AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 16, 1997
 
                                                      REGISTRATION NO. 333-
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
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                                   FORM S-11
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
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                             SL GREEN REALTY CORP.
      (Exact name of registrant as specified in its governing instrument)
 
                              70 WEST 36TH STREET
                               NEW YORK, NY 10018
                    (Address of principal executive offices)
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                                STEPHEN L. GREEN
                CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
                             SL GREEN REALTY CORP.
                              70 WEST 36TH STREET
                               NEW YORK, NY 10018
                    (Name and address of agent for service)
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                                   Copies to:
 
                                            
           DOUGLAS A. SGARRO, ESQ.                         ALAN L. GOSULE, ESQ.
              BROWN & WOOD LLP                           ROBERT E. KING, JR., ESQ.
           ONE WORLD TRADE CENTER                             ROGERS & WELLS
             NEW YORK, NEW YORK                               200 PARK AVENUE
                 10048-0557                                 NEW YORK, NEW YORK
               (212) 839-5300                                 (212) 878-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. /X/ ------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING REGISTRATION OF SECURITIES BEING REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE Common Stock, $.01 par value per share.............................. 9,315,000 shares $20.00 $186,300,000 $56,454.55
(1) Includes 1,215,000 shares that are issuable upon exercise of the Underwriters' over-allotment option. (2) Estimated solely for the purpose of calculating the registration fee. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET
ITEM NUMBER AND CAPTION LOCATION OR HEADING IN PROSPECTUS - ---------------------------------------------------------------- ----------------------------------------------------- 1. Forepart of Registration Statement and Outside Front Forepart of Registration Statement and Outside Front Cover Page of Prospectus Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of Prospectus Prospectus 3. Summary Information, Risk Factors and Ratio of Prospectus Summary; The Company; Risk Factors Earnings to Fixed Charges 4. Determination of Offering Price Outside Front Cover Page; Underwriting 5. Dilution Dilution 6. Selling Security Holders Not applicable 7. Plan of Distribution Outside Front Cover Page; Underwriting 8. Use of Proceeds Use of Proceeds; Structure and Formation of the Company 9. Selected Financial Data Selected Financial Information 10. Management's Discussion and Analysis of Financial Management's Discussion and Analysis of Financial Condition and Results of Operations Condition and Results of Operations 11. General Information as to Registrant Outside Front Cover Page; Prospectus Summary; The Company; Management; Structure and Formation of the Company; Capital Stock 12. Policy with Respect to Certain Activities Prospectus Summary; The Company; Policies with Respect to Certain Activities; Partnership Agreement; Capital Stock; Additional Information 13. Investment Policies of Registrant Prospectus Summary; The Company; Business and Growth Strategies; Policies with Respect to Certain Activities 14. Description of Real Estate Prospectus Summary; The Properties 15. Operating Data The Company; The Properties; Financial Statements 16. Tax Treatment of Registrant and its Security Holders Prospectus Summary; Federal Income Tax Consequences 17. Market Price of and Dividends on the Registrant's Risk Factors; Distributions; The Company; Structure Common Equity and Related Stockholder Matters and Formation of the Company 18. Description of Registrant's Securities Capital Stock 19. Legal Proceedings The Properties 20. Security Ownership of Certain Beneficial Owners and Principal Stockholders Management 21. Directors and Executive Officers Management 22. Executive Compensation Management 23. Certain Relationships and Related Transactions The Company; Management; Structure and Formation of the Company; Certain Relationships and Transactions 24. Selection, Management and Custody of Registrant's Outside Front Cover Page; Prospectus Summary; The Investments Company; The Properties 25. Policies with Respect to Certain Transactions Policies with Respect to Certain Activities 26. Limitations of Liability The Company; Capital Stock; Management 27. Financial Statements and Information Prospectus Summary; Selected Financial Information; Financial Statements 28. Interests of Named Experts and Counsel Experts; Legal Matters 29. Disclosure of Commission Position on Indemnification Management for Securities Act Liabilities
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JUNE 16, 1997 PROSPECTUS 8,100,000 SHARES SL GREEN REALTY CORP. [LOGO] COMMON STOCK -------------------------- SL Green Realty Corp. (together with its subsidiaries, the "Company") has been formed for the purpose of continuing the commercial real estate business of S.L. Green Properties, Inc., and its affiliated partnerships and entities ("SL Green"). For more than 17 years, SL Green has been engaged in the business of owning, managing, leasing, acquiring and repositioning Class B office properties in Manhattan. Upon completion of the Offering, the Company will own or have contracted to acquire interests in eight Class B office properties encompassing approximately 1.9 million rentable square feet located in midtown Manhattan (the "Properties") and will manage 28 office properties (including the Properties) encompassing approximately 6.1 million rentable square feet. The Company will operate as a fully integrated, self-administered and self-managed real estate investment trust (a "REIT"). Management expects that the Company will be the first publicly-traded real estate company to invest primarily in Manhattan office properties. All of the shares of Common Stock, par value $.01 per share, of the Company ("Common Stock") offered hereby are being sold by the Company. Upon completion of the Offering, approximately 13% of the equity in the Company will be beneficially owned by officers and directors of the Company and certain other affiliated parties, on a fully diluted basis. Prior to the Offering, there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price per share will be between $19.00 and $21.00. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. Application will be made to list the Common Stock, subject to official notice of issuance, on the New York Stock Exchange under the symbol "SLG." -------------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING, AMONG OTHERS: - Concentration of all of the Company's properties in midtown Manhattan, and the dependence of such properties on the conditions of the New York metropolitan economy and the midtown Manhattan office market. - Absence of arm's length negotiations with respect to the Company's interests in the properties and other assets to be contributed by SL Green to the Company in connection with its formation, resulting in the risk that the consideration to be paid by the Company for such assets may exceed the fair market value of such assets and other potential conflicts of interest relating to the formation of the Company and the operation of its ongoing business. - Recent and expected growth requiring the Company to integrate successfully new acquisitions. - Limitations on the Company's ability to sell, or reduce the amount of mortgage indebtedness on, two of the Properties. - Limitations on the stockholders' ability to change control of the Company, including restrictions on ownership of more than 9.0% of the outstanding shares of Common Stock. -------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS (1) COMPANY (2) Per Share................................................ $ $ $ Total(3)................................................. $ $ $
(1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at approximately $5,600,000. (3) The Company has granted the Underwriters an option to purchase up to an aggregate of 1,215,000 shares of Common Stock to cover over-allotments. If all of such shares are purchased, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." -------------------------- The shares of Common Stock offered by this Prospectus are offered by the Underwriters subject to prior sale, withdrawal, cancellation or modification of the offer without notice to, delivery to and acceptance by the Underwriters and to certain further conditions. It is expected that delivery of the shares of Common Stock offered hereby will be made at the offices of Lehman Brothers Inc., New York, New York, on or about , 1997. -------------------------- LEHMAN BROTHERS PRUDENTIAL SECURITIES INCORPORATED , 1997 [MAP OF MIDTOWN MANHATTAN SHOWING PROPERTY LOCATIONS] [PICTURES OF THE PROPERTIES] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." TABLE OF CONTENTS PROSPECTUS SUMMARY.................... 1 The Company........................... 1 Risk Factors.......................... 2 Business and Growth Strategies........ 4 The Properties........................ 6 Structure and Formation of the Company............................. 7 The Offering.......................... 10 Distributions......................... 10 Tax Status of the Company............. 11 Summary Selected Financial Information......................... 11 RISK FACTORS.......................... 13 Dependence on Midtown Markets Due to Limited Geographic Diversification..................... 13 No Assurance of Fair Price for Company's Assets.................... 13 Conflicts of Interest in the Formation Transactions and the Business of the Company............................. 13 Risks Associated with Rapid Growth; Risks Associated with the Acquisition of Substantial New Properties; Lack of Operating History............................. 14 Limitations on Ability to Sell or Reduce the Mortgage Indebtedness on Certain Properties.................. 15 Limits on Changes in Control.......... 16 Real Estate Investment Risks.......... 17 Risks of Adverse Effect on Company from Debt Servicing and Refinancing, Increases in Interest Rates, Financial Covenants and Absence of Limitation on Debt.................. 20 Immediate and Substantial Dilution.... 21 Risks of Failure to Qualify as a REIT and Other Tax Liabilities........... 21 Competition........................... 22 Risks of Third-Party Property Management, Leasing and Construction Businesses.......................... 23 Possible Environmental Liabilities.... 23 Other Risks of Ownership of Common Stock............................... 24 Dependence on Key Personnel........... 25 Historical Losses of the Operations of the SL Green Predecessors........... 26 Changes in Policies Without Stockholder Approval................ 26 Uninsured Loss........................ 26 Benefits to Managing Underwriter...... 26 Costs of Compliance with Americans with Disabilities Act and Similar Laws................................ 26 THE COMPANY........................... 28 BUSINESS AND GROWTH STRATEGIES........ 30 The Market Opportunity................ 30 Growth Strategies..................... 31 USE OF PROCEEDS....................... 36 DISTRIBUTIONS......................... 37 CAPITALIZATION........................ 41 DILUTION.............................. 42 SELECTED FINANCIAL INFORMATION........ 44 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 46 Overview.............................. 46 Results of Operations................. 46 Pro Forma Operating Results........... 50 Liquidity and Capital Resources....... 51 Cash Flows............................ 52 Funds from Operations................. 53 Inflation............................. 53 MARKET OVERVIEW....................... 54 New York Economy...................... 54 Manhattan Office Market............... 56 THE PROPERTIES........................ 61 The Portfolio......................... 61 673 First Avenue...................... 67 470 Park Avenue South................. 70 36 West 44th Street (The Bar Building)........................... 72 70 West 36th Street................... 74 1414 Avenue of the Americas........... 76 29 West 35th Street................... 78 Acquisition Properties................ 80 The Option Property................... 84 General Terms of Leases in the Midtown Markets............................. 85 Mortgage Indebtedness................. 85 Credit Facility....................... 86 Environmental Matters................. 86 Property Management and Leasing Services............................ 87
i Construction Services................. 87 Employees............................. 88 Transfer of Properties................ 88 Assets Not Being Transferred to the Company............................. 88 Competition........................... 89 Regulation............................ 90 Insurance............................. 90 Legal Proceedings..................... 90 MANAGEMENT............................ 91 Directors, Director Nominees and Executive Officers.................. 91 Committees of the Board of Directors........................... 93 Compensation of Directors............. 94 Executive Compensation................ 94 Employment and Noncompetition Agreements.......................... 95 Stock Option Plan..................... 95 Incentive Compensation Plan........... 96 401(k) Plan........................... 96 Limitation of Liability and Indemnification..................... 96 STRUCTURE AND FORMATION OF THE COMPANY............................. 98 The Operating Entities of the Company............................. 98 Formation Transactions................ 99 Consequences of the Offering and the Formation Transactions.............. 100 Benefits to Related Parties........... 100 POLICIES WITH RESPECT TO CERTAIN ACTIVITIES.......................... 101 Investment Policies................... 102 Disposition Policies.................. 103 Financing Policies.................... 103 Conflict of Interest Policies......... 104 Interested Director and Officer Transactions........................ 104 Business Opportunities................ 105 Policies with Respect to Other Activities.......................... 105 CERTAIN RELATIONSHIPS AND TRANSACTIONS........................ 106 Formation Transactions................ 106 Cleaning Services..................... 106 Security Services..................... 106 PARTNERSHIP AGREEMENT................. 106 Operational Matters................... 106 Liability and Indemnification......... 110 Transfers of Interests................ 110 PRINCIPAL STOCKHOLDERS................ 112 CAPITAL STOCK......................... 113 General............................... 113 Common Stock.......................... 113 Preferred Stock....................... 113 Excess Stock.......................... 114 Power to Issue Additional Shares of Common Stock and Preferred Stock.... 114 Restrictions on Transfer.............. 114 Transfer Agent and Registrar.......... 116 CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S CHARTER AND BYLAWS.... 117 Classification and Removal of Board of Directors; Other Provisions......... 117 Business Combination Statute.......... 118 Control Share Acquisition Statute..... 118 Amendments to the Charter............. 119 Advance Notice of Director Nominations and New Business.................... 119 Anti-takeover Effect of Certain Provisions of Maryland Law and of the Charter and Bylaws.............. 119 Rights to Purchase Securities and Other Property...................... 119 SHARES AVAILABLE FOR FUTURE SALE...... 120 General............................... 120 Registration Rights................... 120 FEDERAL INCOME TAX CONSEQUENCES....... 121 General............................... 121 Taxation of the Company............... 121 Taxation of Stockholders.............. 126 Other Tax Considerations.............. 129 State and Local Tax................... 131 UNDERWRITING.......................... 132 EXPERTS............................... 134 LEGAL MATTERS......................... 134 ADDITIONAL INFORMATION................ 135 GLOSSARY OF SELECTED TERMS............ 136 INDEX TO FINANCIAL STATEMENTS......... F-1
ii CAUTIONARY STATEMENT INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" RELATING TO, WITHOUT LIMITATION, FUTURE ECONOMIC PERFORMANCE, PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS AND PROJECTIONS OF REVENUE AND OTHER FINANCIAL ITEMS, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE CAUTIONARY STATEMENTS SET FORTH UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE IN THE PROSPECTUS IDENTIFY IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD- LOOKING STATEMENTS. iii PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT (I) THE INITIAL PUBLIC OFFERING PRICE IS $20.00 PER SHARE (THE MIDPOINT OF THE PRICE RANGE SET FORTH ON THE COVER PAGE OF THIS PROSPECTUS), (II) THE TRANSACTIONS DESCRIBED UNDER "STRUCTURE AND FORMATION OF THE COMPANY" ARE CONSUMMATED, AND (III) THE UNDERWRITERS' OVERALLOTMENT OPTION IS NOT EXERCISED. AS USED HEREIN, (I) THE "COMPANY" MEANS SL GREEN REALTY CORP., A MARYLAND CORPORATION, AND ONE OR MORE OF ITS SUBSIDIARIES (INCLUDING SL GREEN OPERATING PARTNERSHIP, L.P.), AND THE PREDECESSORS THEREOF OR, AS THE CONTEXT MAY REQUIRE, SL GREEN REALTY CORP. ONLY OR SL GREEN OPERATING PARTNERSHIP, L.P. ONLY AND (II) "SL GREEN" MEANS SL GREEN PROPERTIES, INC., A NEW YORK CORPORATION, AS WELL AS THE AFFILIATED PARTNERSHIPS AND OTHER ENTITIES THROUGH WHICH STEPHEN L. GREEN HAS HISTORICALLY CONDUCTED COMMERCIAL REAL ESTATE ACTIVITIES. SEE "GLOSSARY OF SELECTED TERMS" FOR THE DEFINITIONS OF CERTAIN TERMS USED IN THIS PROSPECTUS. THE COMPANY The Company has been formed for the purpose of continuing the commercial real estate business of SL Green. For more than 17 years, SL Green has been engaged in the business of owning, managing, leasing, acquiring and repositioning Class B office properties in Manhattan. Upon completion of the Offering, the Company will own or have contracted to acquire interests in eight Class B office properties encompassing approximately 1.9 million rentable square feet located in midtown Manhattan (the "Properties") and will manage 28 office properties (including the Properties) encompassing approximately 6.1 million rentable square feet. Of these Properties, interests in six office Properties encompassing approximately 1.2 million rentable square feet are currently owned and managed by SL Green (the "Core Portfolio") and interests in two office Properties encompassing approximately 700,000 rentable square feet will be acquired upon completion of the Offering (the "Acquisition Properties"). As of March 31, 1997, the weighted average occupancy rate of the Core Portfolio was 95% and of the Acquisition Properties was 88%. Also, upon completion of the Offering, the Company expects to own an option to acquire an additional 333,000 rentable square foot Class B office property in midtown Manhattan. See "The Properties--The Option Property." The Company will operate as a fully integrated, self-administered and self-managed real estate investment trust (a "REIT"). Management expects that the Company will be the first publicly-traded real estate company to invest primarily in Manhattan office properties. The term "Class B" is generally used in the Manhattan office market to describe office properties which are more than 25 years old but which are in good physical condition, enjoy widespread acceptance by high-quality tenants and are situated in desirable locations in Manhattan. Examples of Class B Manhattan office properties (other than the Properties) include the Graybar Building, the Kent Building, the Lincoln Building, the Fred French Building and Five and Seven Penn Plaza. Class B office properties can be distinguished from Class A properties in that Class A properties are generally newer properties with higher finishes and obtain the highest rental rates within their markets. A variety of tenants who do not require, desire or cannot afford Class A space are attracted to Class B office properties due to their prime locations, excellent amenities, distinguished architecture and relatively less expensive rental rates. Class B office space has historically attracted many smaller growth oriented firms (many of which have fueled the recent growth in the New York City metropolitan economy) and has played a critical role in satisfying the space requirements of particular industry groups in Manhattan, such as the advertising, apparel, business services, engineering, not-for-profit, "new media" and publishing industries. In addition, several areas of Manhattan, including many in which particular trades or industries traditionally congregate, are dominated by Class B office space and contain no or very limited Class A office space. Examples of such areas include the Garment District (where three of the Properties are located), the Flatiron District (where one of the Properties is located), the areas immediately south and north of Houston Street ("Soho" and "Noho", respectively), Chelsea, and the area surrounding the United Nations (where one of the Properties is located). Businesses significantly concentrated in certain of these areas include those in the following industries: new media, garment, apparel, toy, jewelry, interior decoration, antiques, giftware, contract furnishing and UN-related businesses. The concentration of 1 businesses creates strong demand for the available Class B office space in those locations. Tenants that currently occupy space in SL Green owned or managed properties include MCI, NationsBank, New York Hospital, Omnicom Group Ltd., Sara Lee Corp. and UNICEF. Other tenants occupying Class B office space in Manhattan include Coca Cola, EMI, Forbes Inc., John Hancock, Mattel Toys and Young & Rubicam. As described herein, current developments in the New York City metropolitan economy provide an attractive environment for owning, operating and acquiring Class B office properties in Manhattan. See "Market Overview." These developments have resulted in growing demand for midtown Manhattan office space (particularly Class B space), declining vacancy rates (the Class B vacancy rate in the midtown and midtown south submarkets of the Manhattan office market (together, the "Midtown Markets") declined from 17.3% at year-end 1992 to 11.7% at March 31, 1997) and appreciation in rental rates and property values. The Company believes there will be a continued strengthening of the Class B office market driven by expected job growth in Manhattan, particularly among smaller companies which are, in many instances, Class B tenants. Additionally, the Company believes that a number of high quality tenants will likely seek to relocate from Class A space to Class B space as a result of the rising cost of Class A space. The Company will seek to capitalize on these growth opportunities by acquiring Class B office properties on a selective basis and, when necessary, enhancing their value after acquisition through repositioning of the properties in their respective submarkets. As described more fully below, the Company may have certain competitive advantages over other potential acquirors of Class B office space due to its local market expertise, historical institutional relationships, enhanced access to capital as a public company and ability to offer tax-advantaged acquisition structures. Additionally, the Company will seek to optimize its properties' cash flow through ongoing intensive management and leasing. See "Business and Growth Strategies." SL Green was founded in 1980 by Stephen L. Green, its Chairman, President and Chief Executive Officer. Since that time, SL Green has become a full service, fully integrated real estate company with a portfolio of over six million square feet of Class B office properties under management. Throughout its history, SL Green has been involved in the acquisition of 31 Class B office properties in Manhattan containing approximately four million square feet and the management of 50 Class B office properties in Manhattan containing approximately 10.5 million square feet. SL Green has offices in midtown and downtown Manhattan and has established a staff of more than 50 persons, including 40 professionals with experience in all aspects of commercial real estate. The Company will be led by, in addition to Stephen L. Green, five senior executives that average more than nine years with SL Green and more than 19 years in the commercial real estate business. This management team has developed a comprehensive knowledge of the Manhattan Class B office market, an extensive network of tenant and other business relationships and experience in acquiring underperforming office properties and repositioning them into profitable Class B properties through intensive full service management and leasing efforts. Upon completion of the Offering, approximately 13% of the equity of the Company, on a fully diluted basis, will be beneficially owned by officers and directors of the Company and other affiliated persons. RISK FACTORS An investment in the Common Stock involves various risks, and prospective investors should carefully consider the matters discussed under "Risk Factors" prior to making an investment in the Company. Such risks include, among others: - concentration of all of the Properties in midtown Manhattan, and the dependence of the Properties on the conditions of the New York metropolitan economy and the Midtown Markets, which increases the risk of the Company's being adversely affected by a downturn in the New York metropolitan economy or the Midtown Markets; - absence of arm's length negotiations with respect to the Company's interests in the Properties and the other assets to be contributed by SL Green to the Company in connection with its formation, 2 resulting in the risks that the consideration to be paid by the Company for such assets may exceed the fair market value of such assets and that the market value of the Common Stock may exceed the stockholders' proportionate share of the aggregate fair market value of such assets; - conflicts of interest in connection with the Formation Transactions (as defined below), including the fact that officers, directors and affiliates of the Company will receive equity interests in the Company and the Operating Partnership (as defined below) with a value of approximately $25.4 million, based on the assumed initial public offering price; - conflicts of interest involving officers and directors of the Company in business decisions regarding the Company, including conflicts associated with sales and refinancings of Properties and the prepayment of debt secured by the Properties and conflicts associated with the provision of cleaning and security services with respect to the Properties by entities controlled by related parties; - risks of integrating recent or expected acquisitions, including the risk that certain of these properties may have characteristics or deficiencies unknown to the Company that affect their valuation or revenue potential; - limitations on the ability of the Company to sell, or reduce the amount of mortgage indebtedness on, two of the Properties (673 First Avenue and 470 Park Avenue South) for up to 12 years following the completion of the Offering (the "Lock-out Period"), except in certain circumstances (the "Lock-out Provisions"), even if any such sale or reduction in mortgage indebtedness would be in the best interests of the Company's stockholders, and the possibility that future property acquisitions in which the Company uses partnership interests as consideration will include comparable limitations; - the anti-takeover effect of limiting actual or constructive ownership of Common Stock to 9.0% of the number of outstanding shares, subject to certain exceptions, and of certain other provisions contained in the organizational documents of the Company and the Operating Partnership, which could have the effect of delaying, deferring or preventing a transaction or change in control of the Company that might involve a premium price for the Common Stock or otherwise would be in the best interests of the Company's stockholders; - risks associated with real estate investments, such as the effect of the large number of competitive office properties in the Midtown Markets, the need to renew leases or re-lease space upon lease expirations and to pay renovation and re-leasing costs in connection therewith, the effect of economic and other conditions on office property cash flows and values, the ability of tenants to make lease payments, the ability of a property to generate revenue sufficient to meet operating expenses (including future debt service), potential environmental liabilities, the illiquidity of real estate investments and the possibility that acquired properties fail to perform as expected; - risks associated with borrowing, such as the inability to refinance outstanding indebtedness upon maturity or refinance such indebtedness on favorable terms and the risk of rising interest rates in connection with variable rate debt; - immediate and substantial dilution of $6.54 in the net tangible book value per share of the shares of Common Stock purchased in the Offering; and - taxation of the Company as a corporation if it fails to qualify as a REIT for Federal income tax purposes, and the Company's liability for certain Federal, state and local income taxes in such event and the resulting decrease in cash available for distribution. 3 BUSINESS AND GROWTH STRATEGIES The Company's primary business objective is to maximize total return to stockholders through growth in distributable cash flow and appreciation in the value of its assets. The Company plans to achieve this objective by capitalizing on the external and internal growth opportunities described below and continuing the operating strategies historically practiced by SL Green. THE MARKET OPPORTUNITY - The Company believes that the continuing recovery of the New York commercial real estate market from the downturn of the late 1980s and early 1990s creates an attractive environment for owning, operating and acquiring Class B office properties in Manhattan. - In particular, recent net private sector job growth (especially in smaller companies), an improving business environment and "quality of life" enhancements in New York City have led to growing demand for office space in Manhattan. - The Midtown Markets in particular have benefited from the growth in smaller companies that have traditionally been attracted to Class B space in the Midtown Markets due to its prime locations and relatively less expensive rental rates (as compared to Class A space) and from the relocation of larger firms from Class A space to Class B space. - The Company expects the supply of office space in the Midtown Markets to remain relatively stable for the foreseeable future because new construction generally is not economically feasible at current market rental rates and property values, there are relatively few sites available for construction and the lead time required for construction typically exceeds three years. - As a result of these positive supply and demand fundamentals, the Class B office vacancy rate in the Midtown Markets declined to 11.7% as of March 31, 1997 from its 1990s high of 17.3% in 1992 and asking rental rates for Class B office in the Midtown Markets increased to $23.88 per square foot as of March 31, 1997 from their 1990s low of $21.89 per square foot as of year-end 1993. These developments coupled with projected continuing decreases in vacancy rates and increases in rental rates create attractive opportunities for owning and acquiring Class B office properties in Manhattan. GROWTH STRATEGIES - The Company will seek to capitalize on current opportunities in the Class B Manhattan office market through (i) property acquisitions--continuing to acquire Class B office properties at significant discounts to replacement costs that provide attractive initial yields and the potential for cash flow growth, (ii) property repositioning--repositioning acquired properties that are underperforming through renovations, active management and proactive leasing and (iii) integrated leasing and property management. - PROPERTY ACQUISITIONS. In acquiring properties, the Company believes that it will have the following advantages over its competitors: (i) over 17 years experience as a full service, fully integrated real estate company focused on the Class B office market in Manhattan, (ii) enhanced access to capital as a public company, (as compared to the generally fragmented and far less institutional ownership of competing Manhattan Class B office properties) and (iii) the ability to offer tax-advantaged structures to sellers. In addition, the Company may benefit from the recent abolition of the New York State Real Property Transfer Gains Tax and from recent tax law developments reducing the transfer tax rates applicable to certain REIT acquisition transactions. - PROPERTY REPOSITIONING. The Company believes that there are a significant number of potential acquisitions that could greatly benefit from management's experience in enhancing property cash 4 flow and value by renovating and repositioning properties to be among the best in their submarkets. In considering such an acquisition, the Company determines the amount of capital required to be invested in a property to achieve the repositioning. The Company then judges the benefit of a repositioning on a total return basis, such that for the Company to undertake the project the present value of the projected future increase in net cash flow and property value must exceed the cost of the capital expenditure required to achieve the repositioning. - INTEGRATED LEASING AND PROPERTY MANAGEMENT. The Company will seek to capitalize on management's extensive knowledge of the Class B Manhattan marketplace and the needs of the tenants therein by continuing SL Green's proactive approach to leasing and management, which includes (i) the use of in-depth market research, (ii) the utilization of an extensive network of third-party brokers, (iii) comprehensive building management analysis and planning and (iv) a commitment to tenant satisfaction and providing "Class A" tenant services. The Company believes that SL Green's proactive leasing efforts have contributed to average occupancy rates at the Properties that are above the market average. During the period between 1994 and 1996, properties owned by SL Green for more than one year averaged occupancy rates of 94.3%, which exceeded the average of 87.2% for Class B Manhattan office space in the Midtown Markets by 8.1% over the comparable period. In addition, SL Green's commitment to tenant service and satisfaction is evidence by the renewal of approximately 78% of the expiring rentable square footage (77% of the expiring leases determined by number of leases) at the Properties in the Core Portfolio owned and managed by SL Green during the period from January 1, 1993 through March 31, 1997. 5 THE PROPERTIES THE PORTFOLIO GENERAL. Upon the completion of the Offering, the Company will own or have contracted to acquire interests in eight Class B office Properties located in midtown Manhattan which contain approximately 1.9 million rentable square feet. Of these Properties, six office properties encompassing approximately 1.2 million rentable square feet are currently owned and managed by SL Green and two office properties encompassing approximately 700,000 rentable square feet will be acquired on or after completion of the Offering. See "Structure and Formation of the Company--Formation Transactions." Upon completion of the Offering, the Company will effectively own 100% of the economic interest in all of the Properties. Certain of the Properties include at least a small amount of retail space on the lower floors, as well as basement/storage space. One Property (673 First Avenue) includes an underground parking garage. In addition to the foregoing, upon completion of the Offering, the Company will own an option to acquire an additional 333,000 rentable square foot office property in midtown Manhattan. See "The Properties--The Option Property." The following table sets forth certain information with respect to each of the Properties as of March 31, 1997:
PERCENTAGE PERCENTAGE OF OF APPROXIMATE PORTFOLIO PORTFOLIO YEAR RENTABLE RENTABLE ANNUAL ANNUAL BUILT/ SQUARE SQUARE PERCENT ESCALATED ESCALATED RENOVATED SUBMARKET FEET FEET LEASED RENT(1) RENT ---------- -------------- ------------ ------------- ----------- ----------- ------------- CORE PORTFOLIO 673 First Ave................ 1928/1990 Grand Central 422,000 22.4% 100% $10,692,472 25.2% South 470 Park Ave. S.(4).......... 1912/1994 Park Avenue 260,000(4) 13.8 95 5,568,931 13.1 South/Flatiron Bar Building(5).............. 1922/1985 Rockefeller 165,000(5) 8.8 81(5) 3,937,435 9.3 Center 70 W. 36th St................ 1923/1994 Garment 150,000 8.0 96 2,752,439 6.5 1414 Ave. of Ams............. 1923/1990 Rockefeller 111,000 5.9 98 3,378,804 8.0 Center 29 W. 35th St................ 1911/1985 Garment 78,000 4.1 92 1,433,221 3.4 ------------ ----- ----- ----------- ----- 1,186,000 63.0 95 27,763,302 65.5 ACQUISITION PROPERTIES 1372 Broadway................ 1914/1985 Garment 508,000 26.9 85 9,552,088 22.6 1140 Ave. of Ams............. 1926/1951 Rockefeller 191,000 10.1 98 5,035,514 11.9 Center ------------ ----- ----- ----------- ----- Total/Weighted Average....... 1,885,000(6) 100.0% 92.5% $42,350,904 100.0% ------------ ----- ----- ----------- ----- ------------ ----- ----- ----------- ----- ANNUAL ANNUAL NET ESCALATED EFFECTIVE RENT RENT PER PER NUMBER LEASED LEASED OF SQUARE SQUARE LEASES FOOT(2) FOOT(3) ----------- ----------- ----------- CORE PORTFOLIO 673 First Ave................ 16 $ 25.33 $ 21.79 470 Park Ave. S.(4).......... 25 22.61 19.57 Bar Building(5).............. 52 29.37 26.09 70 W. 36th St................ 39 19.14 15.94 1414 Ave. of Ams............. 31 31.01 31.04 29 W. 35th St................ 8 20.09 16.20 --- ----------- ----------- 171 24.63 21.60 ACQUISITION PROPERTIES 1372 Broadway................ 31 22.21 21.35 1140 Ave. of Ams............. 40 26.93 24.92 --- ----------- ----------- Total/Weighted Average....... 242 $ 24.29 $ 28.03 --- ----------- ----------- --- ----------- -----------
- ------------------------ (1) As used throughout this Prospectus, Annual Escalated Rent represents the annualized monthly base rent in effect as of March 31, 1997 (after giving effect to any contractual increases in monthly base rent that have occurred up to such date) including annualized monthly tenant pass-throughs of operating and other expenses (but excluding tenant electricity costs) under each lease executed as of March 31, 1997, or, if such monthly rent has been reduced by a temporary rent concession, the monthly rent that would have been in effect at such date in the absence of such concession. (2) Annual Escalated Rent Per Leased Square Foot, as used throughout this Prospectus, represents Annual Escalated Rent, as described in footnote (1) above, presented on a per leased square foot basis. (3) As used throughout this Prospectus, Annual Net Effective Rent Per Leased Square Foot represents (a) for leases in effect at the time an interest in the relevant property was first acquired by SL Green, the remaining lease payments under the lease divided by the number of months remaining under the lease multiplied by 12 and (b) for leases entered into after an interest in the relevant property was first acquired by SL Green and for leases at the Acquisition Properties, all lease payments under the lease divided by the number of months in the lease multiplied by 12, and, in the case of both (a) and (b), adjusted for tenant improvement costs and leasing commissions, if any, paid or payable by SL Green and presented on a per leased square foot basis. In certain cases, Annual Net Effective Rent Per Leased Square Foot may exceed Annual Escalated Rent Per Leased Square Foot as a result of the provision for future contractual increases in rental payments in the Annual Net Effective Rent Per Leased Square Foot data. (4) 470 Park Avenue South is comprised of two buildings, 468 Park Avenue South (a 17-story office building) and 470 Park Avenue South (a 12-story office building). (5) SL Green first acquired an interest in the Bar Building in October 1996. SL Green has commenced an aggressive leasing program at the Property and as of May 31, 1997, approximately 93% of the rentable square feet in the Property was leased. The Bar Building is comprised of two buildings, 36 West 44th Street (a 14-story building) and 35 West 43rd Street (a four-story building). (6) Includes approximately 1,718,000 square feet of rentable office space, 137,000 square feet of rentable retail space and 30,000 square feet of garage space. 6 STRUCTURE AND FORMATION OF THE COMPANY STRUCTURE OF THE COMPANY The Company will be the sole general partner of SL Green Operating Partnership, L.P., a Delaware limited partnership (the "Operating Partnership"). The Company will conduct substantially all of its business, and will hold all of its interests in the Properties, through the Operating Partnership. As the sole general partner of the Operating Partnership, the Company will have exclusive power to manage and conduct the business of the Operating Partnership, subject to certain exceptions (including the Lock-out Provisions). See "Partnership Agreement." The following diagram depicts the ownership structure of the Company upon completion of the Offering and the Formation Transactions (as defined below): [DIAGRAM REGARDING OWNERSHIP STRUCTURE OF COMPANY] 7 FORMATION TRANSACTIONS Certain transactions have been consummated or will be consummated concurrently with the completion of the Offering. These transactions (the "Formation Transactions") include the following: - The Company was organized as a Maryland corporation and the Operating Partnership was organized as a Delaware limited partnership in June 1997. - Lehman Brothers Holdings Inc. ("LBHI"), an affiliate of Lehman Brothers Inc., entered into a credit agreement with SL Green pursuant to which LBHI agreed to loan to SL Green up to $40 million (the "LBHI Loan") which will be used to acquire interests in the Core Portfolio and the Acquisition Properties, to fund property related operating expenses, to fund organizational expenses of the Company and to purchase short-term United States Treasury instruments ("Treasury Securities"). The LBHI Loan will be secured by partnership interests in certain Property-owning entities and the Treasury Securities. - The Company will sell 8,100,000 shares of Common Stock in the Offering and will contribute the net proceeds therefrom to the Operating Partnership in exchange for 8,100,000 Units (representing approximately an 84% economic interest in the Operating Partnership after the Offering). - The Operating Partnership will receive a contribution of its interests in the Core Portfolio as well as 95% of the economic interest in S.L. Green Management Corp. (the "Management Corporation"), S.L. Green Realty, Inc. (the "Leasing Corporation") and Emerald City Construction Corp. (the "Construction Corporation", and together with the Management Corporation and the Leasing Corporation, the "Service Corporations") from the Property-owning entities, the partners or members of such entities and the holders of interests in the Service Corporations. As consideration therefor, the Operating Partnership will issue to such entities, partners or members and holders 1,130,395 Units (having an aggregate value of approximately $22.6 million, based on the assumed initial offering price) and approximately $6.4 million. - The management and leasing business of SL Green with respect to the Properties in which the Company will have a 100% membership interest will be transferred to SL Green Management LLC (the "Management LLC" and, together with the Management Corporation, the "Management Entities"), a limited liability company in which the Company will own all of the economic interest. - The Operating Partnership will obtain for $500,000 an option to acquire 50 West 23rd Street, a 333,000 rentable square foot office property in midtown Manhattan (the "Option Property") from an unaffiliated seller for a purchase price of $36 million in cash. See "The Properties--The Option Property." - The Operating Partnership will acquire interests in the Acquisition Properties for an aggregate purchase price of approximately $73.4 million, to be funded with net proceeds from the Offering and mortgage financing. - The Operating Partnership will use approximately $74.1 million of net proceeds from the Offering to repay mortgage debt encumbering the Core Portfolio and the LBHI Loan (including $1.7 million in prepayment penalties, fees and other costs and excluding approximately $7.5 million in proceeds drawn under the LBHI Loan to fund purchase of the Acquisition Properties). - The Company will issue to Victor Capital Group, L.P. ("Victor Capital") 45,495 shares of restricted Common Stock and the Operating Partnership will pay $900,000 (funded with borrowings under the LBHI Loan and proceeds from the Offering) to Victor Capital as consideration for financial advisory services rendered to the Company in connection with the Formation Transactions. Additional information regarding the Formation Transactions is set forth under "Structure and Formation of the Company--Formation Transactions." 8 BENEFITS TO RELATED PARTIES Certain affiliates of the Company will realize certain material benefits in connection with the Formation Transactions and the Offering, including the following: - Certain SL Green entities (including entities owned by Stephen L. Green) will receive 887,895 Units in consideration for their interests in the Properties, Property-owning entities and the management, leasing and construction businesses of SL Green with a total value of approximately $17.8 million, based on the assumed initial public offering price (representing approximately 9.2% of the equity of the Company on a fully-diluted basis). - The Operating Partnership will use $20 million to repay a portion of the LBHI Loan that was made to an SL Green entity (which is indirectly owned by Stephen L. Green) and invested in Treasury Securities pledged as collateral therefor (which, upon repayment of the LBHI Loan, will be released to such SL Green entity). - Certain members of SL Green management (including Nancy A. Peck, Steven H. Klein, Benjamin P. Feldman, Gerard Nocera and Louis A. Olsen) own an aggregate of 383,110 shares of restricted Common Stock that initially will have a value of $7.7 million, based on the assumed initial public offering price. - Certain members of SL Green management (including Stephen L. Green, Nancy A. Peck, Steven H. Klein, Benjamin P. Feldman, Gerard Nocera and Louis A. Olsen) will become officers and/or directors of the Company. In addition, each of such persons will enter into three year employment and noncompetition agreements with the Company. See "Management--Employment and Noncompetition Agreements." Also, the Company will grant to directors, officers and employees of the Company options to purchase an aggregate of 660,000 shares of Common Stock at the initial public offering price under the Company's stock option plan, subject to certain vesting requirements. See "Management." - The structure of the Formation Transactions will provide the Unit recipients (including the members of management referred to above) the opportunity for deferral of the tax consequences of their contribution to the Operating Partnership of their interests in the Properties, Property-owning entities and Service Corporations. - An SL Green entity will own all of the voting stock of each of the Service Corporations (representing a 5% equity interest therein). - Pursuant to the Lock-out Provisions, the Company will be restricted in its ability to sell, or reduce the amount of mortgage indebtedness on, two of the Properties (673 First Avenue and 470 Park Avenue South) for up to 12 years following the completion of the Offering, which could enable certain participants in the Formation Transactions (including certain SL Green entities) to defer certain tax consequences associated with the Formation Transactions. - Persons or entities receiving Units in the Formation Transactions (including entities owned by Stephen L. Green) will have registration rights with respect to shares of Common Stock issued in exchange for Units. Additional information concerning benefits to related parties is set forth under "Structure and Formation of the Company--Benefits to Related Parties." 9 THE OFFERING Common Stock Offered by the Company.......... 8,100,000 shares Common Stock Outstanding After the 8,528,605 shares(1) Offering................................... Common Stock and Units Outstanding After the 9,659,000 shares and Units (2) Offering................................... Use of Proceeds.............................. To repay mortgage indebtedness, to acquire interests in the Properties, to pay Formation Transaction expenses and to repay $39.4 million outstanding under the LBHI Loan. Proposed NYSE Symbol......................... "SLG"
- ------------------------ (1) Includes 428,605 shares of restricted Common Stock to be issued in the Formation Transactions. (2) Includes 1,130,395 Units expected to be issued in connection with the Formation Transactions that may be exchanged for cash or, at the option of the Company, shares of Common Stock on a one-for-one basis generally commencing two years after completion of the Offering. Excludes 1,215,000 shares that are issuable upon exercise of the Underwriters' over-allotment option and 660,000 shares reserved for issuance upon the exercise of stock options to be granted pursuant to the Company's 1997 Stock Option Plan concurrently with the Offering. DISTRIBUTIONS The Company intends to make regular quarterly distributions to holders of its Common Stock. The initial distribution, covering a partial quarter commencing on the date of the closing of the Offering and ending on September 30, 1997, is expected to be $ per share, which represents a pro rata distribution based upon a full quarterly distribution of $.3625 per share and an annual distribution of $1.45 per share (or an annual distribution rate of approximately 7.25%, based on an assumed initial public offering price of $20.00). See "Distributions." The Company intends initially to distribute annually approximately % of estimated cash available for distribution. The Company's estimate of cash available for distribution for the twelve months ending March 31, 1998 is based upon pro forma Funds from Operations (as defined below) for the 12 months ended March 31, 1997, with certain adjustments as described in "Distributions." The Company anticipates that approximately % (or $ per share) of the distributions intended to be paid by the Company for the 12-month period following the completion of Offering will represent a return of capital for Federal income tax purposes and in such event will not be subject to Federal income tax under current law to the extent such distributions do not exceed a stockholder's basis in his Common Stock. The Company intends to maintain its initial distribution rate for the 12-month period following the completion of the Offering unless actual results of operations, economic conditions or other factors differ materially from the assumptions used in its estimate. Distributions by the Company will be determined by the Board of Directors and will be dependent upon a number of factors, including revenue received from the Company's properties, the operating expenses of the Company, interest expense, the ability of tenants at the Company's properties to meet their financial obligations and unanticipated capital expenditures. The Company believes that its estimate of cash available for distribution is reasonable; however, no assurance can be given that the estimate will prove accurate, and actual distributions may therefore be significantly different from expected distributions. See "Distributions." The Company does not intend to reduce the expected distribution per share if the Underwriters' over-allotment option is exercised. 10 TAX STATUS OF THE COMPANY The Company intends to elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year ending December 31, 1997, and believes its organization and proposed method of operation will enable it to meet the requirements for qualification as a REIT. To maintain REIT status, an entity must meet a number of organizational and operational requirements. In addition, in order to maintain its qualification as a REIT under the Code, the Company generally will be required each year to distribute at least 95% of its net taxable income (excluding any net capital gain). See "Federal Income Tax Consequences--Taxation of the Company--Annual Distribution Requirements." As a REIT, the Company generally will not be subject to Federal income tax on net income it distributes currently to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to Federal income tax at regular corporate rates. See "Federal Income Tax Consequences--Taxation of the Company--Failure to Qualify" and "Risk Factors-- Tax Risks--Failure to Qualify as a REIT." Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain Federal, state and local taxes on its income and property. SUMMARY SELECTED FINANCIAL INFORMATION The following table sets forth summary selected financial and operating information on a pro forma basis for the Company, and on a historical combined basis for the SL Green Predecessor (as defined below), and should be read in conjunction with all of the financial statements and notes thereto included in this Prospectus. The combined historical balance sheet information as of December 31, 1996 and 1995 and statements of income for the years ended December 31, 1996, 1995, and 1994 of the SL Green Predecessor have been derived from the historical combined financial statements audited by Ernst & Young LLP, independent auditors, whose report with respect thereto is included elsewhere in this Prospectus. The operating data for the three months ended March 31, 1997 and 1996 and the years ended December 31, 1993 and 1992 have been derived from the unaudited combined financial statements of the SL Green Predecessor. In the opinion of management of the SL Green Predecessor, the operating data for the three months ended March 31, 1997 and 1996 and the years ended December 31, 1993 and 1992 include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. The results of operations for the interim periods ended March 31, 1997 and 1996 are not necessarily indicative of the result to be obtained for the full fiscal year. The "SL Green Predecessor" consists of 100% of the net assets and results of operations of two Properties, 1414 Avenue of the Americas and 70 West 36th Street, equity interests in four other Properties, 673 First Avenue, 470 Park Avenue South, 29 West 35th Street and the Bar Building (which interests are accounted for under the equity method) and 100% of the net assets and results of operations of the Service Corporations. The unaudited pro forma financial and operating information for the Company as of and for the three months ended March 31, 1997 and the year ended December 31, 1996 assumes completion of the Offering and the Formation Transactions as of the beginning of the periods presented for the operating data and as of the stated date for the balance sheet data. The pro forma financial information is not necessarily indicative of what the actual financial position and results of operations of the Company would have been as of and for the period indicated, nor does it purport to represent the Company's future financial position and results of operations. 11 THE COMPANY (PRO FORMA) AND THE SL GREEN PREDECESSOR (HISTORICAL) (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------------------------- THREE MONTHS ENDED MARCH 31, HISTORICAL ------------------------------------------- ---------------------------------------------- PRO FORMA PRO FORMA 1997 1997 1996 1996 1996 1995 1994 ------------- ------------- ------------- ------------- --------- --------- --------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) OPERATING DATA: TOTAL REVENUE................. $ 12,525 $ 3,971 $ 2,307 $ 45,837 $ 10,182 $ 6,564 $ 6,600 ------------- ------ ------ ------------- --------- --------- --------- PROPERTY OPERATING EXPENSE.... 3,667 814 733 14,908 3,197 2,505 2,009 REAL ESTATE TAXES............. 1,769 243 118 7,242 703 496 543 INTEREST...................... 1,479 345 221 5,935 1,357 1,212 1,555 DEPRECIATION AND AMORTIZATION................ 1,509 271 175 6,248 975 775 931 MARKETING, GENERAL AND ADMINISTRATION.............. 257 896 1,079 1,027 3,250 3,052 2,351 ------------- ------ ------ ------------- --------- --------- --------- TOTAL EXPENSES................ 8,681 2,569 2,326 35,360 9,482 8,040 7,389 ------------- ------ ------ ------------- --------- --------- --------- OPERATING INCOME (LOSS)....... 3,844 1,402 (19) 10,477 700 (1,476) (789) EQUITY IN NET INCOME (LOSS) OF UNCOMBINED JOINT VENTURES... (76) (287) (475) (247) (1,408) (1,914) (1,423) ------------- ------ ------ ------------- --------- --------- --------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND MINORITY INTEREST........... $ 3,768 $ 1,115 $ (494) $ 10,230 $ (708) $ (3,390) $ (2,212) ------------- ------ ------ ------------- --------- --------- --------- ------------- ------ ------ ------------- --------- --------- --------- INCOME BEFORE EXTRAORDINARY ITEM AND MINORITY INTEREST PER SHARE................... $ .39 $ 1.06 ------------- ------------- 1993 1992 ------------- ------------- (UNAUDITED) (UNAUDITED) OPERATING DATA: TOTAL REVENUE................. $ 5,926 $ 5,516 ------ ------------- PROPERTY OPERATING EXPENSE.... 1,741 1,431 REAL ESTATE TAXES............. 592 676 INTEREST...................... 1,445 1,440 DEPRECIATION AND AMORTIZATION................ 850 773 MARKETING, GENERAL AND ADMINISTRATION.............. 1,790 1,531 ------ ------------- TOTAL EXPENSES................ 6,418 5,851 ------ ------------- OPERATING INCOME (LOSS)....... (492) (335) EQUITY IN NET INCOME (LOSS) OF UNCOMBINED JOINT VENTURES... 88 (2,227) ------ ------------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND MINORITY INTEREST........... $ (404) $ (2,562) ------ ------------- ------ ------------- INCOME BEFORE EXTRAORDINARY ITEM AND MINORITY INTEREST PER SHARE...................
AS OF MARCH 31, 1997 -------------------------- PRO FORMA HISTORICAL ----------- ------------- AS OF DECEMBER 31, ------------------------------------------------------------- PRO FORMA HISTORICAL HISTORICAL ----------- ----------- ----------------------------------- 1996 1996 1995 1994 1993 ----------- ----------- --------- --------- ------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) BALANCE SHEET DATA: COMMERCIAL REAL ESTATE, BEFORE ACCUMULATED DEPRECIATION.............. $ 210,010 $ 26,396 $ 209,424 $ 26,284 $ 15,559 $ 15,761 $ 15,352 TOTAL ASSETS............................ 219,101 30,515 222,045 30,072 16,084 15,098 16,218 MORTGAGES AND NOTES PAYABLE............. 47,196 16,544 47,611 16,610 12,700 12,699 12,699 ACCRUED INTEREST PAYABLE................ 92 90 92 90 2,894 12,699 1,576 MINORITY INTEREST....................... 15,746 0 15,780 0 0 0 0 OWNERS EQUITY (DEFICIT)................. 118,832 (7,563) 119,096 (8,405) (18,848) (15,520) (13,486) OTHER DATA: FUND FROM OPERATIONS.................... 5,239 -- 16,282 -- NET CASH PROVIDED BY OPERATING ACTIVITIES............................ -- 769 -- 272 NET CASH PROVIDED BY FINANCING ACTIVITIES............................ -- (339) -- 11,960 NET CASH (USED IN) INVESTING ACTIVITIES............................ -- (112) -- (12,375) 1992 ------------- (UNAUDITED) BALANCE SHEET DATA: COMMERCIAL REAL ESTATE, BEFORE ACCUMULATED DEPRECIATION.............. $ 16,080 TOTAL ASSETS............................ 15,645 MORTGAGES AND NOTES PAYABLE............. 9,500 ACCRUED INTEREST PAYABLE................ 4,757 MINORITY INTEREST....................... 0 OWNERS EQUITY (DEFICIT)................. (8,449) OTHER DATA: FUND FROM OPERATIONS.................... NET CASH PROVIDED BY OPERATING ACTIVITIES............................ NET CASH PROVIDED BY FINANCING ACTIVITIES............................ NET CASH (USED IN) INVESTING ACTIVITIES............................
- ------------------------ (1) The Company generally considers Funds from Operations an appropriate measure of liquidity of an equity REIT because industry analysts have accepted it as a performance measure of equity REITs. "Funds from Operations" as defined by the National Association of Real Estate Investment Trusts ("NAREIT") means net income (computed in accordance with generally accepted accounting principles ("GAAP")) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. The Company's Funds from Operations are not comparable to Funds from Operations reported by other REITs that do not define the term using the current NAREIT definition or that interpret the current NAREIT definition differently than does the Company. The Company believes that in order to facilitate a clear understanding of the combined historical operating results of the SL Green Predecessor and the Company, Funds from Operations should be examined in conjunction with net income as presented in the audited combined financial statements and information included elsewhere in this Prospectus. Funds from Operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity or ability to make distributions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity--Funds from Operations." 12 RISK FACTORS An investment in the Common Stock involves various risks. Prospective investors should carefully consider the following information in conjunction with the other information contained in this Prospectus before making a decision to purchase Common Stock in the Offering. DEPENDENCE ON MIDTOWN MARKETS DUE TO LIMITED GEOGRAPHIC DIVERSIFICATION All of the Properties are located in midtown Manhattan. Like other office markets, the Midtown Markets have experienced downturns in the past, including most recently in the late 1980s and early 1990s, and future declines in the New York metropolitan economy or the Midtown Markets could adversely affect the Company's financial performance. The Company's financial performance and its ability to make distributions to stockholders are therefore dependent on conditions in the New York metropolitan economy and the Midtown Markets. The Company's revenue and the value of its properties may be affected by a number of factors, including the economic climate in metropolitan New York (which may be adversely affected by business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics, increased telecommuting, infra-structure quality, New York State and New York City budgetary constraints and priorities and other factors) and conditions in the Midtown Markets (such as oversupply of or reduced demand for office space). There can be no assurance as to the continued growth of the New York metropolitan economy, the continued strength of the Midtown Markets or the future growth rate of the Company. NO ASSURANCE OF FAIR PRICE FOR COMPANY'S ASSETS The amount of consideration in the Company to be received by SL Green and certain related parties in the Formation Transactions was not determined as a result of arm's length negotiations with such persons or with purchasers in the Offering. The amount of consideration to be paid by the Company to acquire interests in the Properties was determined by SL Green, and certain related persons will receive substantial economic benefits as a result of the consummation of the Formation Transactions and the Offering. See "Structure and Formation of the Company--Benefits to Related Parties." No independent valuations or appraisals of the Properties were obtained by the Company in connection with the acquisition of property interests in the Formation Transactions. Accordingly, there can be no assurance that the consideration to be paid by the Company for these interests represents the fair market value thereof or that such consideration does not exceed the estimates of value. The valuation of the Company has not been determined by a valuation of its assets, but instead has been determined by SL Green and the Underwriters based upon a capitalization of the Company's pro forma Funds from Operations, estimated cash available for distribution and potential for growth, and the other factors discussed under "Underwriting." In determining the estimated initial public offering price, certain assumptions were made concerning the estimate of revenue to be derived from the Properties. See "Distributions." This methodology has been used because management believes that it is appropriate to value the Company as an ongoing business, rather than with a view to values that could be obtained from a liquidation of the Company or of individual assets owned by the Company. There can be no assurance that the price paid by the Company for its interests in the Properties and for its other assets will not exceed the fair market value of such assets, and it is possible that the market value of the Common Stock may exceed stockholders' proportionate share of the aggregate fair market value of such assets. CONFLICTS OF INTEREST IN THE FORMATION TRANSACTIONS AND THE BUSINESS OF THE COMPANY TAX CONSEQUENCES UPON SALE OR REDUCTION IN MORTGAGE INDEBTEDNESS. Certain holders of Units may experience different and more adverse tax consequences compared to those experienced by holders of shares of Common Stock or other holders of Units upon the sale of, or reduction of mortgage indebtedness on, any of the Company's properties. Therefore, such holders and the Company, may have different 13 objectives regarding the appropriate pricing and timing of any sale of, or reduction of mortgage indebtedness on, the Company's Properties, and regarding the appropriate characteristics of additional properties to be considered for acquisition. Certain directors and officers of the Company will be holders of Units, and their status as holders of Units may influence the Company not to sell particular properties, or not to pay down mortgage indebtedness on particular properties, even though such sales or debt paydowns might otherwise be financially advantageous to the Company and its stockholders. See "--Limitations on Ability to Sell or Reduce the Mortgage Indebtedness on Certain Properties" below. RISK OF LESS VIGOROUS ENFORCEMENT OF TERMS OF CONTRIBUTION AND OTHER AGREEMENTS. Certain SL Green entities have ownership interests in the Properties and in the other assets to be acquired by the Company. Following the completion of the Offering and the Formation Transactions, the Company, under the agreements relating to the contribution of such interests, will be entitled to indemnification and damages in the event of breaches of representations or warranties made by such SL Green entities. In addition, Stephen L. Green, Nancy A. Peck, Steven H. Klein, Benjamin P. Feldman, Gerard Nocera and Louis A. Olsen will enter into employment and noncompetition agreements with the Company pursuant to which they will agree, among other things, not to engage in certain business activities in competition with the Company. See "Management--Employment and Noncompetition Agreements." To the extent that the Company chooses to enforce its rights under any of these contribution, employment and noncompetition agreements, it may determine to pursue available remedies, such as actions for damages or injunctive relief, less vigorously than it otherwise might because of its desire to maintain its ongoing relationship with the individual involved. FUTURE DEALINGS WITH AFFILIATES OF THE COMPANY. After the completion of the Offering and the Formation Transactions, two SL Green entities owned by a son of Stephen L. Green may provide cleaning and security services to office properties, including the Company's Properties. Although the Company believes that the terms and conditions of the contracts pursuant to which these services would be provided, taken as a whole, would not be less favorable to the Company than those which could have been obtained from a third party-providing comparable services, such contracts will not be the result of arm's length negotiations and, therefore, there can be no assurance to this effect. The Company has adopted certain policies relating to conflicts of interest. These policies include a resolution adopted by the Company's Board of Directors which requires all transactions in which executive officers or directors have a material conflicting interest to that of the Company to be approved by a majority of the disinterested directors or by the holders of a majority of the shares of Common Stock held by disinterested stockholders. There can be no assurance, however, that the Company's policies will be successful in eliminating the influence of such conflicts, and if they are not successful, decisions could be made that might fail to reflect fully the interests of all stockholders. See "Policies with Respect to Certain Activities--Conflict of Interest Policies." OUTSIDE INTERESTS OF OFFICERS AND DIRECTORS. Certain officers and directors of the Company will continue to own direct and indirect interests in office properties and other real estate assets, which interests may give rise to certain conflicts of interest concerning the fulfillment of their responsibilities as officers and directors of the Company. See "The Properties--Assets Not Being Transferred to the Company." For a discussion of the role of the Company's disinterested directors and the Company's policies and agreements designed to minimize any adverse effects from these conflicts of interest, see "Policies with Respect to Certain Activities--Conflict of Interest Policies." RISKS ASSOCIATED WITH RAPID GROWTH; RISKS ASSOCIATED WITH THE ACQUISITION OF SUBSTANTIAL NEW PROPERTIES; LACK OF OPERATING HISTORY The Company is experiencing a period of rapid growth. The Company's ability to manage its growth effectively will require it to integrate successfully its new acquisitions. Including the Acquisition Properties, two of the Properties have relatively short or no operating history under management by SL Green. SL Green has had limited control over the operation of these Properties, and such Properties may have 14 characteristics or deficiencies unknown to the Company affecting their valuation or revenue potential. No assurance can be given as to the future operating performance of these Properties under the Company's management. The Company is currently under contract to acquire two Class B office properties encompassing approximately 700,000 rentable square feet. See "The Properties--The Acquisition Properties." In addition, the Company expects to own an option to purchase an additional 333,000 rentable square foot Class B office property. See "The Properties--The Option Property." In the future, the Company expects to acquire additional office properties. As noted above, acquisitions entail the risk that investments will fail to perform in accordance with expectations, including operating and leasing expectations. The Company anticipates that certain of its acquisitions will be financed using the proceeds of periodic equity or debt offerings, lines of credit or other forms of secured or unsecured financing that will result in a risk that permanent financing for newly acquired projects might not be available or would be available only on disadvantageous terms. If permanent debt or equity financing is not available on acceptable terms to refinance acquisitions undertaken without permanent financing, further acquisitions may be curtailed or cash available for distribution may be adversely affected. In addition, it is anticipated that acquisition risks may be heightened for acquisitions of Manhattan office properties due to the large size of many Manhattan office properties and the complexity of acquisition transactions in the Manhattan office market. See "--Other Risks of Ownership of Common Stock--Dependence on External Sources of Capital" below. LIMITATIONS ON ABILITY TO SELL OR REDUCE THE MORTGAGE INDEBTEDNESS ON CERTAIN PROPERTIES In connection with the solicitation of approval of partners or members in the various Property-owning entities to transfer their interests to the Company, the Company agreed to certain restrictions relating to future capital transactions involving two of the Properties. Pursuant to the Lock-out Provisions, the Company may not sell its interest in (except in certain events, including certain transactions that would not result in the recognition of any gain for tax purposes) or, earlier than one year prior to its maturity, reduce the mortgage indebtedness (other than pursuant to scheduled amortization) on 673 First Avenue or 470 Park Avenue South during the Lock-out Period without, in the case of each such Property, the consent of holders of 75% of the Units originally issued to limited partners in the Operating Partnership who immediately prior to completion of the Formation Transactions owned direct or indirect interests in such Property that remain outstanding at the time of such vote (other than Units held by the Company and Units the adjusted tax basis of which have been increased to reflect fair market value through a taxable disposition or otherwise). (This vote requirement does not apply to a sale of all or substantially all of the assets of the Operating Partnership, but such a transaction during the Lock-out Period generally would require the approval of the holders, as a group, of 75% of the aggregate Units originally issued with respect to 673 First Avenue and 470 Park Avenue South that remain outstanding (excluding Units held by the Company and Units the adjusted tax basis of which have been increased to reflect fair market value through a taxable disposition or otherwise) unless the transaction would not result in the recognition of any gain for tax purposes with respect to such Units and certain other conditions are satisfied.) In addition, during the Lock-out Period, the Company is obligated to use commercially reasonable efforts, commencing one year prior to the stated maturity, to refinance at maturity (on a basis that is nonrecourse to the Operating Partnership and the Company, with the least amount of principal amortization as is available on commercially reasonable terms) the mortgage indebtedness secured by each of these two Properties at not less than the principal amount outstanding on the maturity date. Finally, during the Lock-out Period, the Company may not incur debt secured by either of these two Properties if the amount of the new debt would exceed the greater of 75% of the value of the Property securing the debt or the amount of existing debt being refinanced (plus costs associated therewith). Thus, the Lock-out Provisions materially restrict the Company from selling or otherwise disposing of its interest in, or refinancing indebtedness encumbering, 673 First Avenue and 470 Park Avenue South without obtaining such consents. The Lock-out Provisions apply even if it would otherwise be in the best interest of the stockholders for the Company to 15 sell its interest in these two Properties, reduce the outstanding indebtedness with respect to either of these Properties or not refinance such indebtedness on a nonrecourse basis at maturity, or increase the amount of indebtedness with respect to these two Properties. The Lock-out Provisions may impair the ability of the Company to take actions during the Lock-out Period that would otherwise be in the best interests of the Company's stockholders and, therefore, may have an adverse impact on the value of the Common Stock (relative to the value that would result if the Lock-out Provisions did not exist). In particular, the Lock-out Provisions could preclude the Operating Partnership (and thus the Company) from participating in certain major transactions that could result in a disposition of the Operating Partnership's assets or a change in control of the Company that would result in the recognition of gain with respect to the holders of Units issued with respect to 673 First Avenue or 470 Park Avenue South even though such disposition or change in control might be in the best interests of the stockholders. See "Partnership Agreement--Operational Matters--Sales of Assets." The Company anticipates that, in connection with future acquisitions of interests in properties in which the Company uses Units as consideration, the Company may agree to limitations on its ability to sell, or reduce the amount of mortgage indebtedness on, such acquired properties, which may increase the Company's leverage. Such limitations may impair the Company's ability to take actions that would otherwise be in the best interests of its stockholders and, therefore, may have an adverse impact on the value of the Common Stock (relative to the value that would result if such limitations did not exist). Such possible future limitations, together with the Lock-out Provisions, may restrict the ability of the Company to sell substantially all of its assets, even if such a sale would be in the best interests of its stockholders. LIMITS ON CHANGES IN CONTROL POTENTIAL EFFECTS OF OWNERSHIP LIMITATION. In order to maintain its qualification as a REIT, not more than 50% in value of the outstanding capital stock of the Company 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 (other than the first year) (the "Five or Fewer Requirement"). In order to protect the Company against the risk of losing REIT status due to a concentration of ownership among its stockholders, the Company's Articles of Incorporation (the "Charter") limits ownership of the issued and outstanding Common Stock by any single stockholder to 9.0% of the lesser of the number or value of the outstanding shares of Common Stock from time to time (the "Ownership Limit"). See "Capital Stock--Restrictions on Transfer." Although the Board of Directors presently has no intention of doing so, the Board of Directors could waive these restrictions if evidence satisfactory to the Board of Directors and the Company's tax counsel was presented that the changes in ownership will not then or in the future jeopardize the Company's status as a REIT and the Board of Directors otherwise decided such action would be in the best interests of the Company. Shares acquired or transferred in breach of the limitation will be automatically transferred to a trust for the exclusive benefit of one or more charitable organizations and the purchaser-transferee shall not be entitled to vote or to participate in dividends or other distributions. In addition, shares of Common Stock acquired or transferred in breach of the limitation may be purchased from such trust by the Company for the lesser of the price paid and the average closing price for the ten trading days immediately preceding redemption. A transfer of shares to a person who, as a result of the transfer, violates the Ownership Limit will be void. See "Capital Stock--Restrictions on Transfer" for additional information regarding the Ownership Limit. The Ownership Limit may have the effect of delaying, deferring or preventing a transaction or a change in control of the Company that might involve a premium price for the Common Stock or otherwise be in the best interests of the stockholders. See "Capital Stock--Restrictions on Transfer." POTENTIAL EFFECTS OF STAGGERED BOARD. The Company's Board of Directors will be divided into three classes. The initial terms of the first, second and third classes will expire in 1998, 1999 and 2000, respectively. Beginning in 1998, directors of each class will be chosen for three-year terms upon the 16 expiration of their current terms and each year one class of directors will be elected by the stockholders. The staggered terms for directors may reduce the possibility of a tender offer or an attempt to effect a change in control of the Company, even if a tender offer or a change in control would be in the best interests of the stockholders. FUTURE ISSUANCES OF COMMON STOCK. The Charter authorizes the Board of Directors to issue additional shares of Common Stock without shareholder approval. Any such issuance could have the effect of diluting existing shareholders' interests in the Company. PREFERRED STOCK. The Charter authorizes the Board of Directors to issue up to 25 million shares of preferred stock, $.01 par value per share (the "Preferred Stock" and, together with the Common Stock, the "Stock"), to reclassify unissued shares of 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 such class or series of any Preferred Stock issued. No shares of Preferred Stock will be issued or outstanding as of the closing of the Offering. LIMITATIONS ON ACQUISITION OF AND CHANGES IN CONTROL PURSUANT TO MARYLAND LAW. Certain provisions of the Maryland General Corporation Law (the "MGCL") may have the effect of inhibiting a third party from making an acquisition proposal for the Company or of impeding 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 of such shares. See "Certain Provisions of Maryland Law and the Company's Charter and ByLaws." REAL ESTATE INVESTMENT RISKS REAL ESTATE OWNERSHIP RISKS. Real estate investments are subject to varying degrees of risk. The yields available from equity investments in real estate and the Company's ability to service debt depend in large part on the amount of income generated, expenses incurred and capital expenditures required. The Company's income and ability to make distributions to its stockholders is dependent upon the ability of its property to generate income in excess of its requirements to meet operating expenses, including debt service and capital expenditures. The Company's income from office properties and the value of its properties may be significantly adversely affected by a number of factors, including national, state and local economic climates and real estate conditions (such as an oversupply of or a reduction in demand for office space in the area; the perceptions of tenants and prospective tenants of the safety, convenience and attractiveness of the Company's properties; the Company's ability to provide adequate management, maintenance and insurance; the quality, philosophy and performance of the Company's management; competition from comparable properties; the occupancy rate of the Company's properties; the ability to collect on a timely basis all rent from tenants; the effects of any bankruptcies or insolvencies of major tenants; the expense of periodically renovating, repairing and re-leasing space (including, without limitation, substantial tenant improvement costs and leasing costs of re-leasing office space); and increasing operating costs (including increased real estate taxes) which may not be passed through fully to tenants). In addition, income from properties and real estate values also are affected by such factors as the cost of compliance with laws, including zoning and tax laws, the potential for liability under applicable laws, interest rate levels and the availability of financing. Certain significant expenditures associated with equity investments in real estate (such as mortgage payments, real estate taxes, insurance and maintenance costs) also may not be reduced if circumstances cause a reduction in income from a property. If any of the above occurred, the Company's ability to make expected distributions to its stockholders could be adversely affected. TENANT DEFAULTS AND BANKRUPTCY. Substantially all of the Company's income will be derived from rental income from its properties and, consequently, the Company's distributable cash flow and ability to make expected distributions to stockholders would be adversely affected if a significant number of tenants 17 at its properties failed to meet their lease obligations. At any time, a tenant at a property in which the Company has an interest may seek the protection of the bankruptcy laws, which could result in delays in rental payments or in the rejection and termination of such tenant's lease, thereby causing a reduction in the Company's cash flow and, possibly, the amounts available for distribution to stockholders. No assurance can be given that tenants will not file for bankruptcy protection in the future or, if any tenants file, that they will affirm their leases and continue to make rental payments in a timely manner. In addition, a tenant from time to time may experience a downturn in its business which may weaken its financial condition and result in the failure to make rental payments when due. If tenant leases are not affirmed following bankruptcy or if a tenant's financial condition weakens, the Company's cash flow and ability to make expected distributions to its stockholders could be adversely affected. While SL Green has not experienced any significant interruption of its cash flow due to tenant defaults in the past five years, no assurance can be given that the Company will not experience significant tenant defaults in the future. RISKS OF LEASE RENEWAL AND RE-LEASING OF SPACE. The Company will be subject to the risk that upon expiration of leases for space located in the Properties, the leases may not be renewed, the space may not be re-leased or the terms of renewal or re-leasing (including the cost of required renovations) may be less favorable than current lease terms. ILLIQUIDITY OF REAL ESTATE. Real estate investments are relatively illiquid and, therefore, will tend to limit the ability of the Company to sell and purchase properties promptly in response to changes in economic or other conditions. In addition, the Code places limits on the Company's ability to sell properties held for fewer than four years, and the Lock-out Provisions impose certain special restrictions with respect to the sale of certain of the Properties during the Lock-out Period. These considerations could make it difficult for the Company to sell properties, even if a sale were in the best interests of the Company's stockholders. OPERATING RISKS. The Properties will be subject to operating risks common to commercial real estate in general, any and all of which may adversely affect occupancy or rental rates. The Properties are subject to increases in operating expenses such as cleaning; electricity; heating, ventilation and air conditioning ("HVAC"); elevator repair and maintenance; insurance and administrative costs; and other general costs associated with security, repairs and maintenance. While the Company's tenants generally are currently obligated to pay a portion of these escalating costs, there can be no assurance that tenants will agree to pay such costs upon renewal or that new tenants will agree to pay such costs. If operating expenses increase, the local rental market may limit the extent to which rents may be increased to meet increased expenses without decreasing occupancy rates. While the Company implements cost saving incentive measures at each of its Properties, if any of the above occurs, the Company's ability to make distributions to stockholders could be adversely affected. RISKS OF INVESTMENTS IN MORTGAGE LOANS. To the extent the Company invests in mortgage loans, such mortgage loans may or may not be recourse obligations of the borrower and generally will not be insured or guaranteed by governmental agencies or otherwise. In the event of a default under such obligations, the Company may have to foreclose its mortgage or protect its investment by acquiring title to a property and thereafter making substantial improvements or repairs in order to maximize the property's investment potential. Borrowers may contest enforcement of foreclosure or other remedies, seek bankruptcy protection against such enforcement and/or bring claims for lender liability in response to actions to enforce mortgage obligations. Relatively high "loan-to-value" ratios and declines in the value of the property may prevent the Company from realizing an amount equal to its mortgage loan upon foreclosure. Upon completion of the Formation Transactions, the Company will acquire a mortgage interest in the Bar Building and 1372 Broadway, which mortgage interests will provide the Company with substantially all control over and economic interest derived from such Properties. See "The Properties--36 West 44th Street (The Bar Building)" and "--Acquisition Properties--1372 Broadway." 18 LACK OF CONTROL AND OTHER RISKS OF JOINT VENTURE INVESTMENTS. The Company may co-invest with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity and, therefore, will not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that the Company's partners or co-venturers might become bankrupt or otherwise fail to fund their share of required capital contributions, that such partners or co-venturers might at any time have economic or other business interests or goals which are inconsistent with the business interests or goals of the Company, and that such partners or co-venturers may be in a position to take action contrary to the instructions or the requests of the Company and contrary to the Company's policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither the Company nor the partner or co-venturer would have full control over the partnership or joint venture. Consequently, actions by such partner or co-venturer might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, the Company may in certain circumstances be liable for the actions of its third-party partners or co-venturers. The Company will seek to maintain sufficient control of such entities to permit it to achieve its business objectives. NET LEASES. As described herein, upon completion of the Offering, with respect to three of the Properties (35 West 43rd Street (a part of the Bar Building), 673 First Avenue and 1140 Avenue of the Americas), the Company will hold a long-term leasehold interest in the land and the improvements. Accordingly, unless the Company can purchase the subject real estate or extend the terms of these leases before their expiration, the Company will lose its interest in the improvements and land upon expiration of the leases, the remaining terms of which exceeds 83 years in the case of 35 West 43rd Street, 40 years in the case of 673 First Avenue and 19 years (with an option to extend for a further 50 year term) in the case of 1140 Avenue of the Americas. The lease for 35 West 43rd Street contains a right of first refusal (which will run for the benefit of the Company), to purchase fee title to the land and building if the owner desires to sell its interest. The lease for 673 First Avenue contains a right of first offer (which will run for the benefit of the Company), whereby if the current fee owner of the Property wishes to create a new underlying lease of the land and building (the term of which would extend beyond the term of the existing lease), then the Company will have a right of first offer to enter into the new underlying lease. See "The Properties." RELIANCE ON MAJOR TENANTS. On a pro forma basis (giving effect to signed leases in effect as of March 31, 1997) during the year ended March 31, 1997, two tenants (Kallir Philips Ross, a subsidiary of The Omnicom Group Ltd. and New York Hospital) each accounted for more than 4% of the Company's pro forma total annual escalated rental revenues, and 11 tenants collectively accounted for approximately 36.2% of the Company's pro forma total annual escalated rental revenues. In addition, New York Hospital occupied 65,000 rentable square feet of additional space pursuant to subleases. See "The Properties--The Portfolio--Tenant Diversification." The Company would be adversely affected in the event of a bankruptcy or insolvency of, or a downturn in the business of, any major tenant which resulted in a failure or delay in such tenant's rent payments. 19 RISKS OF ADVERSE EFFECT ON COMPANY FROM DEBT SERVICING AND REFINANCING, INCREASES IN INTEREST RATES, FINANCIAL COVENANTS AND ABSENCE OF LIMITATION ON DEBT DEBT FINANCING. The Company is subject to the risks normally associated with debt financing, including the risk that the Company's cash flow will be insufficient to meet required payments of principal and interest, the risk of violating loan covenants, the risk of rising interest rates on the Company's variable rate debt and the risk that the Company will not be able to repay or refinance existing indebtedness on its properties at maturity (which generally will not have been fully amortized at maturity) or that the terms of such refinancing will not be as favorable as the terms of existing indebtedness. There can be no assurance that the Company will be able to refinance any indebtedness it may incur or otherwise obtain funds by selling assets or raising equity to make required payments on indebtedness. In addition, the Company's ability to sell certain Properties or refinance indebtedness encumbering such Properties will be restricted by the Lock-Out Provisions. If one or more properties are mortgaged to secure payment of indebtedness and the Company is unable to generate funds to cover debt service, the mortgage securing such properties could be foreclosed upon by, or such properties could otherwise be transferred to, the mortgagee with a consequent loss of income and asset value to the Company. Although no Property owned or controlled by SL Green has been subject to bankruptcy proceedings, during the downturn in the real estate market in the late 1980s and early 1990s, certain real estate assets (including one office property in Manhattan and one office property in Hempstead, New York) owned by partnerships affiliated with SL Green did not generate sufficient cash flow to service the debt secured by such properties. As a result, the partnerships which owned these properties have transferred or agreed to transfer the properties to the lenders in satisfaction of the loans. RISK OF RISING INTEREST RATES. Advances under the Credit Facility (defined below) will bear interest at a variable rate. In addition, the Company may incur indebtedness in the future that also bears interest at a variable rate or may be required to refinance its debt at higher rates. Accordingly, increases in interest rates could increase the Company's interest expense, which could adversely affect the Company's ability to pay expected distributions to stockholders. CREDIT FACILITY REQUIREMENTS. The Company currently is engaged in discussions with various lenders regarding the establishment of a revolving credit facility (the "Credit Facility") that will be used to facilitate acquisitions and for working capital purposes. Although the Company expects that the Credit Facility will be established shortly after the completion of the Offering, there can be no assurance at this time as to whether the Company will be successful in obtaining the Credit Facility or, if the Credit Facility is established, the terms thereof. It is anticipated that borrowings under the Credit Facility will be secured by a first mortgage lien on certain Properties in which the Operating Partnership will acquire interests therein in connection with the Formation Transactions. If payments required under the Credit Facility cannot be made or if there should occur other events of default, the lender may seek to foreclose on those assets securing borrowings under the Credit Facility which could have a material adverse effect on the ability of the Company to make expected distributions to stockholders and distributions required by the REIT provisions of the Code. In addition, upon expiration of the term of the Credit Facility, it is anticipated that the Operating Partnership will be required to obtain an extension or renewal of the Credit Facility or refinance borrowings thereunder through the issuance of debt or equity securities or alternative lending sources. See "The Properties--The Credit Facility." NO LIMITATION ON DEBT. Upon completion of the Offering and the Formation Transactions, the debt to market capitalization ratio ("Debt Ratio") of the Company will be approximately 19.4%. The Company currently has a policy of incurring debt only if upon such incurrence the Company's Debt Ratio would be 50% or less. However, the organizational documents of the Company do not contain any limitation on the amount of indebtedness the Company may incur. Accordingly, the Board of Directors could alter or 20 eliminate this policy and would do so, for example, if it were necessary in order for the Company to continue to qualify as a REIT. If this policy were changed, the Company could become more highly leveraged, resulting in an increase in debt service that could adversely affect the Company's cash available for distribution to stockholders and could increase the risk of default on the Company's indebtedness. See "Policies with Respect to Certain Activities--Financing Policies." The Company has established its debt policy relative to the total market capitalization of the Company rather than relative to the book value of its assets. The Company has used total market capitalization because it believes that the book value of its assets (which to a large extent is the depreciated original cost of real property, the Company's primary tangible assets) does not accurately reflect its ability to borrow and to meet debt service requirements. The market capitalization of the Company, however, is more variable than book value, and does not necessarily reflect the fair market value of the underlying assets of the Company at all times. The Company also will consider factors other than market capitalization in making decisions regarding the incurrence of indebtedness, such as the purchase price of properties to be acquired with debt financing, the estimated market value of its properties upon refinancing and the ability of particular properties and the Company as a whole to generate cash flow to cover expected debt service. IMMEDIATE AND SUBSTANTIAL DILUTION As set forth more fully under "Dilution," the pro forma net tangible book value per share of the assets of the Company after the Offering will be substantially less than the estimated initial public offering price per share in the Offering. Accordingly, purchasers of the Common Stock offered hereby will experience immediate and substantial dilution of $6.54 in the net tangible book value of the Common Stock from the assumed initial public offering price. See "Dilution." RISKS OF FAILURE TO QUALIFY AS A REIT AND OTHER TAX LIABILITIES FAILURE TO QUALIFY AS A REIT. The Company intends to operate so as to qualify as a REIT for Federal income tax purposes. The Company expects to qualify as a REIT, but no assurance can be given that it will so qualify or be able to remain so qualified. The Company has received an opinion of its counsel, Brown & Wood LLP, that, based on certain assumptions and representations, the Company is organized in conformity with the requirements for qualification as a REIT under the Code and the Company's proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT. Investors should be aware, however, that opinions of counsel are not binding on the IRS or any court. The REIT qualification opinion only represents the view of counsel to the Company based on counsel's review and analysis of existing law, which includes no controlling precedent. Furthermore, both the validity of the opinion and the qualification of the Company as a REIT will depend on the Company's continuing ability to meet various requirements concerning, among other things, the ownership of its outstanding stock, the nature of its assets, the sources of its income and the amount of its distributions to its stockholders. Because the Company has no history of operating so as to qualify as a REIT, there can be no assurance that the Company will do so successfully. See "Federal Income Tax Consequences--Taxation of the Company--Failure to Qualify." If the Company were to fail to qualify as a REIT for any taxable year, the Company would not be allowed a deduction for distributions to its stockholders in computing its taxable income and would be subject to Federal income tax (including any applicable minimum tax) on its taxable income at regular corporate rates. Unless entitled to relief under certain Code provisions, the Company also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. As a result, cash available for distribution would be reduced for each of the years involved. In addition, although the Company intends to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause the Board of Directors, with the consent of stockholders holding at least a majority of all of the outstanding shares of 21 Common Stock, to revoke the REIT election. Furthermore, no assurance can be given that new legislation, Treasury Regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to the Company's qualification as a REIT or the Federal income tax consequences of such qualification. See "Federal Income Tax Consequences." REIT MINIMUM DISTRIBUTION REQUIREMENTS. In order to qualify as a REIT, the Company generally will be required each year to distribute to its stockholders at least 95% of its net taxable income (excluding any net capital gain). In addition, the Company may be subject to income and excise tax if the Company does not meet certain distribution requirements. See "Federal Income Tax Consequences--Taxation of the Company--Annual Distribution Requirements." The Company intends to make distributions to its stockholders to comply with the 95% distribution requirement and to avoid income and excise tax. The Company's income will consist primarily of its share of the income of the Operating Partnership, and the cash available for distribution by the Company to its stockholders will consist of its share of cash distributions from the Operating Partnership. Differences in timing between (i) the actual receipt of income and actual payment of deductible expenses, and (ii) the inclusion of such income and deduction of such expenses in arriving at taxable income of the Company, could require the Company, through the Operating Partnership, to borrow funds on a short-term basis to meet the 95% distribution requirement and to avoid income and excise tax. The requirement to distribute a substantial portion of the Company's net taxable income could cause the Company to distribute amounts that otherwise would be spent on future acquisitions, unanticipated capital expenditures or repayment of debt, which could require the Company to borrow funds or to sell assets to fund the costs of such items. OTHER TAX LIABILITIES. Even if the Company qualifies as a REIT, it will be subject to certain Federal, state and local taxes on its income and property. In particular, the Company will derive a portion of its operating cash flow from the activities of the Service Corporations, which will be subject to Federal, state and local income tax. See "Federal Income Tax Consequences--Other Tax Considerations--Service Corporations." COMPETITION All of the Properties are located in highly developed areas of midtown Manhattan that include a large number of other office properties. Manhattan is by far the largest office market in the United States and contains more rentable square feet than the next six largest central business district office markets in the United States combined. Of the total inventory of 378 million rentable square feet in Manhattan, approximately 173 million rentable square feet is comprised of Class B office space and 205 million rentable square feet is comprised of Class A office space. Class A office properties are generally newer than Class B office properties, have higher finishes and command higher rental rates. Many tenants have been attracted to Class B properties in part because of their relatively less expensive rental rates (as compared to Class A properties) and the tightening of the Class A office market in midtown Manhattan. See "Market Overview." Consequently, an increase in vacancy rates and/or a decrease in rental rates for Class A office space would likely have an adverse effect on rental rates for Class B office space. Also, the number of competitive Class B office properties in Manhattan (some of which are newer and better located) could have a material adverse effect on the Company's ability to lease office space at its properties, and on the effective rents the Company is able to charge. In addition, the Company may compete with other property owners that have greater resources than the Company. In particular, although currently no other publicly traded REITs have been formed primarily to own, operate and acquire Manhattan Class B office properties, the Company may in the future compete with such other REITs. In addition, the Company may face competition from other real estate companies (including other REITs that currently invest in markets other than Manhattan) that have greater financial resources than the Company or that are willing to acquire properties in transactions which are more highly leveraged than the Company is willing to undertake. The Company also will face competition from other 22 real estate companies that provide management, leasing, construction and other services similar to those to be provided by the Service Corporations. In addition, certain requirements for REIT qualification may in the future limit the Company's ability to increase operations conducted by the Service Corporations without jeopardizing the Company's qualification as a REIT. See "Federal Income Tax Consequences-- Other Tax Considerations--Service Corporations." RISKS OF THIRD-PARTY PROPERTY MANAGEMENT, LEASING AND CONSTRUCTION BUSINESSES The Company will be subject to the risks associated with the management, leasing and construction businesses that will be conducted by the Service Corporations. These risks include the risk that management and leasing contracts with third party property owners will not be renewed upon expiration (or will be canceled pursuant to cancellation options) or will not be renewed on terms at least as favorable to the Company as current terms, that the rental revenues upon which management, leasing and construction fees are based will decline as a result of general real estate market conditions or specific market factors affecting properties serviced by the Company, and that leasing and construction activity generally will decline. Each of these developments could adversely affect the revenues of the Management Corporation, the Leasing Corporation and the Construction Corporation and could adversely affect the ability of the Company to make expected distributions to its stockholders. In order to maintain its qualification as a REIT, the Company will not have voting control over the Service Corporations. It currently is anticipated that an SL Green entity will own 100% of the voting common stock of each of the Service Corporations. As a result, the Company will not have the ability to elect or remove any members of the board of directors of the Management Corporation, the Leasing Corporation or the Construction Corporation, and, therefore, its ability to influence the day-to-day decisions of the Service Corporations will be limited. As a result, the boards of directors or management of the Service Corporations may implement business policies or decisions that might not have been implemented by persons elected by the Company and that are adverse to the interests of the Company or that lead to adverse financial results, which could adversely affect the ability of the Company to make expected distributions to the Company's stockholders. POSSIBLE ENVIRONMENTAL LIABILITIES Under various Federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up certain hazardous substances released at a property, and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred by the parties in connection with any contamination. In addition, some environmental laws create a lien on a contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the release of hazardous substances. The cost of any required remediation and the owner's liability therefore as to any property is generally not limited under such enactments and could exceed the value of the property and/or the aggregate assets of the owner. The presence of contamination or the failure to remediate contamination may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. No assurances can be given that (i) a prior owner, operator or occupant, such as a tenant, did not create a material environmental condition not known to the Company or SL Green, (ii) a material environmental condition with respect to any Property does not exist, or (iii) future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in the imposition of environmental liability. The Company engaged independent environmental consulting firms to perform Phase I environmental site assessments on the Properties in order to assess existing environmental conditions. All of the Phase I assessments have been conducted since March 1997, except for the Bar Building, where a Phase I assessment was conducted in September 1996. All of the Phase I assessments met the requirements of the 23 American Society for Testing and Materials ("ASTM") Standard Practice for Phase I Environmental Site Assessments (the "ASTM Standard"). Under the ASTM Standard, a Phase I environmental site assessment consists of a site visit, a historical record review, a review of regulatory agency data bases and records, interviews, and a report, with the purpose of identifying potential environmental concerns associated with real estate. The Phase I assessments conducted at the Properties also addressed certain issues that are not covered by the ASTM Standard, including asbestos, radon, lead-based paint and lead in drinking water. These environmental site assessments did not reveal any known environmental liability that the Company believes will have a material adverse effect on the Company's financial condition or results of operations or would represent a material environmental cost, nor is the Company aware of any such material environmental liability. See "The Properties--Environmental Matters." OTHER RISKS OF OWNERSHIP OF COMMON STOCK ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK. Prior to the completion of the Offering, there has been no public market for the Common Stock and there can be no assurance that an active trading market will develop or be sustained or that shares of Common Stock will be resold at or above the assumed initial public offering price. The initial public offering price of the Common Stock will be determined by agreement among the Company and the underwriters and may not be indicative of the market price for the Common Stock after the completion of the Offering. See "Underwriting." EFFECT ON COMMON STOCK PRICE OF SHARES AVAILABLE FOR FUTURE SALE. Sales of a substantial number of shares of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices of the Common Stock. Beginning up to two years after the completion of the Offering (or less in certain circumstances), holders of Units may be able to sell shares of Common Stock received upon exercise of their redemption right in the public market pursuant to registration or available exemptions from registration. Furthermore, a substantial number of shares of Common Stock will, pursuant to employee benefit plans, be issued or reserved for issuance from time to time, including shares of Common Stock reserved for issuance pursuant to options issued concurrently with the completion of the Offering, and these shares of Common Stock will be available for sale in the public market from time to time pursuant to exemptions from registration or upon registration. No prediction can be made about the effect that future sales of shares of Common Stock will have on the market price of the Common Stock. EFFECT ON COMMON STOCK PRICE OF MARKET CONDITIONS. As with other publicly traded equity securities, the value of the Common Stock will depend upon various market conditions, which may change from time to time. Among the market conditions that may affect the value of the Common Stock are the following: the extent to which a secondary market develops for the Common Stock following the completion of the Offering; the extent of institutional investor interest in the Company; the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate-based companies); the Company's financial performance; and general stock and bond market conditions. Although the offering price of the Common Stock will be determined by the Company in consultation with the underwriters, there can be no assurance that the Common Stock will not trade below the offering price following the completion of the offering. EFFECT ON COMMON STOCK PRICE OF GROWTH POTENTIAL AND CASH DISTRIBUTIONS. It is generally believed that the market value of the equity securities of a REIT is based primarily upon the market's perception of the REIT's growth potential and its current and potential future cash distributions, whether from operations, sales or refinancings, and is secondarily based upon the value of the underlying assets. For that reason, shares of Common Stock may trade at prices that are higher or lower than the net asset value per share of Common Stock or per Unit. To the extent the Company retains operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of the Company's underlying assets, may not correspondingly increase the market price of the Common Stock. The failure of the Company to meet the market's expectation with regard to future earnings and 24 cash distributions likely would adversely affect the market price of the Common Stock. If the market price of the Common Stock declined significantly, the Company might breach certain covenants with respect to future debt obligations, which breach might adversely affect the Company's liquidity and the Company's ability to make future acquisitions. EFFECT ON COMMON STOCK PRICE OF MARKET INTEREST RATES. One of the factors that will influence the price of the Common Stock will be the dividend yield on the Common Stock (as a percentage of the price of the Common Stock) relative to market interest rates. Thus, an increase in market interest rates may lead prospective purchasers of Common Stock to expect a higher dividend yield, which would adversely affect the market price of the Common Stock. EFFECT ON COMMON STOCK PRICE OF UNRELATED EVENTS. As with other publicly traded equity securities, the value of the Common Stock will depend upon various market conditions, including conditions unrelated to the New York metropolitan economy, the Manhattan office market or real estate investments generally. Thus, events which depress equity market prices may not have any effect on real estate market values, and shares of Common Stock may trade at prices below the Company's net asset value. DEPENDENCE ON EXTERNAL SOURCES OF CAPITAL. In order to qualify as a REIT under the Code, the Company generally is required each year to distribute at least 95% of its net taxable income (excluding any net capital gain). See "Federal Income Tax Considerations--Taxation of the Company--Annual Distribution Requirements." Because of these distribution requirements, it is unlikely that the Company will be able to fund all future capital needs, including capital needs in connection with acquisitions, from cash retained from operations. As a result, to fund future capital needs, the Company likely will have to rely on third-party sources of capital, which may or may not be available on favorable terms or at all. The Company's access to third-party sources of capital will depend upon a number of factors, including the market's perception of the Company's growth potential and its current and potential future earnings and cash distributions and the market price of the Common Stock. Moreover, additional equity offerings may result in substantial dilution of stockholders' interests in the Company, and additional debt financing may substantially increase the Company's leverage. See "Policies with Respect to Certain Activities--Financing Policies." INFLUENCE OF OFFICERS, DIRECTORS AND SIGNIFICANT STOCKHOLDERS. Upon the completion of the Offering, management of the Company collectively will beneficially own approximately 13% of the issued and outstanding shares of Common Stock and Units (which will be exchangeable by the holders for cash or, at the election of the Company, shares of Common Stock on a one-for-one basis generally after two years). See "Principal Stockholders." In addition, Stephen L. Green and Benjamin P. Feldman will serve on the initial board of directors of the Company. Accordingly, such persons will have substantial influence on the Company, which influence may not be consistent with the interests of other stockholders, and may in the future have a substantial influence on the outcome of any matters submitted to the Company's stockholders for approval if all or a significant number of their Units are exchanged for shares of Common Stock. In addition, although there is no current agreement, understanding or arrangement for these stockholders to act together on any matter, these stockholders would be in a position to exercise significant influence over the affairs of the Company if they were to act together in the future. DEPENDENCE ON KEY PERSONNEL The Company is dependent on the efforts of its executive officers. The loss of their services could have a material adverse effect on the operations of the Company. Prior to the completion of the Offering, each of the executive officers will enter into an employment and noncompetition agreement with the Company. See "Management--Employment and Noncompetition Agreements." 