AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1997
REGISTRATION NO. 333-29329
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
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)
------------------------
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)
------------------------
Copies to:
MICHAEL F. TAYLOR, 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 10166
(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(3)
Common Stock, $.01 par value per
share......................... 11,615,000 shares $20.00 $232,300,000 $70,393.94
(1) Includes 1,515,000 shares that are issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid.
------------------------
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.
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CROSS REFERENCE SHEET
ITEM NUMBER AND CAPTION LOCATION OR HEADING IN PROSPECTUS
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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; Material 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
SUBJECT TO COMPLETION, DATED AUGUST 14, 1997
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.
[LOGO]
PROSPECTUS
10,100,000 SHARES
SL GREEN REALTY CORP.
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 affiliates ("SL Green"). For more than 17
years, SL Green has acquired and managed Class B office properties in Manhattan.
Upon completion of the Offering, the Company will own or have contracted to
acquire interests in nine Class B office properties encompassing approximately
2.2 million rentable square feet located in midtown Manhattan (the
"Properties"). In addition, the Company will manage 29 office properties
(including the Properties) encompassing approximately 6.4 million rentable
square feet. Interests of Stephen L. Green in certain properties deemed
inconsistent with the Company's investment objectives will not be acquired by
the Company. See "The Properties-- Assets Not Being Transferred to the Company."
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 Company is selling all of the shares of Common Stock, par value $.01 per
share, of the Company ("Common Stock") offered by this Prospectus. Upon
completion of the Offering, approximately 21% 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.
There is currently no public market for the Common Stock. The Company
anticipates 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. The Common Stock
has been approved for listing, 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 and the fact that SL Green
and certain related persons will receive substantial economic benefits
(including the issuance to officers, directors and affiliates of the
Company of equity interests in the Company valued at approximately $54.7
million, the use of $20 million of Offering proceeds to repay a portion of
a loan made to a company owned by Stephen L. Green and of $6.4 million of
Offering proceeds to purchase the interests of third party partners in the
Properties), 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 including those related
to sales and refinancings of Properties.
- The Company's estimated initial annual distributions represent 106% of its
estimated initial cash available for distribution, resulting in the
likelihood that the Company will be required to fund distributions from
working capital or borrowings or reduce such distributions.
- 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.
- 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, including payment to Lehman of a
financial advisory fee equal to 0.75% of the gross proceeds of the
Offering and the repayment to a Lehman affiliate of an approximately $40
million loan made prior to the Offering.
- 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.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES 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
$4,150,000.
(3) The Company has granted the Underwriters an option to purchase up to an
aggregate of 1,515,000 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
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEGG MASON WOOD WALKER
INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
, 1997
[MAP OF MIDTOWN MANHATTAN SHOWING PROPERTY LOCATIONS
WITH FOOTNOTE IDENTIFYING ACQUISITION PROPERTIES]
[PHOTOGRAPH OF BAR BUILDING LOBBY WITH CAPTION NOTING THE BUILDING]
[PHOTOGRAPH OF 1140 AVENUE OF THE AMERICAS WITH CAPTION NOTING THE ADDRESS
AND FOOTNOTE IDENTIFYING THE PROPERTY AS AN ACQUISITION PROPERTY]
[PHOTOGRAPH OF 470 PARK AVENUE SOUTH WITH CAPTION NOTING THE ADDRESS]
[PHOTOGRAPH OF 673 FIRST AVENUE WITH CAPTION NOTING THE ADDRESS]
[PHOTOGRAPH OF 1372 BROADWAY WITH CAPTION NOTING THE ADDRESS
AND FOOTNOTE IDENTIFYING THE PROPERTY AS AN ACQUISITION PROPERTY]
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
Conflicts of Interest................. 4
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
The Company's Dependence on the
Midtown Markets Due to Limited
Geographic Diversification Could
Adversely Affect the Company's
Financial Performance............... 13
There is No Assurance that the Company
is Paying Fair Market Value for the
Properties.......................... 13
Conflicts of Interest in the Formation
Transactions and the Business of the
Company Could Adversely Affect the
Company............................. 14
A sale of, or reduction in mortgage
indebtedness on, any of the
Properties will have different
effects on holders of Units than
on stockholders................... 14
The Company may pursue less vigorous
enforcement of terms of
contribution and other agreements
because of conflicts of interest
with certain officers............. 14
Conflicts of interest will exist in
future dealings with affiliates of
the Company....................... 14
Outside interests of officers and
directors could conflict with the
Company's interests............... 15
Estimated Initial Cash Available for
Distribution Will Not be Sufficient
to Make Distributions at Expected
Levels.............................. 15
The Company May Not Achieve Expected
Returns on Recently Acquired
Properties and Property
Acquisitions........................ 15
Limitations on Ability to Sell or
Reduce the Mortgage Indebtedness on
Certain Properties Could Adversely
Affect the Value of the Common
Stock............................... 16
The Managing Underwriter Will Receive
Material Benefits................... 17
The Ability of Stockholders to Effect
a Change of Control of the Company
is Limited.......................... 17
Stock ownership limit in the Charter
could inhibit changes in
control........................... 17
Potential effects of staggered board
could inhibit changes in
control........................... 18
Future issuances of Common Stock
could dilute existing
stockholders' interests........... 18
Issuances of preferred stock could
inhibit changes in control........ 18
Certain provisions of Maryland law
could inhibit changes in
control........................... 18
Dependence on Smaller and Growth-
Oriented Businesses to Rent Class B
Office Space Could Adversely Affect
the Company's Cash Flow............. 18
The Company's Performance and Value
are Subject to Risks Associated with
the Real Estate Industry............ 18
The Company's ability to make
distributions is dependent upon
the ability of its office
properties to generate income in
excess of operating expenses...... 18
Tenant defaults and bankruptcies
could adversely affect the
Company's cash flow............... 19
Lease expirations could adversely
affect the Company's cash flow.... 19
Illiquidity of real estate
investments could adversely affect
the Company's financial
condition......................... 19
Operating costs could adversely
affect the Company's cash flow.... 19
Investments in mortgage loans could
cause expenses which could
adversely affect the Company's
financial condition............... 20
Joint venture investments could be
adversely affected by the
Company's lack of sole
decision-making authority and
reliance upon a co-venturer's
financial condition............... 20
The expiration of net leases could
adversely affect the Company's
financial condition............... 20
The Company's financial condition
could be adversely affected due to
its reliance on major tenants..... 20
i
The Company's Use of Debt Financing,
Increases in Interest Rates,
Financial Covenants and Absence of
Limitation on Debt Could Adversely
Affect the Company.................. 21
The required repayment of debt or
interest thereon could adversely
affect the Company's financial
condition......................... 21
Rising interest rates could
adversely affect the Company's
cash flow......................... 21
Credit facility requirements could
adversely affect the Company's
ability to make expected
distributions..................... 21
The Company's policy of no
limitation on debt could adversely
affect the Company's cash flow.... 22
Purchasers of Common Stock in the
Offering Will Experience Immediate
and Substantial Book Value
Dilution............................ 22
Failure to Qualify as a REIT Would
Cause the Company to be Taxed as a
Corporation......................... 22
The Company will be taxed as a
corporation if it fails to qualify
as a REIT......................... 22
To qualify as a REIT the Company
must maintain minimum distribution
requirements...................... 23
Other tax liabilities could
adversely affect the Company's
cash flow......................... 23
Lack of Operating History and
Inexperience of Management in
Operating a REIT Could Affect REIT
Qualification....................... 23
Competition in its Marketplace Could
Have an Adverse Impact on the
Company's Results of Operations..... 24
The Financial Condition of Third-Party
Property Management, Leasing and
Construction Businesses Could
Adversely Affect the Company's
Financial Condition................. 24
Liability for Environmental Matters
Could Adversely Affect the Company's
Financial Condition................. 25
Other Risks of Ownership of Common
Stock Could Adversely Affect the
Trading Price of the Common Stock... 25
Absence of prior public market for
Common Stock could adversely
affect the Common Stock price..... 25
Availability of shares for future
sale could adversely affect the
Common Stock price................ 25
Changes in market conditions could
adversely affect the Common Stock
price............................. 26
Growth potential and cash
distributions could adversely
affect the Common Stock price..... 26
Changes in market interest rates
could adversely affect the Common
Stock price....................... 26
Unrelated events could adversely
affect the Common Stock price..... 26
The Company's dependence on external
sources of capital could adversely
affect the Common Stock price..... 26
The officers, directors and
significant stockholders of the
Company will have substantial
influence......................... 27
The Company Relies on Key Personnel
Whose Continued Service is Not
Guaranteed.......................... 27
The SL Green Predecessor Has Had
Historical Accounting Losses and Has
a Deficit in Owners' Equity; The
Company May Experience Future
Losses.............................. 27
Stockholder Approval is Not Required
to Change Policies of the Company... 27
Uninsured Losses Could Adversely
Affect the Company's Cash Flow...... 28
The Costs of Compliance with the
Americans with Disabilities Act and
Similar Laws Could Adversely Affect
the Company's Cash Flow............. 28
Americans with Disabilities Act..... 28
Other Laws.......................... 28
THE COMPANY........................... 29
BUSINESS AND GROWTH STRATEGIES........ 31
The Market Opportunity................ 31
Growth Strategies..................... 32
USE OF PROCEEDS....................... 37
DISTRIBUTIONS......................... 39
CAPITALIZATION........................ 43
DILUTION.............................. 44
SELECTED FINANCIAL INFORMATION........ 46
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 48
Overview.............................. 48
Results of Operations................. 48
Pro Forma Operating Results........... 52
ii
Liquidity and Capital Resources....... 53
Cash Flows............................ 54
Funds from Operations................. 55
Inflation............................. 55
MARKET OVERVIEW....................... 56
New York Economy...................... 56
Manhattan Office Market............... 58
THE PROPERTIES........................ 64
The Portfolio......................... 64
673 First Avenue...................... 70
470 Park Avenue South................. 73
36 West 44th Street (The Bar
Building)........................... 75
70 West 36th Street................... 77
1414 Avenue of the Americas........... 79
29 West 35th Street................... 81
