PROSPECTUS SUPPLEMENT Filed pursuant to Rule 424(b)(3)
(To Prospectus Dated June 15, 2001) File No. 333-61170
3,453,881
Reckson Associates Realty Corp.
Class A Common Stock
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This prospectus supplement supplements and amends the prospectus,
dated June 15, 2001, relating to the sale by Crescent Real Estate Equities
Limited Partnership (the "Selling Stockholder") of up to 3,453,881 shares of
our Class A common stock, par value $.01 per share. On August 17, 2001, the
Selling Stockholder sold all of the 3,453,881 shares to Lehman Brothers Inc.
The shares were sold by the Selling Stockholder at a price of $22.75 per share
for an aggregate purchase price of approximately $78,575,793. The Company will
not receive any of the proceeds from the sale of the shares by the Selling
Stockholder. On August 16, 2001, the last reported sale price of our Class A
common stock was $23.60.
Lehman Brothers Inc. proposes to offer the shares at a price of
$22.95 per share and may sell the shares to dealers at that price less a
concession of $.10 per share. Amounts received by Lehman Brothers Inc. from
sales of the shares in excess of the price at which it purchased the shares
from the Selling Stockholder may be deemed to be underwriting commissions
under the Securities Act of 1933.
This prospectus supplement should be read in conjunction with, and
may not be delivered or utilized without, the prospectus. This prospectus
supplement is qualified by reference to the prospectus, except to the extent
that information contained herein supersedes the information contained in the
prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus supplement or the
prospectus. Any representation to the contrary is a criminal offense.
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LEHMAN BROTHERS INC.
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The date of this prospectus supplement is August 17, 2001.
PROSPECTUS
----------
3,453,881 Shares
RECKSON ASSOCIATES REALTY CORP.
Class A Common Stock
(Par Value $0.01 Per Share)
----------------------
This prospectus relates to the offer and sale from time to time by
the selling stockholder referred to in this prospectus of up to 3,453,881
shares of our Class A common stock, $.01 par value per share, which may be
offered in transactions on any national securities exchange or quotation
service on which the Class A common stock may be listed at the time of sale,
in negotiated transactions or otherwise, at fixed prices, at market prices
prevailing at the time of sale, at prices related to prevailing market prices,
at negotiated prices, without consideration, or by any other legally available
means. The registration of the Class A common stock does not necessarily mean
that any of the Class A common stock will be offered or sold by the selling
stockholder.
The selling stockholder will receive all of the net proceeds from the
sale of the Class A common stock and will pay all underwriting discounts and
selling commissions, if any, applicable to any such sale. We will not receive
any of the proceeds from the sale of the shares of Class A common stock by the
selling stockholder. We are paying the costs of preparing and filing the
registration statement of which this prospectus is a part.
Our Class A common stock is listed on the New York Stock Exchange
under the symbol "RA." On June 8, 2001, the last reported sale price of the
Class A common stock was $22.70 per share.
The Class A common stock may be sold by the selling stockholder from
time to time directly to purchasers or through agents, underwriters or
dealers. See "Plan of Distribution" and "Selling Stockholder." The selling
stockholder and any dealers, agents or underwriters which participate in the
distribution of the Class A common stock may be deemed to be "underwriters"
within the meaning of the Securities Act of 1933 and any commission received
by them and any profit on the resale of the Class A common stock purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act. See "Plan of Distribution" for a description of
indemnification arrangements.
See "Risk Factors" beginning on page 3 of this prospectus for a
description of risks that should be considered by purchasers of the Class A
common stock.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
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The date of this prospectus is June 15, 2001.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, we file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). These reports, proxy
statements and other information may be inspected and copied at the Public
Reference Room maintained by the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, as well as the regional offices of the
Commission at 7 World Trade Center (13th Floor), New York, New York 10048, and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such information can be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The public may obtain information on the
operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. The Commission maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. You may access the Commission's
web site at http://www.sec.gov. These materials can also be inspected at the
office of the New York Stock Exchange, 20 Broad Street, New York, New York,
the exchange on which our common stock is listed.
We have filed with the Commission a Registration Statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), of which this prospectus constitutes a part. This
prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. For further information,
reference is made to the Registration Statement.
In this prospectus "we", "us" or "ours" and the "Company" each refers
to Reckson Associates Realty Corp.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents that we previously filed with the Commission
pursuant to the Exchange Act are incorporated by reference in this prospectus
(other than information in such documents that is deemed not to be filed):
SEC Filings (File No. 1-13762) Period
Annual Report on Form 10-K Year ended December 31, 2000
Quarterly Report on Form 10-Q Quarter ended March 31, 2001
Registration Statement Filed on Filed May 9, 1995 (as amended)
Form 8-A
We also incorporate by reference each of the following documents that
we will file with the Commission after the date of this prospectus until the
particular offering is completed or after the date of the initial registration
statement and prior to effectiveness of the registration statement:
2
o Reports filed under Section 13(a) and (c) of the Exchange Act;
o Definitive proxy or information statements filed under
Section 14 of the Exchange Act in connection with any
subsequent stockholders' meeting; and
o Any reports filed under Section 15(d) of the Exchange Act.
Any statement contained herein or in a document all or any portion of
which is incorporated or deemed to be incorporated by reference herein will be
deemed to be modified or superceded for purposes of this prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supercedes such earlier statement. Any statement so modified or
superseded will not be deemed, except as so modified or superceded, to
constitute a part of this prospectus.
We will provide a copy of any or all of these documents (exclusive of
exhibits unless the exhibits are specifically incorporated by reference
therein), without charge, to each person to whom this prospectus is delivered,
upon written or oral request to Reckson Associates Realty Corp., 225
Broadhollow Road, Melville, New York 11747, Attn: Susan McGuire, Investor
Relations, telephone number (631) 694-6900.
CAUTIONARY STATEMENTS CONCERNING
FORWARD-LOOKING INFORMATION
Certain information both included and incorporated by reference in
this prospectus may contain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act, and as
such may involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of our company
to be materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. Forward-looking
statements, which are based on certain assumptions and describe our future
plans, strategies and expectations are generally identifiable by use of the
words "may," "will," "should," "expect," "anticipate," "estimate," "believe,"
"intend" or "project" or the negative thereof or other variations thereon or
comparable terminology. Factors which could have a material adverse effect on
the operations and future prospects of our company are described below under
"Risk Factors." These risks and uncertainties should be considered in
evaluating any forward-looking statements contained or incorporated by
reference herein. Our actual results may differ significantly from the results
discussed in the forward-looking statements.
RISK FACTORS
An investment in our Class A common stock involves various risks.
Prospective investors should carefully consider the following information in
conjunction with the other information contained in this prospectus before
purchasing the securities offered hereby.
3
o We are dependent on the New York Tri-State area market due to limited
geographic diversification and our financial results may suffer as a result of
a decline in economic conditions in such area
A decline in the economic conditions in the New York tri-state area
(the "Tri-State Area") and for commercial real estate could adversely affect
our business, financial condition and results of operations. All of our
properties, except one office property located in Orlando, Florida, are
located in the Tri-State Area, although our organizational documents do not
restrict us from owning properties outside this area. Each of our five markets
are located in New York City and the suburbs of New York City and may be
similarly affected by economic changes in this area. A significant downturn in
the financial services industry and related industries would likely have a
negative effect on these markets and on the performance of our properties.
The following is a breakdown of our office and industrial properties
for each of our five markets at March 31, 2001:
Number of Properties(1) Square Footage Annual Base Rent(2)
----------------------- -------------- -------------------
Long Island
Office 27 4,372,848 $87,632,452
Industrial 95 5,894,445 $35,719,809
Westchester
Office 24 3,291,373 $65,740,732
Industrial 3 163,000 $1,820,496
New Jersey
Office 18 2,141,068 $42,983,756
Industrial 5 324,254 $2,308,461
Connecticut
Office 8 1,123,188 $22,991,991
Industrial 1 452,414 $2,876,568
New York City
Office 5 3,516,361 $100,970,183
(1) We also own one 357,000 square foot office building located in
Orlando, FL and two 10,000 square foot retail properties on Long
Island.
(2) Represents base rents from leases in place as of March 31, 2001, for
the period April 1, 2001 through March 31, 2002, excluding the
reimbursement by tenants of electrical costs.