25 HISTORICAL LOSSES OF THE OPERATIONS OF THE SL GREEN PREDECESSOR The SL Green Predecessor had losses before extraordinary items of approximately $708,000 and $3.4 million in the years ended December 31, 1996 and 1995, respectively, and had a cumulative deficit in owners' equity of approximately $7.6 million as of March 31, 1997. These net losses reflect certain non-cash charges such as depreciation and amortization. These historical results are not indicative of future results. Nonetheless, there can be no assurance that the Company will not incur net losses in the future. CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL The investment, financing, borrowing and distribution policies of the Company and its policies with respect to all other activities, including qualification as a REIT, growth, debt, capitalization and operations, will be determined by the Board of Directors. Although it has no present intention to do so, the Board of Directors may amend or revise these policies at any time and from time to time at its discretion without a vote of the stockholders of the Company. A change in these policies could adversely affect the Company's financial condition, results of operations or the market price of the Common Stock. UNINSURED LOSS The Company initially will carry comprehensive liability, fire, flood, extended coverage and rental loss (for rental losses extending up to 12 months) with respect to its properties with policy specifications and insured limits customarily carried for similar properties. Certain types of losses (such as from wars, environmental hazards and employee discrimination claims), however, may be either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose both its capital invested in, and anticipated profits from, one or more of its properties, and may continue to be obligated on the mortgage indebtedness or other obligations related to the property. Any such loss may adversely affect the business of the Company and its financial condition and results of operations. It is anticipated that new owner's title insurance policies will not be obtained for two of the Properties in the Core Portfolio (the Bar Building and 1414 Avenue of the Americas) in connection with the Formation Transactions. Each of these Properties is covered by existing title insurance policies insuring the interests of the Property-owning entities. Further, each title insurance policy covering each such Property is for an amount which is less than the current value of the Property. In the event of a loss with respect to a Property relating to a title defect that is in excess of the amount of such title insurance policy, the Company could lose both its capital invested in and anticipated profits from such property. BENEFITS TO MANAGING UNDERWRITER Lehman Brothers Inc. ("Lehman"), the lead managing underwriter of the Offering, and certain of its affiliates will receive material benefits from the Offering and the Formation Transactions in addition to underwriting discounts and commissions. The Company will pay Lehman an advisory fee equal to 0.75% of the gross proceeds of the Offering (including any exercise of the Underwriters' overallotment option) for advisory services in connection with the evaluation, analysis and structuring of the Company's formation as a REIT. Affiliates of Lehman will be repaid the LBHI Loan in the aggregate principal amount of approximately $39 million made to certain affiliates of the Company prior to the Offering. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources" and "Underwriting." COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND SIMILAR LAWS AMERICANS WITH DISABILITIES ACT. Under the Americans with Disabilities Act of 1980 (the "ADA"), places of public accommodation and commercial facilities are required to meet certain Federal requirements related to access and use by disabled persons. These requirements became effective in 1992. 26 Although management of the Company believes that the Properties are substantially in compliance with present requirements of the ADA, the Company may incur additional costs of compliance in the future. A number of additional Federal, state and local laws exist which impose further burdens or restrictions on owners with respect to access by disabled persons and may require modifications to the Properties, or restrict certain further renovations thereof, with respect to access by disabled persons. Final regulations under the ADA have not yet been promulgated and the ultimate amount of the cost compliance with the ADA or other such laws is not currently ascertainable. While such costs are not expected to have a material effect on the Company, they could be substantial. If required changes involve greater expense than the Company currently anticipates, the Company's ability to make expected distributions could be adversely affected. OTHER LAWS. The Properties are also subject to various Federal, state and local regulatory requirements, such as state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. The Company believes that the Properties are currently in compliance with all such regulatory requirements. However, there can be no assurance that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by the Company and could have an adverse effect on the Company's Funds from Operations and expected distributions. 27 THE COMPANY The Company has been formed for the purpose of continuing the commercial real estate business of SL Green. For more than 17 years, SL Green has been engaged in the business of owning, managing, leasing, acquiring and repositioning Class B office properties in Manhattan. Upon completion of the Offering, the Company will own or have contracted to acquire interests in eight Class B office properties encompassing approximately 1.9 million rentable square feet located in midtown Manhattan (the "Properties") and will manage 28 office properties (including the Properties) encompassing approximately 6.1 million rentable square feet. Of these Properties, interests in six office Properties encompassing approximately 1.2 million rentable square feet are currently owned and managed by SL Green (the "Core Portfolio") and interests in two office Properties encompassing approximately 700,000 rentable square feet will be acquired upon completion of the Offering (the "Acquisition Properties"). As of March 31, 1997, the weighted average occupancy rate of the Core Portfolio was 95% and of the Acquisition Properties was 88%. Also, upon completion of the Offering, the Company expects to own an option to acquire an additional 333,000 rentable square foot Class B office property in midtown Manhattan. See "The Properties--The Option Property". The Company will operate as a fully integrated, self-administered and self-managed REIT. Management expects that the Company will be the first publicly-traded real estate company to invest primarily in Manhattan office properties. The term "Class B" is generally used in the Manhattan office market to describe office properties which are more than 25 years old but which are in good physical condition, enjoy widespread acceptance by high-quality tenants and are situated in desirable locations in Manhattan. Examples of Class B Manhattan office properties (other than the Properties) include the Graybar Building, the Kent Building, the Lincoln Building, the Fred French Building and Five and Seven Penn Plaza. Class B office properties can be distinguished from Class A properties in that Class A properties are generally newer properties with higher finishes and obtain the highest rental rates within their markets. A variety of tenants who do not require, desire or cannot afford Class A space are attracted to Class B office properties due to their prime locations, excellent amenities, distinguished architecture and relatively less expensive rental rates. Class B office space has historically attracted many smaller growth oriented firms (many of which have fueled the recent growth in the New York City metropolitan economy) and has played a critical role in satisfying the space requirements of particular industry groups in Manhattan, such as the advertising, apparel, business services, engineering, not-for-profit, new media and publishing industries. In addition, several areas of Manhattan, including many in which particular trades or industries traditionally congregate, are dominated by Class B office space and contain no or very limited Class A office space. Examples of such areas include the Garment District (where three of the Properties are located), the Flatiron District (where one Property is located), Soho, Noho, Chelsea, and the area surrounding the United Nations (where one Property is located). Businesses significantly concentrated in certain of these areas include those in the following industries: new media, garment, apparel, toy, jewelry, interior decoration, antiques, giftware, contract furnishing and UN-related businesses. The concentration of businesses creates strong demand for the available Class B office space in those locations. Tenants that currently occupy space in SL Green owned or managed Properties include MCI, NationsBank, New York Hospital, Omnicom Group Ltd., Sara Lee Corp. and UNICEF. Other tenants occupying Class B office space in Manhattan include Coca Cola, EMI, Forbes Inc., John Hancock, Mattel Toys and Young & Rubicam. As described herein, current developments in the New York City economy provide an attractive environment for owning, operating and acquiring Class B office properties in Manhattan. See "Market Overview." These developments have resulted in growing demand for midtown Manhattan office space (particularly Class B space), declining vacancy rates (the Class B vacancy rate in the Midtown Markets declined from 17.3% at year-end 1992 to 11.7% at March 31, 1997) and appreciation in rental rates and property values. The Company believes there will be a continued strengthening of the Class B office market driven by expected job growth in Manhattan, particularly among smaller companies which are, in 28 many instances, Class B tenants. Additionally, the Company believes that a number of high quality tenants will likely seek to relocate from Class A space to Class B space in the Midtown Markets as a result of the rising cost of Class A space. The Company will seek to capitalize on these growth opportunities by acquiring Class B office properties on a selective basis and, when necessary, enhancing their value after acquisition through repositioning of the properties in their respective submarkets. As described more fully below, the Company may have certain competitive advantages over other potential acquirors of Class B office space due to its local market expertise, historical institutional relationships, enhanced access to capital as a public company and ability to offer tax-advantaged acquisition structures. Additionally, the Company will seek to optimize its properties' cash flow through ongoing intensive management and leasing. See "Business and Growth Strategies." SL Green was founded in 1980 by Stephen L. Green, its Chairman, President and Chief Executive Officer. Since that time, SL Green has become a full service, fully integrated real estate company with a portfolio of over six million square feet of Class B office properties under management. Throughout its history, SL Green has been involved in the acquisition of 31 Class B office properties in Manhattan containing approximately four million square feet and the management of 50 Class B office properties in Manhattan containing approximately 10.5 million square feet. SL Green has offices in midtown and downtown Manhattan and has established a staff of more than 50 persons, including 40 professionals with experience in all aspects of commercial real estate. The Company will be led by, in addition to Stephen L. Green, five senior executives that average more than nine years with SL Green and more than 19 years in the commercial real estate business. This management team has developed a comprehensive knowledge of the Manhattan Class B office market, an extensive network of tenant and other business relationships and experience in acquiring underperforming office properties and repositioning them into profitable Class B properties through intensive full service management and leasing efforts. Upon completion of the Offering, approximately 13% of the equity of the Company, on a fully diluted basis, will be beneficially owned by officers and directors of the Company and other affiliated persons. SL Green consists of six operating divisions, each of which is headed by an executive team comprised of industry experts with substantial experience in either the leasing, marketing, asset and property management, construction management, legal or accounting aspects of the real estate business. The integration of this expertise allows SL Green to provide high quality, cost effective leasing and management services essential to enhancing the value of its office properties. The Company was incorporated in the State of Maryland on June 10, 1997. Its executive offices are located at 70 West 36th Street, New York, New York 10018-8007 and its telephone number is (212) 594-2700. 29 BUSINESS AND GROWTH STRATEGIES The Company's primary business objective is to maximize total return to stockholders through growth in distributable cash flow and appreciation in the value of its assets. The Company plans to achieve this objective by capitalizing on the external and internal growth opportunities described below and continuing the operating strategies historically practiced by SL Green. THE MARKET OPPORTUNITY Management believes that current developments in the New York City economy provide an attractive environment for owning, operating and acquiring Class B office properties in Manhattan. The New York commercial real estate market is currently recovering from the sustained downturn of the late 1980s and early 1990s. Specifically, the New York City metropolitan economy has recently benefited from consistent net private sector job growth, an improving business environment and enhancements in the "quality of life" afforded to city residents. In that regard, private sector employment gained an average of almost 44,000 jobs per year between 1994 and 1996 for an average annual growth rate of 1.4%; between March of 1996 and 1997, private sector employment growth was 1.9%, which is the highest growth rate in more than ten years. Much of this private sector job growth has been concentrated among smaller companies involved in growth oriented industries. Smaller companies have traditionally been attracted to Class B office properties in the Midtown Markets due to their prime locations and relatively less expensive rental rates (as compared to Class A office properties). These smaller companies conduct business in industries including: business services, software, advertising, audio recording, trade sectors (e.g., apparel and other textile products), major media (e.g., television, magazines and publishing), new media (e.g., entertainment software, online/Internet services, CD-ROM title development and web site design) and engineering, as well as nonprofit endeavors. The combination of a growing office space demand fueled by a strengthening New York City economy and limited recent and projected new supply of office space has resulted in a recovery in the Midtown Markets. The combined vacancy rate for Class A and Class B office space in the Midtown Markets declined to 11.1% at March 31, 1997 from a 1990s high of 16.8% at year-end 1991. The Class B segment of the market which tightened to a vacancy rate of 11.7% at March 31, 1997 from its 1990s high of 17.3% at year-end 1992, a 32% decline. According to Rosen Consulting Group, a nationally recognized real estate consulting company, the outlook in the New York metropolitan area is for healthy private sector employment growth of 1.3% per annum in 1997 and 1998, followed by 1.0% growth per annum through 2001, which is expected to generate significant demand for office space. Specifically, Rosen Consulting Group projects vacancy rates in the Class B Midtown Markets to further drop to 6.0% by 2001, resulting in projected average asking market rents of $30.53 per square foot, a 28% increase over average asking rents as of March 31, 1997 of $23.88 per square foot. See "Market Overview". However, conditions in the New York City metropolitan economy and the Midtown Markets are subject to change and there can be no assurance that any such projections will approximate actual results. See "Risk Factors--Dependence on Midtown Markets Due to Limited Geographical Diversification." The Company believes the pronounced recovery of Class B space is being driven by the growth of smaller companies, the relocation of large firms from Class A space to Class B as a result of the dearth of available Class A space, particularly in large blocks, and the heightened cost consciousness of large tenants. In that regard, as of September 1995, there were 30 blocks of 150,000 or more rentable square feet of Class A space available for lease in the Midtown Markets. As of March 31, 1997 the number of such available blocks had declined to 12. Recent examples of large, traditional Class A tenants relocating into SL Green owned or managed Class B midtown office space are Newbridge Communications, a subsidiary of K-III Communications moving to 49,000 square feet of space at 673 First Avenue, Kallir Philips Ross, a subsidiary of The Omnicom Group Ltd. moving to 80,000 square feet at 673 First Avenue, Revere National Corp. moving to 2,743 square feet at 70 West 36th Street, The Really Useful Company (a subsidiary of Andrew Lloyd Weber's enterprises) moving to 3,033 square feet at the Bar Building and Guidepost 30 Associates, the publishing division of The Norman Vincent Peale Foundation moving to 17,400 square feet at 16 East 34th Street. Additionally, examples of other prominent tenants relocating to Class A space are EMI Records recent move to 49,380 square feet of space at 304 Park Avenue South and America Online's announcement that it will be locating in Manhattan for the first time in 10,149 square feet of space at a Class B midtown building at 620 Avenue of the Americas. As the supply of Class A space continues to contract, management believes that it is likely that more high quality tenants will locate in well-located Class B office properties, many of which offer comparable amenities to Class A buildings at a significant discount to Class A costs. Improving supply and demand fundamentals in the Midtown Markets have generated increasingly favorable rental terms from a property owner's perspective. According to Rosen Consulting Group, asking rental rates for Class B space in the Midtown Markets have increased to $23.88 per square foot as of March 31, 1997 from their 1990s low of $21.89 per square foot as of year-end 1993. Management believes that opportunities to acquire Class B office properties in Manhattan on economically attractive terms will be available to the Company. The Rosen Consulting Group estimates that the replacement cost of Class A office space in Manhattan (no Class B space is built in Manhattan) is approximately $358 per square foot, which is substantially above the estimated current acquisition price of Class A space of $225 to $300 per square foot and the estimated current acquisition price for Class B space of $90 to $200 per square foot. Furthermore, even if rental rates were to approach a level that would justify new construction, there are few development sites available in Manhattan and the regulatory approval process is both costly and lengthy. The Company believes that as the Class A market continues to recover, rental rates and corresponding property values should increase to a level that may justify new construction. The Company also believes that property values and rental rates in the Class B market have historically tracked those of the Class A market and, consequently, there is potential for rental rate and property value increases in the Class B marketplace. Further, the Company believes that the recent abolition of the New York State Real Property Transfer Gains Tax, which effectively reduced the cost of sales involving commercial properties that have appreciated in value, may create an increase in the number of properties available for acquisition. Prior to such abolition, a seller of commercial property in New York was subject to a substantial New York State gains tax (in addition to income tax). As described more fully below, the Company may have certain competitive advantages over other potential acquirors of Class B office space due to its local market expertise, historical institutional relationships, enhanced access to capital as a public company and ability to offer tax-advantaged acquisition structures. GROWTH STRATEGIES Management will seek to capitalize on current opportunities in the Class B Manhattan office market through (i) property acquisitions -- continuing to acquire Class B office properties at significant discounts to replacement costs that provide attractive initial yields and the potential for cash flow growth, (ii) property repositioning -- repositioning acquired properties that are underperforming through renovations, active management and proactive leasing and (iii) integrated leasing and property management. PROPERTY ACQUISITIONS The Company will seek to continue SL Green's ability to capitalize on favorable market conditions for acquiring Manhattan Class B office properties and management's experience in enhancing the value of its properties. In assessing acquisition candidates, the Company will evaluate the following factors: (i) the property's strategic location in its marketplace and its strategic fit within the Company's portfolio, (ii) current and projected occupancy and market rental rates and the ability to operate the property profitably at competitive rental rates, (iii) the purchase price as compared to the replacement cost of the property, (iv) the potential to modify and/or upgrade and reposition the property in its market to increase returns 31 and (v) the quality of the construction and presence of existing and/or potential deferred maintenance issues. The Company believes that it will have the following competitive advantages over its competitors, primarily private companies and individuals, in acquiring Class B properties in Manhattan: LOCAL MARKET EXPERTISE. Since its inception in 1980, SL Green has developed into a full service, fully integrated real estate company which manages over six million square feet of Class B office space in Manhattan. Consequently, management has accumulated an extensive working knowledge of the Class B Manhattan office market with a substantial base of information concerning current and prospective tenants, effective rental rates, property management and renovation costs, the complicated regulatory processes characteristic of the Manhattan office market, as well as other factors relevant to the sourcing and evaluation of potential acquisition properties. The depth and expertise of SL Green management is unusual in the Class B marketplace, which has historically attracted far less institutional interest than the Class A property sector. ENHANCED ACCESS TO CAPITAL. Management believes that upon completion of the Offering, the Company should obtain better access to capital than is generally available to private real estate firms, especially those that compete for Manhattan Class B properties. In that regard, management believes that ownership of Class B office space in Manhattan is more fragmented and far less institutional in nature than ownership of Class A Manhattan office space. As a public company, the Company will have the potential to raise capital through subsequent issuances of securities in the public and private marketplace. The Company also intends to finance property acquisitions through single asset debt financings and to obtain, upon completion of the Offering, a revolving credit facility for up to $50 million to finance acquisitions. However, no assurances can be made as to the availability of any such financing sources. UNIT ACQUISITIONS. Upon completion of the Offering, management believes that the Company will be the first publicly-traded real estate company to focus primarily on the Manhattan Class B office market. As an "UPREIT", the Company will have the ability to acquire properties for Units and thereby provide sellers with deferral of income taxes that would otherwise be payable upon a cash sale. In addition, Units afford property sellers diversification and liquidity of investment as well as certain estate planning benefits. Management believes that the Company operates in an established and mature real estate market in which many property owners have owned their properties for many years and therefore have a low tax basis in such properties. Consequently, the ability to offer Units may afford the Company certain competitive advantages over other potential acquirors who are unable to offer tax-efficient consideration. HISTORICAL INSTITUTIONAL RELATIONSHIPS. Through its 17 year operating history, SL Green has established relationships with numerous financial institutions for which it acts as landlord or as a property manager. In particular, SL Green's substantial third-party management business affords the Company access to numerous institutional owners of property that may in the future seek to divest property holdings. For example, within six weeks of taking over the management and leasing responsibilities at 36 West 44th Street (The Bar Building), a 165,000 square foot Class B office property in midtown Manhattan, SL Green contracted to purchase a mortgage interest encumbering the property from an insurance company. This mortgage interest is convertible by the Company, at its option, into fee ownership. The ability of SL Green to assess quickly the current and potential value and physical condition of this property enabled SL Green to make a pre-emptive offer to purchase the property. Consequently, the property was taken off the market, precluding prospective purchasers from engaging in acquisition discussions with the insurance company. RECENT TAX LAW DEVELOPMENTS. Recently, the New York State legislature voted to abolish the New York State Real Property Transfer Gains Tax, which effectively reduced the cost of sales involving commercial properties that have appreciated in value. Prior to such abolition, sellers of commercial properties located in New York State were subject to a special 10% tax (2.5% in the case of certain 32 transfers to REITs) on their gains. Further, the Company will have a competitive tax advantage due to recent tax law amendments affecting REITs. Under recent amendments to the New York State and New York City transfer tax laws, transfer tax rates applicable to certain REIT acquisition transactions were reduced 50% through August 1999 (from 3.025% to 1.5125% in the aggregate). Consequently, the Company may be able to structure acquisitions that qualify for these reduced rates and thereby enhance its attractiveness to sellers. PROPERTY REPOSITIONING The Company believes that, consistent with its core operating philosophy of maximizing asset value, it can reposition future acquisition properties, where warranted, in order to enhance property cash flow and value. To achieve these goals, the Company works to increase occupancy and rental rates by repositioning buildings to be among the best in their submarkets. The Company considers the amount of capital required to be invested in a property to achieve the repositioning. The Company then judges the benefit of a repositioning on a total return basis, such that for the Company to undertake the project the present value of the projected future increase in net cash flow and property value must exceed the cost of the capital expenditure required to achieve the repositioning. The repositionings pursued by SL Green in the past have consisted of both intensive large scale renovations as well as smaller scale repositionings. In the case of an intensive large scale renovation, either a property's use is changed (e.g., from light industrial/warehouse to office) or a property is completely rehabilitated. In the case of a smaller scale repositioning, generally cosmetic renovations are made to targeted areas of a building, deferred maintenance is corrected and an intensive leasing program is commenced. The Company believes there are a significant number of potential acquisitions for which this strategy can be successfully implemented due to the large number of Manhattan office properties that have significant deferred maintenance or have been undermanaged. The Company believes this situation has resulted from fragmented ownership that is generally non-institutional and has limited access to capital. An important component of the Company's repositioning strategy is its construction management capability. SL Green's construction management division has renovated approximately two million square feet of office space, including entire building renovations, at an aggregate cost exceeding $100 million. In the past, SL Green has implemented successful repositioning programs which have involved significant capital investments to improve the physical condition with respect to building facade, entrance and lobby, mechanical systems (including HVAC, fire/safety and elevators) and tenant space layout, while maintaining cost control with respect to these activities. Additionally, SL Green has benefited in its repositioning efforts from its fully-integrated real estate operations. The Company believes that its in-house leasing, property management and construction management capabilities provide it with valuable information regarding the cost of accommodating tenant preferences and the potential rental revenues achievable from various repositioning options. Examples of successful implementation of this strategy within the Core Portfolio include 673 First Avenue and the Bar Building. At 673 First Avenue, SL Green converted a distribution and warehouse facility into an office property to take advantage of desirable 40,000 square foot floor plates and a strategic location near the United Nations complex. To accomplish the repositioning, SL Green invested approximately $25 million in the Property for (i) a new building entrance, lobby and storefronts, (ii) complete replacement of the elevator systems, (iii) the creation of common areas, (iv) entirely reconfigured HVAC and electrical systems and (v) the build-out of tenant spaces. The repositioning resulted in the conversion of a 43% occupied warehouse/distribution facility into a 97% occupied Class B office building within 24 months. The Property's net operating income (NOI) increased dramatically from approximately $466,000 per annum upon acquisition to approximately $7.6 million per annum following repositioning and lease-up (exclusive of net lease payments and debt service payments). SL Green is currently pursuing a similar strategy at the Bar Building. This Property also suffers from deferred maintenance and is underperforming relative to its market potential. West Forty-Fourth Street, between Fifth Avenue and Avenue of the 33 Americas, where the Bar Building is located, has many attractive buildings and prominent clubs which, by association, enhance the value of this Property. Therefore, in order to capitalize on the location of the building, a distinctive facade will be created to attract the attention of high quality tenants. Also, a "pre-built" tenant space program has been undertaken as well as public corridor renovations, all which have resulted in the execution of 12 leases encompassing 24,500 square feet since acquisition. INTEGRATED LEASING AND PROPERTY MANAGEMENT The Company intends to continue SL Green's strategy of seeking to optimize long-term cash flow from its properties through the implementation and integration of targeted leasing and management programs. PROACTIVE LEASING PROGRAM. The Company will seek to capitalize on its market position and relationships with an extensive network of brokers and tenants to implement a proactive leasing program. Management believes that its extensive knowledge of the Class B Manhattan office market enhances its ability to monitor, understand and anticipate the current and future space needs of tenants in its submarkets. The leasing process for an acquisition property begins with extensive market research in order to determine the strengths and weaknesses of the property. This review includes an analysis of the building's physical characteristics, aesthetic attributes, floor plate sizes, services, elevators and mechanical systems, followed by an in-depth market analysis to determine the property's competitive position in the marketplace and perception in the brokerage community. The results of these analyses are used to develop the appropriate marketing strategy and the appropriate program to communicate the positive attributes and key features of the property or space to the marketplace and the brokerage community. These strategies may include the development of marketing tools such as brochures, listing sheets, fliers, signage and advertising copy. The utilization of third-party brokerage firms in implementing a successful leasing program is an integral component of the Company's leasing strategy. By closing transactions quickly and at market terms and paying commissions promptly, SL Green has created a network of relationships with leasing professionals who regularly bring tenants to SL Green owned and managed properties. An example of SL Green's implementation of its proactive leasing strategy is 16 East 34th Street. When SL Green was hired by new ownership in September, 1991 as the leasing and managing agent for 16 East 34th Street, a 330,000 square foot Class B midtown Manhattan office property, the property was only 50% occupied and suffered from a poor image in its marketplace. The SL Green team developed a cost effective building redevelopment program and a related marketing program designed to reposition quickly the property in its marketplace. The implementation of these programs resulted in over 150,000 square feet of executed leases to high quality tenants within 18 months, bringing occupancy to 90% during a period of rising and historically high vacancy rates in Manhattan office properties. The Company believes that SL Green's proactive leasing efforts have contributed to average occupancy rates at the Properties that are above the market average. During the period between 1994 and 1996, properties owned by SL Green for more than one year averaged occupancy rates of 94.3%, which exceeded the average of 87.2% for Class B Manhattan office space in the Midtown Markets by 8.1% over the comparable period. Another key component of the SL Green leasing strategy that will be continued by the Company is a commitment to tenant retention. Each leasing executive regularly conducts in-person interviews with existing tenants in order to gain insight into each tenant's business objectives, financial position and strength and future space requirements. This knowledge, in addition to a full understanding of each tenant's current lease obligation, is utilized to develop a plan to retain existing tenants in order to maximize long term cash flow. SL Green's commitment to tenant service and satisfaction is evidenced by the renewal of approximately 78% of the expiring rentable square footage (77% of the expiring leases 34 determined by number of leases) at the Properties in the Core Portfolio owned and managed by SL Green during the period from January 1, 1993 through March 31, 1997. IMPLEMENTATION OF STRATEGIC MANAGEMENT SYSTEMS. SL Green's proactive management begins with a comprehensive operational and physical analysis of a property followed by a preventive maintenance assessment. SL Green professionals evaluate all service contracts, survey electrical capacity and costs and, after interviewing all building personnel, appraise personnel resources and payroll costs on an ongoing basis. Based on the results of the analysis of the contractual lease obligations, building position in the market and the capital/aesthetic improvements needed to bring the property to its desired level relative to its competition, SL Green develops and implements a management program designed to provide tenants with the highest level of service while maintaining the lowest cost to ownership. An example of SL Green successfully implementing its strategic management systems is the Bar Building. Upon purchasing a mortgage interest in the Property, SL Green implemented a strategic property management program which reduced operating expenses by more than $400,000 per annum. Specifically, the management professionals at SL Green rebid the cleaning and security contracts, evaluated the staffing at the property, and determined the associated costs that could be reduced while improving service. The aggregate contractual operating expense reduction was in excess of $300,000. Meanwhile, SL Green's in-house counsel vigorously managed the real estate tax certiorari process which resulted in an approximately $100,000 real estate tax reduction. MAXIMIZING TENANT SATISFACTION. SL Green seeks to provide tenants with a level of service more typically found in Class A properties. Characteristics of SL Green office property redevelopments include upgraded or new entrances, lobbies, elevator cabs/mechanicals, hallways, bathrooms, windows, telecom systems and tenant spaces. Additionally, SL Green seeks to provide certain tenant amenities typically associated only with Class A properties. For example, SL Green maintains flowers in its buildings' lobbies and also provides uniformed concierges focused on tenant service as opposed to the security guards found at many Class B Manhattan office buildings. Within particular submarkets, SL Green arranges for the provision of cleaning and 24 hour, seven days per week security services to its tenants. The Company believes that this level of service is unusual in the Class B market, in large part due to the highly fragmented nature of Class B ownership and management. RELocate, a real estate market research firm, estimates that the 630 Class B buildings in the Midtown Markets are owned by over 500 different entities, many of whom own a single property or a few properties. The Company believes that the relatively large size of its operations and focus on the Class B market enables it to provide a level of service superior to that typically provided by the smaller owner/operators that permeate the Class B Manhattan marketplace. 35 USE OF PROCEEDS The net cash proceeds to the Company from the Offering, after deducting the underwriting discounts and commissions are estimated to be approximately $150.7 million (approximately $173.3 million if the Underwriters' over-allotment option is exercised in full), based upon the assumed initial public offering price of $20.00 per share. The net cash proceeds of the Offering will be used by the Company as follows: (i) approximately $42.2 million to repay mortgage indebtedness encumbering the Core Portfolio, including approximately $1.5 million in prepayment penalties and other financing fees and expenses, (ii) approximately $6.4 million to purchase the direct or indirect interests of certain participants in the Formation Transactions in the Properties, (iii) approximately $59.4 million to acquire the Acquisition Properties, (iv) approximately $3.1 million to pay certain expenses incurred in the Formation Transactions, (v) $31.9 million to repay the LBHI Loan (including $2.5 million and $200,000 borrowed under the LBHI Loan to fund Offering expenses and prepayment penalties, respectively, and excluding approximately $7.5 million incurred to finance purchase of the Acquisition Properties) and, (vi) $7.7 million to fund capital expenditures and for general working capital needs. If the Underwriters' over-allotment option to purchase 1,215,000 additional shares of Common Stock is exercised in full, the Company expects to use the additional net proceeds (which will be approximately $22.6 million) to acquire additional properties and/or for working capital. Pending application of the net proceeds of the Offering, the Company will invest such portion of the net proceeds in interest-bearing accounts and/or short-term, interest-bearing securities which are consistent with the Company's intention to qualify for taxation as a REIT. The LBHI Loan was incurred within the 12 month period preceding the date of this Prospectus. Borrowings under the LBHI Loan bear interest at a weighted average interest rate of 6.8% and have an average remaining term to maturity of approximately 10 months as of May 31, 1997. The proceeds of the LBHI Loan were used to acquire interests in the Core Portfolio and Acquisition Properties, to fund property related operating expenses, to fund organizational expenses and to purchase Treasury Securities. See "Structure and Formation of the Company--Benefits to Related Parties." The mortgages and other indebtedness to be repaid upon the completion of the Offering (excluding the LBHI Loan) had a weighted average interest rate of approximately 9.05% and an average remaining term to maturity of 11 years as of March 31, 1997. The following table sets forth the amount of existing mortgage debt (excluding the LBHI Loan) to be repaid upon completion of the Offering.
PROCEEDS USED FOR REPAYMENT UPON COMPLETION OF THE OFFERING PROPERTY (IN THOUSANDS) (1) - ---------------------------------------------------------------------------------- ------------------------------ 673 First Avenue.................................................................. $ 1,000 470 Park Avenue South............................................................. $ 13,033 Bar Building...................................................................... $ 10,200 70 W. 36th Street................................................................. $ 6,552 1414 Ave. of Americas............................................................. $ 9,866 ------- Total......................................................................... $ 40,651 ------- -------
- ------------------------ (1) Exact repayment amounts may differ due to amortization. The figures are estimated as of July 31, 1997 and exclude prepayment penalties estimated to aggregate approximately $1.5 million. 36 DISTRIBUTIONS Subsequent to the completion of the Offering, the Company intends to make regular quarterly distributions to the holders of its Common Stock. The initial distribution, covering a partial quarter commencing on the date of completion of the Offering and ending on September 30, 1997, is expected to be $ per share, which represents a pro rata distribution based on a full quarterly distribution of $.3625 per share and an annual distribution of $1.45 per share (or an annual distribution rate of approximately 7.25%, based on an assumed initial public offering price of $20.00). The Company does not intend to reduce the expected distribution per share if the Underwriters' over-allotment option is exercised. The following discussion and the information set forth in the table and footnotes below should be read in conjunction with the financial statements and notes thereto, the pro forma financial information and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources" included elsewhere in this Prospectus. The Company intends initially to distribute annually approximately % of estimated Cash Available for Distribution. The estimate of Cash Available for Distribution for the 12 months ending March 31, 1998 is based upon pro forma Funds from Operations for the 12 months ended March 31, 1997, adjusted for (i) certain known events and/or contractual commitments that either have occurred or will occur subsequent to March 31, 1997 or during the 12 months ended March 31, 1997, but were not effective for the full 12 months, and (ii) for certain non-GAAP adjustments consisting of (A) revisions to historical rent estimates from a GAAP basis to amounts currently being paid or due from tenants, (B) pro forma amortization of financing costs, and (C) an estimate of amounts anticipated for recurring tenant improvements, leasing commissions and capital expenditures. No effect was given to any changes in working capital resulting from changes in current assets and current liabilities (which changes are not anticipated to be material) or the amount of cash estimated to be used for (i) investing activities for acquisition and other activities and (ii) financing activities. The estimate of Cash Available for Distribution is being made solely for the purpose of setting the initial distribution and is not intended to be a projection or forecast of the Company's results of operations or its liquidity, nor is the methodology upon which such adjustments were made necessarily intended to be a basis for determining future distributions. Future distributions by the Company will be at the discretion of the Board of Directors. There can be no assurance that any distributions will be made or that the estimated level of distributions will be maintained by the Company. The Company anticipates that its distributions will exceed earnings and profits for Federal income tax reporting purposes due to non-cash expenses, primarily depreciation and amortization, to be incurred by the Company. Therefore, it is expected that approximately % (or $ per share) of the distributions anticipated to be paid by the Company for the 12-month period following the completion of the Offering will represent a return of capital for Federal income tax purposes and in such event will not be subject to Federal income tax under current law to the extent such distributions do not exceed a stockholder's basis in his Common Stock. The nontaxable distributions will reduce the stockholder's tax basis in the Common Stock and, therefore, the gain (or loss) recognized on the sale of such Common Stock or upon liquidation of the Company will be increased (or decreased) accordingly. The percentage of stockholder distributions that represents a nontaxable return of capital may vary substantially from year to year. The Code generally requires that a REIT distribute annually at least 95% of its net taxable income (excluding any net capital gain). See "Federal Income Tax Consequences--Annual Distribution Requirements." The estimated Cash Available for Distribution is anticipated to be in excess of the annual distribution requirements applicable to REITs under the Code. Under certain circumstances, the Company may be required to make distributions in excess of Cash Available for Distribution in order to meet such distribution requirements. For a discussion of the tax treatment of distributions to holders of Common Stock, see "Federal Income Tax Consequences--Taxation of Stockholders." 37 The Company believes that its estimate of Cash Available for Distribution constitutes a reasonable basis for setting the initial distribution, and the Company intends to maintain its initial distribution rate for the 12-month period following the completion of the Offering unless actual results of operations, economic conditions or other factors differ materially from the assumptions used in its estimate. The Company's actual results of operations will be affected by a number of factors, including the revenue received from its properties, the operating expenses of the Company, interest expense, the ability of tenants of the Company's properties to meet their financial obligations and unanticipated capital expenditures. Variations in the net proceeds from the Offering as a result of a change in the initial public offering price or the exercise of the Underwriters' over-allotment option may affect Cash Available for Distribution, the payout ratio based on Cash Available for Distribution and available reserves. No assurance can be given that the Company's estimate will prove accurate. Actual results may vary substantially from the estimate. The following table describes the calculation of pro forma Funds from Operations for the 12 months ended March 31, 1997 and the adjustments to pro forma Funds from Operations for the 12 months ended March 31, 1997 in estimating initial Cash Available for Distribution for the 12 months ending March 31, 1998:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ----------- Pro forma net income before minority interest for the year ended December 31, 1996................... $ 10,230 Plus: Pro forma net income before minority interest for the three months ended March 31, 1997................................................................................... 3,768 Less: Pro forma net income before minority interest for the three months ended March 31, 1996................................................................................... (2,336) ----------- Pro forma net income before minority interest for the 12 months ended March 31, 1997................. 11,662 Plus: Pro forma real estate depreciation for the 12 months ended March 31, 1997 (1)................ 5,856 Plus: Pro forma amortization (excluding financing costs) for the 12 months ended March 31, 1997 (2)............................................................................... 349 ----------- Pro forma Funds from Operations for the 12 months ended March 31, 1997 (3)........................... 17,867 Adjustments: Net increases in rental income (4)................................................................. 2,414 Provision for lease expirations, assuming no renewals (5).......................................... (432) Non-recurring lease surrender income and real estate tax refund (6)................................ (2,120) Estimated adjusted pro forma Funds from Operations for the 12 months ending March 31, 1998........... 17,729 Net effect of straight-line rents (7).............................................................. (2,520) Pro forma amortization of financing costs for the 12 months ending March 31, 1997 (8).............. 199 Estimated recurring capitalized tenant improvements and leasing commissions (9).................... (957) Estimated recurring capital expenditures (10)...................................................... (773) Effect of non-cash transaction (11)................................................................ 1,395 Scheduled mortgage loan principal payments (12).................................................... ----------- Estimated Cash Available for Distribution for the 12 months ending March 31, 1998.................... ----------- The Company's share of estimated Cash Available for Distribution (13).............................. Minority interest's share of estimated Cash Available for Distribution............................. Total estimated initial annual cash distributions.................................................... 14,006 Estimated initial annual distribution per share (14)............................................... 1.45 Payout ratio based on estimated Cash Available for Distribution (15)............................... %
38 - ------------------------ (1) Pro forma real estate depreciation for the year ended December 31, 1996 of $5,724 minus pro forma real estate depreciation for the three months ended March 31, 1996 of $1,314 plus pro forma real estate depreciation for the three months ended March 31, 1997 of $1,446. (2) Pro forma amortization (excluding financing costs) for the year ended December 31, 1996 of $328 minus pro forma amortization (excluding financing costs) for the three months ended March 31, 1996 of $81 plus pro forma amortization (excluding financing costs) for the three months ended March 31, 1997 of $102. (3) The Company generally considers Funds from Operations an appropriate measure of liquidity of an equity REIT because industry analysts have accepted it as a performance measure of equity REITs. "Funds from Operations" as defined by NAREIT means net income (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. The Company's Funds from Operations are not comparable to Funds from Operations reported by other REITs that do not define the term using the current NAREIT definition or that interpret the current NAREIT definition differently than does the Company. The Company believes that in order to facilitate a clear understanding of the combined historical operating results of the SL Green Predecessors and the Company, Funds from Operations should be examined in conjunction with net income as presented in the combined financial statements and information included elsewhere in this Prospectus. Funds from Operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity or ability to make distributions. (4) Represents the net increases in rental income from (i) new leases and renewals that were not in effect for the entire 12-month period ended March 31, 1997 of $1,330 and (ii) new leases and renewals that went into effect between April 1, 1997 and May 31, 1997 of $1,084. (5) Assumes no lease renewals or new leases (other than month-to-month leases) for leases expiring after March 31, 1997 unless a new or renewal lease has been entered into by May 31, 1997. The $552 decrease represents the loss in net rental income assuming all leases of space expiring between April 1, 1997 and March 31, 1998 for which no renewals or new leases have been entered into by May 31, 1997 expire in accordance with their terms and space covered by such expiring leases is not re-leased; the decrease is partially offset by a net increase of $120 of rental income from tenants on month-to-month leases which are assumed to continue throughout the period. (6) The non-recurring transactions consist of lease surrender income at 1372 Broadway and a real estate tax refund at 1140 Avenue of the Americas. (7) Represents the effect of adjusting straight-line rental revenue included in pro forma net income from the straight-line accrual basis to amounts currently being paid or due from tenants. (8) Pro forma amortization of financing costs for the year ended December 31, 1996 of $196 minus pro forma amortization of financing costs for the three months ended March 31, 1996 of $35 plus pro forma amortization of financing costs for the three months ended March 31, 1997 of $38. Financing costs for periods are based on principal mortgage indebtedness outstanding of $47,196. See "The Properties--Mortgage Indebtedness." (9) Reflects recurring tenant improvements and leasing commissions anticipated for the 12 months ending March 31, 1998 which have been calculated by multiplying (i) the weighted average tenant improvements and leasing commissions expenditures for renewed and retenanted space at the Properties incurred during 1994, 1995, 1996 and the three months ended March 31, 1997 of $9.04 per square foot (assuming a renewal rate of 75% of expiring square footage as compared to the actual weighted average renewal rate of 78.3% during the period from January 1, 1994 through March 31, 39 1997-- See "The Properties--The Portfolio--Historical Tenant Improvements and Leasing Commissions"), by (ii) 106,000 (the average annual square feet of leased space for which leases expire during the years ending December 31, 1997 through December 31, 2002). The weighted average annual per square foot cost of tenant improvements and leasing commission expenditures is presented below:
WEIGHTED THREE MONTHS AVERAGE YEAR ENDED DECEMBER 31, ENDED JANUARY 1, ------------------------------- MARCH 31, 1994- 1994 1995 1996 1997 MARCH 31, 1997 --------- --------- --------- ------------- --------------- RENEWALS: Tenant improvement costs ("TI") per square foot......................................... $1.84 $ 0.00 $ 2.38 $ 0.00 $ 1.85 Leasing commission costs ("LC") per square foot......................................... $1.64 $ 1.98 $ 3.45 $ 0.94 $ 2.97 --------- --------- --------- ------ ------ Total Renewal TI and LC per square foot........ $3.48 $ 1.98 $ 5.83 $ 0.94 $ 4.82 RE-TENANTED OR NEWLY TENANTED SPACE: TI per square foot............................. $16.41 $ 22.73 $ 13.77 $ 6.06 $ 14.80 LC per square foot............................. $7.27 $ 4.55 $ 9.42 $ 5.03 $ 6.88 --------- --------- --------- ------ ------ Total Re-tenanted TI and LC per square foot.... $23.69 $ 27.28 $ 23.19 $ 11.09 $ 21.68 --------- --------- --------- ------ ------ --------- --------- --------- ------ ------
3 1/4 YEAR AVERAGE WEIGHTED ANNUAL AVERAGE TI AND SQUARE FOOTAGE RATE OF LC PER SQUARE EXPIRING IN RENEWALS/ TOTAL FOOT 1997-2002 RE-TENANTED COST ----------------- -------------- ------------- --------- Renewal.......................... $ 4.82 x 106,000 x 75%(i) = $ 383 Re-tenanted...................... $ 21.68 x 106,000 x 25% = $ 574 --------- $ 957 --------- ---------
-------------------------------- (i) The historical weighted average renewal rate, based on square footage, for the Company from January 1, 1994 through March 31, 1997 is 78.3%. (10) Estimated recurring capital expenditures have been calculated by multiplying (i) $0.41 (the weighted average of capital expenditures per square foot for the Core Portfolio during the period January 1, 1994 through December 31, 1996) by (ii) 1,885 (the aggregate square footage of the Core Portfolio and the Acquisition Properties). See "The Properties--The Portfolio--Historical Capital Expenditures." For the 12 months ending March 31, 1998, the estimated cost of recurring building improvements and equipment upgrades and replacements (excluding costs of tenant improvements) at the Properties is approximately $773. Following completion of the Formation Transactions and the Offering, the Company expects to have remaining net proceeds of $7.7 million available for capital expenditures and working capital purposes. (11) The non-cash transaction relates to the capital lease on 673 First Avenue. (12) Scheduled mortgage loan principal payments for the 12 months ended March 31, 1998. (13) The Company's share of estimated Cash Available for Distribution and estimated initial annual cash distributions to stockholders of the Company is based on its approximate 88.3% aggregate partnership interest in the Operating Partnership. (14) Based on a total of 8,528,605 shares of Common Stock to be outstanding after the Offering (8,100,000 shares to be sold in the Offering, assuming no exercise of the Underwriters' over-allotment option, and 428,605 additional shares to be issued in the Formation Transactions.) (15) Calculated as estimated initial annual cash distributions to stockholders of the Company divided by the Company's share of estimated Cash Available for Distribution for the 12 months ending March 31, 1998. The payout ratio based on estimated adjusted pro forma Funds from Operations is 79%. 40 CAPITALIZATION The following table sets forth the combined historical capitalization of the SL Green Predecessors as of March 31, 1997 and on a pro forma basis giving effect to the Formation Transactions, the Offering, and use of the net proceeds from the Offering as set forth under "Use of Proceeds." The information set forth in the table should be read in conjunction with the financial statements and notes thereto, the pro forma financial information and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" included elsewhere in this Prospectus.
MARCH 31, 1997 ------------------------ COMBINED HISTORICAL PRO FORMA ----------- ----------- (IN THOUSANDS) Mortgage debt............................................................................. $ 16,544 $ 47,197 Minority interests in Operating Partnership............................................... -- 15,746 Stockholders' equity: Preferred Stock, $.01 par value; 25,000 shares authorized; none issued and outstanding........................................................................... -- -- Common Stock, $.01 par value; 100,000 shares authorized; 8,529 issued and outstanding (1)................................................................................... -- 85 Additional paid-in capital.............................................................. -- 118,747 Owners' deficit......................................................................... (7,563) -- ----------- ----------- Total owners' (deficit)/stockholders' equity.......................................... (7,563) 118,832 ----------- ----------- Total capitalization................................................................ $ 8,981 $ 181,775 ----------- ----------- ----------- -----------
- ------------------------ (1) Includes 8,528,605 shares of Common Stock to be issued in the Formation Transactions and the Offering. Does not include (i) 1,130,395 shares of Common Stock that may be issued upon the exchange of Units issued in connection with the Formation Transactions beginning two years following the completion of the Offering (or earlier in certain circumstances), (ii) 660,000 shares of Common Stock subject to options being granted concurrently with the Offering under the Company's stock option plans or (iii) 1,215,000 shares of Common Stock that are issuable upon exercise of the Underwriters' over-allotment option. 41 DILUTION At March 31, 1997, the Company had a deficiency in net tangible book value attributable to continuing investors of approximately $8.7 million. After giving effect to (i) the sale of the shares of Common Stock offered hereby (at an assumed initial public offering price of $20.00 per share) and the receipt by the Company of approximately $147 million in net proceeds from the Offering, after deducting the Underwriters' discounts and commissions and other estimated expenses of the Offering, (ii) the repayment of approximately $80 million of mortgage indebtedness secured by certain of the Properties and the LBHI Loan, and (iii) the other Formation Transactions, the pro forma net tangible book value at March 31, 1997 would have been approximately $114.7 million, or $13.46 per share of Common Stock. This amount represents an immediate increase in net tangible book value of $24.40 per share to the continuing investors and an immediate and substantial dilution in pro forma net tangible book value of $6.54 per share of Common Stock to new investors. The following table illustrates this dilution: Assumed initial public offering price per share............. $ 20.00 Deficiency in net tangible book value per share prior to the Offering attributable to continuing investors (1)......... (10.94) Increase in net tangible book value per share attributable to the Offering (2).............................................. 24.40 Pro forma net tangible book value after the Offering (3).... 13.46 --------- Dilution in net tangible book value per share of Common Stock to new investors (4)................................ $ 6.54
- ------------------------ (1) Deficiency in net tangible book value per share prior to the Offering attributable to continuing investors is determined by dividing net tangible book value of the Company attributable to continuing investors (based on the March 31, 1997 net book value of the tangible assets (consisting of total assets less intangible assets consisting of deferred lease fees and loan costs and after the Formation Transactions, net of liabilities to be assumed) by the sum of the number of shares of Common Stock (i) issued and outstanding and (ii) issuable (upon the exchange of all Units to be issued) to continuing investors in the Formation Transactions. (2) Based on an assumed initial public offering price of $20.00 per share and after deducting Underwriters' discounts and commissions and estimated expenses of the Offering and the Formation Transactions. (3) Based on total pro forma net tangible book value of $114.7 million divided by the total number of shares of Common Stock outstanding after the completion of the Offering (8,528,605 shares), and excluding shares that may be issuable upon exercise of stock options. There is no impact on dilution attributable to the issuance of Common Stock in exchange for Units to be issued to the continuing investors in the Formation Transactions because such Units would be exchanged for Common Stock on a one-for-one basis. (4) Dilution is determined by subtracting net tangible book value per share of Common Stock after the Offering from an assumed initial public offering price of $20.00. The following table summarizes, on a pro forma basis giving effect to the Offering and the Formation Transactions, the number of shares of Common Stock to be sold by the Company in the Offering and the number of shares of Common Stock and Units to be issued to the continuing investors in the Formation Transactions, the deficiency in the net tangible book value as of March 31, 1997 of the assets contributed by 42 the continuing investors in the Formation Transactions and the net tangible book value of the average contribution per share based on total contributions.
PURCHASE COMMON STOCK/ CASH/ PRICE(1) UNITS ISSUED BOOK VALUE OF BOOK VALUE OF ------------------------ CONTRIBUTIONS AVERAGE SHARES/ --------------------- CONTRIBUTION UNITS PERCENT $ PERCENT PER SHARE/UNIT ----------- ----------- ---------- --------- -------------- (IN THOUSANDS EXCEPT PERCENTAGES) New investors in the Offering........................... 8,100 84% $ 147,028 113% $ 20.00(1) Common Stock issued to continuing investors............. 429 4% (4,685) (4)% $ (10.94) Units issued to continuing investors.................... 1,130 12% (12,367) (9)% $ (10.94) ----- --- ---------- --------- Total............................................... 9,659 100% $ 129,976 100% ----- --- ---------- --------- ----- --- ---------- ---------
- ------------------------ (1) Before deducting Underwriters' discounts and commissions and other estimated expenses of the Offering and the Formation Transactions. (2) Based on the March 31, 1997 net book value of the assets, less net book value of deferred financing and leasing cost to be contributed in connection with the Formation Transactions, net of liabilities to be assumed. 43 SELECTED FINANCIAL INFORMATION The following table sets forth summary selected financial and operating information on a pro forma basis for the Company, and on a historical combined basis for the SL Green Predecessor (as defined below), and should be read in conjunction with all of the financial statements and notes thereto included in this Prospectus. The combined historical balance sheet information as of December 31, 1996 and 1995 and statements of income for the years ended December 31, 1996, 1995, and 1994 of the SL Green Predecessor have been derived from the historical combined financial statements audited by Ernst & Young LLP, independent auditors, whose report with respect thereto is included elsewhere in this Prospectus. The operating data for the three months ended March 31, 1997 and 1996 and the years ended December 31, 1993 and 1992 have been derived from the unaudited combined financial statements of the SL Green Predecessor. In the opinion of management of the SL Green Predecessor, the operating data for the three months ended March 31, 1997 and 1996 and the years ended December 31, 1993 and 1992 include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. The results of operations for the interim periods ended March 31, 1997 and 1996 are not necessarily indicative of the results to be obtained for the full fiscal year. Historical operating results may not be comparable to future operating results. In addition, the Company believes that the book value of the Properties, which reflects historical costs of such real estate assets less accumulated depreciation, is not indicative of the fair value of the Properties. The "SL Green Predecessors" consists of 100% of the net assets and results of operations of two Properties, 1414 Avenue of the Americas and 70 West 36th Street, equity interests in four other Properties, 673 First Avenue, 470 Park Avenue South, 29 West 35th Street and the Bar Building (which interests are accounted for under the equity method) and 100% of the net assets and results of operations of the Service Corporations. The unaudited pro forma financial and operating information for the Company as of and for the three months ended March 31, 1997 and the year ended December 31, 1996 assumes completion of the Offering and the Formation Transactions as of the beginning of the periods presented for the operating data and as of the stated date for the balance sheet data. The pro forma financial information is not necessarily indicative of what the actual financial position and results of operations of the Company would have been as of and for the period indicated, nor does it purport to represent the Company's future financial position and results of operations. 44 THE COMPANY (PRO FORMA) AND THE SL GREEN PREDECESSOR (HISTORICAL) (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------------------------------- ---------------------------------------------- HISTORICAL ---------------------------------------------- PRO FORMA PRO FORMA 1997 1997 1996 1996 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) 1996 1995 1994 ------------- ------------- ------------- ------------- --------- --------- --------- OPERATING DATA: Total Revenue............... $ 12,525 $ 3,971 $ 2,307 $ 45,837 $ 10,182 $ 6,564 $ 6,600 ------------- ------ ------ ------------- --------- --------- --------- Property Operating Expense................... 3,667 814 733 14,908 3,197 2,505 2,009 Real Estate Taxes........... 1,769 243 118 7,242 703 496 543 Interest.................... 1,479 345 221 5,935 1,357 1,212 1,555 Depreciation and Amortization.............. 1,509 271 175 6,248 975 775 931 Marketing, General and Administration............ 257 896 1,079 1,027 3,250 3,052 2,351 ------------- ------ ------ ------------- --------- --------- --------- Total Expenses.............. 8,681 2,569 2,326 35,360 9,482 8,040 7,389 ------------- ------ ------ ------------- --------- --------- --------- Operating Income(Loss)...... 3,844 1,402 (19) 10,477 700 (1,476) (789) Equity in Net Income (Loss) of Uncombined Joint Ventures.................. (76) (287) (475) (247) (1,408) (1,914) (1,423) ------------- ------ ------ ------------- --------- --------- --------- Income (Loss) Before Extraordinary Item and Minority Interest......... $ 3,768 $ 1,115 $ (494) $ 10,230 $ 708 $ (3,390) $ (2,212) ------------- ------ ------ ------------- --------- --------- --------- Income Before Extraordinary Item and Minority Interest Per Share................. $ .39 $ 1.06 ------------- ------------- 1993 1992 (UNAUDITED) (UNAUDITED) ------------- ------------- OPERATING DATA: Total Revenue............... $ 5,926 $ 5,516 ------ ------------- Property Operating Expense................... 1,741 1,431 Real Estate Taxes........... 592 676 Interest.................... 1,445 1,440 Depreciation and Amortization.............. 850 773 Marketing, General and Administration............ 1,790 1,531 ------ ------------- Total Expenses.............. 6,418 5,851 ------ ------------- Operating Income(Loss)...... (492) (335) Equity in Net Income (Loss) of Uncombined Joint Ventures.................. 88 (2,227) ------ ------------- Income (Loss) Before Extraordinary Item and Minority Interest......... $ (404) $ (2,562) ------ ------------- Income Before Extraordinary Item and Minority Interest Per Share.................
AS OF MARCH 31, 1997 AS OF DECEMBER 31, -------------------------- ----------------------------------------------------------- PRO FORMA HISTORICAL PRO FORMA HISTORICAL HISTORICAL ----------- ------------- ----------- ----------- --------------------------------- 1996 1993 (UNAUDITED) (UNAUDITED) (UNAUDITED) 1996 1995 1994 (UNAUDITED) ----------- ------------- ----------- ----------- --------- --------- ----------- BALANCE SHEET DATA: Commercial Real Estate, Before Accumulated Depreciation.......... $ 210,000 $ 26,396 $ 209,424 $ 26,284 $ 15,559 $ 15,761 $ 15,352 Total Assets........................ 219,101 30,515 222,045 30,072 16,084 15,098 16,218 Mortgages and Notes Payable......... 47,196 16,544 47,611 16,610 12,700 12,699 12,699 Accrued Interest Payable............ 92 90 92 90 2,894 12,699 1,576 Minority Interest................... 15,746 0 15,780 0 0 0 0 Owners Equity (Deficit)............. 118,832 (7,563) 119,096 (8,405) (18,848) (15,520) (13,486) OTHER DATA: Fund from Operations................ 5,239 -- 16,282 -- Net Cash Provided by Operating Activities........................ -- 769 -- 272 Net Cash Provided by Financing Activities........................ -- (339) -- 11,960 Net Cash (Used in) Investing Activities........................ -- (112) -- (12,375) 1992 (UNAUDITED) ------------- BALANCE SHEET DATA: Commercial Real Estate, Before Accumulated Depreciation.......... $ 16,080 Total Assets........................ 15,645 Mortgages and Notes Payable......... 9,500 Accrued Interest Payable............ 4,757 Minority Interest................... 0 Owners Equity (Deficit)............. (8,449) OTHER DATA: Fund from Operations................ Net Cash Provided by Operating Activities........................ Net Cash Provided by Financing Activities........................ Net Cash (Used in) Investing Activities........................
- ------------------------ (1) The Company generally considers Funds from Operations an appropriate measure of liquidity of an equity REIT because industry analysts have accepted it as a performance measure of equity REITs. "Funds from Operations" as defined by the National Association of Real Estate Investment Trusts ("NAREIT") means net income (computed in accordance with generally accepted accounting principles ("GAAP")) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. The Company's Funds from Operations are not comparable to Funds from Operations reported by other REITs that do not define the term using the current NAREIT definition or that interpret the current NAREIT definition differently than does the Company. The Company believes that in order to facilitate a clear understanding of the combined historical operating results of the SL Green Predecessor and the Company, Funds from Operations should be examined in conjunction with net income as presented in the audited combined financial statements and information included elsewhere in this Prospectus. Funds from Operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity or ability to make distributions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity--Funds from Operations." 45 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion should be read in conjunction with the Selected Financial Information, the Historical Combined Financial Statements and the Pro Forma Combined Balance Sheet and Pro Forma Combined Statements of Income of the Company contained in this Prospectus. The Combined Financial Statements of the SL Green Predecessor include 100% of the net assets and results of operations of two Properties, 1414 Avenue of the Americas and 70 West 36th Street, equity interests in four other properties, 673 First Avenue, 470 Park Avenue South, 29 West 35th Street and the Bar Building (which interests are accounted for under the equity method) and 100% of the net assets and results of operations of the Service Corporations. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 TO THREE MONTHS ENDED MARCH 31, 1996 Rental revenue increased $752,000 or 115.9%, to $1,401,000 from $649,000 for the three months ended March 31, 1997 compared to the three months ended March 31, 1996. The increase was due primarily to the acquisition of 1414 Avenue of the Americas during July 1996 which had rental revenue of $867,000, partially offset by a decrease in rental revenue of $27,000 at 70 West 36th Street. Escalations and reimbursement revenues increased $117,000, or 97.5%, to $237,000 from $120,000 for the three months ended March 31, 1997 compared to the three months ended March 31, 1996. The increase was due primarily to the acquisition of 1414 Avenue of the Americas, offset by a decrease at 70 West 36th Street due to reduced porter wage escalations revenue. New leases with more current base years utilized to calculate the escalations account for the decreased escalation revenue. Management revenues increased $270,000, or 53.0% to $779,000 from $509,000 for the three months ended March 31, 1997 compared to the three months ended March 31, 1996. The increase in revenue is attributable to the addition of several buildings under service contracts. Leasing commission revenues increased $595,000, or 67.6%, to $1,475,000 from $880,000 for the three months ended March 31, 1997 compared to the three months ended March 31, 1996 due to the addition of several buildings under service contracts and intensified efforts to perform leasing services for unaffiliated third parties. Construction revenue increased by $74,000, to $75,000 for the three months ended March 31, 1997 compared to the three months ended March 31, 1996. Overall construction revenue remained constant but a larger amount related to property-owning partnerships in the quarter ended March 31, 1996 and was eliminated pursuant to the equity method of accounting. Other income for the quarter ended March 31, 1997 consisted of $5,000 of interest. Equity in net loss of uncombined joint ventures decreased $188,000, or 39.6%, to $287,000 from $475,000 for the quarter ended March 31, 1997 compared to the quarter ended March 31, 1996 as follows:
INCREASE PROPERTY (DECREASE) - --------------------------------------------------------------------------------- ----------- 673 First Avenue................................................................. $ (129,000) 470 Park Avenue South............................................................ (65,000) 29 West 35th Street.............................................................. 9,000 ----------- Bar Building..................................................................... (3,000) ----------- ----------- $ (188,000)
46 The decrease in net loss for 673 First Avenue was due primarily to lower interest expense as a result of mortgage loan principal amortization and lower amortization expense as a result of deferred leasing commissions written off during 1995 for a tenant that vacated. The decrease in net loss for 470 Park Avenue South was due primarily to a general reduction in operating expenses. The decrease in net income of uncombined joint ventures for 29 West 35th Street was due primarily to reduced porter wage escalation revenue as a result of new leases with more current base years utilized in the calculation of the escalation. The increase in net income for the Bar Building was due to the acquisition of the Property during September 1996. Operating expenses increased $81,000, or 11.1%, to $814,000 for the three months ended March 31, 1997 compared to the three months ended March 31, 1996. The increase was due primarily to the inclusion of 1414 Avenue of the Americas which was acquired during July 1996, offset by reductions at 70 West 36th Street and the Leasing Corporation. Interest expense increased $124,000 or 56.1%, to $345,000 for the three months ended March 31, 1997 compared to the three months ended March 31, 1996. The increase was due to the inclusion of 1414 Avenue of the Americas offset by the forgiveness of debt at 70 West 36th Street as of December 31, 1996. Depreciation and amortization increased $96,000, or 54.9%, to $271,000 from $175,000 for the quarter ended March 31, 1997 compared to the quarter ended March 31, 1996. The increase was due primarily to the inclusion of 1414 Avenue of the Americas. Real estate taxes increased $125,000, or 105.9% to 243,000 from $$118,000 for the three months ended March 31, 1997 compared to the three months ended March 31, 1996. The increase was due primarily to the inclusion of 1414 Avenue of the Americas. Marketing, general and administrative expenses decreased $183,000, or 17.0%, to $896,000 for the quarter ended March 31, 1997 compared to the quarter ended March 31, 1996. The decrease was primarily due to reduced expenses at the Management and Leasing Corporations. As a result of the foregoing, net income increased $1,609,000 to $1,115,000 from a loss of $494,000 for the quarter ended March 31, 1997 compared to the quarter ended March 31, 1996. COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995 Rental revenue increased $1,783,000, or 73.8%, to $4,199,000 from $2,416,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995. The increase was due primarily to the acquisition of 1414 Avenue of the Americas during July 1996 which had rental revenue of $1,612,000 and increased occupancy plus contractual rent increases amounting to $152,000 at 70 West 36th Street. Escalations and reimbursement revenues increased $293,000, or 38.6%, to $1,051,000 from $758,000 for the year ended December 31, 1995. The acquisition of 1414 Avenue of the Americas accounted for an increase of $428,000 which was offset by a decrease of $166,000 at 70 West 36th Street due to reduced real estate tax escalations and porter wage escalation revenue. New leases with more current base years utilized to calculate the escalations and a reduction in real estate tax expense accounted for the decreased escalation revenue. Management revenues remained substantially unchanged with a slight increase for the year ended December 31, 1996 compared to the year ended December 31, 1995. Leasing commission revenues increased $1,475,000, or 164.4%, to $2,372,000 from $897,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995 due to the addition of 47 several buildings under service contracts and intensified efforts to perform leasing services for unaffiliated third parties. Construction revenue decreased by $132,000, or 56.7%, to $101,000 from $233,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995. Overall construction revenue remained constant but a larger amount related to property-owning partnerships and was eliminated pursuant to the equity method of accounting. Other income for the year ended December 31, 1996 was $123,000 which consisted of miscellaneous consulting fees and interest. Equity in net loss of uncombined joint ventures decreased $506,000 or 26.4% to $1,408,000 from $1,914,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995 as follows:
INCREASE PROPERTY (DECREASE) - --------------------------------------------------------------------------------- ----------- 673 First Avenue................................................................. $ (392,000) 470 Park Avenue South............................................................ (130,000) 29 West 35th Street.............................................................. 22,000 ----------- Bar Building..................................................................... (6,000) ----------- ----------- $ (506,000)
The decrease in net loss for 673 First Avenue was due primarily to lower interest expense as a result of mortgage loan principal amortization and lower amortization expense as a result of deferred leasing commissions written off during 1995 for a tenant that vacated. The decrease in net loss for 470 Park Avenue South was due primarily to a reduction in real estate tax expense as a result of a decrease in assessed valuation. The decrease in net income for 29 West 35th Street was due primarily to reduced rental revenue as a result of a vacancy. The increase in net income for the Bar Building was due to the acquisition of the Property during October 1996. Operating expenses increased $691,000, or 27.6%, to $3,197,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995 due substantially to the inclusion of 1414 Avenue of the Americas which was acquired during July 1996. Interest expense increased $146,000 or 12.0%, to $1,357,000 from $1,212,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995. The inclusion of 1414 Avenue of the Americas accounted for an increase of $446,000 which was offset by a decrease of $300,000 for 70 West 36th Street due to refinancing at a lower interest rate. Depreciation and amortization increased $200,000, or 25.9%, to $975,000 from $775,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995. The increase was due primarily to the inclusion of 1414 Avenue of the Americas. Real estate taxes increased $207,000 or 41.7%, to $703,461 from $497,000 for the year ended December 31, 1996 compared to year ended December 31, 1995. The increase was due to the inclusion of $290,000 for 1414 Avenue of the Americas offset by a decrease of $83,000 for 70 West 36th Street which resulted from a reduction in property assessment. 48 Marketing, general and administrative expenses increased $197,000, or 6.5%, to $3,250,000 from $3,053,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995, due primarily to staff increases for the Leasing Corporation. As a result of the foregoing, net loss decreased $2,682,000, or 79.1%, to $708,000 from $3,390,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995. COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994 Rental revenue decreased by $189,000, or 7.2%, to $2,416,000 from $2,605,000 for the year ended December 31, 1995 compared to the year ended December 31, 1994 due to several vacancies at 70 West 36th Street. Escalation and reimbursed revenues decreased $44,000, or 5.4%, to $758,000 from $802,000 for the year ended December 31, 1995 compared to the year ended December 31, 1994 due primarily to a decrease in electric and sundry charges at 70 West 36th Street. Management revenues increased $300,000, or 15.3%, to $2,260,000 from $1,960,000 for the year ended December 31, 1995 as compared to the year ended December 31, 1994 due to an increase in unaffiliated third party management assignments. Leasing commission revenue remained consistent with a slight increase for the year ended December 31, 1995 as compared to the year ended December 31, 1994. Construction revenue decreased $111,000, or 32.2%, to $233,000 from $344,000 for the year ended December 31, 1995 as compared to the year ended December 31, 1994 due to a decrease in tenant installation work at non-affiliated third party buildings. Equity in net loss of uncombined joint ventures increased by $491,000, or 34.5%, to $1,914,000 from $1,423,000 for the year ended December 31, 1995 as compared to the year ended December 31, 1994 as follows:
INCREASE PROPERTY (DECREASE) - --------------------------------------------------------------------------------- ----------- 673 First Avenue................................................................. $ 399,000 470 Park Avenue South............................................................ 106,000 29 West 35th Street.............................................................. (14,000) ----------- $ 491,000 ----------- -----------
The increase in net loss for 673 First Avenue was due primarily to reduced revenue as a result of a vacancy during 1995 and the write off of related deferred leasing commissions. The increase in net loss for 470 Park Avenue South was due primarily to increased miscellaneous income in 1994 as result of a tenant buying out of its lease. The increase in net income for 29 West 35th Street was due primarily to reduced operating expenses. Operating expenses increased $470,000, or 24.7%, to $2,505,000 from $2,009,000 for the year ended December 31, 1995 compared to the year ended December 31, 1994 due primarily to staff increases in the corporations which provide management, construction and leasing services. Interest expense decreased $344,000 or 22.1%, to $1,212,000 from $1,555,000 for the year ended December 31, 1995 compared to the year ended December 31, 1994. The decrease was due to a loan restructuring at 70 West 36th Street. Depreciation and amortization decreased $157,000, or 16.8%, to $775,000 from $931,000 for the year ended December 31, 1995 compared to the year ended December 31, 1994 due to the write off of deferred 49 leasing commissions and tenant installation work related to vacated tenants during 1994 at 70 West 36th Street. Real estate taxes decreased $46,000, or 8.5%, to $497,000 from $543,000 for the year ended December 31, 1995 as compared to the year ended December 31, 1994 due to a decrease in assessed valuation for 70 West 36th Street. Marketing, general and administrative expenses increased $701,000, or 29.8%, to $3,053,000 from $2,351,000 for the year ended December 31, 1995 compared to the year ended December 31, 1994. The increase was due to additional staff and other expense increases, necessitated by increased business, for the corporations which provide management construction and leasing services. As a result of the foregoing, net loss increased $1,178,000, or 53.2%, to $3,390,000 from $2,212,000 for the year ended December 31, 1995 compared to the year ended December 31, 1994. PRO FORMA OPERATING RESULTS THREE MONTHS ENDED MARCH 31, 1997 On a pro forma basis, after giving effect to the Offering, income before minority interest would have been $3,768,000 for the quarter ended March 31, 1997, representing an increase of $2,653,000 over the historical combined income before minority interest for the same period. The increase is accounted for as follows: INCREASES TO INCOME: Decrease in interest expense due to mortgage loans repaid or forgiven...................................................... $1,319,000 Additional income due to the acquisition of 1372 Broadway....... 2,505,000 Additional income due to the inclusion of 1140 Avenue of the Americas...................................................... 392,000 Straight line rent adjustments related to the acquisition of other partners' interests..................................... 188,000 Net increase in depreciation and amortization due to acquisition other partners' interests acquisition of new debt and repayment or forgiveness of mortgage loans.................... 45,000 DECREASES TO INCOME: Interest expense related to new mortgage loans.................. (289,000) Additional general and administrative expenses associated with a public company................................................ (257,000) Other partners share of net losses for properties historically accounted for under the equity method......................... (98,000) Elimination of the Service Corporations' income under the equity method of accounting.......................................... (1,127,000) Straight line adjustment to 673 First Avenue net lease due to acquisition of non-continuing partners' interest.............. (25,000) ---------- $2,653,000 ---------- ----------
50 YEAR ENDED DECEMBER 31, 1996 On a pro forma basis, after giving effect to the Offering, income before minority interest would have been $10,230,000 for the year ended December 31, 1996, representing an increase of $10,938,000 over the historical combined income before minority interest and extraordinary income on debt forgiveness for the same period. The increase is accounted for as follows: INCREASES TO INCOME: Decrease in interest expense due to mortgage loans repaid or forgiven..................................................... $4,699,000 Additional income due to the acquisition of 1372 Broadway...... 5,544,000 Additional income due to the inclusion of 1140 Avenue of the Americas..................................................... 1,699,000 Additional net income due to the inclusion of the Bar Building for the full year............................................ 1,132,000 Straight line rent adjustments related to the acquisition of other partners' interests.................................... 787,000 Net increase in depreciation and amortization due to acquisition other partners' interests, acquisition of new debt and repayment or forgiveness of mortgage loans.......... (68,000) DECREASES TO INCOME: Interest expense related to new mortgage loans................. (1,155,000) Additional general and administrative expenses associated with a public company............................................. (1,027,000) Other partners' share of net losses for properties historically accounted for under the equity method........................ (425,000) Elimination of the Service Corporations' income under the equity method of accounting.................................. (284,000) Straight line adjustment to 673 First Avenue net lease due to acquisition of non-continuing partners' interest............. (100,000) ---------- $10,938,000 ---------- ----------
LIQUIDITY AND CAPITAL RESOURCES The SL Green Predecessor historically relied on fixed and floating rate mortgage financing plus the use of its capital for the acquisition, redevelopment and renovation of the Properties. The proceeds from the Offering as well as $14 million in new mortgage loans, which will be secured by 1140 Avenue of the Americas, will be utilized to repay existing mortgage loans, acquire properties, pay transaction expenses and provide working capital. See "Use of Proceeds". The mortgage loans currently secured by the Properties, which will be consolidated in the financial statements of the Company, will be reduced from $91.4 million to $33.2 million as a result of the repayment and cancellation of certain mortgage loans. Total mortgage loans including new mortgage loans will amount to $46.5 million as a result of the Formation Transactions. All mortgage loans assigned to the Company by the Properties have fixed interest rates ranging from 8.25% to 9.0% and it is anticipated that the new mortgage loan will also bear interest at fixed rates. At maturity, the principal balance of the loan encumbering 673 First Avenue will be $2 million and the principal balance of the loan encumbering 470 Park Avenue South will be $8.3 million. Subsequent to the Formation Transactions the mortgage loans would represent approximately 19.4% of the Company's market capitalization based on an estimated total market capitalization of $240 million. The Company is currently negotiating with several lenders for the Credit Facility, which the Company expects to be in place by the completion of the Offering although there is no assurance that this will be the case. The Credit Facility will be utilized to facilitate acquisitions and fund associated renovations, tenant 51 improvements and leasing commissions. After paying down mortgage debt as well as expenses of the transaction, the Company expects to have working capital of approximately $7.6 million, which will be used to fund anticipated capital improvements on the Bar Building and general corporate purposes. The Company estimates that for the 12 months ending March 31, 1998, it will incur approximately $2.5 million of expenses attributable to non-incremental revenue generating capital expenditures which includes $1.3 million for the Acquisition Properties, $823,000 for the Bar Building and $419,000 for the balance of the Core Portfolio. The Company expects to make distributions to its stockholders primarily based on its distribution from the Operating Partnership. The Operating Partnership income will be derived primarily from lease revenue from the Properties and, to a limited extent, from fees generated by the Service Corporations. The Company also expects to acquire properties in the future. Such acquisitions may require substantial capital leasing of a property. The Company expects that a portion of such costs will be funded from draws under the Credit Facility, to the extent the Credit Facility is obtained, from additional borrowings secured by the target property and from future issuances of equity. In the long term, the Company expects that capital needs will be met through a combination of net cash provided by operations, borrowings and additional equity issuances. CASH FLOWS COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 TO THREE MONTHS ENDED MARCH 31, 1996 Net cash provided by operating activities increased $596,000 to $769,000 from $173,000 for the quarter ended March 31, 1997 compared to the quarter ended March 31, 1996. The increase was due primarily to the acquisition of 1414 Avenue of the Americas, an increase in leasing commission income and a decrease in the equity in net losses of uncombined joint ventures. Net cash used in investing activities increased $53,000 to $112,000 from $59,000 for the quarter ended March 31, 1997 compared to the quarter ended March 31, 1996. The increase was due primarily to the acquisition of 1414 Avenue of the Americas. Net cash used in financing activities increased $164,000 to $339,000 from $175,000 for the quarter ended March 31, 1997 compared to the quarter ended March 31, 1996. The increase was due primarily to the acquisition of 1414 Avenue of the Americas, the refinancing of the mortgage on 70 West 36th Street and net cash distribution to owners. COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995. Net cash provided by operating activities increased $506,000 to $272,000 from a deficit of $234,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995. The increase was due primarily to the acquisition of 1414 Avenue of the Americas, an increase in leasing commission income and a decrease in the equity in net losses of uncombined joint ventures. Net cash used in inventory activities increased $11,943,000 to $12,375,000 from $432,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995. The increase was due primarily to the acquisition of 1414 Avenue of the Americas plus contributions to the partnerships that own 470 Park Avenue South and the Bar Building. Net cash provided by financing activities increased $11,987,000 to $11,960,000 form $63,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995. The increase was due primarily to the acquisition of 1414 Avenue of the Americas, the refinancing of the mortgage on 70 West 36th Street and net cash contribution from owners. COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994. Net cash used in operating activities increased by $1,173,000 to a deficit of $234,000 from a positive cash flow of $939,000 for the year ended December 31, 1995 compared to the year ended December 31, 1994. The increase was due primarily to an increase in the share of net loss of uncombined joint ventures, operating expense increases related to the Service Corporations and additional marketing, general and 52 administrative expenses for the Service Corporations. Net cash used in investing activities decreased $135,000 to $432,000 from $567,000 for the year ended December 31, 1995 compared to the year ended December 31, 1994. The decrease was due primarily to reduced investments in building improvements and reduced contributions to investee partnerships. Cash provided by financing activities decreased $115,000 to $63,000 from $178,000 due to reduced contributions from owners. FUNDS FROM OPERATIONS The Company generally considers Funds from Operations an appropriate measure of liquidity of an equity REIT because industry analysts have accepted it as a performance measure of equity REITs. "Funds from Operations" as defined by NAREIT means net income (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. The Company's Funds from Operations are not comparable to Funds from Operatins reported by other REITs that do not define the term using the current NAREIT definition or that interpret the current NAREIT definition differently than does the Company. The Company believes that in order to facilitate a clear understanding of the combined historical operating results of the SL Green Predecessor and the Company, Funds from Operatios should be examined in conjunction with net income as presented in the audited combined financial statements and information included elsewhere in this Prospectus. Funds from Operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity or ability to make distributions. On a pro forma basis after giving effect to the Offering, Funds from Operations for the three months ended March 31, 1997 and for the year ended December 31, 1996, respectively, are as follows:
PRO FORMA --------------------------- THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, 1997 1996 ------------- ------------ Net income before minority interest and extraordinary item...... $ 3,768 $ 10,230 Add: Depreciation and amortization................................. 1,509 6,248 Amortization of deferred financing costs and depreciation of non-rental real estate assets............................... (38) (196) ------ ------------ Funds from Operations........................................... $ 5,239 $ 16,282 ------ ------------ ------ ------------
INFLATION Substantially all of the office leases provide for separate real estate tax and operating expense escalations over a base amount. In addition, many of the leases provide for fixed base rent increases or indexed escalations. The Company believes that inflationary increases may be at least partially offset by the contractual rent increases described above. 53 MARKET OVERVIEW UNLESS INDICATED OTHERWISE, INFORMATION CONTAINED HEREIN CONCERNING THE NEW YORK METROPOLITAN ECONOMY AND THE MANHATTAN OFFICE MARKET IS DERIVED FROM A REPORT COMMISSIONED BY THE COMPANY AND PREPARED BY THE ROSEN CONSULTING GROUP, A NATIONALLY KNOWN REAL ESTATE CONSULTING COMPANY, AND IS INCLUDED HEREIN (THE "ROSEN MARKET STUDY"), WITH THE CONSENT OF THE ROSEN CONSULTING GROUP. The Company believes that the strength of the New York metropolitan economy and the current supply/demand fundamentals in the Manhattan office market provide an attractive environment for acquiring, owning and operating Class B office properties. NEW YORK ECONOMY New York City is a leading international city with a large, dynamic and diverse economy. According to the U.S. Bureau of Economic Analysis, as of July 1994, the economy of the New York consolidated metropolitan statistical area ("CMSA") was larger than the economies of the next two largest U.S. CMSAs combined (Los Angeles and Chicago), and larger than the economy of any individual state except California, based on aggregate personal income (which the Company believes is a good proxy for overall economic output). Strong growth of the national economy has benefited New York City, causing the New York metropolitan area (including Bronx, Kings, New York, Putnam, Queens, Richmond, Rockland and Westchester counties) economy to improve significantly in recent years. Private sector employment gained an average of almost 44,000 jobs per year between 1994 and 1996 for an average annual growth rate of 1.4%; between March of 1996 and 1997, private sector employment growth was an even stronger 1.9%, which is the strongest growth rate in more than ten years. In July of 1996, Inc. magazine named New York City as the "Best Place to Do Business," stating that urban, compact areas promote interaction among companies, suppliers and customers. With its unique appeal, New York City is headquarters to many of the leading corporations and service firms in the U.S., including: - more Fortune 500 companies (47) than any other U.S. city; - three of the four largest U.S. commercial banks (400 international banks have offices in New York City--more than any other city in the world); - 23 of the 25 largest U.S. securities firms; - four of the 10 largest U.S. money managers; - 27 of the 100 largest U.S. law firms (64 of the 100 largest U.S. law firms have offices in New York City); - four of the "Big Six" accounting firms; and - four of the largest U.S. entertainment/media conglomerates. New York is also a world leader in the advertising industry and contains a large base of nonprofit organizations. It also has the largest consulate community in the world, contributing to its position as an international center of business and politics. In addition to its diverse base of large businesses, Manhattan also has a large base of small companies. The New York City Office of the Comptroller reports that small businesses (which are defined as businesses with fewer than 500 employees) comprise approximately 99.7% of all businesses in New York City and employ approximately 70.7% of the private-sector work force. In the three years between 1994 and 1996, during which period some 132,000 private sector jobs were added in the New York metropolitan area (an average of approximately 44,000 each year), the percentage of jobs added from small business has 54 grown increasingly more significant, especially in New York City, where small businesses added approximately 69,000 jobs during 1994 and 1995 and approximately 22,000 jobs between the third quarters of 1995 and 1996. The single fastest-growing employment sector in the New York metropolitan economy is the services sector, which grew at a rate of 3.4% during the year ended in March of 1997. With more than 1.4 million jobs, the services sector currently represents 37% of the New York metropolitan area's total employment base and 44% of its private sector employment base. Important components of the services sector are business services, legal services, engineering and management services and membership organizations (including approximately 20,000 nonprofit organizations which are based in New York City). One of the largest components of the services industry is business services, which supplied approximately 285,000 jobs as of March 1997, representing 19.9% of total services employment. Between 1992 and 1996, growth in business services employment averaged 4% per year, and between March 1996 and March 1997, business services employment grew 6.1%. Fueling the growth in the business services sector are the advertising industry, audio recording, software industries and agencies providing temporary workers. One very active sector of business services is the new media industry that is centered south of 41st Street in what is known as midtown south's "Silicon Alley." The companies that work in this industry include entertainment software, online/Internet services, CD-ROM title developers, and web site designers. Roughly 1,250 firms in Manhattan belong to the new media industry, and employment growth in this sector is estimated to be 30% per year through 1998. The trade sector is the second largest and fastest growing part of the metropolitan economy, with an employment gain of 8,800 jobs during the 12 months ended March 31, 1997, representing a 1.3% annual growth rate. Approximately 68% of the metropolitan area's trade jobs are in the retail sector, where growth was an even stronger 2.2% during the same period. The retail industry has benefited from improved city services, reduced crime and an increase in the number of visitors and their spending volume. Part of New York City's appeal to employers is a highly educated work-force. Over 40% of New York County's residents over the age of 25 have received a college degree and nearly half of those residents have received a graduate or professional degree, rates that are well above the national average. In addition, with a population of approximately 7.4 million, including approximately 169,000 households that have an annual income in excess of $150,000, New York City also provides a large base of potential consumers with significant disposable income, which is of particular appeal to businesses providing goods and services. Increased spending by local residents combined with a higher level of visitor spending caused retail sales growth in New York City to average 3.2% annually during the period January 1, 1994 to December 31, 1996. New York City is an international financial and cultural capital that, in addition to housing the United Nations and numerous foreign missions, attracts tourism, is a center for international investment and a favored North American base for many multinational corporations headquartered overseas. The lower cost of office rents when compared internationally with other major cities is a competitive advantage in attracting such overseas companies to New York City. Midtown Manhattan ranks 13th among major business centers around the world in terms of office rental rates, after such cities as Tokyo, London, Paris, Hong Kong and Singapore, while downtown Manhattan ranked 37th. New York City is the consummate "24-hour city," featuring a wide variety of restaurants, entertainment and cultural offerings, such as Broadway theater and productions at Carnegie Hall and Lincoln Center. In addition, many of the world's finest museums, including The Metropolitan Museum of Art, The Museum of Modern Art, The Guggenheim Museum, The Whitney Museum and The Museum of Natural History, are located in New York City. New York City is also home to major educational institutions, including Columbia University, Fordham University, New York University and Rockefeller University. The quality of life in New York City also has improved with the implementation of various public/ private ventures and government initiatives. For example, Business Improvement Districts ("BIDs"), which 55 are public/private ventures that provide security, sanitation and other services within their boundaries, operate in the Grand Central Station, Penn Station and Times Square areas and in thirty-three additional areas within New York City. In addition, crime in New York City has declined. Preliminary estimates for 1996 show that New York City ranked 159th out of the 198 largest U.S. cities in terms of total crimes, lower than such cities as Atlanta (1), Miami (8), Phoenix (42), Milwaukee (83) and Philadelphia (114). According to the New York City Police Department, New York City's crime rate decreased 16% during 1996, and the seven felony categories have declined a cumulative 39% since 1993 (a greater decrease than any other large U.S. city during the last three years). The New York City government is "reinventing" itself in an effort to streamline its operations and attract and retain businesses. For example, the New York Economic Development Council has been actively involved in encouraging businesses to remain in New York City. New York City also has recently reduced or eliminated numerous taxes, including the real property transfer tax, the unincorporated businesses tax, the commercial rent tax, the hotel occupancy tax and the sidewalk vault tax. New York City also was influential in eliminating the New York State real property gains tax. Even with the reduction or elimination of numerous taxes, New York City estimates a budget surplus for its fiscal year ending June 30, 1997 of approximately $856 million, as a result of savings in operating expenses and improvements in the New York City economy. With its dynamic and diverse base of businesses, New York City is poised to continue its course of steady growth and economic improvement. Private sector job creation in the New York metropolitan area is anticipated to continue at an average rate of 1.3% per annum, or approximately 42,000 private sector jobs per annum through 1998, and continue to increase at approximately 1.0% annually through 2001. MANHATTAN OFFICE MARKET OVERVIEW. The Company believes that current supply/demand fundamentals in the Manhattan office market provide an attractive environment for acquiring, owning and operating Class B Manhattan office properties. Specifically, the Midtown Markets have the following favorable characteristics: (i) the Class A and Class B sectors of the Midtown Markets, collectively, have experienced four consecutive years of positive net absorption and declining vacancy rates; (ii) there have been virtually no new additions to supply in the Midtown Markets since 1992; and (iii) significant new office development is unlikely at the current time because there are relatively few sites available for construction, the lead time required for construction typically exceeds three years and new construction generally is not economically feasible given current market rental rates. The Manhattan office market consists primarily of midtown, midtown south and downtown submarkets. According to Rosen Consulting Group, the Midtown Markets extends from the north side of 32nd Street to 62nd Street; midtown south is defined as Canal Street to the south side of 32nd Street; and downtown is defined as Battery to Canal Street. In each case the submarkets are defined from the East River on the east to the Hudson River on the west. As referred to herein, the Midtown Markets collectively consist of midtown and midtown south. 56 SIZE OF MARKET. The Manhattan office market, with an overall stock of approximately 378 million square feet, is the largest office market in the U.S and is larger than the next six largest U.S. central business district office markets combined (Chicago, Washington, D.C., Boston, San Francisco, Philadelphia and Los Angeles). The following chart sets forth the size of the Manhattan office market and the size of certain other U.S. office markets, as of December 31, 1996: 1996 COMPARATIVE OFFICE STOCK