Acquisition Properties................ 83
The Option Properties................. 88
General Terms of Leases in the Midtown
Markets............................. 90
Mortgage Indebtedness................. 90
Credit Facility....................... 91
Environmental Matters................. 91
Property Management and Leasing
Services............................ 92
Construction Services................. 92
Employees............................. 93
Transfer of Properties................ 93
Assets Not Being Transferred to the
Company............................. 93
Competition........................... 94
Regulation............................ 94
Insurance............................. 95
Legal Proceedings..................... 95
MANAGEMENT............................ 96
Directors, Director Nominees and
Executive Officers.................. 96
Committees of the Board of
Directors........................... 98
Compensation of Directors............. 99
Executive Compensation................ 99
Employment and Noncompetition
Agreements.......................... 100
Stock Option and Incentive Plan....... 101
Incentive Compensation Plan........... 101
401(k) Plan........................... 102
Limitation of Liability and
Indemnification..................... 102
STRUCTURE AND FORMATION OF THE
COMPANY............................. 104
The Operating Entities of the
Company............................. 104
Formation Transactions................ 105
Consequences of the Offering and the
Formation Transactions.............. 106
Benefits to Related Parties........... 107
POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES.......................... 108
Investment Policies................... 108
Disposition Policies.................. 109
Financing Policies.................... 109
Conflict of Interest Policies......... 110
Interested Director and Officer
Transactions........................ 111
Business Opportunities................ 111
Policies with Respect to Other
Activities.......................... 111
CERTAIN RELATIONSHIPS AND
TRANSACTIONS........................ 112
Formation Transactions................ 112
Cleaning Services..................... 112
Security Services..................... 112
Related Party Transactions............ 112
PARTNERSHIP AGREEMENT................. 112
Operational Matters................... 112
Liability and Indemnification......... 116
Transfers of Interests................ 116
Fiduciary Duty........................ 117
PRINCIPAL STOCKHOLDERS................ 118
CAPITAL STOCK......................... 119
General............................... 119
Common Stock.......................... 119
Preferred Stock....................... 119
Excess Stock.......................... 120
Power to Issue Additional Shares of
Common Stock and Preferred Stock.... 120
Restrictions on Transfer.............. 120
Transfer Agent and Registrar.......... 122
CERTAIN PROVISIONS OF MARYLAND LAW AND
THE COMPANY'S CHARTER AND BYLAWS.... 123
Classification and Removal of Board of
Directors; Other Provisions......... 123
Business Combination Statute.......... 124
Control Share Acquisition Statute..... 124
Amendments to the Charter............. 125
Advance Notice of Director Nominations
and New Business.................... 125
Anti-takeover Effect of Certain
Provisions of Maryland Law and of
the Charter and Bylaws.............. 125
Rights to Purchase Securities and
Other Property...................... 125
SHARES AVAILABLE FOR FUTURE SALE...... 126
General............................... 126
Registration Rights................... 126
MATERIAL FEDERAL INCOME TAX
CONSEQUENCES........................ 127
iii
General............................... 127
Taxation of the Company............... 127
Taxation of Stockholders.............. 133
Other Tax Considerations.............. 136
State and Local Tax................... 137
UNDERWRITING.......................... 138
EXPERTS............................... 140
LEGAL MATTERS......................... 141
ADDITIONAL INFORMATION................ 141
GLOSSARY OF SELECTED TERMS............ 142
INDEX TO FINANCIAL STATEMENTS......... F-1
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.
iv
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 nine
Class B office properties encompassing approximately 2.2 million rentable square
feet located in midtown Manhattan (the "Properties") and will manage 29 office
properties (including the Properties) encompassing approximately 6.4 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 three office
Properties encompassing approximately 1.0 million rentable square feet will be
acquired upon completion of the Offering (the "Acquisition Properties"). As of
June 30, 1997, the weighted average occupancy rate of the Core Portfolio was 97%
and of the Acquisition Properties was 89%. Also, upon completion of the
Offering, the Company will own options to acquire an interest in an additional
Class B office property in midtown Manhattan containing approximately 250,000
rentable square feet and an additional Class B office property in downtown
Manhattan containing approximately 800,000 rentable square feet of office space.
See "The Properties--The Option Properties." Interests of Stephen L. Green in
certain properties deemed inconsistent with the Company's investment objectives
will not be acquired by the Company. See "The Properties--Assets Not Being
Transferred to the Company." 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. 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 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), the areas immediately south and north of Houston Street ("Soho" and
"Noho", respectively), Chelsea (where one Property is located), and the area
surrounding the United Nations (where one Property is located). Businesses
significantly concentrated in
1
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 Cowles Business Media, Kallir, Philips, Ross Inc., NationsBank, New York
Hospital, Newbridge Communications, Ross Stores and UNICEF.
As described herein, current developments in the New York metropolitan
economy provide an attractive environment for owning, operating and acquiring
Class B office properties in Manhattan. See "Business and Growth Strategies--The
Market Opportunity" and "Risk Factors--The Company's Dependence on the Midtown
Markets Due to Limited Geographic Diversification Could Adversely Affect The
Company's Financial Performance" below. The Company will seek to capitalize on
growth opportunities in its marketplace 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 Manhattan
office space due to its local market expertise, long-term relationships with
brokers and property owners attributable to its property management and leasing
businesses, 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--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 which, upon completion of the
Offering, will have a portfolio of approximately 6.4 million rentable 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, six senior executives that average more than seven 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
21% of the equity of the Company, on a fully diluted basis, will be beneficially
owned by officers and directors of the Company and certain other affiliated
parties.
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 (as defined herein), 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, 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;
2
- 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
$54.7 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;
- the Company's estimated initial annual distributions represent 106% of its
estimated initial cash available for distribution, resulting in the
likelihood that the Company will be required to fund distributions from
working capital or borrowings or reduce such distributions.
- integration of 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,
which could benefit certain participants in the Formation Transactions
(including Stephen L. Green, members of his immediate family and
unaffiliated partners in the Property-owning entities), and the
possibility that future property acquisitions in which the Company uses
partnership interests as consideration will include comparable
limitations;
- Lehman and certain affiliates will receive material benefits from the
Offering and the Formation Transactions in addition to underwriting
discounts and commissions, including payment to Lehman of a financial
advisory fee equal to 0.75% of the gross proceeds of the Offering and the
repayment to a Lehman affiliate of an approximately $40 million loan made
to the Company prior to the Offering;
- 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;
- dependence on smaller and growth-oriented businesses to rent Class B
office space;
- office real estate investment risks, 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;
- the inability to refinance outstanding indebtedness upon maturity or to
refinance such indebtedness on favorable terms, the risk of rising
interest rates in connection with variable rate debt and the absence of
limitations in the Company's organizational documents on the incurrence of
debt;
- immediate and substantial dilution of $6.94 in the net tangible book value
per share of the shares of Common Stock purchased in the Offering; and
3
- taxation of the Company as a corporation if it fails to qualify as a REIT
for Federal income tax purposes, the Company's liability for certain
Federal, state and local income taxes in such event and the resulting
decrease in cash available for distribution.
CONFLICTS OF INTEREST
Following the formation of the Operating Partnership and the completion of
the Offering, there will be conflicts of interest, with respect to certain
transactions, between the holders of Units (including Mr. Green) and the
stockholders of the Company. In particular, the consummation of certain business
combinations, the sale of any properties or a reduction of indebtedness could
have adverse tax consequences to holders of Units which would make such
transactions less desirable to such holders. The Company has adopted certain
policies that are designed to eliminate or minimize certain potential conflicts
of interest. Subject to the Lock-out Provisions, the limited partners of the
Operating Partnership have agreed that in the event of a conflict in the
fiduciary duties owed by the Company to its stockholders and by the General
Partner to such limited partners, the General Partner will fulfill its fiduciary
duties to such limited partnership by acting in the best interests of the
Company's stockholders. See "Policies with Respect to Certain
Activities--Conflict of Interest Policies" and "Partnership Agreement."
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.
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 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.
- 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 11.3% as of June
30, 1997 from its 1990s high of 17.3% in 1992 and asking rental rates for
Class B office space in the Midtown Markets increased to $24.44 per square
foot as of June 30, 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. However, concentration of the Properties in these markets
increases the risk of the Company being adversely affected by any downturn
in the New York metropolitan economy. See "Risk Factors--The Company's
Dependence on the Midtown Markets Due to Limited Geographic
Diversification Could Adversely Affect the Company's Financial
Performance."
4
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 flow and value by
renovating and repositioning properties to be among the best in their
submarkets.
- 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. See "Business and Growth
Strategies--Growth Strategies--Integrated Leasing and Property
Management." In addition, SL Green's commitment to tenant service and
satisfaction is evidenced by the renewal of approximately 80% of the
expiring rentable square footage (78% 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, 1994 through June
30, 1997.
5
THE PROPERTIES
THE PORTFOLIO
GENERAL. Upon the completion of the Offering, the Company will own or have
contracted to acquire interests in nine Class B office Properties located in
midtown Manhattan which contain approximately 2.2 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
three office properties encompassing approximately 1.0 million 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 options
to acquire an interest in an office building containing approximately 250,000
rentable square feet in midtown Manhattan and a property containing
approximately 800,000 rentable square feet of office space in downtown
Manhattan. See "The Properties--The Option Properties."