4
o Debt servicing and refinancing, increases in interest rates and financial
covenants could adversely affect our economic performance
Dependence upon debt financing; risk of inability to service or
refinance debt. In order to qualify as a real estate investment trust, or
REIT, for federal income tax purposes, we are required to distribute at least
90% of our taxable income. As a result, we are more reliant on debt or equity
financings than many other non-REIT companies that are able to retain more of
their income.
We are subject to the risks associated with debt financing. Our cash
flow could be insufficient to meet required payments of principal and
interest. We may not be able to refinance existing indebtedness, which in
virtually all cases requires substantial principal payments at maturity, or
the terms of such refinancing might not be as favorable as the terms of the
existing indebtedness. As of March 31, 2001, the weighted average maturity of
our existing indebtedness was approximately 6.3 years and our total existing
indebtedness was approximately $1.5 billion. We also may not be able to
refinance any indebtedness we incur in the future. Finally, we may not be able
to obtain funds by selling assets or raising equity to make required payments
on maturing indebtedness.
Rising interest rates could adversely affect cash flow. We conduct
all of our operations through, and serve as the sole general partner of,
Reckson Operating Partnership, L.P. (the "Operating Partnership"). Increases
in interest rates could increase the Operating Partnership's interest expense,
which could adversely affect the ability to service its indebtedness or to pay
dividends to our stockholders. As of March 31, 2001, approximately 39% of our
debt was variable rate debt and our total debt was approximately $1.5 billion.
Outstanding advances under the credit facility of the Operating Partnership
bear interest at variable rates. In addition, we may incur indebtedness in the
future that also bears interest at a variable rate.
Requirements of credit facility could adversely affect our financial
condition and our ability to make distributions. The ability of the Operating
Partnership to borrow under our credit facility is subject to certain
financial covenants, including covenants relating to limitations on unsecured
and secured borrowings, minimum interest and fixed charge coverage ratios, a
minimum equity value and a maximum dividend payout ratio. The Operating
Partnership relies on borrowings under its credit facility to finance
acquisition and development activities and for working capital purposes and,
if the Operating Partnership is unable to borrow under its credit facility, it
could adversely affect our financial condition. The Operating Partnership has
obtained a three-year unsecured credit facility from The Chase Manhattan Bank,
as Administrative Agent, which provides for a maximum borrowing amount of up
to $575 million. The credit facility also contains a financial covenant
limiting the amount of distributions that we may pay to holders of our common
stock during any fiscal quarter if they exceed, when added to all
distributions paid during the three immediately preceding quarters, the
greater of:
o 90% of our funds from operations; and
o the amounts required in order for us to continue to qualify
as a REIT.
5
Although the Operating Partnership presently is in compliance with
the covenants under the credit facility, there is no assurance that the
Operating Partnership will continue to be in compliance or that we will be
able to service our indebtedness or pay dividends to our stockholders.
No limitation on debt. Currently, we have a policy of incurring debt
only if our Debt Ratio is 50% or less. As of March 31, 2001, our Debt Ratio
was 44.3%. For these purposes, Debt Ratio is defined as the total debt of the
Operating Partnership as a percentage of the market value of outstanding
shares of common stock, including the conversion of outstanding partnership
units in the Operating Partnership, the liquidation preference of our
preferred stock, the contributed value of Metropolitan Partners LLC's
("Metropolitan's") preferred interest and the liquidation preference of the
preferred units of the Operating Partnership, excluding all units of general
partnership owned by us, plus total debt (including our share of joint venture
debt and net of minority partners' share of joint venture debt). Under this
policy, we could incur additional debt if our stock price increases, even if
we may not have a corresponding increase in our ability to repay the debt. In
addition, as of March 31, 2001, our debt-to-equity ratio was 1:1.26. We
calculated our debt-to-equity ratio by comparing the total debt of the
Operating Partnership to the value of our outstanding common stock and the
common units of limited partnership interest of the Operating Partnership
(including its share of joint venture debt and net of minority partners' share
of joint venture debt), each based upon the market value of the common stock,
and the liquidation preference of our preferred stock, the contributed value
of Metropolitan's preferred interest and the preferred units of limited
partnership interest in the Operating Partnership, excluding all units of
general partnership interest owned by us. As described above, our credit
facility contains financial covenants which limit the ability of the Operating
Partnership to incur additional indebtedness. However, our organizational
documents do not contain any limitation on the amount of indebtedness we may
incur. Accordingly, the Board of Directors could alter or eliminate this
policy and would do so, for example, if it were necessary in order for us to
continue to qualify as a REIT. If this policy were changed, we could become
more highly leveraged, resulting in higher interest payments that could
adversely affect our ability to pay dividends to our stockholders and could
increase the risk of default on the Operating Partnership's existing
indebtedness.
o We may have conflicts of interest with FrontLine Capital Group; we have
credit risk as a result of loans we have made to FrontLine
Conflicts as a result of overlapping management. Certain members of
our executive management, including one of our co-chief executive officers and
our treasurer, serve in similar capacities for FrontLine Capital Group
("FrontLine") (formerly known as Reckson Service Industries, Inc.), an entity
that we spun-off to our stockholders in 1998. In addition, three members of
our Board of Directors (including one of our co-chief executive officers and
one of our co-presidents) also serve as directors of FrontLine. Although the
individuals referred to above are committed to our success, they are also
committed to the success of FrontLine. As of March 31, 2001, our senior
management and directors beneficially owned approximately 14.85% of our
outstanding common stock and approximately 15.10% of the outstanding common
stock of FrontLine. In calculating the ownership of our common stock, we have
included our Class A common stock and our Class B exchangeable common stock;
and we have assumed the exchange of all limited partnership units in the
Operating Partnership for shares of Class A common stock
6
and the exercise of all vested stock options. There is a risk that the common
membership of management, members of the Boards of Directors and ownership of
common stock will lead to conflicts of interest in the fiduciary duties owed to
stockholders by common directors and officers in connection with transactions
between the two companies, as well as a conflict in allocating management
time.
Conflicts in our loans to FrontLine. In June 1998, the Operating
Partnership established a credit facility with FrontLine (the "FrontLine
Facility") in the amount of $100 million for our service sector operations and
other general corporate purposes. In addition, in June 1998, the Operating
Partnership authorized the investment of $100 million with respect to the
funding of the investment of Reckson Strategic Venture Partners, LLC (the
"Reckson Strategic Venture Partners Commitment"). Amounts available under the
Reckson Strategic Venture Partners Commitment are funded through investments
by the Operating Partnership into REIT qualified joint ventures with Reckson
Strategic Venture Partners or through loans directly to FrontLine under a
credit agreement with terms substantially identical to those under the
FrontLine Facility. In March 2001, we increased the Reckson Strategic Venture
Partners Commitment to $110 million and, as of March 31, 2001, approximately
$109.1 million had been funded through the Reckson Strategic Venture Partners
Commitment. The amount available under the credit facility relating to the
Reckson Strategic Venture Partners Commitment is reduced by the amount of any
REIT qualified joint venture investments between the Operating Partnership and
Reckson Strategic Venture Partners. Loans under the Reckson Strategic Venture
Partners Commitment in excess of $25 million in any single investment are
subject to approval by our Board of Directors, while advances under the
FrontLine Facility in excess of $10 million in respect of any single
investment are subject to approval by our Board of Directors, or a committee
thereof. The FrontLine Facility and the credit agreement relating to the
Reckson Strategic Ventures Partners Commitment are due in June 2003 and
advances thereunder are recourse obligations. Interest accrues on these
facilities at a rate equal to the greater of (1) the prime rate plus 2% and
(2) 12% per annum, with the rate on amounts that are outstanding for more than
one year increasing annually at a rate of 4% of the prior year's rate.
Interest is not payable under these facilities prior to maturity and principal
is prepayable without penalty.
Subject to the amendments described below, as long as there are
outstanding advances under the FrontLine Facility or borrowings by FrontLine
under the credit agreement with respect to the Reckson Strategic Venture
Partners Commitment, FrontLine is prohibited from paying dividends on any
shares of FrontLine's capital stock or incurring additional debt. The
FrontLine Facility and the credit agreement with respect to the Reckson
Strategic Venture Partners Commitment are subject to certain other covenants
and prohibit advances thereunder to the extent the advances could, in our
determination, endanger our status as a REIT. The terms of the FrontLine
Facility and the credit agreement with respect to the Reckson Strategic
Venture Partners Commitment were not negotiated at arms' length and thus may
not reflect terms that could have been obtained from independent third
parties. Additional indebtedness may be incurred by our subsidiaries. As of
March 31, 2001, borrowings under the FrontLine Facility aggregated
approximately $93.4 million and, pursuant to the Reckson Strategic Venture
Partners Commitment, the Operating Partnership had made approximately $67.7
million in REIT qualified joint venture investments with Reckson Strategic
Venture Partners and had advanced approximately $41.4 million under the credit
agreement.