STOCK SQUARE FEET RANK METROPOLITAN STATISTICAL AREA (000) - ----------- ------------------------------------------------ --------- 1......... New York, NY (includes all of Manhattan) 378,000 2......... Chicago, IL 118,820 3......... Washington, DC 78,801 4......... Boston, MA 47,390 5......... San Francisco, CA 39,940 6......... Philadelphia, PA-NJ 38,525 7......... Los Angeles-Long Beach, CA 36,563 8......... Houston, TX 36,410 9......... Dallas, TX 30,580 10........ Pittsburgh, PA 29,390
Within Manhattan, 46% of the office space is classified as Class B space; almost half of the Class B space is located in midtown, and approximately one-fourth of the Class B space is located in each of midtown south and downtown. The following table sets forth the relative sizes of the Class A and Class B office markets and the rents and vacancy rates as of March 31, 1997 existing in such markets: MANHATTAN OFFICE MARKET OVERVIEW
% OF CLASS A 1ST QUARTER 1997 1ST QUARTER 1997 AND CLASS B STOCK VACANCY RATE RENT/SQUARE FEET ------------------------ ------------------------ -------------------- CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B ----------- ----------- ----------- ----------- --------- --------- Midtown Markets (1)..................... 70.2% 73.9% 10.6% 11.7% $ 35.49 $ 23.88 Midtown................................. 67.9% 48.3% 10.4% 11.6% $ 35.93 $ 25.87 Midtown South........................... 2.4% 25.7% 17.2% 11.9% $ 27.84 $ 20.21 Downtown................................ 29.8% 26.1% 15.2% 18.0% $ 28.54 $ 21.94 Total................................... 54.3%(2) 45.7%(2) 12.0% 13.3% $ 32.87 $ 23.20
- ------------------------ (1) Consists of midtown and midtown south submarkets. (2) Represents proportion of total Class A stock and Class B stock in the Manhattan office market. HISTORICAL PERSPECTIVE. The Midtown Markets experienced rapid growth both in demand for, and supply of, office space during the 1980s. A wave of new construction peaked in the late 1980s and, between 1985 and 1992, 39 buildings containing approximately 20.3 million square feet of space were built. However, since 1992, there has been very little new construction in the Midtown Markets. 57 NEW CONTRUCTION OF OFFICE SPACE MIDTOWN MARKETS [Bar chart showing new construction from 1980 through the projection for 1998] Source: Real Estate Board of New York (historical); Rosen Consulting Group (projections). In the late 1980s and early 1990s, as much of the new supply of office space was being delivered, the demand for space in the Midtown Markets fell off abruptly as a result of the general downturn in the economy and subsequent corporate downsizings. As a result of the increase in inventory and the significant decrease in employment in Manhattan, Class A vacancy rates in the Midtown Markets increased into the double digits, reaching 17.8% in 1991 and Class B vacancy rates in the Midtown Markets increased to 17.3% in 1992. In the early 1990s, however, conditions began to improve in the Midtown Markets, as a result of the following factors: new jobs were created as the national and New York metropolitan economies recovered from their downturns; existing midtown Manhattan businesses expanded, resulting in an increased need for office space; and some traditional downtown Manhattan tenants, such as banks and securities firms, moved to the Midtown Markets in search of greater amenities and improved access to transportation. LIMITED SUPPLY OF NEW OFFICE SPACE. The Company expects the supply of office space in the Midtown Markets to remain relatively stable for the foreseeable future because there are relatively few sites available for construction, the lead time required for construction typically exceeds three years and new construction generally is not economically feasible at current market rental rates. Virtually no new construction of office space in the Midtown Markets is anticipated in the near term, except one major Class A development, containing approximately 1.5 million square feet, scheduled to be completed in 1999, which has substantial grandfathered tax benefits. (The Company does not believe that this property will have a material impact on the market because it represents less than 1% of the total Class A midtown office space and is already substantially preleased to two tenants.) In the absence of tax incentives, the Company believes that rents generally would have to increase significantly to justify the cost of new construction. Assuming development costs of approximately $358 per square foot (as estimated by Rosen 58 Consulting Group), a market base rent in excess of $55 per square foot would be needed to make construction economically viable. This suggests that, in order to justify new construction, market base rents (not taking into account any tax benefits that may apply) generally would have to increase to at least 42% more than current asking rents for Class A office space in midtown Manhattan (as estimated by Rosen Consulting Group). INCREASING DEMAND FOR OFFICE SPACE IN THE MIDTOWN MARKETS. In addition, net absorption as calculated by Rosen Consulting Group ("Net Absorption") of Class B office space in the Midtown Markets has been positive since 1992 and surged in 1994, 1995 and 1996, reaching 3.0 million, 1.5 million and 1.7 million square feet, respectively. Net Absorption was slightly negative at 250,000 square feet during the first quarter of 1997, but Net Absorption in the Midtown Markets is forecasted to reach 2.0 million square feet for all of 1997. An average of 28,400 office space-consuming jobs are projected to be created annually from 1997 until 2001, leading to an estimated average annual Net Absorption of Class B office space in the Midtown Markets of 1.4 million square feet in 1998 and 1999. NET ABSORPTION OF CLASS B OFFICE SPACE MIDTOWN MARKETS EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
SQUARE FEET (MILLIONS) 1993 1.1 1994 3.0 1995 1.5 1996 1.7 1997 proj. 2.0 1998 proj. 1.5 1999 proj. 1.3 2000 proj. 1.0
As a result of sustained positive Net Absorption coupled with virtually no new construction since 1992, the Class A office vacancy rate in the Midtown Markets had fallen to 10.6% as of March 31, 1997 from its 1990s high of 17.8% in 1991 and the Class B office vacancy rate in the Midtown Markets had fallen to 11.7% from its 1990s high of 17.3% in 1992. As a result of the projected economic strength and private sector job growth, combined with a lack of projected new construction through 1998, Rosen Consulting Group projects that the Class A vacancy rate in the midtown markets will fall to 8.2% in 1998 and further to 6.4% in 2001; similarly, Rosen Consulting Group projects that the Class B vacancy rate in the Midtown Markets will fall to 8.8% in 1998 and further to 6.0% in 2001. The Company believes the demand for Class B space will increase as a result of the expectation of the following factors: (i) growth in the office space demands of small businesses, which generally choose to locate in office space with lower occupancy costs, (ii) the continued desire of larger corporations to reduce office occupancy costs and (iii) growth in key office-consuming sectors such as finance, securities, legal services and accounting which would reduce the availability of Class A office space. 59 The following chart shows the history and projections of vacancy rates and asking rents for Class B office space in the Midtown Markets. According to Rosen Consulting Group, rent growth is inversely related to vacancy rates. When market conditions tighten and the market vacancy rate falls below the optional vacancy rate, rent growth accelerates. The optimal vacancy rate is the vacancy rate at which neither excess supply nor excess demand exists, and it is determined by examining the historical relationship between vacancy rates and rent growth. As shown in the chart below, the Class B vacancy rate in the Midtown Markets rose to its highest level in 1992, at which time average asking rents continued to decline to their lowest levels in 1993. Since 1992, the Class B vacancy rate has decreased, and as the actual vacancy rate has approached the optimal vacancy rate, average asking rents stabilized and began to rise in 1995. The chart further shows that as vacancy rates decline below the optimal rate of 10% (as is projected to occur over the next four years), projected asking rents begin to increase at an accelerated rate over current levels. In light of the supply and demand fundamentals outlined above and the estimate of Class A base rental rates required to justify new office construction (in excess of $55 per square foot), the Company believes the estimate in the chart below of Class B asking rents in the $30 per square foot range at a projected vacancy level of 6% to be reasonable. However, conditions in the Midtown Markets are subject to change and there can be no assurance that any projections will approximate actual results. See "Risk Factors--Dependence on Midtown Markets Due to Limited Geographic Diversification." OFFICE VACANCY RATES AND ASKING RENTS MIDTOWN MARKETS CLASS B [Bar chart showing vacancy rates and asking rents for 1991 through the projection for 2001] POSITIVE OUTLOOK FOR EFFECTIVE RENTAL RATES. As discussed above, the Company anticipates continued growth in the demand for Class A and Class B office space in the Midtown Markets and relatively little new supply of such space being delivered over the next several years. Accordingly, the Company believes that vacancy rates among Class A and Class B properties in the Midtown Markets should continue to decrease, which the Company believes should result in increased rental rates and decreased re-leasing costs in well-managed, well-located Class A and Class B office properties. However, there can be no assurance that any of these expectations will be met. 60 THE PROPERTIES THE PORTFOLIO GENERAL. Upon the completion of the Offering, the Company will own or have contracted to acquire interests in eight Class B office Properties located in midtown Manhattan which contain approximately 1.9 million rentable square feet. Of these Properties, six office properties encompassing 1.2 million rentable square feet are currently owned and managed by SL Green and two office properties encompassing approximately 700,000 rentable square feet will be acquired on or after completion of the Offering. See "Structure and Formation of the Company--Formation Transactions." Upon completion of the Offering, the Company will effectively own 100% of the economic interest in each of the Properties. Certain of the Properties include at least a small amount of retail space on the lower floors, as well as basement/storage space. One Property (673 First Avenue) includes an underground parking garage. The Company believes that each of the Properties is adequately covered by property and liability insurance. In addition, upon completion of the Offering, the Company expects to own an option to acquire 50 West 23rd Street, a 333,000 rentable square foot Class B office building in midtown Manhattan. See "--The Option Property" below. As noted above under "Market Overview," the Manhattan office market is predominantly segregated into two distinct categories: Class A and Class B. The Class B category generally includes office properties that are more than 25 years old, in good physical condition, attract high-quality tenants and are situated in desirable locations in Manhattan. Class B properties can be distinguished from Class A properties in that Class A properties are generally newer properties with higher finishes and obtain the highest rental rates in their markets. The following table sets forth certain information with respect to each of the Properties as of March 31, 1997:
PERCENTAGE PERCENTAGE OF OF APPROXIMATE PORTFOLIO PORTFOLIO YEAR RENTABLE RENTABLE ANNUAL ANNUAL BUILT/ SQUARE SQUARE PERCENT ESCALATED ESCALATED RENOVATED SUBMARKET FEET FEET LEASED RENT(1) RENT ---------- ---------------- ------------ ------------- ----------- ----------- ------------- CORE PORTFOLIO - -------------------- 673 First Ave....... 1928/1990 Grand Central 422,000 22.4% 100% $10,692,472 25.2% South 470 Park Ave. 1912/1994 Park Avenue 260,000(4) 13.8 95 5,568,931 13.1 S.(4)............. South/Flatiron Bar Building (5).... 1922/1985 Rockefeller 165,000(5) 8.8 81(5) 3,937,435 9.3 Center 70 W. 36th St....... 1923/1994 Garment 150,000 8.0 96 2,752,439 6.5 1414 Ave. of Ams.... 1923/1990 Rockefeller 111,000 5.9 98 3,378,804 8.0 Center 29 W. 35th St....... 1911/1985 Garment 78,000 4.1 92 1,433,221 3.4 ------------ ----- --- ----------- ----- 1,186,000 63.0 95 27,763,302 65.5 ACQUISITION PROPERTIES - -------------------- 1372 Broadway....... 1914/1985 Garment 508,000 26.9 85 9,552,088 22.6 1140 Ave. of Ams.... 1926/1951 Rockfeller 191,000 10.1 98 5,035,514 11.9 Center ------------ ----- --- ----------- ----- Total/Weighted 1,885,000(6) 100.0% 92.5% $42,350,904 100.0% Average........... ------------ ----- --- ----------- ----- ------------ ----- --- ----------- ----- ANNUAL ANNUAL NET ESCALATED EFFECTIVE RENT RENT PER PER NUMBER LEASED LEASED OF SQUARE SQUARE LEASES FOOT(2) FOOT(3) ----------- ----------- ----------- CORE PORTFOLIO - -------------------- 673 First Ave....... 16 $ 25.33 $ 21.79 470 Park Ave. 25 22.61 19.57 S.(4)............. Bar Building (5).... 52 29.37 26.09 70 W. 36th St....... 39 19.14 15.94 1414 Ave. of Ams.... 31 31.01 31.04 29 W. 35th St....... 8 20.09 16.20 --- ----------- ----------- 171 24.93 21.60 ACQUISITION PROPERTIES - -------------------- 1372 Broadway....... 31 22.21 21.35 1140 Ave. of Ams.... 40 26.93 24.92 --- ----------- ----------- Total/Weighted 242 $ 24.29 $ 28.03 Average........... --- ----------- ----------- --- ----------- -----------
- ---------------------------------- (1) As used throughout this Prospectus, Annual Escalated Rent represents the annualized monthly base rent in effect as of March 31, 1997 (after giving effect to any contractual increases in monthly base rent that have occurred up to such date) including annualized monthly tenant pass-throughs of operating and other expenses (but excluding tenant electricity costs) under each lease executed as of March 31, (FOOTNOTES CONTINUED ON FOLLOWING PAGE) 61 (FOOTNOTES CONTINUED FROM PRECEDING PAGE) 1997, or, if such monthly rent has been reduced by a temporary rent concession, the monthly rent that would have been in effect at such date in the absence of such concession. (2) Annual Escalated Rent Per Leased Square Foot, as used throughout this Prospectus, represents Annual Escalated Rent, as described in footnote (1) above, presented on a per leased square foot basis. (3) As used throughout this Prospectus, Annual Net Effective Rent Per Leased Square Foot represents (a) for leases in effect at the time an interest in the relevant property was first acquired by SL Green, the remaining lease payments under the lease divided by the number of months remaining under the lease multiplied by 12 and (b) for leases entered into after an interest in the relevant property was first acquired by SL Green and for leases at the Acquisition Properties, all lease payments under the lease divided by the number of months in the lease multiplied by 12, and, in the case of both (a) and (b), adjusted for tenant improvement costs and leasing commissions, if any, paid or payable by SL Green and presented on a per leased square foot basis. In certain cases, Annual Net Effective Rent Per Leased Square Foot may exceed Annual Escalated Rent Per Leased Square Foot as a result of the provision for future contractual increases in rental payments in the Annual Net Effective Rent Per Leased Square Foot data. (4) 470 Park Avenue South is comprised of two buildings, 468 Park Avenue South (a 17-story office building) and 470 Park Avenue South (a 12-story office building). (5) SL Green first acquired an interest in the Bar Building in October 1996. SL Green has commenced an aggressive leasing program at the Property. The Bar Building is comprised of two buildings, 36 West 44th Street (a 14-story building) and 35 West 43rd Street (a four-story building). (6) Includes approximately 1,718,000 square feet of rentable office space, 137,000 square feet of rentable retail space and 30,000 square feet of garage space. HISTORICAL OCCUPANCY. The Properties in the Core Portfolio historically have achieved consistently higher occupancy rates in comparison to the overall Class B Midtown Markets, as shown in the following table:
OCCUPANCY RATE OF CLASS B PERCENT OFFICE PROPERTIES LEASED AT THE IN THE MIDTOWN PROPERTIES (1) MARKETS (2) ----------------- ----------------------------- March 31, 1997...................................... 95% 88% December 31, 1996................................... 95 89 December 31, 1995................................... 95 87 December 31, 1994................................... 98 86 December 31, 1993................................... 96 84 December 31, 1992................................... 93 83
- ------------------------ (1) Includes space for leases that were executed as of the relevant date in Properties owned by SL Green as of that date. (2) Includes vacant space available for direct lease, but does not include vacant space available for sublease; including vacant space available for sublease would reduce the occupancy rate as of each date shown. Sources: RELocate, Rosen Consulting Group. LEASE EXPIRATIONS. Leases at the Properties, as at many other Manhattan office properties, typically extend for a term of ten or more years, compared to typical lease terms of 5-10 years in other large U.S. office markets. From January 1, 1994 through March 31, 1997, SL Green renewed approximately 77% of the leases scheduled to expire at the Properties in the Core Portfolio owned and managed by SL Green during such period, constituting renewal of approximately 78% of the expiring rentable square footage during such period. As a result of these re-leasing efforts, through December 31, 2002, the average annual rollover at the Properties is approximately 111,000 square feet, representing an average annual expiration of 6.3% of the total leased square feet at the Properties per year (assuming no tenants exercise renewal or cancellation options and no tenant bankruptcies or other tenant defaults). 62 The following table sets out a schedule of the annual lease expirations at the Properties (including the Acquisition Properties) with respect to leases in place as of March 31, 1997 for each of the next ten years and thereafter (assuming that no tenants exercise renewal or cancellation options and that there are no tenant bankruptcies or other tenant defaults):
ANNUAL ANNUAL ESCALATED ESCALATED RENT RENT PER PERCENTAGE ANNUAL PER LEASED SQUARE OF ESCALATED LEASED SQUARE FOOT NUMBER FOOTAGE TOTAL RENT SQUARE OF EXPIRING OF OF LEASED OF FOOT OF LEASES WITH EXPIRING EXPIRING SQUARE EXPIRING EXPIRING FUTURE YEAR OF LEASE EXPIRATION LEASES LEASES FEET LEASES(1) LEASES (2) STEP-UPS(3) - ------------------------------------------- ----------- ---------- ----------- ------------- ----------- ----------- March 31 through December 31, 1997......... 29 79,099 4.5% $ 2,199,148 $ 27.80(4) $ 28.00(4) 1998....................................... 27 72,650 4.2 2,065,204 28.43 30.03 1999....................................... 29 119,407 6.9 3,232,203 27.07 27.87 2000....................................... 23 144,460 8.3 2,742,167 25.90 27.39 2001....................................... 27 83,447 4.8 2,221,181 26.62 29.47 2002....................................... 22 136,683 7.8 2,813,700 20.59 22.02 2003....................................... 24 238,929 13.7 5,581,806 23.36 29.42 2004....................................... 20 317,704 18.2 7,532,635 23.71 28.62 2005....................................... 10 185,634 10.6 4,212,456 22.69 25.34 2006....................................... 15 139,528 8.0 3,745,237 26.84 32.17 2007 and thereafter........................ 16 226,081 13.0 5,005,163 22.14 28.34 --- ---------- ----- ------------- ----------- ----------- TOTAL.................................. 242 1,743,622 100.0% $ 42,350,900 $ 24.29(5) $ 28.03 --- ---------- ----- ------------- ----------- ----------- --- ---------- ----- ------------- ----------- -----------
- ------------------------ (1) Annual Escalated Rent of Expiring Leases, as used throughout this Prospectus, represents the annualized monthly base rent in effect as of March 31, 1997 (after giving effect to any contractual increases in annualized monthly base rent that have occurred up to such date) including monthly tenant pass-throughs of operating and other expenses (but excluding tenant electricity costs) under each lease executed as of March 31, 1997 which expires in the applicable year or, if such monthly rent has been reduced by a temporary rent concession, the monthly rent that would have been in effect at such date in the absence of such concession. (2) Annual Escalated Rent Per Leased Square Foot of Expiring Leases, as used throughout this Prospectus, represents Annual Escalated Rent of Expiring Leases, as described in footnote (1) above, presented on a per leased square foot basis. (3) Annual Escalated Rent Per Leased Square Foot of Expiring Leases With Future Step-Ups represents Annual Escalated Rent Per Leased Square Foot of Expiring Leases, as described in footnote (2) above, adjusted to reflect contractual increases in monthly base rent that occur after March 31, 1997. (4) For comparison purposes, the Direct Weighted Average Rental Rate for the Class B Midtown Markets, according to RELocate (as adjusted by the Company to weight the representation of the Properties in the Grand Central South, Garment, Park Avenue South/Flatiron and Rockefeller Center submarkets), was $23.56 as of March 31, 1997. The Direct Weighted Average Rental Rate represents the weighted average of asking rental rates for direct Class B office space as it relates to the Properties. Asking rental rates generally are higher than actual rental rates (which generally are not publicly available). In addition, the Direct Weighted Average Rental Rate represents a large number of Class B properties in various locations within the Midtown Markets, and, therefore, may not be representative of asking or actual rental rates at the Properties. 63 (5) Excluding rental payments attributable to retail space at the Properties, the Weighted Average Annual Escalated Rent Per Leased Square Foot of Expiring Leases would be $23.69. TENANT DIVERSIFICATION. The Properties (including the Acquisition Properties) currently are leased to over 200 tenants which are engaged in a variety of businesses, including publishing, health services, retailing and banking. The following table sets forth information regarding the leases with respect to the 20 largest tenants at the Properties, based on the amount of square footage leased by such tenants as of March 31, 1997:
PERCENTAGE PERCENTAGE OF OF AGGREGATE AGGREGATE PORTFOLIO PORTFOLIO REMAINING LEASED ANNUAL ANNUAL LEASE TERM TOTAL LEASED SQUARE ESCALATED ESCALATED TENANT PROPERTY IN MONTHS SQUARE FEET FEET RENT RENT - -------------------------------- ---------------------- ------------- ------------ ------------- ------------- ------------- Kallir, Philips, Ross........... 673 First Avenue 87 80,000 4.6% $ 2,394,175 5.7% New York Hospital(1)............ 673 First Avenue 113 76,000 4.4 1,852,156 4.4 Cygne........................... 1372 Broadway 160 70,098 4.0 1,242,838 2.9 Capital-Mercury................. 1372 Broadway 100 64,122 3.7 1,292,732 3.1 Ann Taylor...................... 1372 Broadway 160 58,975 3.4 1,169,118 2.8 NationsBank..................... 1372 Broadway 36 55,238 3.2 1,364,343 3.2 Newbridge Communications(2)..... 673 First Avenue 103 49,000 2.8 1,456,518 3.4 UNICEF.......................... 673 First Avenue 81 40,300 2.3 1,070,667 2.5 U.S. Committee for UNICEF....... 673 First Avenue 81 40,000 2.3 1,078,259 2.5 Franklin Strategic.............. 673 First Avenue 85 40,000 2.3 1,308,407 3.1 Republic of South Africa........ 673 First Avenue 85 40,000 2.3 1,108,913 2.6 Henry Siegel.................... 1372 Broadway 101 34,045 2.0 578,765 1.4 Meredith Garage Corp............ 673 First Avenue 88 30,000 1.7 372,058 0.9 Ross Stores(3).................. 1372 Broadway 67 29,949 1.7 566,246 1.3 AJ Contracting.................. 470 Park Ave. So. 153 27,870 1.6 635,803 1.5 Cowles Business Media........... 470 Park Ave. So. 71.5 24,767 1.4 582,774 1.4 Workbench....................... 470 Park Ave. So. 69 22,000 1.3 375,000 0.9 House of Ronnie................. 1372 Broadway 72 20,500 1.2 429,987 1.0 Institute for Office Management.................... 29 W 35th St. 84 19,500 1.1 535,322 1.3 1140 Avenue of the Solomon Page (4)................ Americas 96 18,800 1.1 476,956 1.1 ----- ------------ --- ------------- --- Total/Weighted Average(5)....... 95 841,164 48.2% $ 19,891,037 47.0% ----- ------------ --- ------------- --- ----- ------------ --- ------------- ---
- ------------------------ (1) This tenant occupies an additional 65,000 square feet of space at 673 First Avenue pursuant to two subleases expiring December 31, 2003 and April 29, 2004. (2) This tenant occupies an additional 13,000 square feet of space at 673 First Avenue pursuant to a sublease expiring April 29, 2004. (3) Since March 31, 1997, this tenant has contracted to lease an additional 18,655 square feet at 1372 Broadway and has extended its lease with respect to the space indicated in the table to June 30, 2007. (4) Since March 31, 1997, this tenant has contracted to lease an additional 9,400 square feet at 1140 Avenue of the Americas. (5) Weighted average calculation based on total rentable square footage leased by each tenant. 64 LEASE DISTRIBUTION. The following table sets forth information relating to the distribution of leases at the Properties (including the Acquisition Properties), based on rentable square feet under lease, as of March 31, 1997:
PERCENTAGE PERCENTAGE OF OF AGGREGATE AGGREGATE PORTFOLIO PORTFOLIO LEASED ANNUAL ANNUAL SQUARE FEET NUMBER OF PERCENT OF TOTAL LEASED SQUARE ESCALATED ESCALATED UNDER LEASE LEASES ALL LEASES SQUARE FEET FEET RENT RENT ------------- ------------- ----------- ------------ ------------- ------------- --------------- 2,500 or less............................ 106 43.8% 147,478 8.5% $ 4,422,650 10.4% 2,501-5,000.............................. 55 22.7 190,095 10.9 5,136,717 12.1 5,001-7,500.............................. 19 7.9 117,891 6.8 2,905,392 6.9 7,501-10,000............................. 21 8.7 190,946 10.9 4,491,121 10.6 10,001-20,000............................ 23 9.5 303,368 17.4 7,248,676 17.1 20,001-39,999............................ 7 2.9 189,131 10.8 3,540,633 8.4 40,000 +................................. 11 4.5 604,733 34.7 14,605,174 34.5 --- ----- ------------ ----- ------------- ----- TOTAL.................................... 242 100.0% 1,743,642 100.0% $ 42,350,903 100.0% --- ----- ------------ ----- ------------- ----- --- ----- ------------ ----- ------------- -----
TENANT RETENTION AND HISTORICAL LEASE RENEWALS. The Company works closely with its tenants to provide a high level of tenant services. The Company continually seeks to improve its tenant roster by attracting high-quality tenants to the Properties and seeks to stabilize its rent roll through the early extension of near-term expiring leases. From January 1, 1994 through March 31, 1997, SL Green renewed 77% of the leases scheduled to expire at the Properties in the Core Portfolio owned and managed by SL Green during such period, constituting renewal of approximately 78% of the expiring rentable square footage in the Core Portfolio during such period. The following table sets forth certain historical information regarding tenants at the Properties in the Core Portfolio who renewed an existing lease at or prior to the expiration of such lease:
TOTAL/ WEIGHTED THREE AVERAGE MONTHS JANUARY 1, ENDED 1994- MARCH 31, MARCH 31, 1994 1995 1996 1997 1997 --------- --------- --------- ----------- ----------- Number of leases expired during calendar year or period.......................................... 5 12 31 4 52 Number of leases renewed.......................... 5 7 26 2 40 Percentage of leases renewed...................... 100.00% 58.33% 83.87% 50.00% 76.92% Aggregate rentable square footage of expiring leases.......................................... 14,223 38,008 136,582 5,683 194,496 Aggregate rentable square footage of lease renewals........................................ 14,223 28,055 107,408 2,564 152,250 Percentage of expiring rentable square foot renewed......................................... 100.00% 73.81% 78.64% 45.12% 78.28%
65 HISTORICAL TENANT IMPROVEMENTS AND LEASING COMMISSIONS. The following table sets forth certain historical information regarding tenant improvement and leasing commission costs for tenants at the Properties in the Core Portfolio for the years 1994 through 1996 and for the first quarter of 1997:
THREE TOTAL/WEIGHTED MONTHS AVERAGE ENDED JANUARY 1, MARCH 31, 1994-MARCH 31, 1994 1995 1996 1997 1997 --------- --------- --------- ----------- -------------- RENEWALS Number of leases............................................. 5 7 26 2 40 Square feet.................................................. 14,223 28,055 107,408 2,564 152,250 Tenant improvement costs per square foot..................... $ 1.84 $ 0.00 $ 2.38 $ 0.00 $ 1.85 Leasing commission costs per square foot..................... $ 1.64 $ 1.98 $ 3.45 $ 0.94 $ 2.97 --------- --------- --------- ----------- ------- Total tenant improvement and leasing commission costs per square foot.............................................. $ 3.48 $ 1.98 $ 5.83 $ 0.94 $ 4.82 --------- --------- --------- ----------- ------- --------- --------- --------- ----------- ------- RE-TENANTED OR NEWLY TENANTED SPACE Number of leases............................................. 8 7 11 9 35 Square feet.................................................. 42,632 25,787 36,911 26,890 132,220 Tenant improvement costs per square foot..................... $ 16.41 $ 22.73 $ 13.77 $ 6.06 $ 14.80 Leasing commission costs per square foot..................... $ 7.27 $ 4.55 $ 9.42 $ 5.03 $ 6.88 --------- --------- --------- ----------- ------- Total tenant improvement and leasing commission costs per square foot.............................................. $ 23.69 $ 27.28 $ 23.19 $ 11.09 $ 21.68 --------- --------- --------- ----------- ------- --------- --------- --------- ----------- ------- TOTAL Number of leases............................................. 13 14 37 11 75 Square feet.................................................. 56,855 53,842 144,319 29,454 284,470 Tenant improvement costs per square foot..................... $ 12.77 $ 10.89 $ 5.29 $ 5.53 $ 7.87 Leasing commission costs per square foot..................... $ 5.86 $ 3.21 $ 4.98 $ 4.67 $ 4.79 --------- --------- --------- ----------- ------- Total tenant improvement and leasing commission costs per square foot.............................................. $ 18.63 $ 14.10 $ 10.27 $ 10.21 $ 12.66(1) --------- --------- --------- ----------- ------- --------- --------- --------- ----------- -------
- ------------------------ (1) The cost of leasing vacant space (i.e., newly-tenating) generally exceeds the cost of renewing or retenating occupied space. During the period January 1, 1994 through March 31, 1997, certain of the Properties were in a lease-up phase. In the event the weighted average of total tenant improvement costs and leasing commission per square foot were calculated assuming a 75% renewal rate on expiring square footage and an occupancy rate throughout such period equal to 92.5% (the occupancy rate at the Properties as of March 31, 1997), such weighted average per share amount would be $9.04. HISTORICAL CAPITAL EXPENDITURES. Each property within the Core Portfolio, except for the Bar Building, has been substantially renovated. Within the next 18 months the Company anticipates spending $5.3 million in capital improvements at the Properties, of which approximately $1.1 million is designated for the Bar Building, an interest in which was first purchased by SL Green in October 1996, and approximately $3.0 million is designated for the Acquisition Properties. See "--36 West 44th Street (The Bar Building)" and "--Acquisition Properties" below. These costs are expected to be paid from remaining net proceeds from the Offering after completion of the Formation Transactions (estimated to be $7.7 million) and/or from operating cash flows. See "Use of Proceeds." Prior to acquisition each property under consideration is evaluated to determine an initial capital budget. The extent of these improvements is predicated on the physical condition and vacancy at the property, and the anticipated target market rent. Ongoing capital budgets are determined annually and are geared toward addressing tenant rollover and changing target market rent. 66 The following table sets forth information regarding historical capital expenditures at the Properties in the Core Portfolio (except for the Bar Building, an interest in which was first acquired by SL Green in October 1996) for the years 1994 through 1996:
1994 1995 1996 TOTAL ---------- ---------- ---------- ------------ 673 First Ave....................................... $ 10,929 $ 52,369 $ 15,636 $ 78,934 470 Park Ave. So. .................................. $ 241,923(1) $ -- $ 130,700(2) $ 372,623 70 W. 36th St. ..................................... $ 129,721(3) $ 24,717 $ 178,521(4) $ 332,959 1414 Ave. of Americas (5)........................... $ -- $ -- $ 132,459(6) $ 132,459 29 W. 35th St. ..................................... $ 68,585 $ 176,123(7) $ 98,786(8) $ 343,494 ---------- ---------- ---------- ------------ Total............................................. $ 451,158 $ 253,209 $ 556,102 $ 1,260,469 ---------- ---------- ---------- ------------ ---------- ---------- ---------- ------------ Total Square Feet................................... 1,021,000 1,021,000 1,021,000 1,021,000 Capital Expenditures Per Square Foot................ $0.44 $0.25 $0.54 $0.41 ---------- ---------- ---------- ------------ ---------- ---------- ---------- ------------
- ------------------------ (1) Expenditures included asbestos abatement, new boiler and new roof-top structures. (2) Expenditures included partial elevator modernization. (3) Expenditures included elevator modernization. (4) Expenditures included new boiler, exit signs and fire doors. (5) SL Green's interest in 1414 Avenue of the Americas was acquired in May, 1996; however, SL Green managed the Property for prior ownership since December 1989. (6) Expenditures included floor renovations, ADA bathrooms, new windows and parapet. (7) Expenditures included elevator modernization. (8) Expenditures included new roof. 673 FIRST AVENUE 673 First Avenue is a 12-story office building that occupies the entire block front on the west side of First Avenue between East 38th Street and East 39th Street in the Grand Central South submarket of the Manhattan office market. 673 First Avenue contains approximately 422,000 rentable square feet (including approximately 366,600 square feet of office space, 26,000 square feet of retail space and a 30,000 square foot garage), with floor plates of approximately 40,000 square feet on all but the top two floors. The building, located three blocks from the United Nations, was completed in 1928 and converted from a warehouse/distribution facility to an office building by SL Green in 1989 and 1990. SL Green acquired a net leasehold interest (which expires in 2037) in the Property and a ground leasehold interest (which expires in 2037) in the land underlying the Property in 1988. Upon completion of the Formation Transactions, such leasehold interests will be transferred to the Company. At 673 First Avenue, SL Green converted a distribution and warehouse facility into an office property to take advantage of desirable 40,000 square foot floor plates and a strategic location near the United Nations complex. To accomplish the repositioning, SL Green invested approximately $25 million in the Property for (i) new building entrance, lobby and storefronts, (ii) complete replacement of the elevator systems, (iii) the creation of common areas, (iv) entirely reconfigured HVAC and electrical systems and (v) the build-out of tenant spaces. The repositioning resulted in the conversion of a 43% occupied warehouse/distribution facility into a 100% occupied Class B office building within 24 months. The Property's net operating income (NOI) increased dramatically from approximately $466,000 per annum upon acquisition to approximately $7.6 million per annum following repositioning and lease-up (exclusive of net lease payments and debt service payments). 67 As of March 31, 1997, 100% of the rentable square footage in 673 First Avenue was leased. The following table sets forth certain information with respect to the Property:
ANNUAL NET EFFECTIVE ANNUAL ESCALATED RENT RENT PER LEASED PER LEASED YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT - ----------------------------------------------------------------- ----------------- ----------------- ------------- 1997(1).......................................................... 100% $ 25.33 $ 21.79 1996............................................................. 100 25.12 21.79 1995............................................................. 97 24.83 21.66 1994............................................................. 100 23.83 21.47 1993............................................................. 100 23.48 21.50 1992............................................................. 100 22.18 21.50
- ------------------------ (1) Information is as of March 31, 1997. As of March 31, 1997, 673 First Avenue was leased to 16 tenants operating in various industries, including healthcare, advertising and publishing, three of whom occupied 10% or more of the rentable square footage at the Property. A major New York City hospital occupied approximately 141,000 square feet (approximately 33% of the Property) under two leases expiring on August 31, 2006 and two subleases expiring December 31, 2003 and April 29, 2004, respectively, that provide for an aggregate annualized base rent as of March 31, 1997 of approximately $3.05 million (approximately $21.63 per square foot) and renewal options for five years on the two direct leases. In addition to annualized base rent, this tenant pays real estate tax escalations and operating escalations in excess of a base year amount. In addition, an advertising firm occupied approximately 80,000 square feet (approximately 19% of the Property) under a lease expiring on June 30, 2004 that provides for annualized base rent as of March 31, 1997 of approximately $1.8 million (approximately $22.00 per square foot). In addition to annualized base rent, this tenant pays real estate tax escalations and operating escalations in excess of a base year amount. Also, a publishing company occupied approximately 62,000 square feet (approximately 14.7% of the Property) under two leases expiring on October 31, 2005 and a sublease expiring on April 30, 2004 that provide for an aggregate annualized base rent as of March 31, 1997 of approximately $1.66 million (approximately $26.77 per square foot). In addition to annualized base rent, this tenant pays real estate tax escalations and operating escalations in excess of a base year payment. 68 The following table sets out a schedule of the annual lease expirations at 673 First Avenue for leases executed as of March 31, 1997 with respect to each of the next ten years and thereafter (assuming that no tenants exercise renewal or cancellation options and that there are no tenant bankruptcies or other tenant defaults):
ANNUAL ANNUAL ESCALATED ESCALATED RENT PER PERCENTAGE ANNUAL RENT LEASED SQUARE OF ESCALATED PER SQUARE FOOT NUMBER FOOTAGE TOTAL RENT LEASED OF EXPIRING OF OF LEASED OF SQUARE FOOT LEASES WITH EXPIRING EXPIRING SQUARE EXPIRING OF EXPIRING FUTURE YEAR OF LEASE EXPIRATION LEASES LEASES FEET LEASES LEASES (1) STEP-UPS - ----------------------------------------------- ----------- --------- ----------- ------------- ----------- ----------- March 31 through December 31, 1997............. -- -- -- -- -- -- 1998........................................... -- -- -- -- -- -- 1999........................................... 1 1,018 0.20% $ 10,180 $ 10.00 $ 10.00 2000........................................... 1 100 0.02 44,223 442.00(2) 511.94(2) 2001........................................... -- -- -- -- -- -- 2002........................................... 1 1,046 0.20 21,480 20.53 24.57 2003........................................... 2 80,300 19.00 2,148,926 26.76 36.25 2004........................................... 6 203,944 48.00 4,893,855 24.00 28.64 2005........................................... 2 49,000 12.00 1,456,518 29.73 32.48 2006........................................... 1 76,000 18.00 1,852,156 24.37 27.58 2007 and thereafter............................ 2 10,659 2.50 265,134 24.87 35.55 --- --------- ----------- ------------- SUBTOTAL/WEIGHTED AVERAGE...................... 16 422,067 100.00% $ 10,692,472 $ 25.33 $ 30.57(3) Unleased at 3/31/97............................ 0 --- --------- ----------- ------------- ----------- ----------- TOTAL...................................... 422,067 100.00% --------- ----------- --------- -----------
- ------------------------ (1) For comparison purposes, according to RELocate, the Direct Weighted Average Rental Rate for the direct Class B Grand Central South submarket (which, according to RELocate is the area bounded by 32nd Street to 40th Street, Fifth Avenue east to the East River) was $26.75 as of March 31, 1997. Direct Weighted Average Rental Rate represents the weighted average of asking rental rates for direct Class B space. Asking rental rates generally are higher than actual rental rates (which generally are not publicly available). Therefore, the Direct Weighted Average Rental Rate may not be representative of asking or actual rental rates at 673 First Avenue. (2) These rental rates reflect the lease of approximately 100 square feet of roof and office space at the Property for the placement of cellular telephone antennas and equipment. (3) The differential between Annual Escalated Rent Per Leased Square Foot of Expiring Leases and Annual Escalated Rent Per Leased Square Foot of Expiring Leases with Future Step-Ups is attributable to significant contractual step-ups in base rental rates that exist in certain leases at this Property. The aggregate undepreciated tax basis of depreciable real property at 673 First Avenue for Federal income tax purposes was $22,583,658 as of December 31, 1996. Depreciation and amortization are computed for Federal income tax purposes on the straight-line method over lives which range up to 39 years. The current real estate tax rate for all Manhattan office properties is $10.252 per $100 of assessed value. The total annual tax for 673 First Avenue at this rate for the 1996-97 tax year is $1,235,469 (at a taxable assessed value of $12,051,000). 69 470 PARK AVENUE SOUTH 470 Park Avenue South is comprised of two buildings, 468 Park Avenue South (a 17-story building) and 470 Park Avenue South (a 12-story building), that occupy the entire blockfront on the west side of Park Avenue South between East 31st and East 32nd Streets in the Park Avenue South/Flatiron submarket of the Manhattan office market. The buildings are joined together by a single lobby and common base building systems. 468 Park Avenue South was completed in 1912 and 470 Park Avenue South was completed in 1917. Various portions of the common areas of both buildings were substantially renovated in 1987, 1990 and 1994. SL Green acquired a 100% fee simple interest in the Property in 1986. Upon completion of the Formation Transactions, this fee simple interest will be transferred to the Company. The Property contains an aggregate of approximately 260,000 rentable square feet (including approximately 232,000 square feet of office space and approximately 28,000 square feet of retail space), with floor plates of approximately 8,400 square feet in the 468 building and floor plates of approximately 9,735 square feet in the 470 building. As of March 31, 1997, 95% of the rentable square footage in 470 Park Avenue South was leased (including space for leases that were executed as of March 31, 1997). The office space was 94% leased and the retail space was 100% leased. The following table sets forth certain information with respect to the Property:
ANNUAL NET EFFECTIVE ANNUAL ESCALATED RENT RENT PER LEASED PER LEASED YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FEET - ------------------------------------------------------------ ------------------- --------------------- ------------- 1997(1)..................................................... 95% $ 22.61 $ 19.57 1996........................................................ 95 21.93 19.57 1995........................................................ 93 21.79 18.50 1994........................................................ 99 21.23 17.82 1993........................................................ 98 21.15 17.62 1992........................................................ 84 21.48 17.36
- ------------------------ (1) Information is as of March 31, 1997. As of March 31, 1997, 470 Park Avenue South was leased to 25 tenants operating in various industries, including financial services, publishing and general contracting, one of whom leased 10% or more of the Property's rentable square feet. A general contractor occupied approximately 27,870 square feet (approximately 11% of the Property) under a lease expiring on December 31, 2009 that provides for annualized base rent as of March 31, 1997 of approximately $636,000 (approximately $22.81 per square foot). In addition to annualized base rent, this tenant pays real estate tax escalations and operating escalations in excess of a base year amount. 70 The following table sets out a schedule of the annual lease expirations at 470 Park Avenue South with respect to leases executed as of March 31, 1997 for each of the next ten years and thereafter (assuming that no tenants exercise renewal or cancellation options and that there are no tenant bankruptcies or other tenant defaults):
ANNUAL ANNUAL ESCALATED ESCALATED RENT PER RENT LEASED PERCENTAGE ANNUAL PER SQUARE FOOT SQUARE OF ESCALATED LEASED OF EXPIRING NUMBER FOOTAGE TOTAL RENT SQUARE LEASES OF OF LEASED OF FOOT OF WITH EXPIRING EXPIRING SQUARE EXPIRING EXPIRING FUTURE YEAR OF LEASE EXPIRATION LEASES LEASES FOOT LEASES LEASES(1) STEP-UPS - --------------------------------------------- ----------- ----------- ---------- ---------- --------- ----------- March 31 through December 31, 1997 -- -- -- -- -- -- 1998......................................... 2 3,536 1.4% $ 80,466 $22.76 $23.22 1999......................................... 3 18,800 7.2 435,594 23.17 24.38 2000......................................... 2 18,135 7.0 412,446 22.74 27.17 2001......................................... 2 18,135 7.0 442,369 24.39 28.64 2002......................................... 5 51,310 19.7 1,135,858 22.14 24.11 2003......................................... 5 61,062 23.5 1,290,923 21.14 26.47 2004......................................... 2 18,364 7.1 316,582 17.24 21.56 2005......................................... 1 9,735 3.7 198,096 20.35 22.40 2006......................................... 1 16,400 6.3 464,792 28.34 37.06 2007 and thereafter.......................... 2 30,870 11.9 791,803 25.65 33.90 --- ----------- --- ---------- --------- ----------- SUBTOTAL/WEIGHTED AVERAGE.................... 25 246,347 94.8% $5,568,931 $22.61 $27.09(2) Unleased at 3/31/97.......................... 13,602 5.2% --- ----------- --- ---------- --------- ----------- TOTAL.................................... 259,949 100% ----------- --- ----------- ---
- ------------------------ (1) For comparison purposes, according to RELocate, the Direct Weighted Average Rental Rate for the direct Class B Park Avenue South/Flatiron submarket (which, according to RELocate, is the area bounded by the northside of 32nd Street, the southside of 20th Street, First Avenue and east to Fifth Avenue from 20th Street to 23rd Street and Broadway from 24th Street to 32nd Street) was $21.99 as of March 31, 1997. Direct Weighted Average Rental Rate represents the weighted average of asking rental rates for direct Class B space. Asking rental rates generally are higher than actual rental rates (which generally are not publicly available). Therefore, the Direct Weighted Average Rental Rate may not be representative of asking or actual rental rates at 470 Park Avenue South. (2) The differential between Annual Escalated Rent Per Leased Square Foot of Expiring Leases and Annual Escalated Rent Per Leased Square Foot of Expiring Leases with Future Step-Ups is attributable to significant contractual step-ups in base rental rates that exist in certain leases at this Property. In 1987, 1990 and 1994, 470 Park Avenue South was substantially renovated by SL Green to upgrade the building's amenities and services to accommodate first class office use. The renovations were completed at a total cost of approximately $2.6 million and included a significant restoration of the exterior of the building, a new lobby, a cosmetic upgrade of the elevator cabs, modernization of the elevator machinery, new plumbing risers, electrical service upgrades, heating plant replacement, asbestos abatement, installation of a new roofing system and new windows and replacement of the bathrooms and HVAC systems on a floor by floor basis. Over the next 18 months, the Company anticipates replacing the sidewalk in front of the building, upgrading the elevators, completing a modest facade restoration and scraping and painting the windows, at an estimated aggregate cost of $337,000. The aggregate undepreciated tax basis of depreciable real property at 470 Park Avenue South for Federal income tax purposes was $15,265,099 as of March 31, 1997. Depreciation and amortization are computed on the straight-line method over 39 years. 71 The current real estate tax rate for all Manhattan office properties is $10.252 per $100 of assessed value. The total annual tax for 470 Park Avenue South at this rate for the 1996-97 tax year is $673,556 (at an assessed value of $6,570,000). 36 WEST 44TH STREET (THE BAR BUILDING) 36 West 44th Street (the Bar Building) is comprised of two buildings, 36 West 44th Street (a 14-story building) and 35 West 43rd Street (a four-story building), located on the south side of West 44th Street through to the north side of West 43rd Street between Fifth and Avenue of the Americas in the Rockefeller Center submarket of the Manhattan office market. The buildings were completed in 1922 and, as discussed below, a renovation is scheduled for 1997/1998. The Property contains approximately 165,000 rentable square feet (including approximately 148,500 square feet of office space and approximately 16,500 square feet of retail space), with floor plates of approximately 12,000 square feet at the 44th Street building and floor plates of approximately 2,200 square feet at the 43rd Street building. A limited liability company owned by SL Green and an unaffiliated real estate fund (the "Bar Building Joint Venture") acquired non-performing mortgage indebtedness encumbering the Property from an institutional lender in October 1996. Pursuant to a subsequent agreement with the mortgagor, the Bar Building Joint Venture obtained the right to foreclose on the Bar Building no earlier than September 30, 1998. Upon recording of the conveyancing instruments, the Bar Building Joint Venture is required to pay to the mortgagor and/or its affiliates the sum of $350,000, and to pay the New York City and New York State Real Property Transfer Gains Taxes imposed upon recording of the conveyancing instruments. Upon completion of the Formation Transactions, the Company will acquire all of the mortgage indebtedness encumbering the Property (representing effectively a 100% economic interest therein) as well as such right of foreclosure. Upon exercising such right of foreclosure, the Company would obtain a leasehold interest (which expires in 2080) in the land and building at 35 West 43rd Street and fee simple title to the building at 36 West 44th Street. The Bar Building is centrally located on 44th Street between Fifth Avenue and Avenue of the Americas, in the heart of midtown Manhattan, a block that includes the headquarters of the Association of the Bar of the City of New York, the University of Pennsylvania Alumni Club, the Harvard Club, the Algonquin Hotel, the Royalton Hotel and the Mansfield Hotel. A new Sofitel hotel is planned for the vacant parcel of land located across the street from the Bar Building. This location is within two and one half blocks of Grand Central Terminal, four blocks of Rockefeller Center and five blocks of the Port Authority Bus Terminal, a major transportation hub for commuters from New Jersey. When SL Green first purchased its interest in the Bar Building in October 1996, approximately 35,000 square feet of space was vacant and approximately 70,000 square feet of space was subject to leases expiring within 18 months. The Property was nearing the end of a consensual foreclosure process during which little capital was spent on preventive maintenance or leasing incentives. Since the purchase of its interest, SL Green has implemented an aggressive leasing and marketing campaign in conjunction with a strategic property-wide renovation program. The Company is planning to spend $1.1 million over the next 18 months on this upgrade and renovation program at the Property, which expense will be funded out of the net proceeds of the Offering. Some of this work includes roof repair, facade restoration and steam cleaning, window upgrade, entrance and lobby upgrade, sidewalk replacement and public corridor renovations. As of May 15, 1997, approximately 11,800 square feet of space at the Property was vacant and approximately 64% of the expiring leases were renewed. As of March 31, 1997, approximately 81% of the rentable square footage in The Bar Building was leased. The office space was 80% leased and the retail space was 89% leased. As noted above, SL Green has commenced an aggressive leasing program at the Property and as of May 31, 1997, approximately 93% 72 of the rentable square feet in the Property was leased. The following table sets forth certain information with respect to the Property:
ANNUAL NET EFFECTIVE ANNUAL ESCALATED RENT RENT PER LEASED PER LEASED YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT - ----------------------------------------------------------------- ------------------- ----------------- ------------- 1997(1).......................................................... 81% $ 29.37 $ 26.09 1996............................................................. 78 29.56 26.56
- ------------------------ (1) Information is as of March 31, 1997. As of March 31, 1997, the Bar Building was leased to 52 tenants operating in various businesses, including legal, not-for-profit and the theater, one of whom occupied 10% or more of the rentable square footage at the Property. A professional organization for lawyers occupied approximately 16,777 square feet (approximately 10.7% of the Property) under two leases expiring on September 30, 1999 that provide for an aggregate annualized base rent as of March 31, 1997 of approximately $403,000 (approximately $24.00 per square foot). In addition to annualized base rent, this tenant pays real estate tax escalations and operating escalations in excess of a base year amount. The following table sets out a schedule of the annual lease expirations at The Bar Building with respect to leases executed as of March 31, 1997 for each of the next ten years and thereafter (assuming that no tenants exercise renewal or cancellation options and that there are no tenant bankruptcies or other tenant defaults):
ANNUAL ANNUAL ESCALATED ESCALATED RENT PER RENT LEASED PERCENTAGE ANNUAL PER SQUARE FOOT SQUARE OF ESCALATED LEASED OF EXPIRING NUMBER FOOTAGE TOTAL RENT SQUARE LEASES OF OF LEASED OF FOOT OF WITH EXPIRING EXPIRING SQUARE EXPIRING EXPIRING FUTURE YEAR OF LEASE EXPIRATION LEASES LEASES FEET LEASES LEASES(1) STEP-UPS - ---------------------------------------------- --------------- --------- --------------- ------------ ----------- ----------- March 31 through December 31, 1997............ 13 32,023 23.9% $ 934,815 $ 29.19 $ 29.23 1998.......................................... 5 5,136 3.8 141,589 27.57 28.41 1999.......................................... 5 22,176 16.5 864,628 38.99 39.59 2000.......................................... 10 23,223 17.3 661,586 28.49 29.66 2001.......................................... 8 16,702 12.5 463,699 27.76 31.04 2002.......................................... 3 7,967 5.9 200,370 25.15 26.75 2003.......................................... 3 8,069 6.0 156,424 19.39 22.99 2004.......................................... 2 9,982 7.4 273,645 27.41 29.40 2005.......................................... -- -- -- -- -- -- 2006.......................................... 2 8,095 6.0 209,407 25.87 28.74 2007 and thereafter........................... 1 700 0.5 31,272 44.67 83.03 -- --------- ----- ------------ ----------- ----------- SUBTOTAL/WEIGHTED AVERAGE..................... 52 134,073 81.4% $ 3,937,435 $ 29.37(2) $ 30.93 -- ------------ ----------- ----------- Unleased at 3/31/97........................... 30,711 18.6% --------- ----- TOTAL..................................... 164,784 100.0% --------- ----- --------- -----
- ------------------------ (1) For comparison purposes, according to RELocate, the Direct Weighted Average Rental Rate for the direct Class B Rockefeller Center submarket (which, according to RELocate, is the area between 40th Street to 59th Street along Avenue of the Americas and 40th Street to 52nd Street between 5th Avenue and Avenue of the Americas) was $27.09 per square foot as of March 31, 1997. Direct (FOOTNOTES CONTINUED ON FOLLOWING PAGE) 73 (FOOTNOTES CONTINUED FROM PRECEDING PAGE) Weighted Average Rental Rate represents the weighted average of asking rental rates for direct Class B space. Asking rental rates generally are higher than actual rental rates (which generally are not publicly available). Therefore, the Direct Weighted Average Rental Rate may not be representative of asking or actual rental rates at the Bar Building. (2) Excluding rental payments attributable to retail space at this Property, the weighted average Annual Escalated Rent Per Leased Square Foot of Expiring Leases would be $28.38. The aggregate tax basis of the mortgage indebtedness encumbering The Bar Building for Federal income tax purposes was $11,063,546 as of March 31, 1997. The current real estate tax rate for all Manhattan office properties is $10.252 per $100 of assessed value. The total annual tax for The Bar Building at this rate for the 1996-97 tax year is $838,409 (at an assessed value of $8,178,000). 70 WEST 36TH STREET 70 West 36th Street is a 16-story office building located on the south side of West 36th Street between Fifth Avenue and Sixth Avenue in the Garment submarket of the Manhattan office market. The building, situated between Grand Central Terminal and Penn Station, was completed in 1923 and various portions of the common areas were renovated in 1985, 1993 and 1994. SL Green acquired a 100% fee simple interest in the Property in 1984. Upon completion of the Formation Transaction, this fee simple interest will be transferred to the Company. The Property contains approximately 150,000 rentable square feet (including approximately 129,000 square feet of office space and approximately 21,000 square feet of retail space including the basement), with floor plates ranging from 6,500 square feet to 10,000 square feet. The Company's headquarters is located at 70 West 36th Street. As of March 31, 1997, approximately 96% of the rentable square footage in 70 West 36th Street was leased (including space for leases that were executed as of March 31, 1997). The office space was 95% leased and the retail space was 100% leased. The following table sets forth certain information with respect to the Property:
ANNUAL NET EFFECTIVE ANNUAL ESCALATED RENT RENT PER LEASED PER LEASED YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT - ---------------------------------------- ------------------- --------------------- ------------- 1997(1)................................. 96% $ 19.14 $ 15.94 1996.................................... 95 19.50 15.92 1995.................................... 94 21.13 16.08 1994.................................... 92 21.31 16.09 1993.................................... 89 21.99 16.59 1992.................................... 92 22.08 16.31
- ------------------------ (1) Information is as of March 31, 1997. As of March 31, 1997, 70 West 36th Street was leased to 39 tenants operating in various industries, including textiles, not-for-profit and advertising, one of whom occupied 10% or more of the rentable square footage at the Property. A textile company occupied approximately 16,222 square feet (approximately 10.8% of the Property) under one lease expiring on December 31, 2003 that provides for an aggregate annualized base rent as of March 31, 1997 of approximately $266,000 (approximately $25.83 per square foot). In addition to annualized base rent, this tenant pays real estate tax escalations and operating escalations in excess of a base year amount. 74 The following table sets out a schedule of the annual lease expirations at 70 West 36th Street with respect to leases executed as of March 31, 1997 for each of the next ten years and thereafter (assuming that no tenants exercise renewal or cancellation options and that there are no tenant bankruptcies or other tenant defaults):
ANNUAL ANNUAL ESCALATED ESCALATED RENT PER RENT LEASED PERCENTAGE ANNUAL PER SQUARE FOOT SQUARE OF ESCALATED LEASED OF EXPIRING NUMBER FOOTAGE TOTAL RENT SQUARE LEASES OF OF LEASED OF FOOT OF WITH EXPIRING EXPIRING SQUARE EXPIRING EXPIRING FUTURE YEAR OF LEASE EXPIRATION LEASES LEASES FEET LEASES LEASES(1) STEP-UPS - -------------------------------------------------- ------------- --------- ----------- ------------ ----------- ----------- March 31 through December 31, 1997................ 5 14,179 9.5% $ 304,819 $ 21.50 $ 21.50 1998.............................................. 7 24,314 16.3 487,373 20.05 21.88 1999.............................................. 3 7,078 4.7 117,575 16.61 17.15 2000.............................................. 2 7,245 4.8 141,864 19.58 19.95 2001.............................................. 7 12,147 8.1 243,276 20.03 21.17 2002.............................................. 6 19,122 12.8 358,489 18.75 20.28 2003.............................................. 3 29,714 19.9 536,014 18.04 20.01 2004.............................................. 1 2,589 1.7 58,017 22.41 22.41 2005.............................................. 2 9,047 6.1 178,309 19.71 20.47 2006.............................................. 3 18,356 12.3 326,702 17.80 23.42 2007 and thereafter............................... -- -- -- -- -- -- -- --------- ----- ------------ ----------- ----------- SUBTOTAL/WEIGHTED AVERAGE......................... 39 143,791 96.2% $ 2,752,439 $ 19.14 $ 20.80 -- ------------ ----------- ----------- Unleased at 3/31/97 5,732 3.8% --------- ----- TOTAL......................................... 149,523 100.0% --------- ----- --------- -----
- ------------------------ (1) For comparison purposes, according to RELocate the Direct Weighted Average Rental Rate for the direct Class B Garment Center submarket (which, according to RELocate is the area from 32nd Street to 40th Street, west of Avenue of the Americas to the Hudson River) was $22.27 as of March 31, 1997. Direct Weighted Average Rental Rate represents the weighted average of asking rental rates for direct Class B space. Asking rental rates generally are higher than actual rental rates (which generally are not publicly available). Therefore, the Direct Weighted Average Rental Rate may not be representative of asking or actual rental rates at 70 West 36th Street. In 1984, a complete renovation of 70 West 36th Street was commenced to convert the Property from a manufacturing loft building into an office building. The conversion included the creation of a new lobby and building entrance, installation of office quality public corridors and lavatories, steam cleaning and repainting of the Property's facade and upgrading and reconfiguration of the building's plumbing system and electric service. In addition, a monitored, state-of-the-art security system was installed for the building's entrance and all tenant spaces. In 1994, further renovations included a new heating plant, asbestos abatement and elevator modernization, including new cabs. The aggregate cost of these renovations was approximately $3 million. 70 West 36th Street is located in the Fashion Center Business Improvement District (BID). The Fashion Center BID encompasses the area bordered to the north and south by 41st Street and 35th Street, respectively, and to the east and west by Avenue of the Americas and Ninth Avenue, respectively. The BID includes approximately 450 buildings with over 5,000 fashion-related tenants occupying more than 34 million square feet of office space. The Fashion Center BID provides a private, uniformed security force for on-street, five-day-per week surveillance and response and a private, uniformed sanitation force. In 75 addition, the BID has been responsible for the implementation of various special projects in the area, including the construction of handicapped access curbs and the installation of enhanced street lighting. The aggregate undepreciated tax basis of depreciable real property at 70 West 36th Street for Federal income tax purposes was $6,749,498 as of March 31, 1997. Depreciation and amortization are computed on the straight-line method over 39 years. The current real estate tax rate for all Manhattan office properties is $10.252 per $100 of assessed value. The total annual tax for 70 West 36th Street at this rate for the 1996-97 tax year, including the applicable BID tax, is $383,955 (at an assessed value of $3,645,000). 1414 AVENUE OF THE AMERICAS 1414 Avenue of the Americas is a 19-story office building located on the southeast corner of Avenue of the Americas (Sixth Avenue) and West 58th Street in the Rockefeller Center submarket of the Manhattan office market. The building, situated one block from Central Park, was completed in 1923 and a renovation program is scheduled for 1997/1998. The program will include new windows, lobby and entrance as well as steam cleaning of the facade, at an estimated aggregate cost of $660,000. SL Green acquired a 100% fee simple interest in the Property in 1996. Upon completion of the Formation Transactions, such fee simple interest will be transferred to the Company. The Property contains approximately 111,000 rentable square feet (including approximately 103,000 square feet of office space and approximately 8,000 square feet of retail space), with floor plates of approximately 6,400 square feet on all but the top floor. Located on the easterly blockfront of Sixth Avenue between 57th and 58th Streets, the Property is at the heart of the Avenue of the Americas corridor which is host to many of world's most recognizable corporate names in domestic and international banking, legal services, manufacturing, securities, printing, publishing, advertising and communications. The Property also benefits from being strategically located one block north of 57th Street. 57th Street has become the focal point of the resurgence of high end and specialty retail development in New York in recent years. Warner Brothers recently expanded their successful company store on 57th Street and Fifth Avenue. In addition, the Nike Town Store recently opened on 57th Street between Fifth and Madison Avenues. High-profile theme retail restaurants such as the Harley Davidson Cafe, the Hard Rock Cafe, the Motown Cafe, Planet Hollywood and the Jekyll and Hyde Cafe have all also opened restaurant/theme stores on 57th Street and Avenue of the Americas. These developments have made the 57th Street corridor a major shopping and tourist destination which accommodates clientele generated by the area's concentration of businesses and tourist attractions. As of March 31, 1997, approximately 98% of the rentable square footage in 1414 Avenue of the Americas was leased (including space for leases that were executed as of March 31, 1997). The office space was 98% leased and the retail space was 100% leased. The following table sets forth certain information with respect to the Property:
ANNUAL NET EFFECTIVE ANNUAL ESCALATED RENT RENT PER LEASED PER LEASED YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT - ---------------------------------------- ------------------- --------------------- ------------- 1997(1)................................. 98% $ 31.01 $ 31.04 1996.................................... 97 30.40 31.11
- ------------------------ (1) Information is as of March 31, 1997. As of March 31, 1997, 1414 Avenue of the Americas was leased to 31 tenants operating in various industries including financial services, shoe manufacturing and travel, two of whom occupied 10% or more of the rentable square footage at the Property. A shoe manufacturer and retailer occupied approximately 12,200 square feet (approximately 11% of the Property) under a lease expiring on September 30, 1998 that 76 provides for annualized base rent as of March 31, 1997 of approximately $420,268 (approximately $34.45 per square foot) and a cancellation option that has been exercised and takes effect as of September 30, 1998. All of the space subject to the expiration has been released to two tenants. In addition to annualized base rent, this tenant pays real estate tax escalations and operating escalations in excess of a base year amount. In addition, an entertainment product developer occupied approximately 13,975 square feet (approximately 12.5% of the Property) under a lease expiring on May 31, 2004 that provides for annualized base rent as of March 31, 1997 of approximately $305,725 (approximately $21.88 per square foot). In addition to annualized base rent, this tenant pays real estate tax escalations and operating escalations in excess of a base year amount. The following table sets out a schedule of the annual lease expirations at 1414 Avenue of the Americas with respect to leases executed as of March 31, 1997 for each of the next ten years and thereafter (assuming that no tenants exercise renewal or cancellation options and that there are no tenant bankruptcies or other tenant defaults:
ANNUAL ANNUAL ESCALATED ESCALATED RENT PER RENT LEASED PERCENTAGE ANNUAL PER SQUARE FOOT SQUARE OF ESCALATED LEASED OF EXPIRING NUMBER FOOTAGE TOTAL RENT SQUARE LEASES OF OF LEASED OF FOOT OF WITH EXPIRING EXPIRING SQUARE EXPIRING EXPIRING FUTURE YEAR OF LEASE EXPIRATION LEASES LEASES FEET LEASES LEASES(1) STEP-UPS - ------------------------------------------------- ------------- ---------- ----------- ------------ ----------- ----------- March 31 through December 31, 1997............... 4 6,480 5.8% $ 162,912 $ 25.14 $ 27.42 1998............................................. 6 12,533(2) 19.3 853,235 39.62 43.01 1999............................................. 2 12,300 11.0 432,980 35.20 38.94 2000............................................. 2 4,200 3.8 108,985 25.95 32.92 2001............................................. 5 14,265 12.8 378,614 26.54 31.64 2002............................................. 1 1,100 1.0 26,400 24.00 26.50 2003............................................. 5 21,465 19.3 575,602 26.82 35.09 2004............................................. 1 13,975 12.6 355,950 25.47 31.84 2005............................................. 1 2,187 2.0 59,150 27.05 34.66 2006............................................. 2 3,100 2.8 82,600 26.65 39.62 2007 and thereafter.............................. 2 8,346 7.5 342,375 41.02 59.98 -- ---------- ----- ------------ ----------- ----------- SUBTOTAL/WEIGHTED AVERAGE........................ 31 108,951 97.8% $ 3,378,804 $ 31.01(3) $ 37.62(4) -- ------------ ----------- ----------- Unleased at 3/31/97 2,400 2.2% ---------- ----- TOTAL........................................ 111,351 100.0% ---------- ----- ---------- -----
- ------------------------ (1) For comparison purposes, according to RELocate the Direct Weighted Average Rental Rate for the direct Class B Rockefeller Center submarket (which, according to RELocate, is the area between 40th Street to 59th Street along Avenue of the Americas and 40th Street to 52nd Street between Fifth Avenue and Avenue of the Americas) was $27.09 as of March 31, 1997. Direct Weighted Average Rental Rate represents the weighted average of asking rental rates for direct Class B space. Asking rental rates generally are higher than actual rental rates (which generally are not publicly available). Therefore, the Direct Weighted Average Rental Rate may not be representative of asking or actual rental rates at 1414 Avenue of the Americas. (2) As noted above, 12,200 square feet of the space expiring during 1998 has been released to two tenants. (FOOTNOTES CONTINUED ON FOLLOWING PAGE) 77 (FOOTNOTES CONTINUED FROM PRECEDING PAGE) (3) Excluding rental payments attributable to retail space at this Property, the weighted average Annual Escalated Rent Per Leased Square Foot of Expiring Leases would be $28.34. (4) The differential between Annual Escalated Rent Per Leased Square Foot of Expiring Leases and Annual Escalated Rent Per Leased Square Foot of Expiring Leases with Future Step-Ups is attributable to significant contractual step-ups in base rental rates that exist in certain leases at this Property. The aggregate undepreciated tax basis of depreciable real property at 1414 Avenue of the Americas for Federal income tax purposes was $11,888,660 as of March 31, 1997. Depreciation and amortization are computed on the straight-line method over 39 years. The current real estate tax rate for all Manhattan office properties is $10.252 per $100 of assessed value. The total annual tax for 1414 Avenue of the Americas at this rate for the 1996-97 tax year is $576,675 (at an assessed value of $5,625,000). 29 WEST 35TH STREET 29 West 35th Street is a 12-story building located on the north side of West 35th Street between Fifth Avenue and Sixth Avenue in the Garment submarket of the Manhattan office market. The building, situated between Grand Central Terminal and Penn Station, was completed in 1911 and substantially renovated in 1985. SL Green acquired a 100% fee simple interest in the Property in 1983. Upon completion of the Formation Transactions, such fee simple interest will be transferred to the Company. The Property contains approximately 78,000 rentable square feet (including approximately 72,000 square feet of office space and approximately 6,000 square feet of retail space), with floor plates of approximately 6,500 square feet. As of March 31, 1997, approximately 92% of the rentable square footage in 29 West 35th Street was leased (including space for leases executed as of March 31, 1997). The office space was 90% leased and the retail space was 100% leased. The following table sets forth certain information with respect to the Property:
ANNUAL NET EFFECTIVE ANNUAL ESCALATED RENT RENT PER LEASED PER LEASED YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT - --------------------------------------------- ------------------- ----------------- ------------- 1997(1)...................................... 92% $ 20.09 $ 16.20 1996......................................... 92 21.06 15.60 1995......................................... 92 21.26 15.77 1994......................................... 100 19.90 15.77 1993......................................... 88 19.53 15.94 1992......................................... 92 19.13 15.75
- ------------------------ (1) Information is as of March 31, 1997. As of March 31, 1997, 29 West 35th Street was leased to eight tenants operating in the publishing, executive recruiting and specialty apparel industries, three of whom occupied 10% or more of the rentable square footage at the Property. A publishing company occupied approximately 19,500 square feet (approximately 25% of the Property) under three leases expiring on April 8, 2004 that provide for an aggregate annualized base rent as of March 31, 1997 of approximately $522,000 (approximately $26.75 per square foot). In addition to annualized base rent, this tenant pays real estate tax escalations and operating escalation in excess of a base year amount. 78 Also, a second publishing company occupied approximately 16,250 square feet (approximately 20.9% of the Property) under a lease expiring on December 31, 1999 that provides for annualized base rent as of March 31, 1997 of approximately $260,000 (approximately $16.00 per square foot). In addition to annualized base rent, this tenant pays real estate tax escalations and operating escalation in excess of a base year amount. In addition, an executive recruiting firm occupied approximately 9,750 square feet (approximately 12.5% of the Property) under a lease expiring on August 14, 1998 that provides for annualized base rent as of March 31, 1997 of approximately $184,000 (approximately $18.85 per square foot). In addition to annualized base rent, this tenant pays real estate tax escalations and operating escalations in excess of a base year amount. The following table sets out a schedule of the annual lease expirations at 29 West 35th Street with respect to leases executed as of March 31, 1997 for each of the next ten years and thereafter (assuming that no tenants exercise renewal or cancellation options and that there are no tenant bankruptcies or other tenant defaults):
ANNUAL ANNUAL ESCALATED ESCALATED RENT PER RENT LEASED PERCENTAGE ANNUAL PER SQUARE FOOT SQUARE OF ESCALATED LEASED OF EXPIRING NUMBER FOOTAGE TOTAL RENT SQUARE LEASES OF OF LEASED OF FOOT OF WITH EXPIRING EXPIRING SQUARE EXPIRING EXPIRING FUTURE YEAR OF LEASE EXPIRATION LEASES LEASES FEET LEASES LEASES(1) STEP-UPS - ------------------------------------------------- ------------- ----------- ----------- ------------ ----------- ----------- March 31 through December 31, 1997............... 1 3,835 4.9% $ 108,112 $ 28.19 $ 28.19 1998............................................. 1 9,750 12.5 184,122 18.88 20.42 1999............................................. 1 16,250 20.9 268,533 16.53 16.53 2000............................................. -- -- -- -- -- -- 2001............................................. -- -- -- -- -- -- 2002............................................. -- -- -- -- -- -- 2003............................................. -- -- -- -- -- -- 2004............................................. 3 28,500 36.6 696,953 24.45 33.74 2005............................................. -- -- -- -- -- -- 2006............................................. -- -- -- -- -- -- 2007 and thereafter.............................. 2 13,000 16.7 175,500 13.50 17.56 -- ----------- ----- ------------ ----------- ----------- SUBTOTAL/WEIGHTED AVERAGE........................ 8 71,335 91.6% $ 1,433,222 $ 20.09 $ 24.75(2) -- -- ------------ ----------- ----------- ------------ ----------- ----------- Unleased at 3/31/97.............................. 6,500 8.4% ----------- ----- TOTAL........................................ 77,835 100.0% ----------- ----- ----------- -----
- ------------------------ (1) For comparison purposes, according to RELocate, the Direct Weighted Average Rental Rate for the direct Class B Garment submarket (which, according to RELocate, is the area from 32nd Street to 40th Street west of Avenue of the Americas to the Hudson River) was $22.27 as of March 31, 1997. Direct Weighted Average Rental Rate represents the weighted average of asking rental rates for direct Class B space. Asking rental rates generally are higher than actual rental rates (which generally are not publicly available). Therefore, the Direct Weighted Average Rental Rate may not be representative of asking or actual rental rates at 29 West 35th Street. (2) The differential between Annual Escalated Rent Per Leased Square Foot of Expiring Leases and Annual Escalated Rent Per Leased Square Foot of Expiring Leases with Future Step-Ups is attributable to significant contractual step-ups in base rental rates that exist in certain leases at this Property. 79 In 1985, 29 West 35th Street was substantially renovated by SL Green at a total cost of approximately $1 million. The program included the renovation of the building's lobby, entrance and storefronts, modernization of the elevator equipment, including new cabs, new electric service and distribution, code compliant lavatories and fire protection system and a new roof and sidewalk. 29 West 35th Street is located in the Fashion Center BID, which encompasses the area bordered to the north and south by 41st Street and 35th Street and to the east and west by Avenue of the Americas and Ninth Avenue, respectively. The BID includes approximately 450 buildings with over 5,000 fashion-related tenants occupying more than 34 million square feet of office space. The Fashion Center BID provides a private, uniformed security force for on-street, five-day-per week surveillance and response and a private, uniformed sanitation force. In addition, the BID has been responsible for the implementation of various special projects in the area, including the construction of handicapped access curbs and the installation of enhanced street lighting. The aggregate undepreciated tax basis of depreciable real property at 29 West 35th Street for Federal income tax purposes was $1,478,769 as of March 31, 1997. Depreciation and amortization are computed on the straight-line method over 39 years. The current real estate tax rate for all Manhattan office properties is $10.252 per $100 of assessed value. The total annual tax for 29 West 35th Street at this rate for the 1996-97 tax year, including the applicable BID tax, is $179,654 (at an assessed value of $1,705,500). ACQUISITION PROPERTIES 1372 BROADWAY. The Company has contracted to acquire a 100% fee interest in 1372 Broadway from an unaffiliated seller. Pursuant to a contractual arrangement with the seller, the closing for the acquisition of such fee interest may not occur prior to January 1998. However, the Company has also contracted to acquire, at the time of the closing of the Offering, from an unaffiliated institutional lender, certain mortgage indebtedness that will effectively entitle the Company to receive all of the cash flow derived from the Property. The aggregate purchase price for such fee interest and such mortgage indebtedness is approximately $52.5 million. 1372 Broadway is a 21-story office building located on the northeast corner of West 37th Street in the Garment submarket of the Manhattan office market. The building, situated within four blocks of the Port Authority Bus Terminal and Penn Station, was completed in 1914 and a renovation is anticipated to commence in the fall of 1997. The Property contains approximately 508,000 rentable square feet (including approximately 475,000 square feet of office space, approximately 24,000 square feet of retail space and 9,000 square feet of mezzanine space), with floor plates ranging from 34,000 square feet to 11,000 square feet. The Property is located within five blocks of Times Square, arguably the most vibrant development area in New York City. Times Square has undergone large-scale redevelopment in recent years that has transformed the area into a popular family entertainment destination. The Company has targeted the Fall of 1997 for commencement of a $2 million capital improvement program geared toward enhancing the infrastructure and marketability of the Property. Included in this renovation is a new lobby, elevator cab modernization, freight elevator upgrade, facade restoration and cleaning, sidewalk replacement and asbestos abatement. 80 As of March 31, 1997, approximately 85% of the rentable square footage in 1372 Broadway was leased (including space for leases that were executed as of March 31, 1997). As of May 15, 1997, approximately 83% of the rentable square feet in the Property was leased. The following table sets forth certain information with respect to the Property:
ANNUAL NET ANNUAL ESCALATED EFFECTIVE RENT RENT PER LEASED PER LEASED YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT - ----------------------------------------------------------------- ------------------- ----------------- ------------- 1997(1).......................................................... 85% $ 22.21 $ 21.35 1996............................................................. 89 22.05 21.20
- ------------------------ (1) Information is as of March 31, 1997. As of March 31, 1997, 1372 Broadway was leased to 31 tenants operating in various industries including financial services, textiles and retailing, four of whom occupied 10% or more of the rentable square footage at the Property. A clothing manufacturer occupied approximately 70,098 square feet (approximately 13.8% of the Property) under a lease expiring on March 31, 2010 that provides for annualized base rent as of March 31, 1997 of approximately $1.24 million (approximately $17.73 per square foot). In addition to annualized base rent, this tenant pays real estate tax escalations and operating escalations in excess of a base year amount. In addition, a shirt manufacturer occupied approximately 64,000 square feet (approximately 12.6% of the Property) under a lease expiring on July 31, 2005 that provides for annualized base rent as of March 31, 1997 of approximately $1.28 million (approximately $20.00 per square foot). In addition to annualized base rent, this tenant pays real estate tax escalations and operating escalations in excess of a base year amount. Also, a women's fashion retailer occupied approximately 58,975 square feet (approximately 11.6% of the Property) under a lease expiring on July 31, 2010 that provides for annualized base rent as of March 31, 1997 of approximately $1.17 million (approximately $19.82 per square foot). In addition to annualized base rent, this tenant pays real estate tax escalations and operating escalations in excess of a base year amount. In addition, a commercial bank occupied approximately 55,238 square feet (approximately 10.9% of the Property) under a lease expiring on March 31, 2000 that provides for annualized base rent as of March 31, 1997 of approximately $1.24 million (approximately $22.37 per square foot). In addition to annualized base rent, this tenant pays real estate tax escalations and operating escalations in excess of a base year amount. 81 The following table sets out a schedule of the annual lease expirations at 1372 Broadway with respect to leases executed as of March 31, 1997 for each of the next ten years and thereafter (assuming that no tenants exercise renewal or cancellation options and that there are no tenant bankruptcies or other tenant defaults):
ANNUAL ESCALATED ANNUAL RENT PER PERCENTAGE ANNUAL ESCALATED LEASED SQUARE OF ESCALATED RENT PER SQUARE FOOT NUMBER FOOTAGE TOTAL RENT LEASED OF EXPIRING OF OF LEASED OF SQUARE FOOT LEASES WITH EXPIRING EXPIRING SQUARE EXPIRING OF EXPIRING FUTURE YEAR OF LEASE EXPIRATION LEASES LEASES FEET LEASES LEASES (1) STEP-UPS - ------------------------------------------------ ----------- --------- ----------- ------------ ----------- ----------- March 31 through December 31, 1997.............. 1 506 0.1% $ 11,119 $ 21.97 $ 21.97 1998............................................ 2 2,847 0.6 138,128 48.52 48.67 1999............................................ 5 10,266 2.0 233,683 27.76 23.66 2000............................................ 4 78,157 15.4 1,996,071 25.54 26.14 2001............................................ -- -- -- -- -- -- 2002............................................ 6 56,138 11.1 1,071,103 19.08 19.90 2003............................................ 1 20,500 4.0 429.987 20.97 21.97 2004............................................ -- -- -- -- -- -- 2005............................................ 2 98,167 19.3 1,871,498 19.06 21.41 2006............................................ 4 8,177 1.6 595,542 72.83 86.90 2007 and thereafter............................. 6 155,331 30.6 3,204,957 20.63 25.47 ----------- --------- ----------- ------------ ----------- ----------- SUBTOTAL/WEIGHTED AVERAGE....................... 31 430,089 84.7% $ 9,552,088 $ 22.21(2) $ 25.05(3) ----------- ------------ ----------- ----------- Unleased at 3/31/97............................. 77,849 15.3% --------- ----------- TOTAL....................................... 507,938 100.0% --------- ----------- --------- -----------
- ------------------------ (1) For comparison purposes, according to RELocate, the Direct Weighted Average Rental Rate for the direct Class B Garment submarket (which, according to RELocate is the area from 32nd Street to 40th Street, west of Avenue of the Americas to the Hudson River) was $22.27 as of March 31, 1997. Direct Weighted Average Rental Rate represents the weighted average of asking rental rates for direct Class B space. Asking rental rates generally are higher than actual rental rates (which generally are not publicly available). Therefore, the Direct Weighted Average Rental Rate may not be representative of asking or actual rental rates at 1372 Broadway. (2) Excluding rental payments attributable to retail space at this Property, the weighted average Annual Escalated Rent Per Leased Square Foot of Expiring Leases would be $20.36. (3) The differential between Annual Escalated Rent Per Leased Square Foot of Expiring Leases and Annual Escalated Rent Per Leased Square Foot of Expiring Leases with Future Step-Ups is attributable to significant contractual step-ups in base rental rates that exist in certain leases at this Property. 1372 Broadway is located in the Fashion Center BID, which encompasses the area bordered to the north and south by 41st Street and 35th Street, respectively, and to the east and west by Avenue of the Americas and Ninth Avenue, respectively. The BID includes approximately 450 buildings with over 5,000 fashion-related tenants occupying more than 34 million square feet of office space. The Fashion Center BID provides a private, uniformed security force for on-street, five-day-per week surveillance and response and a private, uniformed sanitation force. In addition, the BID has been responsible for the implementation of various special projects in the area, including the construction of handicapped access curbs and the installation of enhanced street lighting. 82 1140 AVENUE OF THE AMERICAS. The Company has contracted to acquire a 100% interest in the leasehold position in 1140 Avenue of the Americas from an unaffiliated seller for an aggregate cash purchase price of approximately $20.9 million. The Company intends to encumber the Property with an approximately $14 million first mortgage loan at the time of closing of the Offering and is currently negotiating the terms of such loan with prospective lenders. 1140 Avenue of the Americas is a 22-story office building completed in 1926 and renovated in 1951 and located in the Rockefeller Center submarket of the Manhattan office market. The Property contains approximately 191,000 rentable square feet (including approximately 175,000 square feet of office space, approximately 7,600 square feet of retail space and 8,400 square feet of mezzanine space), with floor plates ranging from 3,500 square feet to 9,400 square feet. 1140 Avenue of the Americas is centrally located at the northeast corner of West 44th Street and Avenue of the Americas, in the heart of midtown Manhattan, at the end of a block that includes the headquarters of the Association of the Bar of the City of New York, the University of Pennsylvania Alumni Club, the Harvard Club, the Algonquin Hotel, the Royalton Hotel and the Mansfield Hotel. A new Sofitel hotel is planned for a vacant parcel of land located on the block. The location is within three blocks of Grand Central Terminal, four blocks of Rockefeller Center and five blocks of the Port Authority Bus Terminal, a major transportation hub for commuters from New Jersey. As of March 31, 1997, approximately 98% of the rentable square footage in 1140 Avenue of the Americas was leased (including space for leases that were executed as of March 31, 1997). The following table sets forth certain information with respect to the Property:
ANNUAL NET ANNUAL ESCALATED EFFECTIVE RENT RENT PER LEASED PER LEASED YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT - ----------------------------------------------------------------- ------------------- ----------------- ------------- 1997(1).......................................................... 98% $ 26.93 $ 24.92 1996............................................................. 99 27.77 24.91
- ------------------------ (1) Information is as of March 31, 1997. As of March 31, 1997, 1140 Avenue of the Americas was leased to 40 tenants operating in various industries including executive placement, financial services and precious stones, none of whom occupied 10% or more of the rentable square footage at the Property. 83 The following table sets out a schedule of the annual lease expirations at 1140 Avenue of the Americas with respect to leases executed as of March 31, 1997 for each of the next ten years and thereafter (assuming that no tenants exercise renewal or cancellation options and that there are no tenant bankruptcies or other tenant defaults):
ANNUAL ESCALATED ANNUAL RENT PER PERCENTAGE ANNUAL ESCALATED LEASED SQUARE OF ESCALATED RENT PER SQUARE FOOT NUMBER FOOTAGE TOTAL RENT LEASED OF EXPIRING OF OF LEASED OF SQUARE FOOT LEASES WITH EXPIRING EXPIRING SQUARE EXPIRING OF EXPIRING FUTURE YEAR OF LEASE EXPIRATION LEASES LEASES FEET LEASES LEASES (1) STEP-UPS - ------------------------------------------------ ----------- --------- ----------- ------------ ----------- ----------- March 31 through December 31, 1997.............. 5 22,076 11.6% $ 677,371 $ 30.68 $ 30.68 1998............................................ 4 5,534 2.9 180,291 32.58 33.04 1999............................................ 9 31,519 16.5 869,030 27.57 27.57 2000............................................ 2 13,400 7.0 376,992 28.13 29.73 2001............................................ 5 22,198 11.6 693,223 31.23 32.10 2002............................................ -- -- -- -- -- -- 2003............................................ 5 17,819 9.3 443,930 24.91 29.30 2004............................................ 5 40,370 21.4 937,632 23.23 27.20 2005............................................ 3 17,498 9.2 448,885 25.65 30.43 2006............................................ 1 9,400 4.9 214,038 27.77 30.77 2007 and thereafter............................. 1 7,175 3.8 194,122 27.06 33.06 --- --------- ----------- ------------ ----------- ----------- SUBTOTAL/WEIGHTED AVERAGE....................... 40 186,989 97.9% $ 5,035,514 $ 26.93(2) $ 29.52(3) --- ------------ ----------- ----------- Unleased at 3/31/97............................. 3,982 2.1% --------- ----------- TOTAL....................................... 190,971 100.0% --------- ----------- --------- -----------
- ------------------------ (1) For comparison purposes, according to RELocate the Direct Weighted Average Rental Rate for the direct Class B Rockefeller Center submarket (which, according to RELocate, is the area between 40th Street to 59th Street along Avenue of the Americas and 40th Street to 52nd Street between Fifth Avenue and Avenue of the Americas) was $27.09 as of March 31, 1997. Direct Weighted Average Rental Rate represents the weighted average of asking rental rates for direct Class B space. Asking rental rates generally are higher than actual rental rates (which generally are not publicly available). Therefore, the Direct Weighted Average Rental Rate may not be representative of asking or actual rental rates at 1140 Avenue of the Americas. (2) Excluding rental payments attributable to retail space at this Property, the weighted average Annual Escalated Rent Per Leased Square Foot of Expiring Leases would be $25.65. (3) The differential between Annual Escalated Rent Per Leased Square Foot of Expiring Leases and Annual Escalated Rent Per Leased Square Foot of Expiring Leases with Future Step-Ups is attributable to significant contractual step-ups in base rental rates that exist in certain leases at this Property. THE OPTION PROPERTY SL Green expects to obtain an option from an unaffiliated seller to acquire a 100% fee interest in 50 West 23rd Street, a 330,000 rentable square foot 13-story Class B office building located in the Chelsea submarket of Manhattan. The cost of obtaining the option is expected to be $500,000 and the purchase price for the property is expected to be approximately $36 million. In connection with the Formation Transactions, the option, if acquired, will be assigned to the Operating Partnership at cost and will be 84 exercisable through July 31, 1997. The term of the option is expected to be extendable for up to three successive one month periods (I.E., through October 31, 1997) at a cost of $100,000 per extension. GENERAL TERMS OF LEASES IN THE MIDTOWN MARKETS Leases entered into for space in the Midtown Markets typically contain terms which may not be contained in leases in other U.S. office markets. The initial term of leases entered into for space in excess of 10,000 square feet in the Midtown Markets generally is ten to 15 years. The tenant often will negotiate an option to extend the term of the lease for one or two renewal periods of five years each. The base rent during the initial term often will provide for agreed upon increases periodically over the term of the lease. Base rent for renewal terms, and base rent for the final years of a long-term year lease (in those leases which do not provide an agreed upon rent during such final years), often is based upon a percentage of the fair market rental value of the premises (determined by binding arbitration in the event the landlord and the tenant are unable to mutually agree upon the fair market value) but not less than the base rent payable at the end of the prior period. Leases typically do not provide for increases in rent based upon increases in the consumer price index. In addition to base rent, the tenant also generally will pay the tenant's pro rata share of increases in real estate taxes and operating expenses for the building over a base year. In some leases, in lieu of paying additional rent based upon increases in building operating expenses, the tenant will pay additional rent based upon increases in the wage rate paid to porters over the porters' wage rate in effect during a base year. Electricity is most often supplied by the landlord either on a submetered basis or rent inclusion basis (i.e., a fixed fee is included in the rent for electricity, which amount may increase based upon increases in electricity rates or increases in electrical usage by the tenant). Base building services other than electricity (such as heat, air-conditioning and freight elevator service during business hours, and base building cleaning) typically are provided at no additional cost, with the tenant paying additional rent only for services which exceed base building services or for services which are provided other than during normal business hours. In a typical lease for a new tenant, the landlord, at its expense, will deliver the premises with all existing improvements demolished and any asbestos abated. The landlord also typically will provide a tenant improvement allowance, which is a fixed sum which the landlord will make available to the tenant to reimburse the tenant for all or a portion of the tenant's initial construction of its premises. Such sum typically is payable as work progresses, upon submission of invoices for the cost of construction. However, in certain leases (most often for relatively small amounts of space), the landlord will construct the premises for the tenant. MORTGAGE INDEBTEDNESS Upon completion of the Offering, the Company expects to have outstanding approximately $46.5 million of indebtedness secured by four of the Properties. The Company currently is negotiating with each of its lenders (and the Property-owning entities are negotiating with each of their lenders) regarding the terms of the indebtedness that will be outstanding after the Offering. The following table sets forth the mortgage debt of the Company expected to be outstanding after completion of the Offering and the Formation Transactions and the Company's best estimate of the expected terms of such indebtedness. 85 MORTGAGE INDEBTEDNESS TO BE OUTSTANDING AFTER THE COMPLETION OF THE OFFERING
ESTIMATED EXPECTED ESTIMATED ESTIMATED ESTIMATED INTEREST PRINCIPAL ANNUAL MATURITY BALANCE AT PROPERTY RATE BALANCE(1) DEBT SERVICE DATE MATURITY - ---------------------------------------------- ----------- ------------- ------------ --------- ------------- 673 First Avenue.............................. 9.0% $ 18,618,630 $ 3,140,964 12/13/03 $ 2,000,000 470 Park Avenue South......................... 8.25 10,934,798 1,206,528 04/14/04 8,284,863 29 West 35th Street........................... 8.46 2,991,454 323,912 02/01/01 2,704,409 1140 Avenue of the Americas (2)............... 8.25(3) 14,000,000 1,155,000 07/31/07 14,000,000 ------------- ------------ ------------- Total....................................... $ 46,544,882 $ 5,826,404 $ 26,989,272 ------------- ------------ ------------- ------------- ------------ -------------