The following table sets forth certain information with respect to each of
the Properties as of June 30, 1997:
PERCENTAGE
OF PERCENTAGE
APPROXIMATE PORTFOLIO OF
YEAR RENTABLE RENTABLE PORTFOLIO
BUILT/ SQUARE SQUARE PERCENT ANNUALIZED ANNUALIZED
RENOVATED SUBMARKET FEET FEET LEASED RENT(1) RENT
---------- ---------------- ------------ ------------- ----------- ----------- -------------
CORE PORTFOLIO
- ------------------------------
673 First Avenue.............. 1928/1990 Grand Central 422,000 19.0% 100% $10,837,480 22.1%
South
470 Park Avenue South(4)...... 1912/1994 Park Avenue 260,000(4) 11.7 99 5,853,720 12.0
South/Flatiron
Bar Building (5).............. 1922/1985 Rockefeller 165,000(5) 7.4 89(5) 4,139,704 8.5
Center
70 W. 36th Street............. 1923/1994 Garment 151,000 6.8 98 2,795,986 5.7
1414 Avenue of the Americas... 1923/1990 Rockefeller 111,000 5.0 98 3,370,001 6.9
Center
29 W. 35th Street............. 1911/1985 Garment 78,000 3.5 92 1,393,135 2.8
------------ ----- --- ----------- -----
1,187,000 53.5 97 28,390,028 58.0
ACQUISITION PROPERTIES
- ------------------------------
1372 Broadway................. 1914/1985 Garment 508,000 22.9 84 9,631,140 19.7
1140 Avenue of the Americas... 1926/1951 Rockfeller 191,000 8.6 98 4,917,520 10.0
Center
50 W. 23rd Street............. 1892/1992 Chelsea 333,000 15.0 91 5,995,608 12.3
------------ ----- --- ----------- -----
Total/Weighted 2,219,000(6) 100.0% 94% $48,934,296 100.0%
Average..................... ------------ ----- --- ----------- -----
------------ ----- --- ----------- -----
ANNUAL
NET
ANNUALIZED EFFECTIVE
RENT RENT
PER PER
NUMBER LEASED LEASED
OF SQUARE SQUARE
LEASES FOOT(2) FOOT(3)
----------- ----------- -----------
CORE PORTFOLIO
- ------------------------------
673 First Avenue.............. 15 $ 25.68 $ 21.79
470 Park Avenue South(4)...... 27 22.66 19.43
Bar Building (5).............. 58 28.33 24.74
70 W. 36th Street............. 38 18.90 16.13
1414 Avenue of the Americas... 31 30.85 30.87
29 W. 35th Street............. 8 19.53 16.23
--- ----------- -----------
177 24.65 21.43
ACQUISITION PROPERTIES
- ------------------------------
1372 Broadway................. 32 22.47 21.57
1140 Avenue of the Americas... 39 26.30 24.70
50 W. 23rd Street............. 16 19.58 17.09
--- ----------- -----------
Total/Weighted 264 $ 23.58 $ 21.11
Average..................... --- ----------- -----------
--- ----------- -----------
- ------------------------
(1) As used throughout this Prospectus, Annualized Rent represents the monthly
contractual rent under existing leases as of June 30, 1997 multiplied by 12.
This amount reflects total rent before any rent abatements and includes
expense reimbursements, which may be estimated as of such date. Total rent
abatements for leases in effect as of June 30, 1997 for the 12 months ending
June 30, 1998 are approximately $815,000.
(2) Annualized Rent Per Leased Square Foot, as used throughout this Prospectus,
represents Annualized 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 (excluding "free rent" and operating expense pass-
throughs, if any) 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 (excluding "free
rent" and operating expense pass-throughs, if any) divided by the number of
months in the lease multiplied by 12, and, in the case of both (a) and (b),
minus tenant improvement costs and leasing commissions, if any, paid or
payable by SL Green and presented on a per leased square foot basis. Annual
Net Effective Rent Per Leased Square Foot includes future contractual
increases in rental payments and therefore, in certain cases, may exceed
Annualized Rent Per Leased Square Foot.
(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
July 15, 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 2,043,000 square feet of rentable office space,
146,000 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 issue the Common Stock offered hereby and will be the sole
general partner of SL Green Operating Partnership, L.P., a Delaware limited
partnership (the "Operating Partnership") and issuer of the Units. 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 Units 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. See "Partnership Agreement--Transfers of
Interests--Redemption of Units." 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 Leasing, Inc. (formerly 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. See "--Formation Transactions."
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]
- ------------------------
(1) 100% of the economic interest in all of the Properties will be owned through
the Operating Partnership.
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.
In connection with the formation of the Company, certain members of SL
Green management (Nancy A. Peck, Steven H. Klein, Benjamin P. Feldman,
Gerard Nocera and Louis A. Olsen) were issued an aggregate of 553,616
shares of Common Stock for total consideration of $3,831 in cash (the
aggregate par value amount of such stock at the time of issuance).
- 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 a company owned by Stephen L. Green up to $46 million
(the "LBHI Loan") 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
is secured by partnership interests in certain Property-owning entities
and the Treasury Securities.
- The Company will sell 10,100,000 shares of Common Stock in the Offering
and will contribute the net proceeds therefrom to the Operating
Partnership in exchange for 10,100,000 Units (which, including the
issuance of Common Stock to Victor Capital Group, L.P. ("Victor Capital")
and to the members of SL Green management referred to herein, will
represent approximately an 81.9% 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 100% of the non-voting common stock of
(representing 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 and holders 2,383,284 Units (having an
aggregate value of approximately $47.7 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% ownership interest and
the tenant representation business with respect to certain properties not
owned by the Company will be transferred to SL Green Management LLC (the
"Management LLC" and, together with the Management Corporation, the
"Management Entities"), a limited liability company which will be a wholly
owned subsidiary of the Company.
- The Operating Partnership will be granted (i) an option from Green 17
Battery LLC, a newly-formed limited liability company owned by Stephen L.
Green ("17 Battery LLC"), to acquire its interest in 17 Battery Place, a
property containing approximately 800,000 rentable square feet of office
space in downtown Manhattan for a purchase price of approximately $59
million in cash and (ii) an option from Green 110E42 Realty LLC, a
newly-formed limited liability company owned by Mr. Green ("110 Realty
LLC"), to acquire its interest in 110 East 42nd Street, an office building
containing approximately 250,000 rentable square feet in midtown Manhattan
(together with 17 Battery Place, the "Option Properties") for a purchase
price of approximately $30 million in cash. See "The Properties--The
Option Properties."
- The Operating Partnership will acquire interests in the Acquisition
Properties for an aggregate purchase price of approximately $113.0 million
(including a $1.6 million escrow account established in connection with
the acquisition of 50 West 23rd Street), to be funded with net proceeds
from the Offering and mortgage financing.
- The Operating Partnership will use approximately $82.3 million of net
proceeds from the Offering to repay mortgage debt encumbering the Core
Portfolio and the LBHI Loan (including approximately $9.4 million in
proceeds drawn under the LBHI Loan to fund purchase of the Acquisition
Properties).
- The Company will issue to Victor Capital 85,600 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.
No independent third-party appraisals, valuations or fairness opinions have
been obtained by the Company in connection with the Formation Transactions.
Accordingly, there can be no assurance that the
8
value of the Units and other consideration received in the Formation
Transactions by persons or entities contributing interests in the Core Portfolio
and the Service Corporations to the Operating Partnership is equivalent to the
fair market value of such interests.
Additional information regarding the Formation Transactions is set forth
under "Structure and Formation of the Company--Formation Transactions."
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 continuing investors (including Stephen L. Green, members of his
immediate family and unaffiliated partners in the Property-owning
entities) will receive 2,383,284 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 $47.7 million, based on the assumed initial public offering
price (representing approximately 18.1% 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 Green Realty LLC, a newly-formed limited
liability company indirectly owned by Stephen L. Green and unaffiliated
with the Company ("Green Realty LLC") and invested in Treasury Securities
pledged as collateral therefor (which, upon repayment of the LBHI Loan,
will be released for the benefit of Stephen L. Green).
- Certain members of SL Green management (Nancy A. Peck, Steven H. Klein,
Benjamin P. Feldman, Gerard Nocera and Louis A. Olsen) own an aggregate of
553,616 shares of restricted Common Stock (purchased for an aggregate of
$3,831) that initially will have a value of $11.1 million, based on the
assumed initial public offering price.
- Certain members of SL Green management (Stephen L. Green, David J.
Nettina, 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 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 and incentive plan, subject to certain vesting
requirements (50,000 of such options will be granted to each of Ms. Peck
and Messrs. Klein, Feldman, Nocera and Olsen; 75,000 of such options will
be granted to Mr. Nettina). In addition, pursuant to the terms of their
employment agreements, Messrs. Nettina and Klein will receive forgivable
loans to purchase Common Stock to be issued under such plan in the
principal amount of $300,000 and $500,000, respectively. See "Management."
- The interests in the Properties, Property-owning entities and Service
Corporations being contributed to the Operating Partnership have a
negative book value of approximately $7.2 million. As a result of the
foregoing transactions, continuing investors, members of management and
affiliates of the Company will receive benefits with an aggregate value of
$79.6 million, consisting of (i) Units with an aggregate value of $47.7
million, based on the assumed initial public offering price, (ii) $20
million in Treasury Securities, (iii) shares of restricted Common Stock of
the Company valued at $11.1 million, based on the assumed initial offering
price and (iv) forgivable loans to purchase Common Stock in the aggregate
principal amount of $800,000.
- The structure of the Formation Transactions will provide the Unit
recipients (including Stephen L. Green, members of his immediate family
and unaffiliated partners in the Property-owning entities) 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.
- A to-be-formed limited liability company owned by Stephen L. Green and his
three sons (the "Service Corporation LLC") will own all of the voting
stock of each of the Service Corporations (representing a 5% equity
interest therein).
9
- 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 Stephen L. Green,
members of his immediate family and unaffiliated partners in the
Property-owning 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."
THE OFFERING
Common Stock Offered by the Company.......... 10,100,000 shares
Common Stock Outstanding After the 10,779,216 shares(1)
Offering...................................
Common Stock and Units Outstanding After the
Offering................................... 13,162,500 shares and Units (2)
Use of Proceeds.............................. To repay mortgage indebtedness, to acquire
interests in the Properties, to pay Formation
Transaction expenses and to repay $39.6
million outstanding under the LBHI Loan.
NYSE Symbol.................................. "SLG"
- ------------------------
(1) Includes 679,216 shares of restricted Common Stock to be issued in the
Formation Transactions.
(2) Includes 2,383,284 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 1,515,000
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 stock option and incentive
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 $.35 per share and an
annual distribution of $1.40 per share (or an annual distribution rate of
approximately 7.00%, based on an assumed initial public offering price of
$20.00). See "Distributions."
The Company intends initially to distribute annually approximately 106% of
estimated cash available for distribution. The Company's estimate of cash
available for distribution for the twelve months ending June 30, 1998 is based
upon pro forma Funds from Operations (as defined below) for the 12 months ended
June 30, 1997, with certain adjustments as described in "Distributions." The
Company anticipates that approximately 30% (or $.42 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. Based on various assumptions and
factual representations made by the Company regarding the various requirements
for qualification as a REIT, in the opinion of Brown & Wood LLP, counsel for the
Company, the Company will be organized in conformity with the requirements for
qualification and taxation as a REIT under the Code and the proposed method of
operation of the Company will enable the Company to meet the requirements for
qualification and taxation as a REIT. The opinion of Brown & Wood LLP is not,
however, binding on the Internal Revenue Service (the "IRS") or any court.
