 13.1.C hereof. B. Each of the Limited Partners agrees that, except as provided in Section 7.3 hereof, the General Partner is authorized to execute, deliver and perform the above-mentioned agreements and transactions on behalf of the Partnership without any further act, approval or vote of the Partners, notwithstanding any other provision of this Agreement (except as provided in Section 7.3 hereof), the Act or any applicable law, rule or regulation. The 31 37 execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity. C. At all times from and after the date hereof, the General Partner may cause the Partnership to obtain and maintain (i) casualty, liability and other insurance on the Properties of the Partnership and (ii) liability insurance for the Indemnitees hereunder. D. At all times from and after the date hereof, the General Partner may cause the Partnership to establish and maintain working capital and other reserves in such amounts as the General Partner, in its sole and absolute discretion, deems appropriate and reasonable from time to time. E. In exercising its authority under this Agreement, the General Partner may, but shall be under no obligation to, take into account the tax consequences to any Partner (including the General Partner) of any action taken by it. The General Partner and the Partnership shall not have liability to a Limited Partner under any circumstances as a result of an income tax liability incurred by such Limited Partner as a result of an action (or inaction) by the General Partner pursuant to its authority under this Agreement so long as the action or inaction is taken in good faith. Section 7.2 Certificate of Limited Partnership. To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate and do all the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and each other state, the District of Columbia or any other jurisdiction, in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.5.A(4) hereof, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate or any amendment thereto to any Limited Partner. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability to the extent provided by applicable law) in the State of Delaware and any other state, or the District of Columbia or other jurisdiction, in which the Partnership may elect to do business or own property. Section 7.3 Restrictions on General Partner's Authority. A. The General Partner may not take any action in contravention of this Agreement, including, without limitation: (1) take any action that would make it impossible to carry on the ordinary business of the Partnership, except as otherwise provided in this Agreement; (2) possess Partnership property, or assign any rights in specific Partnership property, for other than a Partnership purpose except as otherwise provided in this Agreement; (3) admit a Person as a Partner, except as otherwise provided in this Agreement; 32 38 (4) perform any act that would subject a Limited Partner to liability as a general partner in any jurisdiction or any other liability except as provided herein or under the Act; or (5) enter into any contract, mortgage, loan or other agreement that prohibits or restricts, or has the effect of prohibiting or restricting, the ability of (a) the General Partner, the Previous General Partner or the Partnership from satisfying its obligations under Section 8.6 hereof in full or (b) a Limited Partner from exercising its rights under Section 8.6 hereof to effect a Redemption in full, except, in either case, with the written consent of such Limited Partner affected by the prohibition or restriction. B. The General Partner shall not, without the prior Consent of the Limited Partners, undertake, on behalf of the Partnership, any of the following actions or enter into any transaction that would have the effect of such transactions: (1) except as provided in Section 7.3.C hereof, amend, modify or terminate this Agreement other than to reflect the admission, substitution, termination or withdrawal of Partners pursuant to Article 11 or Article 12 hereof; (2) make a general assignment for the benefit of creditors or appoint or acquiesce in the appointment of a custodian, receiver or trustee for all or any part of the assets of the Partnership; (3) institute any proceeding for bankruptcy on behalf of the Partnership; or (4) subject to the rights of Transfer provided in Sections 11.1.C and 11.2 hereof, approve or acquiesce to the Transfer of the Partnership Interest of the General Partner, or admit into the Partnership any additional or successor General Partners. C. Notwithstanding Section 7.3.B hereof, the General Partner shall have the power, without the Consent of the Limited Partners, to amend this Agreement as may be required to facilitate or implement any of the following purposes: (1) to add to the obligations of the General Partner or surrender any right or power granted to the General Partner or any Affiliate of the General Partner for the benefit of the Limited Partners; (2) to reflect the admission, substitution or withdrawal of Partners or the termination of the Partnership in accordance with this Agreement, and to amend Exhibits A and C in connection with such admission, substitution or withdrawal; (3) to reflect a change that is of an inconsequential nature and does not adversely affect the Limited Partners in any material respect, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the provisions of this Agreement; 33 39 (4) to satisfy any requirements, conditions or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law; (5) (a) to reflect such changes as are reasonably necessary (i) for either the General Partner or the Special Limited Partner, as the case may be, to maintain its status as a "qualified REIT subsidiary" within the meaning of Code Section 856(i)(2) or (ii) for the Previous General Partner to maintain its status as a REIT or to satisfy the REIT Requirement; (b) to reflect the Transfer of all or any part of a Partnership Interest among the Previous General Partner, the General Partner, the Special Limited Partner or any other "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2)) with respect to the Previous General Partner; (6) to modify the manner in which Capital Accounts are computed (but only to the extent set forth in the definition of "Capital Account" or contemplated by the Code or the Regulations); and (7) the issuance of additional Partnership Interests in accordance with Section 4.2. The General Partner will provide notice to the Limited Partners when any action under this Section 7.3.C is taken. D. Notwithstanding Sections 7.3.B and 7.3.C hereof, this Agreement shall not be amended, and no action may be taken by the General Partner, without the Consent of each Partner adversely affected, if such amendment or action would (i) convert a Limited Partner Interest in the Partnership into a General Partner Interest (except as a result of the General Partner acquiring such Partnership Interest), (ii) modify the limited liability of a Limited Partner, (iii) alter the rights of any Partner to receive the distributions to which such Partner is entitled, pursuant to Article 5 or Section 13.2.A(4) hereof, or alter the allocations specified in Article 6 hereof (except, in any case, as permitted pursuant to Sections 4.2 and 7.3.C hereof), (iv) alter or modify the Redemption rights, Cash Amount or REIT Shares Amount as set forth in Sections 8.6 and 11.2 hereof, or amend or modify any related definitions, or (v) amend this Section 7.3.D; provided, however, that the Consent of each Partner adversely affected shall not be required for any amendment or action that affects all Partners holding the same class or series of Partnership Units on a uniform or pro rata basis. Further, no amendment may alter the restrictions on the General Partner's authority set forth elsewhere in this Section 7.3 without the Consent specified therein. Any such amendment or action consented to by any Partner shall be effective as to that Partner, notwithstanding the absence of such consent by any other Partner. Section 7.4 Reimbursement of the General Partner. A. The General Partner shall not be compensated for its services as general partner of the Partnership except as provided in elsewhere in this Agreement (including the provisions of Articles 5 and 6 hereof regarding distributions, payments and allocations to which it may be entitled in its capacity as the General Partner). B. Subject to Sections 7.4.C and 15.11 hereof, the Partnership shall be liable for, and shall reimburse the General Partner on a monthly basis, or such other basis as the General Partner may determine in its sole and absolute discretion, for all sums expended in connection with the Partnership's business, including, without limitation, (i) expenses relating to the ownership of interests in and management and operation of, or for the benefit of, the Partnership, (ii) compensation of officers and employees, including, without limitation, payments under future 34 40 compensation plans of the General Partner that may provide for stock units, or other phantom stock, pursuant to which employees of the General Partner will receive payments based upon dividends on or the value of REIT Shares, (iii) director fees and expenses and (iv) all costs and expenses of the General Partner being a public company, including costs of filings with the SEC, reports and other distributions to its shareholders; provided, however, that the amount of any reimbursement shall be reduced by any interest earned by the General Partner with respect to bank accounts or other instruments or accounts held by it on behalf of the Partnership as permitted pursuant to Section 7.5 hereof. Such reimbursements shall be in addition to any reimbursement of the General Partner as a result of indemnification pursuant to Section 7.7 hereof. C. To the extent practicable, Partnership expenses shall be billed directly to and paid by the Partnership and, subject to Section 15.11 hereof, reimbursements to the General Partner or any of its Affiliates by the Partnership pursuant to this Section 7.4 shall be treated as "guaranteed payments" within the meaning of Code Section 707(c). Section 7.5 Outside Activities of the Previous General Partner and the General Partner. Neither the General Partner nor the Previous General Partner shall directly or indirectly enter into or conduct any business, other than in connection with (a) the ownership, acquisition and disposition of Partnership Interests as General Partner, (b) the management of the business of the Partnership, (c) the operation of the Previous General Partner as a reporting company with a class (or classes) of securities registered under the Exchange Act, (d) the Previous General Partner's operations as a REIT, (e) the offering, sale, syndication, private placement or public offering of stock, bonds, securities or other interests, (f) financing or refinancing of any type related to the Partnership or its assets or activities, (g) the General Partner's qualification as a "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2)) and (h) such activities as are incidental thereto. Nothing contained herein shall be deemed to prohibit the General Partner or the Previous General Partner from executing guarantees of Partnership debt for which it would otherwise be liable in its capacity as General Partner. Subject to Section 7.3.B hereof, the General Partner, the Previous General Partner, the Special Limited Partner and all "qualified REIT subsidiaries" (within the meaning of Code Section 856(i)(2)), taken as a group, shall not own any assets or take title to assets (other than temporarily in connection with an acquisition prior to contributing such assets to the Partnership) other than Partnership Interests as the General Partner or Special Limited Partner and other than such cash and cash equivalents, bank accounts or similar instruments or accounts as such group deems reasonably necessary, taking into account Section 7.1.D hereof and the requirements necessary for the Previous General Partner to qualify as a REIT and for the Previous General Partner, the General Partner and the Special Limited Partner to carry out their respective responsibilities contemplated under this Agreement and the Charter. Notwithstanding the foregoing, if the Previous General Partner or the General Partner acquires assets in its own name and owns Property other than through the Partnership, the Partners agree to negotiate in good faith to amend this Agreement, including, without limitation, the definition of "Adjustment Factor," to reflect such activities and the direct ownership of assets by the Previous General Partner or the General Partner. The General Partner and any Affiliates of the General Partner may acquire Limited Partner Interests and shall be entitled to exercise all rights of a Limited Partner relating to such Limited Partner Interests. Section 7.6 Contracts with Affiliates. A. The Partnership may lend or contribute funds or other assets to its Subsidiaries or other Persons in which it has an equity investment, and such Persons may borrow funds from the Partnership, on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person. 35 41 B. Except as provided in Section 7.5 hereof and subject to Section 3.1 hereof, the Partnership may transfer assets to joint ventures, limited liability companies, partnerships, corporations, business trusts or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law as the General Partner, in its sole and absolute discretion, believes to be advisable. C. Except as expressly permitted by this Agreement, neither the General Partner nor any of its Affiliates shall sell, transfer or convey any property to the Partnership, directly or indirectly, except pursuant to transactions that are determined by the General Partner in good faith to be fair and reasonable. D. The General Partner, in its sole and absolute discretion and without the approval of the Limited Partners, may propose and adopt on behalf of the Partnership employee benefit plans funded by the Partnership for the benefit of employees of the General Partner, the Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership or any of the Partnership's Subsidiaries. E. The General Partner is expressly authorized to enter into, in the name and on behalf of the Partnership, a right of first opportunity arrangement and other conflict avoidance agreements with various Affiliates of the Partnership and the General Partner, on such terms as the General Partner, in its sole and absolute discretion, believes are advisable. Section 7.7 Indemnification. A. To the fullest extent permitted by applicable law, the Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, attorney's fees and other legal fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Partnership ("Actions") as set forth in this Agreement in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise; provided, however, that the Partnership shall not indemnify an Indemnitee (i) for willful misconduct or a knowing violation of the law or (ii) for any transaction for which such Indemnitee received an improper personal benefit in violation or breach of any provision of this Agreement. Without limitation, the foregoing indemnity shall extend to any liability of any Indemnitee, pursuant to a loan guaranty or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), and the General Partner is hereby authorized and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.7 in favor of any Indemnitee having or potentially having liability for any such indebtedness. It is the intention of this Section 7.7.A that the Partnership indemnify each Indemnitee to the fullest extent permitted by law. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct set forth in this Section 7.7.A. The termination of any proceeding by conviction of an Indemnitee or upon a plea of nolo contendere or its equivalent by an Indemnitee, or an entry of an order of probation against an Indemnitee prior to judgment, does not create a presumption that such Indemnitee acted in a manner contrary to that specified in this Section 7.7.A with respect to the subject matter of such proceeding. Any indemnification pursuant to this Section 7.7 shall be made only out of the assets of the Partnership, and neither the General Partner nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership or otherwise provide funds to enable the Partnership to fund its obligations under this Section 7.7. 36 42 B. To the fullest extent permitted by law, expenses incurred by an Indemnitee who is a party to a proceeding or otherwise subject to or the focus of or is involved in any Action shall be paid or reimbursed by the Partnership as incurred by the Indemnitee in advance of the final disposition of the Action upon receipt by the Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee's good faith belief that the standard of conduct necessary for indemnification by the Partnership as authorized in this Section 7.7.A has been met, and (ii) a written undertaking by or on behalf of the Indemnitee to repay the amount if it shall ultimately be determined that the standard of conduct has not been met. C. The indemnification provided by this Section 7.7 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns and administrators of the Indemnitee unless otherwise provided in a written agreement with such Indemnitee or in the writing pursuant to which such Indemnitee is indemnified. D. The Partnership may, but shall not be obligated to, purchase and maintain insurance, on behalf of any of the Indemnitees and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. E. Any liabilities which an Indemnitee incurs as a result of acting on behalf of the Partnership or the General Partner (whether as a fiduciary or otherwise) in connection with the operation, administration or maintenance of an employee benefit plan or any related trust or funding mechanism (whether such liabilities are in the form of excise taxes assessed by the IRS, penalties assessed by the Department of Labor, restitutions to such a plan or trust or other funding mechanism or to a participant or beneficiary of such plan, trust or other funding mechanism, or otherwise) shall be treated as liabilities or judgments or fines under this Section 7.7, unless such liabilities arise as a result of (i) such Indemnitee's intentional misconduct or knowing violation of the law, or (ii) any transaction in which such Indemnitee received a personal benefit in violation or breach of any provision of this Agreement or applicable law. F. In no event may an Indemnitee subject any of the Partners to personal liability by reason of the indemnification provisions set forth in this Agreement. G. An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.7 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. H. The provisions of this Section 7.7 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.7 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the Partnership's liability to any Indemnitee under this Section 7.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. I. It is the intent of the Partners that any amounts paid by the Partnership to the General Partner pursuant to this Section 7.7 shall be treated as "guaranteed payments" within the meaning of Code Section 707(c). 37 43 Section 7.8 Liability of the General Partner. A. Notwithstanding anything to the contrary set forth in this Agreement, neither the General Partner nor any of its directors or officers shall be liable or accountable in damages or otherwise to the Partnership, any Partners or any Assignees for losses sustained, liabilities incurred or benefits not derived as a result of errors in judgment or mistakes of fact or law or of any act or omission if the General Partner or such director or officer acted in good faith. B. The Limited Partners expressly acknowledge that the General Partner is acting for the benefit of the Partnership, the Limited Partners and the General Partner's shareholders collectively and that the General Partner is under no obligation to give priority to the separate interests of the Limited Partners or the General Partner's shareholders (including, without limitation, the tax consequences to Limited Partners, Assignees or the General Partner's shareholders) in deciding whether to cause the Partnership to take (or decline to take) any actions. C. Subject to its obligations and duties as General Partner set forth in Section 7.1.A hereof, the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its employees or agents (subject to the supervision and control of the General Partner). The General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by it in good faith. D. Any amendment, modification or repeal of this Section 7.8 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner's, and its officers' and directors', liability to the Partnership and the Limited Partners under this Section 7.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. E. Notwithstanding anything herein to the contrary, except for fraud, willful misconduct or gross negligence, or pursuant to any express indemnities given to the Partnership by any Partner pursuant to any other written instrument, no Partner shall have any personal liability whatsoever, to the Partnership or to the other Partner(s), for the debts or liabilities of the Partnership or the Partnership's obligations hereunder, and the full recourse of the other Partner(s) shall be limited to the interest of that Partner in the Partnership. To the fullest extent permitted by law, no officer, director or shareholder of the General Partner shall be liable to the Partnership for money damages except for (i) active and deliberate dishonesty established by a non-appealable final judgment or (ii) actual receipt of an improper benefit or profit in money, property or services. Without limitation of the foregoing, and except for fraud, willful misconduct or gross negligence, or pursuant to any such express indemnity, no property or assets of any Partner, other than its interest in the Partnership, shall be subject to levy, execution or other enforcement procedures for the satisfaction of any judgment (or other judicial process) in favor of any other Partner(s) and arising out of, or in connection with, this Agreement. This Agreement is executed by the officers of the General Partner solely as officers of the same and not in their own individual capacities. F. To the extent that, at law or in equity, the General Partner has duties (including fiduciary duties) and liabilities relating thereto to the Partnership or the Limited Partners, the General Partner shall not be liable to the Partnership or to any other Partner for its good faith reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict the duties and liabilities of the General Partner otherwise existing at law or in equity, are agreed by the Partners to replace such other duties and liabilities of such General Partner. 38 44 Section 7.9 Other Matters Concerning the General Partner. A. The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties. B. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers, architects, engineers, environmental consultants and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters that the General Partner reasonably believes to be within such Person's professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion. C. The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and a duly appointed attorney or attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty that is permitted or required to be done by the General Partner hereunder. D. Notwithstanding any other provision of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order (i) to protect the ability of the Previous General Partner to continue to qualify as a REIT, (ii) for the Previous General Partner otherwise to satisfy the REIT Requirements, (iii) to avoid the Previous General Partner incurring any taxes under Code Section 857 or Code Section 4981 or (iv) for the General Partner or the Special Limited Partner to continue to qualify as a "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2)), is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners. Section 7.10 Title to Partnership Assets. Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively with other Partners or Persons, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership assets for which legal title is held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be held by the General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the General Partner shall use its best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held. Section 7.11 Reliance by Third Parties. Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority, without the consent or approval of any other Partner or Person, to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and take any and all actions on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner as if it were the Partnership's sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies that may be available against such Person to contest, negate or disaffirm any action 39 45 of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expediency of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership. ARTICLE 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS Section 8.1 Limitation of Liability. The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement (including, without limitation, Section 10.4 hereof) or under the Act. Section 8.2 Management of Business. No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, director, member, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operations, management or control (within the meaning of the Act) of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, member, employee, partner, agent, representative, or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement. Section 8.3 Outside Activities of Limited Partners. Subject to any agreements entered into pursuant to Section 7.6.D hereof and any other agreements entered into by a Limited Partner or its Affiliates with the General Partner, the Partnership or a Subsidiary (including, without limitation, any employment agreement), any Limited Partner and any Assignee, officer, director, employee, agent, trustee, Affiliate or shareholder of any Limited Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities that are in direct or indirect competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner or Assignee. Subject to such agreements, none of the Limited Partners nor any other Person shall have any rights by virtue of this Agreement or the partnership relationship established hereby in any business ventures of any other Person (other than the General Partner, to the extent expressly provided herein), and such Person shall have no obligation pursuant to this Agreement, subject to Section 7.6.D hereof and any other agreements entered into by a Limited Partner or its Affiliates with the General Partner, the Partnership or a Subsidiary, to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person, even if such opportunity is of a character that, if presented to the Partnership, any Limited Partner or such other Person, could be taken by such Person. Section 8.4 Return of Capital. Except pursuant to the rights of Redemption set forth in Section 8.6 hereof, no Limited Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent 40 46 of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. Except to the extent provided in Article 6 hereof or otherwise expressly provided in this Agreement, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee either as to the return of Capital Contributions or as to profits, losses or distributions. Section 8.5 Rights of Limited Partners Relating to the Partnership. A. In addition to other rights provided by this Agreement or by the Act, and except as limited by Section 8.5.C hereof, each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner's interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Limited Partner's own expense: (1) to obtain a copy of (i) the most recent annual and quarterly reports filed with the SEC by the Previous General Partner or the General Partner pursuant to the Exchange Act and (ii) each report or other written communication sent to the shareholders of the Previous General Partner; (2) to obtain a copy of the Partnership's federal, state and local income tax returns for each Fiscal Year; (3) to obtain a current list of the name and last known business, residence or mailing address of each Partner; (4) to obtain a copy of this Agreement and the Certificate and all amendments thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments thereto have been executed; and (5) to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and that each Partner has agreed to contribute in the future, and the date on which each became a Partner. B. The Partnership shall notify any Limited Partner that is a Qualifying Party, on request, of the then current Adjustment Factor or any change made to the Adjustment Factor. C. Notwithstanding any other provision of this Section 8.5, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner determines in its sole and absolute discretion to be reasonable, any information that (i) the General Partner believes to be in the nature of trade secrets or other information the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or the General Partner or (ii) the Partnership or the General Partner is required by law or by agreements with unaffiliated third parties to keep confidential. Section 8.6 Redemption Rights of Qualifying Parties. A. After the first Twelve-Month Period, a Qualifying Party, but no other Limited Partner or Assignee, shall have the right (subject to the terms and conditions set forth herein) to require the Partnership to redeem all or a portion of the Redeemable Units held by such Tendering Party (such Redeemable Units being hereafter "Tendered Units") in exchange (a "Redemption") for REIT shares issuable on, or the Cash Amount payable on, the Specified Redemption Date, as determined by the Partnership in its sole discretion. Any Redemption shall be exercised 41 47 pursuant to a Notice of Redemption delivered to the General Partner by the Qualifying Party when exercising the Redemption right (the "Tendering Party"). A Tendering Party shall have no right to receive distributions with respect to any Tendered Units (other than the Cash Amount) paid after delivery of the Notice of Redemption, whether or not the Partnership Record Date for such distribution precedes or coincides with such delivery of the Notice of Redemption. If the Partnership elects to redeem Tendered Units for cash, the Cash Amount shall be delivered as a certified check payable to the Tendering Party or, in the General Partner's sole and absolute discretion, in immediately available funds. B. If the Partnership elects to redeem Tendered Units for REIT Shares rather than cash, then the Partnership shall direct the Previous General Partner to issue and deliver such REIT Shares to the Tendering Party pursuant to the terms set forth in this Section 8.6.B, in which case, (i) the Previous General Partner, acting as a distinct legal entity, shall assume directly the obligation with respect thereto and shall satisfy the Tendering Party's exercise of its Redemption right, and (ii) such transaction shall be treated, for federal income tax purposes, as a transfer by the Tendering Party of such Tendered Units to the Previous General Partner in exchange for REIT shares. The percentage of the Tendered Units tendered for Redemption by the Tendering Party for which the Partnership elects to cause the Previous General Partner to issue REIT Shares (rather than cash) is referred to as the "Applicable Percentage." In making such election to cause the Previous General Partner to acquire Tendered Units, the Partnership shall act in a fair, equitable and reasonable manner that neither prefers one group or class of Qualifying Parties over another nor discriminates against a group or class of Qualifying Parties. If the Partnership elects to redeem any number of Tendered Units for REIT Shares, rather than cash, on the Specified Redemption Date, the Tendering Party shall sell such number of the Tendered Units to the Previous General Partner in exchange for a number of REIT Shares equal to the product of the REIT Shares Amount and the Applicable Percentage. The Tendering Party shall submit (i) such information, certification or affidavit as the Previous General Partner may reasonably require in connection with the application of the Ownership Limit and other restrictions and limitations of the Charter to any such acquisition and (ii) such written representations, investment letters, legal opinions or other instruments necessary, in the Previous General Partner's view, to effect compliance with the Securities Act. The product of the Applicable Percentage and the REIT Shares Amount, if applicable, shall be delivered by the Previous General Partner as duly authorized, validly issued, fully paid and accessible REIT Shares and, if applicable, Rights, free of any pledge, lien, encumbrance or restriction, other than the Ownership Limit and other restrictions provided in the Charter, the Bylaws of the Previous General Partner, the Securities Act and relevant state securities or "blue sky" laws. Neither any Tendering Party whose Tendered Units are acquired by the Previous General Partner pursuant to this Section 8.6.B, any Partner, any Assignee nor any other interested Person shall have any right to require or cause the Previous General Partner or the General Partner to register, qualify or list any REIT Shares owned or held by such Person, whether or not such REIT Shares are issued pursuant to this Section 8.6.B, with the SEC, with any state securities commissioner, department or agency, under the Securities Act or the Exchange Act or with any stock exchange; provided, however, that this limitation shall not be in derogation of any registration or similar rights granted pursuant to any other written agreement between the Previous General Partner and any such Person. Notwithstanding any delay in such delivery, the Tendering Party shall be deemed the owner of such REIT Shares and Rights for all purposes, including, without limitation, rights to vote or consent, receive dividends, and exercise rights, as of the Specified Redemption Date. REIT Shares issued upon an acquisition of the Tendered Units by the Previous General Partner pursuant to this Section 8.6.B may contain such legends regarding restrictions under the Securities Act and applicable state securities laws as the Previous General Partner in good faith determines to be necessary or advisable in order to ensure compliance with such laws. C. Notwithstanding the provisions of Section 8.6.A and 8.6.B hereof, the Tendering Parties (i) where the Redemption would consist of less than all the Partnership Common Units held by Partners other than the General Partner and the Special Limited Partner, shall not be entitled to elect or effect a Redemption to the extent that the aggregate Percentage Interests of the Limited Partners (other than the Special Limited Partner) would be reduced, as a result of the Redemption, to less than one percent (1%) and (ii) shall have no rights under this Agreement that 42 48 would otherwise be prohibited under the Charter. To the extent that any attempted Redemption would be in violation of this Section 8.6.C, it shall be null and void ab initio, and the Tendering Party shall not acquire any rights or economic interests in REIT Shares otherwise issuable by the Previous General Partner under Section 8.6.B hereof. D. In the event that the Partnership declines to cause the Previous General Partner to acquire all of the Tendered Units from the Tendering Party in exchange for REIT Shares pursuant to Section 8.6.B hereof following receipt of a Notice of Redemption (a "Declination"): (1) The Previous General Partner or the General Partner shall give notice of such Declination to the Tendering Party on or before the close of business on the Cut-Off Date. (2) The Partnership may elect to raise funds for the payment of the Cash Amount either (a) by requiring that the General Partner contribute such funds from the proceeds of a registered public offering (a "Public Offering Funding") by the Previous General Partner of a number of REIT Shares ("Registrable Shares") equal to the REIT Shares Amount with respect to the Tendered Units or (b) from any other sources (including, but not limited to, the sale of any Property and the incurrence of additional Debt) available to the Partnership. (3) Promptly upon the General Partner's receipt of the Notice of Redemption and the Previous General Partner or the General Partner giving notice of the Partnership's Declination, the General Partner shall give notice (a "Single Funding Notice") to all Qualifying Parties then holding a Partnership Interest (or an interest therein) and having Redemption rights pursuant to this Section 8.6 and require that all such Qualifying Parties elect whether or not to effect a Redemption of their Partnership Common Units to be funded through such Public Offering Funding. In the event that any such Qualifying Party elects to effect such a Redemption, it shall give notice thereof and of the number of Partnership Common Units to be made subject thereon in writing to the General Partner within ten (10) Business Days after receipt of the Single Funding Notice, and such Qualifying Party shall be treated as a Tendering Party for all purposes of this Section 8.6. In the event that a Qualifying Party does not so elect, it shall be deemed to have waived its right to effect a Redemption for the current Twelve-Month Period; provided, however, that the Previous General Partner shall not be required to acquire Partnership Common Units pursuant to this Section 8.6.D more than twice within a Twelve-Month Period. Any proceeds from a Public Offering Funding that are in excess of the Cash Amount shall be for the sole benefit of the Previous General Partner and/or the General Partner. The General Partner and/or the Special Limited Partner shall make a Capital Contribution of such amounts to the Partnership for an additional General Partner Interest and/or Limited Partner Interest. Any such contribution shall entitle the General Partner and the Special Limited Partner, as the case may be, to an equitable Percentage Interest adjustment. E. Notwithstanding the provisions of Section 8.6.B hereof, the Previous General Partner shall not, under any circumstances, elect to acquire Tendered Units in exchange for the REIT Shares Amount if such exchange would be prohibited under the Charter. 43 49 F. Notwithstanding anything herein to the contrary (but subject to Section 8.6.C hereof), with respect to any Redemption pursuant to this Section 8.6: (1) All Partnership Common Units acquired by the Previous General Partner pursuant to Section 8.6.B hereof shall be contributed by the Previous General Partner to either or both of the General Partner and the Special Limited Partner in such proportions as the Previous General Partner, the General Partner and the Special Limited Partner shall determine. Any Partnership Common Units so contributed to the General Partner shall automatically, and without further action required, be converted into and deemed to be a General Partner Interest comprised of the same number of Partnership Common Units. Any Partnership Common Units so contributed to the Special Limited Partner shall remain outstanding. (2) Subject to the Ownership Limit, no Tendering Party may effect a Redemption for less than five hundred (500) Redeemable Units or, if such Tendering Party holds (as a Limited Partner or, economically, as an Assignee) less than five hundred (500) Redeemable Units, all of the Redeem able Units held by such Tendering Party. (3) Each Tendering Party (a) may effect a Redemption only once in each fiscal quarter of a Twelve-Month Period and (b) may not effect a Redemption during the period after the Partnership Record Date with respect to a distribution and before the record date established by the Previous General Partner for a distribution to its shareholders of some or all of its portion of such Partnership distribution. (4) Notwithstanding anything herein to the contrary, with respect to any Redemption or acquisition of Tendered Units by the Previous General Partner pursuant to Section 8.6.B hereof, in the event that the Previous General Partner or the General Partner gives notice to all Limited Partners (but excluding any Assignees) then owning Partnership Interests (a "Primary Offering Notice") that the Previous General Partner desires to effect a primary offering of its equity securities then, unless the Previous General Partner and the General Partner otherwise consent, commencement of the actions denoted in Section 8.6.E hereof as to a Public Offering Funding with respect to any Notice of Redemption thereafter received, whether or not the Tendering Party is a Limited Partner, may be delayed until the earlier of (a) the completion of the primary offering or (b) ninety (90) days following the giving of the Primary Offering Notice. (5) Without the Consent of the Previous General Partner, no Tendering Party may effect a Redemption within ninety (90) days following the closing of any prior Public Offering Funding. (6) The consummation of such Redemption shall be subject to the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. (7) The Tendering Party shall continue to own (subject, in the case of an Assignee, to the provision of Section 11.5 hereof) all Redeemable Units subject to any Redemption, and be treated as a Limited Partner or an Assignee, as applicable, with respect 44 50 to such Redeemable Units for all purposes of this Agreement, until such Redeemable Units are either paid for by the Partnership pursuant to Section 8.6.A hereof or transferred to the Previous General Partner (or directly to the General Partner or Special Limited Partner) and paid for, by the issuance of the REIT Shares, pursuant to Section 8.6.B hereof on the Specified Redemption Date. Until a Specified Redemption Date and an acquisition of the Tendered Units by the Previous General Partner pursuant to Section 8.6.B hereof, the Tendering Party shall have no rights as a shareholder of the Previous General Partner with respect to the REIT Shares issuable in connection with such acquisition. For purposes of determining compliance with the restrictions set forth in this Section 8.6.F, all Partnership Common Units beneficially owned by a Related Party of a Tendering Party shall be considered to be owned or held by such Tendering Party. G. In connection with an exercise of Redemption rights pursuant to this Section 8.6, the Tendering Party shall submit the following to the General Partner, in addition to the Notice of Redemption: (1) A written affidavit, dated the same date as the Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of REIT Shares by (i) such Tendering Party and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the Tendering Party nor any Related Party will own REIT Shares in excess of the Ownership Limit; (2) A written representation that neither the Tendering Party nor any Related Party has any intention to acquire any additional REIT Shares prior to the closing of the Redemption on the Specified Redemption Date; and (3) An undertaking to certify, at and as a condition to the closing of the Redemption on the Specified Redemption Date, that either (a) the actual and constructive ownership of REIT Shares by the Tendering Party and any Related Party remain unchanged from that disclosed in the affidavit required by Section 8.6.G(1) or (b) after giving effect to the Redemption, neither the Tendering Party nor any Related Party shall own REIT Shares in violation of the Ownership Limit. Section 8.7 Partnership Right to Call Limited Partner Interests. Notwithstanding any other provision of this Agreement, on and after the date on which the aggregate Percentage Interests of the Limited Partners (other than the Special Limited Partner) are less than one percent (1%), the Partnership shall have the right, but not the obligation, from time to time and at any time to redeem any and all outstanding Limited Partner Interests (other than the Special Limited Partner's Limited Partner Interest) by treating any Limited Partner as a Tendering Party who has delivered a Notice of Redemption pursuant to Section 8.6 hereof for the amount of Partnership Common Units to be specified by the General Partner, in its sole and absolute discretion, by notice to such Limited Partner that the Partnership has elected to exercise its rights under this Section 8.7. Such notice given by the General Partner to a Limited Partner pursuant to this Section 8.7 shall be treated as if it were a Notice of Redemption delivered to the General Partner by such Limited Partner. For purposes of this Section 8.7, (a) any Limited Partner (whether or not otherwise a Qualifying Party) may, in the General Partner's sole and absolute discretion, be treated as a Qualifying Party that is a Tendering Party and (b) the provisions of Sections 8.6.C(1), 8.6.F(2), 8.6.F(3) and 8.6.F(5) hereof shall not apply, but the remainder of Section 8.6 hereof shall apply, mutatis mutandis. 45 51 ARTICLE 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS Section 9.1 Records and Accounting. A. The General Partner shall keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership's business, including, without limitation, all books and records necessary to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Section 8.5.A or Section 9.3 hereof. Any records maintained by or on behalf of the Partnership in the regular course of its business may be kept on, or be in the form for, punch cards, magnetic tape, photographs, micrographics or any other information storage device, provided that the records so maintained are convertible into clearly legible written form within a reasonable period of time. B. The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with generally accepted accounting principles, or on such other basis as the General Partner determines to be necessary or appropriate. To the extent permitted by sound accounting practices and principles, the Partnership, the General Partner and the Previous General Partner may operate with integrated or consolidated accounting records, operations and principles. Section 9.2 Fiscal Year. The Fiscal Year of the Partnership shall be the calendar year. Section 9.3 Reports. A. As soon as practicable, but in no event later than one hundred five (105) days after the close of each Fiscal Year, the General Partner shall cause to be mailed to each Limited Partner, of record as of the close of the Fiscal Year, an annual report containing financial statements of the Partnership, or of the Previous General Partner if such statements are prepared solely on a consolidated basis with the Previous General Partner, for such Fiscal Year, presented in accordance with generally accepted accounting principles, such statements to be audited by a nationally recognized firm of independent public accountants selected by the General Partner. B. As soon as practicable, but in no event later than one hundred five (105) days after the close of each calendar quarter (except the last calendar quarter of each year), the General Partner shall cause to be mailed to each Limited Partner, of record as of the last day of the calendar quarter, a report containing unaudited financial statements of the Partnership, or of the Previous General Partner if such statements are prepared solely on a consolidated basis with the Previous General Partner, and such other information as may be required by applicable law or regulation or as the General Partner determines to be appropriate. At the request of any Limited Partner, the General Partner shall provide access to the books, records and workpapers upon which the reports required by this Section 9.3 are based, to the extent required by the Act. ARTICLE 10 TAX MATTERS Section 10.1 Preparation of Tax Returns. The General Partner shall arrange for the preparation and timely filing of all returns with respect to Partnership income, gains, deductions, losses and other items required of 46 52 the Partnership for federal and state income tax purposes and shall use all reasonable effort to furnish, within ninety (90) days of the close of each taxable year, the tax information reasonably required by Limited Partners for federal and state income tax reporting purposes. The Limited Partners shall promptly provide the General Partner with such information relating to the Contributed Properties, including tax basis and other relevant information, as may be reasonably requested by the General Partner from time to time. Section 10.2 Tax Elections. Except as otherwise provided herein, the General Partner shall, in its sole and absolute discretion, determine whether to make any available election pursuant to the Code, including, but not limited to, the election under Code Section 754 and the election to use the "recurring item" method of accounting provided under Code Section 461(h) with respect to property taxes imposed on the Partnership's Properties; provided, however, that, if the "recurring item" method of accounting is elected with respect to such property taxes, the Partnership shall pay the applicable property taxes prior to the date provided in Code Section 461(h) for purposes of determining economic performance. The General Partner shall have the right to seek to revoke any such election (including, without limitation, any election under Code Sections 461(h) and 754) upon the General Partner's determination in its sole and absolute discretion that such revocation is in the best interests of the Partners. Section 10.3 Tax Matters Partner. A. The General Partner shall be the "tax matters partner" of the Partnership for federal income tax purposes. The tax matters partner shall receive no compensation for its services. All third-party costs and expenses incurred by the tax matters partner in performing its duties as such (including legal and accounting fees and expenses) shall be borne by the Partnership in addition to any reimbursement pursuant to Section 7.4 hereof. Nothing herein shall be construed to restrict the Partnership from engaging an accounting firm to assist the tax matters partner in discharging its duties hereunder, so long as the compensation paid by the Partnership for such services is reasonable. At the request of any Limited Partner, the General Partner agrees to consult with such Limited Partner with respect to the preparation and filing of any returns and with respect to any subsequent audit or litigation relating to such returns; provided, however, that the filing of such returns shall be in the sole and absolute discretion of the General Partner. B. The tax matters partner is authorized, but not required: (1) to enter into any settlement with the IRS with respect to any administrative or judicial proceedings for the adjustment of Partnership items required to be taken into account by a Partner for income tax purposes (such administrative proceedings being referred to as a "tax audit" and such judicial proceedings being referred to as "judicial review"), and in the settlement agreement the tax matters partner may expressly state that such agreement shall bind all Partners, except that such settlement agreement shall not bind any Partner (i) who (within the time prescribed pursuant to the Code and Regulations) files a statement with the IRS providing that the tax matters partner shall not have the authority to enter into a settlement agreement on behalf of such Partner or (ii) who is a "notice partner" (as defined in Code Section 6231) or a member of a "notice group" (as defined in Code Section 6223(b)(2)); (2) in the event that a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax purposes (a "final adjustment") is mailed to the tax matters partner, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the United States Tax Court or the United States Claims Court, or the filing of a complaint for refund with the District Court of the United States for the district in which the Partnership's principal place of business is located; 47 53 (3) to intervene in any action brought by any other Partner for judicial review of a final adjustment; (4) to file a request for an administrative adjustment with the IRS at any time and, if any part of such request is not allowed by the IRS, to file an appropriate pleading (petition or complaint) for judicial review with respect to such request; (5) to enter into an agreement with the IRS to extend the period for assessing any tax that is attributable to any item required to be taken into account by a Partner for tax purposes, or an item affected by such item; and (6) to take any other action on behalf of the Partners in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations. The taking of any action and the incurring of any expense by the tax matters partner in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the tax matters partner and the provisions relating to indemnification of the General Partner set forth in Section 7.7 hereof shall be fully applicable to the tax matters partner in its capacity as such. Section 10.4 Withholding. Each Limited Partner hereby authorizes the Partnership to withhold from or pay on behalf of or with respect to such Limited Partner any amount of federal, state, local or foreign taxes that the General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Code Section 1441, Code Section 1442, Code Section 1445 or Code Section 1446. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a loan by the Partnership to such Limited Partner, which loan shall be repaid by such Limited Partner within fifteen (15) days after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution that would otherwise be made to the Limited Partner or (ii) the General Partner determines, in its sole and absolute discretion, that such payment may be satisfied out of the Available Funds of the Partnership that would, but for such payment, be distributed to the Limited Partner. Each Limited Partner hereby unconditionally and irrevocably grants to the Partnership a security interest in such Limited Partner's Partnership Interest to secure such Limited Partner's obligation to pay to the Partnership any amounts required to be paid pursuant to this Section 10.4. In the event that a Limited Partner fails to pay any amounts owed to the Partnership pursuant to this Section 10.4 when due, the General Partner may, in its sole and absolute discretion, elect to make the payment to the Partnership on behalf of such defaulting Limited Partner, and in such event shall be deemed to have loaned such amount to such defaulting Limited Partner and shall succeed to all rights and remedies of the Partnership as against such defaulting Limited Partner (including, without limitation, the right to receive distributions). Any amounts payable by a Limited Partner hereunder shall bear interest at the base rate on corporate loans at large United States money center commercial banks, as published from time to time in the Wall Street Journal, plus four (4) percentage points (but not higher than the maximum lawful rate) from the date such amount is due (i.e., fifteen (15) days after demand) until such amount is paid in full. Each Limited Partner shall take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder. 48 54 ARTICLE 11 TRANSFERS AND WITHDRAWALS Section 11.1 Transfer. A. No part of the interest of a Partner shall be subject to the claims of any creditor, to any spouse for alimony or support, or to legal process, and may not be voluntarily or involuntarily alienated or encumbered except as may be specifically provided for in this Agreement. B. No Partnership Interest shall be Transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 11. Any Transfer or purported Transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void ab initio. C. Notwithstanding the other provisions of this Article 11 (other than Section 11.6.D hereof), the Partnership Interests of the General Partner and the Special Limited Partner may be Transferred, in whole or in part, at any time or from time to time, to or among the Previous General Partner, the General Partner, the Special Limited Partner, and any other Person that is, at the time of such Transfer, a "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2)) with respect to the Previous General Partner. Any transferee of the entire General Partner Interest pursuant to this Section 11.1.C shall automatically become, without further action or Consent of any Limited Partners, the sole general partner of the Partnership, subject to all the rights, privileges, duties and obligations under this Agreement and the Act relating to a general partner. Any transferee of a Limited Partner Interest pursuant to this Section 11.1.C shall automatically become, without further action or Consent of any Limited Partners, a Substituted Limited Partner. Upon any Transfer permitted by this Section 11.1.C, the transferor Partner shall be relieved of all its obligations under this Agreement. The provisions of Section 11.2.B (other than the last sentence thereof), 11.3, 11.4.A and 11.5 hereof shall not apply to any Transfer permitted by this Section 11.1.C. Section 11.2 Transfer of General Partner's Partnership Interest. A. The General Partner may not Transfer any of its General Partner Interest or withdraw from the Partnership except as provided in Sections 11.2.B and 11.2.C hereof. B. The General Partner shall not withdraw from the Partnership and shall not Transfer all or any portion of its interest in the Partnership (whether by sale, disposition, statutory merger or consolidation, liquidation or otherwise) without the Consent of the Limited Partners, which Consent may be given or withheld in the sole and absolute discretion of the Limited Partners. Upon any Transfer of such a Partnership Interest pursuant to the Consent of the Limited Partners and otherwise in accordance with the provisions of this Section 11.2.B, the transferee shall become a successor General Partner for all purposes herein, and shall be vested with the powers and rights of the transferor General Partner, and shall be liable for all obligations and responsible for all duties of the General Partner, once such transferee has executed such instruments as may be necessary to effectuate such admission and to confirm the agreement of such transferee to be bound by all the terms and provisions of this Agreement with respect to the Partnership Interest so acquired. It is a condition to any Transfer otherwise permitted hereunder that the transferee assumes, by operation of law or express agreement, all of the obligations of the transferor General Partner under this Agreement with respect to such Transferred Partnership Interest, and such Transfer shall relieve the transferor General Partner of its obligations under this Agreement without the Consent of the Limited Partners. In the event that the General Partner withdraws from the Partnership, in violation of this Agreement or otherwise, or otherwise dissolves or terminates, or upon the bankruptcy of the General Partner, a Majority in Interest of the Limited Partners may elect to continue the Partnership business by selecting a successor General Partner in accordance with the Act. 49 55 C. The General Partner may merge with another entity if immediately after such merger substantially all of the assets of the surviving entity, other than the General Partner Interest held by the General Partner, are contributed to the Partnership as a Capital Contribution in exchange for Partnership Units. Section 11.3 Limited Partners' Rights to Transfer. A. General. Prior to the end of the first Twelve-Month Period, no Limited Partner shall Transfer all or any portion of its Partnership Interest to any transferee without the Consent of the General Partner, which Consent may be withheld in its sole and absolute discretion; provided, however, that any Limited Partner may, at any time, without the consent of the General Partner, (i) Transfer all or part of its Partnership Interest to any Designated Party, any Family Member, any Controlled Entity or any Affiliate, provided that the transferee is, in any such case, a Qualified Transferee, or (ii) pledge (a "Pledge") all or any portion of its Partnership Interest to a lending institution, that is not an Affiliate of such Limited Partner, as collateral or security for a bona fide loan or other extension of credit, and Transfer such pledged Partnership Interest to such lending institution in connection with the exercise of remedies under such loan or extension or credit (any Transfer or Pledge permitted by this proviso is hereinafter referred to as a "Permitted Transfer"). After such first Twelve-Month Period, each Limited Partner, and each transferee of Partnership Units or Assignee pursuant to a Permitted Transfer, shall have the right to Transfer all or any portion of its Partnership Interest to any Person, subject to the provisions of Section 11.6 hereof and to satisfaction of each of the following conditions: (1) General Partner Right of First Refusal. The transferring Partner shall give written notice of the proposed Transfer to the General Partner, which notice shall state (i) the identity of the proposed transferee and (ii) the amount and type of consideration proposed to be received for the Transferred Partnership Units. The General Partner shall have ten (10) Business Days upon which to give the Transferring Partner notice of its election to acquire the Partnership Units on the proposed terms. If it so elects, it shall purchase the Partnership Units on such terms within ten (10) Business Days after giving notice of such election; provided, however, that in the event that the proposed terms involve a purchase for cash, the General Partner may at its election deliver in lieu of all or any portion of such cash a note payable to the Transferring Partner at a date as soon as reasonably practicable, but in no event later than one hundred eighty (180) days after such purchase, and bearing interest at an annual rate equal to the total dividends declared with respect to one (1) REIT Share for the four (4) preceding fiscal quarters of the General Partner, divided by the Value as of the closing of such purchase; provided, further, that such closing may be deferred to the extent necessary to effect compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, if applicable, and any other applicable requirements of law. If it does not so elect, the Transferring Partner may Transfer such Partnership Units to a third party, on terms no more favorable to the transferee than the proposed terms, subject to the other conditions of this Section 11.3. (2) Qualified Transferee. Any Transfer of a Partnership Interest shall be made only to a single Qualified Transferee; provided, however, that, for such purposes, all Qualified Transferees that are Affiliates, or that comprise investment accounts or funds managed by a single Qualified Transferee and its Affiliates, shall be considered together to be a single Qualified Transferee; provided, further, that each Transfer meeting the minimum Transfer restriction of Section 11.3.A(3) hereof may be to a separate Qualified Transferee. (3) Minimum Transfer Restriction. Any Transferring Partner must Transfer not less than the lesser of (i) the greater of five hundred (500) Partnership Units or one-third (1/3) of the number of Partnership Units owned by such Partner as of the Effective Date or (ii) all of the remaining Partnership Units 50 56 owned by such Transferring Partner; provided, however, that, for purposes of determining compliance with the foregoing restriction, all Partnership Units owned by Affiliates of a Limited Partner shall be considered to be owned by such Limited Partner. (4) Transferee Agreement to Effect a Redemption. Any proposed transferee shall deliver to the General Partner a written agreement reasonably satisfactory to the General Partner to the effect that the transferee will, within six (6) months after consummation of a Partnership Common Units Transfer, tender its Partnership Common Units for Redemption in accordance with the terms of the Redemption rights provided in Section 8.6 hereof. (5) No Further Transfers. The transferee (other than a Designated Party) shall not be permitted to effect any further Transfer of the Partnership Units, other than to the General Partner. (6) Exception for Permitted Transfers. The conditions of Sections 11.3.A(1) through 11.3.A(5) hereof shall not apply in the case of a Permitted Transfer. It is a condition to any Transfer otherwise permitted hereunder (whether or not such Transfer is effected during or after the first Twelve-Month Period) that the transferee assumes by operation of law or express agreement all of the obligations of the transferor Limited Partner under this Agreement with respect to such Transferred Partnership Interest, and no such Transfer (other than pursuant to a statutory merger or consolidation wherein all obligations and liabilities of the transferor Partner are assumed by a successor corporation by operation of law) shall relieve the transferor Partner of its obligations under this Agreement without the approval of the General Partner, in its sole and absolute discretion. Notwithstanding the foregoing, any transferee of any Transferred Partnership Interest shall be subject to any and all ownership limitations (including, without limitation, the Ownership Limit) contained in the Charter that may limit or restrict such transferee's ability to exercise its Redemption rights, including, without limitation, the Ownership Limit. Any transferee, whether or not admitted as a Substituted Limited Partner, shall take subject to the obligations of the transferor hereunder. Unless admitted as a Substituted Limited Partner, no transferee, whether by a voluntary Transfer, by operation of law or otherwise, shall have any rights hereunder, other than the rights of an Assignee as provided in Section 11.5 hereof. B. Incapacity. If a Limited Partner is subject to Incapacity, the executor, administrator, trustee, committee, guardian, conservator or receiver of such Limited Partner's estate shall have all the rights of a Limited Partner, but not more rights than those enjoyed by other Limited Partners, for the purpose of settling or managing the estate, and such power as the Incapacitated Limited Partner possessed to Transfer all or any part of its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership. C. Opinion of Counsel. In connection with any Transfer of a Limited Partner Interest, the General Partner shall have the right to receive an opinion of counsel reasonably satisfactory to it to the effect that the proposed Transfer may be effected without registration under the Securities Act and will not otherwise violate any federal or state securities laws or regulations applicable to the Partnership or the Partnership Interests Transferred. If, in the opinion of such counsel, such Transfer would require the filing of a registration statement under the Securities Act or would otherwise violate any federal or state securities laws or regulations applicable to the Partnership or the Partnership Units, the General Partner may prohibit any Transfer otherwise permitted under this Section 11.3 by a Limited Partner of Partnership Interests. 51 57 D. Adverse Tax Consequences. No Transfer by a Limited Partner of its Partnership Interests (including any Redemption, any other acquisition of Partnership Units by the General Partner or any acquisition of Partnership Units by the Partnership) may be made to any person if (i) in the opinion of legal counsel for the Partnership, it would result in the Partnership being treated as an association taxable as a corporation, or (ii) such Transfer is effectuated through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Code Section 7704. Section 11.4 Substituted Limited Partners. A. No Limited Partner shall have the right to substitute a transferee (including any Designated Party or other transferees pursuant to Transfers permitted by Section 11.3 hereof) as a Limited Partner in its place. A transferee (including, but not limited to, any Designated Party) of the interest of a Limited Partner may be admitted as a Substituted Limited Partner only with the Consent of the General Partner, which Consent may be given or withheld by the General Partner in its sole and absolute discretion. The failure or refusal by the General Partner to permit a transferee of any such interests to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership or the General Partner. Subject to the foregoing, an Assignee shall not be admitted as a Substituted Limited Partner until and unless it furnishes to the General Partner (i) evidence of acceptance, in form and substance satisfactory to the General Partner, of all the terms, conditions and applicable obligations of this Agreement, (ii) a counterpart signature page to this Agreement executed by such Assignee and (iii) such other documents and instruments as may be required or advisable, in the sole and absolute discretion of the General Partner, to effect such Assignee's admission as a Substituted Limited Partner. B. A transferee who has been admitted as a Substituted Limited Partner in accordance with this Article 11 shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement. C. Upon the admission of a Substituted Limited Partner, the General Partner shall amend Exhibit A to reflect the name, address and number of Partnership Units of such Substituted Limited Partner and to eliminate or adjust, if necessary, the name, address and number of Partnership Units of the predecessor of such Substituted Limited Partner. Section 11.5 Assignees. If the General Partner, in its sole and absolute discretion, does not consent to the admission of any permitted transferee under Section 11.3 hereof as a Substituted Limited Partner, as described in Section 11.4 hereof, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be entitled to all the rights of an assignee of a limited partnership interest under the Act, including the right to receive distributions from the Partnership and the share of Net Income, Net Losses and other items of income, gain, loss, deduction and credit of the Partnership attributable to the Partnership Units assigned to such transferee and the rights to Transfer the Partnership Units provided in this Article 11, but shall not be deemed to be a holder of Partnership Units for any other purpose under this Agreement (other than as expressly provided in Section 8.6 hereof with respect to a Qualifying Party that becomes a Tendering Party), and shall not be entitled to effect a Consent or vote with respect to such Partnership Units on any matter presented to the Limited Partners for approval (such right to Consent or vote, to the extent provided in this Agreement or under the Act, fully remaining with the transferor Limited Partner). In the event that any such transferee desires to make a further assignment of any such Partnership Units, such transferee shall be subject to all the provisions of this Article 11 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of Partnership Units. 52 58 Section 11.6 General Provisions. A. No Limited Partner may withdraw from the Partnership other than as a result of a permitted Transfer of all of such Limited Partner's Partnership Units in accordance with this Article 11, with respect to which the transferee becomes a Substituted Limited Partner, or pursuant to a redemption (or acquisition by the Previous General Partner) of all of its Partnership Units pursuant to a Redemption under Section 8.6 hereof and/or pursuant to any Partnership Unit Designation. B. Any Limited Partner who shall Transfer all of its Partnership Units in a Transfer (i) permitted pursuant to this Article 11 where such transferee was admitted as a Substituted Limited Partner, (ii) pursuant to the exercise of its rights to effect a redemption of all of its Partnership Units pursuant to a Redemption under Section 8.6 hereof and/or pursuant to any Partnership Unit Designation or (iii) to the Previous General Partner or the General Partner, whether or not pursuant to Section 8.6.B hereof, shall cease to be a Limited Partner. C. If any Partnership Unit is Transferred in compliance with the provisions of this Article 11, or is redeemed by the Partnership, or acquired by the Previous General Partner pursuant to Section 8.6 hereof, on any day other than the first day of a Fiscal Year, then Net Income, Net Losses, each item thereof and all other items of income, gain, loss, deduction and credit attributable to such Partnership Unit for such Fiscal Year shall be allocated to the transferor Partner or the Tendering Party, as the case may be, and, in the case of a Transfer or assignment other than a Redemption, to the transferee Partner (including, without limitation, the General Partner and the Special Limited Partner as transferees of the Previous General Partner in the case of an acquisition of Partnership Common Units pursuant to Section 8.6 hereof), by taking into account their varying interests during the Fiscal Year in accordance with Code Section 706(d), using the "interim closing of the books" method or another permissible method selected by the General Partner. Solely for purposes of making such allocations, each of such items for the calendar month in which a Transfer occurs shall be allocated to the transferee Partner and none of such items for the calendar month in which a Transfer or a Redemption occurs shall be allocated to the transferor Partner or the Tendering Party, as the case may be, if such Transfer occurs on or before the fifteenth (15th) day of the month, otherwise such items shall be allocated to the transferor. All distributions of Available Cash attributable to such Partnership Unit with respect to which the Partnership Record Date is before the date of such Transfer, assignment or Redemption shall be made to the transferor Partner or the Tendering Party, as the case may be, and, in the case of a Transfer other than a Redemption, all distributions of Available Cash thereafter attributable to such Partnership Unit shall be made to the transferee Partner. D. In addition to any other restrictions on Transfer herein contained, in no event may any Transfer or assignment of a Partnership Interest by any Partner (including any Redemption, any acquisition of Partnership Units by the Previous General Partner or any other acquisition of Partnership Units by the Partnership) be made (i) to any person or entity who lacks the legal right, power or capacity to own a Partnership Interest; (ii) in violation of applicable law; (iii) of any component portion of a Partnership Interest, such as the Capital Account, or rights to distributions, separate and apart from all other components of a Partnership Interest; (iv) in the event that such Transfer would cause either (a) the Previous General Partner to cease to comply with the REIT Requirements or (b) the General Partner or the Special Limited Partner to cease to qualify as a "qualified REIT subsidiary" (within the meaning of Code Section 856(i)(2); (v) if such Transfer would, in the opinion of counsel to the Partnership or the General Partner, cause a termination of the Partnership for federal or state income tax purposes (except as a result of the Redemption (or acquisition by the Previous General Partner) of all Partnership Common Units held by all Limited Partners other than the Special Limited Partner); (vi) if such Transfer would, in the opinion of legal counsel to the Partnership, cause the Partnership to cease to be classified as a partnership for federal income tax purposes (except as a result of the Redemption (or acquisition by the Previous General Partner) of all Partnership Common Units held by all Limited Partners other than the Special Limited Partner); (vii) if such Transfer would cause the Partnership to 53 59 become, with respect to any employee benefit plan subject to Title I of ERISA, a "party-in-interest" (as defined in ERISA Section 3(14)) or a "disqualified person" (as defined in Code Section 4975(c)); (viii) if such Transfer would, in the opinion of legal counsel to the Partnership, cause any portion of the assets of the Partnership to constitute assets of any employee benefit plan pursuant to Department of Labor Regulations Section 2510.2-101; (ix) if such Transfer requires the registration of such Partnership Interest pursuant to any applicable federal or state securities laws; (x) if such Transfer causes the Partnership to become a "publicly traded partnership," as such term is defined in Code Section 469(k)(2) or Code 7704(b); or (xi) if such Transfer subjects the Partnership to regulation under the Investment Company Act of 1940, the Investment Advisors Act of 1940 or ERISA, each as amended. ARTICLE 12 ADMISSION OF PARTNERS Section 12.1 Admission of Successor General Partner. A successor to all of the General Partner's General Partner Interest pursuant to Section 11.2 hereof who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective immediately prior to such Transfer. Any such successor shall carry on the business of the Partnership without dissolution. In each case, the admission shall be subject to the successor General Partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission. Section 12.2 Admission of Additional Limited Partners. A. After the admission to the Partnership of an Original Limited Partner on the date hereof, a Person (other than an existing Partner) who makes a Capital Contribution to the Partnership in accordance with this Agreement shall be admitted to the Partnership as an Additional Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance, in form and substance satisfactory to the General Partner, of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof, (ii) a counterpart signature page to this Agreement executed by such Person and (iii) such other documents or instruments as may be required in the sole and absolute discretion of the General Partner in order to effect such Person's admission as an Additional Limited Partner. B. Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Limited Partner without the consent of the General Partner, which consent may be given or withheld in the General Partner's sole and absolute discretion. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the General Partner to such admission. C. If any Additional Limited Partner is admitted to the Partnership on any day other than the first day of a Fiscal Year, then Net Income, Net Losses, each item thereof and all other items of income, gain, loss, deduction and credit allocable among Partners and Assignees for such Fiscal Year shall be allocated among such Additional Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Fiscal Year in accordance with Code Section 706(d), using the "interim closing of the books" method or another permissible method selected by the General Partner. Solely for purposes of making such allocations, each of such items for the calendar month in which an admission of any Additional Limited Partner occurs shall be allocated among all the Partners and Assignees including such Additional Limited Partner, in accordance with the principles described in Section 11.6.C hereof. All distributions of Available Cash with respect to which the Partnership Record Date is before the date of such admission shall be made solely to Partners and Assignees other than the Additional Limited Partner, and all distributions of Available Cash thereafter shall be made to all the Partners and Assignees including such Additional Limited Partner. 55 60 Section 12.3 Amendment of Agreement and Certificate of Limited Partnership. For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment of this Agreement (including an amendment of Exhibit A) and, if required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Section 2.4 hereof. Section 12.4 Admission of Initial Limited Partners. The Persons listed on Exhibit A as limited partners of the Partnership shall be admitted to the Partnership as Limited Partners upon their execution and delivery of this Agreement. ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION Section 13.1 Dissolution. The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership without dissolution. However, the Partnership shall dissolve, and its affairs shall be wound up, upon the first to occur of any of the following (each a "Liquidating Event"): A. the expiration of its term as provided in Section 2.5 hereof; B. an event of withdrawal, as defined in the Act (including, without limitation, bankruptcy), of the sole General Partner unless, within ninety (90) days after the withdrawal, a "majority in interest" (as such phrase is used in Section 17-801(3) of the Act) of the remaining Partners agree in writing, in their sole and absolute discretion, to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a successor General Partner: C. an election to dissolve the Partnership made by the General Partner in its sole and absolute discretion, with or without the Consent of the Limited Partners; D. entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act; E. the occurrence of a Terminating Capital Transaction; F. the Redemption (or acquisition by the Previous General Partner, the General Partner and/or the Special Limited Partner) of all Partnership Common Units other than Partnership Common Units held by the General Partner or the Special Limited Partner; or G. the Redemption (or acquisition by the General Partner) of all Partnership Common Units other than Partnership Common Units held by the General Partner. 55 61 Section 13.2 Winding Up. A. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets and satisfying the claims of its creditors and Partners. After the occurrence of a Liquidating Event, no Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership's business and affairs. The General Partner (or, in the event that there is no remaining General Partner or the General Partner has dissolved, become bankrupt within the meaning of the Act or ceased to operate, any Person elected by a Majority in Interest of the Limited Partners (the General Partner or such other Person being referred to herein as the "Liquidator")) shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership's liabilities and property, and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the General Partner, include shares of stock in the Previous General Partner) shall be applied and distributed in the following order: (1) First, to the satisfaction of all of the Partnership's debts and liabilities to creditors other than the Partners and their Assignees (whether by payment or the making of reasonable provision for payment thereof); (2) Second, to the satisfaction of all of the Partnership's debts and liabilities to the General Partner (whether by payment or the making of reasonable provision for payment thereof), including, but not limited to, amounts due as reimbursements under Section 7.4 hereof; (3) Third, to the satisfaction of all of the Partnership's debts and liabilities to the other Partners and any Assignees (whether by payment or the making of reasonable provision for payment thereof); and (4) Subject to the terms of any Partnership Unit Designation, the balance, if any, to the General Partner, the Limited Partners and any Assignees in accordance with and in proportion to their positive Capital Account balances, after giving effect to all contributions, distributions and allocations for all periods. The General Partner shall not receive any additional compensation for any services performed pursuant to this Article 13. B. Notwithstanding the provisions of Section 13.2.A hereof that require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership's assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its sole and absolute discretion, defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors) and/or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2.A hereof, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interest of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt. 56 62 C. In the event that the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article 13 to the Partners and Assignees that have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2) to the extent of, and in proportion to, positive Capital Account balances. If any Partner has a deficit balance in its Capital Account (after giving effect to all contributions, distributions and allocations for all taxable years, including the year during which such liquidation occurs), such Partner shall have no obligation to make any contribution to the capital of the Partnership with respect to such deficit, and such deficit shall not be considered a debt owed to the Partnership or to any other Person for any purpose whatsoever. In the sole and absolute discretion of the General Partner or the Liquidator, a pro rata portion of the distributions that would otherwise be made to the Partners pursuant to this Article 13 may be withheld or escrowed to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership, provided that such withheld or escrowed amounts shall be distributed to the General Partner and Limited Partners in the manner and order of priority set forth in Section 13.2.A hereof as soon as practicable. Section 13.3 Deemed Distribution and Recontribution. Notwithstanding any other provision of this Article 13, in the event that the Partnership is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), but no Liquidating Event has occurred, the Partnership's Property shall not be liquidated, the Partnership's liabilities shall not be paid or discharged and the Partnership's affairs shall not be wound up. Instead, for federal income tax purposes the Partnership shall be deemed to have distributed the Property in kind to the Partners and the Assignees, who shall be deemed to have assumed and taken such Property subject to all Partnership liabilities, all in accordance with their respective Capital Accounts. Immediately thereafter, the Partners and the Assignees shall be deemed to have recontributed the Partnership Property in kind to the Partnership, which shall be deemed to have assumed and taken such Property subject to all such liabilities; provided, however, that nothing in this Section 13.3 shall be deemed to have constituted any Assignee as a Substituted Limited Partner without compliance with the provisions of Section 11.4 hereof. Section 13.4 Rights of Limited Partners. Except as otherwise provided in this Agreement, (a) each Limited Partner shall look solely to the assets of the Partnership for the return of its Capital Contribution, (b) no Limited Partner shall have the right or power to demand or receive property other than cash from the Partnership and (c) no Limited Partner shall have priority over any other Limited Partner as to the return of its Capital Contributions, distributions or allocations. Section 13.5 Notice of Dissolution. In the event that a Liquidating Event occurs or an event occurs that would, but for an election or objection by one or more Partners pursuant to Section 13.1 hereof, result in a dissolution of the Partnership, the General Partner shall, within thirty (30) days thereafter, provide written notice thereof to each of the Partners and, in the General Partner's sole and absolute discretion or as required by the Act, to all other parties with whom the Partnership regularly conducts business (as determined in the sole and absolute discretion of the General Partner), and the General Partner may, or, if required by the Act, shall, publish notice thereof in a newspaper of general circulation in each place in which the Partnership regularly conducts business (as determined in the sole and absolute discretion of the General Partner). Section 13.6 Cancellation of Certificate of Limited Partnership. Upon the completion of the liquidation of the Partnership cash and property as provided in Section 13.2 hereof, the Partnership shall be terminated, a certificate of cancellation shall be filed with the State of Delaware, all qualifications of the Partnership as a foreign limited partnership or association in jurisdictions other than the State of Delaware shall be cancelled, and such other actions as may be necessary to terminate the Partnership shall be taken. 37 63 Section 13.7 Reasonable Time for Winding-Up. A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.2 hereof, in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect between the Partners during the period of liquidation. ARTICLE 14 PROCEDURES FOR ACTIONS AND CONSENTS OF PARTNERS; AMENDMENTS; MEETINGS Section 14.1 Procedures for Actions and Consents of Partners. The actions requiring consent or approval of Limited Partners pursuant to this Agreement, including Section 7.3 hereof, or otherwise pursuant to applicable law, are subject to the procedures set forth in this Article 14. Section 14.2 Amendments. Amendments to this Agreement may be proposed by the General Partner or by a Majority in Interest of the Limited Partners. Following such proposal, the General Partner shall submit any proposed amendment to the Limited Partners. The General Partner shall seek the written consent of the Limited Partners on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that the General Partner may deem appropriate. For purposes of obtaining a written consent, the General Partner may require a response within a reasonable specified time, but not less than fifteen (15) days, and failure to respond in such time period shall constitute a consent that is consistent with the General Partner's recommendation with respect to the proposal; provided, however, that an action shall become effective at such time as requisite consents are received even if prior to such specified time. Section 14.3 Meetings of the Partners. A. Meetings of the Partners may be called by the General Partner and shall be called upon the receipt by the General Partner of a written request by a Majority in Interest of the Limited Partners. The call shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than seven (7) days nor more than thirty (30) days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote or Consent of Partners is permitted or required under this Agreement, such vote or Consent may be given at a meeting of Partners or may be given in accordance with the procedure prescribed in Section 14.3.B hereof. B. Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement for the action in question). Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified. C. Each Limited Partner may authorize any Person or Persons to act for it by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or its attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy (or there is receipt of a proxy authorizing a later date). Every proxy shall be revocable at the pleasure of the Limited Partner executing it, such revocation to be effective upon the Partnership's receipt of written notice of such revocation from the Limited Partner executing such proxy. 58 64 D. Each meeting of Partners shall be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate in its sole and absolute discretion. Without limitation, meetings of Partners may be conducted in the same manner as meetings of the General Partner's shareholders and may be held at the same time as, and as part of, the meetings of the General Partner's shareholders. ARTICLE 15 GENERAL PROVISIONS Section 15.1 Addresses and Notice. Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication (including by telecopy, facsimile, or commercial courier service) to the Partner or Assignee at the address set forth in Exhibit A or such other address of which the Partner shall notify the General Partner in writing. Section 15.2 Titles and Captions. All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to "Articles" or "Sections" are to Articles and Sections of this Agreement. Section 15.3 Pronouns and Plurals. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. Section 15.4 Further Action. The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement. Section 15.5 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns. Section 15.6 Waiver. A. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition. B. The restrictions, conditions and other limitations on the rights and benefits of the Limited Partners contained in this Agreement, and the duties, covenants and other requirements of performance or notice by the Limited Partners, are for the benefit of the Partnership and, except for an obligation to pay money to the Partnership, may be waived or relinquished by the General Partner, in its sole and absolute discretion, on behalf of the Partnership in one or more instances from time to time and at any time; provided, however, that any such waiver or relinquishment may not be made if it would have the effect of (i) creating liability for any other Limited Partner, 59 65 (ii) causing the Partnership to cease to qualify as a limited partnership, (iii) reducing the amount of cash otherwise distributable to the Limited Partners, (iv) resulting in the classification of the Partnership as an association or publicly traded partnership taxable as a corporation or (v) violating the Securities Act, the Exchange Act or any state "blue sky" or other securities laws; provided, further, that any waiver relating to compliance with the Ownership Limit or other restrictions in the Charter shall be made and shall be effective only as provided in the Charter. Section 15.7 Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto. Section 15.8 Applicable Law. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law. In the event of a conflict between any provision of this Agreement and any non-mandatory provision of the Act, the provisions of this Agreement shall control and take precedence. Section 15.9 Entire Agreement. This Agreement contains all of the understandings and agreements between and among the Partners with respect to the subject matter of this Agreement and the rights, interests and obligations of the Partners with respect to the Partnership. Section 15.10 Invalidity of Provisions. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. Section 15.11 Limitation to Preserve REIT Status. Notwithstanding anything else in this Agreement, to the extent that the amount paid, credited, distributed or reimbursed by the Partnership to any REIT Partner or its officers, directors, employees or agents, whether as a reimbursement, fee, expense or indemnity (a "REIT Payment"), would constitute gross income to the REIT Partner for purposes of Code Section 856(c)(2) or Code Section 856(c)(3), then, notwithstanding any other provision of this Agreement, the amount of such REIT Payments, as selected by the General Partner in its discretion from among items of potential distribution, reimbursement, fees, expenses and indemnities, shall be reduced for any Fiscal Year so that the REIT Payments, as so reduced, for or with respect to such REIT Partner shall not exceed the lesser of: (i) an amount equal to the excess, if any, of (a) four and nine-tenths percent (4.9%) of the REIT Partner's total gross income (but excluding the amount of any REIT Payments) for the Fiscal Year that is described in subsections (A) through (H) of Code Section 856(c)(2) over (b) the amount of gross income (within the meaning of Code Section 856(c)(2)) derived by the REIT Partner from sources other than those described in subsections (A) through (H) of Code Section 856(c)(2) (but not including the amount of any REIT Payments); or (ii) an amount equal to the excess, if any, of (a) twenty-four percent (24%) of the REIT Partner's total gross income (but excluding the amount of any REIT Payments) for the Fiscal Year that is described in subsections (A) through (I) of Code Section 856(c)(3) over (b) the amount of gross income (within the meaning of Code Section 856(c)(3)) derived by the REIT Partner from sources other than those described in subsections (A) through (I) of Code Section 856(c)(3) (but not including the amount of any REIT Payments); 60 66 provided, however, that REIT Payments in excess of the amounts set forth in clauses (i) and (ii) above may be made if the General Partner, as a condition precedent, obtains an opinion of tax counsel that the receipt of such excess amounts shall not adversely affect the REIT Partner's ability to qualify as a REIT. To the extent that REIT Payments may not be made in a Fiscal Year as a consequence of the limitations set forth in this Section 15.11, such REIT Payments shall carry over and shall be treated as arising in the following Fiscal Year. The purpose of the limitations contained in this Section 15.11 is to prevent any REIT Partner from failing to qualify as a REIT under the Code by reason of such REIT Partner's share of items, including distributions, reimbursements, fees, expenses or indemnities, receivable directly or indirectly from the Partnership, and this Section 15.11 shall be interpreted and applied to effectuate such purpose. Section 15.12 No Partition. No Partner nor any successor-in-interest to a Partner shall have the right while this Agreement remains in effect to have any property of the Partnership partitioned, or to file a complaint or institute any proceeding at law or in equity to have such property of the Partnership partitioned, and each Partner, on behalf of itself and its successors and assigns hereby waives any such right. It is the intention of the Partners that the rights of the parties hereto and their successors-in-interest to Partnership property, as among themselves, shall be governed by the terms of this Agreement, and that the rights of the Partners and their successors-in-interest shall be subject to the limitations and restrictions as set forth in this Agreement. Section 15.13 No Third-Party Rights Created Hereby. The provisions of this Agreement are solely for the purpose of defining the interests of the Partners, inter se; and no other person, firm or entity (i.e., a party who is not a signatory hereto or a permitted successor to such signatory hereto) shall have any right, power, title or interest by way of subrogation or otherwise, in and to the rights, powers, title and provisions of this Agreement. No creditor or other third party having dealings with the Partnership shall have the right to enforce the right or obligation of any Partner to make Capital Contributions or loans to the Partnership or to pursue any other right or remedy hereunder or at law or in equity. None of the rights or obligations of the Partners herein set forth to make Capital Contributions or loans to the Partnership shall be deemed an asset of the Partnership for any purpose by any creditor or other third party, nor may any such rights or obligations be sold, transferred or assigned by the Partnership or pledged or encumbered by the Partnership to secure any debt or other obligation of the Partnership or any of the Partners. [the next page is the signature page] 61 67 IN WITNESS WHEREOF, this Agreement has been executed as of the date first written above. PREVIOUS GENERAL PARTNER: APARTMENT INVESTMENT AND MANAGEMENT COMPANY By: /s/ Peter Kompaniez ------------------- Name: Peter Kompaniez Title: Vice Chairman GENERAL PARTNER: AIMCO-GP, INC. By: /s/ Peter Kompaniez ------------------- Name: Peter Kompaniez Title: Vice President SPECIAL LIMITED PARTNER: AIMCO-LP, INC. By: /s/ Peter Kompaniez ------------------- Name: Peter Kompaniez Title: Vice President LIMITED PARTNERS: By: AIMCO-GP, INC., as attorney-in-fact By: /s/ Peter Kompaniez ------------------- Name: Peter Kompaniez Title: Vice President 62 68 EXHIBIT A PARTNERS AND PARTNERSHIP UNITS Exhibit A, the list of Partners and Partnership Units, is maintained by the General Partner and omitted from this copy of the Agreement. A-1 69 EXHIBIT B EXAMPLES REGARDING ADJUSTMENT FACTOR For purposes of the following examples, it is assumed that (a) the Adjustment Factor in effect on June 30, 1995 is 1.0 and (b) on July 1, 1995 (the "Partnership Record Date" for purposes of these examples), prior to the events described in the examples, there are 100 REIT Shares issued and outstanding. Example 1 On the Partnership Record Date, the Previous General Partner declares a dividend on its outstanding REIT Shares in REIT Shares. The amount of the dividend is one REIT Share paid in respect of each REIT Share owned. Pursuant to Paragraph (i) of the definition of "Adjustment Factor," the Adjustment Factor shall be adjusted on the Partnership Record Date, effective immediately after the stock dividend is declared, as follows: 1.0 * 200 =2.0 ----- 100 Accordingly, the Adjustment Factor after the stock dividend is declared is 2.0. Example 2 On the Partnership Record Date, the Previous General Partner distributes options to purchase REIT Shares to all holders of its REIT Shares. The amount of the distribution is one option to acquire one REIT Share in respect of each REIT Share owned. The strike price is $4.00 a share. The Value of a REIT Share on the Partnership Record Date is $5.00 per share. Pursuant to Paragraph (ii) of the definition of "Adjustment Factor," the Adjustment Factor shall be adjusted on the Partnership Record Date, effective immediately after the options are distributed, as follows: 1.0* (100+100) = 1.1111 ------------- (100 +100*$4.00) ---------- $5.00 Accordingly, the Adjustment Factor after the options are distributed is 1.1111. If the options expire or become no longer exercisable, then the retroactive adjustment specified in Paragraph (ii) of the definition of "Adjustment Factor" shall apply. B-1 70 Example 3 On the Partnership Record Date, the Previous General Partner distributes assets to all holders of its REIT Shares. The amount of the distribution is one asset with a fair market value (as determined by the General Partner) of $1.00 in respect of each REIT Share owned. It is also assumed that the assets do not relate to assets received by the Previous General Partner or the General Partner pursuant to a pro rata distribution by the Partnership. The Value of a REIT Share on the Partnership Record Date is $5.00 a share. Pursuant to Paragraph (iii) of the definition of "Adjustment Factor," the Adjustment Factor shall be adjusted on the Partnership Record Date, effective immediately after the assets are distributed, as follows: 1.0 * $5.00 = 1.25 ------------ $5.00-$1.00 Accordingly, the Adjustment Factor after the assets are distributed is 1.25. B-2 71 EXHIBIT C LIST OF DESIGNATED PARTIES Terry Considine Peter K. Kompaniez Robert P. Lacy Michael & Verona Sollinger Patrick Stucker Stonegate Funding Company Steven F. Goldstone Donaldson C. Pillsbury Christopher Crowley Richard D. Spizzini Henry L. King Alfonso G. Canales Thomas J. Flynn Carl E. Yasharian Margot A. Mathoni David B. Pall Thomas E. Woodruff Glen H. & Joyce E. Rosmann Warren H. Leland Amerett L. Donahoe Daniel E. Landon Conrad F. Fingerson Dwight E. Lowell, II Alfred V. & Lois E. Gangnes Edward S. Stone Sycamore Realty Trust, V E. Oran Brigham Donald Ravitch Brian Conboy Alan B. Grebene Charles A. Cahill, III Harold F. & Lucille J. Goodman Timothy J. Tucker C-1 72 EXHIBIT D [INTENTIONALLY OMITTED] D-1 73 EXHIBIT E NOTICE OF REDEMPTION To: AIMCO-GP, Inc. c/o Apartment Investment and Management Company 1873 South Bellaire Street Suite 1700 Denver, Colorado 80222 The undersigned Limited Partner or Assignee hereby irrevocably tenders for Redemption _______ Partnership Common Units in AIMCO Properties, L.P. in accordance with the terms of the Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of July 29, 1994, as amended (the "Agreement"), and the Redemption rights referred to therein. All capitalized terms used herein and not otherwise defined shall have the same meaning ascribed to them respectively in the Agreement. The undersigned Limited Partner or Assignee: (a) if the Partnership elects to redeem such Partnership Common Units for REIT Shares rather than cash, hereby irrevocably transfers, assigns, contributes and sets over to the Previous General Partner all of the undersigned Limited Partner's or Assignee's right, title and interest in and to such Partnership Common Units; (b) undertakes (i) to surrender such Partnership Common Units and any certificate therefor at the closing of the Redemption and (ii) to furnish to the Previous General Partner, prior to the Specified Redemption Date, the documentation, instruments and information required under Section 8.6.G of the Agreement; (c) directs that the certificate representing the REIT Shares, or the certified check representing the Cash Amount, in either case, deliverable upon the closing of such Redemption be delivered to the address specified below; (d) represents, warrants, certifies and agrees that: (i) the undersigned Limited Partner or Assignee is a Qualifying Party; (ii) the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, good, marketable and unencumbered title to such Partnership Common Units, free and clear of the rights or interests of any other person or entity; (iii) the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, the full right, power and authority to tender and surrender such Partnership Common Units as provided herein; and (iv) the undersigned Limited Partner or Assignee has obtained the consent or approval of all persons and entities, if any, having the right to consent to or approve such tender and surrender; and E-1 74 (e) acknowledges that he will continue to own such Partnership Common Units until and unless such Redemption transaction closes. Dated: ------------------ Name of Limited Partner or Assignee: ----------------------------------------- ----------------------------------------- (Signature of Limited Partner or Assignee) ----------------------------------------- (Street Address) ----------------------------------------- (City) (State) (Zip Code) Signature Guaranteed by: ----------------------------------------- Issue Check Payable to: ----------------------------------------- Please insert social security or identifying number: ----------------------------------------- E-2 75 EXHIBIT F FORM OF UNIT CERTIFICATE THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE PARTNERSHIP AN OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP, IN FORM AND SUBSTANCE SATISFACTORY TO THE PARTNERSHIP, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS. IN ADDITION, THE LIMITED PARTNERSHIP INTEREST EVIDENCED BY THIS CERTIFICATE MAY BE SOLD OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THE AGREEMENT OF LIMITED PARTNERSHIP OF AIMCO PROPERTIES, L.P., DATED AS OF JULY 29, 1994, A COPY OF WHICH MAY BE OBTAINED FROM AIMCO-GP, INC., THE GENERAL PARTNER, AT ITS PRINCIPAL EXECUTIVE OFFICE. Certificate Number -------- AIMCO PROPERTIES, L.P. FORMED UNDER THE LAWS OF THE STATE OF DELAWARE This certifies that ----------------------------------------------------------- is the owner of --------------------------------------------------------------- FULLY PAID PARTNERSHIP COMMON UNITS OF AIMCO PROPERTIES, L.P., transferable on the books of the Partnership in person or by duly authorized attorney on the surrender of this Certificate properly endorsed. This Certificate and the Partnership Common Units represented hereby are issued and shall be held subject to all of the provisions of the Agreement of Limited Partnership, as the same may be amended and/or supplemented from time to time. IN WITNESS WHEREOF, the undersigned has signed this Certificate. Dated: By -------------------------------- F-1 76 For Value Received, hereby -------------------------------- sells, assigns and transfers unto --------------------------------------------- - ------------------------------------------------------------------------------- Partnership Common Unit(s) represented by the within Certificate, and does hereby irrevocably constitute and appoint the General Partner of AIMCO Properties, L.P. as its Attorney to transfer said Partnership Common Unit(s) on the books of AIMCO Properties, L.P. with full power of substitution in the premises. Dated: -------------------- By: ------------------------------ Name: F-2 77 EXHIBIT G PARTNERSHIP UNIT DESIGNATION OF THE CLASS B PARTNERSHIP PREFERRED UNITS OF AIMCO PROPERTIES, L.P. 1. NUMBER OF UNITS AND DESIGNATION. A class of Partnership Preferred Units is hereby designated as "Class B Partnership Preferred Units," and the number of Partnership Preferred Units constituting such class shall be Seven Hundred Fifty Thousand (750,000). 2. DEFINITIONS. For purposes of the Class B Partnership Preferred Units, the following terms shall have the meanings indicated in this Section 2. Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement. "Agreement" shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time. "Call Date" shall have the meaning set forth in paragraph (a) of Section 5 of this Exhibit G. "Class B Partnership Preferred Unit" means a Partnership Preferred Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Exhibit G. It is the intention of the General Partner that each Class B Partnership Preferred Unit shall be substantially the economic equivalent of one share of Class B Preferred Stock. "Class B Preferred Stock" means the Class B Cumulative Convertible Preferred Stock, par value $0.01 per share, of the Previous General Partner. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. Reference to any provision of the Code shall mean such provision as in effect from time to time, as the same may be amended, and any successor thereto, as interpreted by any applicable regulations or other administrative pronouncements as in effect from time to time. "Common Stock" shall mean the Class A Common Stock, $.01 par value per share, of the Previous General Partner or such shares of the Previous General Partner's capital stock into which outstanding shares of Common Stock shall be reclassified. "Distribution Payment Date" shall mean any date on which cash dividends are paid on the Class B Preferred Stock. "Junior Partnership Units" shall have the meaning set forth in paragraph (c) of Section 8 of this Exhibit G. "Parity Partnership Units" shall have the meaning set forth in paragraph (b) of Section 8 of this Exhibit G. G-1 78 "Partnership" shall mean AIMCO Properties, L.P., a Delaware limited partnership. "Senior Partnership Units" shall have the meaning set forth in paragraph (a) of Section 8 of this Exhibit G. 3. DISTRIBUTIONS. On every Distribution Payment Date, the holders of Class B Partnership Preferred Units shall be entitled to receive distributions payable in cash in an amount per Class B Partnership Preferred Unit equal to the per share dividend payable on the Class B Preferred Stock on such Distribution Payment Date. Each such distribution shall be payable to the holders of record of the Class B Partnership Preferred Units, as they appear on the records of the Partnership at the close of business on the record date for the dividend payable with respect to the Class B Preferred Stock on such Distribution Payment Date. Holders of Class B Partnership Preferred Units shall not be entitled to any distributions on the Class B Partnership Preferred Units, whether payable in cash, property or stock, except as provided herein. 4. LIQUIDATION PREFERENCE. (1) In the event of any liquidation, dissolution or winding up of the Partnership, whether voluntary or involuntary, before any payment or distribution of the Partnership (whether capital or surplus) shall be made to or set apart for the holders of Junior Partnership Units, the holders of Class B Partnership Preferred Units shall be entitled to receive One Hundred Dollars ($100) per Class B Partnership Preferred Unit (the "Liquidation Preference"), plus an amount equal to all dividends (whether or not earned) accumulated, accrued and unpaid on each share of Class B Preferred Stock to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. Until the holders of the Class B Partnership Preferred Units have been paid the Liquidation Preference in full, plus an amount equal to all dividends (whether or not earned) accumulated, accrued and unpaid on the Class B Preferred Stock to the date of final distribution to such holders, no payment will be made to any holder of Junior Partnership Units upon the liquidation, dissolution or winding up of the Partnership. If, upon any liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, distributable among the holders of Class B Partnership Preferred Units shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any Parity Partnership Units, then such assets, or the proceeds thereof, shall be distributed among the holders of Class B Partnership Preferred Units and any such Parity Partnership Units ratably in the same proportion as the respective amounts that would be payable on such Class B Partnership Preferred Units and any such other Parity Partnership Units if all amounts payable thereon were paid in full. For the purposes of this Section 4, (i) a consolidation or merger of the Partnership with one or more partnerships, or (ii) a sale or transfer of all or substantially all of the Partnership's assets shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Partnership. (2) Upon any liquidation, dissolution or winding up of the Partnership, after payment shall have been made in full to the holders of Class B Partnership Preferred Units and any Parity Partnership Units, as provided in this Section 4, any other series or class or classes of Junior Partnership Units shall, subject to the respective terms thereof, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Class B Partnership Preferred Units and any Parity Partnership Units shall not be entitled to share therein. 