- ------------------------ (1) As of August 1, 1997. (2) The Company expects to encumber this Acquistion Property with a first mortgage loan upon approximately the terms set forth in this table. (3) Estimated based upon current market interest rates. CREDIT FACILITY The Company currently is engaged in discussions with various lenders regarding the establishment of a revolving Credit Facility that will be used to facilitate acquisitions and for working capital purposes. Although the Company expects that the Credit Facility will be established shortly after the completion of the Offering, there can be no assurance at this time as to whether the Company will be successful in obtaining the Credit Facility, or, if the Credit Facility is established, the terms governing the Credit Facility. ENVIRONMENTAL MATTERS The Company engaged independent environmental consulting firms to perform Phase I environmental site assessments on the Properties, in order to assess existing environmental conditions. All of the Phase I assessments have been conducted since March 1997, except for the Bar Building, where a Phase I assessment was conducted in September 1996. All of the Phase I assessments met the ASTM Standard. Under the ASTM Standard, a Phase I environmental site assessment consists of a site visit, a historical record review, a review of regulatory agency data bases and records, interviews, and a report, with the purpose of identifying potential environmental concerns associated with real estate. The Phase I assessments conducted at the Properties also addressed certain issues that are not covered by the ASTM Standard, including asbestos, radon, lead-based paint and lead in drinking water. These environmental site assessments did not reveal any known environmental liability that the Company believes will have a material adverse effect on the Company's financial condition or results of operations or would represent a material environmental cost. The following summarizes certain environmental issues described in the Phase I environmental site assessment reports: The asbestos surveys conducted as part of the Phase I site assessments identified immaterial amounts of damaged, friable asbestos-containing material ("ACM") in isolated locations in three of the Core Properties (470 Park Avenue South, 29 West 35th Street and the Bar Building) and in the Acquisition Properties (1140 Avenue of the Americas and 1372 Broadway). At each of these Properties, the environmental consultant recommended abatement of the damaged, friable ACM. At all of the Properties except 50 West 23rd Street, non-friable ACM, in good condition, was identified. For each of these Properties, the consultant recommended preparation and implementation of an asbestos Operations and Maintenance ("O & M") program, to monitor the condition of ACM and to ensure that any ACM that becomes friable 86 and damaged is properly addressed. The Company does not believe that any risks associated with ACM are likely to have a material adverse effect on the Company's business. The Phase I environmental site assessments identified minor releases of petroleum products at the Bar Building and at 70 West 36th Street. The consultant recommended implementation of certain measures to further investigate, and to clean up, these releases. The Company does not believe that any actions that may be required as a result of these releases will have a material adverse effect on the Company's business. PROPERTY MANAGEMENT AND LEASING SERVICES The Company (through the Management Entities and the Leasing Corporation) will conduct its management and leasing business largely in the same manner as it currently is conducted by SL Green. SL Green currently provides management and leasing services for 28 properties (including the Properties in the Core Portfolio) in the New York metropolitan area. Of these properties, SL Green currently has an ownership interest in the six Properties in the Core Portfolio to be owned by the Company. SL Green's management and leasing business is an established office property management and leasing business with extensive experience. SL Green has been managing and leasing Manhattan office properties since 1981. SL Green seeks to provide tenants with a level of service more typically found in Class A properties. The Company's comprehensive tenant service program and property amenities have been designed to maximize tenant satisfaction and retention as well as to establish long-term relationships with its tenant base. See "Business and Growth Strategies" above. The Company believes that its fully integrated management structure enhances its ability to respond to tenant needs and permits the Company to maintain control over certain costs associated with the management and renovation of its properties. The Company maintains a staff of 40 professionals experienced in the management of Manhattan Class B office properties. This management team has developed a comprehensive knowledge of the Class B Manhattan office market, an extensive network of local tenant and other business relationships and is experienced in acquiring office properties and repositioning them into profitable Class B properties through intensive full service management and leasing efforts. In addition, the Company seeks to capitalize on its market position and relationships with an extensive network of brokers and tenants to implement a proactive leasing program. Management believes that its extensive knowledge of the Class B Manhattan office market enhances its ability to monitor, understand and anticipate the current and future space needs of tenants in its submarkets. See "Business and Growth Strategies" above. After the completion of the Offering and the Formation Transactions, the Company (through the Management LLC) will provide management and leasing services for the Properties to be owned by the Company. In addition, it is anticipated that the Company (through the Management Corporation and the Leasing Corporation) will provide management and leasing services for properties in which the Company owns no interest. CONSTRUCTION SERVICES The Company (through the Construction Corporation and the Management Entities) will conduct the construction business largely in the same manner as it currently is conducted by SL Green. Construction services will be provided both as a part of the Company's management business and through the Construction Corporation as a general contractor. CONSTRUCTION MANAGEMENT AS PART OF MANAGEMENT SERVICE AGREEMENTS. A fee from 1.5% to 5% of costs incurred for capital improvements or tenant installations is paid to the Management Entities for construction management services. These services are comprised of (i) preconstruction scope of work development 87 and preliminary cost estimating for the leasing department in connection with potential leasing transactions, plan review and approval of proposed tenant installation plans; coordination with property management with respect to tenant installation construction as it relates to building systems; and, coordination and supervision of tenant's architects, engineers and contractors in managed properties from the beginning of lease workletter negotiations through construction of the tenant's build-out to move-in and (ii) capital improvement programs, including major building renovations, system upgrades, local law compliance requirements, and completion of deferred maintenance items requiring replacement (rather than repair). GENERAL CONTRACTOR SERVICES PROVIDED THROUGH THE CONSTRUCTION CORPORATION. The Construction Corporation will charge from 5% to 10% over the costs of construction for the building of tenant installations in properties managed and leased by the Management Entities and the Leasing Corporation. This service enables the leasing agent to offer "turn-key" and "prebuilt" spaces to prospective tenants who want to have space prepared for them to move into without having to go through the designing/building process, while holding down the costs of tenant improvements. EMPLOYEES The Company initially intends to employ approximately 50 persons. Of such 50 employees, approximately 48 will be "home office" executive and administrative personnel and approximately two will be on-site management and administrative personnel. Following the completion of the Offering and the Formation Transactions, the Company currently expects that none of these employees will be represented by a labor union. TRANSFER OF PROPERTIES Interests in the Properties in the Core Portfolio will be acquired by the Company (through the Operating Partnership) pursuant to agreements for contribution of interests (each a "Contribution Agreement"). The acquisitions are subject to all of the terms and conditions of such agreements. The holders of interests in the Property-owning entities (which own partial or complete interests in the individual Properties) will transfer their interests to entities controlled by the Company for cash or Units. The Company will assume all the rights, obligations and responsibilities of the contributors of interests. The transfer of ownership interests in each Property is subject to the completion of the Offering. The Contribution Agreements generally contain representations only with respect to the ownership of the interests by the holders thereof and certain other limited matters. Pursuant to a Supplemental Representations and Warranties Agreement (the "Supplemental Agreement"), certain SL Green entities will agree to indemnify the Company against certain breaches of representations and warranties made by such SL Green entities with respect to the Properties and the management, leasing and construction businesses being transferred to the Company for a period of 12 months following the completion of the Offering. The maximum aggregate liability of such SL Green entities under the Supplemental Agreement is limited to the value of the Units received by the SL Green entities in the Formation Transactions, with no liability being assumed until the aggregate liability exceeds $250,000. Recourse for any liabilities under the Supplemental Agreement will be limited to Units received by such SL Green entities in the Formation Transactions. Certain SL Green entities will pledge an aggregate of approximately $17.75 million of Units (based on the initial public offering price of shares of Common Stock) to secure their indemnification obligations under the Supplemental Agreement. ASSETS NOT BEING TRANSFERRED TO THE COMPANY In addition to the interests of SL Green in the Properties which are being acquired by the Company, SL Green also owns interests in certain other properties which the Company will not acquire at the time of the completion of the Offering and the Formation Transactions. These interests are (i) a portion of a net leasehold interest scheduled to expire in 2000, in a substantially vacant showroom building located at 305 88 East 63rd Street in Manhattan which is slated for conversion to residential space, (ii) a one-third non-controlling interest in a loft building located at 133 West 21st Street in Manhattan substantially occupied by one tenant pursuant to leases scheduled to expire in the near term, (iii) the net leasehold of an office building located at 215 Park Avenue South in Manhattan, the equity in which is controlled by the leasehold mortgagee and which the Company believes has no value to SL Green, (iv) interests in ground floor retail and other non-office commercial space in various predominantly residential buildings located in Manhattan (830/832 Broadway, 5 East 16th Street, 12 East 12th Street, 8 East 12th Street and 30 West 15th Street), (v) an 89% interest in a warehouse/distribution center in Bethlehem, Pennsylvania and (vi) a 12% interest in a limited liability company that owns a mortgage interest in a 300,000 square foot office building in midtown Manhattan, which interest cannot be transferred to the Company without the consent of the owner of the remaining 88% interest. The Company also will not acquire at the time of the completion of the Offering any interest in certain office property service businesses currently conducted by companies which are owned by a son of Stephen L. Green. These services include office cleaning (and related) services and security services with respect to the Company's properties and properties in which the Company will not own any interest, as well as facilities management services with respect to third parties. The interests in these service businesses are not being transferred to the Company at the time of the completion of the Offering in order to maintain the Company's qualification as a REIT for Federal income tax purposes or because the Company does not believe such services are directly related or material to the Company's business strategy. After the completion of the Offering, the Company may retain two entities (both of which are owned by a son of Stephen L. Green) to provide cleaning and security services for the Properties. Such services would be provided to the Company at competitive rates. The Company expects these services would be provided under contracts with such SL Green entities with an initial one-year term, but will be terminable by either party upon 30 days' notice. Any actions with respect to the contracts to provide these services that may be taken by the Company in the future would need to be approved by a vote of the disinterested members of the Board of Directors of the Company. See "Policies with Respect to Certain Activities--Conflict of Interest Policies." After the completion of the Offering, certain employees of the Management LLC will supervise the provision of cleaning and security services by SL Green entities with respect to the Company's properties. COMPETITION All of the Properties are located in highly developed areas of midtown Manhattan that include a large number of other office properties. Manhattan is by far the largest office market in the United States and contains more rentable square feet than the next six largest central business district office markets in the United States combined. Of the total inventory of 378 million rentable square feet in Manhattan approximately 205 million rentable square feet is comprised of Class A office space and 173 million of Class B office space. Class A office properties are generally newer than Class B office properties, have higher finishes and command higher rental rates. Many tenants have been attracted to Class B properties in part because of their relatively less expensive rental rates and the tightening of the Class A office market in midtown Manhattan. See "Market Overview." Consequently, an increase in vacancy rates and/or a decrease in rental rates for Class A office space would likely have an adverse effect on rental rates for Class B office space. Also, the number of competitive Class B office properties in Manhattan (some of which are newer and better located) could have a material adverse effect on the Company's ability to lease office space at its properties, and on the effective rents the Company is able to charge. In addition, the Company may compete with other property owners that have greater resources than the Company. See "Risk Factors--Competition." 89 REGULATION GENERAL. Office properties in Manhattan are subject to various laws, ordinances and regulations, including regulations relating to common areas. The Company believes that each Property has the necessary permits and approvals to operate its business. AMERICANS WITH DISABILITIES ACT. The Company's properties must comply with Title III of the ADA to the extent that such properties are "public accommodations" as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of the Company's properties where such removal is readily achievable. The Company believes that the Properties are in substantial compliance with the ADA and that it will not be required to make substantial capital expenditures with respect to the Properties to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and the Company will continue to assess its properties and to make alterations as appropriate in this respect. ENVIRONMENTAL MATTERS. Under various Federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up certain hazardous substances released at a property, and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred by the parties in connection with the contamination. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of contamination or the failure to remediate contamination may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. See "Risk Factors." INSURANCE The Operating Partnership carries comprehensive liability, fire, extended coverage and rental loss insurance covering all of the Properties, with policy specifications and insured limits which the Company believes are adequate and appropriate under the circumstances. There are, however, certain types of losses that are not generally insured because they are either uninsurable or not economically feasible to insure. Should an uninsured loss or a loss in excess of insured limits occur, the Operating Partnership could lose its capital invested in the property, as well as the anticipated future revenues from the property and, in the case of debt which is with recourse to the Operating Partnership, would remain obligated for any mortgage debt or other financial obligations related to the property. Any such loss would adversely affect the Company. Moreover, as a general partner of the Operating Partnership, the Company will generally be liable for any unsatisfied obligations other than non-recourse obligations. The Company believes that the Properties will be adequately insured; however no assurance can be given that material losses in excess of insurance proceeds will not occur in the future. LEGAL PROCEEDINGS The Company currently is not a party to any legal proceedings. Certain SL Green entities are parties to a variety of legal proceedings relating to their ownership of the Properties in the Core Portfolio and SL Green's activities with regard to its construction, management and leasing businesses, respectively, arising in the ordinary course of business. Because the Company may be acquiring certain of the Properties subject to associated liabilities, it may therefore become a successor party-in-interest to certain of these proceedings as a result of the Formation Transactions. The Company believes that substantially all of this liability is covered by insurance. All of these matters, taken together, are not expected to have a material adverse impact on the Company. 90 MANAGEMENT DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS The Board of Directors of the Company will be expanded immediately following the completion of the Offering to include the director nominees named below, each of whom has been nominated for election and has consented to serve. Upon election of the director nominees, a majority of directors will not be employees or affiliates of the Company or SL Green. Pursuant to the Company's Charter, the Board of Directors is divided into three classes of directors. The initial terms of the first, second and third classes will expire in 1998, 1999 and 2000, respectively. Beginning in 1998, directors of each class will be chosen for three-year terms upon the expiration of their current terms and each year one class of directors will be elected by the stockholders. The Company believes that classification of the Board of Directors will help to assure the continuity and stability of the Company's business strategies and policies as determined by the Board of Directors. Holders of shares of Common Stock will have no right to cumulative voting in the election of directors. Consequently, at each annual meeting of stockholders, the holders of a majority of the shares of Common Stock will be able to elect all of the successors of the class of directors whose terms expire at that meeting. The following table sets forth certain information with respect to the directors, director nominees and executive officers of the Company immediately following the completion of the Offering:
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- Stephen L. Green..................................... 59 Chairman of the Board, Chief Executive Officer and President (term will expire in 2000) Nancy Ann Peck....................................... 53 Executive Vice President--Development and Operations Steven H. Klein...................................... 37 Executive Vice President--Acquisitions Benjamin P. Feldman.................................. 45 Executive Vice President, General Counsel and Director (term will expire in 1999) Gerard Nocera........................................ 40 Executive Vice President--Leasing Louis A. Olsen....................................... 53 Treasurer and Chief Financial Officer Edwin Thomas Burton, III............................. 54 Director Nominee (term will expire in 1998) John S. Levy......................................... 61 Director Nominee (term will expire in 1999) John J. Robbins...................................... 58 Director Nominee (term will expire in 2000)
STEPHEN L. GREEN will serve as the Chairman of the Board of Directors, Chief Executive Officer and President of the Company. Stephen L. Green founded S.L. Green Real Estate in 1980. Since then he has been involved in the acquisition of over 30 Manhattan office buildings containing in excess of four million square feet and the management of 50 Manhattan office buildings containing in excess of 10 million square feet. His clients have included Aldrich Eastman & Waltch, Bank of New York, CalPERS, Dai-lchi Kangyo Bank, and CS First Boston. Mr. Green is a Governor of the Real Estate Board of New York and an at-large member of the Executive Committee of the Board of Governors of the Real Estate Board of New York. Additionally, Mr. Green is a Co-Chairman of the Real Estate Tax Fairness Coalition. Mr. Green received a B.A. degree from Hartwick College and a J.D. degree from Boston College Law School. Mr. Green is the husband of Nancy A. Peck. NANCY ANN PECK will serve as Executive Vice President-Development and Operations of the Company. Since 1983, Ms. Peck has supervised redevelopment of the SL Green projects and has overseen the management and construction of all properties owned and managed by SL Green. Prior to joining SL Green, Ms. Peck served as project coordinator for projects valued inexcess of $500 million, one of which was the renovation and conversion of the two million square foot American Furniture Mart in Chicago into a multi-use complex. Ms. Peck worked for McKeon Construction Corp., Paul Properties and Shelter Rock Holdings Corp. She recently was appointed to the Board of Directors of the Real Estate Board of New 91 York, Management Division. Ms. Peck received a B.A. degree from the University of California at Berkeley and an MBA in finance from New York University Business Scool. She is the wife of Stephen L. Green. STEVEN H. KLEIN will serve as Executive Vice President-Acquisitions of the Company. Mr. Klein has overseen the Asset Management division of SL Green since 1991 and participates in acquisition, sale and investment analysis decisions. Mr. Klein has played a major role in the redevelopment of SL Green's managed portfolio. Prior to joining SL Green, Mr. Klein worked at Gallin Realty Company in marketing and leasing. Mr. Klein received a B.A. degree from the University of Michigan. BENJAMIN P. FELDMAN will serve as Executive Vice President and General Counsel of the Company and as a Director of the Company. He has served as General Counsel of SL Green since 1987. Mr. Feldman handles the legal aspects of all leasing, financing and acquisition decisions. Prior to joining the Company, Mr. Feldman was vice-president and general counsel for Bruce Berger Realty. Mr. Feldman received a B.A. degree from Columbia University and a J.D. degree from Columbia University School of Law. GERARD NOCERA will serve as Executive Vice President-Leasing of the Company. Since 1991, Mr. Nocera has been responsible for the development and implementation of marketing and leasing programs at SL Green owned and managed properties. Prior to joining SL Green, Mr. Nocera worked for The Cohen Brothers as a landlord representative. Mr. Nocera is a member of the Real Estate Board of New York. Mr. Nocera received a B.A. degree from Duquesne University. LOUIS A. OLSEN will serve as Treasurer and Chief Financial Officer of the Company. Since 1988, Mr. Olsen has overseen all financial and accounting functions at SL Green. Before joining SL Green, Mr. Olsen was vice president and comptroller of the management division of Edward S. Gordon Company where he was responsible for the financial accounting of an 8 million square foot commercial office portfolio managed by Edward S. Gordon. Mr. Olsen also served for four years as vice president of Chase Manhattan Bank where he was responsible for financial reporting for the $200 million Real Estate Owned Portfolio. Mr. Olsen also worked as a manager in the real estate department at Peat, Marwick & Mitchell. Mr. Olsen received a B.S. degree in accounting from Bloomfield College and an M.B.A. degree in accounting and taxation from Fairleigh Dickenson University. Mr. Olsen is a licensed New York State Certified Public Accountant. EDWIN THOMAS BURTON, III has been Chairman of the Board of Trustees and a member of the Investment Advisory Committee of the Virginia Retirement System ("VRS") for state and local employees of the Commonwealth of Virginia ($25 billion in assets) since 1994. Mr. Burton also served as the Chairman of the VRS Special Committee on the sale of RF&P Corporation, a $70 million real estate company. He is also currently a visiting professor of commerce and economics at the University of Virginia, where he has received several awards of distinction. From 1994 until 1995, Mr. Burton served as Senior Vice President, Managing Director and member of the Board of Directors of Interstate Johnson Lane, Incorporated, an investment banking firm where he was responsible for the Corporate Finance and Public Finance Divisions. From 1987 to 1994, Mr. Burton served as President of Rothschild Financial Services, Incorporated (a subsidiary of Rothschild, Inc. of North America), an investment banking company headquartered in New York City that is involved in proprietary trading, securities lending and other investment activities. From 1985 until 1987, Mr. Burton was a partner of First Capital Strategists, a partnership that managed security lending and investment activities for large endowment portfolios. Mr. Burton also served as a consultant to the American Stock Exchange from 1985 until 1986 and a senior vice president with Smith Barney (or its corporate predecessor) from 1976 until 1984. Mr. Burton currently serves on the Board of Directors of Capstar, a publicly traded hotel company and SNL Securities, a private securities date company. He has held various teaching positions at York College, Rice University and Cornell University and has written and lectured extensively in the field of economics. Mr. Burton also serves as a member of the Children's Medical Center Committee of the University of Virginia Hospital Advisory Board, a member of the Jefferson Scholar Selection Committee at the University of Virginia, a board member of 92 Madison House in Charlottesville, Virginia and a member of the Governor's Commission on Governmental Reform for the Commonwealth of Virginia. Mr. Burton received a B.A. and an M.A. in economics from Rice University and a Ph.D in economics from Northwestern University. JOHN S. LEVY is a private investor. Mr. Levy was associated with Lehman Brothers Inc. (or its corporate predecessors) from 1983 until 1995. During this period, Mr. Levy served as Managing Director and Chief Administrative Officer of the Financial Services Division, Senior Executive Vice President and Co-Director of the International Division overseeing the International Branch System and Managing Partner of the Equity Securities Division, where he managed the International, Institutional, Retail and Research Departments. Prior to that period, Mr. Levy was associated with A.G. Becker Incorporated (or its corporate predecessors) from 1960 until 1983. During this period, Mr. Levy served as Managing Director of the Execution Services Division, Vice President-Manager of Institutional and Retail Sales, Manager of the Institutional Sales Division, Manager of the New York Retail Office and a Registered Representative. Mr. Levy received a B.A. degree from Dartmouth College. JOHN J. ROBBINS has served as a Trustee of Keene Creditors Trust (a trust which compensates holders of asbestos-related claims) since August 1996. He was a partner of Kenneth Leventhal & Company from 1972 to 1992, serving as Managing Partner of the firm's New York office from 1979 to 1992 and as a member of the firm's Executive Committee from 1982 to 1992. Mr. Robbins is a member of the American Institute of Certified Public Accountants ("AICPA") and served as a member of the Accounting Standards Executive Committee of the AICPA, as well as the AICPA Task Forces on Income Taxes and Interest Capitalization. He also served as Chairman of the AICPA Task Forces on Bankruptcy and Consolidations. In addition, Mr. Robbins was a member of the Emerging Issues Task Force of the Financial Accounting Standards Board. Mr. Robbins received a B.A. in accounting from the University of Texas. COMMITTEES OF THE BOARD OF DIRECTORS EXECUTIVE COMMITTEE. Promptly following the completion of the Offering, the Board of Directors will establish an Executive Committee. Subject to the Company's conflict of interest policies, the Executive Committee will be granted the authority to acquire and dispose of real estate and the power to authorize, on behalf of the full Board of Directors, the execution of certain contracts and agreements, including those related to the borrowing of money by the Company (and, consistent with the Partnership Agreement of the Operating Partnership, to cause the Operating Partnership to take such actions). The Executive Committee initially will consist of Stephen L. Green and at least two additional directors. AUDIT COMMITTEE. Promptly following the completion of the Offering, the Board of Directors will establish an Audit Committee. The Audit Committee will make recommendations concerning the engagement of independent public accountants, review with the independent public accountants the scope and results of the audit engagement, approve professional services provided by the independent public accountants, review the independence of the independent public accountants, consider the range of audit and non-audit fees and review the adequacy of the Company's internal accounting controls. The Audit Committee initially will consist of two or more independent directors. COMPENSATION COMMITTEE. Promptly following the completion of the Offering, the Board of Directors will establish a Compensation Committee consisting of at least two independent directors to establish remuneration levels for executive officers of the Company and to implement and administer the Company's stock option plans and any other incentive programs. The Board of Directors may from time to time establish certain other committees to facilitate the management of the Company. 93 COMPENSATION OF DIRECTORS The Company intends to pay its non-employee directors annual compensation of $12,000 for their services. In addition, non-employee directors will receive a fee of $1,000 for each Board of Directors meeting attended (in person or by telephone). Non-employee directors will receive an additional fee of $500 for each committee meeting attended (in person or by telephone), unless the committee meeting is held on the day of a meeting of the Board of Directors. Non-employee directors also will be reimbursed for reasonable expenses incurred to attend director and committee meetings. Compensation and fees may be paid to non-employee directors in the form of cash or Common Stock, at the election of each such director. Officers of the Company who are directors will not be paid any director's compensation or fees. Pursuant to the Company's stock option plan, non-employee directors will receive, upon initial election to the Board of Directors, options to purchase 6,000 shares of Common Stock (at the initial public offering price or, if elected following the completion of the Offering, at the prevailing market price) which will vest after one year. EXECUTIVE COMPENSATION The following table sets forth the annual base salary rates and other compensation expected to be paid in 1997 to the Company's Chief Executive Officer and each of the Company's other four most highly compensated executive officers.
1997 BASE SALARY RATE OPTIONS NAME TITLE (1) ALLOCATED (2) - ----------------------------------------- ----------------------------------------- -------------- ------------- Stephen L. Green......................... Chairman of the Board, President and $ 250,000 Chief Executive Officer Nancy A. Peck............................ Executive Vice President-- Development $ 150,000 and Operations Steven H. Klein.......................... Executive Vice President-- Acquisitions $ 175,000 Benjamin P. Feldman...................... Executive Vice President and General $ 150,000 Counsel Gerard Nocera............................ Executive Vice President--Leasing $ 175,000
- ------------------------ (1) Does not include bonuses that may be paid to the above individuals. See "--Incentive Compensation" below. (2) Upon the effective date of the Offering, options to purchase a total of 660,000 shares of Common Stock will be granted to officers and other employees of the Company under the Company's stock option plan at a price equal to the initial public offering price. See "--Stock Option Plan" below." 94 OPTION GRANTS IN FISCAL YEAR 1997
PERCENT OF TOTAL OPTIONS TO OPTIONS BE GRANTED EXERCISE TO BE TO EMPLOYEES PRICE EXPIRATION NAME GRANTED(1) IN FISCAL YEAR PER SHARE(2) DATE - ------------------------------------------- ----------------- --------------------- ------------------- ----------------- Stephen L. Green........................... Nancy A. Peck.............................. Benjamin P. Feldman........................ Steven H. Klein............................ Gerard Nocera.............................. Louis A. Olsen............................. POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF SHARE PRICE APPRECIATION FOR OPTION TERM ---------------------- NAME 5% 10% - ------------------------------------------- ---------- ---------- Stephen L. Green........................... Nancy A. Peck.............................. Benjamin P. Feldman........................ Steven H. Klein............................ Gerard Nocera.............................. Louis A. Olsen.............................
- ------------------------ (1) The options for one-third of the covered shares (disregarding fractional shares, if any) will become exercisable on each of the first, second and third anniversaries of the date of the grant. (2) Based on the assumed initial public offering price. The exercise price per share will be the initial public offering price. EMPLOYMENT AND NONCOMPETITION AGREEMENTS Each of Stephen L. Green, Nancy A. Peck, Steven H. Klein, Benjamin P. Feldman, Gerard Nocera and Louis A. Olsen will enter into an employment and noncompetition agreement with the Company which will be effective as of the completion of the Offering. Each agreement will expire on the third anniversary of the closing of the Offering, unless otherwise extended and provides for certain severance payments in the event of the employee's death, disability, termination without cause or resignation with good reason. The employment and noncompetition agreements will, subject to certain exceptions, prohibit each of such persons from engaging, directly or indirectly, during the term of his or her employment, in any business which engages or attempts to engage in, directly or indirectly, the acquisition, development, construction, operation, management or leasing of any office real estate property within the New York City metropolitan area (the "Competitive Activities"). Pursuant to the agreements, each of such persons will devote substantially all of his or her business time to the Company. The employment and noncompetition agreement of Stephen L. Green will also, subject to certain exceptions, prohibit Mr. Green from engaging, directly or indirectly, during the Noncompetition Period in any Competitive Activities. The Noncompetition Period is the period beginning on the date of the termination of employment and ending on the later of (i) three years from the closing of the Offering and (ii) one year from the termination of his employment with the Company. STOCK OPTION PLAN Prior to the Offering, the Board of Directors will adopt, and the stockholders will approve, the 1997 Stock Option Plan. On and after the closing of the Offering, the 1997 Stock Option Plan will be administered by the Compensation Committee of the Board of Directors. Officers and certain other employees of the Company and its subsidiaries generally will be eligible to participate in the 1997 Stock Option Plan. Non-employee Directors of the Company are eligible to receive stock options under the 1997 Stock Option Plan on a limited basis. See "--Compensation of Directors." The following summary of the 1997 Stock Option Plan is qualified in its entirety by reference to the full text of the 1997 Stock Option Plan, a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The 1997 Stock Option Plan authorizes (i) the grant of stock options that qualify as incentive stock options under Section 422 of the Code ("ISOs"), (ii) the grant of stock options that do not so qualify 95 ("NQSOs"), (iii) the grant of stock options in lieu of cash Directors' fees and employee bonuses, (iv) grants of shares of Common Stock, in lieu of cash compensation and (v) the making of loans to acquire shares of Common Stock, in lieu of compensation. The exercise price of stock options will be determined by the Compensation Committee, but may not be less than 100% of the fair market value of the shares of Common Stock on the date of grant in the case of ISOs; provided that, in the case of grants of NQSOs granted in lieu of cash Directors' fees and employee bonuses, the exercise price may not be less than 50% of the fair market value of the shares of Common Stock on the date of grant. The Company has reserved 1,100,000 shares of Common Stock for issuance under the 1997 Stock Option Plan. INCENTIVE COMPENSATION PLAN Prior to the completion of the Offering, the Company intends to establish an incentive compensation plan for key officers of the Company and the Company's subsidiaries and affiliates. This plan will provide for payment of cash bonuses to participating officers after an evaluation of the officer's performance and the overall performance of the Company has been completed. The Chief Executive Officer will make recommendations to the Compensation Committee of the Board of Directors, which will make the final determination for the award of bonuses in its sole discretion. The Compensation Committee will determine the amount of such bonuses, if any, for the Chief Executive Officer in its sole discretion. 401(k) PLAN Effective upon the completion of the Offering, the Company intends to maintain a 401(k) Savings/ Retirement Plan (the "401(k) Plan") to cover eligible employees of the Company and any designated affiliate. The 401(k) Plan will permit eligible employees of the Company to defer up to 15% of their annual compensation, subject to certain limitations imposed by the Code. The employees' elective deferrals are immediately vested and non-forfeitable upon contribution to the 401(k) Plan. LIMITATION OF LIABILITY AND INDEMNIFICATION The MGCL permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (i) actual receipt of an improper benefit or profit in money, property or services, or (ii) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Charter contains such a provision which eliminates such liability to the maximum extent permitted by the MGCL. The Charter authorizes the Company, to the maximum extent permitted by Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (i) any present or former director or officer, or (ii) any individual who, while a director of the Company and at the request of the Company serves or has served another corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, member, partner or trustee of such corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise from and against any claim or liability which such persons may incur by reason of his status as a present or former stockholder, director or officer of the Company. The Bylaws obligate the Company, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (i) any present or former director or officer who is made a party to the proceeding by reason of his service in that capacity, or (ii) any individual who while a director of the Company and at the request of the Company serves or has served another corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, member, partner or trustee of such corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or 96 other enterprise and who is made a party to the proceeding by reason of his service in that capacity against any claim or liability to which he may become subject by reason of such service. The Charter and the Bylaws also permit the Company to indemnify and advance expenses to any person who served a predecessor of the Company in any of the capacities described above and to any employee or agent of the Company or a predecessor of the Company. The MGCL requires a corporation (unless its charter provides otherwise, which the Company's Charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that (i) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (A) was committed in bad faith, or (B) was the result of active and deliberate dishonesty, (ii) the director or officer actually received an improper personal benefit in money, property or services, or (iii) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation. In addition, the MGCL requires the Company, as a condition to advancing expenses, to obtain (i) a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification by the Company as authorized by the Bylaws, and (ii) a written statement by or on his behalf to repay the amount paid or reimbursed by the Company if it shall ultimately be determined that the standard of conduct was not met. The Partnership Agreement also provides for indemnification and advance of expenses of the Company and its officers and directors to the same extent indemnification and advance of expenses is provided to officers and directors of the Company in the Charter and Bylaws, and limits the liability of the Company and its officers and directors to the Operating Partnership and its partners to the same extent liability of officers and directors of the Company to the Company and its stockholders is limited under the Charter. See "Partnership Agreement--Liability and Indemnification." 97 STRUCTURE AND FORMATION OF THE COMPANY THE OPERATING ENTITIES OF THE COMPANY Following the completion of the Offering and the Formation Transactions, the operations of the Company will be carried on through the Operating Partnership. The Formation Transactions were designed to (i) enable the Company to raise the necessary capital to acquire the Properties, repay certain mortgage indebtedness secured by certain of the Properties and establish a working capital reserve, (ii) provide a vehicle for future acquisitions, (iii) enable the Company to comply with certain requirements under the Code (and the regulations promulgated by the IRS thereunder (the "Treasury Regulations")) relating to REITs, and (iv) preserve certain tax advantages for certain participants in the Formation Transactions. THE OPERATING PARTNERSHIP. Following the completion of the Offering and the Formation Transactions, substantially all of the Company's assets will be held by, and its operations conducted through, the Operating Partnership and its subsidiaries and affiliates. The Company is the sole general partner of the Operating Partnership and will have the exclusive power under the Partnership Agreement to manage and conduct the business of the Operating Partnership. Except with respect to the Lock-out Provisions, limited partners generally will have only limited consent rights. See "Partnership Agreement." The Board of Directors of the Company will manage the affairs of the Company by directing the affairs of the Operating Partnership. The Operating Partnership will continue until December 31, 2095, unless sooner dissolved or terminated. The Operating Partnership cannot be dissolved for a period of 50 years without the consent of the limited partners, except in connection with a sale of all or substantially all of its assets, which also requires the consent of the limited partners. See "Partnership Agreement." The Company's limited and general partner interests in the Operating Partnership will entitle it to share in cash distributions from, and in the profits and losses of, the Operating Partnership in proportion to the Company's percentage interest therein and will entitle the Company to vote on substantially all matters requiring a vote of the limited partners. Following the completion of the Offering and the Formation Transactions, the Company initially will own an approximate 88.3% interest in the Operating Partnership. Certain participants in the Formation Transactions, including entities owned by Stephen L. Green, will own the remaining Units. The Operating Partnership anticipates that it will acquire additional properties in exchange for Units in the future, in which case partners in the partnerships that own such properties will become limited partners of the Operating Partnership. After the completion of the Offering and the Formation Transactions, the Operating Partnership expects to make regular quarterly cash distributions to its partners (including the Company) in proportion to their percentage interests in the Operating Partnership. The Company, in turn, will pay cash dividends to its stockholders in an amount per share of Common Stock equal to the amount distributed by the Operating Partnership per Unit. In addition, after a holding period of up to two years following the completion of the Offering, and at any time thereafter (for as long as the Operating Partnership is in existence and subject to compliance with the securities laws and the ownership limits of the Company's organizational documents), limited partners in the Operating Partnership will be able to have their Units redeemed by the Operating Partnership. In the event that the Company elects to acquire Units in exchange for shares of Common Stock upon the exercise of a redemption right by a limited partner, each such acquisition will increase the Company's percentage ownership interest in the Operating Partnership and will decrease the aggregate percentage ownership interest of the limited partners (other than the Company) in the Operating Partnership. THE MANAGEMENT CORPORATION. In order to maintain the Company's qualification as a REIT while realizing income from management contracts with third parties, all of the management operations with respect to properties in which the Company will not own 100% of the interest will be conducted through the Management Corporation. The Company, through the Operating Partnership, will own 100% of the 98 non-voting common stock (representing 95% of the total equity) of the Management Corporation. Through dividends on its equity interest, the Operating Partnership expects to receive substantially all of the cash flow from the Management Corporation's operations. All of the voting common stock of the Management Corporation (representing 5% of the total equity) will be held by an SL Green affiliate. This controlling interest will give the SL Green affiliate the power to elect all directors of the Management Corporation. THE MANAGEMENT LLC. All of the management and leasing and construction operations with respect to the Properties and properties to be acquired by the Company will be conducted through the Management LLC. The Operating Partnership will own a 100% interest in the Management LLC. THE LEASING CORPORATION. In order to maintain the Company's qualification as a REIT while realizing income from leasing and tenant representation services performed for third parties, all of the leasing operations and tenant representation services with respect to properties in which the Company will not own 100% of the interest will be conducted through the Leasing Corporation. The Company, through the Operating Partnership, will own 100% of the non-voting common stock (representing 95% of the total equity) of the Leasing Corporation. Through dividends on its equity interest, the Operating Partnership expects to receive substantially all of the cash flow from the Leasing Corporation's operations. All of the voting common stock of the Leasing Corporation (representing 5% of the total equity) will be held by an SL Green affiliate. This controlling interest will give the SL Green affiliate the power to elect all directors of the Leasing Corporation. THE CONSTRUCTION CORPORATION. In order to maintain the Company's qualification as a REIT while realizing income from construction services all of the Company's construction operations will be conducted through the Construction Corporation. The Company, through the Operating Partnership, will own 100% of the non-voting common stock (representing 95% of the total equity) of the Construction Corporation. Through dividends on its equity interest, the Operating Partnership expects to receive substantially all of the cash flow from the Construction Corporation's operations. All of the voting common stock of the Construction Corporation (representing 5% of the total equity) will be held by an SL Green affiliate. This controlling interest will give the SL Green affiliate the power to elect all directors of the Construction Corporation. FORMATION TRANSACTIONS The following Formation Transactions have been consummated or will be consummated concurrently with the completion of the Offering. - The Company was organized as a Maryland corporation and the Operating Partnership was organized as a Delaware limited partnership in June 1997 - LBHI entered into the LBHI Loan with SL Green pursuant to which LBHI agreed to loan to SL Green up to $40 million, which will be used to acquire interests in the Core Portfolio and the Acquisition Properties, to fund property related operating expenses, to fund organizational expenses of the Company and to purchase Treasury Securities. The LBHI Loan will be secured by partnership interests in certain Property-owning entities and the Treasury Securities. - The Company will sell 8,100,000 shares of Common Stock in the Offering and will contribute the net proceeds therefrom to the Operating Partnership in exchange for 8,100,000 Units (representing approximately an 84% economic interest in the Operating Partnership after the Offering). - The Operating Partnership will receive a contribution of its interests in the Core Portfolio as well as 95% of the economic interest in the Service Corporations from the Property-owning entities, the partners or members of such entities and the holders of interests in the Service Corporations. As consideration therefor, the Operating Partnership will issue to such entities, partners or members 99 and holders 1,130,395 Units (having an aggregate value of approximately $22.6 million, based on the assumed initial offering price) approximately and $6.4 million. - The management and leasing business of SL Green with respect to the Properties in which the Company will have a 100% membership interest will be transferred to the Management LLC. - The Operating Partnership will obtain for $500,000 an option to acquire 50 West 23rd Street, a 333,000 rentable square foot office property in midtown Manhattan from an unaffiliated seller for a purchase price of $36 million in cash. See "The Properties--The Option Property." - The Operating Partnership will acquire interests in the Acquisition Properties for an aggregate purchase price of approximately $73.4 million, to be funded with net proceeds from the Offering and mortgage financing. - The Operating Partnership will use approximately $74.1 million of net proceeds from the Offering to repay mortgage debt encumbering the Core Portfolio and the LBHI Loan (including $1.7 million in prepayment penalties, fees and other costs and excluding approximately $7.5 million in proceeds drawn under the LBHI Loan to fund purchase of the Acquisition Properties). - The Company will issue to Victor Capital 45,495 shares of restricted Common Stock and the Operating Partnership will pay $900,000 (funded with borrowings under the LBHI Loan and proceeds from the Offering) to Victor Capital as consideration for financial advisory services rendered to the Company in connection with the Formation Transactions. CONSEQUENCES OF THE OFFERING AND THE FORMATION TRANSACTIONS The Offering and the Formation Transactions will have the following consequences: - The Operating Partnership directly or indirectly will own substantially all of the interests in the Properties currently owned by SL Green and its affiliates. - The purchasers of the Common Stock offered in the Offering will own approximately 95% of the outstanding Common Stock. - The Company will be the general partner of, and will own approximately 88.3% of the ownership interests in, the Operating Partnership and 95% of the non-voting stock in the Service Corporations. If all limited partners in the Operating Partnership were to exchange their Units for Common Stock immediately after the completion of the Offering (notwithstanding the provision of the Partnership Agreement which prohibits such exchange for up to two years following the completion of the Offering), but subject to the Ownership Limit, then the participants in the Formation Transactions would beneficially own approximately 11.7% of the outstanding shares of Common Stock. See "Risk Factors--Conflicts of Interests in the Formation Transactions and the Business of the Company--Substantial Benefits to Related Parties" and "Principal Stockholders." BENEFITS TO RELATED PARTIES Certain affiliates of the Company will realize certain material benefits in connection with the Formation Transactions and the Offering, including the following: - Certain SL Green entities (including entities owned by Stephen L. Green) will receive 887,895 Units in consideration for their interests in the Properties, Property-owning entities and the management, leasing and construction businesses of SL Green with a total value of approximately $17.8 million, based on the assumed initial public offering price (representing approximately 9.2% of the equity of the Company on a fully-diluted basis). 100 - The Operating Partnership will use $20 million to repay a portion of the LBHI Loan that was made to an SL Green entity (which is indirectly owned by Stephen L. Green) and invested in Treasury Securities pledged as collateral therefor (which, upon repayment of the LBHI Loan, were released to such SL Green entity). - Certain members of SL Green management (including Nancy A. Peck, Steven H. Klein, Benjamin P. Feldman, Gerard Nocera and Louis A. Olsen) own an aggregate of 383,110 shares of restricted Common Stock that initially will have a value of $7.7 million, based on the assumed initial public offering price. - Certain members of SL Green management (including Stephen L. Green, Nancy A. Peck, Steven H. Klein, Benjamin P. Feldman, Gerard Nocera and Louis A. Olsen) will become officers and/or directors of the Company. In addition, each of such persons will enter into three year employment and noncompetition agreements with the Company. See "Management--Employment and Noncompetition Agreements." Also, the Company will grant to directors, officers and employees of the Company options to purchase an aggregate of 660,000 shares of Common Stock at the initial public offering price under the Company's stock option plan, subject to certain vesting requirements. See "Management." - The structure of the Formation Transactions will provide the Unit recipients (including the members of management referred to above) the opportunity for deferral of the tax consequences of their contribution to the Operating Partnership of their interest in the Properties, Property-owning entities and Service Corporations. - An SL Green entity will own all of the voting stock of each of the Service Corporations (representing a 5% equity interest therein). - Pursuant to the Lock-out Provisions, the Company will be restricted in its ability to sell, or reduce the amount of mortgage indebtedness on, two of the Properties (673 First Avenue and 470 Park Avenue South) for up to 12 years following the completion of the Offering, which could enable certain participants in the Formation Transactions (including the Green Group) to defer certain tax consequences associated with the Formation Transactions. - Persons or entities receiving Units in the Formation Transactions (including entities owned by Stephen L. Green) will have registration rights with respect to shares of Common Stock issued in exchange for Units. See "Risk Factors--Conflicts of Interests in the Formation Transactions and the Business of the Company," "Management" and "Certain Relationships and Transactions." POLICIES WITH RESPECT TO CERTAIN ACTIVITIES The following is a discussion of certain investment, financing and other policies of the Company. These policies have been determined by the Company's Board of Directors and may be amended or revised from time to time by the Board of Directors without a vote of the stockholders, except that (i) the Company cannot change its policy of holding its assets and conducting its business only through the Operating Partnership and its affiliates without the consent of the holders of Units as provided in the Partnership Agreement, (ii) changes in certain policies with respect to conflicts of interest must be consistent with legal requirements, and (iii) the Company cannot take any action intended to terminate its qualification as a REIT without the approval of the holders of a majority of the outstanding shares of Common Stock. 101 INVESTMENT POLICIES INVESTMENT IN REAL ESTATE OR INTERESTS IN REAL ESTATE. The Company will conduct all of its investment activities through the Operating Partnership and its affiliates. The Company's primary business objective is to maximize total return to stockholders through growth in distributable cash flow and appreciation in the value of its assets. For a discussion of the Properties and the Company's corporate and growth strategies, see "The Properties" and "Business and Growth Strategies." The Company expects to pursue its investment objectives primarily through the direct or indirect ownership by the Operating Partnership of the Properties and other acquired office properties. The Company currently intends to invest primarily in existing improved properties but may, if market conditions warrant, invest in development projects as well. Furthermore, the Company currently intends to invest in or develop commercial office properties, primarily in midtown Manhattan. However, future investment or development activities will not be limited to any geographic area or product type or to a specified percentage of the Company's assets. The Company does not have any limit on the amount or percentage of its assets that may be invested in any one property or any one geographic area. The Company intends to engage in such future investment or development activities in a manner which is consistent with the maintenance of its status as a REIT for Federal income tax purposes. In addition, the Company may purchase or lease income-producing commercial properties and other types of properties for long-term investment, expand and improve the real estate presently owned or other properties purchased, or sell such real estate or other properties, in whole or in part, if and when circumstances warrant. The Company also may participate with third parties in property ownership, through joint ventures or other types of co-ownership. Such investments may permit the Company to own interests in larger assets without unduly restricting diversification and, therefore, may add flexibility in structuring its portfolio. The Company will not, however, enter into a joint venture or partnership to make an investment that would not otherwise meet its investment policies. Equity investments may be subject to existing mortgage financing and other indebtedness or such financing or indebtedness as may be incurred in connection with acquiring or refinancing these investments. Debt service on such financing or indebtedness will have a priority over any distributions with respect to the Common Stock. Investments also are subject to the Company's policy not to be treated as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). INVESTMENTS IN REAL ESTATE MORTGAGES. While the Company's business objectives emphasize equity investments in commercial real estate, the Company may, in the discretion of the Board of Directors, invest in mortgages and other types of equity real estate interests consistent with the Company's qualification as a REIT. In that regard, upon completion of the Formation Transactions, the Company will acquire mortgage interests in the Bar Building and 1372 Broadway which will provide the Company with substantially all control over, and economic interest derived from, such Properties. Although the Company does not presently intend to emphasize investments in mortgages or deeds of trust, it may invest in non-performing mortgages on an opportunistic basis in order to acquire an equity interest in the underlying property or in participating or convertible mortgages if the Company concludes that it would be in the Company's interest to do so. Investments in real estate mortgages are subject to the risk that one or more borrowers may default under such mortgages and that the collateral securing such mortgages may not be sufficient to enable an investor to recoup its full investment. SECURITIES OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE ACTIVITIES AND OTHER ISSUERS. Subject to the percentage of ownership limitations and gross income tests necessary for REIT qualification, the Company also may invest in securities of other REITs, securities of other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. See "Federal Income Tax Considerations--Taxation of the Company." No such investment will be made, however, unless the Board of Directors determines that the proposed investment would not cause the 102 Company or the Operating Partnership to be an "investment company" within the meaning of the 1940 Act. The Company may acquire all or substantially all of the securities or assets of other REITs or similar entities if such investments would be consistent with the Company's investment policies. DISPOSITION POLICIES The Company does not currently intend to dispose of any of the Properties, although it reserves the right to do so, subject to the Lock-out Provisions, if, based upon management's periodic review of the Company's portfolio, the Board of Directors determines that such action would be in the best interests of the Company. The tax consequences of the disposition of the Properties may, however, influence the decision of certain directors and executive officers of the Company who hold Units as to the desirability of a proposed disposition. See "Risk Factors--Conflicts of Interests in the Formation Transactions and the Business of the Company" and "--Limitations on Ability to Sell or Reduce the Mortgage Indebtedness on Certain Properties." Any decision to dispose of a Property must be approved by a majority of the Board of Directors (and in accordance with the applicable partnership agreement). In addition, under the Lock-out Provisions contained in the Partnership Agreement, the Company may not sell (except in certain events, including certain transactions that would not result in the recognition of any gain for tax purposes) 673 First Avenue and 470 Park Avenue South during the Lock-out Period without, in the case of either Property, the consent of holders of 75% of the Units originally issued to limited partners in the Operating Partnership who immediately prior to completion of the Formation Transactions owned direct or indirect interests in such Property that remain outstanding at the time of such vote (other than Units held by the Company and excluding any such Units the adjusted tax basis of which has been increased, in the hands of the holder or any predecessor holder thereof, to reflect fair market value through a taxable disposition or otherwise). The Lock-out Provisions apply even if it would otherwise be in the best interest of the stockholders for the Company to sell one or more of these three Properties. FINANCING POLICIES As a general policy, the Company intends to limit its total consolidated indebtedness, and its pro rata share of unconsolidated indebtedness, so that at the time any debt is incurred, the Company's Debt Ratio does not exceed 50%. Upon the completion of the Offering and the Formation Transactions, the Debt Ratio of the Company will be approximately 19.4%. The Charter and Bylaws do not, however, limit the amount or percentage of indebtedness that the Company may incur. In addition, the Company may from time to time modify its debt policy in light of current economic conditions, relative costs of debt and equity capital, market values of its Properties, general conditions in the market for debt and equity securities, fluctuations in the market price of its Common Stock, growth and acquisition opportunities and other factors. Accordingly, the Company may increase its Debt Ratio beyond the limits described above. If this policy were changed, the Company could become more highly leveraged, resulting in an increased risk of default on its obligations and a related increase in debt service requirements that could adversely affect the financial condition and results of operations of the Company and the Company's ability to make distributions to stockholders. The Company has established its debt policy relative to the total market capitalization of the Company computed at the time the debt is incurred, rather than relative to the book value of its assets, a ratio that is frequently employed, because it believes the book value of its assets (which to a large extent is the depreciated value of real property, the Company's primary tangible asset) does not accurately reflect its ability to borrow and to meet debt service requirements. Total market capitalization, however, is subject to greater fluctuation than book value, and does not necessarily reflect the fair market value of the underlying assets of the Company at all times. Moreover, due to fluctuations in the value of the Company's portfolio of properties over time, and since any measurement of the Company's total consolidated 103 indebtedness, and its pro rata share of unconsolidated indebtedness incurred, to total market capitalization is made only at the time debt is incurred, the Debt Ratio could exceed the 50% level. The Company has not established any limit on the number or amount of mortgages that may be placed on any single property or on its portfolio as a whole. Although the Company will consider factors other than total market capitalization in making decisions regarding the incurrence of debt (such as the purchase price of properties to be acquired with debt financing, the estimated market value of properties upon refinancing, and the ability of particular properties and the Company as a whole to generate sufficient cash flow to cover expected debt service), there can be no assurance that the Debt Ratio, or any other measure of asset value, at the time the debt is incurred or at any other time will be consistent with any particular level of distributions to stockholders. CONFLICT OF INTEREST POLICIES The Company has adopted certain policies and entered into agreements with its executive officers designed to eliminate or minimize certain potential conflicts of interest. See "Management--Employment and Noncompetition Agreements." In that regard, the Company has adopted a policy that, without the approval of a majority of the disinterested Directors, it will not (i) acquire from or sell to any director, officer or employee of the Company, or any entity in which a director, officer or employee of the Company beneficially owns more than a 1% interest, or acquire from or sell to any affiliate of any of the foregoing, any of the assets or other property of the Company, (ii) make any loan to or borrow from any of the foregoing persons or (iii) engage in any other transaction with any of the foregoing persons. In addition, the Company's Board of Directors is subject to certain provisions of Maryland law, which are designed to eliminate or minimize certain potential conflicts of interest. There can be no assurance, however, that these policies and provisions or these agreements always will be successful in eliminating the influence of such conflicts, and if they are not successful, decisions could be made that may fail to reflect fully the interests of all stockholders. INTERESTED DIRECTOR AND OFFICER TRANSACTIONS Under Maryland law, a contract or other transaction between the Company and a director or between the Company and any other corporation or other entity in which a director is a director or has a material financial interest is not void or voidable solely on the grounds of such common directorship or interest, the presence of the director at the meeting at which the contract or transaction is authorized, approved or ratified or the counting of the director's vote in favor thereof if (i) the transaction or contract is authorized, approved or ratified by the board of directors or a committee of the board, after disclosure of the common directorship or interest, by the affirmative vote of a majority of disinterested directors, even if the disinterested directors constitute less than a quorum, or by a majority of the votes cast by disinterested stockholders, or (ii) the transaction or contract is fair and reasonable to the Company. Under Delaware law (where the Operating Partnership is formed), the Company, as general partner, has a fiduciary duty to the Operating Partnership and, consequently, such transactions also are subject to the duties of care and loyalty that the Company, as general partner, owes to limited partners in the Operating Partnership (to the extent such duties have not been eliminated pursuant to the terms of the Partnership Agreement). The Company will adopt a policy which requires that all contracts and transactions between the Company, the Operating Partnership or any of its subsidiaries, on the one hand, and a director or executive officer of the Company or any entity in which such director or executive officer is a director or has a material financial interest, on the other hand, must be approved by the affirmative vote of a majority of the disinterested directors. Where appropriate in the judgment of the disinterested directors, the Board of Directors may obtain a fairness opinion or engage independent counsel to represent the interests of non-affiliated security holders, although the Board of Directors will have no obligation to do so. 104 BUSINESS OPPORTUNITIES Pursuant to Maryland law, each director is obligated to offer to the Company any business opportunity (with certain limited exceptions) that comes to him and that the Company reasonably could be expected to have an interest in pursuing. After the Formation Transactions, SL Green will continue to own interests in certain other properties as well as entities that will provide cleaning (and related) services to office properties and security services to office properties, including the Properties. The Company will not have any interest in these properties or businesses. See "The Properties--Assets Not Being Transferred to the Company." POLICIES WITH RESPECT TO OTHER ACTIVITIES The Company and the Operating Partnership have authority to offer Common Stock, Preferred Stock, Units, preferred Units or options to purchase capital stock or Units in exchange for property and to repurchase or otherwise acquire its Common Stock or Units or other securities in the open market or otherwise and may engage in such activities in the future. Except in connection with the Formation Transactions, the Company has not issued Common Stock, Units or any other securities in exchange for property or any other purpose, and the Board of Directors has no present intention of causing the Company to repurchase any Common Stock. The Company may issue Preferred Stock from time to time, in one or more series, as authorized by the Board of Directors without the need for stockholder approval. See "Capital Stock--Preferred Stock." The Company has not engaged in trading, underwriter or agency distribution or sale of securities of other issuers other than the Operating Partnership, nor has the Company invested in the securities of other issuers other than the Operating Partnership for the purposes of exercising control, and does not intend to do so. At all times, the Company intends to make investments in such a manner as to qualify as a REIT, unless because of circumstances or changes in the Code (or the Treasury Regulations), the Board of Directors determines that it is no longer in the best interest of the Company to qualify as a REIT and such determination is approved by a majority vote of the Company's stockholders, as required by the Charter. The Company has not made any loans to third parties, although it may in the future make loans to third parties, including, without limitation, to joint ventures in which it participates. The Company intends to make investments in such a way that it will not be treated as an investment company under the 1940 Act. The Company's policies with respect to such activities may be reviewed and modified or amended from time to time by the Company's Board of Directors without a vote of the stockholders. 105 CERTAIN RELATIONSHIPS AND TRANSACTIONS FORMATION TRANSACTIONS The terms of the acquisitions of interests in the Properties and the Service Corporations by the Operating Partnership are described in "Structure and Formation of the Company--The Formation Transactions." CLEANING SERVICES First Quality Maintenance, L.P. ("First Quality") provides cleaning and related services with respect to the Properties. First Quality is owned by Gary Green, a son of Stephen L. Green. The cost of cleaning and related services generally is passed through to tenants as part of the operating expense escalation clause under leases. First Quality also provides additional services directly to tenants on a separately negotiated basis. The aggregate amount of fees to First Quality for services provided (excluding services provided directly to tenants) was approximately $188,000 in 1994, $164,000 in 1995 and $296,000 in 1996. After the completion of the Offering, the Company may retain First Quality to provide cleaning and related services for the Company's properties at market rates. In addition, the cleaning entity will continue to have the non-exclusive opportunity to provide cleaning and related services to individual tenants at the Company's properties on a basis separately negotiated with any tenant seeking such additional services. The cleaning entity will provide such services to individual tenants pursuant to agreements on customary terms (including at market rates). First Quality leases 3,740 square feet of space at 70 West 36th Street pursuant to a lease that expires on December 31, 2005 and provides for annual rental payments of approximately $68,660. SECURITY SERVICES Class Security LLC ("Classic Security") provides security services with respect to the Properties. Classic Security is owned by Gary Green, a son of Stephen L. Green. The aggregate amount of fees for such services was approximately $24,000 in 1996 (no fees were paid to such entity in 1994 or 1995). After the completion of the Offering, Classic Security may continue to provide security services for the Company's properties at market rates. PARTNERSHIP AGREEMENT THE FOLLOWING SUMMARY OF THE AGREEMENT OF LIMITED PARTNERSHIP OF THE OPERATING PARTNERSHIP (THE "PARTNERSHIP AGREEMENT"), INCLUDING THE DESCRIPTIONS OF CERTAIN PROVISIONS SET FORTH ELSEWHERE IN THIS PROSPECTUS, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PARTNERSHIP AGREEMENT, WHICH IS FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART. OPERATIONAL MATTERS GENERAL. Holders of Units (other than the Company in its capacity as general partner) will hold a limited partnership interest in the Operating Partnership, and all holders of Units (including the Company in its capacity as general partner) will be entitled to share in cash distributions from, and in the profits and losses of, the Operating Partnership. Each Unit generally will receive distributions in the same amount paid on each share of Common Stock. See "Distributions." Holders of Units will have the rights to which limited partners are entitled under the Partnership Agreement and, to the extent not limited by the Partnership Agreement, the Delaware Revised Uniform Limited Partnership Act (the "Act"). The Units have not been and are not expected to be registered pursuant to any Federal or state securities laws or listed on any exchange or quoted on any national market system. The Partnership Agreement imposes certain restrictions on the transfer of Units, as described below. 106 PURPOSES, BUSINESS AND MANAGEMENT. The purpose of the Operating Partnership includes the conduct of any business that may be lawfully conducted by a limited partnership formed under the Act, except that the Partnership Agreement requires the business of the Operating Partnership to be conducted in such a manner that will permit the Company to be classified as a REIT under Section 856 of the Code, unless the Company ceases to qualify as a REIT for reasons other than the conduct of the business of the Operating Partnership. Subject to the foregoing limitation, the Operating Partnership may enter into partnerships, joint ventures or similar arrangements and may own interests directly or indirectly in any other entity. The Company, as the general partner of the Operating Partnership, has the exclusive power and authority to conduct the business of the Operating Partnership, subject to the consent of the limited partners in certain limited circumstances discussed below. No limited partner may take part in the operation, management or control of the business of the Operating Partnership by virtue of being a holder of Units. The Company may not conduct any business other than the business of the Operating Partnership without the consent of the holders of a majority of the limited partnership interests (not including the limited partnership interests held by the Company in its capacity as a limited partner in the Operating Partnership). DISTRIBUTIONS. The Partnership Agreement provides for the quarterly distribution of Available Cash (as defined below), as determined in the manner provided in the Partnership Agreement, to the Company and the limited partners in proportion to their percentage interests in the Operating Partnership. "Available Cash" is generally defined as net income plus any reduction in reserves and minus interest and principal payments on debt, capital expenditures, any additions to reserves and other adjustments. Neither the Company nor the limited partners are entitled to any preferential or disproportionate distributions of Available Cash. BORROWING BY THE OPERATING PARTNERSHIP. The Company is authorized to cause the Operating Partnership to borrow money and to issue and guarantee debt as it deems necessary for the conduct of the activities of the Operating Partnership. Such debt may be secured by mortgages, deeds of trust, liens or encumbrances on properties of the Operating Partnership. The Company also may cause the Operating Partnership to borrow money to enable the Operating Partnership to make distributions, including distributions in an amount sufficient to permit the Company, as long as it qualifies as a REIT, to avoid the payment of any Federal income tax. See "Policies with Respect to Certain Activities--Financing Policies." Pursuant to the Lock-out Provisions, the Operating Partnership may not, earlier than one year prior to its maturity, repay the mortgage indebtedness on 673 First Avenue or 470 Park Avenue South and may not consent to any such prepayment of mortgage indebtedness on 673 First Avenue or 470 Park Avenue South (other than pursuant to scheduled amortization) during the Lock-out Period without, in the case of each such Property, the consent of holders of 75% of the Units originally issued to limited partners in the Operating Partnership who immediately prior to completion of the Formation Transactions owned direct or indirect interests in such Property that remain outstanding at the time of such vote (whether held by the original recipient of such Units or by a successor or transferee of the original recipient, but excluding Units held by the Company and excluding any such Units the adjusted tax basis of which has been increased, in the hands of the holder or any predecessor holder thereof, to reflect fair market value through a taxable disposition or otherwise) unless the repayment is in connection with either a refinancing of the outstanding debt (on a basis that is nonrecourse to the Operating Partnership and providing for the least amount of principal amortization that is available on commercially reasonable terms and permitting certain guarantees by the holders of the Units originally issued with respect to the affected Property) or an involuntary sale pursuant to foreclosure of a mortgage securing the debt (or other similar event). In addition, during the Lock-out Period, the Company is obligated to use commercially reasonable efforts, commencing one year prior to the stated maturity, to refinance at maturity (on a basis that is nonrecourse to the Operating Partnership and providing for the least amount of principal amortization that is available on commercially reasonable terms and permitting certain guarantees by the holders of the Units originally issued with 107 respect to the affected Property) the mortgage indebtedness secured by each of these two Properties at not less than the principal amount outstanding on the maturity date. Finally, during the Lock-out Period, the Company may not incur debt secured by either of these two Properties if the amount of the new debt would exceed the greater of 75% of the value of the Property securing the debt or the amount of existing debt being refinanced (plus the costs associated therewith). REIMBURSEMENT OF THE COMPANY; TRANSACTIONS WITH THE COMPANY AND ITS AFFILIATES. The Company will not receive any compensation for its services as general partner of the Operating Partnership. The Company, however, as a partner in the Operating Partnership, has the same right to allocations and distributions as other partners in the Operating Partnership. In addition, the Operating Partnership will reimburse the Company for substantially all expenses it incurs relating to the ongoing operation of the Company and offerings of Units or shares of Common Stock (or rights, options, warrants or convertible or exchangeable securities). Except as expressly permitted by the Partnership Agreement, affiliates of the Company will not engage in any transactions with the Operating Partnership except on terms that are fair and reasonable and no less favorable to the Operating Partnership than would be obtained from an unaffiliated third party. SALES OF ASSETS. Under the Partnership Agreement, the Company generally has the exclusive authority to determine whether, when and on what terms the assets of the Operating Partnership (including the Properties) will be sold, subject to the Lock-out Provisions. A sale of all or substantially all of the assets of the Operating Partnership (or a merger of the Operating Partnership with another entity) generally requires an affirmative vote of the holders of a majority of the outstanding Units (including Units held by the Company), but also is subject to the Lock-out Provisions. Under the Lock-out Provisions, the Operating Partnership may not sell or otherwise dispose of 673 First Avenue or 470 Park Avenue South (or any direct or indirect interest therein) during the Lock-out Period (except pursuant to a sale or other disposition of all or substantially all of the Operating Partnership's assets approved as described below, an involuntary sale pursuant to foreclosure of a mortgage secured by one of these Properties or a bankruptcy proceeding, and certain transactions, including a "Section 1031 like-kind exchange," that would not result in the recognition of any gain for tax purposes by the holders of Units issued in the Formation Transactions with respect to these Properties) without, in the case of each such Property, the consent of holders of 75% of the Units originally issued to limited partners in the Operating Partnership who immediately prior to the completion of the Formation Transactions owned direct or indirect interests in such Property that remain outstanding at the time of such vote (whether held by the original recipient of such Units or by a successor or transferee of the original recipient, but excluding Units held by the Company and excluding any such Units the adjusted tax basis of which has been increased, in the hands of the holder or any predecessor holder thereof, to reflect fair market value through a taxable disposition or otherwise). Under the Lock-out Provisions, a sale or other disposition of all or substantially all of the assets of the Operating Partnership during the Lock-out Period generally would require the approval of the holders, as a group, of 75% of the aggregate Units originally issued with respect to 673 First Avenue and 470 Park Avenue South that remain outstanding (whether held by the original recipient of such Units or by a successor or transferee of the original recipient, but excluding Units held by the Company and excluding any such Units the adjusted tax basis of which has been increased, in the hands of the holder or any predecessor holder thereof, to reflect fair market value through a taxable disposition or otherwise). The consent requirement under the Lockout Provisions, however, would not apply in the event of a merger or consolidation involving the Operating Partnership and substantially all of its assets if (i) the transaction would not result in the recognition of any gain with respect to the Units originally issued with respect to 673 First Avenue and 470 Park Avenue South, (ii) the Lock-out Provisions would continue to apply with respect to each of these two Properties, and (iii) the surviving entity agrees to a number of restrictions and conditions for the benefit of the holders of such Units designed to preserve the benefit of certain provisions and restrictions in the Partnership Agreement for the holders of such Units. 108 NO REMOVAL OF THE GENERAL PARTNER. The Partnership Agreement provides that the limited partners may not remove the Company as general partner of the Operating Partnership with or without cause (unless neither the General Partner nor its parent entity is a "public company," in which case the General Partner may be removed for cause). ISSUANCE OF LIMITED PARTNERSHIP INTERESTS. The Company is authorized, without the consent of the limited partners, to cause the Operating Partnership to issue Units to the Company, to the limited partners or to other persons for such consideration and upon such terms and conditions as the Company deems appropriate. The Operating Partnership also may issue partnership interests in different series or classes, which may be senior to the Units. If Units are issued to the Company, then the Company must issue shares of Common Stock and must contribute to the Operating Partnership the proceeds received by the Company from such issuance. In addition, the Company may cause the Operating Partnership to issue to the Company partnership interests in different series or classes of equity securities, which may be senior to the Units, in connection with an offering of securities of the Company having substantially similar rights upon the contribution of the proceeds therefrom to the Operating Partnership. Consideration for partnership interests may be cash or any property or other assets permitted by the Act. No limited partner has preemptive, preferential or similar rights with respect to capital contributions to the Operating Partnership or the issuance or sale of any partnership interests therein. AMENDMENT OF THE PARTNERSHIP AGREEMENT. Generally, the Partnership Agreement may be amended with the approval of the Company, as general partner, and limited partners (including the Company) holding a majority of the Units. Certain provisions regarding, among other things, the rights and duties of the Company as general partner or the dissolution of the Operating Partnership, may not be amended without the approval of a majority of the Units not held by the Company. Notwithstanding the foregoing, the Company, as general partner, has the power, without the consent of the limited partners, to amend the Partnership Agreement in certain circumstances. Certain amendments that would affect the fundamental rights of a limited partner must be approved by the Company and each limited partner that would be adversely affected by such amendment. In addition, any amendment that would affect the Lock-out Provisions with respect to 673 First Avenue or 470 Park Avenue South during the Lock-out Period would require, in the case of each such Property affected by the Amendment, the consent of holders of 75% of the Units originally issued with respect to such Property that remain outstanding at the time of such vote (whether held by the original recipient of such Units or by a successor or transferee of the original recipient, but excluding Units held by the Company and excluding any such Units the adjusted tax basis of which has been increased, in the hands of the holder or any predecessor holder thereof, to reflect fair market value through a taxable disposition or otherwise). DISSOLUTION, WINDING UP AND TERMINATION. The Operating Partnership will continue until December 31, 2095, unless sooner dissolved and terminated. The Operating Partnership will be dissolved prior to the expiration of its term, and its affairs wound up upon the occurrence of the earliest of: (i) the withdrawal of the Company as general partner without the permitted transfer of the Company's interest to a successor general partner (except in certain limited circumstances); (ii) the sale of all or substantially all of the Operating Partnership's assets and properties (subject to the Lock-out Provisions during the Lockout Period); (iii) the entry of a decree of judicial dissolution of the Operating Partnership pursuant to the provisions of the Act; (iv) the entry of a final non-appealable order for relief in a bankruptcy proceeding of the general partner, or the entry of a final non-appealable judgment ruling that the general partner is bankrupt or insolvent (except that, in either such case, in certain circumstances the limited partners (other than the Company) may vote to continue the Operating Partnership and substitute a new general partner in place of the Company); and (v) on or after January 1, 2046, at the option of the Company, in its sole and absolute discretion. Upon dissolution, the Company, as general partner, or any liquidator will proceed to liquidate the assets of the Operating Partnership and apply the proceeds therefrom in the order of priority set forth in the Partnership Agreement. 109 LIABILITY AND INDEMNIFICATION LIABILITY OF THE COMPANY AND LIMITED PARTNERS. The Company, as general partner of the Operating Partnership, is liable for all general recourse obligations of the Operating Partnership to the extent not paid by the Operating Partnership. The Company is not liable for the nonrecourse obligations of the Operating Partnership. Assuming that a limited partner does not take part in the control of the business of the Operating Partnership and otherwise acts in conformity with the provisions of the Partnership Agreement and the Act, the liability of a limited partner for obligations of the Operating Partnership under the Partnership Agreement and the Act will be limited, subject to certain exceptions, generally to the loss of such limited partner's investment in the Operating Partnership represented by his Units. The Operating Partnership will operate in a manner that the Company deems reasonable, necessary or appropriate to preserve the limited liability of the limited partners. EXCULPATION AND INDEMNIFICATION OF THE COMPANY. The Partnership Agreement generally provides that the Company, as general partner of the Operating Partnership, will incur no liability to the Operating Partnership or any limited partner 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 Company carried out its duties in good faith. In addition, the Company is not responsible for any misconduct or negligence on the part of its agents, provided the Company appointed such agents in good faith. The Partnership Agreement also provides for indemnification (including, in certain circumstances, the advancement of expenses) of the Company, the directors and officers of the Company and such other persons as the Company may from time to time designate against any judgments, penalties, fines, settlements and reasonable expenses that are actually (or will be) incurred by such person in connection with a proceeding in which any such person is involved, or is threatened to be involved, as a party or otherwise, unless it is established that: (i) the act or omission of the indemnified person was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty; (ii) the indemnified person actually received an improper personal benefit in money, property or services; or (iii) in the case of any criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful. TRANSFERS OF INTERESTS RESTRICTIONS ON TRANSFER OF THE COMPANY'S INTEREST. The Company may not transfer any of its interests as general or limited partner in the Operating Partnership, except in connection with a merger or sale of all or substantially all of its assets, in which (i) the limited partners in the Operating Partnership either will receive, or will have the right to receive, substantially the same consideration as holders of shares of Common Stock, and (ii) such transaction has been approved by the holders of a majority of the interests in the Operating Partnership (including interests held by the Company). The Lock-out Provisions do not apply to a sale or other transfer by the Company of its interests as a partner in the Operating Partnership, but they would apply to transfers of assets of the Operating Partnership undertaken during the Lock-out Period in connection with or as part of any such transaction by the Company. See "--Operational Matters--Sales of Assets" above. RESTRICTIONS ON TRANSFERS OF UNITS BY LIMITED PARTNERS. For up to two years after the completion of the Offering, a limited partner may not transfer any of his rights as a limited partner without the consent of the Company, which consent the Company may withhold in its sole discretion. Any attempted transfer in violation of this restriction will be void ab initio and without any force or effect. Beginning two years after the completion of the Offering, limited partners (other than the Company) will be permitted to transfer all or any portion of their Units without restriction as long as they satisfy certain requirements set forth in the Partnership Agreement. In addition, limited partners will be permitted to dispose of their Units following the expiration of up to a two-year period following the completion of the Offering by exercising the redemption right described below. See "--Redemption of Units" below. 110 The right of any permitted transferee of Units to become a substituted limited partner is subject to the consent of the Company, which consent the Company may withhold in its sole and absolute discretion. If the Company does not consent to the admission of a transferee of Units as a substituted limited partner, then the transferee will succeed to all economic rights and benefits attributable to such Units (including the redemption right described below), but will not become a limited partner or possess any other rights of limited partners (including the right to vote). REDEMPTION OF UNITS. Subject to certain limitations and exceptions, holders of Units (other than the Company) have the right to have each of their Units redeemed by the Operating Partnership at any time beginning two years after the completion of the Formation Transactions. Unless the Company elects to assume and perform the Operating Partnership's obligation with respect to the redemption right, as described below, the limited partner will receive cash from the Operating Partnership in an amount equal to the market value of the Units to be redeemed. The market value of a Unit for this purpose will be equal to the average of the closing trading price of a share of Common Stock on the NYSE for the ten trading days before the day on which the redemption notice was given to the Operating Partnership of exercise of the redemption right. In lieu of the Operating Partnership's acquiring the Units for cash, the Company will have the right (except as described below, if the Common Stock is not publicly traded) to elect to acquire the Units directly from a limited partner exercising the redemption right, in exchange for either cash or shares of Common Stock, and, upon such acquisition, the Company will become the owner of such Units. The redemption generally will occur on the tenth business day after the notice to the Operating Partnership, except that no redemption or exchange can occur if delivery of shares of Common Stock would be prohibited either under the provisions of the Company's Charter designed primarily to protect the Company's qualification as a REIT or under applicable Federal or state securities laws as long as the shares of Common Stock are publicly traded. See "Capital Stock--Restrictions on Transfer--Ownership Limits." In the event that the Common Stock is not publicly traded but another entity whose stock is publicly traded owns more than 50% of the capital stock of the Company (referred to as the "Parent Entity"), the redemption right will be determined by reference to the publicly traded stock of the Parent Entity and the Company will have the right to elect to acquire the Units to be redeemed for publicly traded stock of the Parent Entity. In the event that the Common Stock is not publicly traded and there is no Parent Entity with publicly traded stock, the redemption right will be based upon the fair market value of the Operating Partnership's assets at the time the redemption right is exercised (as determined in good faith by the Company based upon a commercially reasonable estimate of the amount that would be realized by the Operating Partnership if each asset of the Operating Partnership were sold to an unaffiliated purchaser in an arm's length transaction where neither the purchaser nor the seller were under economic compulsion to enter into the transaction), and the Company and the Operating Partnership will be obligated to satisfy the redemption right in cash (unless the redeeming partner, in such partner's sole and absolute discretion, consents to the receipt of Common Stock), payable on the thirtieth business day after notice was given to the Operating Partnership of exercise of the redemption right. 111 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of Common Stock (or Common Stock for which Units are exchangeable) by (i) each director (and director nominee) of the Company, (ii) each executive officer of the Company, (iii) all directors (including director nominees) and executive officers of the Company as a group, and (iv) each person or entity which is expected to be the beneficial owner of 5% or more of the outstanding shares of Common Stock immediately following the completion of the Offering. Except as indicated below, all of such Common Stock is owned directly, and the indicated person or entity has sole voting and investment power. The extent to which a person will hold shares of Common Stock as opposed to Units is set forth in the footnotes below.
NUMBER OF SHARES AND UNITS PERCENT OF BENEFICIALLY PERCENT OF ALL SHARES NAME AND ADDRESS OF BENEFICIAL OWNER OWNED ALL SHARES(1) AND UNITS(2) - ------------------------------------------------------------------ ----------------- ------------- ------------- Stephen L. Green (3).............................................. 887,895 9.4% 9.2% Nancy A. Peck (4)................................................. 136,825 1.6% 1.4% Steven H. Klein (4)............................................... 54,730 0.1% 0.1% Benjamin P. Feldman (4)........................................... 82,095 0.1% 0.1% Gerard Nocera (4)................................................. 54,730 0.1% 0.1% Louis A. Olsen (4)................................................ 54,730 0.1% 0.1% Edwin Thomas Burton, III.......................................... 0 N/A N/A John S. Levy...................................................... 0 N/A N/A John J. Robbins................................................... 0 N/A N/A All directors, director nominees and executive officers as a group (9 persons)..................................................... 1,271,005 13.5% 13.2%
- ------------------------ (1) Assumes 8,528,605 shares of Common Stock outstanding immediately following the Offering. Assumes that all Units held by the person are redeemed for shares of Common Stock. The total number of shares of Common Stock outstanding used in calculating this percentage assumes that none of the Units held by other persons are redeemed for shares of Common Stock. (2) Assumes a total of 9,659,000 shares of Common Stock and Units outstanding immediately following the Offering (8,528,605 shares of Common Stock and 1,130,395 Units, which may be redeemed for cash or shares of Common Stock under certain circumstances). Assumes that all Units held by the person are redeemed for shares of Common Stock. The total number of shares of Common Stock outstanding used in calculating this percentage assumes that all of the Units held by other persons are redeemed for shares of Common Stock. (3) Represents Units issued in the Formation Transactions. (4) Represents shares of restricted Common Stock. 112 CAPITAL STOCK GENERAL The Company's Charter provides that the Company may issue up to 100 million shares of common stock, $.01 par value per share ("Common Stock"), 25 million shares of preferred stock, $.01 par value per share ("Preferred Stock"), and 75 million shares of excess stock, $.01 par value per share ("Excess Stock"). Upon completion of the Offering, 8,528,605 shares of Common Stock will be issued and outstanding (9,743,605 shares if the Underwriters' over-allotment option is exercised in full) and no shares of Preferred Stock will be issued and outstanding. Under Maryland law, stockholders generally are not liable for the corporation's debts or obligations. COMMON STOCK All shares of Common Stock offered hereby will be duly authorized, 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, holders of shares of Common Stock are entitled to receive dividends on such stock if, as and when authorized and declared by the Board of Directors of the Company out of assets legally available therefor and to share ratably in the assets of the Company legally available for distribution to its stockholders in the event of its liquidation, dissolution or winding up after payment of or adequate provision for all known debts and liabilities of the Company. Subject to the provisions of the Charter regarding Excess Stock, each outstanding share of 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 such 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 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 Common Stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any securities of the Company. Subject to the provisions of the Charter regarding Excess Stock, shares of Common Stock will have equal dividend, liquidation and other rights. The Charter authorizes the Board of Directors to reclassify any unissued shares of Common Stock into other classes or series of classes of 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 such class or series. PREFERRED STOCK The Charter authorizes the Board of Directors to classify any unissued shares of Preferred Stock and to reclassify any previously classified but unissued shares of Preferred Stock of any series. Prior to issuance of shares of each series the Board is required by the MGCL and the Charter to set, subject to the provisions of the Charter regarding Excess Stock, the terms, preferences, conversion or 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 such series. Thus, the Board could authorize the issuance of shares of Preferred Stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control of the Company that might involve a premium price for holders of Common Stock or otherwise be in their best interest. As of the date hereof, no shares of Preferred Stock are outstanding and the Company has no present plans to issue any Preferred Stock. 113 EXCESS STOCK For a description of Excess Stock, see "--Restrictions on Transfer." POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK The Company believes that the power of the Board of Directors to issue additional authorized but unissued shares of Common Stock or Preferred Stock and to classify or reclassify unissued shares of Common Stock or Preferred Stock and thereafter to cause the Company to issue such classified or reclassified shares of stock will provide the Company with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs which might arise. The additional classes or series, as well as the Common Stock, will be available for issuance without further action by the Company's stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which the Company's securities may be listed or traded. Although the Board of Directors has no intention at the present time of doing so, it could authorize the Company to issue a class or series that could, depending upon the terms of such class or series, delay, defer or prevent a transaction or a change of control of the Company that might involve a premium price for holders of Common Stock or otherwise be in their best interest. The Company intends to furnish its stockholders with annual reports containing audited consolidated financial statements and an opinion thereon expressed by an independent public accounting firm and quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. RESTRICTIONS ON TRANSFER For the Company to qualify as a REIT under the Code, among other things, not more than 50% in value of its 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 taxable year) (the "Five or Fewer Requirement"), and such 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 taxable year) or during a proportionate part of a shorter taxable year. Pursuant to the Code, Common 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 such entities for purposes of the Five or Fewer Requirement (I.E., the beneficial owners of such entities will be counted as persons). See "Federal Income Tax Consequences." In order to protect the Company against the risk of losing it status as a REIT due to a concentration of ownership among its stockholders, the Charter, subject to certain exceptions, provides that no stockholder may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.0% (the "Ownership Limit") of the aggregate number or value of the Company's outstanding shares of Common Stock. In the event the Company issues Preferred Stock, it may, in the Articles Supplementary creating such Preferred Stock, determine a limit on the ownership of such stock. Any direct or indirect ownership of shares of stock in excess of the Ownership Limit or that would result in the disqualification of the Company 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 the best interests of the Company to attempt to 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 the Company's tax counsel is presented that the changes in ownership will not then or in the future jeopardize the Company's REIT status and the Board of Directors otherwise decides that such action is in the best interest of the Company. 114 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 the discovery by the Company that capital stock has been transferred in violation of the provisions of the Company's 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 the Company that shares of capital stock have been transferred in violation of the provisions of the Company's 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 such Excess Stock would be permitted under the Ownership Limit. If such 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 (i) 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 such 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 such shares of capital stock were converted for the ten trading days immediately preceding such sale or gift, and (ii) 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 owned 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, statue, rule or regulation, then the original transferee-stockholder of any shares of Excess Stock may be deemed, at the option of the Company, to have acted as an agent on behalf of the Company in acquiring the shares of Excess Stock and to hold the shares of Excess Stock on behalf of the Company. In addition, the Company 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 such shares by the original transferee-stockholder, or if the original transferee-stockholder did not give value for such 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 such shares of Excess Stock were converted for the ten trading days immediately preceding such sale or gift, and (ii) the average closing price for the class of stock from which such shares of Excess Stock were converted for the ten trading days immediately preceding the date the Company elects to purchase such shares. The Company 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. The Company may pay the amount of such 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 the Company of the transfer or, if no such notice is given, the date the Board of Directors determines that a violative transfer has been made. 115 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 the Company in writing any information with respect to the direct, indirect and constructive ownership of capital stock of the company 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 such 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 the best interest of the Company. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is . 116 CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S CHARTER AND BYLAWS THE FOLLOWING SUMMARY OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER AND BYLAWS OF THE COMPANY DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO MARYLAND LAW AND THE CHARTER AND BYLAWS OF THE COMPANY, COPIES OF WHICH ARE EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART. The Charter and the bylaws of the Company (the "Bylaws") contain certain provisions that could make more difficult an acquisition or change in control of the Company by means of a tender offer, a proxy contest or otherwise. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of the Company to negotiate first with the Board of Directors. The Company believes that the benefits of these provisions outweigh the potential disadvantages of discouraging such proposals because, among other things, negotiation of such proposals might result in an improvement of their terms. The description set forth below is intended as a summary only and is qualified in its entirety by reference to the Charter and the Bylaws, which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. See also "Capital Stock--Restrictions on Transfer." CLASSIFICATION AND REMOVAL OF BOARD OF DIRECTORS; OTHER PROVISIONS The Company's Charter provides for the Board of Directors to be divided into three classes of directors, with each class to consist as nearly as possible of an equal number of directors. The term of office of the first class of directors will expire at the 1998 annual meeting of stockholders; the term of the second class of directors will expire at the 1999 annual meeting of stockholders; and the term of the third class will expire at the 2000 annual meeting of stockholders. At each annual meeting of stockholders, the class of directors to be elected at such meeting will be elected for a three-year term, and the directors in the other two classes will continue in office. Because stockholders will have no right to cumulative voting for the election of directors, at each annual meeting of stockholders the holders of a majority of the shares of Common Stock will be able to elect all of the successors to the class of directors whose term expires at that meeting. The Company's Charter also provides that, except for any directors who may be elected by holders of a class or series of capital stock other than the Common Stock, directors may be removed only for cause and only by the affirmative vote of stockholders holding at least two-thirds of all the votes entitled to be cast for the election of directors. Vacancies on the Board of Directors may be filled by the affirmative vote of the remaining directors and, in the case of a vacancy resulting from the removal of a director, by the stockholders by a majority of the votes entitled to be cast for the election of directors. A vote of stockholders holding at least two-thirds of all the votes entitled to be cast thereon is required to amend, alter, change, repeal or adopt any provisions inconsistent with the foregoing classified board and director removal provisions. Under the Charter, the power to amend the Bylaws of the Company is vested exclusively in the Board of Directors, and the stockholders do not have any power to adopt, alter or repeal the Bylaws absent amendment to the Charter to confer such power. These provisions may make it more difficult and time-consuming to change majority control of the Board of Directors of the Company and, thus, may reduce the vulnerability of the Company to an unsolicited proposal for the takeover of the Company or the removal of incumbent management. Because the Board of Directors will have the power to establish the preferences and rights of additional series of capital stock without stockholder vote, the Board of Directors may afford the holders of any series of senior capital stock preferences, powers and rights, voting or otherwise, senior to the rights of holders of shares of Common Stock. The issuance of any such senior capital stock could have the effect of delaying or preventing a change in control of the Company. The Board of Directors, however, currently does not contemplate the issuance of any series of capital stock other than shares of Common Stock. 117 See "Management--Directors, Director Nominees and Executive Officers" for a description of the limitations on liability of directors of the Company and the provisions for indemnification of directors and officers provided for under applicable Maryland law and the Charter. BUSINESS COMBINATION STATUTE The MGCL establishes special requirements with respect to "business combinations" between Maryland corporations and "interested stockholders" unless exemptions are applicable. Among other things, the law prohibits for a period of five years a merger and other specified or similar transactions between a company and an interested stockholder and requires a super majority vote for such transactions after the end of the five-year period. For this purpose, "interested stockholders" are all persons owning beneficially, directly or indirectly, 10% or more of the outstanding voting stock of a Maryland corporation, and affiliates and associates of the Maryland corporation (which are, generally, any entities controlling, controlled by, or under common control with, the Maryland corporation) which owned beneficially, directly or indirectly, 10% or more of the outstanding voting stock of such Maryland corporation. "Business combinations" include any merger or similar transaction subject to a statutory vote and additional transactions involving transfers of assets or securities in specified amounts to interested stockholders or their affiliates. Unless an exemption is available, transactions of these types may not be consummated between a Maryland corporation and an interested stockholder or its affiliates for a period of five years after the date on which the stockholder first became an interested stockholder. Thereafter, the transaction may not be consummated unless recommended by the board of directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by all holders of outstanding shares of voting stock and two-thirds of the votes entitled to be cast by all holders of outstanding shares of voting stock other than the interested stockholder. A business combination with an interested stockholder that is approved by the board of directors of a Maryland corporation at any time before an interested stockholder first becomes an interested stockholder is not subject to the special voting requirements. An amendment to a Maryland corporation's charter electing not to be subject to the foregoing requirements must be approved by the affirmative vote of at least 80% of the votes entitled to be cast by all holders of outstanding shares of voting stock and two-thirds of the votes entitled to be cast by holders of outstanding shares of voting stock who are not interested stockholders. Any such amendment is not effective until 18 months after the vote of stockholders and does not apply to any business combination of a corporation with a stockholder who was an interested stockholder on the date of the stockholder vote. The Company has opted out of the business combination provisions of the MGCL, but the Board of Directors may elect to adopt these provisions of the MGCL in the future. CONTROL SHARE ACQUISITION STATUTE Maryland law imposes certain limitations on the voting rights in a "control share acquisition." The MGCL considers a "control share acquisition" to occur at each of the 20%, 33 1/3% and 50% acquisition levels, and requires the affirmative vote of at least two-thirds of the votes entitled to be cast by holders of outstanding shares of voting stock (excluding shares owned by the acquiring person and certain members of management) to accord voting rights to capital stock acquired in a control share acquisition. The statute also requires Maryland corporations to hold a special meeting at the request of an actual or proposed control share acquirer generally within 50 days after a request is made by means of the submission of an "acquiring person statement," but only if the acquiring person (i) posts a bond for the cost of a meeting (not including the expenses of opposing approval of the voting rights) and (ii) submits a definitive financing agreement with respect to the proposed control share acquisition to the extent that financing is not provided by the acquiring person. In addition, unless its charter or bylaws provide otherwise, the statute gives a Maryland corporation, within certain time limitations, various redemption rights if there is a stockholder vote on the issue and the grant of voting rights is not approved, or if an acquiring person statement is not delivered to the corporation within 10 days following an actual control share acquisition. 118 Moreover, unless the charter or bylaws provide otherwise, the statute provides that if, before a control share acquisition occurs, voting rights are accorded to control shares that result in the acquiring persons having majority voting power, then minority stockholders have certain appraisal rights. An acquisition of shares may be exempted from the control share statute, provided that a charter or bylaw provision is adopted for such purpose prior to the control share acquisition. The Company has opted out of the control share provisions of the MGCL, but the Board of Directors may elect to adopt these provisions of the MGCL in the future. AMENDMENTS TO THE CHARTER The Charter, including its provisions on classification of the Board of Directors, restrictions on transferability of shares of Common Stock and removal of directors, may be amended only by the affirmative vote of the holders of not less than two-thirds of all of the votes entitled to be cast on the matter. However, the provisions of the Charter relating to authorized shares of stock and the classification and reclassification of shares of Common Stock and Preferred Stock may be amended by the affirmative vote of the holders of not less than a majority of the votes entitled to be cast on the matter. ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS The Bylaws of the Company provide that (i) with respect to an annual meeting of stockholders, nominations of persons for election to the Board of Directors and the proposal of business to be considered by stockholders may be made only (A) pursuant to the Company's notice of the meeting, (B) by the Board of Directors or (C) by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in the Bylaws and (ii) with respect to special meetings of the stockholders, only the business specified in the Company's notice of meeting may be brought before the meeting of stockholders and nominations of persons for election to the Board of Directors may be made only (A) pursuant to the Company's notice of the meeting, (B) by the Board of Directors or (C) provided that the Board of Directors has determined that directors shall be elected at such meeting, by a stockholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in the Bylaws. ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER AND BYLAWS The business combination provisions and the control share acquisition provisions of the MGCL, the provisions of the Charter on classification of the Board of Directors and removal of directors and the advance notice provisions of the Bylaws could delay, defer or prevent a transaction or a change in control of the Company that might involve a premium price for holders of Common Stock or otherwise be in their best interests. RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY The Charter authorizes the Board of Directors to create and issue rights entitling the holders thereof to purchase from the Company shares of capital stock or other securities or property. The times at which and terms upon which such rights are to be issued would be determined by the Board of Directors and set forth in the contracts or instruments that evidence such rights. This provision is intended to confirm the Board of Directors' authority to issue share purchase rights, which might have terms that could impede a merger, tender offer or other takeover attempt, or other rights to purchase shares or securities of the Company or any other corporation. 119 SHARES AVAILABLE FOR FUTURE SALE GENERAL Upon the completion of the Offering, the Company will have outstanding 8,528,605 shares of Common Stock (9,743,605 shares if the Underwriters' overallotment option is exercised in full). In addition, 1,130,395 shares of Common Stock are reserved for issuance upon exchange of Units. The shares of Common Stock issued in the Offering will be freely tradeable by persons other than "affiliates" of the Company without restriction under the Securities Act, subject to the limitations on ownership set forth in the Charter. See "Capital Stock--Restrictions on Transfer." The shares of Common Stock received by the participants in the Formation Transactions or acquired by any participant in redemption of Units (the "Restricted Shares") will be "restricted" securities under the meaning of Rule 144 promulgated under the Securities Act ("Rule 144") and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including exemptions contained in Rule 144. As described below under "--Registration Rights," the Company has granted certain holders registration rights with respect to their shares of Common Stock. In general, under Rule 144, if one year has elapsed since the later of the date of acquisition of Restricted Shares from the Company or any "affiliate" of the Company, as that term is defined under the Securities Act, the acquiror or subsequent holder thereof is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock or the average weekly trading volume of the Common Stock during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission (the "Commission"). Sales under Rule 144 also are subject to certain manner of sales provisions, notice requirements and the availability of current public information about the Company. If two years have elapsed since the date of acquisition of Restricted Shares from the Company or from any "affiliate" of the Company, and the acquiror or subsequent holder thereof is deemed not to have been an affiliate of the Company at any time during the 90 days immediately preceding a sale, such person is entitled to sell such shares in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. The Company has established a stock option plan for the purpose of attracting and retaining highly qualified directors, executive officers and other key employees. See "Management--Stock Option Plan" and "--Compensation of Directors." The Company intends to issue options to purchase approximately 660,000 shares of Common Stock to directors, officers and certain key employees prior to the completion of the Offering and has reserved 440,000 additional shares for future issuance under the plan. On or prior to the expiration of the initial 12-month period following the completion of the Offering, the Company expects to file a registration statement with the Commission with respect to the shares of Common Stock issuable under these plans, which shares may be resold without restriction, unless held by affiliates. Prior to the Offering, there has been no public market for the Common Stock. Trading of the Common Stock on the New York Stock Exchange is expected to commence immediately following the completion of the Offering. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of Common Stock (including shares issued upon the exercise of options), or the perception that such sales could occur, could adversely affect prevailing market prices of the Common Stock. See "Risk Factors--Other Risks of Ownership of Common Stock" and "Partnership Agreement-- Transfer of Interests." REGISTRATION RIGHTS The Company has granted the participants in the Formation Transactions who received Units in the Formation Transactions certain registration rights with respect to the shares of Common Stock owned by them or acquired by them in connection with the exercise of the redemption right under the Partnership Agreement. These registration rights require the Company to register all such shares of Common Stock upon request. The Company will bear expenses incident to its registration requirements under the registration rights, except that such expenses shall not include any underwriting discounts or commissions or transfer taxes, if any, relating to such shares. 120 FEDERAL INCOME TAX CONSEQUENCES GENERAL The following discussion summarizes the material Federal income tax consequences that are generally applicable to all prospective stockholders of the Company. The specific tax consequences of owning Common Stock will vary for stockholders because of the different circumstances of stockholders and the discussion contained herein does not purport to address all aspects of federal income taxation that may be relevant to particular holders in light of their personal investment or tax circumstances. Therefore, it is imperative that a stockholder review the following discussion and consult with his own tax advisors to determine the interaction of his individual tax situation with the anticipated tax consequences of owning Common Stock. The information in this section and the opinions of Brown & Wood LLP are based on the Code, existing and proposed Treasury Regulations thereunder, current administrative interpretations and court decisions. No assurance can be given that future legislation, Treasury Regulations, administrative interpretations and court decisions will not significantly change current law or affect existing interpretations of current law in a manner which is adverse to stockholders. Any such change could apply retroactively to transactions preceding the date of change. The Company and the Operating Partnership do not plan to obtain any rulings from the IRS concerning any tax issue with respect to the Company. Thus, no assurance can be provided that the opinions and statements set forth herein (which do not bind the IRS or the courts) will not be challenged by the IRS or will be sustained by a court if so challenged. The following description does not constitute tax advice. This summary does not give a detailed discussion of state, local or foreign tax considerations. Except where indicated, the discussion below describes general Federal income tax considerations applicable to individuals who are citizens or residents of the United States. Accordingly, the following discussion has limited application to domestic corporations and persons subject to specialized Federal income tax treatment, such as foreign persons, trusts, estates, tax-exempt entities, regulated investment companies and insurance companies. As used in this section, the term "Company" refers solely to SL Green Realty Corp. and the term "Operating Partnership" refers solely to SL Green Operating Partnership, L.P. PROSPECTIVE STOCKHOLDERS ARE STRONGLY URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH STOCKHOLDERS' RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION. TAXATION OF THE COMPANY GENERAL. The Company will make an election to be taxed as a REIT under Sections 856 through 860 of the Code effective for its taxable year ending December 31, 1997. The Company believes that, commencing with such taxable year, it will be organized and will operate in such a manner as to qualify for taxation as a REIT under the Code and the Company intends to continue to operate in such a manner. Although the Company has been structured so as to qualify to be treated as a REIT, no assurance can be given that the Company will operate in a manner so as to qualify or remain qualified as a REIT. In the opinion of Brown & Wood LLP, commencing with the Company's taxable year ending December 31, 1997, the Company will be organized in conformity with the requirements for qualification and taxation as a REIT under the Code. This opinion is based on various assumptions relating to the organization and operation of the Company, the Operating Partnership, the Management LLC, the 121 Management Corporation (together with the Management LLC, the "Management Entities"), the Leasing Corporation and the Construction Corporation and upon certain representations made by the Company, the Operating Partnership, the Management Entities, the Leasing Corporation and the Construction Corporation as to certain relevant factual matters, including matters related to the organization and expected manner of operation of the Company, the Operating Partnership, the Property-owning entities, the Management Entities, the Leasing Corporation and the Construction Corporation. Moreover, such qualification and taxation as a REIT will depend upon the Company's ability to meet on a continuing basis, through actual annual operating results, distribution levels, and diversity of stock ownership, the various qualification tests imposed under the Code (discussed below). Brown & Wood LLP will not review compliance with these tests on a continuing basis. Accordingly, no assurance can be given that the Company will satisfy such tests on a continuing basis. See "--Failure to Qualify" below. The following is a general summary of the material Code provisions that govern the Federal income tax treatment of a REIT and its stockholders. These provisions of the Code are highly technical and complex. If the Company qualifies for taxation as a REIT, it generally will not be subject to Federal corporate income taxes on net income that it distributes currently to stockholders. This treatment substantially eliminates the "double taxation" (taxation at both the corporate and stockholder levels) that generally results from investment in a corporation. However, the Company will be subject to Federal income and excise tax in certain circumstances, including the following. First, the Company will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains. Second, under certain circumstances, the Company may be subject to the "alternative minimum tax" on its items of tax preference. Third, if the Company has (i) net income from the sale or other disposition of "foreclosure property" (which is, in general, property acquired by foreclosure or otherwise on default of a loan secured by the property) held primarily for sale to customers in the ordinary course of business or (ii) other non-qualifying income from foreclosure property, the Company will be subject to tax at the highest corporate rate on such income. Fourth, if the Company has net income from prohibited transactions (which are, in general, certain sales or other dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business), such income will be subject to a 100% tax. Fifth, if the Company fails to satisfy either the 75% gross income test or the 95% gross income test (both of which are discussed below), but nonetheless maintains its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on the greater of the amount by which the Company fails the 75% or 95% test, multiplied by a fraction intended to reflect the Company's profitability. Sixth, if the Company fails 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 and (iii) any undistributed taxable income from prior years, the Company will be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. Seventh, if the Company acquires any asset from a C corporation (i.e., a corporation generally subject to full corporate level tax) in a transaction in which the basis of the asset in the Company's hands is determined by reference to the basis of the asset (or any other property) in the hands of the C corporation and the Company recognizes gain on the disposition of such asset during the ten-year period (the "Recognition Period") beginning on the date on which such asset was acquired by the Company, then, to the extent of such property's "built-in" gain (the excess of the fair market value of such property at the time of acquisition by the Company over the adjusted basis in such property at such time), such gain will be subject to tax at the highest regular corporate rate applicable (the "Built-In Gain Rule"). REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation, trust, or association (i) that is managed by one or more trustees or directors; (ii) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest; (iii) that would be taxable as a domestic corporation, but for Section 856 through 859 of the Code; (iv) that is neither a financial institution nor an insurance company subject to certain provisions of the Code; (v) the beneficial 122 ownership of which is held by 100 or more persons; (vi) during the last half of each taxable year not more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities); and (vii) that meets certain other tests, described below, regarding the nature of its income and assets. The Code provides that conditions (i) through (iv), inclusive, must be met during the entire taxable year and that condition (v) 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. Conditions (v) and (vi), however, will not apply until after the first taxable year for which an election is made to be taxed as a REIT. The Company anticipates issuing sufficient shares of Common Stock in the Offering with sufficient diversity of ownership to allow the Company to satisfy conditions (v) and (vi) immediately following the Offering. In addition, the Company's Charter will include restrictions regarding the transfer of its shares of capital stock that are intended to assist the Company in continuing to satisfy the share ownership requirements described in (v) and (vi) above. See "Capital Stock--Restrictions on Transfer." In addition, a corporation may not elect to become a REIT unless its taxable year is the calendar year. The Company's taxable year will be the calendar year. If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary," that subsidiary is disregarded for Federal income tax purposes and all assets, liabilities and items of income, deduction and credit of the subsidiary are treated as assets, liabilities and items of the REIT itself. (A qualified REIT subsidiary is a corporation all of the capital stock of which has been owned by the REIT from the commencement of such corporate existence.) Similarly, a single member limited liability company owned by the REIT or by the Operating Partnership is disregarded as a separate entity for Federal income tax purposes. In the case of a REIT that is a partner in a partnership, Treasury Regulations provide that for purposes of the gross income tests and asset tests the REIT will be deemed to own its proportionate share (based on its interest in partnership capital) of the assets of the partnership and will be deemed to be entitled to the income of the partnership attributable to such share. In addition, the assets and gross income of the partnership will retain the same character in the hands of the REIT for purposes of Section 856 of the Code, including satisfying the gross income tests and asset tests, that they have in the hands of the Partnership. Thus, the Company's proportionate share of the assets, liabilities and items of gross income of the Operating Partnership will be treated as assets, liabilities and items of gross income of the Company for purposes of applying the requirements described herein. INCOME TESTS. In order to maintain qualification as a REIT, three gross income tests must be satisfied annually. First, at least 75% of the REIT's gross income (excluding gross income from "prohibited transactions") 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 the REIT's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property investments described above and from dividends, interest and gain from the sale or disposition of stock or securities, or from any combination of the foregoing. Third, gain from the sale or other disposition of stock or securities held for less than one year, gain from prohibited transactions and gain on the sale or other disposition of real property held for less than four years (apart from involuntary conversions and sales of foreclosure property) must represent less than 30% of the REIT's gross income (including gross income from prohibited transactions) for each taxable year. For purposes of applying the 30% gross income test, the holding period of Properties and other assets acquired in the Formation Transactions will be deemed to have commenced on the date of the Formation Transactions. Rents received by a REIT will qualify as "rents from real property" in satisfying the gross income requirements for a REIT described above only if several conditions are met. First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or 123 accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales. Second, rents received from a tenant will not qualify as "rents from real property" in satisfying the gross income tests if the REIT, or a direct or indirect owner of 10% or more of the REIT, directly or constructively, owns 10% or more of such tenant (a "Related Party Tenant"). Third, 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." Finally, in order for rents received with respect to a property to qualify as "rents from real property," the REIT generally must not operate or manage the property or furnish or render services to tenants, except through an "independent contractor" who is adequately compensated and from whom the Company derives no income. The "independent contractor" requirement, however, does not apply to the extent the services provided by the REIT are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered "rendered to the occupant." The Company does not anticipate charging rent that is based in whole or in part on the income or profits of any person (except by reason of being based on a fixed percentage or percentages of receipts of sales consistent with the rule described above). The Company does not anticipate deriving rent attributable to personal property leased in connection with real property that exceeds 15% of the total rents. The Company will provide certain services with respect to the Properties, but the Company believes (and has represented to Brown & Wood LLP ) that all such services will be considered "usually or customarily rendered" in connection with the rental of space for occupancy only, so that the provision of such services will not jeopardize the qualification of rent from the Properties as "rents from real property." In rendering its opinion on the Company's ability to qualify as a REIT, Brown & Wood LLP is relying on such representations. In the case of any services that are not "usual and customary" under the foregoing rules, the Company intends to employ "independent contractors" to provide such services. The Operating Partnership may receive certain types of income, including rent from Related Party Tenants, with respect to the properties it owns that will not qualify under the 75% or 95% gross income test. In particular, dividends on the Operating Partnership's stock in the Service Corporations will not qualify under the 75% gross income test. The Company believes, however, that the aggregate amount of such items and other non-qualifying income in any taxable year will not cause the Company to exceed the limits on non-qualifying income under the 75% and 95% gross income tests. The Management LLC will receive managements fees from the Operating Partnership with respect to properties that are wholly-owned by the Operating Partnership. In the opinion of Brown & Wood LLP, such fees will not constitute gross income of the Operating Partnership. If the Company fails to satisfy one or both of the 75% or the 95% gross income tests for any taxable year, it nevertheless may qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions generally will be available if the Company's failure to meet any such tests was due to reasonable cause and not due to willful neglect, the Company attaches a schedule of the sources of its income to its Federal corporate income tax 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 the Company would be entitled to the benefit of these relief provisions. As discussed in "--General" above, even if these relief provisions were to apply, a tax would be imposed with respect to the excess net income. Moreover, these relief provisions are unavailable if the Company fails the 30% gross income test. ASSET TESTS. The Company must also satisfy three tests relating to the nature of its assets at the close of each quarter of its taxable year. First, at least 75% of the value of the Company's total assets must be represented by real estate assets (including (i) its allocable share of real estate assets held by the Operating Partnership or any partnerships in which the Operating Partnership owns an interest and (ii) stock or debt instruments held for not more than one year purchased with the proceeds of a stock offering or long-term (i.e., at least five-year) public debt offering of the Company), cash, cash items and government securities. 124 Second, of the investments not included in the 75% asset class, the value of any one issuer's securities owned by the Company may not exceed 5% of the value of the Company's total assets. Third, of the investments not included in the 75% asset class, the Company may not own more than 10% of any one issuer's outstanding voting securities. After initially meeting the asset tests at the close of any quarter, the Company will not lose its status as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. If the failure to satisfy the asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient non-qualifying assets within 30 days after the close of that quarter. The Company intends to maintain adequate records of the value of its assets to ensure compliance with the asset tests and to take such other action within 30 days after the close of any quarter as may be required to cure any noncompliance. Based on the foregoing, the 5% test must generally be met for any quarter in which the Company acquires securities of an issuer. Thus, this requirement must be satisfied not only on the date the Company acquires securities of the Service Corporations, but also each time the Company increases its ownership of securities of a Service Corporation (including as a result of increasing its interest in the Operating Partnership as limited partners exercise their redemption rights). The Operating Partnership will own all of the non-voting stock of each of the Service Corporations, which stock represents 95% of the equity of the Service Corporations. See "Structure and Formation of the Company--The Operating Entities of the Company--The Service Corporations." By virtue of its ownership of Units, the Company will be considered to own its pro rata share of the assets of the Operating Partnership, including the securities of the Service Corporations described above. The Operating Partnership will not own more than 10% of the voting securities of the Service Corporations and, therefore, the Company will not own more than 10% of the voting securities of the Service Corporations. In addition, the Company and senior management believe that the Company's pro rata share of the value of the securities of the Service Corporations will not exceed, for each service Corporation, as of the completion of the Offering, 5% of the total value of the Company's assets. The Company's belief is based in part upon its analysis of the anticipated operating cash flows of the Service Corporations. There can be no assurance, however, that the IRS will not contend that the value of the securities of a Service Corporation exceeds the 5% value limitation. Brown & Wood LLP, in rendering its opinion regarding the qualification of the Company as a REIT, will rely on the conclusions of the Company and its senior management as to the value of the securities of the Service Corporations. As noted above, the 5% value requirement must be satisfied at or within 30 days after the end of each quarter during which the Company increases its (direct or indirect) ownership of securities of the Service Corporations (including as a result of increasing its interest in the Operating Partnership). Although the Company plans to take steps to ensure that it satisfies the 5% value test for any quarter with respect to which retesting is to occur, there can be no assurance that such steps always will be successful or will not require a reduction in the Operating Partnership's overall interest in a service Corporation. Although currently the IRS will not rule regarding compliance with the 10% voting securities test, in the opinion of Brown & Wood LLP the Company's proposed structure will meet the current statutory requirements with respect to the 10% voting securities test. ANNUAL DISTRIBUTION REQUIREMENTS. The Company, 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 (i) the sum of (A) 95% of the Company's "REIT taxable income" (computed without regard to the dividends paid deduction and the REIT's net capital gain) and (B) 95% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of noncash income. Such distributions must be paid during the taxable year to which they relate (or during the following taxable year, if declared before the Company timely files its tax return for the preceding year and paid on or before the first regular dividend payment after such declaration). To the extent that the Company does not distribute all of its net 125 capital gain or distributes at least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax on the undistributed amount at regular corporate capital gains rates and ordinary income tax rates. Furthermore, if the Company fails to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income of such year, (ii) 95% of its REIT capital gain income for such year and (iii) any undistributed taxable income from prior periods, the Company will be subject to a 4% excise tax on the excess of such amounts over the amounts actually distributed. In addition, if the Company disposes of any asset subject to the Built-In Gain Rule during its Recognition Period, the Company will be required to distribute at least 95% of the built-in gain (after tax), if any, recognized on the disposition. The Company intends to make timely distributions sufficient to satisfy the annual distribution requirements. In this regard, it is expected that the Company's REIT taxable income will be less than its cash flow due to the allowance of depreciation and other noncash charges in the computing of REIT taxable income. Moreover, the Partnership Agreement of the Operating Partnership authorizes the Company, as general partner, to take such steps as may be necessary to cause the Operating Partnership to make distributions to its partners of amounts sufficient to permit the Company to meet these distribution requirements. It is possible, however, that the Company, from time to time, may not have sufficient cash or other liquid assets to meet the 95% distribution requirement due to timing differences between the actual receipt of income and actual payment of deductible expenses and the inclusion of such income and deduction of such expenses in arriving at REIT taxable income of the Company, or due to an excess of nondeductible expenses such as principal amortization or capital expenditures over noncash deductions such as depreciation. In the event that such circumstances do occur, then in order to meet the 95% distribution requirement, the Company may cause the Operating Partnership to arrange for short-term, or possibly long-term, borrowings to permit the payment of required dividends. Under certain circumstances, the Company 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 that may be included in the Company's deduction for dividends paid for the earlier year. Thus, the Company may be able to avoid being taxed on amounts distributed as deficiency dividends. However, the Company would be required to pay to the IRS interest based upon the amount of any deduction taken for deficiency dividends. FAILURE TO QUALIFY. If the Company fails to qualify for taxation as a REIT in any taxable year and certain relief provisions do not apply, the Company will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Unless entitled to relief under specific statutory provisions, the Company also will 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 the Company would be entitled to such statutory relief. Distributions to stockholders in any year in which the Company fails to qualify as a REIT will not be deductible by the Company, nor will the Company be required to make distributions. If the Company makes distributions, such distributions will be taxable as ordinary income to the extent of the Company's current and accumulated earnings and profits. Subject to certain limitations in the Code, corporate distributees may be eligible for the dividends received deduction. TAXATION OF STOCKHOLDERS TAXATION OF DOMESTIC STOCKHOLDERS. As long as the Company qualifies as a REIT, distributions made to the Company'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 corporate stockholders will not be eligible for the dividends received deduction as to such amounts. Distributions that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent they do not exceed the Company'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. Distributions in excess of current and accumulated 126 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 of Common Stock, but rather will reduce the adjusted basis of a stockholder's shares of Common Stock. To the extent that such distributions exceed the stockholder's adjusted basis in its shares of Common Stock, 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), assuming the shares of Common Stock are a capital asset in the hands of the stockholder. Any dividend declared by the Company in October, November or December of any year payable to a stockholder of record on a specific date in any such month shall be treated as both paid by the Company and received by the stockholder on December 31 of such year, if the dividend is actually paid by the Company during January of the following calendar year. Stockholders may not include in their individual income tax returns net operating losses or capital losses of the Company. In addition, distributions from the Company and gain from the disposition of shares of Common Stock will not be treated as "passive activity" income and, therefore, stockholders will not be able to use passive losses to offset such income. In general, any loss upon a sale or exchange of shares of Common Stock by a stockholder which has held such shares of Common Stock 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 the Company required to be treated by such stockholder as long-term capital gains. BACKUP WITHHOLDING. The Company will report to its domestic stockholders and the IRS the amount of dividends paid during each calendar year and the amount of tax withheld, if any, with respect thereto. Under the backup withholding rules, a stockholder may be subject to backup withholding at the rate of 31% with respect to dividends 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 and certifies as to no loss of exemption, and otherwise complies with the applicable requirements of the backup withholdings rules. Any amount paid as backup withholding will be creditable against the stockholder's income tax liability. The United States Treasury has recently issued proposed regulations regarding the withholding and information reporting rules discussed above. In general, the proposed regulations do not alter the substantive withholding and information reporting requirements but unify current certification procedures and forms and clarify and modify reliance standards. If finalized in their current form, the proposed regulations would generally be effective for payments made after December 31, 1997, subject to certain transition rules. In addition, the Company may be required to withhold a portion of capital gain distributions made to any stockholders which fail to certify their non foreign status to the Company. See "--Taxation of Foreign Stockholders" below. TAXATION OF TAX-EXEMPT STOCKHOLDERS. The IRS has ruled that amounts distributed as dividends by a qualified REIT generally do not constitute unrelated business taxable income ("UBTI") when received by a tax-exempt entity. Based on that ruling, the dividend income from the Common Stock will not be UBTI to a tax-exempt stockholder, provided that a tax-exempt stockholder has not held its shares of Common Stock as "debt financed property" within the meaning of the Code and such shares are not otherwise used in a trade or business. Similarly, income from the sale of Common Stock will not constitute UBTI unless such tax-exempt stockholder has held such shares as "debt financed property" within the meaning of the Code or has used the shares in a trade or business. Notwithstanding the above, however, a portion of the dividends paid by a "pension held REIT" will be treated as UBTI as to any trust which is described in Section 401(a) of the Code and is tax-exempt under Section 501(a) of the Code (a "qualified trust") and which holds more than 10% (by value) of the interests in the REIT. A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT but for the application of a "look-through" exception to the "not closely held" requirement applicable to qualified 127 trusts, and (ii) either (A) at least one such qualified trust holds more than 25% (by value) of the interests in the REIT, or (B) one or more such qualified trusts, each of which owns more than 10% (by value) of the interests in the REIT, hold in the aggregate more than 50% (by value) of the interests in the REIT. The percentage of any REIT dividend treated as UBTI is equal to the ratio of (i). the gross income (less direct expenses related thereto) of the REIT from unrelated trades or businesses (determined as if the REIT were a qualified trust) to (ii) the total gross income (less direct expenses related thereto) of the REIT. A de minimis exception applies where this percentage is less than 5% for any year. The provisions requiring qualified trusts to treat a portion of REIT distributions as UBTI will not apply if the REIT is able to satisfy the "not closely held" requirement without relying upon the "look-through" exception with respect to qualified trusts. As a result of certain limitations on transfer and ownership of Common Stock contained in the Charter, the Company does not expect to be classified as a "pension held REIT." TAXATION OF FOREIGN STOCKHOLDERS. The rules governing U.S. Federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships and other foreign stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt will be made herein to provide more than a limited summary of such rules. Prospective Non-U.S. Stockholders should consult with their own tax advisors to determine the impact of U.S. Federal, state and local income tax laws with regard to an investment in shares of Common Stock, including any reporting requirements. ORDINARY DIVIDENDS. Distributions, other than distributions that are treated as attributable to gain from sales or exchanges by the Company of U.S. real property interests (discussed below) and other than distributions designated by the Company as capital gain dividends, will be treated as ordinary income to the extent that they are made out of current or accumulated earnings and profits of the Company. Such distributions to foreign stockholders will ordinarily be subject to a withholding tax equal to 30% of the gross amount of the distribution, unless an applicable tax treaty reduces that tax rate. However, if income from the investment in the shares of Common Stock is treated as effectively connected with the Non-U.S. Stockholder's conduct of a U.S. trade or business, the Non-U.S. Stockholder generally will be subject to a 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 if the stockholder is a foreign corporation). The Company expects to withhold U.S. income tax at the rate of 30% on the gross amount of any dividends, other than dividends treated as attributable to gain from sales or exchanges of U.S. real property interests and capital gain dividends, paid to a Non-U.S. Stockholder, unless (i) a lower treaty rate applies and the required form evidencing eligibility for that reduced rate is filed with the Company or (ii) the Non-U.S. Stockholder files an IRS Form 4224 (or its future equivalent) with the Company claiming that the distributions are "effectively connected" income. Pursuant to current Treasury Regulations, dividends paid to an address in a country outside the United States are generally presumed to be paid to a resident of such country for purposes of determining the applicability of withholding discussed above and the applicability of a tax treaty rate. Under proposed Treasury Regulations, not currently in effect, however, a Non-U.S. Stockholder who wishes to claim the benefit of an applicable treaty rate would be required to satisfy certain certification and other requirements. RETURN OF CAPITAL. Distributions in excess of current and accumulated earnings and profits of the Company, which are not treated as attributable to the gain from disposition by the Company of a U.S. real property interest, will not be taxable to a Non-U.S. Stockholder to the extent that they do not exceed the adjusted basis of the Non-U.S. Stockholder's shares of Common Stock, but rather will reduce the adjusted basis of such shares of Common Stock. To the extent that such distributions exceed the adjusted basis of a Non-U.S. Stockholder's shares of Common Stock, they will give rise to tax liability if the Non-U.S. Stockholder otherwise would be subject to tax on any gain from the sale or disposition of its shares of Common Stock, as described below. If it cannot be determined at the time a distribution is made whether 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. Stockholder may seek a 128 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 the Company. CAPITAL GAIN DIVIDENDS. For any year in which the Company qualifies as a REIT, distributions that are attributable to gain from sales or exchanges by the Company of U.S. real property interests will be taxed to a Non-U.S. Stockholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980, as amended ("FIRPTA"). Under FIRPTA, these distributions are taxed to a Non-U.S. Stockholder as if such gain were effectively connected with a U.S. business. Thus, Non-U.S. Stockholders will be taxed on such distributions at the same capital gain rates applicable to U.S. stockholders (subject to any applicable alternative minimum tax and special alternative minimum tax in the case of nonresident alien individuals), without regard to whether such distributions are designated by the Company as capital gain dividends. Also, distributions subject to FIRPTA may be subject to a 30% branch profits tax in the hands of a corporate Non-U.S. Stockholder not entitled to treaty relief or exemption. The Company is required by applicable Treasury Regulations under FIRPTA to withhold 35% of any distribution that could be designated by the Company as a capital gain dividend. COMMON STOCK SALES. Gain recognized by a Non-U.S. Stockholder upon a sale or exchange of shares of Common Stock generally will not be taxed under FIRPTA if the Company is a "domestically controlled REIT," defined generally as a REIT in respect of which at all times during a specified testing period less than 50% in value of the stock was held directly or indirectly by foreign persons. It is currently anticipated that the Company will be a "domestically controlled REIT" and that therefore the sale of shares of Common Stock will not be subject to taxation under FIRPTA. However, gain not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i) investment in the shares of Common Stock is treated as "effectively connected" with the Non-U.S. Stockholder's U.S. trade or business, in which case the Non-U.S. Stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain, or (ii) the Non U.S. Stockholder 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, or maintains an office or a fixed place of business in the United States to which the gain is attributable, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains. A similar rule will apply to capital gain dividends not subject to FIRPTA. Although the Company anticipates that it will qualify as a domestically controlled REIT, because the Common Stock will be publicly traded, no assurance can be given that the Company will continue to so qualify. If the Company were not a domestically controlled REIT, whether or not a Non-U.S. Stockholder's sale of shares of Common Stock would be subject to tax under FIRPTA would depend on whether or not the shares of Common Stock were regularly traded on an established securities market (such as the NYSE, on which the Company has applied for the listing of the shares of Common Stock) and on the size of the selling Non-U.S. Stockholder's interest in the Company. If the gain on the sale of shares of Common Stock were to be subject to tax under FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as U.S. stockholders with respect to such gain (subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals) and the purchaser of such shares of Common Stock may be required to withhold 10% of the gross purchase price. OTHER TAX CONSIDERATIONS EFFECT OF TAX STATUS OF OPERATING PARTNERSHIP AND OTHER ENTITIES ON REIT QUALIFICATION. All of the Company's significant investments are held through the Operating Partnership. The Operating Partnership may hold interests in certain Properties through Property-owning entities. The Operating Partnership and the Property-owning entities, as well as the Management LLC, involve special tax considerations. These tax considerations include: (i) allocations of income and expense items of the Operating Partnership and the Property-owning entities, which could affect the computation of taxable income of the Company, (ii) the status of the Operating Partnership, the Property-owning entities and the Management LLC as partnerships or entities that are disregarded as entities separate from their owners (as opposed to associations 129 taxable as corporations) for income tax purposes and (iii) the taking of actions by the Operating Partnership or any of the Property-owning entities that could adversely affect the Company's qualification as REIT. In the opinion of Brown & Wood LLP, based on certain representations of the Company and the Operating Partnership, for Federal income tax purposes, the Operating Partnership will be treated as a partnership and neither the Management LLC nor any of the Property-owning entities will be treated as an association taxable as a corporation. If, however, the Operating Partnership or any of such other entities were treated as an association taxable as a corporation, the Company would fail to qualify as a REIT for a number of reasons. The Partnership Agreement requires that the Operating Partnership be operated in a manner that will enable the Company to satisfy the requirements for classification as a REIT. In this regard, the Company will control the operation of the Operating Partnership through its rights as the sole general partner of the Operating Partnership. TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. When property is contributed to a partnership in exchange for an interest in the partnership, the partnership generally takes a carryover basis in that property for tax purposes (i.e., the partnership's basis is equal to the adjusted basis of the contributing partner in the property), rather than a basis equal to the fair market value of the property at the time of contribution. Pursuant to Section 704(c) of the Code, income, gain, loss and deductions attributable to such contributed property 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 the contributed property at the time of contribution and the adjusted tax basis of such property at the time of contribution (a "Book-Tax Difference"). Such allocations are solely for Federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. The Operating Partnership will be funded by way of contributions of appreciated property to the Operating Partnership in the Formation Transactions. Consequently, the Operating Partnership Agreement will require such allocations to be made in a manner consistent with Section 704(c) of the Code and the regulations thereunder (the "Section 704(c) Regulations"). The Section 704(c) Regulations require partnerships to use a "reasonable method" for allocation of items affected by Section 704(c) of the Code and outline three methods which may be considered reasonable for these purposes. The Operating Partnership intends to use the "traditional method" of Section 704(c) allocations, which is the least favorable method from the Company's perspective because of certain technical limitations. Under the traditional method, depreciation with respect to a contributed Property for which there is a Book-Tax Difference first will be allocated to the Company and other partners who did not have an interest in such Property until they have been allocated an amount of depreciation equal to what they would have been allocated if the Operating Partnership had purchased such property for its fair market value at the time of contribution. In addition, if such a Property is sold, gain equal to the Book-Tax Difference at the time of sale will be specially allocated to the Purchaser who contributed the Property. These allocations will tend to eliminate the Book-Tax Differences with respect to the contributed Properties over the life of the Operating Partnership. However, they may not always entirely eliminate the Book-Tax Difference on an annual basis or with respect to a specific taxable transaction such as a sale. This could cause the Company (i) to be allocated lower amounts of depreciation deduction for tax purposes than would be allocated to the Company if all Properties were to have a tax basis equal to their fair market value at the time of contribution and (ii) to be allocated lower amounts of taxable loss in the event of a sale of such contributed interests in the Properties at a book loss, than the economic or book loss allocated to the Company as a result of such sale, with a corresponding benefit to the other partners in the Operating Partnership. These allocations possibly might adversely affect the Company's ability to comply with REIT distribution requirements, although the Company does not anticipate that this will occur. These allocations 130 may also affect the earnings and profits of the Company for purposes of determining the portion of distributions taxable as a dividend income. See "--Taxation of U.S. Stockholders". The application of these rules over time may result in a higher portion of distributions being taxed as dividends than would have occurred had the Company purchased its interests in the Properties at their agreed values. Interests in the Properties purchased by the Operating Partnership for cash simultaneously with or subsequent to the admission of the Company to the Operating Partnership initially will have a tax basis equal to their fair market value. Thus, Section 704(c) of the Code will not apply to such interests. SERVICE CORPORATIONS. A portion of the amounts to be used by the Operating Partnership to fund distributions to stockholders is expected to come from the Service Corporations, through dividends on non-voting stock of the Service Corporations to be held by the Operating Partnership. The Service Corporations will not qualify as RETs and thus will pay Federal, state and local income taxes on its net income at normal corporate rates. To the extent that the Service Corporations are required to pay Federal, state and local income taxes, the cash available for distribution to the Company's stockholders will be reduced accordingly. As described above, the value of the securities of any Service Corporation held by the Operating Partnership cannot exceed 5% of the value of the Operating Partnership's assets at a time when the Company is considered to acquire additional securities of the Service Corporation. See "--Taxation of the Company--Asset Tests." This limitation may restrict the ability of the Service Corporations to increase the sizes of their businesses unless the value of the assets of the Operating Partnership is increasing at a commensurate rate. STATE AND LOCAL TAX The Company and its stockholders may be subject to state and local tax in states and localities in which it does business or owns property. The tax treatment of the Company and the stockholders in such jurisdications may differ from the Federal income tax treatment described above. 131 UNDERWRITING The underwriters of the Offering (the "Underwriters"), for whom Lehman Brothers Inc. and Prudential Securities Incorporated are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions contained in the Underwriting Agreement (the form of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part) to purchase from the Company and the Company has agreed to sell to each Underwriter, the aggregate number of shares of Common Stock set forth below opposite the name of each such Underwriter.
NUMBER OF UNDERWRITER SHARES - --------------------------------------------------------------------------------- ---------- Lehman Brothers Inc.............................................................. Prudential Securities Incorporated............................................... ---------- Total........................................................................ 8,100,000 ---------- ----------
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase shares of Common Stock are subject to certain conditions, and that if any of the shares of Common Stock are purchased by the Underwriters pursuant to the Underwriting Agreement, all of the shares agreed to be purchased by the Underwriters under the Underwriting Agreement must be so purchased. The Company has been advised that the Underwriters propose to offer the shares of Common Stock directly to the public at the initial public offering price set forth on the cover page of this Prospectus, and to certain selected dealers who may include the Underwriters at such public offering price less a selling concession not in excess of $ per share. The selected dealers may reallow a concession not in excess of $ per share to certain brokers or dealers. After the Offering, the public offering price, the concession to selected dealers and the reallowance may be changed by the Representatives. The Company has granted to the Underwriters an option to purchase up to an additional 1,215,000 shares of Common Stock at the public offering price less the aggregate underwriting discounts and commissions shown on the cover page of this Prospectus, solely to cover overallotments, if any. Such option may be exercised at any time within 30 days after the date of the Underwriting Agreement. To the extent that such option is exercised, each Underwriter will be committed, subject to certain conditions, to purchase a number of additional shares of Common Stock proportionate to such Underwriter's initial commitment as indicated in the preceding table. The Company has agreed that it will not, without the prior written consent of Lehman Brothers Inc., offer for sale, contract to sell, sell or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of), directly or indirectly, any shares of Common Stock (other than shares offered hereby, shares issued pursuant to the 1997 Stock Option Plan and any Units or shares of Common Stock that may be issued in connection with any acquisition of a property), or sell or grant options, rights or warrants with respect to any shares of Common Stock (other than the grant of options pursuant to the 1997 Stock Option Plan), for a period of 180 days after the date of this Prospectus. In addition, certain SL Green entities and certain officers of the Company have agreed that they will not, without the prior written consent of the Company and Lehman Brothers Inc., subject to certain exceptions, offer for sale, contract to sell, sell or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of), directly or indirectly, any shares of Common Stock or Units received by them in connection with the Formation Transactions or the Offering, for an initial period of one year after the date of this Prospectus, after which time one-third of such Common Stock or Units held by each such entity or person shall no longer be subject to such restrictions and an additional one-third thereof shall be released from such restrictions on each of the second and third anniversaries of the date of this Prospectus. Also, Victor 132 Capital has agreed to similar restrictions with respect to the shares of Common Stock received by it in connection with the Formation Transactions for a period of one year after the date of this Prospectus. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to the payments they may be required to make in respect thereto. The Underwriters do not intend to confirm sales of Common Stock to any account over which they exercise discretionary authority. Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price will be determined through negotiations between the Company and the Representatives. Among the factors to be considered in such negotiations, in addition to prevailing market conditions, are distribution rates and financial characteristics of publicly traded REITs that the Company and the Representatives believe to be comparable to the Company, the expected results of operations of the Company (which are based on the results of operations of the Properties in recent periods), estimates of future business potential and earnings prospects of the Company as a whole and the current state of the real estate market in the Midtown Markets and the economy as a whole. The initial price per share to the public set forth on the cover page of this Prospectus should not, however, be considered an indication of the actual value of the Common Stock. Such price is subject to change as a result of market conditions and other factors. Application has been made to list the shares of Common Stock on the NYSE under the symbol "SLG." Until the distribution of the Common Stock is completed, rules of the Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the offering, I.E., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus, the Representatives may reduce that short position by purchasing Common Stock in the open market. The Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described herein. The Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the Offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security by purchasers in an offering. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Certain of the Underwriters and their affiliates have from time to time performed, and may continue to perform in the future, various investment banking and other services for the Company, for which 133 customary compensation has been, and will be, received. The Company will pay an advisory fee equal to 0.75% of the gross proceeds of the Offering (including any exercise of the Underwriters' overallotment option) to Lehman Brothers Inc. for advisory services in connection with the evaluation, analysis and structuring of the Company's formation as a REIT. In connection with the Offering, an affiliate of Lehman Brothers Inc. will receive $39.4 million of the net proceeds in repayment of amounts outstanding under the LBHI Loan. See "Use of Proceeds", "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Certain Relationships and Transactions". The Underwriters have reserved for sale at the public offering price up to 931,500 shares of Common Stock to directors, officers, employees and consultants of the Company, their business affiliates and related parties who have expressed an interest in purchasing shares. The number of shares available for sale to the general public will be reduced to the extent such persons purchase the reserved shares. Any reserved shares not so purchased will be offered by the Underwriters to the general public on the same basis as the others have been offered hereby. EXPERTS The balance sheet of SL Green Realty Corp. as of June 12, 1997, the combined financial statements of the SL Green Predecessor as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, the combined financial statements of the uncombined joint ventures of the SL Green Predecessor as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, the statements of revenues and certain expenses for each of the Properties at (i) 36 West 44th Street, (ii) 1372 Broadway and (iii) 1140 Avenue of the Americas in the Borough of Manhattan for the year ended December 31, 1996 and the statement of revenues and certain expenses for the property at 1414 Avenue of the Americas in the Borough of Manhattan for the year ended December 31, 1995, all appearing in this Prospectus and Registration Statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in these reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The Rosen Market Study was prepared for the Company by Rosen Consulting Group, which is a real estate consulting firm with significant expertise relating to the New York metropolitan area economy and the Manhattan office market and the various submarkets therein. Information relating to the New York economy and the Manhattan office market set forth on "Market Overview" is derived from the Rosen Market Study and is included in reliance on the Rosen Consulting Group's authority as experts on such matters. LEGAL MATTERS The validity of the shares of Common Stock and certain tax matters will be passed upon for the Company by Brown & Wood LLP. In addition, the description of Federal income tax consequences under the heading "Federal Income Tax Consequences" is based upon the opinion of Brown & Wood LLP. Certain legal matters will be passed upon for the Underwriters by Rogers & Wells, New York, New York. Rogers & Wells may rely on the opinion of Brown & Wood LLP as to certain matters of Maryland law. 134 ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S - -11 (of which this Prospectus is a part) under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. Statements contained in this Prospectus as to the content of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement is qualified in all respects by such reference and the exhibits and schedules hereto. For further information regarding the Company and the Common Stock offered hereby, reference is hereby made to the Registration Statement and such exhibits and schedules, which may be obtained from the Commission as its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed by the Commission. The Commission maintains a website at http:/www.sec.gov containing reports, proxy and information statements and other information regarding registrants, including the Company, that file electronically with the Commission. In addition, the Company intends to file an application to list the Common Stock on the New York Stock Exchange and, if the Common Stock is listed on the New York Stock Exchange, similar information concerning the Company can be inspected and copied at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. The Company intends to furnish its stockholders with annual reports containing audited combined financial statements and a report thereon by independent certified public accountants. 135 GLOSSARY OF SELECTED TERMS Unless the context otherwise requires, the following capitalized terms shall have the meanings set forth below for the purposes of this Prospectus: "ACMS" means asbestos containing materials. "ADA" means the Americans with Disabilities Act, as amended. "ACQUISITION PROPERTIES" means the two office properties which the Company has contracted to acquire on or after completion of the Offering. "BlDS" means Business Improvement Districts (public/private ventures that provide security, sanitation and other services within their boundaries). "BOOK-TAX DIFFERENCE" means the difference between the fair market value of a contributed property at the time of contribution and the adjusted tax basis of such property at the time of contribution. "BYLAWS" means the Company's bylaws, as supplemented or amended. "CHARTER" means the Company's articles of incorporation, as supplemented or amended. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means shares of the Company's Common Stock, $.01 par value per share. "COMPANY" means SL Green Realty Corp., a Maryland corporation, and one or more of its subsidiaries (including the Operating Partnership), and the predecessors thereof or, as the context may require, SL Green Realty Corp. only or the Operating Partnership only. "CONSTRUCTION CORPORATION" means the corporation which following completion of the Offering will conduct the construction business with respect to properties in which the Company has no ownership interest. "CORE PORTFOLIO" means the six office properties that will be acquired by the Company from SL Green upon completion of the Offering. "CREDIT FACILITY" means the revolving credit facility which the Company expects to establish in order to facilitate acquisitions of properties and for working capital purposes. "EXCESS STOCK" means the separate class of stock of the Company into which shares of stock of the Company owned, or deemed to be owned, or transferred to a stockholder in excess of the Ownership Limit will automatically be converted. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as amended. "FORMATION TRANSACTIONS" means the transactions described in "Structure and Formation of the Company--Formation Transactions." "401(K) PLAN" means the Company's Section 401(k) Savings/Retirement Plan. "FUNDS FROM OPERATIONS" means net income (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. "GAAP" means generally accepted accounting principles. 136 "INTERESTED STOCKHOLDER" means, with respect to the business combination provisions of the MGCL, any person who beneficially owns 10% or more of the voting power of a corporation's shares. "IRA" means an individual retirement account or annuity. "IRS" means the United States Internal Revenue Service. "LEASING CORPORATION" means the corporation which following completion of the Offering will conduct the leasing business with respect to properties in which the Company has no interest. "LOCK-OUT PERIOD" means the period, up to 12 years following the completion of the Offering, during which the Lock-out Provisions will be in effect. "LOCK-OUT PROVISIONS" means the limitations on the ability of the Company to sell, or reduce the amount of mortgage indebtedness on, two of the Properties (673 First Avenue and 470 Park Avenue South) for up to 12 years following the completion of the Offering, except in certain circumstances. "MANAGEMENT CORPORATION" means the corporation which following completion of the Offering will conduct the management business with respect to properties in which the Company has no ownership interest. "MANAGEMENT ENTITIES" means the Management Corporation and the Management LLC. "MANAGEMENT LLC" means the limited liability company to which SL Green will transfer its management and leasing business with respect to the Properties owned by the Company. "MGCL" means the Maryland General Corporation Law. "NAREIT" means the National Association of Real Estate Investment Trusts. "1940 ACT" means the Investment Company Act of 1940, as amended. "NON-U.S. STOCKHOLDERS" means nonresident alien individuals, foreign corporations, foreign partnerships and other foreign stockholders. "OFFERING" means this offering of shares of Common Stock of the Company pursuant to and as described in this Prospectus. "OPERATING PARTNERSHIP" means SL Green Operating Partnership, L.P., a Delaware limited partnership. "OWNERSHIP LIMIT" means the restriction contained in the Company's Charter providing that, subject to certain exceptions, no holder may own, or be deemed to own by virtue of the attribution provision of the Code, more than 9.0% of the aggregate number or value of shares of Common Stock of the Company. "PARENT ENTITY" means an entity whose stock is publicly traded and which owns more than 50% of the capital stock of the Company. "PARTNERSHIP AGREEMENT" means the Agreement of Limited Partnership of the Operating Partnership, as amended from time to time. "PCBS" means polychlorinated biphenyls. "PREFERRED STOCK" means one or more classes of Preferred Stock of the Company as designated and issued by the Board of Directors from time to time. "PROPERTIES" means the eight Class B properties located in midtown Manhattan in which the Company will own interests upon completion of the Offering. "REIT" means a real estate investment trust as defined by Sections 856 through 860 of the Code and applicable Treasury Regulations. 137 "RELATED PARTY TENANT" means, for purposes of determining whether rents received by the Company will qualify as "rents from real property" for satisfying the gross income requirements for a REIT, a tenant in which the Company, or an owner of 10% or more of the Company, directly or constructively has at least a 10% ownership interest. "RESTRICTED SHARES" means the shares of Common Stock received by the participants in the Formation Transactions or acquired by any participant in the Formation Transactions as a result of the redemption of Units. "SECTION 704(c) REGULATIONS" means the regulations promulgated by the IRS under Section 704(c) of the Code. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SERVICE CORPORATIONS" means the Management Corporation, the Leasing Corporation and the Construction Corporation. "TREASURY REGULATIONS" means the regulations promulgated by the IRS under the Code. "TRUSTEE" means the trustee appointed by the Company, but not affiliated with the Company, who will name a charitable trust for the benefit of a charitable organization to receive any shares of Common Stock purportedly transferred to a stockholder in violation of the applicable Ownership Limit or Existing Holder Limit. "UBTI" means unrelated business taxable income. "UNDERWRITERS" means the underwriters of the Offering, for whom Lehman Brothers Inc. and Prudential Securities Incorporated are acting as representatives. "UNITS" means units of partnership interest in the Operating Partnership. "UPREIT" means a REIT conducting business through a partnership. 138 INDEX TO FINANCIAL STATEMENTS SL GREEN REALTY CORP. Pro Forma Combined Financial Statements (unaudited).................................. F-3 Pro Forma Combined Balance Sheet as of March 31, 1997............................ F-4 Pro Forma Combined Statement of Income for the Three Months Ended March 31, 1997................................................................. F-5 Pro Forma Combined Statement of Income for the Year Ended December 31, 1996...... F-6 Notes to Pro Forma Combined Financial Information................................ F-7 Historical Report of Independent Auditors................................................... F-16 Balance Sheet as of June 12, 1997................................................ F-17 Notes to Balance Sheet........................................................... F-18 THE SL GREEN PREDECESSOR Combined Financial Statements Report of Independent Auditors................................................... F-21 Combined Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996 and 1995..................................................... F-22 Combined Statements of Operations for the Three Months Ended March 31, 1997 and 1996 (unaudited) and the Years Ended December 31, 1996, 1995, and 1994.......... F-23 Combined Statements of Owners' Deficit for the Three Months Ended March 31, 1997 (unaudited) and the Years Ended December 31, 1996, 1995, and 1994............... F-24 Combined Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 (unaudited) and the Years Ended December 31, 1996, 1995, and 1994..... F-25 Notes to the Combined Financial Statements....................................... F-26 Schedule III Real Estate and Accumulated Depreciation as of December 31, 1996................. F-36 Uncombined Joint Ventures--Combined Financial Statements Report of Independent Auditors................................................... F-38 Combined Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996 and 1995..................................................... F-39 Combined Statements of Operations for the Three Months Ended March 31, 1997 and 1996 (unaudited) and the Years Ended December 31, 1996, 1995, and 1994.......... F-40 Combined Statements of Owners' Deficit for the Three Months Ended March 31, 1997 (unaudited) and Years Ended December 31, 1996, 1995, and 1994................... F-41 Combined Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 (unaudited) and the Years Ended December 31, 1996, 1995, and 1994.......... F-42 Notes to the Combined Financial Statements....................................... F-43 Schedule III Real Estate and Accumulated Depreciation as of December 31, 1996................. F-53
F-1 INDEX TO FINANCIAL STATEMENTS (CONTINUED)
1414 AVENUE OF THE AMERICAS Report of Independent Auditors................................................ F-55 Statement of Revenues and Certain Expenses for the Six Months Ended June 30, 1996 (unaudited) and the Year Ended December 31, 1995.............. F-56 Notes to Statement of Revenues and Certain Expenses........................... F-57 36 WEST 44TH STREET Report of Independent Auditors................................................ F-59 Statement of Revenues and Certain Expenses for the Three Months Ended March 31, 1997 (unaudited) and the Year Ended December 31, 1996............. F-60 Notes to Statement of Revenues and Certain Expenses........................... F-61 1372 BROADWAY Report of Independent Auditors................................................ F-63 Statement of Revenues and Certain Expenses for the Three Months Ended March 31, 1997 (unaudited) and the Year Ended December 31, 1996............. F-64 Notes to Statement of Revenues and Certain Expenses........................... F-65 1140 AVENUE OF THE AMERICAS Report of Independent Auditors................................................ F-67 Statement of Revenues and Certain Expenses For Three Months Ended March 31, 1997 (unaudited) and the Year ended December 31, 1996............. F-68 Notes to Statement of Revenues and Certain Expenses........................... F-69
F-2 SL GREEN REALTY CORP. PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED) The unaudited pro forma financial and operating information as of March 31, 1997 and for the three months ended March 31, 1997 and the year ended December 31, 1996 is presented as if the Offering and the Formation Transactions all had occurred on March 31, 1997 with respect to the combined balance sheet and at the beginning of each of the periods presented for the combined statements of income. The pro forma March 31, 1997 balance sheet information also gives effect to the recording of minority interests for Operating Partnership Units, as if these transactions occurred on March 31, 1997. The pro forma financial statements do not purport to represent what the Company's financial position or results of operations would have been assuming the completion of the Formation Transactions and the Offering on such date or at the beginning of the period indicated, nor do they purport to project the Company's financial position or results of operations at any future date or for any future period. F-3 SL GREEN REALTY CORP. PRO FORMA COMBINED BALANCE SHEET AS OF MARCH 31, 1997
SL GREEN ELIMINATION OF SL GREEN PREDECESSOR THE ACQUISITION SERVICE REALTY HISTORICAL OFFERING PROPERTIES CORPORATIONS PRO FORMA CORP. (A) (B) (C) (D) ADJUSTMENTS ------------- ------------- ----------- ----------- --------------- ----------- ASSETS : Commercial Real Estate Property at Cost.................................. Land.................................... $ 4,465 $ 15,018 $ 7,366 Buildings and Improvements.............. 21,931 60,072 84,358 Property Under Capital Lease............ 4,592 12,208 --- ------------- ----------- ----------- ------- ----------- 26,396 79,682 103,932 Less Accumulated Depreciation......... (5,941) (1,958) (14,185) --- ------------- ----------- ----------- ------- ----------- 20,455 77,724 89,747(E) Cash and Cash Equivalents............... 1 794 $ 147,028 (66,390) $ (309) (72,240)(F) Restricted Cash......................... 1,242 2,597(G) Tenant Receivables...................... 1,583 (1,505) 259(G) Related Party Receivables............... 835 (30) (G) Deferred Rents Receivable............... 1,502 9,462(H) Investment in Partnerships.............. 1,607 (554) (2,269)(G) Deferred Lease Fees and Loan Costs...... 1,145 3,456(I) Other Assets............................ 1,351 (989) 2,599(G) --- ------------- ----------- ----------- ------- ----------- Total Assets.......................... 1 $ 30,514 $ 147,028 $ 11,334 $ (3,387) $ 33,611 --- ------------- ----------- ----------- ------- ----------- --- ------------- ----------- ----------- ------- ----------- LIABILITIES AND EQUITY : Mortgage Loans Payable.................. $ 16,544 $ 30,652(J) Accrued Interest Payable................ 89 3(J) LBHI Loan Payable....................... $ 8,700 (8,700)(K) Capitalized Lease Obligations........... 4,592 14,587(L) Deferred Land Lease Payable............. 11,485(L) Accrued Expenses and Accounts Payable... 810 $ (550) 902(G) Accounts Payable to Related Parties..... 1,767 (1,758) 479(G) Excess of Distributions and Share of Losses Over Amounts Invested in Partnership........................... 17,627 (64) (16,564)(G) Security Deposits....................... 1,240 2,682(G) --- ------------- ----------- ----------- ------- ----------- Total Liabilities..................... 38,077 13,292 (2,372) 35,526 --- ------------- ----------- ----------- ------- ----------- Minority Interest in Operating Partnerships.......................... 15,746(M) Common Stock............................ 1 $ 1 (2)(N) Additional Paid-In Capital.............. 147,027 (44,460)(N) SL Green Group.......................... (7,450) (1,958) (1,015) 26,688(N) Other Partners.......................... (113) 113(N) --- ------------- ----------- ----------- ------- ----------- Total Equity.......................... 1 (7,563) 147,028 (1,958) (1,015) (1,915) --- ------------- ----------- ----------- ------- ----------- Total Liabilities and Equity.......... 1 $ 30,514 $ 147,028 $ 11,334 $ (3,387) $ 33,611 --- ------------- ----------- ----------- ------- ----------- --- ------------- ----------- ----------- ------- ----------- COMPANY PRO FORMA ----------- ASSETS : Commercial Real Estate Property at Cost.................................. Land.................................... $ 26,849 Buildings and Improvements.............. 166,361 Property Under Capital Lease............ 16,800 ----------- 210,010 Less Accumulated Depreciation......... (22,084) ----------- 187,926 Cash and Cash Equivalents............... 8,884 Restricted Cash......................... 3,839 Tenant Receivables...................... 337 Related Party Receivables............... 805 Deferred Rents Receivable............... 10,964 Investment in Partnerships.............. (1,216) Deferred Lease Fees and Loan Costs...... 4,601 Other Assets............................ 2,961 ----------- Total Assets.......................... $ 219,101 ----------- ----------- LIABILITIES AND EQUITY : Mortgage Loans Payable.................. $ 47,196 Accrued Interest Payable................ 92 LBHI Loan Payable....................... Capitalized Lease Obligations........... 19,179 Deferred Land Lease Payable............. 11,485 Accrued Expenses and Accounts Payable... 1,162 Accounts Payable to Related Parties..... 488 Excess of Distributions and Share of Losses Over Amounts Invested in Partnership........................... 999 Security Deposits....................... 3,922 ----------- Total Liabilities..................... 84,523 ----------- Minority Interest in Operating Partnerships.......................... 15,746 Common Stock............................ Additional Paid-In Capital.............. 118,832 SL Green Group.......................... Other Partners.......................... ----------- Total Equity.......................... 134,578 ----------- Total Liabilities and Equity.......... $ 219,101 ----------- -----------
F-4 SL GREEN REALTY CORP. PRO FORMA COMBINED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997
SL GREEN ELIMINATION SL GREEN PREDECESSOR ACQUISITION OF SERVICE REALTY HISTORICAL THE PROPERTIES CORPORATIONS CORP. (O) OFFERING (P) (Q) ----------- ------------- ----------- ------------- ------------- REVENUES: Rental Revenue............................... $ 1,489 $ 3,341 Escalations and Reimbursement Revenues....... 149 1,896 Management Revenues.......................... 779 $ (779) Leasing Commissions.......................... 1,475 (1,475) Construction Revenues........................ 74 (74) Investment Income............................ Other Income................................. 5 ----------- ------ ----- ------ ------------- Total Revenues............................. 3,971 5,237 (2,328) ----------- ------ ----- ------ ------------- Share of Net Loss of Investees............... 287 76 ------ ------------- EXPENSES: Operating Expenses........................... 814 1,051 (380) Ground Rent.................................. 78 Interest..................................... 345 95 Depreciation and Amortization................ 271 314 Real Estate Taxes............................ 243 802 Marketing, General and Administrative........ 896 (896) ----------- ------ ----- ------ ------------- Total Expenses............................. 2,596 2,340 (1,276) ----------- ------ ----- ------ ------------- Income (Loss) Before Minority Interest and Extraordinary Item....................... 1,115 2,897 (1,128) Minority Interest in Operating Partnership (X)........................................ ----------- ------ ----- ------ ------------- Income (Loss) Before Extraordinary Item.... $ 1,115 $ 2,897 ($ 1,128) ----------- ------ ----- ------ ------------- ----------- ------ ----- ------ ------------- Income Before Extraordinary Item Per Common Share (Y).................................. COMPANY PRO FORMA PRO ADJUSTMENTS FORMA ------------- ----------- REVENUES: Rental Revenue............................... $ 5,254(R) $ 10,084 Escalations and Reimbursement Revenues....... 381(R) 2,426 Management Revenues.......................... Leasing Commissions.......................... Construction Revenues........................ Investment Income............................ (R) Other Income................................. 10(R) 15 ------ ----------- Total Revenues............................. 5,645 12,525 ------ ----------- Share of Net Loss of Investees............... (287) (S) 76 ------ ----------- EXPENSES: Operating Expenses........................... 1,123(T) 2,608 Ground Rent.................................. 981(T) 1,059 Interest..................................... 1,039(U) 1,479 Depreciation and Amortization................ 924(V) 1,509 Real Estate Taxes............................ 724(T) 1,769 Marketing, General and Administrative........ 257(W) 257 ------ ----------- Total Expenses............................. 5,048 8,681 ------ ----------- Income (Loss) Before Minority Interest and Extraordinary Item....................... 884 3,768 Minority Interest in Operating Partnership (X)........................................ (441) (441) ------ ----------- Income (Loss) Before Extraordinary Item.... $ 443 $ 3,327 ------ ----------- ------ ----------- Income Before Extraordinary Item Per Common Share (Y).................................. $ 0.39 ----------- -----------
F-5 SL GREEN REALTY CORP. PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996
SL GREEN ELIMINATION SL GREEN PREDECESSOR ACQUISITION OF SERVICE REALTY HISTORICAL THE PROPERTIES CORPORATIONS PRO FORMA CORP. (O) OFFERING (P) (Q) ADJUSTMENTS ----------- ----------------- ----------- --------------- --------------- ----------------- REVENUES: Rental Revenue.............. $ 4,199 $ 13,787 $ 20,985(D) Escalations and Reimbursement Revenues.... 1,051 2,558 2,304(D) Management Revenues......... 2,336 $ (2,336) Leasing Commissions......... 2,372 (2,372) Construction Revenues....... 101 (101) Investment Income........... 15(D) Other Income................ 123 894 (92) 13(D) ----------- ------- ----------- ------- ------- ------- Total Revenues............ 10,182 17,239 (4,901) 23,317 ----------- ------- ----------- ------- ------- ------- Share of Net Loss of Investees................. 1,408 247 (1,408)(E) ------- ------- ------- EXPENSES: Operating Expenses.......... 3,197 4,700 (1,522) 4,608(F) Ground Rent................. 3,925(F) Interest.................... 1,357 379 4,199(G) Depreciation and Amortization.............. 975 1,566 (92) 3,799(H) Real Estate Taxes........... 703 3,350 3,189(F) Marketing, General and Administrative............ 3,250 (3,250) 1,027(I) ----------- ------- ----------- ------- ------- ------- Total Expenses............ 9,482 9,995 (4,864) 20,747 ----------- ------- ----------- ------- ------- ------- Income (Loss) Before Minority Interest Extraordinary and Item.................... (708) 7,244 (284) 3,978 Minority Interest in Operating Partnership (J)....................... (1,197) ----------- ------- ----------- ------- ------- ------- Income (Loss) Before Extraordinary Item.................... ($ 708) $ 7,244 ($ 284) $ 2,781 ----------- ------- ----------- ------- ------- ------- ----------- ------- ----------- ------- ------- ------- Income Before Extraordinary Item Per Common Share (K)........ COMPANY PRO FORMA ----------- REVENUES: Rental Revenue.............. $ 38,971 Escalations and Reimbursement Revenues.... 5,913 Management Revenues......... Leasing Commissions......... Construction Revenues....... Investment Income........... 15 Other Income................ 938 ----------- Total Revenues............ 45,837 ----------- Share of Net Loss of Investees................. 247 ----------- EXPENSES: Operating Expenses.......... 10,983 Ground Rent................. 3,925 Interest.................... 5,935 Depreciation and Amortization.............. 6,248 Real Estate Taxes........... 7,242 Marketing, General and Administrative............ 1,027 ----------- Total Expenses............ 35,360 ----------- Income (Loss) Before Minority Interest Extraordinary and Item.................... 10,230 Minority Interest in Operating Partnership (J)....................... (1,197) ----------- Income (Loss) Before Extraordinary Item.................... $ 9,033 ----------- ----------- Income Before Extraordinary Item Per Common Share (K)........ $ 1.06 ----------- -----------
F-6 SL GREEN REALTY CORP. NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION MARCH 31, 1997 (UNAUDITED) (IN THOUSANDS) ADJUSTMENTS TO THE PRO FORMA COMBINED BALANCE SHEET (A) To reflect the S.L. Green Predecessor historical combined balance sheet as of March 31, 1997. The real estate and other assets and the assumption of liabilities and deficit of the S.L. Green Predecessor will be transferred at their historical amounts to the Operating Partnership. (B) To reflect the issuance of 8,100 shares of common stock at an assumed price of $20 per share. Equity is reduced by the estimated costs of the common stock Offering of $15,093 of which $2,926 was paid prior to the date of offering. (C) To reflect the purchase price and estimated closing costs of 1372 Broadway and 1140 Avenue of the Americas as follows:
1140 TOTAL 1372 AVENUE OF ACQUISITION BROADWAY THE AMERICAS PROPERTIES ----------- ------------- ----------- Land................................................... $ 10,828 $ 4,190 $ 15,018 Building............................................... 43,312 16,760 60,072 Property under capital lease........................... 0 4,592 4,592 Accumulated Depreciation............................... (1,354) (604) (1,958) ----------- ------------- ----------- 52,786 24,938 77,724 Net Property Cash................................................... (47,440) (18,950) (66,390) Capitalized Lease Obligation........................... 0 4,592 4,592 LBHI Loan Payable...................................... 6,700 2,000 8,700 ----------- ------------- ----------- ----------- ------------- -----------
(D) To reflect adjustments required to record the Company's investments in the Management Corporations under the equity method of accounting as a result of noncontrolling interests held after the formation transactions. (E) To reflect 673 First Avenue, 470 Park Avenue South, 29 West 35th Street and 36 West 44th Street ("The Equity Properties") as consolidated entities rather than equity method investees due to the acquisition of additional partnership interests and to record payment of transfer costs on the transfer of the properties to the operating partnership as follows:
EQUITY PARTNERSHIP TRANSFER CONVERSION ACQUISITION COSTS TOTAL ----------- ----------- ----------- --------- 673 First Avenue............................... $ 29,602 $ 9,294 $ 416 $ 39,312 470 Park Avenue South.......................... 25,027 2,836 235 28,098 29 West 35th Street............................ 2,941 2,262 62 5,265 36 West 44th Street............................ 13,980 2,704 100 16,784 70 West 36th Street............................ 0 0 124 124 1414 Avenue of the Americas.................... 0 0 164 164 ----------- ----------- ----------- --------- $ 71,550 $ 17,096 $ 1,101 $ 89,747 ----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
F-7 SL GREEN REALTY CORP. NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION (CONTINUED) MARCH 31, 1997 (UNAUDITED) (IN THOUSANDS) (F) To reflect the reduction in cash as follows: LBHI Loan Repayment............................................... $ (39,251) Less Transaction Costs Deducted From Offering Proceeds............ 2,726 Mortgage Loan Repayments.......................................... (40,773) Accrued Interest Payable.......................................... (142) Mortgage Loan Borrowings.......................................... 14,000 Repayment Penalties/Transfer Fees................................. (1,530) Acquisition of Partners' Interests................................ (6,359) Distribution To Partners.......................................... (1,400) Real Property Transfers Taxes..................................... (1,078) Fund Security Deposit............................................. (1,000) Payment Of Amounts Due Affiliates................................. (75) Cash Balances Per Equity Conversion............................... 2,642 --------- $ (72,240) --------- ---------
(G) To reflect various assets and liabilities of The Equity Properties on consolidated basis rather than equity method investees due to the acquisition of additional partnership interests. (H) Increase in deferred rent receivable Additions in straight line and free rent to reflect The Equity Properties as consolidated entities.............................. $ 14,972 Reductions in straight line and free rent as a result of the purchase of partners interest in the Equity properties........... (5,510) --------- Net Increase in Deferred Rent Receivable........................... $ 9,462 --------- ---------
(I) Increase in deferred lease fees and loan costs Additions in deferred lease fees and loan costs to reflect The Equity Properties as consolidated entities................... $ 4,774 Reduction in deferred lease fees and loan costs as a result of the purchase of partners interest in The Equity Properties mentioned above............................................................ (1,318) --------- $ 3,456 --------- ---------
F-8 SL GREEN REALTY CORP. NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION (CONTINUED) MARCH 31, 1997 (UNAUDITED) (IN THOUSANDS) (J) Increase in Mortgage Loans Payable and Decrease in Accrued Interest Payable
MORTGAGE ACCRUED LOANS INTEREST PAYABLE PAYABLE ----------- --------- Additions to reflect The Equity Properties as consolidated entities rather than Equity Method Investees 673 First Avenue...................................................... $ 36,039 $ 5,499 470 Park Avenue South................................................. 25,113 10,497 29 West 35th Street................................................... 3,023 21 36 West 44th Street................................................... 10,200 0 New Mortgage Loans Payable Secured by 1140 Sixth Avenue.......................................... 14,000 0 Amounts repaid.......................................................... (40,773) (142) Decrease as a result of the purchase of partners interest in the Equity Properties..................................... (5,994) (7,393) Debt forgiven........................................................... (10,956) (8,479) ----------- --------- $ 30,652 $ 3 ----------- --------- ----------- ---------
(K) To eliminate a portion of acquisition costs, $6,700 for 1372 Broadway and $2,000 for 1140 Sixth Avenue, which were borrowed under the LBHI loan. (L) To reflect the lease obligation of 673 First Avenue as a consolidated entity rather than an equity method investee due to the acquisition of the minority partners' interests. (M) To establish minority interests based on approximately 1,130,395 units issued to the continuing partners in operating partnership representing a 11.7% ownership interest............ $ 15,746 --------- ---------
(N) Decrease in additional paid--in capital Additions: Debt forgiveness.................................................. $ 19,435 Net increase to reflect The Equity Properties as consolidated entities rather than equity method investees due to the acquisition of additional partnership interests................. 1,250 Deductions: Minority interest in operating partnership........................ (15,746) Repayment of LBHI Loan............................................ (20,000) Preformation distribution of excess working capital............... (1,400) Buy out of mortgagee's profit participation on 1414 Avenue of the Americas............................................ (1,200) --------- $ (17,661) --------- ---------
(O) To reflect the S.L. Green Predecessors historical combined statement of operations for the quarter ended March 31, 1997. F-9 SL GREEN REALTY CORP. NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION (CONTINUED) MARCH 31, 1997 (UNAUDITED) (IN THOUSANDS) (P) To reflect the operations of 1372 Broadway and 1140 Avenue of the Americas for the quarter ended March 31, 1997 as follows :
1140 TOTAL 1372 AVENUE OF ACQUISITION BROADWAY THE AMERICAS PROPERTIES ----------- ------------- ----------- Rental Revenue......................................... $ 2,164 $ 1,177 $ 3,341 Escalation and Reimbursement Revenue................... 1,737 159 1,896 ----------- ------ ----------- Total Revenue.................................... 3,901 1,336 5,237 Operating Expenses..................................... 569 482 1,051 Interest............................................... 0 95 95 Depreciation and Amortization.......................... 271 121 392 Real Estate Taxes...................................... 557 245 802 ----------- ------ ----------- Total Expenses................................... 1,397 943 2,340 ----------- ------ ----------- Income Before Minority Interest........................ $ 2,504 $ 393 $ 2,897 ----------- ------ ----------- ----------- ------ -----------
(Q) To reflect the adjustments required to the operations for the quarter ended March 31, 1997 of the service corporations under the equity method of accounting as a result of non controlling interests held after the formation transactions. (R) To reflect the revenues for the quarter ended March 31,1997 of The Equity Properties as consolidated entities rather than equity method investees due to the acquisition of additional partnership interests.
ESCALATION AND RENTAL REIMBURSEMENT INVESTMENT OTHER REVENUE REVENUE INCOME INCOME ----------- ----------------- ------------- --------- 673 First Avenue............................. $ 2,722 $ 150 $ 0 $ 2,872 470 Park Avenue South........................ 1,354 45 10 1,409 29 West 35th Street.......................... 336 51 0 387 36 West 44th Street.......................... 842 135 0 977 ----------- ----- --- --------- $ 5,254 $ 381 $ 10 $ 5,645 ----------- ----- --- --------- ----------- ----- --- ---------
(S) To reflect the elimination of equity in net income of investees for The Equity Properties which are reported as consolidated entities due to the acquisition of additional partnership interests. F-10 SL GREEN REALTY CORP. NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION (CONTINUED) MARCH 31, 1997 (UNAUDITED) (IN THOUSANDS) (T) To reflect the expenses for the quarter ended March 31, 1997 of The Equity Properties as consolidated entities rather than equity method investees due to the acquisition of additional partnership interests.
OPERATING GROUND REAL ESTATE EXPENSES RENT TAX ----------- ----------- ------------- 673 First Avenue............................................ $ 326 $ 958 $ 304 470 Park Avenue South....................................... 257 0 168 29 West 35th Street......................................... 160 0 45 36 West 44th Street......................................... 380 23 207 ----------- ----- ----- $ 1,123 $ 981 $ 724 ----------- ----- ----- ----------- ----- -----
(U) To reflect interest expense for The Equity Properties as consolidated entities, to eliminate interest expense on debt paid off or forgiven and to record interest expense on new mortgage loans.
EQUITY INTEREST NEW METHOD EXPENSE INTEREST CONVERSION ELIMINATED EXPENSE TOTAL ----------- ----------- ----------- --------- 673 First Avenue................................. $ 1,166 $ (392) $ 0 $ 774 470 Park Avenue South............................ 613 (356) 0 257 29 West 35th Street.............................. 64 0 0 64 36 West 44th Street.............................. 226 (226) 0 0 70 West 36th Street.............................. 0 (91) 0 (91) 1414 Avenue of the Americas...................... 0 (254) 0 (254) New Mortgage Interest............................ 0 0 289 289 ----------- ----------- ----- --------- $ 2,069 $ (1,319) $ 289 $ 1,039 ----------- ----------- ----- --------- ----------- ----------- ----- ---------
(V) To reflect depreciation and amortization expense for The Equity Properties as consolidated entities and depreciation and amortization adjustments for changes in book value due to the acquisition of other partners' interests, decreases in amortization for deferred loan costs related to debt paid off or forgiven and increases in amortization for new deferred loan costs.
NEW EQUITY BOOK DEBT DEFERRED METHOD VALUE PAID OFF COST CONVERSION CHANGES FORGIVEN AMORTIZATION TOTAL ------------- ----------- ----------- --------------- --------- 673 First Avenue...................... $ 452 $ 10 $ 0 $ 12 $ 474 470 Park Avenue South................. 353 (23) 0 3 333 29 West 35th Street................... 57 (3) 0 2 56 36 West 44th Street................... 106 7 (24) 0 89 70 West 36th Street................... 0 0 (18) 1 (17) 1414 Avenue of the Americas........... 0 0 (12) 1 (11) ----- --- --- --- --------- $ 968 $ (9) $ (54) $ 19 $ 924 ----- --- --- --- --------- ----- --- --- --- ---------
F-11 SL GREEN REALTY CORP. NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION (CONTINUED) MARCH 31, 1997 (UNAUDITED) (IN THOUSANDS) (W) To reflect the net increase in marketing, general and administrative expenses related to operations of a public company. (X) Represents the 11.7% interest of the minority in the Operating Partnership. (Y) Pro Forma net income per common share is based upon 8,528,605 shares of common stock expected to be outstanding after the Offering. As each Operating Partnership unit is redeemable for cash, or at the company's election, for one share of common stock, the calculation of earnings per share upon redemption will be unaffected as unitholders and stockholders share equally on a per unit and per share basis in the net income of the Company. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. Management does not believe the adoption of Statement No. 128 will have a material impact on earnings per share. F-12 SL GREEN REALTY CORP. NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION DECEMBER 31, 1996 (UNAUDITED) (IN THOUSANDS) (A) To reflect the S.L. Green Predecessor historical combined statement of operations for the year ended December 31, 1996. (B) To reflect the operations of 1372 Broadway and 1140 Avenue of the Americas for the year ended December 31, 1996 as follows:
1140 TOTAL 1372 AVENUE OF ACQUISITION BROADWAY THE AMERICAS PROPERTIES ----------- ------------- ----------- Rental Revenue......................................... $ 9,236 $ 4,551 $ 13,787 Escalation and Reimbursement Revenue................... 1,842 716 2,558 Other Income........................................... 690 204 894 ----------- ------ ----------- Total Revenue.................................... 11,768 5,471 17,239 ----------- ------ ----------- Operating Expenses..................................... 2,797 1,902 4,699 Interest on Capitalized Lease.......................... 0 379 379 Depreciation and Amortization.......................... 1,083 484 1,567 Real Estate Taxes...................................... 2,343 1,007 3,350 ----------- ------ ----------- Total Expenses................................... 6,223 3,772 9,995 ----------- ------ ----------- ----------- ------ ----------- Income Before Minority Interest........................ $ 5,545 $ 1,699 $ 7,244 ----------- ------ -----------
(C) To reflect the adjustments required to the operations for the year ended December 31, 1996 of the service corporations under the equity method of accounting as a result of non controlling interests held after the formation transactions. (D) To reflect the revenues for the year ended December 31,1996 of The Equity Properties as consolidated entities rather than equity method investees due to the acquisition of additional partnership interests.
ESCALATION AND RENTAL REIMBURSEMENT INVESTMENT OTHER REVENUE REVENUE INCOME INCOME --------- --------------- ------------- ----------- 673 First Avenue............................. $ 10,699 $ 392 $ 0 $ 0 470 Park Avenue South........................ 5,302 366 0 13 29 West 35th Street.......................... 1,347 418 15 0 36 West 44th Street.......................... 3,637 1,128 0 0 --------- ------ --- --- $ 20,985 $ 2,304 $ 15 $ 13 --------- ------ --- --- --------- ------ --- ---
F-13 SL GREEN REALTY CORP. NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION (CONTINUED) DECEMBER 31, 1996 (UNAUDITED) (IN THOUSANDS) (E) To reflect the elimination of equity in net income of investees for The Equity Properties which are reported as consolidated entities due to the acquisition of additional partnership interests. (F) To reflect the expenses for the year ended December 31, 1996 of The Equity Properties as conslidated entities rather than equity method investees due to the acquisition of additional partnership interests.
OPERATING GROUND REAL ESTATE EXPENSES RENT TAXES ----------- --------- ----------- 673 First Avenue............................................ $ 1,334 $ 3,832 $ 1,254 470 Park Avenue South....................................... 1,017 0 672 29 West 35th Street......................................... 598 0 181 36 West 44th Street......................................... 1,659 93 1,082 ----------- --------- ----------- $ 4,608 $ 3,925 $ 3,189 ----------- --------- ----------- ----------- --------- -----------
(G) To reflect interest expense for The Equity Properties as consolidated entities, to eliminate interest expense on debt paid off or forgiven and to record interest expense on new mortgage loans.
EQUITY INTEREST NEW METHOD EXPENSE INTEREST CONVERSION ELIMINATED EXPENSE TOTAL ----------- ----------- --------- --------- 673 First Avenue................................. $ 4,774 $ (1,571) $ 0 $ 3,203 470 Park Avenue South............................ 2,466 (1,537) 0 929 29 West 35th Street.............................. 269 0 0 269 36 West 44th Street.............................. 234 (234) 0 0 70 West 36th Street.............................. 0 (911) 0 (911) 1414 Avenue of the Americas...................... 0 (446) 0 (446) New Mortgage Interest............................ 0 0 1,155 1,155 ----------- ----------- --------- --------- $ 7,743 $ (4,699) $ 1,155 $ 4,199 ----------- ----------- --------- --------- ----------- ----------- --------- ---------
F-14 SL GREEN REALTY CORP. NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION (CONTINUED) DECEMBER 31, 1996 (UNAUDITED) (IN THOUSANDS) (H) To reflect depreciation and amortization expense for The Equity Properties as consolidated entities and depreciation and amortization adjustments for changes in book value due to the acquisition of other partners' interests, decreases in amortization for deferred loan costs related to debt paid off or forgiven and increases in amortization for new deferred loan costs.
NEW EQUITY BOOK DEBT DEFERRED METHOD VALUE PAID OFF COST CONVERSION CHANGES FORGIVEN AMORTIZATION TOTAL ----------- ----------- ----------- --------------- --------- 673 First Avenue..................... $ 1,804 $ 40 $ 0 $ 49 $ 1,893 470 Park Avenue South................ 1,441 (101) 0 15 1,355 29 West 35th Street.................. 240 (22) 0 8 226 36 West 44th Street.................. 383 47 (22) 0 408 70 West 36th Street.................. 0 0 (66) 4 (62) 1414 Avenue of the Americas.......... 0 0 (23) 2 (21) ----------- ----- ----- --- --------- $ 3,868 $ (36) $ (111) $ 78 $ 3,799 ----------- ----- ----- --- --------- ----------- ----- ----- --- ---------
(I) To reflect the net increase in marketing, general and administrative expenses related to operations of a public company. (J) Represents the 11.7% interest of the minority in the Operating Partnership. (K) Pro Forma net income per common share is based upon 8,528,605 shares of common stock expected to be outstanding after the Offering. As each Operating Partnership unit is redeemable for cash, or at the company's election, for one share of common stock, the calculation of earnings per share upon redemption will be unaffected as unitholders and stockholders share equally on a per unit and per share basis in the net income of the Company. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. Management does not believe the adoption of Statement No. 128 will have a material impact on earnings per share. F-15 REPORT OF INDEPENDENT AUDITORS The Board of Directors SL Green Realty Corp. We have audited the accompanying balance sheet of SL Green Realty Corp. as of June 12, 1997. This balance sheet is the responsibility of SL Green Realty Corp. Our responsibility is to express an opinion on the balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet presents fairly, in all material respects, the financial position of SL Green Realty Corp. at June 12, 1997 in conformity with generally accepted accounting principles. /S/ Ernst & Young LLP New York, New York June 12, 1997 F-16 SL GREEN REALTY CORP. BALANCE SHEET JUNE 12, 1997 ASSETS Cash (NOTE 1)....................................................................... $ 1,000 --------- Total assets........................................................................ $ 1,000 --------- --------- LIABILITIES AND STOCKHOLDER'S EQUITY Commitments and contingencies (NOTE 3) Common stock, $.01 par value, 100,000,000 shares authorized, 1,000 shares issued and outstanding (NOTES 1, 2 AND 3).................................................... $ 10 Paid in capital..................................................................... 990 Retained earnings (NOTE 2) --------- Total liabilities and stockholder's equity.......................................... $ 1,000 --------- ---------
See accompanying notes. F-17 SL GREEN REALTY CORP. NOTES TO BALANCE SHEET JUNE 12, 1997 1. ORGANIZATION AND FORMATION TRANSACTIONS FORMATION AND INITIAL PUBLIC OFFERING SL Green Realty Corp. (the "Company"), a Maryland corporation, and SL Green Operating Partnership, L.P., (the "Operating Partnership"), were formed in June 1997 for the purpose of combining the commercial real estate business of S.L. Green Properties, Inc. and its affiliated partnerships and entities ("SL Green"). The Operating Partnership will receive a contribution of interests in the real estate properties as well as 95% of the economic interest in the management, leasing and construction companies (the "Service Corporations"). The Company expects to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended; and will operate as a fully integrated, self-administered, self-managed REIT. A REIT is a legal entity that holds real estate interests and, through payments of dividends to shareholders, is permitted to reduce or avoid the payment of federal income taxes at the corporate level. The Company has authorized the issuance of up to 100 million shares of Common Stock, $.01 par value per share, 75 million shares of Excess Stock, at $.01 par value per share, and 25 million shares of Preferred Stock, par value $.01 per share. In connection with the formation of the Company, the Company issued 1,000 shares of Common Stock to Stephen L. Green at $1 per share, for an aggregate consideration of $1,000 consisting of cash. At the conclusion of the Offering such shares of stock will be repurchased by the Company at cost. As of June 12, 1997, no shares of Excess Stock or Preferred Stock are issued and outstanding. The Company expects to issue 8.1 million shares of its Common Stock to the public through a public offering (the "Offering"). In addition, the Company expects to issue to its executive officers approximately 383,110 shares, as founders' shares. Substantially all of the Company's assets will be held by, and its operations conducted through, the Operating Partnership, a newly formed Delaware limited partnership. The Company will be the sole managing general partner of the Operating Partnership. Continuing investors will expect to hold, in the aggregate, a 11.7% limited partnership interest in the Operating Partnership. MANAGEMENT In order to maintain the Company's qualification as a REIT while realizing income from management leasing and construction contracts from third parties, all of the management operations with respect to properties in which the Company will not own 100% of the interest will be conducted through the Service Corporations. The Company, through the Operating Partnership, will own 100% of the non-voting common stock (representing 95% of the total equity) of the Service Corporations. Through dividends on its equity interest, the Operating Partnership expects to receive substantially all of the cash flow from the Service Corporations' operations. All of the voting common stock of the Service Corporations (representing 5% of the total equity) will be held by an SL Green affiliate. This controlling interest will give the SL Green affiliate the power to elect all directors of the Service Corporations. All of the management and leasing with respect to the properties to be contributed and to be acquired by the Company will be conducted through the Management LLC. The Operating Partnership will own a 100% interest in the Management LLC. The Company will account for its investment in the Service Corporations on the equity basis of accounting. For further description, see the caption "Structure and Formation of the Company". F-18 SL GREEN REALTY CORP. NOTES TO BALANCE SHEET JUNE 12, 1997 1. ORGANIZATION AND FORMATION TRANSACTIONS (CONTINUED) PARTNERSHIP AGREEMENT In accordance with the partnership agreement of the Operating Partnership (the "Operating Partnership Agreement"), all allocations of distributions and profits and losses are to be made in proportion to the percentage ownership interests of their respective partners. As the managing general partner of the Operating Partnership, the Company will be required to take such reasonable efforts, as determined by it in its sole discretion, to cause the Operating Partnership to distribute sufficient amounts to enable the payment of sufficient distributions by the Company to avoid any federal income or excise tax at the Company level as a consequence of a sale of a SL Green property. Under the Operating Partnership agreement each limited partner will have the right to redeem limited partnership interest for cash, or if the Company so elects shares of common stock, as described further under the caption "Partnership Agreement Transfer of Interest--Redemption of Units". INITIAL PUBLIC OFFERING AND USE OF PROCEEDS The net cash proceeds to be received by the Company from the Offering (after deducting underwriting discounts) are estimated to be approximately $150.7 million. Of this amount the Company expects that approximately $42.2 million to repay mortgage indebtedness encumbering the properties, including $1.5 million for prepayment penalties and other financing fees and expenses, approximately $6.4 million to purchase the direct or indirect interests of certain participants in the Formation Transactions in the properties, approximately $59.4 million to acquire properties, approximately $3.1 million to pay certain expenses incurred in the Formation Transactions, $31.9 million to repay the Lehman Brothers Holdings Inc. loan (including $2.5 million and $200,000 borrowed under the loan to fund offering expenses and prepayment penalties, respectively, and excluding approximately $7.5 million incurred to finance purchase of acquisition properties) and the balance for capital expenditures and general working capital needs. If the underwriters' over-allotment option to purchase 1.215 million shares of Common Stock is exercised, the Company will use the additional net proceeds (estimated to be approximately $22.6 million if the option is exercised in full) to acquire an additional interest in the Operating Partnership which will be used to acquire additional properties and/or for working capital. 2. STOCKHOLDER'S EQUITY COMMON STOCK The authorized capital stock of the Company will consist of 200,000,000 shares of capital stock, $.01 par value, of which 100 million shares initially will be designated as shares of Common Stock. Under the Company's Charter, the Board of Directors will have authority to issue, without any further action by the stockholders, shares of capital stock in one or more series having such preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption as the Board of Directors may determine. RETAINED EARNINGS The Company has not engaged in any operations from inception in 1997. F-19 SL GREEN REALTY CORP. NOTES TO BALANCE SHEET JUNE 12, 1997 3. COMMITMENTS AND CONTINGENCIES STOCK OPTION PLAN The Company intends to adopt a stock option plan designed to attract, retain and motivate executive officers of the Company and other key employees and the plan will authorize the issuance of shares of common stock pursuant to options granted under the plan, as described further under the caption "Stock Option Plan." INCENTIVE COMPENSATION PLAN The Company intends to establish an incentive compensation plan for key officers of the Company and its subsidiaries and affiliates. This plan will provide for payment of cash bonuses to participating officers after an evaluation of the officer's performance and the overall performance of the Company. The Compensation Committee of Board of Directors will make the determination for the award of the bonuses. EMPLOYMENT AGREEMENTS The Company will enter into employment and non-competition agreements with certain executive officers, as described further under the caption "Employment and Non-Competition Agreements." CREDIT FACILITY The Company currently is engaged in discussions with various lenders regarding the establishment of a revolving Credit Facility that will be used to facilitate acquisitions and for working capital purposes. Although the Company expects that the Credit Facility will be established shortly after the completion of the Offering, there can be no assurance at this time as to whether the Company will be successful in obtaining the Credit Facility, or, if the Credit Facility is established, the terms governing the Credit Facility. F-20 REPORT OF INDEPENDENT AUDITORS The Partners, Members and Stockholders SL Green Predecessor We have audited the accompanying combined balance sheets of SL Green Predecessor as of December 31, 1996 and 1995, and the related combined statements of operations, owners' deficit and cash flows for each of the three years in the period ended December 31, 1996. We have also audited the financial statement schedule listed on the Index to Financial Statements included in the Prospectus. These financial statements and financial statement schedule are the responsibility of SL Green Predecessor's management. Our responsibility is to express an opinion on these financial statements and financial statement 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 combined financial statements referred to above present fairly, in all material respects, the combined financial position of SL Green Predecessor at December 31, 1996 and 1995, and the combined results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be set forth therein. /S/ Ernst & Young LLP New York, New York April 16, 1997, except for Note 9, as to which date is May 27, 1997 F-21 SL GREEN PREDECESSOR COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, -------------------- 1996 1995 MARCH 31, --------- --------- 1997 ----------- (UNAUDITED) ASSETS Commercial real estate properties, at cost (NOTE 4) Land........................................................................... $ 4,465 $ 4,465 $ 1,517 Buildings and improvements..................................................... 21,931 21,819 14,042 ----------- --------- --------- 26,396 26,284 15,559 Less accumulated depreciation.................................................. (5,941) (5,721) (5,025) ----------- --------- --------- 20,455 20,563 10,534 Cash and cash equivalents...................................................... 794 476 619 Restricted cash................................................................ 1,242 1,227 664 Receivables.................................................................... 1,583 914 383 Related party receivables (NOTE 7)............................................. 835 1,186 1,016 Deferred rents receivable...................................................... 1,304 1,265 904 Investment in uncombined joint venture (NOTE 2)................................ 1,607 1,730 369 Deferred costs, net (NOTE 3)................................................... 1,344 1,371 449 Other assets................................................................... 1,351 1,340 1,146 ----------- --------- --------- Total assets................................................................... $ 30,515 $ 30,072 $ 16,084 ----------- --------- --------- ----------- --------- --------- LIABILITIES AND OWNERS' DEFICIT Mortgage notes payable (NOTE 4)................................................ $ 16,544 $ 16,610 $ 12,700 Accrued interest payable (NOTE 4).............................................. 90 90 2,894 Accounts payable and accrued expenses.......................................... 810 1,037 756 Accounts payable to related parties (NOTE 7)................................... 1,767 2,213 2,092 Excess of distributions and share of losses over investments in uncombined joint ventures (NOTE 2)...................................................... 17,627 17,300 15,826 Security deposits.............................................................. 1,240 1,227 664 ----------- --------- --------- Total liabilities.............................................................. 38,078 38,477 34,932 Commitments, contingencies and other matters (NOTES 6, 8, 9 AND 10) Owners' deficit................................................................ (7,563) (8,405) (18,848) ----------- --------- --------- Total liabilities and owners' deficit.......................................... $ 30,515 $ 30,072 $ 16,084 ----------- --------- --------- ----------- --------- ---------