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 "Material 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
"Material Federal Income Tax Consequences--Taxation of the Company--Failure to
Qualify" and "Risk Factors--Failure to Qualify as a REIT Would Cause the Company
to be Taxed as a Corporation." 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 six months ended June 30, 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
six months ended June 30, 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 June 30, 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 six months ended June 30, 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,
----------------------------------------------
SIX MONTHS ENDED JUNE 30, HISTORICAL
------------------------------------------- ----------------------------------------------
PRO FORMA PRO FORMA
1997 1997 1996 1996 1996 1995 1994
------------- ------------- ------------- ------------- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
OPERATING DATA:
Total revenue................. $ 28,936 $ 7,334 $ 4,098 $ 53,189 $ 10,182 $ 6,564 $ 6,600
------------- ------ ------------- ------------- --------- --------- ---------
Property operating expense.... 7,649 1,625 1,230 16,224 3,197 2,505 2,009
Real estate taxes............. 4,078 482 232 8,248 703 496 543
Interest...................... 2,986 713 442 5,858 1,357 1,212 1,555
Depreciation and
amortization................ 3,630 599 406 6,979 975 775 931
Marketing, general and
administration.............. 1,428 1,835 2,029 2,643 3,250 3,052 2,351
------------- ------ ------------- ------------- --------- --------- ---------
Total expenses................ 19,771 5,254 4,339 39,952 9,482 8,040 7,389
------------- ------ ------------- ------------- --------- --------- ---------
Operating income (loss)....... 9,165 2,080 (241) 13,237 700 (1,476) (789)
Equity in net income (loss) of
uncombined joint ventures... -- (564) (817) (504) (1,408) (1,914) (1,423)
------------- ------ ------------- ------------- --------- --------- ---------
Income (loss) before
extraordinary item and
minority interest........... 9,165 1,516 (1,058) 12,733 (708) (3,390) (2,212)
Minority interest............. (1,659) -- -- (2,305) -- -- --
------------- ------ ------------- ------------- --------- --------- ---------
Income (loss) before
extraordinary item.......... $ 7,506 $ 1,516 $ (1,058) $ 10,428 $ (708) $ (3,390) $ (2,212)
------------- ------ ------------- ------------- --------- --------- ---------
------------- ------ ------------- ------------- --------- --------- ---------
Income before extraordinary
item per share.............. $ 0.70 $ 0.97
------------- -------------
------------- -------------
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)
Minority interest............. -- --
------ -------------
Income (loss) before
extraordinary item.......... $ (404) $ $(2,562)
------ -------------
------ -------------
Income before extraordinary
item per share..............
AS OF JUNE 30, 1997
--------------------------
PRO FORMA HISTORICAL
----------- -------------
AS OF DECEMBER 31,
------------------------------------------------
HISTORICAL
------------------------------------------------
1996 1995 1994 1993
----------- --------- --------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA:
Commercial real estate, before accumulated
depreciation...................................... $ 246,033 $ 42,905 $ 26,284 $ 15,559 $ 15,761 $ 15,352
Total assets........................................ 259,435 48,764 30,072 16,084 15,098 16,218
Mortgages and notes payable......................... 46,733 33,646 16,610 12,700 12,699 12,699
Accrued interest payable............................ 97 109 90 2,894 12,699 1,576
Minority interest................................... 31,848 0 0 0 0 0
Owners' equity (deficit)............................ 144,215 (7,150) (8,405) (18,848) (15,520) (13,486)
OTHER DATA:
Funds from operations............................... 12,702 -- -- -- -- --
Net cash provided by (used in) operating
activities........................................ -- 1,140 272 (234) 939 --
Net cash provided by financing activities........... -- 6,575 11,960 63 178 --
Net cash (used in) investing activities............. -- (7,145) (12,375) (432) (567) --
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:
Funds from operations............................... --
Net cash provided by (used in) operating
activities........................................ --
Net cash provided by financing activities........... --
Net cash (used in) investing activities............. --
- ------------------------
(1) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ('NAREIT') in
March 1995 defines Funds from Operations as net income (loss) (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring
and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. The Company believes that Funds from Operations is helpful to
investors as a measure of the performance of an equity REIT because, along
with cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes Funds from Operations in accordance
with standards established by NAREIT which may not be comparable to Funds
from Operations reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently than the Company. 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
(determined in accordance with GAAP) as an indication of the Company's
financial performance or to cash flow from operating activities (determined
in accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including
its ability to make cash distributions. For a reconciliation of net income
and Funds from Operations, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Funds from Operations."
12
RISK FACTORS
An investment in the Common Stock involves various risks. Prospective
investors should carefully consider the following information before making a
decision to purchase Common Stock in the Offering.
THE COMPANY'S DEPENDENCE ON THE MIDTOWN MARKETS DUE TO LIMITED GEOGRAPHIC
DIVERSIFICATION COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL PERFORMANCE
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.
THERE IS NO ASSURANCE THAT THE COMPANY IS PAYING FAIR MARKET VALUE FOR THE
PROPERTIES
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 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." Prudential Securities Incorporated
will act as "qualified independent underwriter" in connection with the Offering.
See "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.
13
CONFLICTS OF INTEREST IN THE FORMATION TRANSACTIONS AND THE BUSINESS OF THE
COMPANY COULD ADVERSELY AFFECT THE COMPANY
A SALE OF, OR REDUCTION IN MORTGAGE INDEBTEDNESS ON, ANY OF THE PROPERTIES
WILL HAVE DIFFERENT EFFECTS ON HOLDERS OF UNITS THAN ON STOCKHOLDERS. Certain
holders of Units, consisting of Stephen L. Green, members of his immediate
family and unaffiliated partners in the Property-owning entities, 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 Properties. Therefore, such
holders and the Company, may have different objectives regarding the appropriate
pricing and timing of any sale of, or reduction of mortgage indebtedness on the
Properties, and regarding the appropriate characteristics of additional
properties to be considered for acquisition. Mr. Green and members of his
immediate family, 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 Could Adversely Affect the Value of the
Common Stock" below.
THE COMPANY MAY PURSUE LESS VIGOROUS ENFORCEMENT OF TERMS OF CONTRIBUTION
AND OTHER AGREEMENTS BECAUSE OF CONFLICTS OF INTEREST WITH CERTAIN
OFFICERS. Certain SL Green entities (Hippomenes Associates, LLC, 64-36 Realty
Associates, 673 First Associates, L.P., Green 6th Avenue Asociates, L.P., S.L.
Green Realty, Inc., S.L. Green Properties, Inc. and EBG Midtown South Corp.)
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, David J. Nettina, 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.
CONFLICTS OF INTEREST WILL EXIST IN 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 (First Quality
Maintenance, L.P. and Classic Security LLC) may provide cleaning and security
services to office properties, including the Company's Properties. These
entities currently provide such services at the Properties. See "Certain
Relationships and Transactions--Cleaning Services" and "--Security Services."
Although management believes, based on its knowledge of the Class B Manhattan
office market obtained over the 17 year operating history of SL Green, that the
terms and conditions of the contracts pursuant to which these services would be
provided 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."
14
OUTSIDE INTERESTS OF OFFICERS AND DIRECTORS COULD CONFLICT WITH THE
COMPANY'S INTERESTS. 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."
ESTIMATED INITIAL CASH AVAILABLE FOR DISTRIBUTION WILL NOT BE SUFFICIENT TO MAKE
DISTRIBUTIONS AT EXPECTED LEVELS
The Company's estimated initial annual distributions represent 106% of the
Company's estimated initial cash available for distribution for the twelve
months ending June 30, 1998. Accordingly, it is expected that the Company
initially will be unable to pay its estimated initial annual distribution of
$1.40 per share to stockholders out of cash available for distribution as
calculated under "Distributions" below. Under such circumstances, the Company
could be required to fund distributions from working capital (expected to
aggregate approximately $6.2 million upon completion of the Offering), draw down
under the Line of Credit, if available, to provide funds for such distribution,
or to reduce the amount of such distribution. In the event the Underwriters'
over-allotment is exercised, pending investment of the proceeds therefrom, the
Company's ability to pay such distribution out of cash available for
distribution may be further adversely affected.
THE COMPANY MAY NOT ACHIEVE EXPECTED RETURNS ON RECENTLY ACQUIRED PROPERTIES AND
PROPERTY ACQUISITIONS
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, three of the Properties
have relatively short or no operating history under management by SL Green. In
addition, despite requests for such information, the Company has been unable to
obtain historical operating data for periods prior to 1996 for the Acquisition
Properties. SL Green has had limited control over the operation of these
Properties, and such Properties may have 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 three Class B office
properties encompassing approximately 1.0 million rentable square feet. See "The
Properties--Acquisition Properties." In addition, the Company will own options
to purchase interests in two additional Class B office properties containing
approximately 800,000 rentable square feet of office space and approximately
250,000 rentable square feet of office space, respectively. See "The
Properties--The Option Properties." 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 Could Adversely Affect the Trading Price of the Common Stock--The
Company's dependence on external sources of capital could adversely affect the
Common Stock price" below.
15
To the extent any future growth of the Company is accompanied by the
issuance of additional shares of Common Stock, any such issuance could have the
effect of diluting existing stockholders' interests in the Company.
LIMITATIONS ON ABILITY TO SELL OR REDUCE THE MORTGAGE INDEBTEDNESS ON CERTAIN
PROPERTIES COULD ADVERSELY AFFECT THE VALUE OF THE COMMON STOCK
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 (including
Stephen L. Green, members of his immediate family and unaffiliated partners in
the Property-owning entities) 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 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."
16
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.
THE MANAGING UNDERWRITER WILL RECEIVE MATERIAL BENEFITS
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 $40 million made to certain affiliates of the Company prior to the
Offering and will receive an administrative fee of up to .02% in connection with
a credit facility being arranged for the Company in anticipation of the
establishment of a revolving line of credit being negotiated by the Company and
Lehman. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources,"
"The Properties--Credit Facility" and "Underwriting." Prudential Securities
Incorporated will act as "qualified independent underwriter" in connection with
the Offering. See "Underwriting."