7
In November 1999, the credit facilities were amended to allow
FrontLine to incur up to $135 million in debt secured by FrontLine's assets
and to pay interest thereon and to allow the payment of dividends on up to
$200 million of preferred stock which may be issued by FrontLine. As
consideration for the amendments, which were approved by our independent
directors, FrontLine paid a fee to the Operating Partnership of approximately
$3.6 million in the form of approximately 176,000 shares of FrontLine's common
stock. As of March 31, 2001, FrontLine had obtained a $25 million revolving
line of credit from a commercial lender and it had issued $51 million of
preferred stock and redeemable convertible preferred stock.
In March 2001, the credit facilities were amended to provide that (i)
interest is payable only at maturity and (ii) we may transfer all or any
portion of any rights or obligations under the credit facilities to our
affiliates. We requested these changes as a result of changes in REIT tax
laws.
Conflicts in transactions with FrontLine under the intercompany
agreement. The Operating Partnership and FrontLine have entered into an
intercompany agreement to formalize their relationship at the outset and to
limit conflicts of interest. The intercompany agreement was not negotiated at
arms' length as it was negotiated while 95% of the common stock of FrontLine
was owned by the Operating Partnership. Under the intercompany agreement,
FrontLine granted the Operating Partnership a right of first opportunity to
make any REIT-qualified investment that becomes available to FrontLine. In
addition, if a REIT-qualified investment opportunity becomes available to an
affiliate of FrontLine, including Reckson Strategic Venture Partners, 100% of
the common ownership interest of which is indirectly owned by FrontLine, the
intercompany agreement requires FrontLine's affiliate to allow the Operating
Partnership to participate in the opportunity to the extent of FrontLine's
interest in the affiliate.
Under the intercompany agreement, the Operating Partnership granted
FrontLine a right of first opportunity to provide to the Operating Partnership
and our tenants any type of non-customary commercial services for occupants of
office, industrial and other property types, which we may not be permitted to
provide because they may generate REIT non-qualifying income under federal tax
laws. FrontLine will provide services to the Operating Partnership at rates
and on terms as attractive as either the best available for comparable
services in the market or those offered by FrontLine to third parties. In
addition, the Operating Partnership will give FrontLine access to its tenants
with respect to commercial services that may be provided to tenants.
Under the intercompany agreement, subject to certain conditions, the
Operating Partnership granted FrontLine a right of first refusal to become the
lessee of any real property acquired by the Operating Partnership if the
Operating Partnership determines that, because the operation of the property
may involve the performance of non-customary services that under the Code a
REIT may not generally provide, it is required to enter into a "master" lease
arrangement. Pursuant to a "master" lease arrangement, the Operating
Partnership would own the property, but lease it entirely to a single lessee
that would operate the property.
With respect to services that FrontLine will provide to the Operating
Partnership, management will have a conflict of interest in determining the
market rates to charge the Operating Partnership for these services. In
addition, management will have a conflict of interest
8
in determining whether the Operating Partnership or FrontLine would pursue a
REIT-qualified investment opportunity outside our core business strategy of
investing in office and industrial properties in the Tri-State Area.
Furthermore, the Operating Partnership and FrontLine may structure investments
so that Reckson Strategic Venture Partners - Reckson Operating Partnership
joint ventures may pursue the portion of investments generating REIT-qualified
income and Reckson Strategic Venture Partners will pursue directly the other
portion of these investments. Accordingly, Reckson Strategic Venture Partners
and Reckson Strategic Venture Partners-Reckson Operating Partnership joint
ventures may have conflicts of interest in the structuring, valuation,
management and disposition of these investments.
Policies with respect to conflicts of interest may not be successful.
We have adopted policies designed to eliminate or minimize conflicts of
interest. These policies include the approval of all transactions in which our
directors or officers have a conflicting interest by a majority of the
directors who are neither officers nor affiliated with us. These policies do
not prohibit sales of assets to or from affiliates, but would require the
sales to be approved by our independent directors. However, there is no
assurance that these policies will be successful and, if they are not
successful, decisions could be made that might fail to reflect fully the
interests of all of our stockholders.
o Our acquisition, development and construction activities could result in
losses
We intend to acquire existing office and industrial properties to the
extent that suitable acquisitions can be made on advantageous terms.
Acquisitions of commercial properties entail risks, such as the risks that we
may not be in a position or have the opportunity in the future to make
suitable property acquisitions on advantageous terms and that our investments
will fail to perform as expected. Some of the properties that we acquire may
require significant additional investment and upgrades and are subject to the
risk that estimates of the cost of improvements to bring such properties up to
standards established for the intended market position may prove inaccurate.
Since our IPO in June 1995, we have acquired 71 office properties (excluding
the office property located in Orlando, Florida and other properties located
outside New York that were acquired and subsequently disposed of in our
acquisition of Tower Realty Trust, Inc.) with aggregate square footage of
approximately 12.6 million and 41 industrial properties (excluding properties
which we acquired and subsequently disposed of) with aggregate square footage
of approximately 3.4 million. In addition, we have developed one office
building encompassing approximately 277,000 square feet and four industrial
buildings encompassing approximately 483,000 square feet.
We also intend to continue the selective development and construction
of office and industrial properties in accordance with our development and
underwriting policies as opportunities arise. We are currently developing one
property comprising approximately 315,000 square feet. Our development and
construction activities include the risks that:
o we may abandon development opportunities after expending resources
to pursue development
o construction costs of a project may exceed our original estimates
o occupancy rates and rents at a newly completed property may not be
sufficient to make the property profitable
9
o financing may not be available to us on favorable terms for
development of a property
o we may not complete construction and lease-up on schedule,
resulting in increased carrying costs to complete construction,
construction costs and, in some instances, penalties owed to
tenants with executed leases
Our development activities are also subject to risks relating to the
inability to obtain, or delays in obtaining, all necessary zoning, land-use,
building, occupancy and other required governmental permits and
authorizations. If any of the above events occur, our ability to pay dividends
to our stockholders and service the Operating Partnership's indebtedness could
be adversely affected. In addition, new development activities, regardless of
whether or not they are ultimately successful, typically require a substantial
portion of management's time and attention.
In June 1999 we acquired a first mortgage note for approximately
$277.5 million on a 1.4 million square foot, 47-story Class A office tower
located at 919 Third Avenue, New York, New York, that was in default. In July
2000, we consented to the filing of a consensual, pre-packaged bankruptcy plan
with the current fee owner and we obtained title to this property in November
2000. We have also obtained a three-year $250 million first mortgage
commitment on the property. At closing, $200 million was funded under the
commitment at an interest rate of LIBOR plus 120 basis points. In addition, we
have commenced a significant capital improvement project with respect to this
property that we anticipate will bring our total investment in this property
to approximately $365 million. As of March 31, 2001 the property is 98%
leased. It is anticipated that the renovation program will be substantially
completed by the first quarter of 2002. There can be no assurance that the
cost incurred to complete the renovation program will not exceed our estimates
or that the program will be completed in the anticipated timeframe.
o Adverse real estate market conditions, increases in operating expenses or
capital expenditures, tenant defaults and uninsured losses could adversely
affect our financial results
Our properties' revenues and value may be adversely affected by a
number of factors, including:
o the national, state and local economic climate and real
estate conditions, such as oversupply of or reduced demand
for space and changes in market rental rates
o the need to periodically renovate, repair and relet our space
o increasing operating costs, including real estate taxes and
utilities, which may not be passed through to tenants
o defaults by our tenants or their failure to pay rent on a timely
basis
o uninsured losses
A significant portion of our expenses of real estate investments,
such as mortgage payments, real estate taxes, insurance and maintenance costs,
are generally not reduced when circumstances cause a decrease in income from
our properties. In addition, our real estate values and income from properties
are also affected by our compliance with laws, including tax laws, interest
rate levels and the availability of financing.
10
Because real estate investments are illiquid, we may not be able to
sell properties when appropriate. Real estate investments generally cannot be
sold quickly. We may not be able to vary our portfolio promptly in response to
economic or other conditions. In addition, provisions of the Internal Revenue
Code of 1986, as amended (the "Code") limit a REIT's ability to sell
properties in some situations when it may be economically advantageous to do
so, thereby adversely affecting returns to our stockholders.