See accompanying notes. F-22 SL GREEN PREDECESSOR COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------- ------------------------------- 1997 1996 1996 1995 1994 --------- --------- --------- --------- --------- (UNAUDITED) Revenues Rental revenue............................... $ 1,401 $ 649 $ 4,199 $ 2,416 $ 2,605 Escalation and reimbursement revenues........ 237 120 1,051 758 802 Management revenues, including $134 (March 1997 (unaudited)), $447 (1996), $449 (1995), and $531 (1994) from affiliates (NOTE 7)................................... 779 509 2,336 2,260 1,959 Leasing commissions.......................... 1,475 880 2,372 897 890 Construction revenues, net, including $62 (March 1997 (unaudited)), $35 (1996), $82 (1995), and $134 (1994) from affiliates (NOTE 7)................................... 74 -- 101 233 344 Other income................................. 5 149 123 -- -- --------- --------- --------- --------- --------- Total revenues................................. 3,971 2,307 10,182 6,564 6,600 --------- --------- --------- --------- --------- Share of net loss from uncombined joint ventures (NOTE 2)............................ 287 475 1,408 1,914 1,423 --------- --------- --------- --------- --------- Expenses Operating expenses........................... 814 733 3,197 2,505 2,009 Interest (NOTE 4)............................ 345 221 1,357 1,212 1,555 Depreciation and amortization................ 271 175 975 775 931 Real estate taxes............................ 243 118 703 496 543 Marketing, general and administrative........ 896 1,079 3,250 3,052 2,351 --------- --------- --------- --------- --------- Total expenses................................. 2,569 2,326 9,482 8,040 7,389 --------- --------- --------- --------- --------- Income (loss) before extraordinary item........ 1,115 (494) (708) (3,390) (2,212) Extraordinary income on forgiveness of debt (NOTE 4)..................................... -- -- 8,961 -- -- --------- --------- --------- --------- --------- Net income (loss).............................. $ 1,115 $ (494) $ 8,253 $ (3,390) $ (2,212) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes. F-23 SL GREEN PREDECESSOR COMBINED STATEMENTS OF OWNERS' DEFICIT (DOLLARS IN THOUSANDS) BALANCE AT JANUARY 1, 1994........................................................ $ (13,487) Distributions................................................................... -- Contributions................................................................... 178 Net loss for the year ended December 31, 1994................................... (2,212) --------- BALANCE AT DECEMBER 31, 1994...................................................... (15,521) Distributions................................................................... -- Contributions................................................................... 63 Net loss for the year ended December 31, 1995................................... (3,390) --------- BALANCE AT DECEMBER 31, 1995...................................................... (18,848) Distributions................................................................... (552) Contributions................................................................... 2,742 Net income for the year ended December 31, 1996................................. 8,253 --------- BALANCE AT DECEMBER 31, 1996...................................................... (8,405) Distributions (Unaudited)....................................................... (286) Contributions (Unaudited)....................................................... 13 Net income for the three months ended March 31, 1997 (Unaudited)................ 1,115 --------- BALANCE AT MARCH 31, 1997 (UNAUDITED)............................................. $ (7,563) --------- ---------
See accompanying notes. F-24 SL GREEN PREDECESSOR COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------- ------------------------------- 1997 1996 1996 1995 1994 --------- --------- --------- --------- --------- (UNAUDITED) OPERATING ACTIVITIES Net income (loss)................................. $ 1,115 $ (494) $ 8,253 $ (3,390) $ (2,212) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization................... 271 175 975 775 931 Share of net loss from uncombined joint ventures...................................... 376 562 1,763 2,249 1,800 Deferred rents receivable....................... (39) 29 (362) 87 (424) Extraordinary gain on the forgiveness of debt... (8,961) Changes in operating assets and liabilities: Restricted cash................................. (15) 64 (563) (38) (64) Receivables..................................... (669) (288) (531) 47 (117) Related party receivables....................... 351 (636) (170) (299) 157 Deferred costs.................................. 27 66 (1,108) (465) 171 Other assets.................................... 12 477 (287) (858) 1,253 Accounts payable and accrued expenses........... (227) (363) 280 (180) (1,034) Accounts payable to related parties............. (446) 760 121 948 (69) Security deposits payable 13 (64) 564 29 90 Accrued interest payable........................ -- (115) 298 861 457 --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities...................................... 769 173 272 (234) 939 --------- --------- --------- --------- --------- INVESTING ACTIVITIES Additions to land, buildings and improvements..... (112) (59) (10,725) (369) (389) Contributions to partnership investments.......... -- -- (1,650) (63) (178) --------- --------- --------- --------- --------- Net cash used in investing activities............. (112) (59) (12,375) (432) (567) --------- --------- --------- --------- --------- FINANCING ACTIVITIES Proceeds from mortgage notes payable.............. -- -- 16,680 -- -- Payments of mortgage notes payable................ (66) -- (6,910) -- -- Cash distributions to owners...................... (286) (175) (552) -- -- Cash contributions from owners.................... 13 -- 2,742 63 178 --------- --------- --------- --------- --------- Net cash provided by financing activities......... (339) (175) 11,960 63 178 --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents..................................... 318 (61) (143) (603) 550 Cash and cash equivalents at beginning of period.......................................... 476 619 619 1,222 672 --------- --------- --------- --------- --------- Cash and cash equivalents at end of period........ $ 794 $ 558 $ 476 $ 619 $ 1,222 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Supplemental cash flow disclosures Interest paid..................................... $ 345 $ 336 $ 1,059 $ 351 $ 1,098 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Income taxes paid $ -- $ -- $ -- $ 35 $ 31 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes. F-25 SL GREEN PREDECESSOR NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES SL Green Predecessor is engaged in the business of owning, managing, leasing, acquiring and repositioning of Class B office properties in Manhattan, New York. PROPOSED TRANSACTIONS Concurrently with the consummation of an initial public offering of SL Green Realty Corp., (the "REIT") Common Stock (the "Offering"), which is expected to be completed in 1997, the REIT and a newly formed limited partnership, SL Green Operating Partnership, L.P. (the "Operating Partnership"), together with the partners and members of the affiliated partnerships of the SL Green Predecessor and other parties which hold ownership interests in the properties (collectively, the "Participants"), will engage in certain formation transactions (the "Formation Transactions"). The Formation Transactions are designed to (i) enable the REIT to raise the necessary capital to acquire the remaining interests in the Properties (see note 2), repay certain mortgage debt relating thereto and pay other indebtedness, (ii) enable the REIT to acquire properties, (iii) fund costs, capital expenditures, and working capital, (iv) provide a vehicle for future acquisitions, (v) enable the REIT to comply with certain requirements under the Federal income tax laws and regulations relating to real estate investment trusts, and (vi) preserve certain tax advantages for certain Participants. The operations of the REIT will be carried on primarily through the Operating Partnership in order to assist the REIT and the Participants in forming the REIT under the Internal Revenue Code of 1986. The REIT will be the sole general partner in the Operating Partnership. The Operating Partnership will receive a contribution of interests in the real estate properties sold, as well as 95% of the economic interest in the management, leasing and construction companies (the "Service Corporations") for third party properties, in exchange for units of limited partnership interests in the Operating Partnership and/or cash. The REIT will be fully integrated, self-administered and self-managed. PRINCIPLES OF COMBINATION The SL Green Predecessor is not a legal entity but rather a combination of real estate properties and affiliated real estate management, construction and leasing entities under common control and interests in entities accounted for on the equity method (see note 2) that are organized as partnerships and a limited liability company. The operations of the properties are included in the financial statements from the date of acquisition by the SL Green Predecessor. All significant intercompany transactions and balances have been eliminated in combination. Capital contributions, distributions and profits and losses are allocated in accordance with the terms of the applicable agreements. F-26 SL GREEN PREDECESSOR NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The accompanying combined financial statements include partnerships and corporations which are under common control as follows:
ENTITY PROPERTY/SERVICE - ---------------------------------------------- ---------------------------------------------- Office Property Entities 64-36 Realty Associates 70 West 36th Street 1414 Management Associates, LP 1414 Avenue of the Americas Service Corporations SL Green Management, Corp. Management SL Green Realty, Inc. Management and leasing Emerald City Construction Corp. Construction
For the entities accounted for on the equity method, the SL Green Predecessor's records its investments in partnerships and limited liability company at cost and adjusts the investment accounts for its share of the entities' income or loss and for cash distributions and contributions (see note 2). USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REAL ESTATE Financial Accounting Standards Board Statement of Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The SL Green Predecessor, adopted SFAS No. 121 in the first quarter of 1996. Through March 31, 1997 (unaudited) and December 31,1996 no indicators of impairment were present and no impairment losses have been recorded in any of the periods presented. DEPRECIATION OF REAL ESTATE PROPERTIES Depreciation and amortization is computed on the straight-line method as follows.
CATEGORY TERM - ---------------------------------------------- ---------------------------------------------- Building 40 years Building improvements remaining life of the building Furniture and fixtures four to seven years Tenant improvements remaining life of the lease
Depreciation expense amounted to $788, $579 and $638 in 1996, 1995 and 1994 respectively. For the unaudited three months ended March 31, 1997 depreciation expense amounted to $249. F-27 SL GREEN PREDECESSOR NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH AND CASH EQUIVALENTS The SL Green Predecessor considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. RESTRICTED CASH Restricted cash consists of security deposits. REVENUE RECOGNITION Rental revenue is recognized on a straight-line basis over the term of the lease. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in deferred rents receivable on the accompanying combined balance sheets. Contractually due but unpaid rents are included in receivables on the accompanying combined balance sheets. DEFERRED LEASE COSTS Deferred lease costs consist of fees and direct costs incurred to initiate and renew operating leases and are amortized on a straight-line basis over the initial lease term or renewal period as appropriate. DEFERRED FINANCING COSTS Deferred financing costs are amortized over the terms of the respective agreements. Unamortized deferred financing costs are expensed when the associated debt is refinanced before maturity. DEFERRED OFFERING COSTS The SL Green Predecessor have incurred costs related to its proposed offering. The deferred offering costs will be charged to the equity of the REIT at the time of the completion of the public offering. INCOME TAXES The partnerships in the SL Green Predecessor are not taxpaying entities for Federal income tax purposes, and, accordingly, no provision or credit has been made in the accompanying financial statements for Federal income taxes. Owners' allocable shares of taxable income or loss are reportable on their income tax returns. The management, leasing and construction entities are C-Corporations, which have had minimal income during the three years ended December 31, 1996 and therefore have paid minimal federal and state income taxes. CREDIT RISK Management of the SL Green Predecessor performs on going credit evaluation of its tenants and requires certain tenants to provide security deposits. Although the SL Green Predecessors' buildings are all located in Mid-town Manhattan, the tenants operate in various industries and there is no dependence upon any single tenant. F-28 SL GREEN PREDECESSOR NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CAPITALIZATION The Service Corporations (three) each have 200 shares of no par value common stock authorized and issued for $1,000, with no addition paid in capital at December 31, 1996 and 1995. INTERIM UNAUDITED FINANCIAL INFORMATION The accompanying interim unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with generally accepted accounting principles may have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The unaudited financial statements as of March 31, 1997 and for the three month periods ended March 31, 1997 and 1996 include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth herein. 2. INVESTMENT IN UNCOMBINED JOINT VENTURES The SL Green Predecessor's investments in three partnerships and a limited liability company, have been accounted for under the equity method since control is shared with other parties. The investment in partnerships and limited liability company are as follows:
PARTNERSHIPS/LIMITED GREEN GROUP LIABILITY COMPANY PROPERTY PERCENTAGE OWNERSHIP - ----------------------------------------------------- -------------------------- ----------------------- 673 First Realty Company............................. 673 First Avenue 67 % 470 Park South Associates, LP........................ 470 Park Avenue South 65 % 29/35 Realty Associates, LP.......................... 29 West 35th Street 21.5% Praedium Bar Associates, LLC......................... 36 West 44th Street 10 %(A) ("Praedium Bar")
- ------------------------ (A) Praedium Bar acquired the first mortgage related to the property in October, 1996 and has the sole right to purchase the fee interest, (the property deed is in escrow), for a nominal cost; accordingly SL Green Predecessor has accounted for Praedium Bar investment as a ownership interest in the property. F-29 SL GREEN PREDECESSOR NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 2. INVESTMENT IN UNCOMBINED JOINT VENTURES (CONTINUED) Condensed combined financial statements of the partnerships and the limited liability company, are as follows:
DECEMBER 31, MARCH 31, -------------------- 1997 1996 1995 ----------- --------- --------- (UNAUDITED) CONDENSED BALANCE SHEETS Commercial real estate property, net......................... $ 72,551 $ 72,958 $ 61,092 Deferred rent receivable..................................... 14,971 14,860 14,337 Cash and cash equivalents, including restricted cash of $1,597 (March 1997 (unaudited)) $1,588 (1996) and $1,205 (1995)..................................................... 3,239 3,811 3,275 Deferred costs and other assets.............................. 7,357 7,271 6,196 ----------- --------- --------- Total assets................................................. $ 98,118 $ 98,900 $ 84,900 ----------- --------- --------- ----------- --------- --------- Mortgages and accrued interest payable....................... $ 90,392 $ 90,245 $ 80,750 Obligations under capital lease.............................. 14,319 14,265 14,060 Deferred rent payable........................................ 11,727 11,459 10,387 Accounts payable and other liabilities....................... 4,237 4,560 3,475 Owners' deficit SL Green Predecessor....................................... (16,020) (15,570) (15,457) Other partners............................................. (6,537) (6,059) (8,315) ----------- --------- --------- Total owners' deficit........................................ (22,557) (21,629) (23,772) ----------- --------- --------- Total liabilities and owner's deficit........................ $ 98,118 $ 98,900 $ 84,900 ----------- --------- --------- ----------- --------- ---------
F-30 SL GREEN PREDECESSOR NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 2. INVESTMENT IN UNCOMBINED JOINT VENTURES (CONTINUED)
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------- ------------------------------- 1997 1996 1996 1995 1994 --------- --------- --------- --------- --------- (UNAUDITED) CONDENSED STATEMENTS OF OPERATIONS Rental revenue and escalations................... $ 5,447 $ 4,393 $ 18,874 $ 17,934 $ 18,235 Other revenue.................................... 10 -- 28 18 129 --------- --------- --------- --------- --------- Total revenues................................... 5,457 4,393 18,902 17,952 18,364 --------- --------- --------- --------- --------- Interest......................................... 2,069 1,879 7,743 7,785 7,721 Depreciation and amortization.................... 969 832 3,580 3,768 3,401 Operating and other expenses..................... 2,972 2,497 10,036 9,552 9,750 --------- --------- --------- --------- --------- Total expenses................................... 6,010 5,208 21,359 21,105 20,872 --------- --------- --------- --------- --------- Loss before outside partner's interest........... (553) (815) (2,457) (3,153) (2,508) Elimination of inter-company management fees..... 89 87 355 335 377 Other partner share of the loss.................. 177 253 694 904 708 --------- --------- --------- --------- --------- Loss allocated to the SL Green Predecessor....... $ (287) $ (475) $ (1,408) $ (1,914) $ (1,423) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
There are several business relationships with related parties which involve management, leasing and construction fee revenues and maintenance expense. Transactions relative to the aforementioned condensed combined statements of operations and balance sheets for the equity investees include the following before elimination of intercompany transactions:
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------- ------------------------------- 1997 1996 1996 1995 1994 --------- --------- --------- --------- --------- (UNAUDITED) Management fee expenses............... $ 159 $ 138 $ 622 $ 563 $ 624 Leasing commission expenses........... 55 43 218 48 80 Construction fees..................... 413 95 185 376 809 Maintenance expenses.................. 50 83 227 132 164
F-31 SL GREEN PREDECESSOR NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 3. DEFERRED COSTS Deferred costs consist of the following:
MARCH 31, 1997 1996 1995 ----------- --------- --------- (UNAUDITED) Deferred financing......................................... $ 817 $ 982 $ 206 Deferred lease............................................. 1,773 1,613 1,365 Deferred offering.......................................... 87 87 -- ----------- --------- --------- 2,677 2,682 1,571 Less accumulated amortization.............................. (1,333) (1,311) (1,122) ----------- --------- --------- $ 1,344 $ 1,371 $ 449 ----------- --------- --------- ----------- --------- ---------
4. MORTGAGE NOTES PAYABLE The mortgage notes payable collateralized by the respective properties and assignment of leases at March 31, 1997 and December 31, 1996 and 1995 are as follows:
MORTGAGE ACCRUED PAYABLE INTEREST MORTGAGE ACCRUED MORTGAGE MORTGAGE NOTES MARCH 31, MARCH 31, PAYABLE INTEREST PAYABLE PROPERTY WITH FIXED INTEREST 1997 1997 1996 1996 1995 - ------------------ ------------------------------------- ----------- ------------- ----------- ------------- ----------- (UNAUDITED) 1414 Avenue of the First mortgage note with interest Americas payable at 7.875%, due June 1, 2006(A).............................. $ 9,912 $ 90 $ 9,946 $ 90 $ -- ----------- --- ----------- --- ----------- Total Fixed Rate Notes............... 9,912 90 9,946 90 -- ----------- --- ----------- --- ----------- MORTGAGE NOTES WITH VARIABLE INTEREST ------------------------------------- 70 W 36th Street First mortgage note with interest payable at LIBOR plus 2%, due January 29, 2001............................. 6,632 -- 6,664 -- 12,700 ----------- --- ----------- --- ----------- Total Variable Rate Notes............ 6,632 -- 6,664 -- 12,700 ----------- --- ----------- --- ----------- Total Mortgage Notes Payable......... $ 16,544 $ 90 $ 16,610 $ 90 $ 12,700 ----------- --- ----------- --- ----------- ----------- --- ----------- --- ----------- ACCRUED INTEREST PROPERTY 1995 - ------------------ ----------- 1414 Avenue of the Americas $ -- ----------- -- ----------- 70 W 36th Street 2,894 ----------- 2,894 ----------- $ 2,894 ----------- -----------
- ------------------------------ (A) SL Green Predecessor does not have the right to prepay the principal balance of the mortgage, in whole or in part, prior to May 31, 2004. If the mortgage is prepaid prior to May 31, 2004 a prepayment fee will be required based upon the greater of 1% of the outstanding principal balance of the mortgage or yield maintenance as defined by the mortgage agreement. (B) In December 1996 the holder of the second mortgage on 70 West 36th Street forgave the indebtedness for no consideration; as a result SL Green Predecessor recognized extraordinary income of $8,961. F-32 SL GREEN PREDECESSOR NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 4. MORTGAGE NOTES PAYABLE (CONTINUED) PRINCIPAL MATURITIES Combined aggregate principal maturities of mortgages and notes payable as of December 31, 1996 are as follows: 1997............................................................... $ 330 1998............................................................... 341 1999............................................................... 353 2000............................................................... 367 2001............................................................... 6,085 Thereafter......................................................... 9,134 --------- $ 16,610 --------- ---------
5. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosures of estimated fair value were determined by management, using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the SL Green Predecessor could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash equivalents and variable rate mortgages are carried at amounts which reasonably approximate their fair values. Estimated fair value is based on anticipated settlements in connection with the REIT formation, interest rates and other related factors currently available to the SL Green Predecessor for issuance of debt with similar terms and remaining maturities. The fair value for each mortgage approximates its carrying amount. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 1996. Although management is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein. 6. RENTAL INCOME The Properties are being leased to tenants under operating leases with expiration dates ranging from 1997 to 2011. The minimum rental amounts due under the leases are generally either subject to scheduled fixed increases or adjustments. The leases generally also require that the tenants reimburse the SL Green Predecessor for increases in certain operating costs and real estate taxes above their base year costs. F-33 SL GREEN PREDECESSOR NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 6. RENTAL INCOME (CONTINUED) Approximate future minimum rents to be received over the next five years and thereafter for leases in effect at December 31, 1996 are as follows: 1997............................................................... $ 5,000 1998............................................................... 5,000 1999............................................................... 4,000 2000............................................................... 4,000 2001............................................................... 3,000 Thereafter......................................................... 11,000 --------- $ 32,000 --------- ---------
7. RELATED PARTY TRANSACTIONS There are several business relationships with related parties, exclusive of the uncombined joint ventures (see note 2) which involve management, leasing, and construction fee revenues, rental income and maintenance expenses in the ordinary course of business. Transactions include the following:
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, -------------------------------- ------------------------------- 1997 1996 1996 1995 1994 --------------- --------------- --------- --------- --------- (UNAUDITED) Management revenues........................ $ 64 $ 33 $ 180 $ 221 $ 284 Leasing commission revenues................ 11 15 37 36 64 Construction fees.......................... -- -- 25 69 107 Rental income.............................. 19 27 33 25 -- Maintenance expense........................ 29 17 93 32 24
Amounts due from related parties consist of:
DECEMBER 31, MARCH 31 -------------------- 1997 1996 1995 ------------- --------- --------- (UNAUDITED) SL Green Properties Inc...................................... $ 507 $ 507 $ 517 First Quality Maintenance.................................... 160 160 374 250 PAS, Associates, LP...................................... 3 363 -- Officers..................................................... 165 156 125 ----- --------- --------- $ 835 $ 1,186 $ 1,016 ----- --------- --------- ----- --------- ---------
Due to related parties, represents amounts due to SL Green Properties Inc. 8. BENEFIT PLAN The building employees of the individual partnerships are covered by multi-employer defined benefit pension plans and post-retirement health and welfare plans. Contributions to these plans amounted to $30, $7 and $7 in 1996, 1995 and 1994, respectively; and $12 for the three months ended March 31, 1997. F-34 SL GREEN PREDECESSOR NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 8. BENEFIT PLAN (CONTINUED) Separate actuarial information regarding such plans is not made available to the contributing employers by the union administrators or trustees, since the plans do not maintain separate records for each reporting unit. 9. COMMITMENTS AND CONTINGENCIES COMMITMENTS On May 23, 1997 SL Green Predecessor entered into an agreement to purchase a mortgage, which is encumbered by the property located at 1372 Broadway, Manhattan New York, for approximately $52 million (with the right to acquire the fee interest for no additional consideration subsequent to December 31, 1997). On May 27, 1997 SL Green Predecessor entered into an agreement to purchase the net lease on the property located at 1140 Avenue of the Americas, Manhattan New York, for approximately $20.9 million. It is anticipated that both transactions will close at the time of the Offering. CONTINGENCIES SL Green Predecessor is party to a variety of legal proceedings relating to the ownership of the properties and it's activities with regard to its construction, management and leasing businesses, arising in the ordinary course of business. SL Green Predecessor's management believes that substantially all of these liabilities are covered by insurance. All of these matters, taken together, are not expected to have a material adverse impact on the SL Green Predecessor's financial position, results of operations or cash flows . 10. ENVIRONMENTAL MATTERS The management of SL Green Predecessor believes that the properties are in compliance in all material respects with applicable federal, state and local ordinances and regulations regarding environmental issues. Management is not aware of any environmental liability that management believes would have a material adverse impact on SL Green Predecessor's financial position, results of operations or cash flows. Management is unaware of any instances in which it would incur significant environmental cost if any of the properties were sold. 11. SUBSEQUENT EVENTS Lehman Brothers Holdings Inc. ("LBHI"), an affiliate of Lehman Brothers Inc., entered into a credit agreement with Green Realty LLC, an affiliate of SL Green Predecessor, pursuant to which LBHI agreed to loan to Green Realty LLC up to $35 million (the "LBHI Loan") which will be used to acquire the remaining interests in the investment partnerships (see note 2) and certain acquisition properties, to fund property related operating expenses, to fund organizational expenses of the REIT and to purchase short-term United States Treasury Instruments. The LBHI Loan is secured by certain partnerships interest in SL Green Predecessor, the treasury securities and the stock of SL Green Properties Inc., an affiliate of SL Green Predecessor, and has been guaranteed by SL Green Management Corp. and SL Green Properties, Inc. F-35 SL GREEN PREDECESSOR SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
COLUMN D ------------------- COLUMN C COST CAPITALIZED -------------------- SUBSEQUENT TO INITIAL COST ACQUISITION COLUMN A COLUMN B -------------------- ------------------- - ---------------------------- ------------- BUILDING AND BUILDING AND DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS - ---------------------------- ------------- ------ ------------ ---- ------------ 70 West 36th St., $ 6,664 $1,517 $ 7,700 $0 $7,063 New York, NY (1 mortgage) 1414 Avenue of the Americas, 10,036 2,948 6,790 0 266 New York, NY (1 mortgage) ------------- ------ ------------ ---- ------ (1) $16,700 $4,465 $14,490 $0 $7,329 ------------- ------ ------------ ---- ------ ------------- ------ ------------ ---- ------ COLUMN E ------------------------------ GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD COLUMN A ------------------------------ - ---------------------------- BUILDING AND DESCRIPTION LAND IMPROVEMENTS TOTAL - ---------------------------- ------ ------------ ------- 70 West 36th St., $1,517 $14,763 $16,280 New York, NY 1414 Avenue of the Americas, 2,948 7,056 10,004 New York, NY ------ ------------ ------- $4,465 $21,819 $26,284 ------ ------------ ------- ------ ------------ ------- COLUMN F COLUMN G COLUMN A ----------- ------------ - ---------------------------- ACCUMULATED DATE OF DESCRIPTION DEPRECIATION CONSTRUCTION - ---------------------------- ----------- ------------ 70 West 36th St., $5,625 New York, NY 1414 Avenue of the Americas, 96 New York, NY ----------- $5,721 ----------- ----------- COLUMN I COLUMN H --------------- COLUMN A -------- LIFE ON WHICH - ---------------------------- DATE DEPRECIATION IS DESCRIPTION ACQUIRED COMPUTED - ---------------------------- -------- --------------- 70 West 36th St., 12/19/84 Various New York, NY 1414 Avenue of the Americas, 6/18/96 Various New York, NY
- ------------------------ (1) Encumbrance includes accrued interest of $90 F-36 SL GREEN PREDECESSOR SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) (DOLLARS IN THOUSANDS) The changes in real estate for the three years ended December 31, 1996 are as follows:
1996 1995 1994 --------- --------- --------- Balance at beginning of period............................... $ 15,559 $ 15,190 $ 14,801 Improvements................................................. 10,725 369 389 --------- --------- --------- Balance at end of period..................................... $ 26,284 $ 15,559 $ 15,190 --------- --------- --------- --------- --------- ---------
The aggregate cost of land, buildings and improvements for Federal income tax purposes at December 31, 1996 was approximately $26,284. The changes in accumulated depreciation, exclusive of amounts relating to equipment, autos, and furniture and fixtures, for the three years ended December 31, 1996 are as follows:
1996 1995 1994 --------- --------- --------- Balance at beginning of period................................... $ 5,025 $ 4,508 $ 3,930 Depreciation for period.......................................... 696 517 578 --------- --------- --------- Balance at end of period......................................... $ 5,721 $ 5,025 $ 4,508 --------- --------- --------- --------- --------- ---------
F-37 REPORT OF INDEPENDENT AUDITORS The Partners, Members and Stockholders SL Green Predecessor We have audited the accompanying combined balance sheets of the uncombined joint ventures of SL Green Predecessor as of December 31, 1996 and 1995 and the related combined statements of operations, owners' deficit and cash flows for each of the three years in the period ended December 31, 1996. We have also audited the financial statement schedule listed on the Index to financial statements included in the Prospectus. These financial statements and financial statement schedule are the responsibility of SL Green Predecessor's management. Our responsibility is to express an opinion on these financial statements and financial statement 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 combined financial statements referred to above present fairly in all material respects, the combined financial position of the uncombined joint ventures of SL Green Predecessor at December 31, 1996 and 1995, and the combined results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information required to be set forth therein. /S/ Ernst & Young LLP New York, New York April 16, 1997 F-38 UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, MARCH 31, -------------------- 1997 1996 1995 ----------- --------- --------- (UNAUDITED) ASSETS Commercial real estate properties, at cost (NOTES 2 AND 5): Land..................................................... $ 6,366 $ 6,366 $ 3,666 Buildings and improvements............................... 75,729 75,307 63,224 Property under capital lease............................. 12,208 12,208 12,208 ----------- --------- --------- 94,303 93,881 79,098 Less accumulated depreciation............................ (21,752) (20,923) (18,006) ----------- --------- --------- 72,551 72,958 61,092 Cash and cash equivalents.................................... 1,642 2,223 2,070 Restricted cash.............................................. 1,597 1,588 1,205 Deferred rents receivable.................................... 14,971 14,860 14,337 Deferred costs, net (NOTE 3)................................. 4,774 4,812 4,771 Other assets................................................. 2,583 2,459 1,425 ----------- --------- --------- Total assets................................................. $ 98,118 $ 98,900 $ 84,900 ----------- --------- --------- ----------- --------- --------- LIABILITIES AND OWNERS' DEFICIT Mortgages and note payable (NOTE 2).......................... $ 74,375 $ 74,827 $ 66,301 Accrued interest payable (NOTE 2)............................ 16,017 15,418 14,449 Obligations under capital lease (NOTE 5)..................... 14,319 14,265 14,060 Deferred rent payable........................................ 11,727 11,459 10,387 Accounts payable and accrued expenses........................ 901 1,200 432 Accounts payable to related parties (NOTE 6)................. 654 688 779 Security deposits............................................ 2,682 2,672 2,264 ----------- --------- --------- Total liabilities............................................ 120,675 120,529 108,672 Commitments, contingencies and other comments (NOTES 5, 7, 8 AND 9) Owners' deficit: SL Green Predecessor....................................... (16,020) (15,570) (15,457) Other partners............................................. (6,537) (6,059) (8,315) ----------- --------- --------- Total owners' deficit........................................ (22,557) (21,629) (23,772) ----------- --------- --------- Total liabilities and owners' deficit........................ $ 98,118 $ 98,900 $ 84,900 ----------- --------- --------- ----------- --------- ---------
See accompanying notes. F-39 UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------- ------------------------------- 1997 1996 1996 1995 1994 --------- --------- --------- --------- --------- (UNAUDITED) Revenues: Rental revenue (NOTE 5).................. $ 5,066 $ 4,106 $ 17,386 $ 16,519 $ 16,559 Escalation and reimbursement revenues (NOTE 5)............................... 381 287 1,488 1,415 1,676 Other income............................. 10 -- 28 18 129 --------- --------- --------- --------- --------- Total revenues............................. 5,457 4,393 18,902 17,952 18,364 --------- --------- --------- --------- --------- Expenses: Operating expenses: Other.................................. 1,083 821 3,115 2,931 3,014 Related parties........................ 209 221 849 695 788 Real estate taxes........................ 724 522 2,316 2,183 2,215 Rent expense (NOTE 5).................... 956 933 3,756 3,743 3,733 Interest (NOTE 2)........................ 2,069 1,879 7,743 7,785 7,721 Depreciation and amortization............ 969 832 3,580 3,768 3,401 --------- --------- --------- --------- --------- Total expenses............................. 6,010 5,208 21,359 21,105 20,872 --------- --------- --------- --------- --------- Net loss................................... $ (553) $ (815) $ (2,457) $ (3,153) $ (2,508) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes. F-40 UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR COMBINED STATEMENTS OF OWNERS' DEFICIT (DOLLARS IN THOUSANDS) BALANCE AT JANUARY 1, 1994........................................................ $ (19,033) Distributions................................................................... -- Contributions................................................................... 797 Net loss for the year ended December 31, 1994................................... (2,508) --------- BALANCE AT DECEMBER 31, 1994...................................................... (20,744) Distributions................................................................... -- Contributions................................................................... 125 Net loss for the year ended December 31, 1995................................... (3,153) --------- BALANCE AT DECEMBER 31, 1995...................................................... (23,772) Distributions................................................................... (1,150) Contributions................................................................... 5,750 Net loss for the year ended December 31, 1996................................... (2,457) --------- BALANCE AT DECEMBER 31, 1996...................................................... (21,629) Distributions (unaudited)....................................................... (400) Contributions (unaudited)....................................................... 25 Net loss for the three months ended March 31, 1997 (unaudited).................. (553) --------- BALANCE AT MARCH 31, 1997 (UNAUDITED)............................................. $ (22,557) --------- ---------
See accompanying notes. F-41 UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------- ------------------------------- 1997 1996 1996 1995 1994 --------- --------- --------- --------- --------- (UNAUDITED) OPERATING ACTIVITIES Net loss $ (553) $ (815) $ (2,457) $ (3,153) $ (2,508) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization.............. 969 832 3,580 3,768 3,401 Deferred rents receivable.................. (111) (102) (524) (370) (985) Changes in operating assets and liabilities: Restricted cash............................ (9) 64 (383) 70 90 Deferred costs............................. (94) 59 (705) (54) (640) Other assets............................... (125) 285 (1,033) (75) 432 Accounts payable and accrued expenses...... (298) (48) 768 (192) (757) Accounts payable to related parties........ (34) (2) (91) (124) (353) Security deposits.......................... 9 (64) 409 (102) (315) Accrued interest on mortgage notes payable.................................. 599 93 969 1,781 1,585 --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities................................. 353 302 533 1,549 (50) --------- --------- --------- --------- --------- INVESTING ACTIVITIES Additions to land, buildings and improvements............................... (429) (32) (4,583) (690) (1,963) --------- --------- --------- --------- --------- Net cash used in investing activities........ (429) (32) (4,583) (690) (1,963) --------- --------- --------- --------- --------- FINANCING ACTIVITIES Proceeds from mortgage notes payable......... -- -- -- -- 11,899 Payments of mortgage notes payable........... (452) (402) (1,674) (1,531) (13,176) Cash distributions to owners................. (400) -- (1,150) -- -- Cash contributions from owners............... 25 -- 5,750 125 797 Capitalized lease obligations................ 322 317 1,277 1,532 1,628 --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities................................. (505) (85) 4,203 126 1,148 --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents................................ (581) 185 153 985 (865) Cash and cash equivalents at beginning of period..................................... 2,223 2,070 2,070 1,085 1,950 --------- --------- --------- --------- --------- Cash and cash equivalents at end of period... $ 1,642 $ 2,255 $ 2,223 $ 2,070 $ 1,085 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Supplemental cash flow disclosures Interest paid................................ $ 1,470 $ 1,786 $ 6,774 $ 6,004 $ 6,136 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Supplemental schedule of non cash investing and financing activities: Assumption of mortgage in connection with property acquisition..................... -- -- $ 10,200 -- -- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes. F-42 UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR NOTES TO COMBINED STATEMENTS (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES The uncombined joint ventures of SL Green Predecessor are engaged in the business of owning, managing and leasing, and repositioning Class B office properties in Manhattan, New York. PROPOSED TRANSACTIONS Concurrently with the consummation of an initial public offering of SL Green Realty Corp. (the "REIT") Common Stock (the "Offering"), which is expected to be completed in 1997 the REIT and a newly formed limited partnership, SL Green Operating Partnership, L.P. (the "Operating Partnership"), together with the partners and members of the affiliated partnerships of the SL Green Predecessor and other parties which hold ownership interests in the properties (collectively, the "Participants"), will engage in certain formation transactions (the "Formation Transactions"). The Formation Transactions are designed to (i) enable the REIT to raise the necessary capital to acquire the remaining interests in the properties and repay certain mortgage debt relating thereto and pay other indebtedness, (ii) enable the REIT to acquire properties, (iii) fund costs, capital expenditures, and working capital, (iv) provide a vehicle for future acquisitions, (v) enable the REIT to comply with certain requirements under the Federal income tax laws and regulations relating to real estate investment trusts, and (vi) preserve certain tax advantages for certain Participants. The operations of the REIT will be carried on primarily through the Operating Partnership in order to assist the REIT and the Participants in forming the REIT under the Internal Revenue Code of 1986. The REIT will be the sole general partner in the Operating Partnership. The Operating Partnership will receive a contribution of interests in the real estate properties as well as 95% of the economic interest in the management, leasing and construction companies (the "Service Corporations") which service third party properties, in exchange for units of limited partnership interests in the Operating Partnership and/or cash. The REIT will be fully integrated self-administered and self-managed. PRINCIPLES OF COMBINATION The uncombined joint ventures of the SL Green Predecessor is not a legal entity but rather a combination of real estate properties (collectively, the "Properties") and interests in entities that are organized as partnerships and a limited liability company. The operations of the properties are included in the financial statements of the SL Green Predecessor from the date of acquisition. All significant intercompany transactions and balances have been eliminated in combination. Capital contributions, distributions and profits and losses are allocated to the owners in accordance with the terms of the applicable agreements. F-43 UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR NOTES TO COMBINED STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The joint ventures included in the accompanying combined financial statements include partnerships and a limited liability company which are not controlled by the SL Green Predecessor, are as follows:
PARTNERSHIPS/LIMITED SL GREEN PREDECESSOR LIABILITY COMPANY PROPERTY PERCENTAGE OWNERSHIP - ---------------------------------------------- ----------------------- --------------------- 673 First Realty Company...................... 673 First Avenue 67.0% 29/35 Realty Associates, LP................... 29 West 35th Street 21.5% 470 Park South Associates, LP................. 470 Park Avenue South 65.0% Praedium Bar Associates, LLC.................. 36 West 44th Street 10.0%(A) ("Praedium Bar")
- ------------------------ (A) Praedium Bar acquired the first mortgage related to the property in October, 1996 and has the sole right to purchase the fee interest, (the property deed is in escrow), for a nominal cost; accordingly SL Green Predecessor has accounted for Praedium Bar investment as an ownership in the property. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REAL ESTATE Financial Accounting Standards Board Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The SL Green Predecessor adopted SFAS No. 121 in the first quarter of 1996. Through March 31,1997 (unaudited), December 31, 1996 no indicators of impairment were present and no impairment losses have been recorded in any of the periods presented. DEPRECIATION OF REAL ESTATE PROPERTIES Depreciation and amortization is computed on the straight-line method as follows:
CATEGORY TERM - ---------------------------------------------- ---------------------------------------------- Building...................................... 40 years Property under capital lease.................. 49 years Building improvements......................... remaining life of the building Tenant improvements........................... remaining life of the lease
F-44 UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR NOTES TO COMBINED STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Depreciation expense including the amortization of the capital lease amounted to $2,917, $2,999 and $2,869 in 1996, 1995 and 1994 respectively. For the unaudited three months ended March 31, 1997 depreciation expense amounted to $836. CASH AND CASH EQUIVALENTS The SL Green Predecessor considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. RESTRICTED CASH Restricted cash consists of security deposits. REVENUE RECOGNITION Rental revenue is recognized on a straight-line basis over the term of the lease. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in deferred rents receivable on the accompanying combined balance sheets. Contractually due but unpaid rents are included in other assets on the accompanying combined balance sheets. Certain lease agreements provide for reimbursement of real estate taxes, insurance and certain common area maintenance costs and rental increases tied to increases in certain economic indexes. DEFERRED LEASE COSTS Deferred lease costs consist of fees and direct costs incurred to initiate and renew operating leases, and are amortized on a straight-line basis over the initial lease term or renewal period as appropriate. DEFERRED FINANCING COSTS Deferred financing costs are amortized over the terms of the respective agreements. Unamortized deferred financing costs are expensed when the associated debt is retired before maturity. CAPITALIZED INTEREST Interest for borrowings used to fund development and construction is capitalized to individual property costs. RENT EXPENSE--LAND Rent expense is recognized on a straight-line basis over the initial term of the lease. The excess of the rent expense recognized over the amounts contractually due pursuant to the underlining lease is included in the deferred lease payable in the accompanying combined balance sheets. F-45 UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR NOTES TO COMBINED STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The entities in the SL Green Predecessor are not taxpaying entities for Federal income tax purposes, and, accordingly, no provision or credit has been made in the accompanying financial statements for Federal income taxes. Owners' allocable shares of taxable income or loss are reportable on their income tax returns. CONCENTRATION OF REVENUE AND CREDIT RISK Approximately 60% of the SL Green Predecessor's revenue for the three years ended December 31, 1996 were derived from 673 First Avenue. The loss or a material decrease in revenues from this building for any reason may have a material adverse effect on the SL Green Predecessor. In addition approximately 30% of the SL Green Predecessor's revenue for the three years ended December 31, 1996 were derived from three tenants, (Society of NY Hospital, Kallir, Phillips, Ross, Inc. and UNICEF), which lease space in the 673 First Avenue building. Management of the SL Green Predecessor performs on going credit evaluations of its tenants and requires certain tenants to provide security deposits. INTERIM UNAUDITED FINANCIAL INFORMATION The accompanying interim unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with generally accepted accounting principles may have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The unaudited financial statements as of March 31, 1997 and for the three months ended March 31, 1997 and 1996 include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth herein. F-46 UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR NOTES TO COMBINED STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 2. MORTGAGE NOTES PAYABLE The mortgage notes payable collateralized by the respective properties and assignment of leases at December 31, 1996 and 1995 and March 31, 1997 are as follows:
MORTGAGE ACCRUED PAYABLE INTEREST MORTGAGE ACCRUED MORTGAGE ACCRUED MORTGAGE NOTES WITH FIXED MARCH 31, MARCH 31, PAYABLE INTEREST PAYABLE INTEREST PROPERTY INTEREST 1997 1997 1996 1996 1995 1995 - -------------------------------------------------- --------- --------- -------- ------- -------- ------- (UNAUDITED) 29 W 35th Street First mortgage note with interest payable at 8.464%, due February 1, 2001 $ 3,023 $ 22 $ 3,040 $ 21 $ 3,096 $ 28 673 First Avenue First mortgage note with interest payable at 9.0%, due December 13, 2003 19,089 -- 19,439 -- 20,736 -- 470 Park Avenue South First mortgage note with interest payable at 8.25%, due April 1, 2004 11,060 77 11,132 77 11,407 78 470 Park Avenue South Second mortgage note with interest payable at 10.0%, due October 31, 1999 1,054 8 1,067 9 1,113 -- (A) 470 Park Avenue South Third mortgage note with interest payable at 10.98%, due September 30, 2001 13,000 10,411 13,000 10,204 13,000 10,376 --------- --------- -------- ------- -------- ------- Total Fixed Rate Notes 47,226 10,518 47,678 10,311 49,352 10,482 --------- --------- -------- ------- -------- ------- MORTGAGE NOTES WITH VARIABLE INTEREST ------------------------- 36 W 44th Street First mortgage note with interest based on LIBOR + 3.4%, due September 30, 1998 10,200 -- 10,200 -- -- -- 673 First Avenue Second mortgage note with interest based on adjusted LIBOR rate, as defined by the mortgage agreement, or Prime + 1.0%, due January 1, 2014 15,180 4,925 15,180 4,574 15,180 -- --------- --------- -------- ------- -------- Total Variable Rate Notes 25,380 4,925 25,380 4,574 15,180 -- --------- --------- -------- ------- -------- UNSECURED NOTE ------------------------- 673 First Avenue Unsecured note with interest based on Prime plus1.0%, due January 1, 2014 1,769 574 1,769 533 1,769 3,967 --------- --------- -------- ------- -------- ------- Total Unsecured Note 1,769 574 1,769 533 1,769 3,967 --------- --------- -------- ------- -------- ------- Total Mortgage and Note Payable $74,375 $16,017 $74,827 $15,418 $66,301 $14,449 --------- --------- -------- ------- -------- ------- --------- --------- -------- ------- -------- -------
F-47 UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR NOTES TO COMBINED STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 2. MORTGAGE NOTES PAYABLE (CONTINUED) An analysis of the mortgages is as follows:
MORTGAGE ACCRUED PAYABLE INTEREST MORTGAGE ACCRUED MORTGAGE ACCRUED MARCH 31 MARCH 31 PAYABLE INTEREST PAYABLE INTEREST MORTGAGE TYPE 1997 1997 1996 1996 1995 1995 - -------------------------------------------------- --------- --------- -------- ------- -------- ------- (UNAUDITED) First mortgages $43,372 $ 99 $43,811 $ 98 $35,239 $ 106 Second mortgages 16,234 4,933 16,247 4,583 16,293 -- Third mortgage 13,000 10,411 13,000 10,204 13,000 10,376 Unsecured note 1,769 574 1,769 533 1,769 3,967 --------- --------- -------- ------- -------- ------- $74,375 $16,017 $74,827 $15,418 $66,301 $14,449 --------- --------- -------- ------- -------- ------- --------- --------- -------- ------- -------- -------
- ------------------------ (A) 470 PARK AVENUE SOUTH The third mortgage requires the monthly payment of minimum interest at 6%. The difference between the minimum interest and the base interest of 10.98% may be deferred until the maturity of the mortgage. The mortgage requires additional interest of 50% of adjusted gross revenue, as defined in the mortgage agreement, of the property for the applicable loan year. If the total loan balance exceeds 90% of the appraised value in lieu of payments of additional interest all of the adjusted gross revenue shall be paid and applied as a reduction of the principal indebtedness until such time as the loan balance is reduced to 90% of the appraised value. Upon payment of the outstanding principal balance at maturity or on another date shared appreciation interest, as defined in the mortgage agreement will be due. The holder of the mortgage is entitled to an annual rate of return on the mortgage of 13%. If the annual rate of return is less than 13%, the share appreciation interest will be increased to the percentage necessary to provide the mortgage holder with such return. Additional interest of $19 and $55 were due in 1996 and 1994 respectively. These amounts were unpaid as of December 31, 1996. F-48 UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR NOTES TO COMBINED STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 2. MORTGAGE NOTES PAYABLE (CONTINUED) PRINCIPAL MATURITIES Combined aggregate principal maturities of mortgages and notes payable as of December 31, 1996 are as follows: 1997............................................................... $ 1,841 1998............................................................... 12,208 1999............................................................... 2,183 2000............................................................... 3,216 2001............................................................... 4,448 Thereafter......................................................... 50,931 --------- $ 74,827 --------- ---------
3. DEFERRED COSTS Deferred costs consist of the following:
MARCH 31, 1997 1996 1995 ----------- --------- --------- (UNAUDITED) Deferred financing............................. $ 3,421 $ 3,372 $ 3,108 Deferred lease................................. 7,492 7,415 7,001 ----------- --------- --------- 10,913 10,787 10,109 Less accumulated amortization.................. (6,139) (5,975) (5,338) ----------- --------- --------- $ 4,774 $ 4,812 $ 4,771 ----------- --------- --------- ----------- --------- ---------
4. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosures of estimated fair value were determined by management, using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the SL Green Predecessor could realize on disposition of financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash equivalents and variable rate mortgages are carried at amounts which reasonably approximate their fair values. Estimated fair value is based on anticipated settlement in connection with the REIT formation, interest rates and other related factors currently available to the SL Green Predecessor for issuance of debt with similar terms and remaining maturities. The fair value by mortgage type as of December 31, 1996 is as follows:
MORTGAGE TYPE CARRYING AMOUNT FAIR VALUE - ---------------------------------------------------------------- ---------------- ----------- First Mortgages................................................. $ 43,811 $ 44,369 Second Mortgages................................................ 16,247 6,067 Third Mortgages................................................. 13,000 12,000 Unsecured Note.................................................. 1,769 0
F-49 UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR NOTES TO COMBINED STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 1996. Although management is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein. 5. LEASE AGREEMENTS OPERATING LEASE The SL Green Predecessor is the lessor and sub-lessor of commercial buildings under operating leases with expiration dates ranging from 1997 to 2031. The minimum rental amounts due under the leases are generally either subject to scheduled fixed increases or adjustments. The leases generally also require that the tenants reimburse the SL Green Predecessor for increases in certain operating costs and real estate taxes above their base year costs. Approximate future minimum rents to be received over the next five years and thereafter for leases in effect at December 31, 1996 are as follows: 1997.............................................................. $ 18,466 1998.............................................................. 18,463 1999.............................................................. 18,713 2000.............................................................. 18,468 2001.............................................................. 18,188 Thereafter........................................................ 54,085 --------- $ 146,383 --------- ---------
CAPITAL LEASE In April 1988, the SL Green Predecessor entered into a lease agreement for property at 673 First Avenue in New York City, which has been capitalized for financial statement purposes. Land was estimated to be approximately 70% of the fair market value of the property. The portion of the lease attributed to land is classified as an operating lease and the remainder as a capital lease. The initial lease term is 49 years with an option for an additional 26 years. Beginning in lease year 11 and 25, the lessor is entitled to additional rent as defined by the lease agreement. Future minimum rental payments under two land operating leases as of December 31, 1996 were as follows: 1997.............................................................. $ 2,753 1998.............................................................. 2,753 1999.............................................................. 2,753 2000.............................................................. 2,870 2001.............................................................. 3,103 Thereafter........................................................ 156,820 --------- $ 171,052 --------- ---------
F-50 UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR NOTES TO COMBINED STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 5. LEASE AGREEMENTS (CONTINUED) Rent expense amounted to approximately $3.7 million for each year ended December 31, 1996, 1995 and 1994, respectively. For the unaudited three months ended March 31, 1997 rent expense amounted to approximately $925. CAPITAL LEASE--BUILDING Leased property consists of the following:
MARCH 31, 1997 1996 1995 ----------- --------- --------- (UNAUDITED) Building....................................... $ 12,208 $ 12,208 $ 12,208 Less accumulation amortization................. 2,097 2,035 1,785 Leased property, net........................... $ 10,111 $ 10,173 $ 10,423
Future minimum payments under the capitalized building lease, including the present value of net minimum lease payments as of December 31, 1996 are as follows: 1997.............................................................. $ 1,140 1998.............................................................. 1,140 1999.............................................................. 1,140 2000.............................................................. 1,177 2001.............................................................. 1,290 Thereafter........................................................ 64,176 --------- Total minimum lease payments...................................... 70,063 Amount representing interest...................................... (55,798) --------- Present value of net minimum capital lease payments............... $ 14,265 --------- ---------
6. RELATED PARTY TRANSACTIONS There are several business relationships with related parties which involve management, leasing, and construction fee revenues and maintenance expenses in the ordinary course of business. Transactions include the following:
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------- --------------------------------------- 1997 1996 1996 1995 1994 --------- --------- --------- ------------- ------------- (UNAUDITED) Management expenses............... $ 159 $ 138 $ 622 $ 563 $ 624 Leasing commission's.............. 55 43 218 48 80 Construction fees................. 413 95 185 376 809 Maintenance expenses.............. 50 83 227 132 164
F-51 UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR NOTES TO COMBINED STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 6. RELATED PARTY TRANSACTIONS (CONTINUED) Amounts due to related parties consist of:
DECEMBER 31, MARCH 31, -------------------- 1997 1996 1995 ------------- --------- --------- (UNAUDITED) SL Green Management, Corp........................... $ 503 $ 512 $ 503 Other partners...................................... 151 176 276 ----- --------- --------- $ 654 $ 688 $ 779 ----- --------- --------- ----- --------- ---------
7. BENEFIT PLAN The building employees of the individual partnerships are covered by multi-employer defined benefit pension plans and post-retirement health and welfare plans. Contributions to these plans amounted to $42, $30 and $32 in 1996, 1995 and 1994, respectively; and $11 for the three months ended March 31, 1997. Separate actuarial information regarding such plans is not made available to the contributing employers by the union administrators or trustees, since the plans do not maintain separate records for each reporting unit. 8. CONTINGENCIES SL Green Predecessor is party to a variety of legal proceedings relating to the ownership of the properties and SL Green Predecessor activities with regard to its construction, management and leasing businesses respectively, arising in the ordinary course of business. SL Green Predecessor management believes that substantially all of these liabilities are covered by insurance. All of these matters, taken together, are not expected to have a material adverse impact on the uncombined joint venture of SL Green Predecessor's, financial position, results of operations or cash flows. 9. ENVIRONMENTAL MATTERS The management of SL Green Predecessor believes that the properties are in compliance in all material respects with applicable federal, state and local ordinances and regulations regarding environmental issues. Management is not aware of any environmental liability that management believes would have a material adverse impact on SL Green Predecessor's financial position, results of operations or cash flows. Management is unaware of any instances in which it would incur significant environmental cost if any of the properties were sold. F-52 THE UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
COLUMN D -------------------- COLUMN C COST CAPITALIZED --------------------- SUBSEQUENT TO INITIAL COST ACQUISITION COLUMN A COLUMN B --------------------- -------------------- - ---------------------------- ------------- BUILDINGS AND BUILDINGS AND DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS - ---------------------------- ------------- ------ ------------- ---- ------------- 673 First Avenue, $39,193) $ 0 $12,208 $0 $28,509 New York, NY (2 mortgages 29 West 35th Street 3,061) 216 1,945 0 2,539 New York, New York (1 mortgage 470 Park Avenue South 35,489) 3,450 22,184 0 9,015 New York, New York (3 mortgages 36 West 44th Street 10,200) 2,700 11,115 0 0 New York, New York (1 mortgage ------------- ------ ------------- ---- ------------- (1) $87,943 $6,366 $47,452 $0 $40,063 ------------- ------ ------------- ---- ------------- ------------- ------ ------------- ---- ------------- COLUMN E ------------------------------- GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD COLUMN A ------------------------------- - ---------------------------- BUILDINGS AND DESCRIPTION LAND IMPROVEMENTS TOTAL - ---------------------------- ------ ------------- ------- 673 First Avenue, $ 0 $40,717 $40,717 New York, NY 29 West 35th Street 216 4,484 4,700 New York, New York 470 Park Avenue South 3,450 31,199 34,649 New York, New York 36 West 44th Street 2,700 11,115 13,815 New York, New York ------ ------------- ------- $6,366 $87,515 $93,881 ------ ------------- ------- ------ ------------- ------- COLUMN F COLUMN G COLUMN A ----------- ------------ - ---------------------------- ACCUMULATED DATE OF DESCRIPTION DEPRECIATION CONSTRUCTION - ---------------------------- ----------- ------------ 673 First Avenue, $ 9,723 New York, NY 29 West 35th Street 1,765 New York, New York 470 Park Avenue South 9,369 New York, New York 36 West 44th Street 66 New York, New York ----------- $20,923 ----------- ----------- COLUMN I COLUMN H --------------- COLUMN A -------- LIFE ON WHICH - ---------------------------- DATE DEPRECIATION IS DESCRIPTION ACQUIRED COMPUTED - ---------------------------- -------- --------------- 673 First Avenue, 4/28/88 Various New York, NY 29 West 35th Street 6/21/83 Various New York, New York 470 Park Avenue South 9/15/86 Various New York, New York 36 West 44th Street 10/01/96 Various New York, New York
- ------------------------ (1) Encumbrance includes accrued interest of $14,885 and excludes principal and interest of an unsecured note of $2,302. F-53 THE UNCOMBINED JOINT VENTURES OF SL GREEN PREDECESSOR SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) (DOLLARS IN THOUSANDS) The changes in real estate for the three years ended December 31, 1996 are as follows:
1996 1995 1994 --------- --------- --------- Balance at beginning of period............................... $ 79,098 $ 78,408 $ 76,445 Improvements................................................. 14,783 690 1,963 --------- --------- --------- Balance at end of period..................................... $ 93,881 $ 79,098 $ 78,408 --------- --------- --------- --------- --------- ---------
The aggregate cost of land, buildings and improvements for Federal income tax purposes at December 31, 1996 was $81,673. The changes in accumulated depreciation, exclusive of amounts relating to equipment, autos, and furniture and fixtures, for the three years ended December 31, 1996 are as follows:
1996 1995 1994 --------- --------- --------- Balance at beginning of period............................... $ 18,006 $ 15,007 $ 12,138 Depreciation for period...................................... 2,917 2,999 2,869 --------- --------- --------- Balance at end of period..................................... $ 20,923 $ 18,006 $ 15,007 --------- --------- --------- --------- --------- ---------
F-54 REPORT OF INDEPENDENT AUDITORS To the Partners, Members, and Shareholders of SL Green Realty Corp. We have audited the statement of revenues and certain expenses of the property at 1414 Avenue of the Americas as described in Note 1, for the year ended December 31, 1995. The financial statement is the responsibility of management of 1414 Avenue of the Americas. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of revenues and certain expenses was prepared for the purposes of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in Form S-11 of SL Green Realty Corp. and is not intended to be a complete presentation of 1414 Avenue of the Americas' revenues and expenses. In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenues and certain expenses of 1414 Avenue of the Americas, as described in Note 1 for the year ended December 31, 1995 in conformity with generally accepted accounting principles. /S/ Ernst & Young LLP May 2, 1997 F-55 1414 AVENUE OF THE AMERICAS STATEMENT OF REVENUES AND CERTAIN EXPENSES (DOLLARS IN THOUSANDS) NOTE 1
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1995 JUNE 30, 1996 ----------------- ----------------- (UNAUDITED) Revenues Rental revenue.................................................... $ 3,325 $ 1,663 Escalations and reimbursement revenue............................. 212 72 Other income...................................................... -- 299 ------ ------ Total revenues...................................................... 3,537 2,034 ------ ------ Certain Expenses Property taxes.................................................... 685 339 Cleaning and security............................................. 351 159 Utilities......................................................... 300 101 Payroll and expenses.............................................. 205 105 Management fees................................................... 161 63 Repairs and maintenance........................................... 84 86 Other operating expenses.......................................... 52 29 ------ ------ Total certain expenses.............................................. 1,838 882 ------ ------ Revenues in excess of certain expenses.............................. $ 1,699 $ 1,152 ------ ------ ------ ------
See accompanying notes. F-56 1414 AVENUE OF THE AMERICAS NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES (DOLLARS IN THOUSANDS) DECEMBER 31, 1995 1. BASIS OF PRESENTATION Presented herein is the statement of revenues and certain expenses related to the operations of 1414 Avenue of the Americas, (the "Property"), located in the borough of Manhattan in New York City. The accompanying financial statement has been prepared in accordance with the applicable rules and regulations of the Securities and Exchange Commission for the acquisition of real estate properties. Accordingly, the financial statements exclude certain expenses that may not be comparable to those expected to be incurred by the SL Green Realty Corp. in the proposed future operations of the aforementioned property. Items excluded consist of interest, ground rent, amortization and depreciation. On June 23, 1996, the SL Green Predecessor purchased the Property and the underlining land lease. 2. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 3. REVENUE RECOGNITION The Property is leased to tenants under operating leases. Minimum rental income is generally recognized on a straight-line basis over the term of the lease. The excess of amounts so recognized over amounts due pursuant to the underlying leases amounted to approximately $208 and $58 (unaudited) for the year ended December 31, 1995 and the six months ended June 30, 1996, respectively. 4. CONCENTRATION OF REVENUE Approximately 22% and 23% of 1414 Avenue of the Americas' revenue for the year ended December 31, 1995 and the six months ended June 30, 1996, respectively were derived from two tenants. 5. MANAGEMENT AGREEMENTS During 1995 and the period ended June 23, 1996 the Property was managed by SL Green Management Corp. as agent. During the period from January 1, 1995 to April 30, 1995 the management fee was based on four percent (4%) of gross collections of which 25% percent of the management fee has been accrued and is payable when the net cash flow of the Property exceeds one million dollars. From May 1, 1995 to June 23, 1996 the management fee was based on three percent (3%) of gross collections from the Property. 6. LEASE AGREEMENTS The Property is being leased to tenants under operating leases with term expiration dates ranging from 1996 to 2010. The minimum rental amounts due under the leases are generally subject to scheduled fixed increases. The leases generally also require that the tenants reimburse the Property for increases in certain operating costs and real estate taxes above their base year costs. Approximate future minimum F-57 1414 AVENUE OF THE AMERICAS NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES (CONTINUED) (DOLLARS IN THOUSANDS) DECEMBER 31, 1995 6. LEASE AGREEMENTS (CONTINUED) rents to be received over the next five years and thereafter for non-cancelable operating leases as of December 31, 1995 (exclusive of renewal option periods) are as follows: 1996............................................................... $ 3,165 1997............................................................... 3,189 1998............................................................... 2,923 1999............................................................... 2,167 2000............................................................... 1,932 Thereafter......................................................... 6,972 --------- $ 20,348 --------- ---------
Prior to the acquisition, the Property was the lessee of a triple net ground lease with term expiration date of 2036. The minimum rental amounts due under the ground lease is subject to scheduled fixed increases. The ground lease requires that the tenant is responsible for the payment for all expenses. In connection with the acquisition of the property and underlining land on June 23, 1996, by SL Green Predecessor the ground lease was terminated. 7. INTERIM UNAUDITED FINANCIAL INFORMATION The financial statement for the six months ended June 30, 1996 is unaudited, however, in the opinion of management all adjustments, (consisting solely of normal recurring adjustments), necessary for a fair presentation of the financial statement for the interim period have been included. The results of the interim period is not necessarily indicative of the results to be obtained for a full fiscal year. F-58 REPORT OF INDEPENDENT AUDITORS To the Partners, Members, and Shareholders of SL Green Realty Corp. We have audited the statement of revenues and certain expenses of the property at 36 West 44th Street ("Bar Building") as described in Note 1, for the year ended December 31, 1996. The financial statement is the responsibility of management of the Bar Building. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of revenues and certain expenses was prepared for the purposes of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in Form S-11 of SL Green Realty Corp. and is not intended to be a complete presentation of the Bar Building's revenues and expenses. In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenues and certain expenses of the Bar Building, as described in Note 1 for the year ended December 31, 1996 in conformity with generally accepted accounting principles. /S/ Ernst & Young LLP May 7, 1997 F-59 36 WEST 44TH STREET STATEMENT OF REVENUES AND CERTAIN EXPENSES (DOLLARS IN THOUSANDS) NOTE 1
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1996 MARCH 31, 1997 ----------------- --------------------- (UNAUDITED) Revenues Rental revenue......................................................... $ 3,599 $ 753 Escalation and reimbursement revenue................................... 980 163 Other income........................................................... 53 2 ------ ----- Total revenues........................................................... 4,632 918 ------ ----- Certain Expenses Property taxes......................................................... 872 207 Cleaning and security.................................................. 838 108 Utilities.............................................................. 358 81 Professional fees...................................................... 133 13 Payroll and expenses................................................... 74 76 Management fees........................................................ 61 29 Repairs and maintenance................................................ 40 22 Ground rent............................................................ 93 23 Other operating expenses............................................... 100 34 ------ ----- Total certain expenses................................................... 2,569 593 ------ ----- Revenues in excess of certain expenses................................... $ 2,063 $ 325 ------ ----- ------ -----
See accompanying notes. F-60 36 WEST 44TH STREET NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 1. BASIS OF PRESENTATION Presented herein is the statement of revenues and certain expenses related to the operations of the Bar Building, (the "Property"), located in the borough of Manhattan in New York City. The accompanying financial statement has been prepared in accordance with the applicable rules and regulations of the Securities and Exchange Commission for the acquisition of real estate properties. Accordingly, the financial statements exclude certain expenses that may not be comparable to those expected to be incurred by the SL Green Realty Corp. in the proposed future operations of the aforementioned Property. Items excluded consist of interest, amortization and depreciation. On September 30, 1996 the SL Green Predecessor acquired its interest. 2. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 3. REVENUE RECOGNITION The Property is leased to tenants under operating leases. Minimum rental income is generally recognized on a straight-line basis over the term of the lease. The excess of amounts due over amounts so recognized pursuant to the underlying leases amounted to approximately $60 and $14 (unaudited) for the year ended December 31, 1996 and the three months ended March 31, 1997, respectively. 4. CONCENTRATION OF REVENUE Approximately 11% and 13% of the Bar Building's revenue for the year ended December 31, 1996 and the three months ended March 31, 1997, respectively, was derived from one tenant. 5. MANAGEMENT AGREEMENTS There was no management fee incurred for the period January 1, through June 28, 1996. The compensation for management services incurred from June 28, through September 30, 1996 included an initial one time start-up fee of $7,500 and thereafter, a monthly fixed fee of $7,500. For the period of October 1, through December 31, 1996 the management fee was based on three percent (3%) of gross receipts from the Property. 6. LEASE AGREEMENTS The Property is being leased to tenants under operating leases with term expiration dates ranging from 1997 to 2006. The minimum rental amounts due under the leases are generally subject to scheduled fixed increases. The leases generally also require that the tenants reimburse the Property for increases in certain operating costs and real estate taxes above their base year costs. Approximate future minimum F-61 36 WEST 44TH STREET NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES (CONTINUED) (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 6. LEASE AGREEMENTS (CONTINUED) rents to be received over the next five years and thereafter for non-cancelable operating leases as of December 31, 1996 (exclusive of renewal option periods) are as follows: 1997............................................................... $ 2,886 1998............................................................... 2,335 1999............................................................... 2,110 2000............................................................... 1,434 2001............................................................... 859 Thereafter......................................................... 1,163 --------- $ 10,787 --------- ---------
The Property is the lessee of a triple net ground lease with term expiration date of 2080. The minimum rental amounts due under the ground lease is subject to scheduled increases, based on 33% of the percentage increase in the Consumer Price Index. The ground lease requires that the tenant is responsible for the payment for all expenses. Approximate future minimum rents to be paid over the next five years and thereafter for the ground lease as of December 31, 1996 are as follows: 1997................................................................ $ 93 1998................................................................ 93 1999................................................................ 93 2000................................................................ 93 2001................................................................ 93 Thereafter.......................................................... 7,347 --------- $ 7,812 --------- ---------
7. RELATED PARTY TRANSACTIONS There are several business relationships with related parties which involve management, leasing and maintenance expenses. Transactions include the following:
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1996 MARCH 31, 1997 --------------------- ----------------------- (UNAUDITED) Leasing commission's................................. $ 40 $ 38 Management fees...................................... 31 29 Cleaning and security................................ 6 7
8. INTERIM UNAUDITED FINANCIAL INFORMATION The financial statement for the three months ended March 31, 1997 is unaudited, however, in the opinion of management all adjustments, (consisting solely of normal recurring adjustments), necessary for a fair presentation of the financial statement for the interim period have been included. The results of the interim period is not necessarily indicative of the results to be obtained for a full fiscal year. F-62 REPORT OF INDEPENDENT AUDITORS To the Partners, Members, and Shareholders of SL Green Realty Corp. We have audited the statement of revenues and certain expenses of the property at 1372 Broadway, as described in Note 1, for the year ended December 31, 1996. The financial statement is the responsibility of management of 1372 Broadway. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of revenues and certain expenses was prepared for the purposes of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in Form S-11 of SL Green Realty Corp. and is not intended to be a complete presentation of 1372 Broadways' revenues and expenses. In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenues and certain expenses of 1372 Broadway, as described in Note 1 for the year ended December 31, 1996 in conformity with generally accepted accounting principles. /S/ Ernst & Young LLP May 2, 1997 F-63 1372 BROADWAY STATEMENT OF REVENUES AND CERTAIN EXPENSES (DOLLARS IN THOUSANDS) NOTE 1
THREE MONTHS ENDED MARCH 31, 1997 YEAR ENDED ------------------- DECEMBER 31, 1996 ----------------- (UNAUDITED) Revenues Rental revenue (net)................................................... $ 8,580 $ 1,907 Escalations and reimbursement revenue.................................. 1,842 322 Other income........................................................... 690 1,415 ------ ------ Total revenues........................................................... 11,112 3,644 ------ ------ Certain Expenses Property taxes......................................................... 2,343 557 Utilities.............................................................. 1,287 224 Management fees........................................................ 459 93 Marketing, general, and administrative................................. 335 77 Repairs and maintenance................................................ 950 220 Insurance.............................................................. 77 17 Security............................................................... 149 31 ------ ------ Total certain expenses................................................... 5,600 1,219 ------ ------ Revenues in excess of certain expenses................................... $ 5,512 $ 2,425 ------ ------ ------ ------
See accompanying notes. F-64 1372 BROADWAY NOTES TO COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 1. BASIS OF PRESENTATION Presented herein is the statement of revenues and certain expenses related to the operations of 1372 Broadway (the "Property"), located in the New York City garment district, which is principally leased by garment, banking, and retail tenants. The accompanying financial statements have been prepared in accordance with the applicable rules and regulations of the Securities and Exchange Commission for the acquisition of real estate properties. Accordingly, the financial statements exclude certain expenses that may not be comparable to those expected to be incurred by the SL Green Realty Corp. in the proposed future operations of the aforementioned property. Items excluded consist of interest, amortization and depreciation. 2. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 3. REVENUE RECOGNITION The Property is being leased to tenants under operating leases. Minimum rental income is generally recognized on a straight-line basis over the term of the lease. The excess of amounts so recognized over amounts due pursuant to the underlying leases amounted to approximately $22 and $(92) (unaudited) for the year ended December 31, 1996 and the three months ended March 31, 1997 respectively. 4. MANAGEMENT AGREEMENTS The Property, as of May 1, 1997, is managed by Axiom Real Estate Management ("Axiom"), Inc. for a fixed annual amount of $37 plus an allocation of overhead costs which were approximately $354 in 1996. Prior to May 1, 1997, was the Property was managed by Winthrop Management for a fee of 5% of gross rental receipts. 5. INSURANCE COSTS Insurance costs represent 1372 Broadway's portion of an umbrella policy held by Winthrop Management. F-65 1372 BROADWAY NOTES TO COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES (CONTINUED) (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 6. LEASE AGREEMENTS The Property is being leased to tenants under operating leases with expiration dates ranging from 1997 to 2010. Most leases contain renewal options at the election of the lessee. The lease agreements generally contain provisions for reimbursements of real estate taxes and operating expenses over base year amounts. Future minimum lease receipts under non-cancelable operating leases as of December 31, 1996 (exclusive of renewal option periods) were as follows: 1997............................................... $ 8,253 1998............................................... 8,389 1999............................................... 8,421 2000............................................... 7,505 2001............................................... 7,084 Thereafter......................................... 36,787 --------- $ 76,439 --------- ---------
7. CONCENTRATION OF REVENUE Approximately 54% of 1372 Broadway's revenue for the year ended December 31, 1996 were derived from four tenants. 8. CONTINGENCY As of March 12, 1996, 1372 Broadway has been in legal proceedings related to grievances filed by the Service Employees International Union for allegedly violating the terms of their agreement for cleaning services. At this time management can not estimate the loss, if any, associated with this litigation. 9. INTERIM UNAUDITED FINANCIAL INFORMATION The financial statement for the three months ended March 31, 1997 is unaudited, however, in the opinion of management all adjustments, (consisting solely of normal recurring adjustments), necessary for a fair presentation of the financial statement for the interim period have been included. The results of the interim period is not necessarily indicative of the results to be obtained for a full fiscal year. 10. SUBSEQUENT EVENT On January 31, 1997, a tenant entered into an agreement whereby certain space leased by the tenant was terminated for a fee of $1,350. F-66 REPORT OF INDEPENDENT AUDITORS To the Partners, Members, and Shareholders of SL Green Realty Corp. We have audited the statement of revenues and certain expenses of the property at 1140 Avenue of the Americas, as described in Note 1, for the year ended December 31, 1996. The financial statement is the responsibility of management of 1140 Avenue of the Americas. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of revenues and certain expenses was prepared for the purposes of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in Form S-11 of S.L. Green Realty Corp. and is not intended to be a complete presentation of 1140 Avenue of the Americas' revenues and expenses. In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenues and certain expenses of 1140 Avenue of the Americas, as described in Note 1 for the year ended December 31, 1996 in conformity with generally accepted accounting principles. /S/ Ernst & Young LLP May 23, 1997 F-67 1140 AVENUE OF THE AMERICAS STATEMENT OF REVENUES AND CERTAIN EXPENSES (DOLLARS IN THOUSANDS) NOTE 1
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1996 MARCH 31, 1997 ----------------- ------------------- (UNAUDITED) Revenues Rental revenue......................................................... $ 4,265 $ 1,086 Escalations and reimbursement revenue.................................. 716 155 Other income........................................................... 204 4 ------- ------- Total revenues........................................................... 5,185 1,245 ------- ------- Certain Expenses Property taxes......................................................... 1,007 245 Utilities.............................................................. 720 175 Cleaning and security.................................................. 551 133 Payroll and expenses................................................... 241 63 Management fees........................................................ 205 49 Repairs and maintenance................................................ 180 44 Professional fees...................................................... 107 35 Interest--capital lease................................................ 56 14 Lease expense.......................................................... 14 3 Insurance.............................................................. 53 16 Other operating expenses............................................... 50 16 ------- ------- Total certain expenses................................................... 3,184 793 ------- ------- Revenues in excess of certain expenses................................... $ 2,001 $ 452 ------- ------- ------- -------
See accompanying notes. F-68 1140 AVENUE OF THE AMERICAS NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 1. BASIS OF PRESENTATION Presented herein is the statement of revenues and certain expenses related to the operations of 1140 Avenue of the Americas, (the "Property"), located in the borough of Manhattan in New York City. The accompanying financial statement has been prepared in accordance with the applicable rules and regulations of the Securities and Exchange Commission for the acquisition of real estate properties. Accordingly, the financial statements exclude certain expenses that may not be comparable to those expected to be incurred by the SL Green Realty Corp. in the proposed future operations of the aforementioned property. Items excluded consist of non-capital lease interest, amortization and depreciation. 2. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 3. REVENUE RECOGNITION The Property is leased to tenants under operating leases. Minimum rental income is generally recognized on a straight-line basis over the term of the lease. The excess of amounts due pursuant to the underlying leases over amounts so recognized amounted to approximately $59 and $27 (unaudited) for the year ended December 31, 1996 and the three months ended March 31, 1997, respectively. 4. CONCENTRATION OF REVENUE Approximately 10% of 1140 Avenue of the Americas' revenue for the year ended December 31, 1996 and the three months ended March 31, 1997, respectively was derived from one tenant. 5. MANAGEMENT AGREEMENTS During 1996 and the period ended March 31, 1997 the Property was managed by Murray Hill Property Management, Inc. During the period from January 1, 1996 to March 31, 1997 the management and asset management fees were based on three percent (3%) and one percent (1%) of gross collections from the Property, respectively. 6. LEASE AGREEMENTS The Property is being leased to tenants under operating leases with term expiration dates ranging from 1997 to 2007. The minimum rental amounts due under the leases are generally subject to scheduled fixed increases. The leases generally also require that the tenants reimburse the Property for increases in certain operating costs and real estate taxes above their base year costs. Approximate future minimum F-69 1140 AVENUE OF THE AMERICAS NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES (CONTINUED) (DOLLARS IN THOUSANDS) DECEMBER 31, 1996 rents to be received over the next five years and thereafter for non-cancelable operating leases as of December 31, 1996 (exclusive of renewal option periods) are as follows: 1997............................................................... $ 4,439 1998............................................................... 4,210 1999............................................................... 3,813 2000............................................................... 3,327 2001............................................................... 2,826 Thereafter......................................................... 7,638 --------- $ 26,253 --------- ---------
The Property operates under a net ground lease with a term expiration date of 2016, with an option to renew for an additional 50 years. The minimum rental amounts due under the ground lease is subject to increases every 21 years based on four and a half percent (4%) of the fair and reasonable market value of the unencumbered land. The current annual rent for the period commencing January 1, 1997 through December 31, 2016 is in arbitration due to a disagreement relating to the market value of the land. The ground lease requires that the tenant is responsible for the payment for all expenses. 7. INTERIM UNAUDITED FINANCIAL INFORMATION The financial statement for the three months ended March 31, 1997 is unaudited, however, in the opinion of management all adjustments, (consisting solely of normal recurring adjustments), necessary for a fair presentation of the financial statement for the interim period have been included. The results of the interim period is not necessarily indicative of the results to be obtained for a full fiscal year. F-70 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ SUMMARY TABLE OF CONTENTS
PAGE ----- Prospectus Summary............................. 1 Risk Factors................................... 13 The Company.................................... 28 Business and Growth Strategies................. 30 Use of Proceeds................................ 36 Distributions.................................. 37 Capitalization................................. 41 Dilution....................................... 42 Selected Financial Information................. 44 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 46 Market Overview................................ 54 The Properties................................. 61 Management..................................... 91 Structure and Formation of the Company......... 98 Policies with Respect to Certain Activities.... 101 Certain Relationships and Transactions......... 106 Partnership Agreement.......................... 106 Principal Stockholders......................... 112 Capital Stock.................................. 113 Certain Provisions of Maryland Law and the Company's Charter and Bylaws................. 117 Shares Available for Future Sale............... 120 Federal Income Tax Consequences................ 121 Underwriting................................... 132 Experts........................................ 134 Legal Matters.................................. 134 Additional Information......................... 135 Glossary of Selected Terms..................... 136 Index to Financial Statements.................. F-1
------------------------ UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 8,100,000 SHARES [LOGO] SL GREEN REALTY CORP. COMMON STOCK --------------------- PROSPECTUS , 1997 --------------------- LEHMAN BROTHERS PRUDENTIAL SECURITIES INCORPORATED - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table itemizes the expenses incurred by the Company in connection with the Offering. All amounts are estimated except for the Registration Fee and the NASD Fee. Registration Fee................................................ $56,454.55 NASD Fee........................................................ 19,130.00 New York Stock Exchange Listing Fee............................. * Printing and Engraving Expenses................................. * Legal Fees and Expenses......................................... * Accounting Fees and Expenses.................................... * Blue Sky Fees and Expenses...................................... * Financial Advisory Fee.......................................... * Environmental and Engineering Expenses.......................... * Miscellaneous................................................... --------- Total................................................... $ * --------- ---------
- ------------------------ * To be completed by amendment. ITEM 31. SALES TO SPECIAL PARTIES See Item 32. ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES Upon Formation of the Registrant, Stephen L. Green was issued 1,000 shares of Common Stock for total consideration of $1,000 in cash in order to provide the initial capitalization of the Registrant. These shares will be repurchased by the Registrant at cost upon completion of the Offering. In connection with the Formation Transactions, certain officers of the Registrant were issued an aggregate of 383,110 shares of Common Stock for total consideration of $3,831 in cash. The issuance of securities described in this Item 32 were made in reliance upon the exemption from registration provided by Section 4(2) under the Securities Act of 1933. ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's officers and directors are and will be indemnified under Maryland and Delaware law, the Charter and Bylaws of the Company and the Partnership Agreement of the Operating Partnership against certain liabilities. The Company's Charter requires the Company to indemnify its directors and officers to the fullest extent permitted from time to time under Maryland law. The Company's Bylaws require it to indemnify (a) any present or former director or officer who has been successful, on the merits or otherwise, in the defense of a proceeding to which he was made a party by reason of his service in that capacity, against reasonable expenses incurred by him in connection with the proceeding and (b) any present or former director or officer against any claim or liability unless it is established that (i) his act or omission was committed in bad faith or was the result of active or deliberate dishonesty, (ii) he actually received an improper personal benefit in money, property or services or (iii) in the case of a criminal proceeding, he had reasonable cause to believe that his act or omission was unlawful. II-1 In addition, the Company's Bylaws require the Company to pay or reimburse, in advance of final disposition of a proceeding, reasonable expenses incurred by a present or former director or officer made a party to a proceeding by reason of his service as a director or officer provided that the Company shall have received (i) a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification by the Company as authorized by the Bylaws and (ii) a written understanding by or on his behalf to repay the amount paid or reimbursed by the Company if it shall ultimately be determined that the standard of conduct was not met. The Bylaws also (i) permit the Company to provide indemnification and advance expenses to a present or former director or officer who served a predecessor of the Company in such capacity, and to any employee or agent of the Company or a predecessor of the Company, (ii) provide that any indemnification or payment or reimbursement of the expenses permitted or reimbursement of expenses under Section 2-418 of the MGCL for directors of Maryland corporations and (iii) permit the Company to provide such other and further indemnification or payment or reimbursement of expenses as may be permitted by Section 2-418 of the MGCL for directors of Maryland corporations. Under Maryland law, a corporation formed in Maryland is permitted to limit, by provision in its charter, the liability of directors and officers so that no director of officer of the Company shall be liable to the Company or to any stockholder for money damages except to the extent that (i) the director or officer actually received an improper benefit in money, property or services, for the amount of the benefit or profit in money, property or services actually received, or (ii) a judgment or other final adjudication adverse to the director or officer is entered in a proceeding based on a finding in a proceeding that the director's or officer's action was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. The Charter has incorporated the provisions of such law limiting the liability of directors and officers. The Partnership Agreement also provides for indemnification of the Company and its officers and directors to the same extent indemnification is provided to officers and directors of the Company in its organizational documents, and limits the liability of the Company and its officers and directors to the Operating Partnership and its partners to the same extent liability of officers and directors of the Company to the Company and its stockholders is limited under their organizational documents. ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED Not Applicable. ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements, all of which are included in the Prospectus: SL GREEN REALTY CORP. Pro Forma Combined Financial Statements (unaudited) Pro Forma Combined Balance Sheet as of March 31, 1997 Pro Forma Combined Statement of Income for the Three Months Ended March 31, 1997 Pro Forma Combined Statement of Income for the Year Ended December 31, 1996 Notes to Pro Forma Combined Financial Information Historical Report of Independent Auditors Balance Sheet as of June 12, 1997 Notes to Balance Sheet II-2 THE SL GREEN PREDECESSOR Combined Financial Statements Report of Independent Auditors Combined Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996 and 1995 Combined Statements of Operations for the Three Months Ended March 31, 1997 and 1996 (unaudited) and the Years Ended December 31, 1996, 1995, and 1994 Combined Statements of Owners' Deficit for the Three Months Ended March 31, 1997 (unaudited) and the Years Ended December 31, 1996, 1995, and 1994 Combined Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 (unaudited) and the Years Ended December 31, 1996, 1995, and 1994 Notes to the Combined Financial Statements Schedule III Real Estate and Accumulated Depreciation as of December 31, 1996 Uncombined Joint Ventures--Combined Financial Statements Report of Independent Auditors Combined Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996 and 1995 Combined Statements of Operations for the Three Months Ended March 31, 1997 and 1996 (unaudited) and the Years Ended December 31, 1996, 1995, and 1994 Combined Statements of Owners' Deficit for the Three Months Ended March 31, 1997 (unaudited) and Years Ended December 31, 1996, 1995, and 1994 Combined Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 (unaudited) and the Years Ended December 31, 1996, 1995, and 1994 Notes to the Combined Financial Statements Schedule III Real Estate and Accumulated Depreciation as of December 31, 1996 1414 AVENUE OF THE AMERICAS Report of Independent Auditors Statement of Revenues and Certain Expenses for the Six Months Ended June 30, 1996 (unaudited) and the Year Ended December 31, 1995 Notes to Statement of Revenues and Certain Expenses 36 WEST 44TH STREET Report of Independent Auditors Statement of Revenues and Certain Expenses for the Three Months Ended March 31, 1997 (unaudited) and the Year Ended December 31, 1996 Notes to Statement of Revenues and Certain Expenses 1372 BROADWAY Report of Independent Auditors Statement of Revenues and Certain Expenses for the Three Months Ended March 31, 1997 (unaudited) and the Year Ended December 31, 1996 Notes to Statement of Revenues and Certain Expenses II-3 1140 AVENUE OF THE AMERICAS Report of Independent Auditors Statement of Revenues and Certain Expenses For the Three Months Ended March 31, 1997 (unaudited) and the Year Ended December 31, 1996 Notes to Statement of Revenues and Certain Expenses (b) Exhibits 1.1 Form of Underwriting Agreement among Lehman Brothers Inc. and Prudential Securities Incorporated, as representatives of the several Underwriters, the Company and the Operating Partnership* 3.1 Articles of Incorporation of the Company 3.2 Bylaws of the Company 5.1 Opinion of Brown & Wood LLP regarding the validity of the securities being registered* 8.1 Opinion of Brown & Wood LLP regarding tax matters* 10.1 Form of Agreement of Limited Partnership of the Operating Partnership 10.2 Form of Articles of Incorporation and Bylaws of the Management Corporation* 10.3 Form of Articles of Incorporation and Bylaws of the Leasing Corporation* 10.4 Form of Articles of Incorporation and Bylaws of the Construction Corporation* 10.5 Form of Employment and Noncompetition Agreement among the Executive Officers and the Company* 10.6 Form of Registration Rights Agreement between the Company and the persons named therein 10.7 1997 Stock Option Plan* 10.8 Supplemental Representations and Warranties Agreement among the Company, the Operating Partnership, and certain SL Green entities* 10.9 Omnibus Contribution Agreement 21.1 List of Subsidiaries 23.1 Consent of Brown & Wood LLP (included as part of Exhibit 5.1)* 23.2 Consent of Ernst & Young LLP 23.3 Consent of Rosen Consulting Group 24.1 Power of Attorney (included on the signature page at page II-7 hereof) 27.1 Financial Data Schedule 99.1 Consent of Edwin T. Burton, III to be named as a proposed director 99.2 Consent of John S. Levy to be named as a proposed director 99.3 Consent of John J. Robbins to be named as a proposed director 99.4 Rosen Market Study
- ------------------------ * To be filed by amendment. ITEM 36. UNDERTAKINGS The Registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act the information omitted from the form of Prospectus filed as part of the Registration Statement in reliance upon Rule 430A and contained in the form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 (3) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery of each purchaser. (4) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable ground to believe that it meets all of the requirements for filing on Form S -11 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York on this 16th day of June, 1997. SL GREEN REALTY CORP. /s/ Stephen L. Green BY: __________________________________ Stephen L. Green Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated as of the 16th day of June, 1997. Each person whose signature appears below hereby constitutes and appoints each of Stephen L. Green, Benjamin P. Feldman and Steven H. Klein as his or her attorney-in-fact and agent, with full power of substitution and resubstitution for him or her in any and all capacities, to sign any or all amendments or post-effective amendments to this Registration Statement, or any Registration Statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith or in connection with the registration of the Common Stock under the Securities Act of 1934, as amended, with the Securities and Exchange Commission, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that such attorney-in-fact and agent or his substitutes may do or cause to be done by virtue hereof. SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- /s/ STEPHEN L. GREEN Chief Executive Officer, June 16, 1997 - ------------------------------ President and Chairman of Stephen L. Green the Board of Directors (principal executive officer) /s/ LOUIS A. OLSEN Treasurer and Chief June 16, 1997 - ------------------------------ Financial Officer Louis A. Olsen (principal financial officer and principal accounting officer) /s/ BENJAMIN P. FELDMAN Director June 16, 1997 - ------------------------------ Benjamin P. Feldman /s/ STEVEN H. KLEIN Director June 16, 1997 - ------------------------------ Steven H. Klein II-6