5. REDEMPTION. Class B Partnership Preferred Units shall be redeemable by the Partnership as follows: (1) At any time that the Previous General Partner exercises its right to redeem all or any of the shares of Class B Preferred Stock, the General Partner shall cause the Partnership to redeem an equal number of G-2 79 Class B Partnership Preferred Units, at a redemption price payable in cash equal to 100% of the Liquidation Preference thereof, plus an amount equal to all accrued and unpaid dividends on each share of Class B Preferred Stock to the date fixed for redemption (the "Call Date"), in the manner set forth herein. (2) If the Partnership shall redeem Class B Partnership Preferred Units pursuant to paragraph (a) of this Section 5, from and after the Call Date (unless the Partnership shall fail to make available the amount of cash necessary to effect such redemption), (i) except for payment of the redemption price, the Partnership shall not make any further distributions on the Class B Partnership Preferred Units so called for redemption (except that, in the case of a Call Date after a distribution record date and prior to the related Distribution Payment Date, holders of Class B Partnership Preferred Units on the distribution record date will be entitled on such Distribution Payment Date to receive the distribution payable thereon), (ii) said units shall no longer be deemed to be outstanding, and (iii) all rights of the holders thereof as holders of Class B Partnership Preferred Units of the Partnership shall cease (except the rights to receive the cash payable upon such redemption, without interest thereon, and to receive any distributions payable thereon). No interest shall accrue for the benefit of the holders of Class B Partnership Preferred Units to be redeemed on any cash set aside by the Partnership. If fewer than all the outstanding Class B Partnership Preferred Units are to be redeemed, units to be redeemed shall be selected by the Partnership from outstanding Class B Partnership Preferred Units not previously called for redemption by any method determined by the General Partner in its discretion. Upon any such redemption, the General Partner shall amend Exhibit A to the Agreement as appropriate to reflect such redemption. 6. STATUS OF REACQUIRED UNITS. All Class B Partnership Preferred Units which shall have been issued and reacquired in any manner by the Partnership (including Class B Partnership Preferred Units which have been surrendered for conversion into Partnership Common Units) shall be deemed cancelled. 7. CONVERSION. Class B Partnership Preferred Units shall be convertible by the holders thereof as follows: (1) Upon any conversion of shares of Class B Preferred Stock into shares of Common Stock, the General Partner shall cause a number of Class B Partnership Preferred Units equal to the number of such converted shares of Class B Preferred Stock to be converted by the holders thereof into Partnership Common Units. The conversion ratio in effect from time to time for the conversion of Class B Partnership Preferred Units into Partnership Common Units pursuant to this Section 7 shall at all times be equal to, and shall be automatically adjusted as necessary to reflect, the conversion ratio in effect from time to time for the conversion of Class B Preferred Stock into Common Stock. (2) Holders of Class B Partnership Preferred Units at the close of business on a distribution payment record date shall be entitled to receive the distribution payable on such units on the corresponding Distribution Payment Date notwithstanding the conversion thereof following such distribution payment record date and prior to such Distribution Payment Date. Except as provided above, the Partnership shall make no payment or allowance for unpaid distributions on converted units or for distributions on the Partnership Common Units issued upon such conversion. Each conversion of Class B Partnership Preferred Units into Partnership Common Units shall be deemed to have been effected at the same time and date that the corresponding conversion of Class B Preferred Stock into Common Stock is deemed to have been effected. G-3 80 (3) No fractional Partnership Common Units shall be issued upon conversion of Class B Partnership Preferred Units. Instead of any fractional Partnership Common Units that would otherwise be deliverable upon the conversion of Class B Partnership Preferred Units, the Partnership shall pay to the holder of such converted units an amount in cash equal to the cash payable to a holder of an equivalent number of converted shares of Class B Preferred Stock in lieu of fractional shares of Common Stock. (4) The Partnership will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of (i) the issue or delivery of Partnership Common Units or other securities or property on conversion or redemption of Class B Partnership Preferred Units pursuant hereto, and (ii) the issue or delivery of Common Stock or other securities or property on conversion or redemption of Class B Preferred Stock pursuant to the terms hereof. 8. RANKING. Any class or series of Partnership Units of the Partnership shall be deemed to rank: (1) prior or senior to the Class B Partnership Preferred Units, as to the payment of distributions and as to distributions of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class B Partnership Preferred Units ("Senior Partnership Units"); (2) on a parity with the Class B Partnership Preferred Units, as to the payment of distributions and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit or other denomination thereof be different from those of the Class B Partnership Preferred Units, if the holders of such class or series of Partnership Units and the Class B Partnership Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per unit or other denomination or liquidation preferences, without preference or priority one over the other ("Parity Partnership Units"); and (3) junior to the Class B Partnership Preferred Units, as to the payment of distributions or as to the distribution of assets upon liquidation, dissolution or winding up, if such class or series of Partnership Units shall be Partnership Common Units or if the holders of Class B Preferred Partnership Units shall be entitled to receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series of Partnership Units ("Junior Partnership Units"). 9. SPECIAL ALLOCATIONS. (1) Gross income and, if necessary, gain shall be allocated to the holders of Class B Partnership Preferred Units for any Fiscal Year (and, if necessary, subsequent Fiscal Years) to the extent that the holders of Class B Partnership Preferred Units receive a distribution on any Class B Partnership Preferred Units (other than an amount included in any redemption pursuant to Section 5 hereof) with respect to such Fiscal Year. (2) If any Class B Partnership Preferred Units are redeemed pursuant to Section 5 hereof, for the Fiscal Year that includes such redemption (and, if necessary, for subsequent Fiscal Years) (a) gross income and gain (in such relative proportions as the General Partner in its discretion shall determine) shall be allocated to the holders of Class B Partnership Preferred Units to the extent that the redemption amounts paid or payable with respect to the Class B Partnership Preferred Units so redeemed exceeds the aggregate Capital Contributions (net of liabilities G-4 81 assumed or taken subject to by the Partnership) per Class B Partnership Preferred Unit allocable to the Class B Partnership Preferred Units so redeemed and (b) deductions and losses (in such relative proportions as the General Partner in its discretion shall determine) shall be allocated to the holders of Class B Partnership Preferred Units to the extent that the aggregate Capital Contributions (net of liabilities assumed or taken subject to by the Partnership) per Class B Partnership Preferred Unit allocable to the Class B Partnership Preferred Units so redeemed exceeds the redemption amount paid or payable with respect to the Class B Partnership Preferred Units so redeemed. 10. RESTRICTIONS ON OWNERSHIP. The Class B Partnership Preferred Units shall be owned and held solely by the General Partner or the Special Limited Partner. 11. GENERAL. (1) The ownership of Class B Partnership Preferred Units may (but need not, in the sole and absolute discretion of the General Partner) be evidenced by one or more certificates. The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent conversion, redemption, or any other event having an effect on the ownership of, Class B Partnership Preferred Units. (2) The rights of the General Partner and the Special Limited Partner, in their capacity as holders of the Class B Partnership Preferred Units, are in addition to and not in limitation of any other rights or authority of the General Partner or the Special Limited Partner, respectively, in any other capacity under the Agreement or applicable law. In addition, nothing contained herein shall be deemed to limit or otherwise restrict the authority of the General Partner or the Special Limited Partner under the Agreement, other than in their capacity as holders of the Class B Partnership Preferred Units. G-5 82 EXHIBIT H PARTNERSHIP UNIT DESIGNATION OF THE CLASS C PARTNERSHIP PREFERRED UNITS OF AIMCO PROPERTIES, L.P. 1. NUMBER OF UNITS AND DESIGNATION. A class of Partnership Preferred Units is hereby designated as "Class C Partnership Preferred Units," and the number of Partnership Preferred Units constituting such class shall be Two Million Seven Hundred Sixty Thousand (2,760,000). 2. DEFINITIONS. For purposes of the Class C Partnership Preferred Units, the following terms shall have the meanings indicated in this Section 2. Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement. "Agreement" shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time. "Call Date" shall have the meaning set forth in paragraph (a) of Section 5 of this Exhibit H. "Class C Partnership Preferred Unit" means a Partnership Preferred Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Exhibit H. It is the intention of the General Partner that each Class C Partnership Preferred Unit shall be substantially the economic equivalent of one share of Class C Preferred Stock. "Class C Preferred Stock" means the Class C Cumulative Preferred Stock, par value $0.01 per share, of the Previous General Partner. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. Reference to any provision of the Code shall mean such provision as in effect from time to time, as the same may be amended, and any successor thereto, as interpreted by any applicable regulations or other administrative pronouncements as in effect from time to time. "Common Stock" shall mean the Class A Common Stock, $.01 par value per share, of the Previous General Partner or such shares of the Previous General Partner's capital stock into which outstanding shares of Common Stock shall be reclassified. "Distribution Payment Date" shall mean any date on which cash dividends are paid on the Class C Preferred Stock. "Junior Partnership Units" shall have the meaning set forth in paragraph (c) of Section 7 of this Exhibit H. "Parity Partnership Units" shall have the meaning set forth in paragraph (b) of Section 7 of this Exhibit H. H-1 83 "Partnership" shall mean AIMCO Properties, L.P., a Delaware limited partnership. "Senior Partnership Units" shall have the meaning set forth in paragraph (a) of Section 7 of this Exhibit H. 3. DISTRIBUTIONS. On every Distribution Payment Date, the holders of Class C Partnership Preferred Units shall be entitled to receive distributions payable in cash in an amount per Class C Partnership Preferred Unit equal to the per share dividend payable on the Class C Preferred Stock on such Distribution Payment Date. Each such distribution shall be payable to the holders of record of the Class C Partnership Preferred Units, as they appear on the records of the Partnership at the close of business on the record date for the dividend payable with respect to the Class C Preferred Stock on such Distribution Payment Date. Holders of Class C Partnership Preferred Units shall not be entitled to any distributions on the Class C Partnership Preferred Units, whether payable in cash, property or stock, except as provided herein. 4. LIQUIDATION PREFERENCE. (1) In the event of any liquidation, dissolution or winding up of the Partnership, whether voluntary or involuntary, before any payment or distribution of the Partnership (whether capital or surplus) shall be made to or set apart for the holders of Junior Partnership Units, the holders of Class C Partnership Preferred Units shall be entitled to receive Twenty Five Dollars ($25) per Class C Partnership Preferred Unit (the "Liquidation Preference"), plus an amount equal to all dividends (whether or not earned) accumulated, accrued and unpaid on each share of Class C Preferred Stock to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. Until the holders of the Class C Partnership Preferred Units have been paid the Liquidation Preference in full, plus an amount equal to all dividends (whether or not earned) accumulated, accrued and unpaid on the Class C Preferred Stock to the date of final distribution to such holders, no payment will be made to any holder of Junior Partnership Units upon the liquidation, dissolution or winding up of the Partnership. If, upon any liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, distributable among the holders of Class C Partnership Preferred Units shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any Parity Partnership Units, then such assets, or the proceeds thereof, shall be distributed among the holders of Class C Partnership Preferred Units and any such Parity Partnership Units ratably in the same proportion as the respective amounts that would be payable on such Class C Partnership Preferred Units and any such other Parity Partnership Units if all amounts payable thereon were paid in full. For the purposes of this Section 4, (i) a consolidation or merger of the Partnership with one or more partnerships, or (ii) a sale or transfer of all or substantially all of the Partnership's assets shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Partnership. (2) Upon any liquidation, dissolution or winding up of the Partnership, after payment shall have been made in full to the holders of Class C Partnership Preferred Units and any Parity Partnership Units, as provided in this Section 4, any other series or class or classes of Junior Partnership Units shall, subject to the respective terms thereof, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Class C Partnership Preferred Units and any Parity Partnership Units shall not be entitled to share therein. 5. REDEMPTION. Class C Partnership Preferred Units shall be redeemable by the Partnership as follows: (1) At any time that the Previous General Partner exercises its right to redeem all or any of the shares of Class C Preferred Stock, the General Partner may cause the Partnership to redeem an equal number of H-2 84 Class C Partnership Preferred Units, at a redemption price payable in cash equal to 100% of the Liquidation Preference thereof, plus an amount equal to all accrued and unpaid dividends on each share of Class C Preferred Stock to the date fixed for redemption (the "Call Date"), in the manner set forth herein. (2) If the Partnership shall redeem Class C Partnership Preferred Units pursuant to paragraph (a) of this Section 5, from and after the Call Date (unless the Partnership shall fail to make available the amount of cash necessary to effect such redemption), (i) except for payment of the redemption price, the Partnership shall not make any further distributions on the Class C Partnership Preferred Units so called for redemption (except that, in the case of a Call Date after a distribution record date and prior to the related Distribution Payment Date, holders of Class C Partnership Preferred Units on the distribution record date will be entitled on such Distribution Payment Date to receive the distribution payable thereon), (ii) said units shall no longer be deemed to be outstanding, and (iii) all rights of the holders thereof as holders of Class C Partnership Preferred Units of the Partnership shall cease (except the rights to receive the cash payable upon such redemption, without interest thereon, and to receive any distributions payable thereon). No interest shall accrue for the benefit of the holders of Class C Partnership Preferred Units to be redeemed on any cash set aside by the Partnership. If fewer than all the outstanding Class C Partnership Preferred Units are to be redeemed, units to be redeemed shall be selected by the Partnership from outstanding Class C Partnership Preferred Units not previously called for redemption by any method determined by the General Partner in its discretion. Upon any such redemption, the General Partner shall amend Exhibit A to the Agreement as appropriate to reflect such redemption. 6. STATUS OF REACQUIRED UNITS. All Class C Partnership Preferred Units which shall have been issued and reacquired in any manner by the Partnership shall be deemed cancelled. 7. RANKING. Any class or series of Partnership Units of the Partnership shall be deemed to rank: (1) prior or senior to the Class C Partnership Preferred Units, as to the payment of distributions and as to distributions of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class C Partnership Preferred Units ("Senior Partnership Units"); (2) on a parity with the Class C Partnership Preferred Units, as to the payment of distributions and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit or other denomination thereof be different from those of the Class C Partnership Preferred Units if such Class or series of Partnership Units shall be Class B Preferred Partnership Units or if the holders of such class or series of Partnership Units and the Class C Partnership Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per unit or other denomination or liquidation preferences, without preference or priority one over the other ("Parity Partnership Units"); and (3) junior to the Class C Partnership Preferred Units, as to the payment of distributions or as to the distribution of assets upon liquidation, dissolution or winding up, if such class or series of Partnership Units shall be Partnership Common Units or if the holders of Class C Preferred H-3 85 Partnership Units shall be entitled to receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series of Partnership Units ("Junior Partnership Units"). 8. SPECIAL ALLOCATIONS. (1) Gross income and, if necessary, gain shall be allocated to the holders of Class C Partnership Preferred Units for any Fiscal Year (and, if necessary, subsequent Fiscal Years) to the extent that the holders of Class C Partnership Preferred Units receive a distribution on any Class C Partnership Preferred Units (other than an amount included in any redemption pursuant to Section 5 hereof) with respect to such Fiscal Year. (2) If any Class C Partnership Preferred Units are redeemed pursuant to Section 5 hereof, for the Fiscal Year that includes such redemption (and, if necessary, for subsequent Fiscal Years) (a) gross income and gain (in such relative proportions as the General Partner in its discretion shall determine) shall be allocated to the holders of Class C Partnership Preferred Units to the extent that the redemption amounts paid or payable with respect to the Class C Partnership Preferred Units so redeemed exceeds the aggregate Capital Contributions (net of liabilities assumed or taken subject to by the Partnership) per Class C Partnership Preferred Unit allocable to the Class C Partnership Preferred Units so redeemed and (b) deductions and losses (in such relative proportions as the General Partner in its discretion shall determine) shall be allocated to the holders of Class C Partnership Preferred Units to the extent that the aggregate Capital Contributions (net of liabilities assumed or taken subject to by the Partnership) per Class C Partnership Preferred Unit allocable to the Class C Partnership Preferred Units so redeemed exceeds the redemption amount paid or payable with respect to the Class C Partnership Preferred Units so redeemed. 9. RESTRICTIONS ON OWNERSHIP. The Class C Partnership Preferred Units shall be owned and held solely by the General Partner or the Special Limited Partner. 10. GENERAL. (1) The ownership of Class C Partnership Preferred Units may (but need not, in the sole and absolute discretion of the General Partner) be evidenced by one or more certificates. The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent conversion, redemption, or any other event having an effect on the ownership of, Class C Partnership Preferred Units. (2) The rights of the General Partner and the Special Limited Partner, in their capacity as holders of the Class C Partnership Preferred Units, are in addition to and not in limitation of any other rights or authority of the General Partner or the Special Limited Partner, respectively, in any other capacity under the Agreement or applicable law. In addition, nothing contained herein shall be deemed to limit or otherwise restrict the authority of the General Partner or the Special Limited Partner under the Agreement, other than in their capacity as holders of the Class C Partnership Preferred Units. H-4 86 EXHIBIT I PARTNERSHIP UNIT DESIGNATION OF THE CLASS D PARTNERSHIP PREFERRED UNITS OF AIMCO PROPERTIES, L.P. 1. NUMBER OF UNITS AND DESIGNATION. A class of Partnership Preferred Units is hereby designated as "Class D Partnership Preferred Units," and the number of Partnership Preferred Units constituting such class shall be Four Million Six Hundred Thousand (4,600,000). 2. DEFINITIONS. For purposes of the Class D Partnership Preferred Units, the following terms shall have the meanings indicated in this Section 2. Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement. "Agreement" shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time. "Call Date" shall have the meaning set forth in paragraph (a) of Section 5 of this Exhibit I. "Class D Partnership Preferred Unit" means a Partnership Preferred Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Exhibit I. It is the intention of the General Partner that each Class D Partnership Preferred Unit shall be substantially the economic equivalent of one share of Class D Preferred Stock. "Class D Preferred Stock" means the Class D Cumulative Preferred Stock, par value $0.01 per share, of the Previous General Partner. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. Reference to any provision of the Code shall mean such provision as in effect from time to time, as the same may be amended, and any successor thereto, as interpreted by any applicable regulations or other administrative pronouncements as in effect from time to time. "Common Stock" shall mean the Class A Common Stock, $.01 par value per share, of the Previous General Partner or such shares of the Previous General Partner's capital stock into which outstanding shares of Common Stock shall be reclassified. "Distribution Payment Date" shall mean any date on which cash dividends are paid on the Class D Preferred Stock. "Junior Partnership Units" shall have the meaning set forth in paragraph (c) of Section 7 of this Exhibit I. "Parity Partnership Units" shall have the meaning set forth in paragraph (b) of Section 7 of this Exhibit I. I-1 87 "Partnership" shall mean AIMCO Properties, L.P., a Delaware limited partnership. "Senior Partnership Units" shall have the meaning set forth in paragraph (a) of Section 7 of this Exhibit I. 3. DISTRIBUTIONS. On every Distribution Payment Date, the holders of Class D Partnership Preferred Units shall be entitled to receive distributions payable in cash in an amount per Class D Partnership Preferred Unit equal to the per share dividend payable on the Class D Preferred Stock on such Distribution Payment Date. Each such distribution shall be payable to the holders of record of the Class D Partnership Preferred Units, as they appear on the records of the Partnership at the close of business on the record date for the dividend payable with respect to the Class D Preferred Stock on such Distribution Payment Date. Holders of Class D Partnership Preferred Units shall not be entitled to any distributions on the Class D Partnership Preferred Units, whether payable in cash, property or stock, except as provided herein. 4. LIQUIDATION PREFERENCE. (1) In the event of any liquidation, dissolution or winding up of the Partnership, whether voluntary or involuntary, before any payment or distribution of the Partnership (whether capital or surplus) shall be made to or set apart for the holders of Junior Partnership Units, the holders of Class D Partnership Preferred Units shall be entitled to receive Twenty Five Dollars ($25) per Class D Partnership Preferred Unit (the "Liquidation Preference"), plus an amount equal to all dividends (whether or not earned) accumulated, accrued and unpaid on each share of Class D Preferred Stock to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. Until the holders of the Class D Partnership Preferred Units have been paid the Liquidation Preference in full, plus an amount equal to all dividends (whether or not earned) accumulated, accrued and unpaid on the Class D Preferred Stock to the date of final distribution to such holders, no payment will be made to any holder of Junior Partnership Units upon the liquidation, dissolution or winding up of the Partnership. If, upon any liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, distributable among the holders of Class D Partnership Preferred Units shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any Parity Partnership Units, then such assets, or the proceeds thereof, shall be distributed among the holders of Class D Partnership Preferred Units and any such Parity Partnership Units ratably in the same proportion as the respective amounts that would be payable on such Class D Partnership Preferred Units and any such other Parity Partnership Units if all amounts payable thereon were paid in full. For the purposes of this Section 4, (i) a consolidation or merger of the Partnership with one or more partnerships, or (ii) a sale or transfer of all or substantially all of the Partnership's assets shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Partnership. (2) Upon any liquidation, dissolution or winding up of the Partnership, after payment shall have been made in full to the holders of Class D Partnership Preferred Units and any Parity Partnership Units, as provided in this Section 4, any other series or class or classes of Junior Partnership Units shall, subject to the respective terms thereof, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Class D Partnership Preferred Units and any Parity Partnership Units shall not be entitled to share therein. 