Competition in our markets is significant. The competition for
tenants in the office and industrial markets in the Tri-State Area is
significant and includes properties owned by other REITs, local privately-held
companies, institutional investors and other owners. There is also significant
competition for acquisitions in our markets from the same types of
competitors. In addition, many users of industrial space in our markets own
the buildings that they occupy.
Increasing operating costs could adversely affect cash flow. Our
properties are subject to operating risks common to commercial real estate,
any and all of which may adversely affect occupancy or rental rates. Our
properties are subject to increases in our operating expenses such as
cleaning, electricity, heating, ventilation and air conditioning; elevator
repair and maintenance; insurance and administrative costs; and other costs
associated with security, landscaping, repairs and maintenance of our
properties. While our tenants generally are currently obligated to pay a
portion of these costs, there is no assurance that tenants will agree to pay
these costs upon renewal or that new tenants will agree to pay these costs
initially. If operating expenses increase, the local rental market may limit
the extent to which rents may be increased to meet increased expenses without
at the same time decreasing occupancy rates. While we have cost saving
measures at each of our properties, if any of the above occurs, our ability to
pay dividends to our stockholders and service our indebtedness could be
adversely affected.
Some potential losses are not covered by insurance. We carry
comprehensive liability, fire, extended coverage and rental loss insurance on
all of our properties. However, losses arising from acts of war or relating to
pollution are not generally insured because they are either uninsurable or not
economically insurable. If an uninsured loss or a loss in excess of insured
limits should occur, we could lose our capital invested in a property, as well
as any future revenue from the property. We would remain obligated on any
mortgage indebtedness or other obligations related to the property.
Investments in mortgage debt could lead to losses. We may invest in
mortgages secured by office or industrial properties. We may acquire the
mortgaged properties through foreclosure proceedings or negotiated
settlements. In addition to the risks associated with investments in
commercial properties, investments in mortgage indebtedness present additional
risks, including the risk that the fee owners of such properties may not make
payments of interest on a current basis and we may not realize our anticipated
return or sustain losses relating to the investments. Although we currently
have no intention to originate mortgage loans as a significant part of our
business, we may make loans to a seller in connection with our purchase of
real estate. The underwriting criteria we would use for these loans would be
based upon the credit and value of the underlying real estate.
11
o Property ownership through partnerships and joint ventures could limit our
control of those investments
Partnership or joint venture investments may involve risks not
otherwise present for investments made solely by us, including the possibility
that our partners or co-venturer might become bankrupt, that our partners or
co-venturer might at any time have different interests or goals than we do,
and that our partners or co-venturer may take action contrary to our
instructions, requests, policies or objectives, including our policy with
respect to maintaining our qualification as a REIT. Other risks of joint
venture investments include impasse on decisions, such as a sale, because
neither our partner or co-venturer nor us would have full control over the
partnership or joint venture. There is no limitation under our organizational
documents as to the amount of funds that may be invested in partnerships or
joint ventures.
The following is a description of the significant joint ventures in
which we are involved:
Our investment in the Omni includes the risks that we cannot
refinance or dispose of the property in our sole discretion and we could have
our general partnership interest converted into a limited partnership
interest. The Operating Partnership owns a 60% general partner interest in
Omni Partners, L.P. (the "Omni Partnership"), the partnership that owns the
Omni, a 575,000 square foot office building located in our Nassau West
Corporate Center office park. Odyssey Partners, L.P. ("Odyssey") and an
affiliate of Odyssey own the remaining 40% interest. Through our partnership
interest, we act as managing partner and have the sole authority to conduct
the business and affairs of the Omni Partnership subject to the limitations
set forth in the amended and restated agreement of limited partnership of Omni
Partners, L.P. (the "Omni Partnership Agreement"). These limitations include
Odyssey's right to negotiate under certain circumstances a refinancing of the
mortgage debt encumbering the Omni and the right to approve any sale of the
Omni made on or before March 13, 2007 (the "Acquisition Date"). The Operating
Partnership will continue to act as the sole managing partner of the Omni
Partnership unless certain conditions specified in the Omni Partnership
Agreement shall occur. Upon the occurrence of any of these conditions, the
Operating Partnership's general partnership interest shall convert to a
limited partnership interest and an affiliate of Odyssey shall be the sole
managing partner, or, at the option of Odyssey, the Operating Partnership
shall be a co-managing partner with an affiliate of Odyssey. In addition, on
the Acquisition Date, the Operating Partnership will have the right to
purchase Odyssey's interest in the Omni Partnership at a price (the "Option
Price") based on 90% of its fair market value. If the Operating Partnership
fails to exercise this option, Odyssey has the right to require the Operating
Partnership to purchase Odyssey's interest in the Omni Partnership on the
Acquisition Date at the Option Price. The Operating Partnership has the right
to extend the Acquisition Date until March 13, 2012. The Option Price shall
apply to the payment of all sums due under a loan made by the Operating
Partnership in March 1997 to Odyssey in the amount of approximately $17
million. The Odyssey loan matures on the Acquisition Date, subject to the
Operating Partnership's right to extend the Acquisition Date as set forth
above, and is secured by a pledge of Odyssey's interest in the Omni
Partnership.
Our joint venture in an office building in Tarrytown, New York
includes the risks that we cannot enter into large leases or refinance or
dispose of the building in our discretion. The Operating Partnership owns a
60% managing member interest in a limited liability company that owns 520
White Plains Road, a 171,761 square foot office building located in Tarrytown,
New
12
York. The remaining 40% member interest is held by Tarrytown Corporate
Center III, L.P. ("TCC"), a partnership affiliated with the Halpern
organization, the organization from which we acquired eight Class A office
properties for approximately $86 million in February 1996. The member
agreement governing the joint venture arrangement requires us to obtain the
consent of TCC prior to engaging in activities such as entering into or
modifying a lease for more than 25,000 rentable square feet, financing or
refinancing indebtedness encumbering the property and selling or otherwise
transferring the property.
Our joint ventures in privatization of government office buildings
and correctional facilities are dependent upon continued outsourcing by
governments and competitive bidding. From time to time, the Operating
Partnership may make REIT qualified joint venture investments in real estate
assets with Reckson Strategic Venture Partners. FrontLine owns 100% of the
common ownership interests of Reckson Strategic Venture Partners and,
accordingly, controls Reckson Strategic Venture Partners. The strategy of
Reckson Strategic Venture Partners is to acquire interests in established
entrepreneurial enterprises with experienced management teams in market
sectors which are in the early stages of their growth cycle or offer
circumstances for attractive investments as well as opportunities for future
growth. REIT qualified joint venture investments with Reckson Strategic
Venture Partners may involve various types of real estate assets and involve
different risks than those in our office and industrial sectors, as to which
we have no prior experience or expertise. No assurance can be given as to the
success of these investments. As of March 31, 2001, the Operating Partnership
had made REIT qualified joint venture investments with Reckson Strategic
Venture Partners of approximately $67.7 million.
Our joint venture in suburban office properties includes the risk
that we will be unable to transfer our interest therein at our discretion. In
September 2000, we formed a joint venture (the "Tri-State JV") with Teachers
Insurance and Annuity Association ("TIAA") and contributed eight Class A
suburban office properties aggregating approximately 1.5 million square feet
to the Tri-State JV in exchange for approximately $136 million and a 51%
majority ownership interest in the Tri-State JV. The operating member of the
Tri-State JV is our subsidiary. The agreement governing the joint venture
provides that if the operating member transfers its interest in Tri-State JV,
or a change in control occurs with respect to the operating member or certain
of our affiliates, under certain limited circumstances, TIAA may elect to
cause the operating member to purchase TIAA's interest in the Tri-State JV.
o Environmental problems are possible
Federal, state and local laws and regulations relating to the
protection of the environment may require a current or previous owner or
operator of real estate to investigate and clean up hazardous or toxic
substances or petroleum product releases at a property. An owner of real
estate is liable for the costs of removal or remediation of certain hazardous
or toxic substances on or in the property. These laws often impose such
liability without regard to whether the owner knew of, or caused, the presence
of the contaminants. Clean-up costs and the owner's liability generally are
not limited under the enactments and could exceed the value of the property
and/or the aggregate assets of the owner. The presence of, or the failure to
properly remediate, the substances may adversely affect the owner's ability to
sell or rent the property or to borrow using the property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the clean-up costs of the substances at a
disposal or treatment
13
facility, whether or not such facility is owned or operated by the person. Even
if more than one person was responsible for the contamination, each person
covered by the environmental laws may be held responsible for the clean-up
costs incurred. In addition, third parties may sue the owner or operator of a
site for damages and costs resulting from environmental contamination emanating
from that site.