                                                                    EXHIBIT 3.1


                              ARTICLES OF INCORPORATION 

                                          OF

                                SL GREEN REALTY CORP.
                                ---------------------


                                      ARTICLE I

                                     INCORPORATOR

         The undersigned, James O'Connor, whose address is c/o Brown & Wood
LLP, One World Trade Center, New York, New York 10048, being at least 18 years
of age, does hereby form a corporation under the general laws of the State of
Maryland.

                                      ARTICLE II

                                         NAME

         The name of the corporation (the "Corporation") is:

                                SL Green Realty Corp.

                                     ARTICLE III

                                       PURPOSE

         The purposes for which the Corporation is formed are to engage in any
lawful act or activity (including, without limitation or obligation, engaging in
business as a real estate investment trust under the Internal Revenue Code of
1986, as amended, or any successor statute (the "Code")) for which corporations
may be organized under the general laws of the State of Maryland as now or
hereafter in force.  For purposes of these Articles, "REIT" means a real estate
investment trust under Sections 856 through 860 of the Code.




                                      ARTICLE IV

                     PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT

         The address of the principal office of the Corporation in the State of
Maryland is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore,
Maryland 21202.  The name of the resident agent of the Corporation in the State
of Maryland is The Corporation Trust Incorporated, whose post address is 32
South Street, Baltimore, Maryland 21202.  The resident agent is a corporation of
and resident of the State of Maryland.

                                      ARTICLE V

                          PROVISIONS FOR DEFINING, LIMITING
                         AND REGULATING CERTAIN POWERS OF THE
                  CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS

         Section 1.  NUMBER AND CLASSIFICATION OF DIRECTORS.  The business 
and affairs of the Corporation shall be managed under the direction of the 
Board of Directors of the Corporation (the "Board of Directors").  The number 
of directors of the Corporation initially shall be three, which number may be 
increased or decreased pursuant to the Bylaws, but shall never be less than 
the minimum number required by the Maryland General Corporation Law.  The 
names of the directors who shall serve until the first annual meeting of 
stockholders and until their successors are duly elected and qualify are:

                   Stephen L. Green
                   Benjamin P. Feldman
                   Steven H. Klein

These directors may increase the number of directors and may fill any vacancy,
whether resulting from an increase in the number of

                                     -2-




directors or otherwise, on the Board of Directors prior to the first annual 
meeting of stockholders in the manner provided in the Bylaws.

          At any meeting of stockholders, the directors may be classified, 
with respect to the terms for which they severally hold office, into three 
classes, one class to hold office initially for a term expiring at the next 
succeeding annual meeting of stockholders, another class to hold office 
initially for a term expiring at the second succeeding annual meeting of 
stockholders and another class to hold office initially for a term expiring 
at the third succeeding annual meeting of stockholders, with the members of 
each class to hold office until their successors are duly elected and 
qualify.  At each annual meeting of the stockholders, the successors to the 
class of directors whose term expires at such meeting shall be elected to 
hold office for a term expiring at the annual meeting of stockholders held in 
the third year following the year of their election.

           Section 2.  AUTHORIZATION BY BOARD OF STOCK ISSUANCE.  The Board 
of Directors may authorize the issuance from time to time of shares of stock 
of the Corporation of any class or series, whether now or hereafter 
authorized, or securities or rights convertible into shares of its stock of 
any class or series, whether now or hereafter authorized, for such 
consideration as the Board of Directors may deem advisable, subject to such 
restrictions or limitations, if any, as may be set forth in the charter or 
the Bylaws.        

                                     -3-





          Section 3.  PREEMPTIVE RIGHTS.  Except as may be provided by the 
Board of Directors in setting the terms of classified or reclassified shares 
of stock pursuant to Article VI, Section 4, no holder of shares of stock of 
the Corporation shall, as such holder, have any preemptive right to purchase 
or subscribe for any additional shares of stock of the Corporation or any 
other security of the Corporation which it may issue or sell.

          Section 4.  INDEMNIFICATION.  The Corporation shall have the power, 
to the maximum extent permitted by Maryland law in effect from time to time, 
to obligate itself to indemnify, and to pay or reimburse reasonable expenses 
in advance of final disposition of a proceeding to, (a) any individual who is 
a present or former director or officer of the Corporation or (b) any 
individual who, while a director of the Corporation and at the request of the 
Corporation, serves or has served as a director, officer, partner or trustee 
of another corporation, partnership, joint venture, trust, employee benefit 
plan or any other enterprise from and against any claim or liability to which 
such person may become subject or which such person may incur by reason of 
his status as a present or former director or officer of the Corporation.  
The Corporation shall have the power, with the approval of its Board of 
Directors, to provide such indemnification and advancement of expenses to a 
person who served a predecessor of the Corporation in any of the capacities 
described in (a) or (b) above and to any employee or agent of the Corporation 
or a predecessor of the Corporation.

                                     -4-




          Section 5.  DETERMINATIONS BY BOARD.  The determination as to any 
of the following matters, made in good faith by or pursuant to the direction 
of the Board of Directors consistent with the charter and in the absence of 
actual receipt of an improper benefit in money, property or services or 
active and deliberate dishonesty established by a court, shall be final and 
conclusive and shall be binding upon the Corporation and every holder of 
shares of its stock: the amount of the net income of the Corporation for any 
period and the amount of assets at any time legally available for the payment 
of dividends, redemption of its stock or the payment of other distributions 
on its stock; the amount of paid-in surplus, net assets, other surplus, 
annual or other net profit, net assets in excess of capital, undivided 
profits or excess of profits over losses on sales of assets; the amount, 
purpose, time of creation, increase or decrease, alteration or cancellation 
of any reserves or charges and the propriety thereof (whether or not any 
obligation or liability for which such reserves or charges shall have been 
created shall have  been paid or discharged); the fair value, or any sale, 
bid or asked price to be applied in determining the fair value, of any asset 
owned or held by the Corporation; and any matters relating to the 
acquisition, holding and disposition of any assets by the Corporation.

          Section 6.  REIT QUALIFICATION.  If the Corporation elects to 
qualify for federal income tax treatment as a REIT, the Board of Directors 
shall use its reasonable best efforts to take

                                     -5-





such actions as are necessary or appropriate to preserve the status of the 
Corporation as a REIT; however,  if the Board of Directors determines that it 
is no longer in the best interests of the Corporation to continue to be 
qualified as a REIT, the Board of Directors may revoke or otherwise terminate 
the Corporation's REIT election pursuant to Section 856(g) of the Code.

          Section 7.  REMOVAL OF DIRECTORS.  Any director, or the entire 
Board of Directors, may be removed from office at any time, for cause only, 
by the affirmative vote of a majority of the votes entitled to be cast for 
the election of directors.

                                 ARTICLE VI

                                    STOCK

          Section 1.  AUTHORIZED SHARES.  The Corporation has authority to 
issue a total of 200,000,000 shares of stock, consisting of 100,000,000 
shares of Common Stock, $0.01 par value per share ("Common Stock"), 
25,000,000 shares of Preferred Stock, $0.01 par value per share ("Preferred 
Stock"), and 75,000,000 shares of Excess Stock, $0.01 par value per share 
("Excess Stock").  The aggregate par value of all authorized shares of stock 
having par value is $2,000,000.

          Section 2.  COMMON STOCK.  Subject to the provisions of Article 
VII, each share of Common Stock shall entitle the holder thereof to one vote. 
The Board of Directors may reclassify any unissued shares of Common Stock 
from time to time in one or more classes or series of stock.

                                     -6-





          Section 3.  PREFERRED STOCK.  The Board of Directors may classify 
any unissued shares of Preferred Stock and reclassify any previously 
classified but unissued shares of Preferred Stock of any series from time to 
time, in one or more series of stock.

          Section 4.  CLASSIFIED OR RECLASSIFIED SHARES.  Prior to issuance 
of classified or reclassified shares of any class or series, the Board of 
Directors by resolution shall: (a) designate that class or series to 
distinguish it from all other classes and series of stock of the Corporation; 
(b) specify the number of shares to be included in the class or series; (c) 
set, subject to the provisions of Article VII  and subject to the express 
terms of any class or series of stock of the Corporation outstanding at the 
time, the preferences, conversion or 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; and (d) cause the Corporation to file 
articles supplementary with the State Department of Assessments and Taxation 
of Maryland ("SDAT").  Any of the terms of any class or series of stock set 
pursuant to clause (c) of this Section 4 may be made dependent upon facts or 
events ascertainable outside the charter (including determinations by the 
Board of Directors or other facts or events within the control of the 
Corporation) and may vary among holders thereof, provided that the manner in 
which such facts, events or variations shall operate upon the terms of such 
class or series of

                                     -7-




stock is clearly and expressly set forth in the articles supplementary filed 
with the SDAT.

          Section 5.  CHARTER AND BYLAWS.  All persons who shall acquire 
stock in the Corporation shall acquire such stock subject to the provisions 
of the charter and the Bylaws.                

                                ARTICLE VII

                           RESTRICTION ON TRANSFER,
                     ACQUISITION AND REDEMPTION OF SHARES 

         Section 1.  DEFINITIONS.  For purposes of this Article VII, the
following terms shall have the following meanings:

              "Beneficial Ownership" shall mean ownership of shares of Equity 
Stock by a Person who is or would be an actual owner, for Federal income tax 
purposes, of such shares of Equity Stock or who is or would be treated as a 
constructive owner of such shares of Equity Stock under Section 542(a)(2) of 
the Code either directly or constructively through the application of Section 
544 of the Code, as modified by Sections 856(h)(1)(B) and 856(h)(3) of the 
Code.  For purposes of determining the percentage ownership of Common Stock 
by any Person, shares of Common Stock that may be acquired upon conversion, 
exchange or exercise of any securities of the Corporation or any debt 
securities of SL Green Operating Partnership, L.P. directly or constructively 
held by such Person, but not Common Stock issuable with respect to the 
conversion, exchange or exercise of securities of the Corporation or debt 
securities of SL Green Operating Partnership, L.P. held by other Persons, 
shall be deemed to be outstanding prior to such conversion, exchange or 
exercise.  The terms "Beneficial Owner,"

                                     -8-





"Beneficially Owns," "Beneficially Own" and "Beneficially Owned" shall have 
the correlative meanings.

              "Charitable Beneficiary" shall mean a beneficiary of the Trust as
determined pursuant to Section 14 of this Article VII.

              "Effective Date" shall mean the date as of which the
Corporation's registration statement on Form S-11 (File No. 33-84324) is
declared effective by the Securities and Exchange Commission.

              "Equity Stock" shall mean stock that is either Common Stock or
Preferred Stock.

              "Market Price" as to any date shall mean the average of the last
sales price reported on the New York Stock Exchange, Inc. ("NYSE") of Common
Stock or Preferred Stock, as the case may be, on the ten trading days
immediately preceding the relevant date, or if not then traded on the New York
Stock Exchange, the average of the last reported sales price of the Common Stock
or Preferred Stock, as the case may be, on the ten trading days immediately
preceding the relevant date as reported on any exchange or quotation system over
which the Common Stock or Preferred Stock, as the case may be, may be traded, or
if not then traded over any exchange or quotation system, then the market price
of the Common Stock or Preferred Stock, as the case may be, on the relevant date
as determined in good faith by the Board of Directors.

              "Ownership Limit" shall initially mean 9.0%, of the lesser of the
aggregate number or value of the outstanding shares of Common Stock of the
Corporation and, after any adjustment as set

                                     -9-






forth in Section 9 of this Article VII, shall mean such percentage as so 
adjusted.  The Corporation may, in Articles Supplementary, determine a limit 
on the ownership of one or more classes or series of its Preferred Stock (the 
"Preferred Stock Limit").  From and after such determination, references to 
the Ownership Limit herein will include the Preferred Stock Limit, as 
applicable.  The number and value of shares of the Equity Stock of the 
Corporation shall be determined by the Board of Directors in good faith, 
which determination shall be conclusive for all purposes hereof.

              "Person" shall mean an individual, corporation, partnership, 
estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) 
of the Code), a portion of a trust permanently set aside for or to be used 
exclusively for the purposes described in Section 642(c) of the Code, 
association, private foundation within the meaning of Section 509(a) of the 
Code, joint stock company or other entity and also includes a group as that 
term is used for purposes of Section 13(d)(3) of the Securities Exchange Act 
of 1934, as amended; but does not include an underwriter which participated 
in a public offering of the Common Stock and/or Preferred Stock for a period 
of 30 days following the purchase by such underwriter of shares of the Common 
Stock and/or Preferred Stock.

              "Purported Beneficial Transferee" shall mean, with respect to 
any purported Transfer which results in Excess Stock as described below in 
Section 3 of this Article VII, the purported beneficial transferee for whom 
the Purported Record Transferee

                                     -10-






would have acquired shares of Equity Stock, if such Transfer had not been 
void under Section 2 of this Article VII.

              "Purported Record Transferee" shall mean, with respect to any 
purported Transfer which results in Excess Stock as described below in 
Section 3 of this Article VII, the record holder of the Equity Stock if such 
Transfer had not been void under Section 2 of this Article VII.

              "Restriction Termination Date" shall mean the first day after 
the Effective Date on which the Board of Directors determines that it is no 
longer in the best interests of the Corporation to attempt to, or continue 
to, qualify as a REIT.

              "Transfer" shall mean any issuance, sale, transfer, gift, 
assignment, devise or other disposition of Equity Stock (including (i) the 
granting of any option or entering into any agreement for the sale, transfer 
or other disposition of Equity Stock or (ii) the sale, transfer, assignment 
or other disposition of any securities or rights convertible into or 
exchangeable for Equity Stock), whether voluntary or involuntary, whether of 
record or beneficially and whether by operation of law or otherwise.  The 
terms "Transfers" and "Transferred" shall have the correlative meanings.

              "Trust" shall mean the trust created pursuant to Section 14 of
this Article VII.

              "Trustee" shall mean the Person that is appointed by the
Corporation pursuant to Section 14 of this Article VII to serve as trustee of
the Trust, and any successor thereto.

                                     -11-





         Section 2.  OWNERSHIP LIMITATION.  (i) Except as provided in Section 
11 of this Article VII, from the Effective Date and prior to the Restriction 
Termination Date, no Person shall Beneficially Own shares of Common Stock 
and/or Preferred Stock in excess of the Ownership Limit.

                   (ii)  Except as provided in Section 11 of this Article 
VII, from the Effective Date and prior to the Restriction Termination Date, 
any Transfer that, if effective, would result in any Person Beneficially 
Owning Common Stock and/or Preferred Stock in excess of the Ownership Limit 
shall be void AB INITIO as to the Transfer of such shares of Common Stock 
and/or Preferred Stock which would be otherwise Beneficially Owned by such 
Person in excess of the Ownership Limit; and the intended transferee shall 
acquire no rights in such shares of Common Stock and/or Preferred Stock.

                  (iii)  From the Effective Date and prior to the Restriction 
Termination Date, any Transfer that, if effective, would result in the Common 
Stock and/or Preferred Stock being Beneficially Owned by less than 100 
Persons (determined without reference to any rules of attribution) shall be 
void AB INITIO as to the Transfer of such shares of Common Stock and/or 
Preferred Stock which would be otherwise Beneficially Owned by the 
transferee; and the intended transferee shall acquire no rights in such 
shares of Common Stock and/or Preferred Stock.

                   (iv)  From the Effective Date and prior to the Restriction
Termination Date, any Transfer that, if effective,

                                     -12-




would result in the Corporation being "closely held" within the meaning of 
Section 856(h) of the Code shall be void AB INITIO as to the Transfer of the 
shares of Common Stock and/or Preferred Stock which would cause the 
Corporation to be "closely held" within the meaning of Section 856(h) of the 
Code; and the intended transferee shall acquire no rights in such shares of 
Common Stock and/or Preferred Stock.

         Section 3.  EXCESS STOCK.  (i) If, notwithstanding the other 
provisions contained in this Article VII, at any time after the date of the 
Effective Date and prior to the Restriction Termination Date, there is a 
purported Transfer or other change in the capital structure of the 
Corporation such that any Person would Beneficially Own Common Stock and/or 
Preferred Stock in excess of the applicable Ownership Limit, then, except as 
otherwise provided in Section 11, such shares of Common Stock and/or 
Preferred Stock in excess of such Ownership Limit (rounded up to the nearest 
whole share) shall be converted into Excess Stock and be treated as provided 
in this Article VII.  Such conversion and treatment shall be effective as of 
the close of business on the business day prior to the date of the purported 
Transfer or change in capital structure.

                   (ii)  If, notwithstanding the other provisions contained 
in this Article VII, at any time after the date of the Effective Date and 
prior to the Restriction Termination Date, there is a purported Transfer or 
other change in the capital structure of the Corporation which, if effective, 
would cause the Corporation to

                                     -13-




become "closely held"  within the meaning of Section 856(h) of the Code, then 
the shares of Common Stock and/or Preferred Stock being Transferred which 
would cause the Corporation to be "closely held" within the meaning of 
Section 856(h) of the Code (rounded up to the nearest whole share) shall be 
converted into Excess Stock and be treated as provided in this Article VII.  
Such conversion and treatment shall be effective as of the close of business 
on the business day prior to the date of the purported Transfer or change in 
capital structure.

          Section 4. PREVENTION OF TRANSFER.  If the Board of Directors or 
its designee shall at any time determine in good faith that a Transfer has 
taken place in violation of Section 2 of this Article VII or that a Person 
intends to acquire or has attempted to acquire beneficial ownership 
(determined without reference to any rules of attribution) or Beneficial 
Ownership of any shares of stock of the Corporation in violation of Section 2 
of this Article VII, the Board of Directors or its designee shall take such 
action as it deems advisable to refuse to give effect to or to prevent such 
Transfer, including, but not limited to, refusing to give effect to such 
Transfer on the books of the Corporation or instituting proceedings to enjoin 
or rescind such Transfer; provided, however, that any Transfers or attempted 
Transfers in violation of subparagraphs Section 2 (ii) and (iv) of this 
Article VII shall automatically result in the conversion and treatment 
described in Section 3, irrespective of any action (or non-action) by the 
Board of Directors.

                                     -14-





          Section 5.  NOTICE TO CORPORATION.  Any Person who acquires or 
attempts to acquire shares in violation of Section 2 of this Article VII, or 
any Person who is or attempts to become a transferee such that Excess Stock 
results under Section 3 of this Article VII, shall immediately give written 
notice or, in the event of a proposed or attempted Transfer, give at least 15 
days prior written notice to the Corporation of such event and shall provide 
to the Corporation such other information as the Corporation may request in 
order to determine the effect, if any, of such Transfer or attempted Transfer 
on the Corporation's status as a REIT.

          Section 6.  INFORMATION FOR CORPORATION.  From the date of the 
Effective Date and prior to the Restriction Termination Date, each Person who 
is a Beneficial Owner of Common Stock and/or Preferred Stock and each Person 
(including the stockholder of record) who is holding Common Stock and/or 
Preferred Stock for a Beneficial Owner shall upon demand provide in writing 
to the Corporation any information with respect to the direct, indirect and 
constructive ownership of Equity Stock of the Corporation 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 such compliance.

          Section 7.  OTHER ACTION BY BOARD.  Subject to the provisions of 
Section 19 of this Article VII, nothing contained in this Article VII shall 
limit the authority of the Board of Directors to take such other action as it 
deems necessary or 

                                     -15-





advisable to protect the Corporation and the interests of its stockholders by 
preservation of the Corporation's status as a REIT.