5. REDEMPTION. Class D Partnership Preferred Units shall be redeemable by the Partnership as follows: (1) At any time that the Previous General Partner exercises its right to redeem all or any of the shares of Class D Preferred Stock, the General Partner may cause the Partnership to redeem an equal number of I-2 88 Class D Partnership Preferred Units, at a redemption price payable in cash equal to 100% of the Liquidation Preference thereof, plus an amount equal to all accrued and unpaid dividends on each share of Class D Preferred Stock to the date fixed for redemption (the "Call Date"), in the manner set forth herein. (2) If the Partnership shall redeem Class D Partnership Preferred Units pursuant to paragraph (a) of this Section 5, from and after the Call Date (unless the Partnership shall fail to make available the amount of cash necessary to effect such redemption), (i) except for payment of the redemption price, the Partnership shall not make any further distributions on the Class D Partnership Preferred Units so called for redemption (except that, in the case of a Call Date after a distribution record date and prior to the related Distribution Payment Date, holders of Class D Partnership Preferred Units on the distribution record date will be entitled on such Distribution Payment Date to receive the distribution payable thereon), (ii) said units shall no longer be deemed to be outstanding, and (iii) all rights of the holders thereof as holders of Class D Partnership Preferred Units of the Partnership shall cease (except the rights to receive the cash payable upon such redemption, without interest thereon, and to receive any distributions payable thereon). No interest shall accrue for the benefit of the holders of Class D Partnership Preferred Units to be redeemed on any cash set aside by the Partnership. If fewer than all the outstanding Class D Partnership Preferred Units are to be redeemed, units to be redeemed shall be selected by the Partnership from outstanding Class D Partnership Preferred Units not previously called for redemption by any method determined by the General Partner in its discretion. Upon any such redemption, the General Partner shall amend Exhibit A to the Agreement as appropriate to reflect such redemption. 6. STATUS OF REACQUIRED UNITS. All Class D Partnership Preferred Units which shall have been issued and reacquired in any manner by the Partnership shall be deemed cancelled. 7. RANKING. Any class or series of Partnership Units of the Partnership shall be deemed to rank: (1) prior or senior to the Class D Partnership Preferred Units, as to the payment of distributions and as to distributions of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class D Partnership Preferred Units ("Senior Partnership Units"); (2) on a parity with the Class D Partnership Preferred Units, as to the payment of distributions and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit or other denomination thereof be different from those of the Class D Partnership Preferred Units if such Class or series of Partnership Units shall be Class B Partnership Preferred Units, Class C Partnership Preferred Units or if the holders of such class or series of Partnership Units and the Class D Partnership Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per unit or other denomination or liquidation preferences, without preference or priority one over the other ("Parity Partnership Units"); and (3) junior to the Class D Partnership Preferred Units, as to the payment of distributions or as to the distribution of assets upon liquidation, dissolution or winding up, if such class or series of Partnership Units shall be Partnership Common Units or if the holders of Class D Preferred Partnership Units shall be entitled to receipt I-3 89 of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series of Partnership Units ("Junior Partnership Units"). 8. SPECIAL ALLOCATIONS. (1) Gross income and, if necessary, gain shall be allocated to the holders of Class D Partnership Preferred Units for any Fiscal Year (and, if necessary, subsequent Fiscal Years) to the extent that the holders of Class D Partnership Preferred Units receive a distribution on any Class D Partnership Preferred Units (other than an amount included in any redemption pursuant to Section 5 hereof) with respect to such Fiscal Year. (2) If any Class D Partnership Preferred Units are redeemed pursuant to Section 5 hereof, for the Fiscal Year that includes such redemption (and, if necessary, for subsequent Fiscal Years) (a) gross income and gain (in such relative proportions as the General Partner in its discretion shall determine) shall be allocated to the holders of Class D Partnership Preferred Units to the extent that the redemption amounts paid or payable with respect to the Class D Partnership Preferred Units so redeemed exceeds the aggregate Capital Contributions (net of liabilities assumed or taken subject to by the Partnership) per Class D Partnership Preferred Unit allocable to the Class D Partnership Preferred Units so redeemed and (b) deductions and losses (in such relative proportions as the General Partner in its discretion shall determine) shall be allocated to the holders of Class D Partnership Preferred Units to the extent that the aggregate Capital Contributions (net of liabilities assumed or taken subject to by the Partnership) per Class D Partnership Preferred Unit allocable to the Class D Partnership Preferred Units so redeemed exceeds the redemption amount paid or payable with respect to the Class D Partnership Preferred Units so redeemed. 9. RESTRICTIONS ON OWNERSHIP. The Class D Partnership Preferred Units shall be owned and held solely by the General Partner or the Special Limited Partner. 10. GENERAL. (1) The ownership of Class D Partnership Preferred Units may (but need not, in the sole and absolute discretion of the General Partner) be evidenced by one or more certificates. The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent conversion, redemption, or any other event having an effect on the ownership of, Class D Partnership Preferred Units. (2) The rights of the General Partner and the Special Limited Partner, in their capacity as holders of the Class D Partnership Preferred Units, are in addition to and not in limitation of any other rights or authority of the General Partner or the Special Limited Partner, respectively, in any other capacity under the Agreement or applicable law. In addition, nothing contained herein shall be deemed to limit or otherwise restrict the authority of the General Partner or the Special Limited Partner under the Agreement, other than in their capacity as holders of the Class D Partnership Preferred Units. I-4 90 EXHIBIT J PARTNERSHIP UNIT DESIGNATION OF THE CLASS E PARTNERSHIP PREFERRED UNITS OF AIMCO PROPERTIES, L.P. 1. NUMBER OF UNITS AND DESIGNATION. A class of Partnership Preferred Units is hereby designated as "Class E Partnership Preferred Units," and the number of Partnership Preferred Units constituting such class shall be Ten Million (10,000,000). 2. DEFINITIONS. For purposes of the Class E Partnership Preferred Units, the following terms shall have the meanings indicated in this Section 2, and capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement: "Agreement" shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time. "Call Date" shall mean a date fixed for redemption of shares of Class E Preferred Stock. "Class E Partnership Preferred Unit" means a Partnership Preferred Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Exhibit J. It is the intention of the General Partner that each Class E Partnership Preferred Unit shall be substantially the economic equivalent of one share of Class E Preferred Stock. "Class E Preferred Stock" means the Class E Cumulative Convertible Preferred Stock, par value $0.01 per share, of the Previous General Partner. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. Reference to any provision of the Code shall mean such provision as in effect from time to time, as the same may be amended, and any successor thereto, as interpreted by any applicable regulations or other administrative pronouncements as in effect from time to time. "Distribution Payment Date" shall mean any date on which dividends are paid on the Class E Preferred Stock. "Issue Date" shall have the meaning set forth in the Articles Supplementary relating to the Class E Preferred Stock. "Junior Partnership Units" shall have the meaning set forth in paragraph (c) of Section 7 of this Exhibit J. "Parity Partnership Units" shall have the meaning set forth in paragraph (b) of Section 7 of this Exhibit J. "Partnership" shall mean AIMCO Properties, L.P., a Delaware limited partnership. "Senior Partnership Units" shall have the meaning set forth in paragraph (a) of Section 7 of this Exhibit J. J-1 91 "Special Dividend" shall have the meaning set forth in the Articles Supplementary relating to the Class E Preferred Stock. 3. DISTRIBUTIONS. On every Distribution Payment Date, the holders of Class E Partnership Preferred Units shall be entitled to receive distributions of the type and in an amount per Class E Partnership Preferred Unit equal to the per share dividend payable on the Class E Preferred Stock on such Distribution Payment Date. Each such distribution shall be payable to the holders of record of the Class E Partnership Preferred Units, as they appear on the records of the Partnership at the close of business on the record date for the dividend payable with respect to the Class E Preferred Stock on such Distribution Payment Date. Holders of Class E Partnership Preferred Units shall not be entitled to any distributions on the Class E Partnership Preferred Units, whether payable in cash, property or stock, except as provided herein. 4. LIQUIDATION PREFERENCE. (1) In the event of any liquidation, dissolution or winding up of the Partnership, whether voluntary or involuntary, before any payment or distribution of the Partnership (whether capital, surplus or otherwise) shall be made to or set apart for the holders of Junior Partnership Units, the holders of Class E Partnership Preferred Units shall be entitled to receive One Dollar ($1.00) per Class E Partnership Preferred Unit (the "Liquidation Preference"), plus an amount equal to the Special Dividend if such dividend is unpaid on the date of final distribution to such holders. Until the holders of the Class E Partnership Preferred Units have been paid the Liquidation Preference in full, plus an amount equal to the Special Dividend if such dividend is unpaid on the date of final distribution to such holders, no payment shall be made to any holder of Junior Partnership Units upon the liquidation, dissolution or winding up of the Partnership. If, upon any liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, distributable among the holders of Class E Partnership Preferred Units shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any Parity Partnership Units, then such assets, or the proceeds thereof, shall be distributed among the holders of Class E Partnership Preferred Units and any such Parity Partnership Units ratably in the same proportion as the respective amounts that would be payable on such Class E Partnership Preferred Units and any such other Parity Partnership Units if all amounts payable thereon were paid in full. For the purposes of this Section 4, (i) a consolidation or merger of the Partnership with one or more partnerships, or (ii) a sale or transfer of all or substantially all of the Partnership's assets shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Partnership. (2) Upon any liquidation, dissolution or winding up of the Partnership, after payment shall have been made in full to the holders of Class E Partnership Preferred Units and any Parity Partnership Units, as provided in this Section 4, any other series or class or classes of Junior Partnership Units shall, subject to the respective terms thereof, be entitled to receive any assets remaining to be paid or distributed, and the holders of the Class E Partnership Preferred Units shall be entitled to share therein on the same basis as the holders of Partnership Common Units (on a per unit basis). 5. REDEMPTION. Class E Partnership Preferred Units shall be redeemable by the Partnership as follows: (1) At any time that the Previous General Partner redeems all or any of the shares of Class E Preferred Stock, the General Partner shall cause the Partnership to redeem an equal number of Class E Partnership Preferred Units, at a redemption price per Class E Partnership Preferred Unit equal to the redemption price per share paid in respect of such redeemed shares of Class E Preferred Stock, in the manner set forth herein; provided, however, J-2 92 that in the event of a redemption of Class E Partnership Preferred Units, if the Call Date occurs after a dividend record date for the Class E Preferred Stock and on or prior to the related Distribution Payment Date, the distribution payable on such Distribution Payment Date in respect of such Class E Partnership Preferred Units called for redemption shall be payable on such Distribution Payment Date to the holders of record of such Class E Partnership Preferred Units on the applicable dividend record date, and shall not be payable as part of the redemption price for such Class E Partnership Preferred Units. (2) If the Partnership shall redeem Class E Partnership Preferred Units pursuant to paragraph (a) of this Section 5, from and after the Call Date (unless the Partnership shall fail to make available the amount of cash necessary to effect such redemption), (i) except for payment of the redemption price, the Partnership shall not make any further distributions on the Class E Partnership Preferred Units so called for redemption, (ii) said units shall no longer be deemed to be outstanding, and (iii) all rights of the holders thereof as holders of Class E Partnership Preferred Units shall cease except the rights to receive the cash payable upon such redemption, without interest thereon; provided, however, that if a Call Date occurs after a dividend record date for the Class E Preferred Stock and on or prior to the related Distribution Payment Date, the full distribution payable on such Distribution Payment Date in respect of such Class E Partnership Preferred Units called for redemption shall be payable on such Distribution Payment Date to the holders of record of such Class E Partnership Preferred Units on the applicable dividend record date notwithstanding the prior redemption of such Class E Partnership Preferred Units. No interest shall accrue for the benefit of the holders of Class E Partnership Preferred Units to be redeemed on any cash set aside by the Partnership. If fewer than all the outstanding Class E Partnership Preferred Units are to be redeemed, units to be redeemed shall be selected by the Partnership from outstanding Class E Partnership Preferred Units not previously called for redemption by any method determined by the General Partner in its discretion. Upon any such redemption, the General Partner shall amend Exhibit A to the Agreement as appropriate to reflect such redemption. 6. STATUS OF REACQUIRED UNITS. All Class E Partnership Preferred Units which shall have been issued and reacquired or redeemed in any manner by the Partnership shall be deemed cancelled. 7. RANKING. Any class or series of Partnership Units of the Partnership shall be deemed to rank: (1) prior or senior to the Class E Partnership Preferred Units, as to the payment of distributions and as to distributions of assets upon liquidation, dissolution or winding up, if (i) such class or series of Partnership Units shall be Class B Partnership Preferred Units, Class C Partnership Preferred Units, Class D Partnership Preferred Units, Class F Partnership Preferred Units, Class G Partnership Preferred Units or Class H Partnership Preferred Units, or (ii) the holders of such class or series shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class E Partnership Preferred Units (the Partnership Units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as "Senior Partnership Units"); (2) on a parity with the Class E Partnership Preferred Units, as to the payment of distributions and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit or other denomination thereof be different from those of the Class E Partnership Preferred Units if the holders of such class or series of Partnership Units and the Class E Partnership Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per J-3 93 unit or other denomination or liquidation preferences, without preference or priority one over the other ( "Parity Partnership Units"); and (3) junior to the Class E Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if (i) such class or series of Partnership Units shall be Partnership Common Units or Class I High Performance Partnership Units or (ii) the holders of Class E Partnership Preferred Units shall be entitled to receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series of Partnership Units (the Partnership Units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as "Junior Partnership Units"). 8. SPECIAL ALLOCATIONS. (1) Gross income and, if necessary, gain shall be allocated to the holders of Class E Partnership Preferred Units for any Fiscal Year (and, if necessary, subsequent Fiscal Years) to the extent that the holders of Class E Partnership Preferred Units receive a distribution on any Class E Partnership Preferred Units (other than an amount included in any redemption pursuant to Section 5 hereof) with respect to such Fiscal Year. (2) If any Class E Partnership Preferred Units are redeemed pursuant to Section 5 hereof, for the Fiscal Year that includes such redemption (and, if necessary, for subsequent Fiscal Years) (a) gross income and gain (in such relative proportions as the General Partner in its discretion shall determine) shall be allocated to the holders of Class E Partnership Preferred Units to the extent that the redemption amounts paid or payable with respect to the Class E Partnership Preferred Units so redeemed exceeds the aggregate Capital Contributions (net of liabilities assumed or taken subject to by the Partnership) per Class E Partnership Preferred Unit allocable to the Class E Partnership Preferred Units so redeemed and (b) deductions and losses (in such relative proportions as the General Partner in its discretion shall determine) shall be allocated to the holders of Class E Partnership Preferred Units to the extent that the aggregate Capital Contributions (net of liabilities assumed or taken subject to by the Partnership) per Class E Partnership Preferred Unit allocable to the Class E Partnership Preferred Units so redeemed exceeds the redemption amount paid or payable with respect to the Class E Partnership Preferred Units so redeemed. 9. CONVERSION. Class E Partnership Preferred Units shall be convertible by the holders thereof as follows: (1) Upon any conversion of shares of Class E Preferred Stock into shares of Common Stock, the General Partner shall cause a number of Class E Partnership Preferred Units equal to the number of such converted shares of Class E Preferred Stock to be converted by the holders thereof into Partnership Common Units. The conversion ratio in effect from time to time for the conversion of Class E Partnership Preferred Units into Partnership Common Units pursuant to this Section 9 shall at all times be equal to, and shall be automatically adjusted as necessary to reflect, the conversion ratio in effect from time to time for the conversion of Class E Preferred Stock into Common Stock. (2) If the Previous General Partner shall after the Issue Date (i) pay a dividend or make a distribution on the Class E Preferred Stock in shares of Common Stock, (ii) subdivide its outstanding Class E Preferred Stock into a greater number of shares, (iii) combine its outstanding Class E Preferred Stock into a smaller number of shares, or (iv) issue any shares of capital stock by reclassification of its outstanding Class E Preferred Stock, then the Partnership shall contemporaneously do the same with respect to the Class E Partnership Preferred Units. If the Previous General Partner shall after the Issue Date issue rights, options or warrants to all holders of Class E Preferred Stock entitling them to subscribe for or purchase Class E Preferred Stock, then upon the subscription for or purchase of shares J-4 94 of Class E Preferred Stock pursuant thereto, the Previous General Partner shall contribute the proceeds from such subscription or purchase to the Partnership in exchange for a number of Partnership Preferred Units equal to the number of shares of Class E Preferred Stock so subscribed for or purchased. (3) Each conversion of Class E Partnership Preferred Units into Partnership Common Units shall be deemed to have been effected at the same time and date that the corresponding conversion of Class E Preferred Stock into Common Stock is deemed to have been effected. (4) The Partnership will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of Partnership Common Units upon conversion of Class E Partnership Preferred Units pursuant hereto. 10. RESTRICTIONS ON OWNERSHIP. The Class E Partnership Preferred Units shall be owned and held solely by the General Partner or the Special Limited Partner. 11. GENERAL. (1) The ownership of Class E Partnership Preferred Units may (but need not, in the sole and absolute discretion of the General Partner) be evidenced by one or more certificates. The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent conversion, redemption, or any other event having an effect on the ownership of, Class E Partnership Preferred Units. (2) The rights of the General Partner and the Special Limited Partner, in their capacity as holders of the Class E Partnership Preferred Units, are in addition to and not in limitation of any other rights or authority of the General Partner or the Special Limited Partner, respectively, in any other capacity under the Agreement or applicable law. In addition, nothing contained herein shall be deemed to limit or otherwise restrict the authority of the General Partner or the Special Limited Partner under the Agreement, other than in their capacity as holders of the Class E Partnership Preferred Units. J-5 95 EXHIBIT K PARTNERSHIP UNIT DESIGNATION OF THE CLASS I HIGH PERFORMANCE PARTNERSHIP UNITS OF AIMCO PROPERTIES, L.P. 1. NUMBER OF UNITS AND DESIGNATION. A class of Partnership Units is hereby designated as "Class I High Performance Partnership Units," and the number of Partnership Units initially constituting such class shall be fifteen thousand (15,000), subject to adjustment at the Class I High Performance Valuation Date, as provided in Section 3 hereof. 2. DEFINITIONS. For purposes of this Partnership Unit Designation, the following terms shall have the meanings indicated in this Section 2. Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement. "AIMCO Equity Capitalization" shall mean the quotient obtained by dividing (i) the sum of the AIMCO Market Values for each trading day included in the Measurement Period, by (ii) the number of trading days included in the Measurement Period. "AIMCO Market Value" shall mean, for any date, the product of (i) the number of REIT Shares and Partnership Units (other than Partnership Preferred Units) outstanding as of the close of business on such date, multiplied by (ii) the Value of a REIT Share on such date. "AIMCO Total Return" shall mean the Total Return of the REIT Shares for the Measurement Period. "Agreement" shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time. "Change of Control" shall mean the occurrence of any of the following events: (i) an acquisition (other than directly from the Previous General Partner) of any voting securities of the Previous General Partner (the "Voting Securities) by any "person" (as the term "person" is used for purposes of Section 13(d) or Section 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) immediately after which such person has "beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) ("Beneficial Ownership") of 20% or more of the combined voting power of the Previous General Partner's then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred, Voting Securities that are acquired in a Non-Control Acquisition (as hereinafter defined) shall not constitute an acquisition that would cause a Change in Control. "Non-Control Acquisition" shall mean an acquisition by (A) an employee benefit plan (or a trust forming a part thereof) maintained by (1) the Previous General Partner or (2) any corporation, partnership or other person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Previous General Partner or in which the Previous General Partner serves as a general partner or manager (a "Subsidiary"), (B) the Previous General Partner or any Subsidiary, or (C) any person in connection with a Non-Control Transaction (as hereinafter defined); K-1 96 (ii) the individuals who constitute the Board of Directors of the Previous General Partner as of January 1, 1998 (the "Incumbent Board") cease for any reason to constitute at least two-thirds (2/3) of the Board of Directors; provided, however, that if the election, or nomination for election by the Previous General Partner's stockholders, of any new director was approved by a vote of at least two-thirds (2/3) of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board; provided, further, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "election contest" (as described in Rule 14a-11 promulgated under the Exchange Act) (an "Election Contest") or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board of Directors (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (iii) approval by stockholders of the Previous General Partner of: (A) a merger, consolidation, share exchange or reorganization involving the Previous General Partner, unless (1) the stockholders of the Previous General Partner, immediately before such merger, consolidation, share exchange or reorganization, own, directly or indirectly immediately following such merger, consolidation, share exchange or reorganization, at least 80% of the combined voting power of the outstanding voting securities of the corporation that is the successor in such merger, consolidation, share exchange or reorganization (the "Surviving Company") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation, share exchange or reorganization, (2) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation, share exchange or reorganization constitute at least two-thirds (2/3) of the members of the board of directors of the Surviving Company, and (3) no persons (other than the Previous General Partner or any Subsidiary, any employee benefit plan (or any trust forming a part thereof) maintained by the Previous General Partner, the Surviving Company or any Subsidiary, or any person who, immediately prior to such merger, consolidation, share exchange or reorganization had Beneficial Ownership of 15% or more of the then outstanding Voting Securities has Beneficial Ownership of 15% or more of the combined voting power of the Surviving Company's then outstanding voting securities (a transaction described in clauses (1) through (3) is referred to herein as a "Non-Control Transaction"); (B) a complete liquidation or dissolution of the Previous General Partner; or (C) an agreement for the sale or other disposition of all or substantially all of the assets of the Previous General Partner to any person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because any person (a "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Previous General Partner that, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by such Subject Person, provided that if a Change of Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Previous General Partner, and after such share acquisition by the Previous General Partner, such Subject Person becomes the Beneficial Owner of any additional Voting Securities that increases the percentage of the then outstanding Voting Securities Beneficially Owned by such Subject Person, then a Change of Control shall occur. "Class I High Performance Cash Amount" shall mean, as of any date, the lesser of (i) an amount of cash equal to the product of the amount that a Holder would receive in respect of each Class I High Performance Partnership Unit if the Partnership sold all of its properties at their fair market value (which may be determined by reference to the Value of a REIT Share), paid all of its