THE ABILITY OF STOCKHOLDERS TO EFFECT A CHANGE OF CONTROL OF THE COMPANY IS
LIMITED
STOCK OWNERSHIP LIMIT IN THE CHARTER COULD INHIBIT CHANGES IN CONTROL. 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."
17
POTENTIAL EFFECTS OF STAGGERED BOARD COULD INHIBIT CHANGES IN CONTROL. 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 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 COULD DILUTE EXISTING STOCKHOLDERS'
INTERESTS. The Charter authorizes the Board of Directors to issue additional
shares of Common Stock without stockholder approval. Any such issuance could
have the effect of diluting existing stockholders' interests in the Company.
ISSUANCES OF PREFERRED STOCK COULD INHIBIT CHANGES IN CONTROL. 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.
CERTAIN PROVISIONS OF MARYLAND LAW COULD INHIBIT CHANGES IN CONTROL.
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. The Company has opted out of these provisions of the MGCL, but
the Board of Directors may elect to adopt these provisions in the future. See
"Certain Provisions of Maryland Law and the Company's Charter and ByLaws."
DEPENDENCE ON SMALLER AND GROWTH-ORIENTED BUSINESSES TO RENT CLASS B OFFICE
SPACE COULD ADVERSELY AFFECT THE COMPANY'S CASH FLOW
Many of the tenants in the Properties are smaller and growth-oriented
businesses that may not have the financial strength of larger corporate tenants.
Smaller companies generally experience a higher rate of failure than large
businesses. Growth-oriented firms may seek other office space, including Class A
space, as they develop. Dependence on these companies could create a higher risk
of tenant defaults and bankruptcies, which could adversely affect the Company's
distributable cash flow and ability to make expected distributions to
stockholders.
THE COMPANY'S PERFORMANCE AND VALUE ARE SUBJECT TO RISKS ASSOCIATED WITH THE
REAL ESTATE INDUSTRY
THE COMPANY'S ABILITY TO MAKE DISTRIBUTIONS IS DEPENDENT UPON THE ABILITY OF
ITS OFFICE PROPERTIES TO GENERATE INCOME IN EXCESS OF OPERATING EXPENSES. 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 office
properties 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
18
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 BANKRUPTCIES COULD ADVERSELY AFFECT THE COMPANY'S CASH
FLOW. 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 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.
LEASE EXPIRATIONS COULD ADVERSELY AFFECT THE COMPANY'S CASH FLOW. 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. Leases on a total
of 2.3% and 3.4% of the total leased square feet at the Properties expire during
1997 and 1998, respectively.
ILLIQUIDITY OF REAL ESTATE INVESTMENTS COULD ADVERSELY AFFECT THE COMPANY'S
FINANCIAL CONDITION. 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 COSTS COULD ADVERSELY AFFECT THE COMPANY'S CASH FLOW. 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.
19
INVESTMENTS IN MORTGAGE LOANS COULD CAUSE EXPENSES WHICH COULD ADVERSELY
AFFECT THE COMPANY'S FINANCIAL CONDITION. 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." 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.
JOINT VENTURE INVESTMENTS COULD BE ADVERSELY AFFECTED BY THE COMPANY'S LACK
OF SOLE DECISION-MAKING AUTHORITY AND RELIANCE UPON A CO-VENTURER'S FINANCIAL
CONDITION. 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.
THE EXPIRATION OF NET LEASES COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL
CONDITION. 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."
THE COMPANY'S FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED DUE TO ITS
RELIANCE ON MAJOR TENANTS. On a pro forma basis (giving effect to signed leases
in effect as of June 30, 1997) during the twelve months ended June 30, 1997,
four tenants (Kallir, Philips, Ross Inc., a subsidiary of The Omnicom Group
Ltd., New York
20
Hospital, Gibbs & Cox and Newbridge Communications) each accounted for more than
3% of the Company's pro forma total annualized rental revenues and 12 tenants
collectively accounted for approximately 34.1% of the Company's pro forma total
annualized 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.
THE COMPANY'S USE OF DEBT FINANCING, INCREASES IN INTEREST RATES, FINANCIAL
COVENANTS AND ABSENCE OF LIMITATION ON DEBT COULD ADVERSELY AFFECT THE COMPANY
THE REQUIRED REPAYMENT OF DEBT OR INTEREST THEREON COULD ADVERSELY AFFECT
THE COMPANY'S FINANCIAL CONDITION. 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.
RISING INTEREST RATES COULD ADVERSELY AFFECT THE COMPANY'S CASH
FLOW. 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 COULD ADVERSELY AFFECT THE COMPANY'S ABILITY TO
MAKE EXPECTED DISTRIBUTIONS. Subject to negotiation of mutually satisfactory
covenants and other terms, LBHI has agreed to provide the Company with a $75
million 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 final terms thereof. While none of the
Company's Properties are currently subject to cross-default or
cross-collateralization provisions, there can be no assurance that the Credit
Facility or other future forms of financing will not contain such provisions.
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
21
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--Credit
Facility."
THE COMPANY'S POLICY OF NO LIMITATION ON DEBT COULD ADVERSELY AFFECT THE
COMPANY'S CASH FLOW. Upon completion of the Offering and the Formation
Transactions, the debt to market capitalization ratio ("Debt Ratio") of the
Company will be approximately 15.0%. 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 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.
PURCHASERS OF COMMON STOCK IN THE OFFERING WILL EXPERIENCE IMMEDIATE AND
SUBSTANTIAL
BOOK VALUE 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 $6.94 in the net tangible book
value of the Common Stock from the assumed initial public offering price. See
"Dilution."
FAILURE TO QUALIFY AS A REIT WOULD CAUSE THE COMPANY TO BE TAXED AS A
CORPORATION
THE COMPANY WILL BE TAXED AS A CORPORATION IF IT FAILS 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 "Material Federal Income Tax
Consequences--Taxation of the Company--Failure to Qualify."
22
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
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 "Material Federal Income Tax Consequences."
TO QUALIFY AS A REIT THE COMPANY MUST MAINTAIN 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 "Material 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 COULD ADVERSELY AFFECT THE COMPANY'S CASH FLOW. 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
"Material Federal Income Tax Consequences--Other Tax Considerations--Service
Corporations."
LACK OF OPERATING HISTORY AND INEXPERIENCE OF MANAGEMENT IN OPERATING A REIT
COULD
AFFECT REIT QUALIFICATION
The Company has been recently organized and has no operating history. The
Company's Board of Directors and executive officers will have overall
responsibility for management of the Company. Although certain of the Company's
executive officers and directors have extensive experience in the acquisition,
management and financing of office and other real properties, none of the
executive officers or directors has prior experience in operating a business in
accordance with the Code requirements for maintaining qualification as a REIT.
Failure to maintain REIT status would have an adverse effect on the Company's
ability to make anticipated distributions to stockholders. There can be no
assurance that the past experience of management will be appropriate to the
business of the Company.
23
COMPETITION IN ITS MARKETPLACE COULD HAVE AN ADVERSE IMPACT ON THE COMPANY'S
RESULTS OF OPERATIONS
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 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 "Material Federal Income Tax Consequences--Other Tax Considerations--Service
Corporations."
THE FINANCIAL CONDITION OF THIRD-PARTY PROPERTY MANAGEMENT, LEASING AND
CONSTRUCTION BUSINESSES COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL
CONDITION
The Company will be subject to the risks associated with the management,
leasing and construction businesses that will be conducted by the Service
Corporations, in which the Operating Partnership will hold a 95% economic
interest. 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. The Service Corporation LLC will
own 100% of the voting common stock (representing 5% of the economic interest)
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
24
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.
LIABILITY FOR ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT THE COMPANY'S
FINANCIAL CONDITION
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 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 COULD ADVERSELY AFFECT THE TRADING
PRICE
OF THE COMMON STOCK
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK COULD ADVERSELY AFFECT THE
COMMON STOCK PRICE. 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."
AVAILABILITY OF SHARES FOR FUTURE SALE COULD ADVERSELY AFFECT THE COMMON
STOCK PRICE. 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
25
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.
CHANGES IN MARKET CONDITIONS COULD ADVERSELY AFFECT THE COMMON STOCK
PRICE. 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.
GROWTH POTENTIAL AND CASH DISTRIBUTIONS COULD ADVERSELY AFFECT THE COMMON
STOCK PRICE. 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 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.
CHANGES IN MARKET INTEREST RATES COULD ADVERSELY AFFECT THE COMMON STOCK
PRICE. 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.
UNRELATED EVENTS COULD ADVERSELY AFFECT THE COMMON STOCK PRICE. 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.
THE COMPANY'S DEPENDENCE ON EXTERNAL SOURCES OF CAPITAL COULD ADVERSELY
AFFECT THE COMMON STOCK PRICE. 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 "Material Federal
Income Tax Consequences--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
26
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."
THE OFFICERS, DIRECTORS AND SIGNIFICANT STOCKHOLDERS OF THE COMPANY WILL
HAVE SUBSTANTIAL INFLUENCE. Upon the completion of the Offering, management of
the Company collectively will beneficially own approximately 21% 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.
THE COMPANY RELIES ON KEY PERSONNEL WHOSE CONTINUED SERVICE IS NOT GUARANTEED
The Company is dependent on the efforts of its executive officers, Stephen
L. Green, Nancy A. Peck, David J. Nettina, Steven H. Klein, Benjamin P. Feldman,
Gerard Nocera and Louis A. Olsen. The loss of their services could have a
material adverse effect on the operations of the Company. As described herein,
the Company will not acquire certain real estate assets in which Mr. Green will
retain an interest, including interests in various properties in Manhattan
including a substantially vacant showroom building, a loft building, an office
building the equity of which is controlled by the leasehold mortgagee, retail
and other non-office commercial space located in predominantly residential
buildings and a warehouse/distribution center located in Pennsylvania. See "The
Properties--Assets Not Being Transferred to the Company." It is expected that
Mr. Green will not devote a substantial amount of time to the management or
operation of these excluded properties. Prior to the completion of the Offering,
each of the executive officers, including Mr. Green, will enter into an
employment and noncompetition agreement with the Company which will provide,
among other items, that each such person will devote substantially all of his or
her business time to the Company and will except the excluded assets referred to
above from the noncompetition provisions thereof. See "Management--Employment
and Noncompetition Agreements."