          Section 8.  AMBIGUITIES.  In the case of an ambiguity in the 
application of any of the provisions of this Article VII, including any 
definition contained in Section 1, the Board of Directors shall have the 
power to determine the application of the provisions of this Article VII with 
respect to any situation based on the facts known to it.

          Section 9.  INCREASE IN OWNERSHIP LIMIT.  Subject to the 
limitations provided in Section 10 of this Article VII, the Board of 
Directors may from time to time increase the Ownership Limit.        

          Section 10.  LIMITATIONS ON CHANGES IN OWNERSHIP LIMIT.  (i) The 
Ownership Limit for a class or series of Equity Stock may not be increased 
if, after giving effect to such increase, five or fewer Beneficial Owners of 
Equity Stock would Beneficially Own, in the aggregate, more than 50.0% in 
value of the outstanding shares of Equity Stock.

                    (ii)  Prior to any modification of the Ownership Limit 
pursuant to Section 9 of this Article VII, the Board of Directors may require 
such opinions of counsel, affidavits, undertakings or agreements as it may 
deem necessary or advisable in order to determine or ensure the Corporation's 
status as a REIT.

          Section 11.  EXEMPTIONS BY BOARD.  The Board of Directors may, in 
its sole discretion, waive the Ownership Limit with respect to any particular 
Person or Persons if evidence satisfactory to the

                                     -16-






Board of Directors and the Corporation's tax counsel is presented that the 
changes in ownership pursuant to such waiver will not cause the Corporation 
not to continue to be qualified as a REIT and are not reasonably likely to 
cause the Corporation not to continue to be qualified as a REIT in the future 
and the Board of Directors otherwise decides that such action is in the best 
interest of the Corporation.
          
            Section 12.  LEGEND.  (i)  In addition to any other legend 
required by applicable law, each certificate for shares of Common Stock shall 
bear substantially the following legend:

                 THE SECURITIES REPRESENTED BY THIS
          CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON
          TRANSFER FOR THE PURPOSE OF THE CORPORATION'S
          MAINTENANCE OF ITS STATUS AS A REAL ESTATE
          INVESTMENT TRUST (A "REIT") UNDER THE INTERNAL
          REVENUE CODE OF 1986, AS AMENDED.  EXCEPT AS
          OTHERWISE PROVIDED PURSUANT TO THE CHARTER OF THE
          CORPORATION, NO PERSON MAY BENEFICIALLY OWN SHARES
          OF COMMON STOCK IN EXCESS OF 9.0% (OR SUCH GREATER
          PERCENTAGE AS MAY BE DETERMINED BY THE BOARD OF
          DIRECTORS OF THE CORPORATION) OF THE AGGREGATE
          NUMBER OR VALUE OF THE OUTSTANDING SHARES OF COMMON
          STOCK OF THE CORPORATION.  ANY PERSON WHO ACQUIRES OR
          ATTEMPTS TO ACQUIRE SHARES OF COMMON STOCK IN EXCESS OF
          THE AFOREMENTIONED LIMITATION, OR ANY PERSON WHO IS OR
          ATTEMPTS TO


                                     -17-




          BECOME A TRANSFEREE SUCH THAT EXCESS STOCK
          RESULTS UNDER THE PROVISIONS OF THE CHARTER, SHALL 
          IMMEDIATELY GIVE WRITTEN NOTICE OR, IN THE EVENT OF A
          PROPOSED OR ATTEMPTED TRANSFER, GIVE AT LEAST 15 DAYS
          PRIOR WRITTEN NOTICE TO THE CORPORATION OF SUCH EVENT AND
          SHALL PROVIDE TO THE CORPORATION SUCH OTHER INFORMATION AS
          IT MAY REQUEST IN ORDER TO DETERMINE THE EFFECT ON ANY SUCH
          TRANSFER ON THE CORPORATION'S STATUS AS A REIT.  ALL
          CAPITALIZED TERMS IN THIS LEGEND HAVE THE MEANINGS DEFINED
          IN THE CHARTER OF THE CORPORATION, A COPY OF WHICH, INCLUDING
          THE RESTRICTIONS ON TRANSFER, WILL BE SENT TO ANY STOCKHOLDER
          ON REQUEST AND WITHOUT CHARGE.  IF THE RESTRICTIONS ON TRANSFER
          ARE VIOLATED, THE SECURITIES REPRESENTED HEREBY WILL BE CONVERTED
          INTO AND TREATED AS 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.

                (ii)  In addition to any other legend required by applicable 
law, each certificate for shares of Preferred Stock shall bear such legend as 
may be set forth in the Articles Supplementary with respect to the 
transferability of such Preferred Stock.    

                                     -18-





          Section 13.  SEVERABILITY.  If any provision of this Article VII or 
any application of any such provision is determined to be void, invalid or 
unenforceable by virtue of any legal decision, statute, rule or regulation, 
then the Purported Record Transferee may be deemed, at the option of the 
Corporation, to have acted as an agent of the Corporation in acquiring such 
shares of Excess Stock and to hold such shares of Excess Stock on behalf of 
the Corporation and the validity and enforceability of the remaining 
provisions shall not be affected and other applications of such provision 
shall be affected only to the extent necessary to comply with the 
determination of such court.

           Section 14.  TRUST FOR EXCESS STOCK.  Upon any purported Transfer 
that results in Excess Stock pursuant to Section 3 of this Article VII, such 
Excess Stock shall be deemed to have been transferred by operation of law to 
the Trustee of a trust (the "Trust") for the exclusive benefit of one or more 
Charitable Beneficiaries.  The Trustee shall be appointed by the Corporation, 
and shall be a Person unaffiliated with the Corporation, any Purported 
Beneficial Transferee or any Purported Record Transferee.  By written notice 
to the Trustee, the Corporation shall designate one or more non-profit 
organizations to be the Charitable Beneficiary(ies) of the interest in the 
Trust representing the Excess Stock such that (a) the shares of Equity Stock, 
from which the shares of Excess Stock held in the Trust were so converted, 
would not violate the restrictions set forth in Section 2 of this Article VII 
in the hands of such Charitable Beneficiary and (b)

                                     -19-




each Charitable Beneficiary is an organization described in Sections 
170(b)(1)(a), 170(c)(2) and 501(c)(3) of the Code.  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 purported Transfer that results in Excess 
Stock pursuant to Section 3 of this Article VII.  Shares of Excess Stock so 
held in trust shall be issued and outstanding stock of the Corporation.  The 
Purported Record Transferee shall have no rights in such Excess Stock except 
as expressly provided for in the this Article VII.        

           Section 15.  DIVIDENDS ON EXCESS STOCK.  Shares of Excess Stock 
will be entitled to dividends and distributions authorized and declared with 
respect to the class or series of Equity Stock from which the Excess Stock 
was converted and will be payable to the Trustee of the Trust in which such 
Excess Stock is held, for the benefit of the Charitable Beneficiary.  
Dividends and distributions will be authorized and declared with respect to 
each share of Excess Stock in an amount equal to the dividends and 
distributions authorized and declared on each share of stock of the class or 
series of Equity Stock from which the Excess Stock was converted.  Any 
dividend or distribution paid to a Purported Record Transferee of Excess 
Stock prior to the discovery by the Corporation that Equity Stock has been 
transferred in violation of the provisions of the Charter shall be repaid by 
the Purported Record Transferee to the Trustee upon demand.  The Corporation 
shall rescind any dividend or distribution authorized and declared but unpaid 
as void AB INITIO with respect to the Purported Record

                                     -20-




Transferee, and the Corporation shall pay such dividend or distribution when 
due to the Trustee of the trust for the benefit of the Charitable Beneficiary.

          Section 16.  LIQUIDATION DISTRIBUTIONS FOR EXCESS STOCK.  Subject 
to the preferential rights of the Preferred Stock, if any, as may be 
determined by the Board of Directors, in the event of any voluntary or 
involuntary liquidation, dissolution or winding up of, or any other 
distribution of all or substantially all of the assets of the Corporation, 
each holder of shares of Excess Stock shall be entitled to receive, in the 
case of Excess Stock converted from Preferred Stock, ratably with each other 
holder of Preferred Stock and Excess Stock converted from Preferred Stock and 
having the same rights to payment upon liquidation, dissolution or winding up 
as such Preferred Stock and, in the case of Excess Stock converted from 
Common Stock, ratably with each other holder of Common Stock and Excess Stock 
converted from Common Stock, that portion of the assets of the Corporation 
available for distribution to its stockholders as the number of shares of the 
Excess Stock held by such holder bears to the total number of shares of (i) 
Preferred Stock and Excess Stock then outstanding (in the case of Excess 
Stock converted from Preferred Stock) and (ii) Common Stock and Excess Stock 
then outstanding (in the case of Excess Stock converted from Common Stock).   

       Any liquidation distributions to be distributed with respect to Excess 
Stock shall be distributed in the same manner as 


                                     -21-




proceeds from the sale of Excess Stock are distributed as set forth in 
Section 18 of this Article VII.  

        Section 17.  VOTING RIGHTS FOR EXCESS STOCK.  Any vote cast by a 
Purported Record Transferee of Excess Stock prior to the discovery by the 
Corporation that Equity Stock has been transferred in violation of the 
provisions of the Charter shall be void AB INITIO.  While the Excess Stock is 
held in trust, the Purported Record Transferee will be deemed to have given 
an irrevocable proxy to the Trustee to vote the shares of Equity Stock which 
have been converted into shares of Excess Stock for the benefit of the 
Charitable Beneficiary.

          Section 18.  NON-TRANSFERABILITY OF EXCESS STOCK.  Excess Stock 
shall not be transferable.  In its sole discretion, the Trustee of the Trust 
may transfer the interest in the Trust representing shares of Excess Stock to 
any Person if the shares of Excess Stock would not be Excess Stock in the 
hands of such Person.  If such transfer is made, the interest of the 
Charitable Beneficiary in the Excess Stock shall terminate and the proceeds 
of the sale shall be payable by the Trustee to the Purported Record 
Transferee and to the Charitable Beneficiary as herein set forth.  The 
Purported Record Transferee shall receive from the Trustee the lesser of (i) 
the price paid by the Purported Record Transferee for its shares of Equity 
Stock that were converted into Excess Stock or, if the Purported Record 
Transferee did not give value for such shares (E.G., the stock was received 
through a gift, devise or other transaction), the average closing price for 
the class of

                                     -22-




shares from which such shares of Excess Stock were converted for the ten 
trading days immediately preceding such sale or gift, and (ii) 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 
Purported Record Transferee by the amount of dividends and distributions 
which have been paid to the Purported Record Transferee and are owed by the 
Purported Record Transferee to the Trustee pursuant to Section 15 of this 
Article VII.  Any proceeds in excess of the amount payable to the Purported 
Record Transferee shall be paid by the Trustee to the Charitable Beneficiary. 
Upon such transfer of an interest in the Trust, the corresponding shares of 
Excess Stock in the Trust shall be automatically exchanged for an equal 
number of shares of Common Stock and/or Preferred Stock, as applicable, and 
such shares of Common Stock and/or Preferred Stock, as applicable, shall be 
transferred of record to the transferee of the interest in the Trust if such 
shares of Common Stock and/or Preferred Stock, as applicable, would not be 
Excess Stock in the hands of such transferee.  Prior to any transfer of any 
interest in the Trust, the Corporation must have waived in writing its 
purchase rights under Section 20 of this Article VII.

          Section 19.  NYSE TRANSACTIONS.  Nothing in this Article VII shall 
preclude the settlement of any transaction entered into through the 
facilities of the NYSE.  The fact that the settlement of any transaction may 
occur shall not negate the effect of any other provision of this Article VII 
and any transferee in such a


                                     -23-







transaction shall be subject to all of the provisions and limitations set 
forth in this Article VII.

          Section 20.  CALL BY CORPORATION ON EXCESS STOCK.  Shares of Excess 
Stock shall be deemed to have been offered for sale to the Corporation, or 
its designee, at a price per share payable to the Purported Record Transferee 
equal to the lesser of (i) the price per share in the transaction that 
created such Excess Stock (or, in the case of a devise or gift, the Market 
Price at the time of such devise or gift) and (ii) the Market Price of the 
Common Stock or Preferred Stock from which such Excess Stock was converted on 
the date the Corporation, or its designee, accepts such offer.  The 
Corporation may reduce the amount payable to the Purported Record Transferee 
by the amount of dividends and distributions which have been paid to the 
Purported Record Transferee and are owed by the Purported Record Transferee 
to the Trustee pursuant to Section 15 of this Article VII.  The Corporation 
may pay the amount of such reductions to the Trustee for the benefit of the 
Charitable Beneficiary.  The Corporation shall have the right to accept such 
offer for a period of 90 days after the later of (i) the date of the 
Corporation's receipt of notice pursuant to Section 5 of this Article VII and 
(ii) if the Corporation does not receive a notice of such Transfer pursuant 
to Section 5 of this Article VII, the date that the Board of Directors 
determines in good faith that a Transfer resulting in Excess Stock has 
occurred, but in no event later than a permitted Transfer pursuant to and in 
compliance with the terms of Section 18 of this Article VII.

                                     -24-




          Section 21.  ENFORCEMENT.  The Corporation is authorized 
specifically to seek equitable relief, including injunctive relief, to 
enforce the provisions of this Article VII.

          Section 22.  NON-WAIVER.  No delay or failure on the part of the 
Corporation or the Board of Directors in exercising any right hereunder shall 
operate as a waiver of any right of the Corporation or the Board of 
Directors, as the case may be, except to the extent specifically waived in 
writing.


                                 ARTICLE VIII

                                   AMENDMENTS

           The Corporation reserves the right from time to time to make any 
amendment to its charter, now or hereafter authorized by law, including any 
amendment altering the terms or contract rights, as expressly set forth in 
this charter, of any shares of outstanding stock.  All rights and powers 
conferred by the charter on stockholders, directors and officers are granted 
subject to this reservation.  Any amendment to the charter shall be valid 
only if approved by the affirmative vote of two-thirds of all the votes 
entitled to be cast on the matter.

                                   ARTICLE IX

                             LIMITATION OF LIABILITY


          To the maximum extent that Maryland law in effect from time to time 
permits limitation of the liability of directors and officers of a 
corporation, no director or officer of the Corporation shall be liable to the 
Corporation or its stockholders for money damages.  Neither the amendment nor 
repeal of this 

                                     -25-




Article IX, nor the adoption or amendment of any other provision of the 
charter or Bylaws inconsistent with this Article IX, shall apply to or affect 
in any respect the applicability of the preceding sentence with respect to 
any act or failure to act which occurred prior to such amendment, repeal or 
adoption.


                                     -26-




        IN WITNESS WHEREOF, I have signed these Articles of Incorporation and 
acknowledge the same to be my act on this 9th day of June, 1997.




                                            /S/ JAMES O'CONNOR
                                            ------------------
                                            James O'Connor








                                                                    EXHIBIT 3.2


                                SL GREEN REALTY CORP.

                                       BYLAWS

                                     ARTICLE I

                                      OFFICES

         Section 1.     PRINCIPAL OFFICE.  The principal office of the 
Corporation shall be located at such place or places as the Board of 
Directors may designate.

         Section 2.     ADDITIONAL OFFICES.  The Corporation may have 
additional offices at such places as the Board of Directors may from time to 
time determine or the business of the Corporation may require.

                                      ARTICLE II
 
                               MEETINGS OF STOCKHOLDERS

         Section 1.  PLACE.  All meetings of stockholders shall be held at 
the principal office of the Corporation or at such other place within the 
United States as shall be stated in the notice of the meeting.

         Section 2.  ANNUAL MEETING.  An annual meeting of the stockholders for
the election of directors and the transaction of any business within the powers
of the Corporation shall be held on a date and at the time set by the Board of
Directors during the month of May in each year.  

         Section 3.  SPECIAL MEETINGS.  The president, chief executive officer
or Board of Directors may call special meetings of the stockholders.  Special
meetings of stockholders shall also be called by the secretary of the
Corporation upon the written request of the holders of shares entitled to cast
not less than 25% of all the votes entitled to be cast at such meeting.  Such
request shall state the purpose of such meeting and the matters proposed to be
acted on at such meeting.  The secretary shall inform such stockholders of the
reasonably estimated cost of preparing and mailing notice of the meeting and,
upon payment to the Corporation by such stockholders of such costs, the
secretary shall give notice to each stockholder entitled to notice of the
meeting.  Unless requested by the stockholders entitled to cast a majority of
all the votes entitled to be cast at such meeting, a special meeting need not be
called to consider any matter which is substantially





the same as a matter voted on at any special meeting of the stockholders held 
during the preceding twelve months.

         Section 4.  NOTICE.  Not less than ten nor more than 90 days before
each meeting of stockholders, the secretary shall give to each stockholder
entitled to vote at such meeting and to each stockholder not entitled to vote
who is entitled to notice of the meeting written or printed notice stating the
time and place of the meeting and, in the case of a special meeting or as
otherwise may be required by any statute, the purpose for which the meeting is
called, either by mail or by presenting it to such stockholder personally or by
leaving it at his residence or usual place of business.  If mailed, such notice
shall be deemed to be given when deposited in the United States mail addressed
to the stockholder at his post office address as it appears on the records of
the Corporation, with postage thereon prepaid.

         Section 5.  SCOPE OF NOTICE.  Any business of the Corporation may be
transacted at an annual meeting of stockholders without being specifically
designated in the notice, except such business as is required by any statute to
be stated in such notice.  No business shall be transacted at a special meeting
of stockholders except as specifically designated in the notice.

         Section 6.  ORGANIZATION.  At every meeting of stockholders, the
Chairman of the Board, if there be one, shall conduct the meeting or, in the
case of vacancy in office or absence of the Chairman of the Board, one of the
following officers present shall conduct the meeting in the order stated:  the
Vice Chairman of the Board, if there be one, the President, the Vice Presidents
in their order of rank and seniority, or a Chairman chosen by the stockholders
entitled to cast a majority of the votes which all stockholders present in
person or by proxy are entitled to cast, shall act as Chairman, and the
Secretary, or, in his absence, an assistant secretary, or in the absence of both
the Secretary and assistant secretaries, a person appointed by the Chairman
shall act as Secretary.

         Section 7.  QUORUM.  At any meeting of stockholders, the presence in
person or by proxy of stockholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this section
shall not affect any requirement under any statute or the charter of the
Corporation for the vote necessary for the adoption of any measure.  If,
however, such quorum shall not be present at any meeting of the stockholders,
the stockholders entitled to vote at such meeting, present in person or by
proxy, shall have the power to adjourn the meeting from time to time to a date
not more than 120 days after the original record date without notice other than
announcement at the meeting.  At such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally notified.

                                        -2-




         Section 8.  VOTING.  A plurality of all the votes cast at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient to
elect a director.  Each share may be voted for as many individuals as there are
directors to be elected and for whose election the share is entitled to be
voted.  A majority of the votes cast at a meeting of stockholders duly called
and at which a quorum is present shall be sufficient to approve any other matter
which may properly come before the meeting, unless more than a majority of the
votes cast is required by statute or by the charter of the Corporation.  Unless
otherwise provided in the charter, each outstanding share, regardless of class,
shall be entitled to one vote on each matter submitted to a vote at a meeting of
stockholders.

         Section 9.  PROXIES.  A stockholder may vote the stock owned of record
by him, either in person or by proxy executed in writing by the stockholder or
by his duly authorized attorney in  fact.  Such proxy shall be filed with the
secretary of the Corporation before or at the time of the meeting.  No proxy
shall be valid after eleven months from the date of its execution, unless
otherwise provided in the proxy.

         Section 10.  VOTING OF STOCK BY CERTAIN HOLDERS.  Stock of the
Corporation registered in the name of a corporation, partnership, trust or other
entity, if entitled to be voted, may be voted by the president or a vice
president, a general partner or trustee thereof, as the case may be, or a proxy
appointed by any of the foregoing individuals, unless some other person who has
been appointed to vote such stock pursuant to a bylaw or a resolution of the
governing body of such corporation or other entity or agreement of the partners
of a partnership presents a certified copy of such bylaw, resolution or
agreement, in which case such person may vote such stock.  Any director or other
fiduciary may vote stock registered in his name as such fiduciary, either in
person or by proxy.

                   Shares of stock of the Corporation directly or indirectly 
owned by it shall not be voted at any meeting and shall not be counted in 
determining the total number of outstanding shares entitled to be voted at 
any given time, unless they are held by it in a fiduciary capacity, in which 
case they may be voted and shall be counted in determining the total number 
of outstanding shares at any given time.

                   The Board of Directors may adopt by resolution a procedure 
by which a stockholder may certify in writing to the Corporation that any 
shares of stock registered in the name of the stockholder are held for the 
account of a specified person other than the stockholder.  The resolution 
shall set forth the class of stockholders who may make the certification, the 
purpose for which the certification may be made, the form of certification 
and the information to be contained in it; if the certification is with 

                                        -3-





respect to a record date or closing of the stock transfer books, the time 
after the record date or closing of the stock transfer books within which the 
certification must be received by the Corporation; and any other provisions 
with respect to the procedure which the Board of Directors considers 
necessary or desirable.  On receipt of such certification, the person 
specified in the certification shall be regarded as, for the purposes set 
forth in the certification, the stockholder of record of the specified stock 
in place of the stockholder who makes the certification.

                   Notwithstanding any other provision of the charter of the 
Corporation or these Bylaws, Title 3, Subtitle 7 of the Corporations and 
Associations Article of the Annotated Code of Maryland (or any successor 
statute) shall not apply to any acquisition by any person of shares of stock 
of the Corporation.  This section may be repealed, in whole or in part, at 
any time, whether before or after an acquisition of control shares and, upon 
such repeal, may, to the extent provided by any successor bylaw, apply to any 
prior or subsequent control share acquisition.

         Section 11.  INSPECTORS.  At any meeting of stockholders, the chairman
of the meeting may, or upon the request of any  stockholder shall, appoint one
or more persons as inspectors for such meeting.  Such inspectors shall ascertain
and report the number of shares represented at the meeting based upon their
determination of the validity and effect of proxies, count all votes, report the
results and perform such other acts as are proper to conduct the election and
voting with impartiality and fairness to all the stockholders.

                   Each report of an inspector shall be in writing and signed 
by him or by a majority of them if there is more than one inspector acting at 
such meeting.  If there is more than one inspector, the report of a majority 
shall be the report of the inspectors.  The report of the inspector or 
inspectors on the number of shares represented at the meeting and the results 
of the voting shall be PRIMA FACIE evidence thereof.

         Section 12.  NOMINATIONS AND STOCKHOLDER BUSINESS

         (a)  ANNUAL MEETINGS OF STOCKHOLDERS.  (1) Nominations of persons for
election to the Board of Directors and the proposal of business to be considered
by the stockholders (except for stockholder proposals included in the proxy
materials pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) may be made at an annual meeting of stockholders
(i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction
of the Board of Directors or (iii) by any stockholder of the Corporation who was
a stockholder of record at the time of giving of notice provided for in this
Section 12(a), who is entitled to vote at the meeting and who complied with the
notice procedures set forth in this Section 12(a).


                                        -4-





              (2)  For nominations or other business to be properly brought 
before an annual meeting by a stockholder pursuant to clause (iii) of 
paragraph (a)(1) of this Section 12, the stockholder must have given timely 
notice thereof in writing to the secretary of the Corporation.  To be timely, 
a stockholder's notice shall be delivered to the secretary at the principal 
executive offices of the Corporation not less than 75 days nor more than 180 
days prior to the first anniversary of the preceding year's annual meeting or 
special meeting in lieu thereof; provided, however, that in the event that 
the date of the annual meeting is advanced by more than seven calendar days 
or delayed by more than 60 days from such anniversary date, notice by the 
stockholder to be timely must be so delivered not earlier than the 180th day 
prior to such annual meeting and not later than the close of business on the 
later of the 75th day prior to such annual meeting or the twentieth day 
following the earlier of the day on which public announcement of the date of 
such meeting is first made or notice of the meeting is mailed to 
stockholders. Such stockholder's notice shall set forth (i) as to each person 
whom the stockholder proposes to nominate for election or reelection as a 
director all information relating to such person that is required to be 
disclosed in solicitations of proxies for election of directors, or is 
otherwise required, in each case pursuant to Regulation 14A under the 
Exchange Act (including such person's written consent to being named in the 
proxy statement as a nominee  and to serving as a director if elected); (ii) 
as to any other business that the stockholder proposes to bring before the 
meeting, a brief description of the business desired to be brought before the 
meeting, the reasons for conducting such business at the meeting and any 
material interest in such business of such stockholder and of the beneficial 
owner, if any, on whose behalf the proposal is made; and (iii) as to the 
stockholder giving the notice and the beneficial owner, if any, on whose 
behalf the nomination or proposal is made, (x) the name and address of such 
stockholder, as they appear on the Corporation's books, and of such 
beneficial owner and (y) the number of shares of each class of stock of the 
Corporation which are owned beneficially and of record by such stockholder 
and such beneficial owner.

              (3)  Notwithstanding anything in the second sentence of paragraph
(a)(2) of this Section 12 to the contrary, in the event that the number of
directors to be elected to the Board of Directors is increased and there is no
public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the Corporation at least 85
days prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Section 12(a) shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the secretary at the principal executive
offices of the Corporation not later than the close of business on the tenth day
following the day on which such public announcement is first made by the
Corporation.


                                        -5-




         (b)  SPECIAL MEETINGS OF STOCKHOLDERS.  Only such business shall be 
conducted at a special meeting of stockholders as shall have been brought 
before the meeting pursuant to the Corporation's notice of meeting.  
Nominations of persons for election to the Board of Directors may be made at 
a special meeting of stockholders at which directors are to be elected (i) 
pursuant to the Corporation's notice of meeting, (ii) by or at the direction 
of the Board of Directors or (iii) provided that the Board of Directors has 
determined that directors shall be elected at such special meeting, by any 
stockholder of the Corporation who is a stockholder of record at the time of 
giving of notice provided for in this Section 12(b), who is entitled to vote 
at the meeting and who complied with the notice procedures set forth in this 
Section 12(b).  In the event the Corporation calls a special meeting of 
stockholders for the purpose of electing one or more directors to the Board 
of Directors, any such stockholder may nominate a person or persons (as the 
case may be) for election to such position as specified in the Corporation's 
notice of meeting, if the stockholder's notice containing the information 
required by paragraph (a)(2) of this Section 12 shall be delivered to the 
secretary at the principal executive offices of the Corporation not earlier 
than the 180th day prior to such special meeting and not later than the close 
of business on the later of the 75th day prior to such special meeting or the 
tenth day following the day on which public announcement is first made of the 
date of the special meeting and of the nominees proposed by the Board of 
Directors to be elected at such meeting.

         (c)  GENERAL.  (1)  Only such persons who are nominated in 
accordance with the procedures set forth in this Section 12 shall be eligible 
to serve as directors and only such business shall be conducted at a meeting 
of stockholders as shall have been brought before the meeting in accordance 
with the procedures set forth in this Section 12.  The presiding officer of 
the meeting shall have the power and duty to determine whether a nomination 
or any business proposed to be brought before the meeting was made in 
accordance with the procedures set forth in this Section 12 and, if any 
proposed nomination or business is not in compliance with this Section 12, to 
declare that such defective nomination or proposal be disregarded.

              (2)  For purposes of this Section 12, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable news service or in a document publicly filed by
the Corporation with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act.

              (3)  Notwithstanding the foregoing provisions of this Section 12,
a stockholder shall also comply with all applicable requirements of state law
and of the Exchange Act and the rules and regulations thereunder with respect to
the matters

                                        -6-




set forth in this Section 12.  Nothing in this Section 12 shall be
deemed to affect any rights of stockholders to request inclusion of proposals in
the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.

         Section 13.  VOTING BY BALLOT.  Voting on any question or in any
election may be VIVA VOCE unless the presiding officer shall order or any
stockholder shall demand that voting be by ballot.

                                     ARTICLE III

                                      DIRECTORS

         Section 1.  GENERAL POWERS; QUALIFICATIONS.  The business and affairs
of the Corporation shall be managed under the direction of its Board of
Directors.

         Section 2.  NUMBER, TENURE AND QUALIFICATIONS.  At any regular 
meeting or at any special meeting called for that purpose, a majority of the 
entire Board of Directors may establish, increase or decrease the number of 
directors, provided that the number thereof shall never be less than the 
minimum number required by the Maryland General Corporation Law, nor more 
than 15, and further provided that the tenure of office of a director shall 
not be affected by any decrease in the number of directors.  

         Section 3.  ANNUAL AND REGULAR MEETINGS.  An annual meeting of the 
Board of Directors shall be held immediately after and at the same place as 
the annual meeting of stockholders, no notice other than this Bylaw being 
necessary. The Board of Directors may provide, by resolution, the time and 
place, either within or without the State of Maryland, for the holding of 
regular meetings of the Board of Directors without other notice than such 
resolution.

         Section 4.  SPECIAL MEETINGS.  Special meetings of the Board of 
Directors may be called by or at the request of the chairman of the board (or 
any co-chairman of the board if more than one), president or by a majority of 
the directors then in office.  The person or persons authorized to call 
special meetings of the Board of Directors may fix any place, either within 
or without the State of Maryland, as the place for holding any special 
meeting of the Board of Directors called by them.

         Section 5.  NOTICE.  Notice of any special meeting of the Board of 
Directors shall be delivered personally or by telephone, facsimile 
transmission, United States mail or courier to each director at his business 
or residence address.  Notice by personal delivery, by telephone or a 
facsimile transmission shall be given at least two days prior to the meeting. 
 Notice by mail shall be given at least five days prior to the meeting and 
shall be deemed to be given when deposited in the United States mail properly 

                                        -7-




addressed, with postage thereon prepaid.  Telephone notice shall be deemed to 
be given when the director is personally given such notice in a telephone 
call to which he is a party. Facsimile transmission notice shall be deemed to 
be given upon completion of the transmission of the message to the number 
given to the Corporation by the director and receipt of a completed 
answer-back indicating receipt. Neither the business to be transacted at, nor 
the purpose of, any annual, regular or special meeting of the Board of 
Directors need be stated in the notice, unless specifically required by 
statute or these Bylaws.

         Section 6.  QUORUM.  A majority of the directors shall constitute a 
quorum for transaction of business at any meeting of the Board of Directors, 
provided that, if less than a majority of such directors are present at said 
meeting, a majority of the directors present may adjourn the meeting from 
time to time without further notice, and provided further that if, pursuant 
to the charter of the Corporation or these Bylaws, the vote of a majority of 
a particular group of directors is required for action, a quorum must also 
include a majority of such group.

                   The Board of Directors present at a meeting which has been
duly called and convened may continue to transact business until adjournment,
notwithstanding the withdrawal of enough directors to leave less than a quorum.

         Section 7.  VOTING.  The action of the majority of the directors
present at a meeting at which a quorum is present shall be the action of the
Board of Directors, unless the concurrence of a greater proportion is required
for such action by applicable statute.

         Section 8.  TELEPHONE MEETINGS.  Directors may participate in a
meeting by means of a conference telephone or similar communications equipment
if all persons participating in the meeting can hear each other at the same
time.  Participation in a meeting by these means shall constitute presence in
person at the meeting.

         Section 9.  INFORMAL ACTION BY DIRECTORS.  Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting, if a consent in writing to such action is signed by each
director and such written consent is filed with the minutes of proceedings of
the Board of Directors.

         Section 10.  VACANCIES.  If for any reason any or all the directors
cease to be directors, such event shall not terminate the Corporation or affect
these Bylaws or the powers of the remaining directors hereunder (even if fewer
than three directors remain).  Any vacancy on the Board of Directors for any
cause other than an increase in the number of directors shall be filled by a
majority of the remaining directors, although such majority is less than a

                                        -8-




quorum.  Any vacancy in the number of directors created by an increase in the
number of directors may be filled by a majority vote of the entire Board of
Directors.  Any individual so elected as director shall hold office for the
unexpired term of the director he is replacing.  

         Section 11.  COMPENSATION.  Directors shall not receive any stated 
salary for their services as directors but, by resolution of the Board of 
Directors, may receive fixed sums per year and/or per meeting and/or per 
visit to real property owned or to be acquired by the Corporation and for any 
service or activity they performed or engaged in as directors.  Directors may 
be reimbursed for expenses of attendance, if any, at each annual, regular or 
special meeting of the Board of Directors or of any committee thereof and for 
their expenses, if any, in connection with each property visit and any other 
service or activity they performed or engaged in as directors; but nothing 
herein contained shall be construed to preclude any directors from serving 
the Corporation in any other capacity and receiving compensation therefor.

         Section 12.  LOSS OF DEPOSITS.  No director shall be liable for any
loss which may occur by reason of the failure of the bank, trust company,
savings and loan association, or other institution with whom moneys or stock
have been deposited.

         Section 13.  SURETY BONDS.  Unless required by law, no director shall
be obligated to give any bond or surety or other security for the performance of
any of his duties.

         Section 14.  RELIANCE.  Each director, officer, employee and agent of
the Corporation shall, in the performance of his duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon an opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the adviser, accountants,
appraisers or other experts or consultants selected by the Board of Directors or
officers of the Corporation, regardless of whether such counsel or expert may
also be a director.

         Section 15.  CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND
AGENTS.  The directors shall have no responsibility to devote their full time to
the affairs of the Corporation.  Any director or officer, employee or agent of
the Corporation, in his personal capacity or in a capacity as an affiliate,
employee, or agent of any other person, or otherwise, may have business
interests and engage in business activities similar to or in addition to or in
competition with those of or relating to the Corporation.

                                        -9-




                                      ARTICLE IV

                                      COMMITTEES

         Section 1.  NUMBER, TENURE AND QUALIFICATIONS.  The Board of Directors
may appoint from among its members an Executive Committee, an Audit Committee, a
Compensation Committee and other committees, composed of two or more directors,
to serve at the pleasure of the Board of Directors.

         Section 2.  POWERS.  The Board of Directors may delegate to committees
appointed under Section 1 of this Article any of the powers of the Board of
Directors, except as prohibited by law.

         Section 3.  MEETINGS.  Notice of committee meetings shall be given in
the same manner as notice for special meetings of the Board of Directors.  A
majority of the members of the committee shall constitute a quorum for the
transaction of business at any meeting of the committee.  The act of a majority
of the committee members present at a meeting shall be the act of such
committee.  The Board of Directors may designate a chairman of any committee,
and such chairman or any two members of any committee may fix the time and place
of its meeting unless the Board shall otherwise provide.  In the absence of any
member of any such committee, the members thereof present at any meeting,
whether or not they constitute a quorum, may appoint another director to act in
the place of such absent member.  Each committee shall keep minutes of its
proceedings. 

         Section 4.  TELEPHONE MEETINGS.  Members of a committee of the Board
of Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time.  Participation in a meeting by these means
shall constitute presence in person at the meeting.

         Section 5.  INFORMAL ACTION BY COMMITTEES.  Any action required or
permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting, if a consent in writing to such action is signed
by each member of the committee and such written consent is filed with the
minutes of proceedings of such committee.

         Section 6.  VACANCIES.  Subject to the provisions hereof, the Board of
Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.

                                        -10-




                                      ARTICLE V

                                       OFFICERS

         Section 1.  GENERAL PROVISIONS.  The officers of the Corporation 
shall include 
[a chief executive officer, a president, a secretary and a treasurer]and may 
include a chairman of the board (or one or more co-chairmen of the board), a 
vice chairman of the board, one or more executive vice presidents, one or 
more senior vice presidents, one or more vice presidents, a chief operating 
officer, a chief financial officer, a treasurer, one or more assistant 
secretaries and one or more assistant treasurers.  In addition, the Board of 
Directors may from time to time appoint such other officers with such powers 
and duties as they shall deem necessary or desirable.  The officers of the 
Corporation shall be elected annually by the Board of Directors at the first 
meeting of the Board of Directors held after each annual meeting of 
stockholders, except that the chief executive officer may appoint one or more 
vice presidents, assistant secretaries and assistant treasurers.  If the 
election of officers shall not be held at such meeting, such election shall 
be held as soon thereafter as may be convenient.  Each officer shall hold 
office until his successor is elected and qualifies or until his death, 
resignation or removal in the manner hereinafter provided.  Any two or more 
offices except president and vice president may be held by the same person.  
In its discretion, the Board of Directors may leave unfilled any office 
except that of president, treasurer and secretary.  Election of an officer or 
agent shall not of itself create contract rights between the Corporation and 
such officer or agent.

         Section 2.  REMOVAL AND RESIGNATION.  Any officer or agent of the 
Corporation may be removed by the Board of Directors if in its judgment the 
best interests of the Corporation would be served thereby, but such removal 
shall be without prejudice to the contract rights, if any, of the person so 
removed.  Any officer of the Corporation may resign at any time by giving 
written notice of his resignation to the Board of Directors, the chairman of 
the board (or any co-chairman of the board if more than one), the president 
or the secretary.  Any resignation shall take effect at any time subsequent 
to the time specified therein or, if the time when it shall become effective 
is not specified therein, immediately upon its receipt.  The acceptance of a 
resignation shall not be necessary to make it effective unless otherwise 
stated in the resignation.  Such resignation shall be without prejudice to 
the contract rights, if any, of the Corporation.

         Section 3.  VACANCIES.  A vacancy in any office may be filled by the
Board of Directors for the balance of the term.

         Section 4.  CHIEF EXECUTIVE OFFICER.  The Board of Directors may 
designate a chief executive officer.  In the absence of such designation, the 
chairman of the board (or, if more than


                                        -11-






one, the co-chairmen of the board in the order designated at the time of 
their election or, in the absence of any designation, then in the order of 
their election) shall be the chief executive officer of the Corporation.  The 
chief executive officer shall have general responsibility for implementation 
of the policies of the Corporation, as determined by the Board of Directors, 
and for the management of the business and affairs of the Corporation.

         Section 5.  CHIEF OPERATING OFFICER.  The Board of Directors may 
designate a chief operating officer.  The chief operating officer shall have 
the responsibilities and duties as set forth by the Board of Directors or the 
chief executive officer.

         Section 6.  CHIEF FINANCIAL OFFICER.  The Board of Directors may
designate a chief financial officer.  The chief financial officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.

         Section 7.  CHAIRMAN OF THE BOARD.  The Board of Directors shall
designate a chairman of the board (or one or more co-chairmen of the board). 
The chairman of the board shall preside over the meetings of the Board of
Directors and of the stockholders at which he shall be present.  If there be
more than one, the co-chairmen designated by the Board of Directors will perform
such duties.  The chairman of the board shall perform such other duties as may
be assigned to him or them by the Board of Directors.

         Section 8.  CHAIRMAN OF THE BOARD EMERITUS.  The directors may elect
by a majority vote, from time to time, a chairman of the board emeritus (or one
or more co-chairmen of the board emeritus).  The chairman of the board emeritus
shall be an honorary position and shall have no vote on any matter considered by
the directors.  The chairman of the board emeritus shall serve for such term as
determined by the Board of Directors and may be removed by a majority role of
directors with or without cause.

         Section 9.  PRESIDENT.  The president or chief executive officer, as
the case may be, shall in general supervise and control all of the business and
affairs of the Corporation.  In the absence of a designation of a chief
operating officer by the Board of Directors, the president shall be the chief
operating officer.  He may execute any deed, mortgage, bond, contract or other
instrument, except in cases where the execution thereof shall be expressly
delegated by the Board of Directors or by these Bylaws to some other officer or
agent of the Corporation or shall be required by law to be otherwise executed;
and in general shall perform all duties incident to the office of president and
such other duties as may be prescribed by the Board of Directors from time to
time.

         Section 10.  VICE PRESIDENTS.  In the absence of the president or in
the event of a vacancy in such office, the vice president (or in the event there
be more than one vice president,

                                        -12-




the vice presidents in the order designated at the time of their election or, 
in the absence of any designation, then in the order of their election) shall 
perform the duties of the president and when so acting shall have all the 
powers of and be subject to all the restrictions upon the president; and 
shall perform such other duties as from time to time may be assigned to him 
by the president or by the Board of Directors.  The Board of Directors may 
designate one or more vice presidents as executive vice president or as vice 
president for particular areas of responsibility.

         Section 11.  SECRETARY.  The secretary shall (a) keep the minutes of
the proceedings of the stockholders, the Board of Directors and committees of
the Board of Directors in one or more books provided for that purpose; (b) see
that all notices are duly given in accordance with the provisions of these
Bylaws or as required by law; (c) be custodian of the corporate records and of
the seal of the Corporation; (d) keep a register of the post office address of
each stockholder which shall be furnished to the secretary by such stockholder;
(e) have general charge of the share transfer books of the Corporation; and
(f) in general perform such other duties as from time to time may be assigned to
him by the chief executive officer, the president or by the Board of Directors.

         Section 12.  TREASURER.  The treasurer shall have the custody of the
funds and securities of the Corporation and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the Board
of Directors.  In the absence of a designation of a chief financial officer by
the Board of Directors, the treasurer shall be the chief financial officer of
the Corporation.

                   The treasurer shall disburse the funds of the Corporation as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and Board of Directors, at the
regular meetings of the Board of Directors or whenever it may so require, an
account of all his transactions as treasurer and of the financial condition of
the Corporation.

                   If required by the Board of Directors, the treasurer shall
give the Corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance of
the duties of his office and for the restoration to the Corporation, in case of
his death, resignation, retirement or removal from office, of all books, papers,
vouchers, moneys and other property of whatever kind in his possession or under
his control belonging to the Corporation.

                                        -13-




         Section 13.  ASSISTANT SECRETARIES AND ASSISTANT TREASURERS.  The 
assistant secretaries and assistant treasurers, in general, shall perform 
such duties as shall be assigned to them by the secretary or treasurer, 
respectively, or by the president or the Board of Directors.  The assistant 
treasurers shall, if required by the Board of Directors, give bonds for the 
faithful performance of their duties in such sums and with such surety or 
sureties as shall be satisfactory to the Board of Directors.

         Section 14.  SALARIES.  The salaries and other compensation of the
officers shall be fixed from time to time by the Board of Directors and no
officer shall be prevented from receiving such salary or other compensation by
reason of the fact that he is also a director.

                                      ARTICLE VI

                        CONTRACTS, LOANS, CHECKS AND DEPOSITS

         Section 1.  CONTRACTS.  The Board of Directors may authorize any
officer or agent to enter into any contract or to execute and deliver any
instrument in the name of and on behalf of the Corporation and such authority
may be general or confined to specific instances.  Any agreement, deed,
mortgage, lease or other document executed by one or more of the directors or by
an  authorized person shall be valid and binding upon the Board of Directors and
upon the Corporation when authorized or ratified by action of the Board of
Directors.

         Section 2.  CHECKS AND DRAFTS.  All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or agent of the
Corporation in such manner as shall from time to time be determined by the Board
of Directors.

         Section 3.  DEPOSITS.  All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
may designate.

                                     ARTICLE VII

                                        STOCK

         Section 1.  CERTIFICATES.  Each stockholder shall be entitled to a 
certificate or certificates which shall represent and certify the number of 
shares of each class of stock held by him in the Corporation.  Each 
certificate shall be signed by the chief executive officer, the president or 
a vice president and countersigned by the secretary or an assistant secretary 
or the treasurer or an assistant treasurer and may be sealed with the seal, 
if any, of the Corporation.  The signatures may be either

                                        -14-





manual or facsimile. Certificates shall be consecutively numbered; and if the 
Corporation shall, from time to time, issue several classes of stock, each 
class may have its own number series.  A certificate is valid and may be 
issued whether or not an officer who signed it is still an officer when it is 
issued.  Each certificate representing shares which are restricted as to 
their transferability or voting powers, which are preferred or limited as to 
their dividends or as to their allocable portion of the assets upon 
liquidation or which are redeemable at the option of the Corporation, shall 
have a statement of such restriction, limitation, preference or redemption 
provision, or a summary thereof, plainly stated on the certificate.  If the 
Corporation has authority to issue stock of more than one class, the 
certificate shall contain on the face or back a full statement or summary of 
the designations and any preferences, conversion and other rights, voting 
powers, restrictions, limitations as to dividends and other distributions, 
qualifications and terms and conditions of redemption of each class of stock 
and, if the Corporation is authorized to issue any preferred or special class 
in series, the differences in the relative rights and preferences between the 
shares of each series to the extent they have been set and the authority of 
the Board of Directors to set the relative rights and preferences of 
subsequent series.  In lieu of such statement or summary, the certificate may 
state that the Corporation will furnish a full statement of such information 
to any stockholder upon request and without charge.  If any class of stock is 
restricted by the Corporation as to transferability, the certificate shall 
contain a full statement of the restriction or state that the Corporation 
will furnish information about the restrictions to the stockholder on request 
and without charge.

         Section 2.  TRANSFERS.  Upon surrender to the Corporation or the
transfer agent of the Corporation of a stock certificate duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, the Corporation shall issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.

                   The Corporation shall be entitled to treat the holder of
record of any share of stock as the holder in fact thereof and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such share or on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of the
State of Maryland.

                   Notwithstanding the foregoing, transfers of shares of any
class of stock will be subject in all respects to the charter of the Corporation
and all of the terms and conditions contained therein.


                                        -15-





         Section 3.  REPLACEMENT CERTIFICATE.  Any officer designated by the
Board of Directors may direct a new certificate to be issued in place of any
certificate previously issued by the Corporation alleged to have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the person
claiming the certificate to be lost, stolen or destroyed.  When authorizing the
issuance of a new certificate, an officer designated by the Board of Directors
may, in his discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or the owner's
legal representative to advertise the same in such manner as he shall require
and/or to give bond, with sufficient surety, to the Corporation to indemnify it
against any loss or claim which may arise as a result of the issuance of a new
certificate.

         Section 4.  CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE.  The
Board of Directors may set, in advance, a record date for the purpose of
determining stockholders entitled to notice of or to vote at any meeting of
stockholders or determining stockholders entitled to receive payment of any
dividend or the allotment of any other rights, or in order to make a
determination of stockholders for any other proper purpose.  Such date, in any
case, shall not be prior to the close of business on the day the record date is
fixed and shall be not more than 90 days and, in the case of a meeting of
stockholders, not less than ten days, before the date on which the meeting or
particular action requiring such determination of stockholders of record is to
be held or taken.

                   In lieu of fixing a record date, the Board of Directors may
provide that the stock transfer books shall be closed for a stated period but
not longer than 20 days.  If the stock transfer books are closed for the purpose
of determining stockholders entitled to notice of or to vote at a meeting of
stockholders, such books shall be closed for at least ten days before the date
of such meeting.

                   If no record date is fixed and the stock transfer books are
not closed for the determination of stockholders, (a) the record date for the
determination of stockholders entitled to notice of or to vote at a meeting of 
stockholders shall be at the close of business on the day on which the notice of
meeting is mailed or the 30th day before the meeting, whichever is the closer
date to the meeting; and (b) the record date for the determination of
stockholders entitled to receive payment of a dividend or an allotment of any
other rights shall be the close of business on the day on which the resolution
of the directors, declaring the dividend or allotment of rights, is adopted.

                   When a determination of stockholders entitled to vote at any
meeting of stockholders has been made as provided in this section, such
determination shall apply to any adjournment

                                        -16-




thereof, except when (i) the determination has been made through the closing 
of the transfer books and the stated period of closing has expired or (ii) 
the meeting is adjourned to a date more than 120 days after the record date 
fixed for the original meeting, in either of which case a new record date 
shall be determined as set forth herein.

         Section 5.  STOCK LEDGER.  The Corporation shall maintain at its 
principal office or at the office of its counsel, accountants or transfer 
agent, an original or duplicate share ledger containing the name and address 
of each stockholder and the number of shares of each class held by such 
stockholder.

         Section 6.  FRACTIONAL STOCK; ISSUANCE OF UNITS.  The Board of 
Directors may issue fractional stock or provide for the issuance of scrip, 
all on such terms and under such conditions as they may determine.  
Notwithstanding any other provision of the charter or these Bylaws, the Board 
of Directors may issue units consisting of different securities of the 
Corporation.  Any security issued in a unit shall have the same 
characteristics as any identical securities issued by the Corporation, except 
that the Board of Directors may provide that for a specified period 
securities of the Corporation issued in such unit may be transferred on the 
books of the Corporation only in such unit.

                                     ARTICLE VIII

                                   ACCOUNTING YEAR

         The Board of Directors shall have the power, from time to time, to fix
the fiscal year of the Corporation by a duly adopted resolution.

                                      ARTICLE IX

                                     DISTRIBUTIONS
                                           
 
         Section 1.  AUTHORIZATION.  Dividends and other distributions upon 
the stock of the Corporation may be authorized and declared by the Board of 
Directors, subject  to the provisions of law and the charter of the 
Corporation. Dividends and other distributions  may be paid in cash, property 
or stock of the Corporation, subject to the provisions of law and the charter.

         Section 2.  CONTINGENCIES.  Before payment of any dividends or other 
distributions, there may be set aside out of any assets of the Corporation 
available for dividends or other distributions such sum or sums as the Board 
of Directors may from time to time, in its absolute discretion, think proper 
as a reserve fund for contingencies, for equalizing dividends or other 
distributions, for repairing or maintaining any property of the Corporation 
or for such other purpose as the Board of Directors

                                        -17-




shall determine to be in the best interest of the Corporation, and the Board 
of Directors may modify or abolish any such reserve in the manner in which it 
was created.

                                      ARTICLE X

                                  INVESTMENT POLICY

         Subject to the provisions of the charter of the Corporation, the 
Board of Directors may from time to time adopt, amend, revise or terminate 
any policy or policies with respect to investments by the Corporation as it 
shall deem appropriate in its sole discretion.

                                      ARTICLE XI

                                         SEAL

         Section 1.  SEAL.  The Board of Directors may authorize the adoption 
of a seal by the Corporation.  The seal shall contain the name of the 
Corporation and the year of its incorporation and the words "Corporate Seal 
Maryland."  The Board of Directors may authorize one or more duplicate seals 
and provide for the custody thereof.

         Section 2.  AFFIXING SEAL.  Whenever the Corporation is permitted or
required to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a seal to place the word
"(SEAL)" adjacent to the signature of the person authorized to execute the
document on behalf of the Corporation.

                                     ARTICLE XII

                      INDEMNIFICATION AND ADVANCES FOR EXPENSES

         To the maximum extent permitted by Maryland law in effect from time 
to time, the Corporation, without requiring a preliminary determination of 
the ultimate entitlement to indemnification, shall indemnify and shall pay or 
reimburse reasonable expenses in advance of final disposition of a proceeding 
to (a) any individual who is a present or former director or officer of the 
Corporation and who is made a party to the proceeding by reason of his 
service in that capacity or (b) any individual who, while a director of the 
Corporation and at the request of the Corporation, serves or has served 
another corporation, partnership, joint venture, trust, employee benefit plan 
or any other enterprise as a director, officer, partner or trustee of such 
corporation, partnership, joint venture, trust, employee benefit plan or 
other enterprise and who is made a party to the proceeding by reason of his 
service in that capacity.  The Corporation may, with the approval of its 
Board of Directors, provide such indemnification and advance for expenses to

                                        -18-




a person who served a predecessor of the Corporation in any of the capacities 
described in (a) or (b) above and to any employee or agent of the Corporation 
or a predecessor of the Corporation.

         Neither the amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of the Bylaws or charter of the Corporation
inconsistent with this Article, shall apply to or affect in any respect the
applicability of the preceding paragraph with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.

                                     ARTICLE XIII

                                   WAIVER OF NOTICE

         Whenever any notice is required to be given pursuant to the charter 
of the Corporation or these Bylaws or pursuant to applicable law, a waiver 
thereof in writing, signed by the person or persons entitled to such notice, 
whether before or after the time stated therein, shall be deemed equivalent 
to the giving of such notice.  Neither the business to be transacted at nor 
the purpose of any meeting need be set forth in the waiver of notice, unless 
specifically required by statute.  The attendance of any person at any 
meeting shall constitute a waiver of notice of such meeting, except where 
such person attends a meeting for the express purpose of objecting to the 
transaction of any business on the ground that the meeting is not lawfully 
called or convened.

                                     ARTICLE XIV

                                 AMENDMENT OF BYLAWS

         The Board of Directors shall have the exclusive power to adopt, 
alter or repeal any provision of these Bylaws and to make new Bylaws.






                                                                  EXHIBIT 10.1











                           ________________________________


                              FIRST AMENDED AND RESTATED

                           AGREEMENT OF LIMITED PARTNERSHIP

                                          OF

                         SL GREEN OPERATING PARTNERSHIP, L.P.


                           ________________________________
















                                                       Dated as of________, 1997




                                  TABLE OF CONTENTS


ARTICLE I  DEFINED TERMS....................................................  1

ARTICLE II  ORGANIZATIONAL MATTERS.......................................... 15
    Section 2.1         Organization........................................ 15
    Section 2.2         Name................................................ 15
    Section 2.3         Registered Office and Agent; Principal Office....... 16
    Section 2.4         Term................................................ 16

ARTICLE III  PURPOSE........................................................ 16
    Section 3.1         Purpose and Business................................ 16
    Section 3.2         Powers.............................................. 17
    Section 3.3         Partnership Only for Purposes Specified............. 17
ARTICLE IV  CAPITAL CONTRIBUTIONS AND ISSUANCES
           OF PARTNERSHIP INTERESTS......................................... 17
    Section 4.1         Capital Contributions of the Partners............... 17
    Section 4.2         Issuances of Partnership Interests.................. 18
    Section 4.3         No Preemptive Rights................................ 20
    Section 4.4         Other Contribution Provisions....................... 20
    Section 4.5         No Interest on Capital.............................. 20

ARTICLE V  DISTRIBUTIONS.................................................... 20
    Section 5.1         Requirement and Characterization of Distributions... 20
    Section 5.2         Amounts Withheld.................................... 23
    Section 5.3         Distributions Upon Liquidation...................... 23
    Section 5.4         Revisions to Reflect Issuance of Additional 
                        Partnership Interests............................... 23

ARTICLE VI  ALLOCATIONS..................................................... 23
    Section 6.1         Allocations For Capital Account Purposes............ 23
    Section 6.2         Revisions to Allocations to Reflect Issuance of
                        Additional Partnership Interests.................... 25

ARTICLE VII  MANAGEMENT AND OPERATIONS OF BUSINESS.......................... 25
    Section 7.1         Management.......................................... 25
    Section 7.2         Certificate of Limited Partnership.................. 30
    Section 7.3         Title to Partnership Assets......................... 30
    Section 7.4         Reimbursement of the General Partner................ 30
    Section 7.5         Outside Activities of the General Partner........... 32
    Section 7.6         Transactions with Affiliates........................ 34
    Section 7.7         Indemnification..................................... 34


                                         -i-




    Section 7.8         Liability of the General Partner.................... 36
    Section 7.9         Other Matters Concerning the General Partner........ 37
    Section 7.10        Reliance by Third Parties........................... 38
    Section 7.11        Restrictions on General Partner's Authority......... 38
    Section 7.12        Loans by Third Parties.............................. 45

ARTICLE VIII  RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS.................... 46
    Section 8.1         Limitation of Liability............................. 46
    Section 8.2         Management of Business.............................. 46
    Section 8.3         Outside Activities of Limited Partners.............. 46
    Section 8.4         Return of Capital................................... 47
    Section 8.5         Rights of Limited Partners Relating to the 
                        Partnership......................................... 47
    Section 8.6         Redemption Right.................................... 48

ARTICLE IX  BOOKS, RECORDS, ACCOUNTING AND REPORTS.......................... 51
    Section 9.1         Records and Accounting.............................. 51
    Section 9.2         Fiscal Year......................................... 51
    Section 9.3         Reports............................................. 51

ARTICLE X  TAX MATTERS...................................................... 52
    Section 10.1        Preparation of Tax Returns.......................... 52
    Section 10.2        Tax Elections....................................... 52
    Section 10.3        Tax Matters Partner................................. 52
    Section 10.4        Organizational Expenses............................. 54
    Section 10.5        Withholding......................................... 54

ARTICLE XI  TRANSFERS AND WITHDRAWALS....................................... 55
    Section 11.1        Transfer............................................ 55
    Section 11.2        Transfers of Partnership Interests of General 
                        Partner............................................. 55
    Section 11.3        Limited Partners' Rights to Transfer................ 56
    Section 11.4        Substituted Limited Partners........................ 57
    Section 11.5        Assignees........................................... 58
    Section 11.6        General Provisions.................................. 58

ARTICLE XII  ADMISSION OF PARTNERS.......................................... 60
    Section 12.1        Admission of Successor General Partner.............. 60
    Section 12.2        Admission of Additional Limited Partners............ 60
    Section 12.3        Amendment of Agreement and Certificate of Limited
                        Partnership......................................... 61

ARTICLE XIII  DISSOLUTION AND LIQUIDATION................................... 61
    Section 13.1        Dissolution......................................... 61
    Section 13.2        Winding Up.......................................... 62
    Section 13.3        Compliance with Timing Requirements of Regulations.. 63
    Section 13.4        Deemed Distribution and Recontribution.............. 64
    Section 13.5        Rights of Limited Partners.......................... 64


                                         -ii-




    Section 13.6        Notice of Dissolution............................... 64
    Section 13.7        Cancellation of Certificate of Limited Partnership.. 65
    Section 13.8        Reasonable Time for Winding Up...................... 65
    Section 13.9        Waiver of Partition................................. 65
    Section 13.10       Liability of Liquidator............................. 65

ARTICLE XIV  AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS................... 65
    Section 14.1        Amendments.......................................... 65
    Section 14.2        Meetings of the Partners............................ 67

ARTICLE XV  GENERAL PROVISIONS.............................................. 68
    Section 15.1        Addresses and Notice................................ 68
    Section 15.2        Titles and Captions................................. 68
    Section 15.3        Pronouns and Plurals................................ 69
    Section 15.4        Further Action...................................... 69
    Section 15.5        Binding Effect...................................... 69
    Section 15.6        Creditors........................................... 69
    Section 15.7        Waiver.............................................. 69
    Section 15.8        Counterparts........................................ 69
    Section 15.9        Applicable Law...................................... 69
    Section 15.10       Invalidity of Provisions............................ 70
    Section 15.11       Power of Attorney................................... 70
    Section 15.12       Entire Agreement.................................... 71
    Section 15.13       No Rights as Shareholders........................... 71
    Section 15.14       Limitation to Preserve REIT Status.................. 71


                                        -iii-




                                      EXHIBIT A
                                      ---------
                                     PARTNERS AND
                                PARTNERSHIP INTERESTS

                                      EXHIBIT B
                                      ---------
                             CAPITAL ACCOUNT MAINTENANCE

                                      EXHIBIT C
                                      ---------
                               SPECIAL ALLOCATION RULES

                                      EXHIBIT D
                                      ---------
                                 NOTICE OF REDEMPTION

                                      EXHIBIT E
                                      ---------
                            VALUE OF CONTRIBUTED PROPERTY


                                         -iv-




                              FIRST AMENDED AND RESTATED
                           AGREEMENT OF LIMITED PARTNERSHIP
                                          OF
                         SL GREEN OPERATING PARTNERSHIP, L.P.

    THIS FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, dated as
of ___________, 1997, is entered into by and among SL Green Realty Corp., a
Maryland corporation, as the General Partner of and a Limited Partner in the
Partnership, and the Persons (as defined below) whose names are set forth on
Exhibit A, as attached hereto (as it may be amended from time to time).

    WHEREAS, the Partnership was formed on _____________, 1997, and, on
___________, 1997, the Partnership adopted an Agreement of Limited Partnership
(the "Prior Agreement"); and

    WHEREAS, the parties hereto will make certain capital contributions to the
Partnership; 

    NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby amend and restate the
Prior Agreement in its entirety and agree to continue the Partnership as a
limited partnership under the Delaware Revised Uniform Limited Partnership Act,
as amended from time to time, 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, 6
DEL. C. Section 17-101, ET SEQ., as it may be amended from time to time, and any
successor to such statute.

         "ADDITIONAL LIMITED PARTNER" means a Person admitted to the
Partnership as a Limited Partner pursuant to Section 12.2 hereof and who is
shown as such on the books and records of the Partnership.

         "ADJUSTED CAPITAL ACCOUNT" means the Capital Account maintained for
each Partner as of the end of each Partnership Year (i) increased by any amounts
which such Partner is obligated to restore pursuant to any provision of this
Agreement or 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) and (ii)
decreased by the items described in Regulations Sections
1.704-l(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-l(b)(2)(ii)(d)(6). 
The foregoing definition of Adjusted Capital Account is intended to comply with
the provisions of Regulations Section 1.704-l(b)(2)(ii)(d) and shall be
interpreted consistently therewith.




         "ADJUSTED CAPITAL ACCOUNT DEFICIT" means, with respect to Partner, the
deficit balance, if any, in such Partner's Adjusted Capital Account as of the
end of the relevant Partnership Year.

         "ADJUSTED PROPERTY" means any property the Carrying Value of which has
been adjusted pursuant to EXHIBIT B hereto.

         "ADJUSTMENT DATE" has the meaning set forth in Section 4.2.B hereof.

         "AFFILIATE" means, with respect to any Person, (i) any Person directly
or indirectly controlling, controlled by or under common control with such
Person, (ii) any Person owning or controlling ten percent (10%) or more of the
outstanding voting interests of such Person, (iii) any Person of which such
Person owns or controls ten percent (10%) or more of the voting interests or
(iv) any officer, director, general partner or trustee of such Person or any
Person referred to in clauses (i), (ii), and (iii) above.  For purposes of this
definition, "control," when used with respect to any Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.

         "AGREED VALUE" means (i) in the case of any Contributed Property
contributed to the Partnership as part of or in connection with the
Consolidation, the amount set forth on Exhibit E attached hereto as the Agreed
Value of such Property; (ii) in the case of any other Contributed Property, the
704(c) Value of such property as of the time of its contribution to the
Partnership, reduced by any liabilities either assumed by the Partnership upon
such contribution or to which such property is subject when contributed; and
(iii) in the case of any property distributed to a Partner by the Partnership,
the Partnership's Carrying Value of such property at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner upon
such distribution or to which such property is subject at the time of
distribution as determined under Section 752 of the Code and the Regulations
thereunder.

         "AGREEMENT" means this First Amended and Restated Agreement of Limited
Partnership, as it may be amended, supplemented or restated from time to time.

         "ARTICLES OF INCORPORATION" means the Articles of Incorporation or
other organizational document governing the General Partner, as amended or
restated from time to time.

         "ASSIGNEE" means a Person to whom one or more Partnership 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:


                                          2




         (a)  all cash revenues and funds received by the Partnership from
whatever source (excluding the proceeds of any Capital Contribution) plus the
amount of any reduction (including, without limitation, a reduction resulting
because the General Partner determines such amounts are no longer necessary) in
reserves of the Partnership, which reserves are referred to in clause (b)(iv)
below;

         (b)  less the sum of the following (except to the extent made with the
proceeds of any Capital Contribution):

              (i)    all interest, principal and other debt payments made
during such period by the Partnership,

              (ii)   all cash expenditures (including capital expenditures)
made by the Partnership during such period,

              (iii)  investments in any entity (including loans made thereto)
to the extent that such investments are permitted under this Agreement and are
not otherwise described in clauses (b)(i) or (ii), and

              (iv)   the amount of any increase in reserves established during
such period which the General Partner determines is necessary or appropriate in
its sole and absolute discretion.

Notwithstanding the foregoing, Available Cash shall not include any cash
received or reductions in reserves, or take into account any disbursements made
or reserves established, after commencement of the dissolution and liquidation
of the Partnership.

         "BOOK-TAX DISPARITIES" means, with respect to any item of Contributed
Property or Adjusted Property, as of the date of any determination, the
difference between the Carrying Value of such Contributed Property or Adjusted
Property and the adjusted basis thereof for federal income tax purposes as of
such date.  A Partner's share of the Partnership's Book-Tax Disparities in all
of its Contributed Property and Adjusted Property will be reflected by the
difference between such Partner's Capital Account balance as maintained pursuant
to EXHIBIT B hereto and the hypothetical balance of such Partner's Capital
Account computed as if it had been maintained, with respect to each such
Contributed Property or Adjusted Property, strictly in accordance with federal
income tax accounting principles.

         "BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in New York, New York are authorized or required by law
to close.

         "CAPITAL ACCOUNT" means the Capital Account maintained for a Partner
pursuant to EXHIBIT B hereto.


                                          3




         "CAPITAL CONTRIBUTION" means, with respect to any Partner, any cash,
cash equivalents or the Agreed Value of Contributed Property which such Partner
contributes or is deemed to contribute to the Partnership pursuant to Section
4.1 or 4.2 hereof.

         "CARRYING VALUE" means (i) with respect to a Contributed Property or
Adjusted Property, the 704(c) Value of such property reduced (but not below
zero) by all Depreciation with respect to such Contributed Property or Adjusted
Property, as the case may be, charged to the Partners' Capital Accounts and (ii)
with respect to any other Partnership property, the adjusted basis of such
property for federal income tax purposes, all as of the time of determination. 
The Carrying Value of any property shall be adjusted from time to time in
accordance with EXHIBIT B hereto, and to reflect changes, additions or other
adjustments to the Carrying Value for dispositions and acquisitions of
Partnership properties, as deemed appropriate by the General Partner.

         "CASH AMOUNT" means an amount of cash  equal to the Value on the
Valuation Date of the Shares Amount.

         "CERTIFICATE" means the Certificate of Limited Partnership relating to
the Partnership filed in the office of the Delaware Secretary of State, as
amended from time to time in accordance with the terms hereof and the Act.

         "CHARTER DOCUMENTS" has the meaning set forth in Section 7.11.D
hereof.

         "CLASS A" has the meaning set forth in Section 5.1.C hereof.

         "CLASS A SHARE" has the meaning set forth in Section 5.1.C hereof.

         "CLASS A UNIT" means any Partnership Unit that is not specifically
designated by the General Partner as being of another specified class of
Partnership Units.

         "CLASS B" has the meaning set forth in Section 5.1.C hereof.

         "CLASS B SHARE" has the meaning set forth in Section 5.1.C hereof.

         "CLASS B UNIT" means a Partnership Unit that is specifically
designated by the General Partner as being a Class B Unit.

         "CODE" means the Internal Revenue Code of 1986, as amended and in
effect from time to time, 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.

         "CONSENT" means the consent or approval of a proposed action by a
Partner given in accordance with Section 14.2 hereof.


                                          4




         "CONSENT OF CERTAIN LIMITED PARTNERS" means Consent of the holders of
75% in the aggregate of the 673 First Avenue Units and the 470 Park Avenue South
Units, collectively considered as one group.

         "CONSENT OF THE OUTSIDE LIMITED PARTNERS" means the Consent of Limited
Partners (excluding for this purpose any Limited Partnership Interests held by
the General Partner, any Person of which the General Partner owns or controls
more than fifty percent (50%) of the voting interests and any Person owning or
controlling, directly or indirectly, more than fifty percent (50%) of the
outstanding voting interests of the General Partner) holding Percentage
Interests that are greater than fifty percent (50%) of the aggregate Percentage
Interest of all Limited Partners who are not excluded for the purposes hereof.

         "CONSOLIDATION" means the transactions whereby the Partnership will
acquire interests in certain office properties located in midtown Manhattan and
certain property management and construction businesses, which provide services
to those properties and to other properties in the New York metropolitan area,
in exchange for Partnership Units upon completion of an initial public offering
by S.L. Green Realty Corporation.

         "CONSOLIDATION TRANSACTION" has the meaning set forth in Section
7.11.C.(5) hereof.

         "CONTRIBUTED PROPERTY" means each property or other asset contributed
to the Partnership, in such form as may be permitted by the Act, but excluding
cash contributed or deemed contributed to the Partnership.  Once the Carrying
Value of a Contributed Property is adjusted pursuant to EXHIBIT B hereto, such
property shall no longer constitute a Contributed Property for purposes of
EXHIBIT B hereto, but shall be deemed an Adjusted Property for such purposes.

         "CONVERSION FACTOR" means 1.0; provided that in the event that the
General Partner Entity (i) declares or pays a dividend on its outstanding Shares
in Shares or makes a distribution to all holders of its outstanding Shares in
Shares, (ii) subdivides its outstanding Shares or (iii) combines its outstanding
Shares into a smaller number of Shares, the Conversion Factor shall be adjusted
by multiplying the Conversion Factor by a fraction, the numerator of which shall
be the number of Shares issued and outstanding on the record date for such
dividend, distribution, subdivision or combination (assuming for such purposes
that such dividend, distribution, subdivision or combination has occurred as of
such time) and the denominator of which shall be the actual number of Shares
(determined without the above assumption) issued and outstanding on the record
date for such dividend, distribution, subdivision or combination; and PROVIDED,
FURTHER that in the event that an entity shall cease to be the General Partner
Entity (the "Predecessor Entity") and another entity shall become the General
Partner Entity (the "Successor Entity"), the Conversion Factor shall be adjusted
by multiplying the Conversion Factor by a fraction, the numerator of which is
the Value of one share of the Predecessor Entity, determined as of the time
immediately prior to when the Successor Entity becomes the General Partner
Entity, and the denominator of which is the Value of one Share of the Successor
Entity 


                                          5




determined as of that same date.  (For purposes of the second proviso in the
preceding sentence, in the event that any shareholders of the Predecessor Entity
will receive consideration in connection with the transaction in which the
Successor Entity becomes the General Partner Entity, the numerator in the
fraction described above for determining the adjustment to the Conversion Factor
(that is, the Value of one Share of the Predecessor Entity) shall be the sum of
the greatest amount of cash and the fair market value of any securities and
other consideration that the holder of one Share in the Predecessor Entity could
have received in such transaction (determined without regard to any provisions
governing fractional shares).)  Any adjustment to the Conversion Factor shall
become effective immediately after the effective date of such event retroactive
to the record date, if any, for  the event giving rise thereto; it being
intended that (x) adjustments to the Conversion Factor are to be made in order
to avoid unintended dilution or anti-dilution as a result of transactions in
which Shares are issued, redeemed or exchanged without a corresponding issuance,
redemption or exchange of Partnership Units and (y) if a Specified Redemption
Date shall fall between the record date and the effective date of any event of
the type described above, that the Conversion Factor applicable to such
redemption shall be adjusted to take into account such event.

         "CONVERTIBLE FUNDING DEBT" has the meaning set forth in Section 7.5.F
hereof.

         "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) obligations of such Person
incurred in connection with entering into a lease which, in accordance with
generally accepted accounting principles, should be capitalized.

         "DEEMED PARTNERSHIP INTEREST VALUE" means, as of any date with respect
to any class of Partnership Interests, the Deemed Value of the Partnership
Interest of such class multiplied by the applicable Partner's Percentage
Interest of such class.

         "DEEMED VALUE OF THE PARTNERSHIP INTEREST" means, as of any date with
respect to any class of Partnership Interests, (a) if the shares of common stock
(or other comparable equity interests) of the General Partner are Publicly
Traded (i) the total number of shares of capital stock (or other comparable
equity interest) of the General Partner corresponding to such class of
Partnership Interest (as provided for in Section 4.2.B hereof) issued and
outstanding as of the close of business on such date (excluding any treasury
shares) multiplied by the Value of a share of such capital stock (or other
comparable equity interest) on such date DIVIDED BY (ii) the Percentage Interest
of the General Partner in such class of Partnership Interests on such date, and
(b) otherwise, the aggregate Value of such class of Partnership Interests
determined as set forth in the fourth and fifth sentences of the definition of
Value.


                                          6




         "DEPRECIATION" means, for each fiscal year, an amount equal to the
federal income tax depreciation, amortization, or other cost recovery deduction
allowable with respect to an asset for such year, except that if the Carrying
Value of an asset differs from its adjusted basis for federal income tax
purposes at the beginning of such year or other period, Depreciation shall be an
amount which bears the same ratio to such beginning Carrying Value as the
federal income tax depreciation, amortization, or other cost recovery deduction
for such year 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 is zero, Depreciation shall be determined with
reference to such beginning Carrying Value using any reasonable method selected
by the General Partner.

         "DISTRIBUTION PERIOD" has the meaning set forth in Section 5.1.C
hereof.

         "EFFECTIVE DATE" means the date of the closing of the Consolidation.

         "EQUITY MERGER" has the meaning set forth in Section 7.11.D hereof.

         "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

         "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

         "EXCHANGED PROPERTY" has the meaning set forth in Section 7.11.C
hereof.

         "470 PARK SOUTH, L.P." means 470 Park Avenue South, L.P., a New York
limited partnership.

         "470 PARK AVENUE SOUTH PROPERTY" has the meaning set forth in Section
7.11.C hereof.

         "470 PARK AVENUE SOUTH UNITS" has the meaning set forth in Section
7.11.C hereof.

         "FUNDING DEBT" means the incurrence of any Debt by or on behalf of the
General Partner for the purpose of providing funds to the Partnership.

         "GENERAL PARTNER" means S.L. Green Realty Corporation, a Maryland
corporation, or its successors as general partner of the Partnership.

         "GENERAL PARTNER ENTITY" means the General Partner; provided, however,
that if (i) the shares of common stock (or other comparable equity interests) of
the General Partner are at any time not Publicly Traded and (ii) the shares of
common stock (or other comparable equity interests) of an entity that owns,
directly or indirectly, fifty percent (50%) or more of the shares of common
stock (or other comparable equity interests) of the General Partner are Publicly


                                          7




Traded, the term "General Partner Entity" shall refer to such entity whose
shares of common stock (or other comparable equity securities) are Publicly
Traded.  If both requirements set forth in clauses (i) and (ii) above are not
satisfied, then the term "General Partner Entity" shall mean the General
Partner.

         "GENERAL PARTNER PAYMENT" has the meaning set forth in Section 15.14
hereof.

         "GENERAL PARTNERSHIP INTEREST" means a Partnership Interest held by
the General Partner that is a general partnership interest.  A General
Partnership Interest may be expressed as a number of Partnership Units.

         "IRS" means the Internal Revenue Service, which administers the
internal revenue laws of the United States.

         "IMMEDIATE FAMILY" means, with respect to any natural Person, such
natural Person's spouse, parents, descendants, nephews, nieces, brothers, and
sisters.

         "INCAPACITY" or "INCAPACITATED" means, (i) as to any individual
Partner, death, total physical disability or entry by a court of competent
jurisdiction adjudicating such Partner incompetent to manage his or her Person
or estate, (ii) as to any corporation which is a Partner, the filing of a
certificate of dissolution, or its equivalent, for the corporation or the
revocation of its charter, (iii) as to any partnership which is a Partner, the
dissolution and commencement of winding up of the partnership, (iv) as to any
estate which is a Partner, the distribution by the fiduciary of the estate's
entire interest in the Partnership, (v) as to any trustee of a trust which 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 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) is
not vacated within ninety (90) days after the expiration of any such stay.


                                          8




         "INDEMNITEE" means (i) any Person made a party to a proceeding or
threatened with being made a party to a proceeding by reason of its status as
(A) the General Partner, (B) a Limited Partner or (C) a director or officer of
the Partnership or the General Partner and (ii) such other Persons (including
Affiliates of the General Partner, a Limited 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.

         "LIMITED PARTNER" means any Person named as a Limited Partner in
Exhibit A attached hereto, as such Exhibit may be amended and restated 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.

         "LIMITED PARTNERSHIP 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 Partnership Interest may
be expressed as a number of Partnership Units.

         "LIQUIDATING EVENT" has the meaning set forth in Section 13.1 hereof.

         "LIQUIDATING TRANSACTION" has the meaning set forth in Section 7.11.C
hereof.

         "LIQUIDATOR" has the meaning set forth in Section 13.2.A hereof.

         "NET INCOME" means, for any taxable period, the excess, if any, of the
Partnership's items of income and gain for such taxable period over the
Partnership's items of loss and deduction for such taxable period.  The items
included in the calculation of Net Income shall be determined in accordance with
EXHIBIT B hereto.  If an item of income, gain, loss or deduction that has been
included in the initial computation of Net Income is subjected to the special
allocation rules in EXHIBIT C hereto, Net Income or the resulting Net Loss,
whichever the case may be, shall be recomputed without regard to such item.

         "NET LOSS" means, for any taxable period, the excess, if any, of the
Partnership's items of loss and deduction for such taxable period over the
Partnership's items of income and gain for such taxable period.  The items
included in the calculation of Net Loss shall be determined in accordance with
EXHIBIT B.  If an item of income, gain, loss or deduction that has been included
in the initial computation of Net Loss is subjected to the special allocation
rules in EXHIBIT C hereto, Net Loss or the resulting Net Income, whichever the
case may be, shall be recomputed without regard to such item.

         "NEW SECURITIES" means (i) any rights, options, warrants or
convertible or exchangeable securities having the right to subscribe for or
purchase shares of capital stock (or other comparable equity interest) of the
General Partner, excluding grants under any Stock 


                                          9




Option Plan, or (ii) any Debt issued by the General Partner that provides any of
the rights described in clause (i).

         "NONRECOURSE BUILT-IN GAIN" means, with respect to any Contributed
Properties or Adjusted Properties that are subject to a mortgage or negative
pledge securing a Nonrecourse Liability, the amount of any taxable gain that
would be allocated to the Partners pursuant to Section 2.B of EXHIBIT C hereto
if such properties were disposed of in a taxable transaction in full
satisfaction of such liabilities and for no other consideration.

         "NONRECOURSE DEDUCTIONS" has the meaning set forth in Regulations
Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a
Partnership 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 a Notice of Redemption substantially in
the form of EXHIBIT D attached hereto.

         "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).

         "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 Partnership 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
continued upon the terms and conditions set forth in this Agreement, and any
successor thereto.

         "PARTNERSHIP INTEREST" means a Limited Partnership Interest or the
General Partnership Interest 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 Units.


                                          10




         "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 Partnership Year
shall be determined in accordance with the rules of Regulations Section
1.704-2(d).

         "PARTNERSHIP RECORD DATE" means the record date established by the
General Partner either (i) for the distribution of Available Cash pursuant to
Section 5.1 hereof, which record date shall be the same as the record date
established by the General Partner Entity for a distribution to its shareholders
of some or all of its portion of such distribution received by the General
Partner if the shares of common stock (or comparable equity interests) of the
General Partner Entity are Publicly Traded, or (ii) if applicable, for
determining the Partners entitled to vote on or consent to any proposed action
for which the consent or approval of the Partners is sought pursuant to Section
14.2 hereof.

         "PARTNERSHIP UNIT" means a fractional, undivided share of the
Partnership Interests of all Partners issued pursuant to, Sections 4.1 and 4.2
hereof, and includes Class A Units, Class B Units and any other classes or
series of Partnership Units established after the date hereof.  The number of
Partnership Units outstanding and the Percentage Interests in the Partnership
represented by such Partnership Units are set forth in EXHIBIT A hereto, as such
Exhibit may be amended and restated from time to time.  The ownership of
Partnership Units may be evidenced by a certificate