debts and distributed the remaining proceeds to the Partners as provided in Section 13.2 of the Agreement, determined as of the applicable Valuation Date, or (ii) in the case of a Declination followed by a Public Offering Funding, the Public Offering Funding Amount. K-2 97 "Class I High Performance Partnership Unit" shall mean a Partnership Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Exhibit K. "Class I High Performance Valuation Date" shall mean the earlier to occur of (i) January 1, 2001, or (ii) the date on which a Change of Control occurs. "Determination Date" shall mean (i) when used with respect to any dividend or other distribution, the date fixed for the determination of the holders of the securities entitled to receive such dividend or distribution, or, if a dividend or distribution is paid or made without fixing such a date, the date of such dividend or distribution, and (ii) when used with respect to any split, subdivision, reverse stock split, combination or reclassification of securities, the date upon which such split, subdivision, reverse stock split, combination or reclassification becomes effective. "Excess Return" shall mean the amount (measured as a percentage), if any, by which (i) the AIMCO Total Return exceeds (ii) the Hurdle Rate of Return. "Ex-Date" shall mean (i) when used with respect to any dividend or distribution, the first date on which the securities on which the dividend or distribution is payable trade regular way on the relevant exchange or in the relevant market without the right to receive such dividend or distribution, and (ii) when used with respect to any split, subdivision, reverse stock split, combination or reclassification of securities, the first date on which the securities trade regular way on such exchange or in such market to reflect such split, subdivision, reverse stock split, combination or reclassification becoming effective. "Extraordinary Distribution" shall mean the distribution by the Previous General Partner, by dividend or otherwise, to all holders of its REIT Shares of evidences of its indebtedness or assets (including securities) other than cash. "Hurdle Rate of Return" shall mean the greater of (x) 115% of the Industry Total Return, or (y) 30% (or, if the Class I High Performance Valuation Date is not January 1, 2001, a percentage equal to the return over the Measurement Period that, if compounded annually over three years, would result in a cumulative return of 30%). "Industry Total Return" shall mean the Total Return of the securities included in the Industry Peer Group Index for the Measurement Period, with such average determined in a manner consistent with the manner in which such index is calculated; provided, however, that if such Total Return would be less than zero without giving effect to the reinvestment of dividends, then the "Industry Total Return" shall be equal to zero. "Industry Peer Group Index" shall mean the Morgan Stanley REIT Index or any other similar industry index approved by the Board of Directors of the Previous General Partner. "Measurement Period" shall mean the period from and including January 1, 1998 to but excluding the Class I High Performance Valuation Date. "Partnership" shall mean AIMCO Properties, L.P., a Delaware limited partnership. "Total Return" shall mean, for any security and for any period, the cumulative total return for such security over such period, as measured by (i) the sum of (A) the cumulative amount of dividends paid in respect of such security for such period (assuming that all dividends other than Extraordinary Distributions are reinvested in such security as of the payment date for such dividend based on the security price on the dividend payment date), and (B) an amount equal to (1) the security price at the end of such period, minus (2) the security price at the beginning of K-3 98 such period, divided by (ii) the security price at the beginning of the measurement period; provided, however, that if the foregoing calculation results in a negative number, the "Total Return" shall be equal to zero. "Value" shall have the meaning set forth in the Agreement, except that Value shall be determined by reference to the average of the daily market prices for twenty (20) consecutive trading days rather than ten (10) consecutive trading days. 3. ADJUSTMENT OF UNITS AT CLASS I HIGH PERFORMANCE VALUATION DATE. (a) If, on the Class I High Performance Valuation Date there is any Excess Return, then, from and after such date, each Class I High Performance Partnership Unit shall, without any action on the part of the Partnership, the General Partner or the Holder thereof, be automatically adjusted to equal a number of Class I High Performance Partnership Units equal to the quotient obtained by dividing (x) the product of (A) 15% of the Excess Return, multiplied by (B) the AIMCO Equity Capitalization, by (y) the product of (A) 15,000 and (B) the Value of a REIT Share on the Class I High Performance Valuation Date. For illustrative purposes, examples of the calculation of such adjustment are set forth in Annex I hereto. (b) If, on the Class I High Performance Valuation Date there is no Excess Return, then, from and after such date, each Class I High Performance Partnership Units shall, without any action on the part of the Partnership, the General Partner or the Holder thereof, be automatically adjusted to equal 1/100 of a Class I High Performance Partnership Unit. 4. DISTRIBUTIONS. On and after the Class I High Performance Valuation Date, the Holders of Class I High Performance Partnership Units shall be entitled to receive distributions (other than distributions upon liquidation) if, as, when and in the same amounts and of the same type as may be paid to Holders of Partnership Common Units as if each Holder of Class I High Performance Partnership Units held an equal number of Partnership Common Units originally issued on the Class I High Performance Valuation Date. 5. ALLOCATIONS. (a) From and after the Class I High Performance Valuation Date, Net Income and Net Loss shall be allocated to each of the Holders of Class I High Performance Partnership Units as if each such Holder was the Holder of an equal number of Partnership Common Units originally issued on the Class I High Performance Valuation Date. (b) In the event that the Partnership disposes of all or substantially all of its assets in a transaction that will lead to a liquidation of the Partnership pursuant to Article XIII of the Agreement, then, notwithstanding Section 6.3.C of the Agreement, each Holder of Class I High Performance Partnership Units shall be specifically allocated items of Partnership income and gain in an amount sufficient to cause the Capital Account of such Holder to be equal to that of a Holder of an equal number of Partnership Common Units. 6. REDEMPTION. Upon the occurrence of a Change of Control, and subject to the applicable requirements of Federal securities laws and any securities exchange or quotation system rules or regulations, each Holder of Class I High Performance Partnership Units shall have the redemption rights of Qualifying Parties set forth in Section 8.6 of the Agreement, except that (i) all references therein to "Redeemable Units" or "Partnership Common Units" shall be deemed to be K-4 99 references to Class I High Performance Partnership Units, (ii) the first Twelve-Month Period applicable to all Class I High Performance Partnership Units shall be deemed to have passed, (iii) all references therein to "Cash Amount" shall be deemed to be references to the Class I High Performance Cash Amount, and (iv) in the event that the Previous General Partner elects to acquire Class I High Performance Partnership Units that have been tendered for Redemption, the Previous General Partner shall acquire each such Class I High Performance Partnership Unit in exchange for a number of REIT Shares equal to the quotient obtained by dividing the Class I High Performance Cash Amount by the Value of a REIT Share, determined as of the applicable Valuation Date. 7. STATUS OF REACQUIRED UNITS. All Class I High Performance Partnership Units which shall have been issued and reacquired in any manner by the Partnership shall be deemed cancelled and no longer outstanding. 8. RESTRICTIONS ON OWNERSHIP AND TRANSFER. The restrictions on Transfer set forth in Sections 11.1.B and 11.3.A of the Agreement shall not apply to Transfers of Class I High Performance Partnership Units. Prior to the Class I High Performance Valuation Date, the Class I High Performance Partnership Units shall be owned and held solely by SMP I, L.L.C., a Delaware limited liability company ("SMP"), Richard S. Ellwood, J. Landis Martin, Thomas L. Rhodes and John D. Smith. On or after the Class I High Performance Valuation Date, the Class I High Performance Partnership Units may be Transferred (i) by SMP to (a) any Person who is a member (a "Member") of SMP immediately prior to such transfer, (b) a Family Member of a Member, (c) a Controlled Entity of a Member, (c) any Person with respect to whom the Member constitutes a Controlled Entity, (d) upon the death of a Member, by will or by the laws of descent and distribution to any Qualified Transferee, and (ii) by any other Person to (a) a Family Member of a such Person, (b) a Controlled Entity of such Person, (c) any other Person with respect to whom such Person constitutes a Controlled Entity, (d) upon the death of such Person, by will or by the laws of descent and distribution to any Qualified Transferee, 9. ADJUSTMENTS. (a) In the event of any Extraordinary Distribution occurring on or after January 1, 1998, for purposes of determining the Value of a REIT Share or the AIMCO Total Return, each price of a REIT Share determined as of a date on or after the Ex-Date for such Extraordinary Distribution shall be adjusted by multiplying such price by a fraction (i) the numerator of which shall be the price of a REIT Share on the date immediately prior to such Ex-Date, and (ii) the denominator of which shall be (A) the price of a REIT Share on the date immediately prior to such Ex-Date, minus (B) the fair market value on the date fixed for such determination of the portion of the evidences of indebtedness or assets so distributed applicable to one REIT Share (as determined by the General Partner, whose determination shall be conclusive); provided further, that such amount shall be so adjusted for each such Extraordinary Distribution occurring on or after January 1, 1998. (b) In the event that, on or after January 1, 1998, the Previous General Partner (i) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a distribution to all holders of its outstanding REIT Shares in REIT Shares, (ii) splits or subdivides its outstanding REIT Shares, (iii) effects a reverse stock split or otherwise combines its outstanding REIT Shares into a smaller number of REIT Shares, or (iv) otherwise reclassifies its outstanding REIT Shares, then, for purposes of determining the Value of a REIT Share or the AIMCO Total Return, each price of a REIT Share determined as of a date on or after the Ex-Date for such transaction shall be adjusted by multiplying such price by a fraction (x) the numerator of which shall be the number of REIT Shares issued and outstanding on the Determination Date for such dividend, distribution, split, subdivision, reverse stock split, combination or reclassification (assuming for such purposes that such dividend, distribution, split, subdivision, reverse K-5 100 split or combination has occurred as of such time) and (y) the denominator of which shall be the actual number of REIT Shares (determined without the above assumption) issued and outstanding on the Determination Date for such dividend, distribution, split, subdivision, reverse stock split, combination or reclassification. (c) The General Partner shall have authority to appropriately adjust the AIMCO Market Value, the AIMCO Total Return or the Value of a REIT Share if any other transaction or circumstance occurs or arises that would have an inequitable result. 10. GENERAL. The ownership of Class I High Performance Partnership Units may (but need not, in the sole and absolute discretion of the General Partner) be evidenced by one or more certificates. The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent conversion, redemption, or any other event having an effect on the ownership of, Class I High Performance Partnership Units. K-6 101 ANNEX I TO EXHIBIT K Numerical Examples of the Calculation of the Adjustment to the Number of Class I High Performance Partnership Units on the Class I High Performance Valuation Date The following table illustrates the adjustment that would be made on the Class I High Performance Valuation Date to the number of Class I High Performance Units under different circumstances. Except as otherwise indicated, it is assumed, for purposes of the illustration, that: (i) the Class I High Performance Valuation Date is January 1, 2001; (ii) the AIMCO Total Return is 14% per year; (iii) the Industry Total Return is 10% per year; and (iv) the weighted average market value of outstanding equity (Common Stock and Partnership Units, other than Partnership Preferred Units) during the Measurement Period is $3,000,000,000 (assumptions (i) - (iv) are referred to as the "Base Case").
(1) (2) (3) (4) (5) (6) ---------- ---------- ------- ---------- ------------ ------- Cumulative Total Return Over Three Years: Company Common Stock 48.2% 119.7% 48.2% 48.2% 119.7% 26.0% Peer Group Index 32.4% 32.4% 71.2% 0% 32.4% 3.0% 115% of Peer Group Index 38.1% 38.1% 83.7% 0% 38.1% 3.5% Minimum Return 30% 30% 30% 30% 30% 30% Excess Return 10.1% 81.6% 0% 18.2% 81.6% 0% Weighted Average Market Value of $ 3,000 $ 4,000 $ 3,000 $ 3,000 $ 10,000 $ 4,000 Outstanding Equity (millions) Excess Shareholder Return (millions) $ 303 $ 3,264 $ 0 $ 546 $ 8,160 $ 0 Value of High Performance Units (millions) $ 45.4 $ 489.6 $ 0 $ 81.9 $ 1,224.0 $ 0 Value of a REIT Share $ 50 $ 70 $ 50 $ 50 $ 70 $ 40 Adjusted Number of Class I High Performance Units: Total 908,000 6,994,286 0 1,638,000 17,485,714 0 Per Unit Adjustment 60.5 466.3 0 109.2 1,165.7 0
(1) Base Case. (2) Base Case, except that the Company Common Stock has a 30% annual Total Return and the weighted average market value of outstanding equity is $4 billion. (3) Base Case, except that the Peer Group Index has a 20% annual Total Return. (4) Base Case, except that the Peer Group Index has a negative annual Total Return of 10%. (5) Base Case, except that the Company Common Stock has a 30% annual Total Return and the weighted average market value of outstanding equity is $10 billion. (6) Base Case, except that the Company Common Stock has an 8% annual Total Return, the Peer Group Index has a 1% annual Total Return and the weighted average market value of outstanding equity is $4 billion. K-7 102 EXHIBIT L PARTNERSHIP UNIT DESIGNATION OF THE CLASS G PARTNERSHIP PREFERRED UNITS OF AIMCO PROPERTIES, L.P. 1. NUMBER OF UNITS AND DESIGNATION. A class of Partnership Preferred Units is hereby designated as "Class G Partnership Preferred Units," and the number of Partnership Preferred Units constituting such class shall be Four Million Fifty Thousand (4,050,000). 2. DEFINITIONS. For purposes of the Class G Partnership Preferred Units, the following terms shall have the meanings indicated in this Section 2. Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement. "Agreement" shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time. "Call Date" shall have the meaning set forth in paragraph (a) of Section 5 of this Exhibit L. "Class G Partnership Preferred Unit" means a Partnership Preferred Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Exhibit L. It is the intention of the General Partner that each Class G Partnership Preferred Unit shall be substantially the economic equivalent of one share of Class G Preferred Stock. "Class G Preferred Stock" means the Class G Cumulative Preferred Stock, par value $0.01 per share, of the Previous General Partner. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. Reference to any provision of the Code shall mean such provision as in effect from time to time, as the same may be amended, and any successor thereto, as interpreted by any applicable regulations or other administrative pronouncements as in effect from time to time. "Common Stock" shall mean the Class A Common Stock, $.01 par value per share, of the Previous General Partner or such shares of the Previous General Partner's capital stock into which outstanding shares of Common Stock shall be reclassified. "Distribution Payment Date" shall mean any date on which cash dividends are paid on the Class G Preferred Stock. "Junior Partnership Units" shall have the meaning set forth in paragraph (c) of Section 7 of this Exhibit L. "Parity Partnership Units" shall have the meaning set forth in paragraph (b) of Section 7 of this Exhibit L. L-1 103 "Partnership" shall mean AIMCO Properties, L.P., a Delaware limited partnership. "Senior Partnership Units" shall have the meaning set forth in paragraph (a) of Section 7 of this Exhibit L. 3. DISTRIBUTIONS. On every Distribution Payment Date, the holders of Class G Partnership Preferred Units shall be entitled to receive distributions payable in cash in an amount per Class G Partnership Preferred Unit equal to the per share dividend payable on the Class G Preferred Stock on such Distribution Payment Date. Each such distribution shall be payable to the holders of record of the Class G Partnership Preferred Units, as they appear on the records of the Partnership at the close of business on the record date for the dividend payable with respect to the Class G Preferred Stock on such Distribution Payment Date. Holders of Class G Partnership Preferred Units shall not be entitled to any distributions on the Class G Partnership Preferred Units, whether payable in cash, property or stock, except as provided herein. 4. LIQUIDATION PREFERENCE. (1) In the event of any liquidation, dissolution or winding up of the Partnership, whether voluntary or involuntary, before any payment or distribution of the Partnership (whether capital or surplus) shall be made to or set apart for the holders of Junior Partnership Units, the holders of Class G Partnership Preferred Units shall be entitled to receive Twenty Five Dollars ($25) per Class G Partnership Preferred Unit (the "Liquidation Preference"), plus an amount equal to all dividends (whether or not earned) accumulated, accrued and unpaid on each share of Class G Preferred Stock to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. Until the holders of the Class G Partnership Preferred Units have been paid the Liquidation Preference in full, plus an amount equal to all dividends (whether or not earned) accumulated, accrued and unpaid on the Class G Preferred Stock to the date of final distribution to such holders, no payment will be made to any holder of Junior Partnership Units upon the liquidation, dissolution or winding up of the Partnership. If, upon any liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, distributable among the holders of Class G Partnership Preferred Units shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any Parity Partnership Units, then such assets, or the proceeds thereof, shall be distributed among the holders of Class G Partnership Preferred Units and any such Parity Partnership Units ratably in the same proportion as the respective amounts that would be payable on such Class G Partnership Preferred Units and any such other Parity Partnership Units if all amounts payable thereon were paid in full. For the purposes of this Section 4, (i) a consolidation or merger of the Partnership with one or more partnerships, or (ii) a sale or transfer of all or substantially all of the Partnership's assets shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Partnership. (2) Upon any liquidation, dissolution or winding up of the Partnership, after payment shall have been made in full to the holders of Class G Partnership Preferred Units and any Parity Partnership Units, as provided in this Section 4, any other series or class or classes of Junior Partnership Units shall, subject to the respective terms thereof, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Class G Partnership Preferred Units and any Parity Partnership Units shall not be entitled to share therein. 5. REDEMPTION. Class G Partnership Preferred Units shall be redeemable by the Partnership as follows: (1) At any time that the Previous General Partner exercises its right to redeem all or any of the shares of Class G Preferred Stock, the General Partner may cause the Partnership to redeem an equal number of L-2 104 Class G Partnership Preferred Units, at a redemption price payable in cash equal to 100% of the Liquidation Preference thereof, plus an amount equal to all accrued and unpaid dividends on each share of Class G Preferred Stock to the date fixed for redemption (the "Call Date"), in the manner set forth herein. (2) If the Partnership shall redeem Class G Partnership Preferred Units pursuant to paragraph (a) of this Section 5, from and after the Call Date (unless the Partnership shall fail to make available the amount of cash necessary to effect such redemption), (i) except for payment of the redemption price, the Partnership shall not make any further distributions on the Class G Partnership Preferred Units so called for redemption (except that, in the case of a Call Date after a distribution record date and prior to the related Distribution Payment Date, holders of Class G Partnership Preferred Units on the distribution record date will be entitled on such Distribution Payment Date to receive the distribution payable thereon), (ii) said units shall no longer be deemed to be outstanding, and (iii) all rights of the holders thereof as holders of Class G Partnership Preferred Units of the Partnership shall cease (except the rights to receive the cash payable upon such redemption, without interest thereon, and to receive any distributions payable thereon). No interest shall accrue for the benefit of the holders of Class G Partnership Preferred Units to be redeemed on any cash set aside by the Partnership. If fewer than all the outstanding Class G Partnership Preferred Units are to be redeemed, units to be redeemed shall be selected by the Partnership from outstanding Class G Partnership Preferred Units not previously called for redemption by any method determined by the General Partner in its discretion. Upon any such redemption, the General Partner shall amend Exhibit A to the Agreement as appropriate to reflect such redemption. 6. STATUS OF REACQUIRED UNITS. All Class G Partnership Preferred Units which shall have been issued and reacquired in any manner by the Partnership shall be deemed cancelled. 7. RANKING. Any class or series of Partnership Units of the Partnership shall be deemed to rank: (1) prior or senior to the Class G Partnership Preferred Units, as to the payment of distributions and as to distributions of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class G Partnership Preferred Units ("Senior Partnership Units"); (2) on a parity with the Class G Partnership Preferred Units, as to the payment of distributions and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit or other denomination thereof be different from those of the Class G Partnership Preferred Units if such Class or series of Partnership Units shall be Class B Preferred Partnership Units or if the holders of such class or series of Partnership Units and the Class G Partnership Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per unit or other denomination or liquidation preferences, without preference or priority one over the other ("Parity Partnership Units"); and (3) junior to the Class G Partnership Preferred Units, as to the payment of distributions or as to the distribution of assets upon liquidation, dissolution or winding up, if such class or series of Partnership Units shall be Partnership Common Units or if the holders of Class G Preferred Partnership Units shall be entitled to receipt L-3 105 of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series of Partnership Units ("Junior Partnership Units"). 8. SPECIAL ALLOCATIONS. (1) Gross income and, if necessary, gain shall be allocated to the holders of Class G Partnership Preferred Units for any Fiscal Year (and, if necessary, subsequent Fiscal Years) to the extent that the holders of Class G Partnership Preferred Units receive a distribution on any Class G Partnership Preferred Units (other than an amount included in any redemption pursuant to Section 5 hereof) with respect to such Fiscal Year. (2) If any Class G Partnership Preferred Units are redeemed pursuant to Section 5 hereof, for the Fiscal Year that includes such redemption (and, if necessary, for subsequent Fiscal Years) (a) gross income and gain (in such relative proportions as the General Partner in its discretion shall determine) shall be allocated to the holders of Class G Partnership Preferred Units to the extent that the redemption amounts paid or payable with respect to the Class G Partnership Preferred Units so redeemed exceeds the aggregate Capital Contributions (net of liabilities assumed or taken subject to by the Partnership) per Class G Partnership Preferred Unit allocable to the Class G Partnership Preferred Units so redeemed and (b) deductions and losses (in such relative proportions as the General Partner in its discretion shall determine) shall be allocated to the holders of Class G Partnership Preferred Units to the extent that the aggregate Capital Contributions (net of liabilities assumed or taken subject to by the Partnership) per Class G Partnership Preferred Unit allocable to the Class G Partnership Preferred Units so redeemed exceeds the redemption amount paid or payable with respect to the Class G Partnership Preferred Units so redeemed. 9. RESTRICTIONS ON OWNERSHIP. The Class G Partnership Preferred Units shall be owned and held solely by the General Partner or the Special Limited Partner. 10. GENERAL. (1) The ownership of Class G Partnership Preferred Units may (but need not, in the sole and absolute discretion of the General Partner) be evidenced by one or more certificates. The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent conversion, redemption, or any other event having an effect on the ownership of, Class G Partnership Preferred Units. (2) The rights of the General Partner and the Special Limited Partner, in their capacity as holders of the Class G Partnership Preferred Units, are in addition to and not in limitation of any other rights or authority of the General Partner or the Special Limited Partner, respectively, in any other capacity under the Agreement or applicable law. In addition, nothing contained herein shall be deemed to limit or otherwise restrict the authority of the General Partner or the Special Limited Partner under the Agreement, other than in their capacity as holders of the Class G Partnership Preferred Units. L-4 106 EXHIBIT M PARTNERSHIP UNIT DESIGNATION OF THE CLASS H PARTNERSHIP PREFERRED UNITS OF AIMCO PROPERTIES, L.P. 1. NUMBER OF UNITS AND DESIGNATION. A class of Partnership Preferred Units is hereby designated as "Class H Partnership Preferred Units," and the number of Partnership Preferred Units constituting such class shall be Two Million Three Hundred Thousand (2,300,000). 2. DEFINITIONS. For purposes of the Class H Partnership Preferred Units, the following terms shall have the meanings indicated in this Section 2, and capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement: "Agreement" shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time. "Call Date" shall have the meaning set forth in paragraph (a) of Section 5 of this Exhibit M. "Class H Partnership Preferred Unit" means a Partnership Preferred Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Exhibit M. It is the intention of the General Partner that each Class H Partnership Preferred Unit shall be substantially the economic equivalent of one share of Class H Preferred Stock. "Class H Preferred Stock" means the Class H Cumulative Preferred Stock, par value $0.01 per share, of the Previous General Partner. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. Reference to any provision of the Code shall mean such provision as in effect from time to time, as the same may be amended, and any successor thereto, as interpreted by any applicable regulations or other administrative pronouncements as in effect from time to time. "Distribution Payment Date" shall mean any date on which cash dividends are paid on the Class H Preferred Stock. "Junior Partnership Units" shall have the meaning set forth in paragraph (c) of Section 7 of this Exhibit M. "Parity Partnership Units" shall have the meaning set forth in paragraph (b) of Section 7 of this Exhibit M. "Partnership" shall mean AIMCO Properties, L.P., a Delaware limited partnership. "Senior Partnership Units" shall have the meaning set forth in paragraph (a) of Section 7 of this Exhibit M. M-1 107 3. DISTRIBUTIONS. On every Distribution Payment Date, the holders of Class H Partnership Preferred Units shall be entitled to receive distributions payable in cash in an amount per Class H Partnership Preferred Unit equal to the per share dividend payable on the Class H Preferred Stock on such Distribution Payment Date. Each such distribution shall be payable to the holders of record of the Class H Partnership Preferred Units, as they appear on the records of the Partnership at the close of business on the record date for the dividend payable with respect to the Class H Preferred Stock on such Distribution Payment Date. Holders of Class H Partnership Preferred Units shall not be entitled to any distributions on the Class H Partnership Preferred Units, whether payable in cash, property or stock, except as provided herein. 4. LIQUIDATION PREFERENCE. (1) In the event of any liquidation, dissolution or winding up of the Partnership, whether voluntary or involuntary, before any payment or distribution of the Partnership (whether capital, surplus or otherwise) shall be made to or set apart for the holders of Junior Partnership Units, the holders of Class H Partnership Preferred Units shall be entitled to receive Twenty Five Dollars ($25) per Class H Partnership Preferred Unit (the "Liquidation Preference"), plus an amount per Class H Partnership Preferred Unit equal to all dividends (whether or not declared or earned) accumulated, accrued and unpaid on one share of Class H Preferred Stock to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. Until the holders of the Class H Partnership Preferred Units have been paid the Liquidation Preference in full, plus an amount equal to all dividends (whether or not declared or earned) accumulated, accrued and unpaid on the Class H Preferred Stock to the date of final distribution to such holders, no payment shall be made to any holder of Junior Partnership Units upon the liquidation, dissolution or winding up of the Partnership. If, upon any liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, distributable among the holders of Class H Partnership Preferred Units shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any Parity Partnership Units, then such assets, or the proceeds thereof, shall be distributed among the holders of Class H Partnership Preferred Units and any such Parity Partnership Units ratably in the same proportion as the respective amounts that would be payable on such Class H Partnership Preferred Units and any such other Parity Partnership Units if all amounts payable thereon were paid in full. For the purposes of this Section 4, (i) a consolidation or merger of the Partnership with one or more partnerships, or (ii) a sale or transfer of all or substantially all of the Partnership's assets shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Partnership. (2) Upon any liquidation, dissolution or winding up of the Partnership, after payment shall have been made in full to the holders of Class H Partnership Preferred Units and any Parity Partnership Units, as provided in this Section 4, any other series or class or classes of Junior Partnership Units shall, subject to the respective terms thereof, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Class H Partnership Preferred Units and any Parity Partnership Units shall not be entitled to share therein. 5. REDEMPTION. Class H Partnership Preferred Units shall be redeemable by the Partnership as follows: (1) At any time that the Previous General Partner exercises its right to redeem all or any of the shares of Class H Preferred Stock, the General Partner may cause the Partnership to redeem an equal number of Class H Partnership Preferred Units, at a redemption price per Class H Partnership Preferred Unit payable in cash equal to 100% of the Liquidation Preference per share of Class H Preferred Stock, plus an amount equal to all accumulated, accrued and unpaid dividends on one share of Class H Preferred Stock to the date fixed for redemption (the "Call Date"), in the manner set forth herein; provided, however, that in the event of a redemption of Class H M-2 108 Partnership Preferred Units, if the Call Date occurs after a dividend record date for the Class H Preferred Stock and on or prior to the related Distribution Payment Date, the distribution payable on such Distribution Payment Date in respect of such Class H Partnership Preferred Units called for redemption shall be payable on such Distribution Payment Date to the holders of record of such Class H Partnership Preferred Units on the applicable dividend record date, and shall not be payable as part of the redemption price for such Class H Partnership Preferred Units. (2) If the Partnership shall redeem Class H Partnership Preferred Units pursuant to paragraph (a) of this Section 5, from and after the Call Date (unless the Partnership shall fail to make available the amount of cash necessary to effect such redemption), (i) except for payment of the redemption price, the Partnership shall not make any further distributions on the Class H Partnership Preferred Units so called for redemption, (ii) said units shall no longer be deemed to be outstanding, and (iii) all rights of the holders thereof as holders of Class H Partnership Preferred Units of the Partnership shall cease except the rights to receive the cash payable upon such redemption, without interest thereon; provided, however, that if a Call Date occurs after a dividend record date for the Class H Preferred Stock and on or prior to the related Distribution Payment Date, the full distribution payable on such Distribution Payment Date in respect of such Class H Partnership Preferred Units called for redemption shall be payable on such Distribution Payment Date to the holders of record of such Class H Partnership Preferred Units on the applicable dividend record date notwithstanding the prior redemption of such Class H Partnership Preferred Units. No interest shall accrue for the benefit of the holders of Class H Partnership Preferred Units to be redeemed on any cash set aside by the Partnership. If fewer than all the outstanding Class H Partnership Preferred Units are to be redeemed, units to be redeemed shall be selected by the Partnership from outstanding Class H Partnership Preferred Units not previously called for redemption by any method determined by the General Partner in its discretion. Upon any such redemption, the General Partner shall amend Exhibit A to the Agreement as appropriate to reflect such redemption. 6. STATUS OF REACQUIRED UNITS. All Class H Partnership Preferred Units which shall have been issued and reacquired in any manner by the Partnership shall be deemed cancelled. 7. RANKING. Any class or series of Partnership Units of the Partnership shall be deemed to rank: (1) prior or senior to the Class H Partnership Preferred Units, as to the payment of distributions and as to distributions of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class H Partnership Preferred Units ("Senior Partnership Units"); (2) on a parity with the Class H Partnership Preferred Units, as to the payment of distributions and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit or other denomination thereof be different from those of the Class H Partnership Preferred Units if (i) such class or series of Partnership Units shall be Class B Partnership Preferred Units, Class C Partnership Preferred Units, Class D Partnership Preferred Units or Class G Partnership Preferred Units or (ii) the holders of such class or series of Partnership Units and the Class H Partnership Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per unit or other denomination or liquidation preferences, without preference or priority one over the other (the Partnership Units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as "Parity Partnership Units"); and M-3 109 (3) junior to the Class H Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if (i) such class or series of Partnership Units shall be Partnership Common Units or Class I High Performance Partnership Units or (ii) the holders of Class H Partnership Preferred Units shall be entitled to receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series of Partnership Units (the Partnership Units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as "Junior Partnership Units"). 8. SPECIAL ALLOCATIONS. (1) Gross income and, if necessary, gain shall be allocated to the holders of Class H Partnership Preferred Units for any Fiscal Year (and, if necessary, subsequent Fiscal Years) to the extent that the holders of Class H Partnership Preferred Units receive a distribution on any Class H Partnership Preferred Units (other than an amount included in any redemption pursuant to Section 5 hereof) with respect to such Fiscal Year. (2) If any Class H Partnership Preferred Units are redeemed pursuant to Section 5 hereof, for the Fiscal Year that includes such redemption (and, if necessary, for subsequent Fiscal Years) (a) gross income and gain (in such relative proportions as the General Partner in its discretion shall determine) shall be allocated to the holders of Class H Partnership Preferred Units to the extent that the redemption amounts paid or payable with respect to the Class H Partnership Preferred Units so redeemed exceeds the aggregate Capital Contributions (net of liabilities assumed or taken subject to by the Partnership) per Class H Partnership Preferred Unit allocable to the Class H Partnership Preferred Units so redeemed and (b) deductions and losses (in such relative proportions as the General Partner in its discretion shall determine) shall be allocated to the holders of Class H Partnership Preferred Units to the extent that the aggregate Capital Contributions (net of liabilities assumed or taken subject to by the Partnership) per Class H Partnership Preferred Unit allocable to the Class H Partnership Preferred Units so redeemed exceeds the redemption amount paid or payable with respect to the Class H Partnership Preferred Units so redeemed. 9. RESTRICTIONS ON OWNERSHIP. The Class H Partnership Preferred Units shall be owned and held solely by the General Partner or the Special Limited Partner. 10. GENERAL. (1) The ownership of Class H Partnership Preferred Units may (but need not, in the sole and absolute discretion of the General Partner) be evidenced by one or more certificates. The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent conversion, redemption, or any other event having an effect on the ownership of, Class H Partnership Preferred Units. (2) The rights of the General Partner and the Special Limited Partner, in their capacity as holders of the Class H Partnership Preferred Units, are in addition to and not in limitation of any other rights or authority of the General Partner or the Special Limited Partner, respectively, in any other capacity under the Agreement or applicable law. In addition, nothing contained herein shall be deemed to limit or otherwise restrict the authority of the General Partner or the Special Limited Partner under the Agreement, other than in their capacity as holders of the Class H M-4 EX-10.2 3 1ST AMENDED & RESTATED CONTRIBUTION AND MGMT AGRMT 1 EXHIBIT 10.2 FIRST AMENDED AND RESTATED CONTRIBUTION AND MANAGEMENT AGREEMENT FIRST AMENDED AND RESTATED CONTRIBUTION AND MANAGEMENT AGREEMENT, dated as of June 15, 1998, amended and restated as of October 1, 1998 (this "Agreement"), by and between Apartment Investment and Management Company, a Maryland corporation ("AIMCO"), and AIMCO Properties, L.P., a Delaware limited partnership (the "OP"). RECITALS WHEREAS, pursuant to the Agreement of Limited Partnership of the OP, AIMCO has previously agreed to certain restrictions on its ability to conduct business other than through the OP; WHEREAS, in order to maintain AIMCO's qualification as a real estate investment trust under Section 856 of the Internal Revenue Code of 1986, as amended (the "Code"), AIMCO has acquired, and may in the future acquire, an interest in corporations with respect to which the OP does not own any interest (each corporation in which AIMCO now owns or may hereafter acquire an interest is referred to herein as a "QRS", except that the following entities shall not be included in the definition of QRS: (i) Insignia Properties Trust, a Maryland real estate investment trust ("IPT"), (ii) Insignia Capital Corporation, a Delaware corporation, (iii) NPI Property Investors, Inc. and (iv) any entity which owns an interest in IPT); and WHEREAS, AIMCO and the OP desire for the OP to acquire from AIMCO the economic benefits of the assets owned by the QRS's, and for AIMCO to grant the OP certain rights with respect to the management and operation of the QRS's; and WHEREAS, AIMCO and the OP have determined that it is desirable and in their respective best interests to memorialize certain arrangements and relationships; and WHEREAS, AIMCO and the OP have previously entered into a Contribution and Management Agreement, dated as of June 15, 1998 (the "Original Agreement"), which AIMCO and the OP have determined will be amended and restated as provided for in this Agreement. NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1 2 AGREEMENT 1. Issuance of Securities to QRS. For each QRS now owned or hereafter acquired by AIMCO, (a) if AIMCO acquired such QRS, in whole or in part, for, or with the proceeds from the sale of, shares of AIMCO common stock, the OP shall issue to such QRS a number of OP Partnership Common Units ("OP Units") equal to the number of such shares of AIMCO common stock, minus the number of OP Units previously issued by the OP to such QRS or any of its subsidiaries, and (b) if AIMCO acquired such QRS, in whole or in part, for securities issued by AIMCO other than common stock, the OP shall issue to such QRS securities of the OP equivalent to those issued by AIMCO, and (c) if AIMCO acquired such QRS, in whole or in part, with the proceeds (whether comprised of cash or other assets) of a loan from the OP to AIMCO, the OP shall issue to such QRS an interest in the OP that (i) entitles the holder thereof to receive distributions in amounts and at the same times as interest payments on such loan (with appropriate reductions in such distributions if any portion of the loan is repaid), (ii) entitles the holder thereof to receive, if and to the extent that any portion of such loan is repaid, a number of OP Units equal to the quotient obtained by dividing the principal amount of the loan repaid by the market price of AIMCO common stock at the date of repayment (it being understood and agreed that if the loan is repaid with funds contributed to such QRS by AIMCO from the proceeds of a sale of AIMCO common stock, the market price of AIMCO common stock at the date of repayment shall be deemed to be the net price per share at which such shares were sold), and (iii) is automatically redeemed for no consideration upon the repayment in full of such loan. 2. Contribution of Dividends and Other Payments. AIMCO shall cause each QRS to pay to AIMCO, either directly or through other QRS's, all dividends, distributions and other payments received by such QRS in respect of any shares of capital stock, any partnership interest or any other property or asset held by such QRS, including any proceeds from the sale, redemption or other disposition for value of such shares of capital stock, partnership interest or other property or asset, but excluding any distributions received in respect of any interests in the OP (collectively, "QRS Proceeds"). AIMCO shall contribute to the OP all QRS Proceeds received by it. AIMCO shall make such contributions either directly or through one or more QRS's. AIMCO shall not receive any consideration (including any additional partnership interests in the OP) in exchange for such contributions. 3. Management and Operation of QRS-Controlled Properties. With respect to each property now or hereafter controlled by a QRS (each, a "Property"), whether controlled directly or indirectly through one or more subsidiaries, AIMCO shall cause such QRS, and each of its subsidiaries, to: 2 3 (a) engage or retain as a manager for such Property only a person or entity that has been selected or approved by the OP, and only on terms that have been approved by the OP; (b) at the request or direction of the OP, terminate the manager of such Property; (c) prohibit the termination of the manager of such Property without the prior consent or approval of the OP; (d) submit an annual operating budget for such Property to the OP for its approval, and make any and all changes to such budget as may be requested by the OP; (e) submit to the OP for its approval all decisions with respect to any expenditures at such Property that have not been provided for in an annual operating budget previously approved by the OP; and (f) prohibit the incurrence of any expense at such Property that has not been approved by the OP. 4. Right of First Refusal. If AIMCO or any QRS proposes to transfer, directly or indirectly, or refinance all or any part of its interest in a QRS or any asset held by a QRS (other than OP Units and other securities issued pursuant to Section 1 hereof), or is required by operation of law or other involuntary transfer to do so, AIMCO shall, or shall cause such QRS to, first offer the OP the opportunity to purchase (x) any or all of the assets (other than any capital stock of another QRS, any OP Units or any other securities issued pursuant to Section 1 hereof) directly or indirectly owned or controlled by the QRS proposed to be transferred, or (y) any or all of the assets (other than any capital stock of another QRS, any OP Units or any other securities issued pursuant to Section 1 hereof) proposed to be transferred or refinanced, in accordance with the following provisions: (a) AIMCO shall provide notice ("Option Notice") to the OP of the proposed transfer or refinancing and all of the terms thereof. (b) Within thirty (30) days after the OP's receipt of the Option Notice, the OP shall have the right, but not the obligation, to elect to purchase (x) any or all of the assets (other than any capital stock of another QRS, any OP Units or any other securities issued pursuant to Section 1 hereof) directly or indirectly owned or controlled by the QRS proposed to be transferred, or (y) any or all of the assets (other than any capital stock of another QRS, any OP Units or any other securities issued pursuant to Section 1 hereof) proposed to be transferred or refinanced, in either case, for no additional consideration. 3 4 (c) If the OP elects to purchase any or all of such assets, then the closing (the "Closing") of such purchase shall occur on a date selected by the OP that is within ninety (90) days after the OP's receipt of the Option Notice, and AIMCO and the OP shall execute such documents and instruments and make such deliveries as may be reasonably required to consummate such purchase. (d) For a period of thirty (30) days commencing immediately after the earlier to occur of (1) the Closing or, (2) if the OP defaults in its obligation to effect the Closing, the date that is ninety (90) days after the OP's receipt of the Option Notice, AIMCO may transfer any or all of the QRS interest, or transfer or refinance any or all of the other assets, as described in the Option Notice. If such QRS interest is not so transferred, or such other assets are not so transferred or refinanced, AIMCO must give notice in accordance with this Section 4 prior to any other or subsequent transfer or refinancing of such QRS interest or other assets. 5. Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 6. Amendment and Modification. Subject to applicable law, this Agreement may be amended, modified, or supplemented only by written agreement of AIMCO and the OP. This Agreement amends and restates the Original Agreement and the parties hereto agree that the Original Agreement shall be of no further force or effect. 7. Severability. Each provision of this Agreement shall be viewed as separate and divisible and if any provision of this Agreement shall be held invalid or unenforceable, this Agreement shall be construed as not containing such provisions, and the rights and obligations of the parties hereto shall be construed and enforced accordingly. 8. Captions. The captions in this Agreement are for convenience only, do not form a part hereof, and do not in any way modify, interpret, or construe the intentions of the parties hereto. 9. Execution; Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be an original, but together shall constitute one and the same instrument. 10. Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of Delaware applicable to contracts made and enforced in such state. * * * * * 4 5 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. APARTMENT INVESTMENT AND MANAGEMENT COMPANY By: /s/ PETER K. KOMPANIEZ ---------------------------------- Peter K. Kompaniez President AIMCO PROPERTIES, L.P. By: AIMCO-GP, Inc. By: /s/ PETER K. KOMPANIEZ ---------------------------------- Peter K. Kompaniez President EX-10.3 4 CONVERTIBLE PROMISSORY NOTE FROM AIMCO PROPERTIES 1 EXHIBIT 10.3 $149,500,000 AIMCO PROPERTIES, L.P. 6-1/2% CONVERTIBLE NOTE AIMCO Properties, L.P., a Delaware limited partnership (the "Company," which term includes any successor limited partnership), for value received, hereby promises to pay to AIMCO-LP, Inc. or registered assigns (the "Holder"), the principal sum of one hundred forty-nine million and five hundred thousand dollars ($149,500,000) on September 30, 2016, and to pay interest on said principal sum from September 30, 1998, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 31, June 30, September 30, and December 31 of each year commencing December 31, 1996, at the rate of 6-1/2% per annum until the principal hereof shall have become due and payable, and on any overdue principal and premium, if any, and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum compounded quarterly. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. In the event that any date on which interest is payable on this Note is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. The principal of (and premium, if any) and the interest on this Note shall be payable in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts. The payment of the principal of (and premium, if any) and interest on this Note will be made at such place and to such account as may be designated by the Holder. Reference is made to an indenture (including any and all indentures supplemental thereto, the "Indenture") dated as of November 1, 1996, duly executed and delivered between Insignia Financial Group, Inc. (together with any successors, the "Issuer") and First Union National Bank of South Carolina, as Trustee (the "Trustee"), which sets forth a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Issuer and the holders of convertible debentures specified therein (the "Convertible Debentures"). All terms used in this Note that are not defined herein but are defined in the Indenture shall have the meanings assigned to them in the Indenture. 2 In the event of any redemption or repurchase of any principal amount of Convertible Debentures by the Issuer, the Company shall concurrently (or immediately prior thereto) redeem an equal principal amount of this Note at a redemption price equal to the redemption price (including any accrued and unpaid interest and any premium or additional payments) payable for such Convertible Debentures. If any principal amount of Convertible Debentures becomes due and payable, an equal principal amount of this Note and all interest accrued thereon shall become due and payable. If the Issuer at any time extends the interest payment period of the Convertible Debentures, the interest payment period for this Note shall be automatically extended for the same amount of time and, at the end of such extended period, the Company shall pay all interest (including an amount equal to the Additional Payments on the Convertible Deventures) then accrued and unpaid (together with interest thereon at the rate specified for the Convertible Debentures to the extent that payment of such interest is enforceable under applicable law) to the Holder. Upon the conversion of any principal amount of Convertible Debentures into shares of Class E Cumulative Preferred Stock of Apartment Investment and Management Company, an equal principal amount of this Note shall automatically be converted into a number of Class E Partnership Preferred Units of the Company equal to the number of shares that such principal amount of Convertible Debentures is converted into. Upon the conversion of any principal amount of Convertible Debentures into shares of Class A Common Stock of Apartment Investment and Management Company, an equal principal amount of this Note shall automatically be converted into a number of Partnership Common Units of the Company equal to the number of shares that such principal amount of Convertible Debentures is converted into. Upon conversion, no adjustment or payment will be made for interest or dividends, but if any principal amount of this Note is converted on or after the Regular Record Date for the payment of an installment of interest on the Convertible Debentures and prior to the opening of business on the next Interest Payment Date, then, notwithstanding such conversion, the interest payable on such Interest Payment Date will be paid to the Holder. No fractional units will be issued upon conversion but a cash adjustment will be made for any fractional interest. The outstanding principal amount of this Note shall be reduced by the portion of the principal amount hereof converted into units. THE INTERNAL LAWS OF THE STATE OF NEW YORK SHALL GOVERN THE NOTE WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF. 2 3 IN WITNESS WHEREOF, the Company has caused this instrument to be executed. AIMCO PROPERTIES, L.P. By: AIMCO-GP, INC., its General Partner By: -------------------------- Name: Peter K. Kompaniez Title: President 3 4 SCHEDULE A The original principal amount of this Note shall be $149,500,000. The following increases or decreases in the principal amount of this Note have been made:
Date of Amount of Amount of Signature of authorized increase increase in decrease in Principal amount of officer of General or principal principal Note following Partner of the decrease amount amount increase or decrease Company - --------------------------------------------------------------------------------
4 EX-27.1 5 FINANCIAL DATA SCHEDULE FOR YEAR ENDED 12/31/97
5 1000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 37,088 22,144 28,656 0 0 89,973 1,663,491 153,285 2,100,510 0 808,530 0 134,579 0 825,597 2,100,510 0 206,943 0 132,438 (7,126) 0 51,385 30,246 0 30,246 0 (269) 0 32,697 1.09 1.08
EX-27.2 6 FINANCIAL DATA SCHEDULE - 6 MONTHS ENDED 6/30/98
5 1000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 49,320 5,767 26,201 0 0 150,644 2,620,899 297,895 3,054,741 0 1,314,475 0 258,863 0 1,031,856 3,054,741 0 170,826 0 104,315 (4,265) 0 34,778 35,998 0 35,998 0 0 0 38,521 0.61 0.61
EX-27.3 7 FINANCIAL DATA SCHEDULE - 3 MONTHS ENDED 6/30/98
5 1,000 3-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 49,320 5,767 26,201 0 0 150,644 2,620,899 297,895 3,054,741 0 1,314,475 0 258,863 0 1,031,856 3,054,741 0 94,669 0 59,785 953 0 19,337 14,594 0 14,594 0 0 0 14,594 0.19 0.19
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