THE SL GREEN PREDECESSOR HAS HAD HISTORICAL ACCOUNTING LOSSES AND HAS A DEFICIT
IN OWNERS' EQUITY; THE COMPANY MAY EXPERIENCE FUTURE LOSSES
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 $7.2 million as of June 30, 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.
STOCKHOLDER APPROVAL IS NOT REQUIRED TO CHANGE POLICIES OF THE COMPANY
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
27
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 LOSSES COULD ADVERSELY AFFECT THE COMPANY'S CASH FLOW
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.
THE COSTS OF COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND SIMILAR
LAWS COULD ADVERSELY AFFECT THE COMPANY'S CASH FLOW
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. 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.
28
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 nine
Class B office properties encompassing approximately 2.2 million rentable square
feet located in midtown Manhattan (the "Properties") and will manage 29 office
properties (including the Properties) encompassing approximately 6.4 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 three office
Properties encompassing approximately 1.0 million rentable square feet will be
acquired upon completion of the Offering (the "Acquisition Properties"). As of
June 30, 1997, the weighted average occupancy rate of the Core Portfolio was 97%
and of the Acquisition Properties was 89%. Also, upon completion of the
Offering, the Company will own options to acquire an additional Class B office
property in midtown Manhattan containing approximately 250,000 rentable square
feet and an additional Class B office property in downtown Manhattan containing
approximately 800,000 rentable square feet of office space. See "The
Properties--The Option Properties". Interests of Stephen L. Green in certain
properties deemed inconsistent with the Company's investment objectives will not
be acquired by the Company. See "The Properties--Assets Not Being Transferred to
the Company." 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. 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 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 (where one Property is located), 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 Cowles Business Media, Kallir, Philips, Ross
Inc., NationsBank, New York Hospital, Newbridge Communications, Ross Stores and
UNICEF.
As described herein, current developments in the New York economy provide an
attractive environment for owning, operating and acquiring Class B office
properties in Manhattan. See "Business and Growth Strategies--The Market
Opportunity" and "Risk Factors--The Company's Dependence on the Midtown Markets
Due to Limited Geographic Diversification Could Adversely Affect the Company's
Financial Performance." 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
29
Markets declined from 17.3% at year-end 1992 to 11.3% at June 30, 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 in the Midtown Markets as a result of the rising cost of Class
A space. The Company will seek to capitalize on growth opportunities in its
marketplace 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 Manhattan office space due to its local market expertise,
long-term relationships with brokers and property owners as a result of its
property management and leasing businesses, 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--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 which, upon completion of the
Offering, will have a portfolio of approximately 6.4 million rentable 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, six senior executives that average more than seven 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
21% of the equity of the Company, on a fully diluted basis, will be beneficially
owned by officers and directors of the Company and certain other affiliated
parties.
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.
30
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.
Unless indicated otherwise, information contained herein concerning the New
York metropolitan economy and the Manhattan office market is derived from the
Rosen Market Study.
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 more
than 44,000 jobs per year between 1994 and 1996 for an average annual growth
rate of 1.4%; between May of 1996 and 1997, private sector employment growth was
1.7%, 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
10.7% at June30, 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 11.3% at June 30,
1997 from its 1990s high of 17.3% at year-end 1992, a 34.7% 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 approximately 1.4% per annum in 1997 and 1998,
followed by approximately 0.9% 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
5.7% by 2001, resulting in projected average asking market rents of $31.30 per
square foot, a 28% increase over average asking rents as of June 30, 1997 of
$24.44 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--The Company's Dependence on the Midtown Markets Due
to Limited Geographic Diversification Could Adversely Affect the Company's
Financial Performance."
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
31
of K-III Communications moving to 49,000 square feet of space at 673 First
Avenue, Kallir, Philips, Ross Inc., 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 Associates, the publishing division of The Norman
Vincent Peale Foundation moving to 17,400 square feet at 16 East 34th Street. 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 $24.44 per square foot as of
June 30, 1997 from their 1990s low of $21.89 per square foot as of year-end
1993. See "The Properties-- The Portfolio" for a discussion of Annualized Rent
associated with the Properties.
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.
Investors should note that the concentration of the Company's investments in
Class B office properties located in Manhattan entails certain risks. See "Risk
Factors--The Company's Dependence on Midtown Markets Due to Limited Geographic
Diversification Could Adversely Affect the Company's Financial Performance" and
"Risk Factors--Competition in its Marketplace Could Have an Adverse Impact on
the Company's Results of Operations."
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.
32
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 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, upon completion
of the Offering, will manage approximately 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 $75 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. SL Green's retention as a property
manager by such owners has in the past led to opportunities to acquire the
managed property or other properties held by such owner. As an example of the
opportunities such relationships can create, 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
33
which represented 8.5% of the Annualized Rent at the Properties as of June 30,
1997, SL Green
contracted to purchase a mortgage interest encumbering the property from an
insurance company with whom SL Green had prior business dealings. 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 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.
Investors should note that acquisitions of office properties entail certain
risks. See "Risk Factors-- The Company May Not Achieve Expected Returns on
Recently Acquired Properties and Property Acquisitions."
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
34
regarding the cost of accommodating tenant preferences and the potential rental
revenues achievable from various repositioning options.
Substantially all of the Properties in the Core Portfolio have benefitted
from SL Green's repositioning strategy. Examples of successful implementation of
this strategy within the Core Portfolio include 673 First Avenue (which property
accounted for 22.1% of the aggregate Annualized Rent at the Properties as of
June 30, 1997) and the Bar Building (which property accounted for 8.5% of the
aggregate Annualized Rent at the Properties as of June 30, 1997). 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
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 successful implementation of its proactive leasing
strategy under uniquely adverse conditions is 16 East 34th Street, a property
managed by SL Green. When SL Green was hired by
35
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 80% of the expiring rentable square footage (78% 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 June 30, 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.
36
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 $189.4
million (approximately $217.8 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 $42.7 million to repay mortgage indebtedness
encumbering the Core Portfolio, including approximately $1.9 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 $99.0 million to acquire the Acquisition Properties (including a
$1.6 million escrow account established in connection with the acquisition of 50
West 23rd Street), (iv) approximately $6.1 million to pay certain expenses
incurred in the Formation Transactions for legal, accounting, and real estate
transfer tax expenses, and Offering Expenses, (v) $27.5 million to repay the
LBHI Loan (excluding the following amounts borrowed under the LBHI Loan that
will be repaid with Offering proceeds and are included above: $200,000 to fund
prepayment penalties, $9.4 million to purchase the Acquisition Properties and
$2.5 million to fund Offering expenses), (vi) $1.5 million to fund payment of a
financial advisory fee to Lehman Brothers Inc. and (vii) $6.2 million to fund
capital expenditures and general working capital needs.
If the Underwriters' over-allotment option to purchase 1,515,000 additional
shares of Common Stock is exercised in full, the Company expects to use the
additional net proceeds (which will be approximately $28.2 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 1.2 years as of June 30, 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 9.2% and an average remaining term to maturity of 11 years as of
June 30, 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)(2)
- ---------------------------------------------------------------------------------- ------------------------------
673 First Avenue.................................................................. $ 1,000
470 Park Avenue South............................................................. 13,042
Bar Building...................................................................... 10,200
70 West 36th Street............................................................... 6,568
1414 Avenue of the Americas....................................................... 9,878
-------
Total......................................................................... $ 40,688
-------
-------
- ------------------------
(1) Exact repayment amounts may differ due to amortization. The figures are as
of June 30, 1997 and exclude prepayment penalties estimated to aggregate
approximately $1.9 million and approximately $100,000 of accrued interest.
(2) Upon completion of the Offering, the Company will have $32.5 million of
mortgage indebtedness encumbering the Core Portfolio and will incur an
additional $14 million mortgage loan to finance the purchase of 50 West 23rd
Street. See "The Properties--Mortgage Indebtedness."As noted herein, LBHI
has committed to provide the Company with a $75 million Credit
37
Facility, subject to negotiation of mutually satisfactory covenants and
other terms. 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. See "The Properties--Credit Facility." In anticipation of the
establishment of the Credit Facility and in order to satisfy all New York
State tax requirements and mitigate costs to the Company, it is currently
expected that LBHI will acquire and modify certain of the mortgage
indebtedness described above and the proceeds from the Offering intended to
repay such indebtedness will be deposited into an escrow account which will
generate a return that will service the principal and interest payments on
such modified indebtedness. Upon the closing of the Credit Facility, these
mortgage liens may be utilized to secure future borrowings under the Credit
Facility. In connection with this credit arrangement, LBHI may receive an
administrative fee of up to .02% of the amount borrowed. See "Underwriting."
It is anticipated that a similar arrangement may be employed in connection
with the Acquisition Properties and other future property acquisitions.
38
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 $.35 per share and an annual distribution of $1.40 per share (or an annual
distribution rate of approximately 7.00%, 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 106% of
estimated Cash Available for Distribution. The estimate of Cash Available for
Distribution for the 12 months ending June 30, 1998 is based upon pro forma
Funds from Operations for the 12 months ended June 30, 1997, adjusted for (i)
certain known events and/or contractual commitments that either have occurred or
will occur subsequent to June 30, 1997 or during the 12 months ended June 30,
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 capitalized 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, development, tenant improvement
and leasing costs and (ii) financing activities (other than scheduled mortgage
loan principal payments on existing mortgage indebtedness). 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 30% (or $.42 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 "Material Federal
Income Tax Consequences--Taxation of the Company--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 "Material Federal Income Tax
Consequences--Taxation of Stockholders."