Environmental laws also govern the presence, maintenance and removal
of asbestos-containing materials ("ACMs"). These laws impose liability for
release of ACMs into the air and third parties may seek recovery from owners
or operators of real properties for personal injury associated with ACMs. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, we may be considered an owner or operator of
properties containing ACMs. Having arranged for the disposal or treatment of
contaminants we may be potentially liable for removal, remediation and other
costs, including governmental fines and injuries to persons and property.
All of our office properties and all of our industrial properties
have been subjected to a Phase I or similar environmental site assessment
after April 1, 1994 that were completed by independent environmental
consultant companies, except for the property located at 35 Pinelawn Road
which was originally developed by us and subjected to a Phase I in April 1992.
These Phase I or similar environmental site assessments involved general
inspections without soil sampling, ground water analysis or radon testing and,
for our properties constructed in 1978 or earlier, survey inspections to
ascertain the existence of ACMs. These environmental site assessments have not
revealed any environmental liability that we believe would have a material
adverse effect on our business.
o Failure to qualify as a REIT would be costly
We have operated (and intend to operate) so as to qualify as a REIT
under the Code beginning with our taxable year ended December 31, 1995.
Although our management believes that we are organized and operated in a
manner to so qualify, no assurance can be given that we will qualify or remain
qualified as a REIT.
If we fail to qualify as a REIT in any taxable year, we will be
subject to federal income tax (including any applicable alternative minimum
tax) on our taxable income at regular corporate rates. Moreover, unless
entitled to relief under certain statutory provisions, we also will be
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification was lost. This treatment would significantly
reduce net earnings available to service indebtedness, make investments or pay
dividends to stockholders because of the additional tax liability to us for
the years involved. Also, we would not then be required to pay dividends to
our stockholders.
o Tax consequences upon a sale or refinancing of properties may result in
conflicts of interest for our directors and officers
Holders of units of limited partnership interest of the Operating
Partnership or co-owners of properties not owned entirely by us may suffer
different and more adverse tax consequences than we will upon the sale or
refinancing of our properties. We may have different objectives
14
from these co-owners and holders of limited partnership units regarding the
appropriate pricing and timing of any sale or refinancing of these properties.
While we, as the sole general partner of the Operating Partnership, have the
exclusive authority as to whether and on what terms to sell or refinance each
property owned solely by the Operating Partnership, our directors and officers
who hold limited partnership units may seek to influence us not to sell or
refinance the properties, even though such a sale might otherwise be
financially advantageous to us, or may seek to influence us to refinance a
property with a higher level of debt.
o Limits on ownership and changes in control may deter changes in management
and third party acquisition proposals
Ownership limit. To maintain our qualification as a REIT, five or
fewer individuals (as defined in the Code, to include certain entities) may
not own, directly or indirectly, more than 50% in value of our outstanding
capital stock during the last half of a taxable year (other than the first
year). In order to protect against the risk of losing REIT status, our charter
limits ownership of our issued and outstanding Class A common stock by any
single stockholder to 9% of the lesser of the number or value of the
outstanding shares of common stock. It also limits ownership of our Class B
exchangeable common stock by any single stockholder to 9% in value of the
outstanding shares of all of our common stock and limits ownership of our
issued and outstanding 7-5/8% Series A Convertible Cumulative Preferred Stock
and Series B Convertible Cumulative Preferred Stock to 9% in value of the
outstanding shares of all of our capital stock. In addition, a stockholder may
not acquire shares of our Series A preferred stock that would result in the
stockholder's owning in excess of 20% of the lesser of the number or value of
outstanding shares of the Series A preferred stock. See "Description of
Preferred Stock--Restrictions on Ownership." These provisions may delay, defer
or prevent a change of control in the Company or other transaction by a third
party without the consent of the Board of Directors even if a change in
control were in the best interests of our stockholders.
Staggered board. Our Board of Directors is divided into three
classes. The terms of the Class I, Class II and Class III directors expire in
2002, 2003, and 2004, respectively. Directors are chosen for a three-year
term. These provisions may deter changes in control because of the increased
time period necessary for a third party to acquire control of management
through positions on the Board of Directors.
Supermajority Vote for Removal of Directors. In our charter, we have
opted into a provision of the Maryland General Corporation law (the "MGCL")
requiring a vote of two-thirds of the common stock to remove one or more
directors.
Majority of Votes Required to Call Special Meetings of Stockholders.
Our bylaws provide that a special meeting of stockholders need only be called
if requested by holders of the majority of votes eligible to be cast at such
meeting.
Future issuances of common stock. Our charter authorizes the Board of
Directors to issue additional shares of common stock without stockholder
approval. We also may issue shares of Class A common stock in exchange for
limited partnership units pursuant to the Operating Partnership's partnership
agreement. We issued approximately 11.7 million shares of Class B exchangeable
common stock in connection with the Tower transaction. These shares are
15
exchangeable at the option of the holder on a one-for-one basis for shares of
our Class A common stock and are entitled currently to an annual dividend of
$2.40 per share, subject to adjustment annually. On or after November 23,
2003, we can redeem the Class B exchangeable common stock on a one-for-one
basis for shares of our Class A common stock. Issuance of Class A common stock
or Class B exchangeable common stock could have the effect of diluting
existing common stockholders' interests.
Our charter permits the issuance of preferred stock which could
delay, defer or prevent a change in control. Our charter authorizes the Board
of Directors to issue up to 25 million shares of preferred stock, of which
9,192,000 shares of Series A Preferred Stock and 2,000,000 shares of Series B
preferred stock are issued and outstanding, to reclassify unissued shares of
capital stock, and to establish the preferences, conversion and other rights,
voting powers, restrictions, limitations and restrictions on ownership,
limitations as to dividends or other distributions, qualifications, and terms
and conditions of redemption for each class or series of any capital stock
issued.
In October 2000, the Board of Directors adopted a Stockholder Rights
Plan (the "Rights Plan") designed to protect stockholders from various abusive
takeover tactics, including attempts to acquire control at an inadequate
price, depriving stockholders of the full value of their investment. The
Rights Plan is designed to allow the Board of Directors to secure the best
available transaction for all of our stockholders. The Rights Plan was not
adopted in response to any known effort to acquire control of the Company.
Under the Rights Plan, each stockholder received a dividend of one
Right for each share of our outstanding Class A common stock owned. The Rights
are exercisable only if a person or group acquires, or announces their intent
to acquire, 15% or more of our Class A common stock, or announces a tender
offer the consummation of which would result in beneficial ownership by a
person or group of 15% or more of the Class A common stock. Each Right
entitles the holder to purchase one one-thousandth of a share of a new series
of junior participating preferred stock of ours at an initial exercise price
of $84.44.
If any person acquires beneficial ownership of 15% or more of the
outstanding shares of Class A common stock, then all Rights holders except the
acquiring person are entitled to purchase our Class A common stock at a price
discounted from the then market price. If we are acquired in a merger after
such an acquisition, all Rights holders except the acquiring person are also
entitled to purchase stock in the buyer at a discount in accordance with the
Rights Plan.
Limitations on acquisition of and changes in control pursuant to
Maryland law. The MGCL contains provisions, referred to as the "control share
acquisition statute," which eliminate the voting rights of shares acquired in
a Maryland corporation in quantities so as to constitute "control shares," as
defined under the MGCL. The MGCL also contains provisions, referred to as the
"business combination statute," which generally limit business combinations
between a Maryland corporation and any 10% owners of the company's stock or
any affiliate thereof. These provisions may have the effect of inhibiting a
third party from making an acquisition proposal for the Company or of
delaying, deferring or preventing a change in control of the Company under
circumstances that otherwise could provide the holders of shares of common
stock with the opportunity to realize a premium over the then-prevailing
market price. As
16
permitted by the MGCL, our bylaws contain a provision exempting any and all
acquisitions by any person of shares of our capital stock from the control
share acquisition statute. The Board of Directors, however, has approved the
Company's opting into the "business combination statute."
o The market value of securities could decrease based on our performance and
market perception and conditions
Effect of earnings and cash dividends. The market value of the equity
securities of a REIT may be based primarily upon the market's perception of
the REIT's growth potential and its current and future cash dividends, and may
be secondarily based upon the real estate market value of the underlying
assets. For the year ended December 31, 2000, we distributed approximately 91%
of our cash available for distribution to our common stockholders.
Adverse impact of rising interest rates. One factor which influences
the price of securities is the dividend or interest rate on the securities
relative to market interest rates. Rising interest rates may lead potential
buyers of our equity securities to expect a higher dividend rate, which would
adversely affect the market price of the securities. In addition, rising
interest rates would result in increased expense, thereby adversely affecting
cash flow and the ability of the Operating Partnership to service its
indebtedness.
THE COMPANY
We were incorporated in September 1994 and commenced operations
effective with the completion of our initial public offering (the "IPO") on
June 2, 1995.
We were formed for the purpose of continuing the commercial real
estate business of our predecessors, affiliated partnerships and other
entities. For more than 40 years, we have been engaged in the business of
owning, developing, acquiring, constructing, managing and leasing office and
industrial properties in the Tri-State Area. Based on industry surveys, we
believe that we are one of the largest owners and operators of Class A
suburban and commercial business district ("CBD") office properties and
industrial properties in the Tri-State Area. When we refer to Class A office
buildings in this prospectus, we mean well maintained, high quality buildings
that achieve rental rates that are at the higher end of the range of rental
rates for office properties in the particular market. We operate as a
fully-integrated, self-administered and self-managed REIT. As of March 31,
2001, we owned 188 properties (the "Properties") (including 10 joint venture
properties) in the Tri-State Area encompassing approximately 21.3 million
rentable square feet, all of which we manage. The Properties consist of 65
Class A suburban office properties encompassing approximately 9.1 million
rentable square feet, 17 Class A CBD office properties encompassing
approximately 5.3 million rentable square feet, 104 industrial properties
encompassing approximately 6.8 million rentable square feet and two 10,000
square foot retail properties. We also own a 357,000 square foot office
building located in Orlando, Florida. In addition, as of March 31, 2001, we
had approximately $2.9 million invested in certain mortgage indebtedness
encumbering approximately 97 acres of land, approximately $17 million in a
note receivable secured by a partnership interest in Omni Partners, L. P.,
owner of the Omni, a 575,000 square foot Class A office property located in
Uniondale, New York and $36.5 million under three notes which are secured by a
minority partner's preferred unit interest in the Operating Partnership (the
"Note Receivable Investments"). As of March 31, 2001, we are in the
17
process of developing a 315,000 square foot office building and also owned
approximately 290 acres of land in 13 separate parcels on which we can develop
approximately 1.4 million square feet of office space and approximately
224,000 square feet of industrial space.
The office properties are Class A office buildings that are
well-located, well-maintained and professionally managed. In addition, these
properties are modern or have been modernized to compete with newer buildings
in their markets. We believe that these properties achieve among the highest
rent and occupancy rates within their markets. Forty-two of the 65 suburban
office properties are located in ten planned office parks and are tenanted by,
among others, national service firms, such as telecommunications firms, "big
five" accounting firms, securities brokerage houses, insurance companies and
health care providers. The industrial properties are utilized for
distribution, warehousing, research and development, and light
manufacturing/assembly activities and are located primarily in three planned
industrial parks.
Our executive offices are located at 225 Broadhollow Road, Melville,
New York 11747 and our telephone number at that location is (631) 694-6900. At
March 31, 2001, we had approximately 330 employees.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares
of Class A common stock by the selling stockholder.
DESCRIPTION OF COMMON STOCK
General
Our charter (the "Charter") provides that we may issue up to 100
million shares of common stock, $.01 par value per share. In addition, units
of limited partnership interest in the Operating Partnership may be redeemed
for cash or, at our option, exchanged for our Class A common stock on a
one-for-one basis. On June 8, 2001, there were 49,616,919 shares of Class A
common stock outstanding and 10,283,513 shares of Class B exchangeable common
stock outstanding.
We issued Class B exchangeable common stock in connection with the
acquisition of Tower Realty Trust, Inc. The shares of Class B common stock
currently are entitled to receive an annual dividend of $2.40 per share,
subject to adjustment annually by a percentage equal to 70% of the cumulative
percentage change in our FFO per share above the FFO per share during the year
prior to issuance. The shares of Class B common stock are convertible at any
time, at the option of the holder, into an equal number of shares of our Class
A common stock, subject to customary antidilution adjustments as well as
certain other adjustments. We, at our option, may redeem any or all of the
Class B common stock in exchange for an equal number of shares of our Class A
common stock (subject to customary antidilution adjustments as well as certain
other adjustments) at any time following November 23, 2003. The Class B common
stock ranks pari passu with the Class A common stock.
18
All shares of Class A common stock have been duly authorized and will
be fully paid and nonassessable. Subject to the preferential rights of any
other shares or series of stock and to the provisions of the Charter regarding
Excess Stock (as defined under "Restrictions on Ownership of Capital Stock"),
holders of shares of Class A common stock offered hereby will be entitled to
receive distributions on the stock if, as and when authorized and declared by
the Board of Directors out of assets legally available therefor and to share
ratably in our assets legally available for distribution to our common
stockholders in the event of our liquidation, dissolution or winding up after
payment of or adequate provision for all known debts and liabilities.
Subject to the provisions of the Charter regarding Excess Stock, each
outstanding share of our Class A common stock and Class B common stock
entitles the holder to one vote on all matters submitted to a vote of
stockholders, including the election of directors, and, except as provided
with respect to any other class or series of stock, the holders of these
shares will possess the exclusive voting power. There is no cumulative voting
in the election of directors, which means that the holders of a majority of
the outstanding shares of our Class A common stock and Class B common stock
can elect all of the directors then standing for election and the holders of
the remaining shares will not be able to elect any directors.
Holders of shares of Class A common stock have no preference,
conversion, exchange, sinking fund, redemption or appraisal rights and have no
preemptive rights to subscribe for any other securities. Subject to the
provisions of the Charter regarding Excess Stock, shares of common stock will
have equal dividend, liquidation and other rights.
Certain Provisions of the Charter
Under the MGCL, a Maryland corporation generally cannot dissolve,
amend its charter, merge, sell all or substantially all of its assets, engage
in a share exchange or engage in similar transactions outside the ordinary
course of business unless approved by the affirmative vote of stockholders
holding at least two-thirds of the shares entitled to vote on the matter
unless a lesser percentage (but not less than a majority of all of the votes
entitled to be cast on the matter) is set forth in the corporation's charter.
The Charter does not provide for a lesser percentage in these situations.
The Charter authorizes the Board of Directors to reclassify any
unissued shares of common stock into other classes or series of classes of
capital stock and to establish the number of shares in each class or series
and to set the preferences, conversion and other rights, voting powers,
restrictions, limitations and restrictions on ownership, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each class or series.
Prospective investors should review the section captioned "Risk
Factors--Limits on Ownership and Changes in Control May Delay Changes in
Management and Third Party Acquisition Proposals."
Restrictions on Ownership
In order to qualify as a REIT under the Code, not more than 50% in
value of our outstanding capital stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code) during the last half of
a taxable year and the stock must be beneficially
19
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). To satisfy
the above ownership requirements and certain other requirements for
qualification as a REIT, the Board of Directors has adopted, and the
stockholders prior to the IPO approved, a provision in the Charter restricting
the ownership or acquisition of shares of common stock and preferred stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American
Stock Transfer & Trust Company.
SELLING STOCKHOLDER
The selling stockholder (which term includes its pledgees,
transferees or other successors in interest) received the shares of Class A
common stock offered hereby in an offering exempt from the registration
requirements of the Securities Act. The selling stockholder may from time to
time offer and sell any or all of the shares of the Class A common stock
offered under this prospectus.
The following table sets forth certain information with respect to
shares of Class A common stock covered by this prospectus and any other shares
of common stock owned by the selling stockholder. Because the selling
stockholder may offer all, some or none of the shares of Class A common stock
that are covered by this prospectus, no estimate can be made of the number of
shares of Class A common stock that will be offered under this prospectus or
the number of shares of common stock that will be owned by the selling
stockholder upon completion of the offering to which this prospectus relates.