39
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 June 30, 1997 and the adjustments to pro
forma Funds from Operations for the 12 months ended June 30, 1997 in estimating
initial Cash Available for Distribution for the 12 months ending June 30, 1998:
(DOLLARS IN
THOUSANDS,
EXCEPT PER
SHARE DATA)
-----------
Pro forma net income before minority interest and extraordinary item for the year ended December 31,
1996............................................................................................... $ 12,733
Plus: Pro forma net income before minority interest and extraordinary item for the six months ended
June 30, 1997.................................................................................... 9,165
Less: Pro forma net income before minority interest and extraordinary item for the six months ended
June 30, 1996.................................................................................... (5,549)
-----------
Pro forma net income before minority interest and extraordinary item for the 12 months ended June 30,
1997(1)............................................................................................ 16,349
Plus: Pro forma real estate depreciation for the 12 months ended June 30, 1997 (2)................. 6,717
Plus: Pro forma amortization (excluding financing costs) for the 12 months ended
June 30, 1997 (3)................................................................................ 424
-----------
Pro forma Funds from Operations for the 12 months ended June 30, 1997 (4)............................ 23,490
Adjustments:
Net increases in rental and management income (5).................................................. 1,795
Provision for lease expirations, assuming no renewals (6).......................................... (492)
Non-recurring lease surrender income and real estate tax refund (7)................................ (2,121)
Interest adjustment (8)............................................................................ 165
-----------
Estimated adjusted pro forma Funds from Operations for the 12 months ending June 30, 1998............ 22,837
Net effect of straight-line rents and non-cash transaction (9)..................................... (1,866)
Pro forma amortization of financing costs for the 12 months ending June 30, 1997 (10).............. 158
Non-real estate depreciation and amortization (11)................................................. 93
-----------
Estimated pro forma Cash Flow from Operating Activities for the 12 months ending
June 30, 1998...................................................................................... 21,222
Investment Activities:
Estimated recurring capitalized tenant improvements and leasing
commissions (12)................................................. $ (1,062)
Estimated recurring capital expenditures (13)...................... (910)
Estimated cash to be used in investing activities.................. (1,972)
40
(DOLLARS IN
THOUSANDS,
EXCEPT PER
SHARE DATA)
-----------
Financing Activities:
Scheduled mortgage loan principal payments (14).................................................. $ (1,872)
Estimated cash to be used in financing activities................................................ $ (1,872)
-----------
Estimated Cash Available for Distribution for the 12 months ending June 30,
1998........................................................................... 17,378
-----------
The Company's share of estimated Cash Available for Distribution (15).......... 14,233
Minority interest's share of estimated Cash Available for Distribution......... 3,145
Total estimated initial annual cash distributions................................ 15,091
Estimated initial annual distribution per share (16)........................... 1.40
Payout ratio based on estimated Cash Available for Distribution (17)........... 106%
- ------------------------
(1) Pro forma net income is based on total revenue of $60,314, of which $5,394
is derived from management, leasing, construction and other activities
relating to properties not owned by the Company.
(2) Pro forma real estate depreciation for the year ended December 31, 1996 of
$6,407 minus pro forma real estate depreciation for the six months ended
June 30, 1996 of $3,016 plus pro forma real estate depreciation for the six
months ended June 30, 1997 of $3,326.
(3) Pro forma amortization (excluding financing costs) for the year ended
December 31, 1996 of $425 minus pro forma amortization (excluding financing
costs) for the six months ended June 30, 1996 of $212 plus pro forma
amortization (excluding financing costs) for the six months ended June 30,
1997 of $211.
(4) The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. The Company believes that Funds from Operations is helpful
to investors as a measure of the performance of an equity REIT because,
along with cash flow from operating activities, financing activities and
investing activities, it provides investors with an indication of the
ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. The Company computes Funds from
Operations in accordance with standards established by NAREIT which may not
be comparable to Funds from Operations reported by other REITs that do not
define the term in accordance with the current NAREIT definition or that
interpret the current NAREIT definition differently than the Company. 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 (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is it indicative of funds available to fund the Company's
cash needs, including its ability to make cash distributions. For a
reconciliation of net income and Funds from Operations, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Funds from Operations."
(5) Represents the (i) net increases in rental income from (a) new leases and
renewals that were not in effect for the entire 12-month period ended June
30, 1997 of $1,537 and (b) new leases and renewals that went into effect
between July 1, 1997 and July 15, 1997 of $146 and (ii) management income
from a new property management contract for a property not owned by SL Green
that was not in effect for the entire 12-month period ended June 30, 1997 of
$112.
(6) Assumes no lease renewals or new leases (other than month-to-month leases)
for leases expiring after June 30, 1997 unless a new or renewal lease has
been entered into by July 15, 1997. The $604 decrease represents the loss in
net rental income assuming all leases of space expiring between July 1, 1997
and June 30, 1998 for which no renewals or new leases have been entered into
by July 15, 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 $112 of rental income from tenants on month-to-month leases
which are assumed to continue throughout the period.
(7) The non-recurring transactions consist of lease surrender income at 1372
Broadway and a real estate tax refund at 1140 Avenue of the Americas.
(8) The amount represents a reduction in interest expense due to amortization of
the related mortgages over the 12-month period ending June 30, 1998.
(9) Represents (i) 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 ($3,518), (ii) the effect of
adjusting straight line rental payments included in pro forma net income
from the straight-line accrual basis to amounts currently being paid or due
from the tenant attributable to the capitalized and operating lease at 673
First Avenue ($1,386) and (iii) the effect of compensation expense relating
to stock loans ($266). See "Management--Employment and Noncompetition
Agreements." Total rent abatements for leases in effect as of June 30, 1997
for the 12 months ending June 30, 1998 are approximately $815.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
41
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
(10) Pro forma amortization of financing costs for the year ended December 31,
1996 of $149 minus pro forma amortization of financing costs for the six
months ended June 30, 1996 of $83 plus pro forma amortization of financing
costs for the six months ended June 30, 1997 of $93. Financing costs for
periods are based on principal mortgage indebtedness outstanding of $46,700.
See "The Properties--Mortgage Indebtedness."
(11) Pro forma non-real estate depreciation and amortization for the year ended
December 31, 1996 of $92 minus pro forma non-real estate depreciation for
the six months ended June 30, 1996 of $46 plus pro forma non-real estate
depreciation and amortization for the six months ended June 30, 1997 of $47.
(12) Reflects recurring tenant improvements and leasing commissions anticipated
for the 12 months ending June 30, 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 six months ended June 30, 1997 of
$9.63 per square foot (assuming a renewal rate of 75% of expiring square
footage as compared to the actual weighted average renewal rate of 80%
during the period from January 1, 1994 through June 30, 1997-- See "The
Properties--The Portfolio--Historical Tenant Improvements and Leasing
Commissions"), by (ii) 110,280 (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:
YEAR ENDED DECEMBER 31, SIX MONTHS WEIGHTED
ENDED AVERAGE
------------------------------- JUNE 30, JANUARY 1, 1994-
1994 1995 1996 1997 JUNE 30, 1997
--------- --------- --------- --------------- -----------------
RENEWALS:
Tenant improvement costs ("TI") per square foot..... $1.96 $ 0.00 $ 2.39 $ 1.84 $ 1.89
Leasing commission costs ("LC") per square foot..... $1.77 $ 1.99 $ 3.36 $ 2.40 $ 2.84
--------- --------- --------- ------ ------
Total Renewal TI and LC per square foot............. $3.73 $ 1.99 $ 5.75 $ 4.24 $ 4.73
RE-TENANTED OR NEWLY TENANTED SPACE:
TI per square foot.................................. $16.41 $ 22.73 $ 13.76 $ 17.99 $ 17.42
LC per square foot.................................. $7.27 $ 4.55 $ 9.41 $ 6.24 $ 6.91
--------- --------- --------- ------ ------
Total Re-tenanted TI and LC per square foot......... $23.68 $ 27.28 $ 23.17 $ 24.23 $ 24.33
--------- --------- --------- ------ ------
--------- --------- --------- ------ ------
3 1/2 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........................ $ 4.73 x 110,280 x 75%(i) = $ 391,218
Re-tenanted.................... $ 24.33 x 110,280 x 25% = $ 670,778
------------
$ 1,061,996
------------
------------
--------------------------------------
(i) The historical weighted average renewal rate, based on square
footage, for the Company from January 1, 1994 through June 30, 1997
is 80%.
(13) 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) 2,219 (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 June
30, 1998, the estimated cost of recurring building improvements and
equipment upgrades and replacements (excluding costs of tenant improvements)
at the Properties is approximately $910. For the 12 months ending June 30,
1998, the estimated cost of non-recurring capital expenditures of the
Properties is approximately $5.2 million. The Company expects to fund
non-recurring capital expenditures, tenant improvements and leasing
commissions from working capital or borrowings. Following completion of the
Formation Transactions and the Offering, the Company expects to have
remaining net proceeds of $6.2 million available for capital expenditures
and working capital purposes.
(14) Scheduled mortgage loan principal payments for the 12 months ending June
30, 1998.
(15) 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 81.9% aggregate partnership interest in the
Operating Partnership.
(16) Based on a total of 10,779,216 shares of Common Stock to be outstanding
after the Offering (10,100,000 shares to be sold in the Offering, assuming
no exercise of the Underwriters' over-allotment option, and 679,216
additional shares to be issued in the Formation Transactions.)
(17) 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 June 30, 1998. The payout ratio
based on estimated adjusted pro forma Funds from Operations is 80.7%.
42
CAPITALIZATION
The following table sets forth the combined historical capitalization of the
SL Green Predecessors as of June 30, 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.
JUNE 30, 1997
------------------------
COMBINED
HISTORICAL PRO FORMA
----------- -----------
(IN THOUSANDS)
Mortgage debt............................................................................. $ 33,646 $ 46,733
Minority interests in Operating Partnership............................................... -- 31,848
Stockholders' equity:
Preferred Stock, $.01 par value; 25,000 shares authorized; none issued and
outstanding........................................................................... -- --
Common Stock, $.01 par value; 100,000 shares authorized; 555 issued and outstanding;
10,779 issued and outstanding on a pro forma basis (1)................................ -- 109
Additional paid-in capital.............................................................. -- 144,106
Owners' deficit......................................................................... (7,150) --
----------- -----------
Total owners' (deficit)/stockholders' equity.......................................... (7,150) 144,215
----------- -----------
Total capitalization................................................................ $ 26,496 $ 222,796
----------- -----------
----------- -----------
- ------------------------
(1) Includes 10,779,216 shares of Common Stock to be issued in the Formation
Transactions and the Offering. Does not include (i) 2,383,284 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 plan or (iii) 1,515,000
shares of Common Stock that are issuable upon exercise of the Underwriters'
over-allotment option.