Shares of Class A Common Shares of Class A Common
Name of Stock Owned Before Stock Covered by this
Selling Stockholder the Offering Prospectus (2)
------------------- ------------------------ ------------------------
Crescent Real Estate
Equities Limited
Partnership (1) 0 3,453,881
---------------------
(1) The selling stockholder was the holder of the class A preferred
membership interest in Metropolitan, and, pursuant to the terms of
the operating agreement of Metropolitan, received the shares of Class
A common stock offered hereby in exchange for its membership
interest. The selling stockholder acquired its interest in
Metropolitan in connection with our acquisition of Tower Realty
Trust, Inc.
(2) The selling stockholder is under no obligation known to us to sell
any of the shares of Class A common stock registered hereunder.
However, assuming the sale of all shares of Class A common stock
registered hereunder, the selling stockholder will have sold all of
the shares of Class A common stock currently held by it.
20
PLAN OF DISTRIBUTION
We have been advised that the selling stockholder (a term that
includes its pledgees, transferees and other successors in interest, as
described above) may offer shares of Class A common stock from time to time
depending on market conditions and other factors, in one or more transactions
on the national securities exchanges or over-the-counter markets on which the
shares are traded, in negotiated transactions or otherwise, at fixed prices,
at market prices prevailing at the time of sale, at prices related to
prevailing market prices, at negotiated prices, without consideration, or by
any other legally available means.
Sales of shares of Class A common stock by the selling stockholder
may involve (i) block transactions in which the broker or dealer so engaged
will attempt to sell the shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction, (ii) purchases by a
broker-dealer as principal and resale by such broker-dealer for its own
account pursuant to this prospectus, (iii) ordinary brokerage transactions and
transactions in which a broker solicits purchasers and (iv) privately
negotiated transactions. To the extent required, this prospectus may be
amended and supplemented from time to time to describe a specific plan of
distribution. In connection with the distribution of the shares of Class A
common stock or otherwise, the selling stockholder may enter into hedging
transactions with broker-dealers. In connection with such transactions,
broker-dealers may engage in short sales of the Class A common stock in the
course of hedging the position they assume with the selling stockholder. The
selling stockholder may also sell the Class A common stock short and redeliver
the shares to close out such short positions.
The selling stockholder may also enter into option transactions
(including call or put option transactions) or other transactions with
broker-dealers which require delivery to such broker-dealer of shares offered
hereby, which shares such broker-dealer may resell pursuant to this prospectus
(as supplemented or amended to reflect such transaction, if necessary). The
selling stockholder may also pledge shares to a broker-dealer and, upon a
default, such broker-dealer may effect sales of the pledged shares pursuant to
this prospectus (as supplemented or amended to reflect such transaction, if
necessary). The selling stockholder may also sell the Class A common stock
through one or more underwriters on a firm commitment or best-efforts basis
(with a supplement or amendment to this prospectus, if necessary). In
addition, any shares that qualify for sale pursuant to Rule 144 may be sold
under Rule 144 rather than pursuant to this prospectus.
Brokers and dealers may receive compensation in the form of
concessions or commissions from the selling stockholder and/or purchasers of
shares for whom they may act as agent and/or to whom they may sell as
principal (which compensation may be in excess of customary commissions). The
selling stockholder and any broker or dealer that participates in the
distribution of shares may be deemed to be underwriters and any commissions
received by them and any profit on the resale of shares positioned by a broker
or dealer may be deemed to be underwriting discounts and commissions under the
Securities Act. We have agreed to indemnify the selling stockholder, each
underwriter who participates in an offering of the shares of Class A common
stock, each person, if any, who controls any of such parties within the
meaning of the Securities Act and the Exchange Act, and each of their
respective directors, officers, employees and agents against certain
liabilities, including liabilities arising under the Securities Act. The
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selling stockholder may agree to indemnify any agent or broker-dealer that
participates in transactions involving sales of the shares of Class A common
stock against certain liabilities, including liabilities arising under the
Securities Act.
We have advised the selling stockholder that Regulation M under the
Exchange Act may apply to sales of shares and to the activities of the selling
stockholder or broker-dealers in connection therewith. Regulation M and other
rules and regulations under the Exchange Act, including anti-fraud provisions,
may limit when the selling stockholder or broker-dealers may sell or purchase
the shares of Class A common stock. We will bear all costs, expenses and fees
in connection with the registration of the shares of Class A common stock
covered by this prospectus. The selling stockholder will bear any brokerage
commissions and similar selling expenses, if any, attributable to the sale of
the shares.
RESTRICTIONS ON OWNERSHIP OF CAPITAL STOCK
Excess Stock
The Charter provides that we may issue up to 75 million shares of
Excess Stock, par value $.01 per share. For a description of our Excess Stock,
see "--Restrictions on Ownership" below.
Restrictions on Ownership
In order for us to qualify as a REIT under the Code, among other
things, not more than 50% in value of our outstanding capital stock may be
owned, directly or indirectly, by five or fewer individuals (defined in the
Code to include certain entities) during the last half of a taxable year
(other than the first year) (the "Five or Fewer Requirement"), and the shares
of capital stock must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of 12 months (other than the first year) or
during a proportionate part of a shorter taxable year. Pursuant to the Code,
stock held by certain types of entities, such as pension trusts qualifying
under Section 401(a) of the Code, United States investment companies
registered under the Investment Company Act of 1940, partnerships, trusts and
corporations, will be attributed to the beneficial owners of the entities for
purposes of the Five or Fewer Requirement (i.e., the beneficial owners of the
entities will be counted as our stockholders).
In order to protect us against the risk of losing our status as a
REIT due to a concentration of ownership among stockholders, our Charter,
subject to certain exceptions, provides that no stockholder may own, or be
deemed to own by virtue of certain attribution provisions of the Code, more
than 9.0% (the "Ownership Limit") of the aggregate number or value of the
outstanding shares of Class A common stock. The Charter also imposes
limitations on the ownership of Class B common stock and preferred stock. Any
transfer of shares of stock that would result in a violation of the Ownership
Limit or that would result in disqualification as a REIT, including any
transfer that results in shares of capital stock being owned by fewer than 100
persons or results in the Company being "closely held" within the meaning of
Section 856(h) of the Code, shall be null and void, and the intended
transferee will acquire no rights to the shares of capital stock. The
foregoing restrictions on transferability and ownership will not apply if the
Board of Directors determines that it is no longer in our best interests to
attempt to
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qualify, or to continue to qualify, as a REIT. The Board of Directors may, in
its sole discretion, waive the Ownership Limit if evidence satisfactory to the
Board of Directors and tax counsel is presented that the changes in ownership
will not then or in the future jeopardize REIT status and the Board of
Directors otherwise decides that waiving the Ownership Limit is in our best
interests.
Shares of capital stock owned, or deemed to be owned, or transferred
to a stockholder in excess of the Ownership Limit will automatically be
converted into shares of "Excess Stock" that will be transferred, by operation
of law, to the trustee of a trust for the exclusive benefit of one or more
charitable organizations described in Section 170(b)(1)(A) and 170(c) of the
Code (the "Charitable Beneficiary"). The trustee of the trust will be deemed
to own the Excess Stock for the benefit of the Charitable Beneficiary on the
date of the violative transfer to the original transferee-stockholder. Any
dividend or distribution paid to the original transferee-stockholder of Excess
Stock prior to our discovery that capital stock has been transferred in
violation of the provisions of the Charter shall be repaid to the trustee upon
demand. Any dividend or distribution authorized and declared but unpaid shall
be rescinded as void ab initio with respect to the original
transferee-stockholder and shall instead be paid to the trustee of the trust
for the benefit of the Charitable Beneficiary. Any vote cast by an original
transferee-stockholder of shares of capital stock constituting Excess Stock
prior to the discovery by us that shares of capital stock have been
transferred in violation of the provisions of the Charter shall be rescinded
as void ab initio. While the Excess Stock is held in trust, the original
transferee-stockholder will be deemed to have given an irrevocable proxy to
the trustee to vote the capital stock for the benefit of the Charitable
Beneficiary. The trustee of the trust may transfer the interest in the trust
representing the Excess Stock to any person whose ownership of the shares of
capital stock converted into Excess Stock would be permitted under the
Ownership Limit. If the transfer is made, the interest of the Charitable
Beneficiary shall terminate and the proceeds of the sale shall be payable to
the original transferee-stockholder and to the Charitable Beneficiary as
described herein. The original transferee-stockholder shall receive the lesser
of (1) the price paid by the original transferee-stockholder for the shares of
capital stock that were converted into Excess Stock or, if the original
transferee-stockholder did not give value for the shares (e.g., the stock was
received through a gift, devise or other transaction), the average closing
price for the class of shares from which the shares of capital stock were
converted for the ten trading days immediately preceding the sale or gift, and
(2) the price received by the trustee from the sale or other disposition of
the Excess Stock held in trust. The trustee may reduce the amount payable to
the original transferee-stockholder by the amount of dividends and
distributions relating to the shares of Excess Stock which have been paid to
the original transferee-stockholder and are owed by the original
transferee-stockholder to the trustee. Any proceeds in excess of the amount
payable to the original transferee-stockholder shall be paid by the trustee to
the Charitable Beneficiary. Any liquidation distributions relating to Excess
Stock shall be distributed in the same manner as proceeds of a sale of Excess
Stock. If the foregoing transfer restrictions are determined to be void or
invalid by virtue of any legal decision, statute, rule or regulations, then
the original transferee-stockholder of any shares of Excess Stock may be
deemed, at our option, to have acted as our agent in acquiring the shares of
Excess Stock and to hold the shares of Excess Stock for us.
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In addition, we will have the right, for a period of 90 days during
the time any shares of Excess Stock are held in trust, to purchase all or any
portion of the shares of Excess Stock at the lesser of (i) the price initially
paid for the shares by the original transferee-stockholder, or if the original
transferee-stockholder did not give value for the shares (e.g., the shares
were received through a gift, devise or other transaction), the average
closing price for the class of stock from which the shares of Excess Stock
were converted for the ten trading days immediately preceding the sale or
gift, and (ii) the average closing price for the class of stock from which the
shares of Excess Stock were converted for the ten trading days immediately
preceding the date we elect to purchase the shares. We may reduce the amount
payable to the original transferee-stockholder by the amount of dividends and
distributions relating to the shares of Excess Stock which have been paid to
the original transferee-stockholder and are owed by the original
transferee-stockholder to the trustee. We may pay the amount of the reductions
to the trustee for the benefit of the Charitable Beneficiary. The 90-day
period begins on the later date of which notice is received of the violative
transfer if the original transferee-stockholder gives notice to us of the
transfer or, if no notice is given, the date the Board of Directors determines
that a violative transfer has been made.
These restrictions will not preclude settlement of transactions
through the New York Stock Exchange.
All certificates representing shares of stock will bear a legend
referring to the restrictions described above.
Each stockholder shall upon demand be required to disclose to us in
writing any information with respect to the direct, indirect and constructive
ownership of our capital stock as the Board of Directors deems necessary to
comply with the provisions of the Code applicable to REITs, to comply with the
requirements of any taxing authority or governmental agency or to determine
any compliance.
The Ownership Limit may have the effect of delaying, deferring or
preventing a change in control of the Company unless the Board of Directors
determines that maintenance of REIT status is no longer in our best interests.
FEDERAL INCOME TAX CONSIDERATIONS
Based on various assumptions and factual representations made by us
regarding our operations, in the opinion of Sidley Austin Brown & Wood LLP,
our counsel, commencing with our taxable year ended December 31, 1995, we have
been organized in conformity with the requirements for qualification as a REIT
under the Code, and our proposed method of operating will enable us to meet
the requirements for qualification and taxation as a REIT. Our qualification
depends upon our ability to meet the various requirements imposed under the
Code through actual operations, as discussed below. Sidley Austin Brown & Wood
LLP will not review our operations and no assurance can be given that actual
operations will meet these requirements. The opinion of Sidley Austin Brown &
Wood LLP is not binding on the IRS or any court. The opinion of Sidley Austin
Brown & Wood LLP is based upon existing law, Internal Revenue Service (the
"IRS") regulations and currently published administrative positions of the IRS
and judicial decisions, which are subject to change either prospectively or
retroactively.
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The provisions of the Code pertaining to REITs are highly technical
and complex. The following is a brief and general summary of certain
provisions that currently govern us and our stockholders' federal income tax
treatment. For the particular provisions that govern us and our stockholders'
federal income tax treatment, reference is made to Sections 856 through 860 of
the Code and the regulations thereunder. The following summary is qualified in
its entirety by reference.
Under the Code, if certain requirements are met in a taxable year, a
REIT generally will not be subject to federal income tax with respect to
income that it distributes to its stockholders. If we fail to qualify during
any taxable year as a REIT, unless certain relief provisions are available, it
will be subject to tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates, which could have a material
adverse effect upon its stockholders. See "Risk Factors-Risks of Failure to
Qualify as a REIT."
In any year in which we qualify to be taxed as a REIT, distributions
made to our stockholders out of current or accumulated earnings and profits
will be taxed to stockholders as ordinary income except that distributions of
net capital gains designated by us as capital gain dividends will be taxed as
long-term capital gain income to the stockholders. To the extent that
distributions exceed current and accumulated earnings and profits, they will
constitute a return of capital, rather than dividend or capital gain income,
and will reduce the basis for the stockholder's common stock or preferred
stock with respect to which the distribution is paid. To the extent that
distributions exceed the stockholder's basis, the excess will be taxed in the
same manner as gain from the sale of that common stock or preferred stock. For
purposes of determining whether a distribution on common stock or preferred
stock is out of current or accumulated earnings and profits, our earnings and
profits will be allocated first to preferred stock and then to common stock.
Beginning in 1998, we may elect to retain long-term capital gains and pay
corporate-level income tax on them and treat the retained gains as if they had
been distributed to stockholders. In this case, each stockholder would include
in income, as long-term capital gain, its proportionate share of the
undistributed gains and would be deemed to have paid its proportionate share
of the tax paid by us with respect thereto. In addition, the basis for a
stockholder's common stock or preferred stock would be increased by the amount
of the undistributed long-term capital gain included in its income, less the
amount of the tax it is deemed to have paid with respect thereto.
Legislation enacted in 1999 contains several tax provisions regarding
REITs, including a reduction of the annual distribution requirement for REIT
taxable income from 95% to 90%. The legislation also changed the 10% voting
securities test under current law to a 10% vote or value test. Thus, subject
to certain exceptions, a REIT will not be allowed to own more than 10% of the
vote or value of the outstanding securities of any issuer (other than a
qualified REIT subsidiary or another REIT). The new 10% value test will not
apply to certain straight-debt securities. An exception to both the 10% vote
and 10% value tests, which will also be an exception to the 5% asset test,
will allow a REIT to own any or all of the securities of a "taxable REIT
subsidiary." A taxable REIT subsidiary will be able to perform non-customary
services for tenants of a REIT without disqualifying rents received from such
tenants for purposes of the REIT's gross income tests and will also be able to
undertake third-party management and development activities as well as
non-real-estate-related activities. A taxable REIT subsidiary will be taxed as
a regular C corporation but will be subject to "earnings stripping"
limitations on
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the deductibility of interest paid to its REIT. In addition, a REIT will be
subject to a 100% excise tax on certain excess amounts to ensure an
arm's-length relationship between the REIT and its taxable REIT subsidiaries.
No more than 20% of a REIT's total assets will be allowed to consist of
securities of taxable REIT subsidiaries.
The foregoing provisions became applicable to us as of January 1,
2001, subject to grandfather rules with respect to the 10% value test as well
as a transition period for the tax-free conversion of existing corporate
subsidiaries into taxable REIT subsidiaries.
Investors are urged to consult their own tax advisors with respect to
the appropriateness of an investment in the securities offered hereby and with
respect to the tax consequences arising under federal law and the laws of any
state, municipality or other taxing jurisdiction, including tax consequences
resulting from the investor's own tax characteristics. In particular, foreign
investors should consult their own tax advisors concerning the tax
consequences of an investment in us, including the possibility of United
States income tax withholding on our distributions.
LEGAL MATTERS
The validity of the issuance of the Class A common stock covered by
this prospectus (and certain legal matters described under "Federal Income Tax
Considerations") will be passed upon for us by Sidley Austin Brown & Wood LLP,
New York, New York.
EXPERTS
The consolidated financial statements and schedule of the Company
appearing in our Annual Report (Form 10-K) for the year ended December 31,
2000, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon included therein and incorporated herein by
reference. Such consolidated financial statements and schedule are
incorporated herein by reference in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
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3,453,881 Shares
RECKSON ASSOCIATES REALTY CORP.
Class A Common Stock
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PROSPECTUS SUPPLEMENT
August 17, 2001
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LEHMAN BROTHERS INC.