43
DILUTION
At June 30, 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 $183.7 million in net proceeds from the Offering,
after deducting the Underwriters' discounts and commissions, the financial
advisory fee payable to Lehman and other estimated expenses of the Offering,
(ii) the repayment of approximately $82.3 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 June 30, 1997
would have been approximately $141 million, or $13.06 per share of Common Stock.
This amount represents an immediate increase in net tangible book value of
$16.91 per share to the continuing investors and an immediate and substantial
dilution in pro forma net tangible book value of $6.94 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).... $ (3.85)
Increase in net tangible book value per share attributable
to the
Offering (2)............................................. 16.91
---------
Pro forma net tangible book value after the Offering (3)... 13.06
---------
Dilution in net tangible book value per share of Common
Stock to new investors (4)............................... $ 6.94
---------
---------
- ------------------------
(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
June 30, 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 $141 million divided by
the total number of shares of Common Stock outstanding after the completion
of the Offering (10,779,216 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 June 30, 1997
of the assets contributed by
44
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........................... 10,100 77% $ 183,711 107% $ 20.00(1)
Common Stock issued to continuing investors............. 679 5% (2,611) (2)% $ (3.85)(2)
Units issued to continuing investors.................... 2,383 18% (9,164) (5)% $ (3.85)(2)
--------- --- ---------- ---------
Total............................................... 13,162 100% $ 171,936 100%
--------- --- ---------- ---------
--------- --- ---------- ---------
- ------------------------
(1) Before deducting Underwriters' discounts and commissions, the financial
advisory fee payable to Lehman and other estimated expenses of the Offering
and the Formation Transactions.
(2) Based on the June 30, 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.
45
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 six months ended June 30, 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
six months ended June 30, 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 June 30, 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 six months ended June 30, 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.
46
THE COMPANY (PRO FORMA) AND THE SL GREEN PREDECESSOR (HISTORICAL)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------------------- ----------------------------------------------
HISTORICAL
----------------------------------------------
1996 1995 1994
--------- --------- ---------
PRO FORMA 1997) 1996 PRO FORMA
1997 ------------- ------------- 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
(UNAUDITED) (UNAUDITED)
OPERATING DATA:
Total revenue.............. $ 28,936 $ 7,334 $ 4,098 $ 53,189 $ 10,182 $ 6,564 $ 6,600
------------- ------ ------------- ------------- --------- --------- ---------
Property operating
expense.................. 7,649 1,625 1,230 16,224 3,197 2,505 2,009
Real estate taxes.......... 4,078 482 232 8,248 703 496 543
Interest................... 2,986 713 442 5,858 1,357 1,212 1,555
Depreciation and
amortization............. 3,630 599 406 6,979 975 775 931
Marketing, general and
administration........... 1,428 1,835 2,029 2,643 3,250 3,052 2,351
------------- ------ ------------- ------------- --------- --------- ---------
Total expenses............. 19,771 5,254 4,339 39,952 9,482 8,040 7,389
------------- ------ ------------- ------------- --------- --------- ---------
Operating income (loss).... 9,165 2,080 (241) 13,237 700 (1,476) (789)
Equity in net income (loss)
of uncombined joint
ventures................. -- (564) (817) (504) (1,408) (1,914) (1,423)
------------- ------ ------------- ------------- --------- --------- ---------
Income (loss) before
extraordinary item and
minority interest........ 9,165 1,516 (1,058) 12,733 (708) (3,390) (2,212)
Minority interest.......... (1,659) -- -- (2,305) -- -- --
------------- ------ ------------- ------------- --------- --------- ---------
Income (loss) before
extraordinary item....... $ 7,506 $ 1,516 $ (1,058) $ 10,428 $ (708) $ (3,390) $ (2,212)
------------- ------ ------------- ------------- --------- --------- ---------
------------- ------ ------------- ------------- --------- --------- ---------
Income before extraordinary
item per share........... $ 0.70 $ 0.97
------------- -------------
------------- -------------
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)
Minority interest.......... -- --
------ -------------
Income (loss) before
extraordinary item....... $ (404) $ (2,562)
------ -------------
------ -------------
Income before extraordinary
item per share...........
AS OF JUNE 30, 1997 AS OF DECEMBER 31,
-------------------------- --------------------------------------------
PRO FORMA HISTORICAL HISTORICAL
----------- ------------- --------------------------------------------
1993
(UNAUDITED) (UNAUDITED) 1996 1995 1994 (UNAUDITED)
----------- ------------- --------- --------- --------- -----------
BALANCE SHEET DATA:
Commercial real estate, before accumulated
depreciation................................... $ 246,033 $ 42,905 $ 26,284 $ 15,559 $ 15,761 $ 15,352
Total assets..................................... 259,435 48,764 30,072 16,084 15,098 16,218
Mortgages and notes payable...................... 46,733 33,646 16,610 12,700 12,699 12,699
Accrued interest payable......................... 97 109 90 2,894 12,699 1,576
Minority interest................................ 31,848 0 0 0 0 0
Owners' equity (deficit)......................... 144,215 (7,150) (8,405) (18,848) (15,520) (13,486)
OTHER DATA:
Funds from operations............................ 12,702 -- -- -- -- --
Net cash provided by (used in) operating
activities..................................... -- 1,140 272 (234) 939 --
Net cash provided by financing activities........ -- 6,575 11,960 63 178 --
Net cash (used in) investing activities.......... -- (7,145) (12,375) (432) (567)
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:
Funds from operations............................ --
Net cash provided by (used in) operating
activities..................................... --
Net cash provided by financing activities........ --
Net cash (used in) investing activities.......... --
- ------------------------
(1) The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. The Company believes that Funds from Operations is helpful
to investors as a measure of the performance of an equity REIT because,
along with cash flow from operating activities, financing activities and
investing activities, it provides investors with an indication of the
ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. The Company computes Funds from
Operations in accordance with standards established by NAREIT which may not
be comparable to Funds from Operations reported by other REITs that do not
define the term in accordance with the current NAREIT definition or that
interpret the current NAREIT definition differently than the Company. 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 (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is it indicative of funds available to fund the Company's
cash needs, including its ability to make cash distributions. For a
reconciliation of net income and Funds from Operations, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Funds from Operations."
47
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.
Due to the size of the Company's Core Portfolio (six properties), the
inclusion of additional properties during any period can result in significant
increases in total revenue and other financial data over prior periods. For the
foregoing reason, the Company does not believe its year to year and quarter to
quarter financial data are comparable, and that percentage growth may not be
maintained at the current rate.
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO SIX MONTHS ENDED JUNE 30,
1996
Rental revenue increased $1,485,000 or 112.9%, to $2,800,000 from $1,315,000
for the six months ended June 30, 1997 compared to the six months ended June 30,
1996. The increase was due primarily to the acquisition of 1414 Avenue of the
Americas during July 1996 which had rental revenue of $1,555,000, partially
offset by a decrease in rental revenue of $70,000 at 70 West 36th Street, due to
a temporary decrease in occupancy and the free rent associated with re-leasing
those spaces.
Escalations and reimbursement revenues increased $171,000, or 60.0%, to
$456,000 from $285,000 for the six months ended June 30, 1997 compared to the
six months ended June 30, 1996. The acquisition of 1414 Avenue of the Americas,
accounted for an increase of $265,000 offset by a decrease of $94,000 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 decreased $97,000, or 9.1% to $966,000 from $1,063,000
for the six months ended June 30, 1997 compared to the six months ended June 30,
1996. A building managed for a third party was sold at the end of 1996 and the
management agreement was terminated resulting in this decrease.
Leasing commission revenues increased $1,806,000, or 140.9%, to $3,088,000
from $1,282,000 for the six months ended June 30, 1997 compared to the six
months ended June 30, 1996 due to the addition of several buildings under
service contracts and intensified efforts to perform leasing services for
unaffiliated third parties.
Construction revenue decreased by $31,000, or 79.5% to $8,000 from $39,000
for the six months ended June 30, 1997 compared to the six months ended June 30,
1996. Overall construction revenue remained constant but a larger amount related
to property-owning partnerships in the six months ended June 30, 1997 and was
eliminated pursuant to the equity method of accounting.
Other income decreased by $98,000 or 86% to $16,000 from $114,000 for the
six months ended June 30, 1997 compared to the six months ended June 30, 1996
primarily due to a one-time consulting engagement in the six months ended June
30, 1996. The remaining other income consisted of interest income.
48
Share of net loss of uncombined joint ventures decreased $253,000, or 31.0%,
to $564,000 from $817,000 for the six months ended June 30, 1997 compared to the
six months ended June 30, 1996 as follows:
INCREASE
PROPERTY (DECREASE)
- --------------------------------------------------------------------------------- -----------
673 First Avenue................................................................. $ (222,000)
470 Park Avenue South............................................................ (32,000)
29 West 35th Street.............................................................. 10,000
Bar Building..................................................................... (9,000)
-----------
$ (253,000)
-----------
-----------
The decrease in net loss for 673 First Avenue was due primarily to increased
rental revenues and escalation and reimbursement revenues resulting from
increased occupancy and contractual rent increases. The loss was also reduced by
lower operating expenses and a reduction in real estate taxes.
The decrease in net loss for 470 Park Avenue South was due primarily to
higher contractual rents and lower operating expenses, offset by reduced porter
wage escalation revenue as a result of new leases with more current base years,
utilized in the calculation of the escalation.
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, and by higher operating expenses.
The increase in net income for the Bar Building was due to the acquisition
of the Property during September 1996.
Operating expenses increased $395,000, or 32.1%, to $1,625,000 from
$1,230,000 for the six months ended June 30, 1997 compared to the six months
ended June 30, 1996. The increase was comprised primarily of the inclusion of
1414 Avenue of the Americas which was acquired during July 1996 ($506,000),
offset by lower expenses at 70 West 36th Street.
Interest expense increased $271,000 or 61.3%, to $713,000 from $442,000 for
the six months ended June 30, 1997 compared to the six months ended June 30,
1996. The inclusion of 1414 Avenue of the Americas accounted for an increase of
$460,000 offset by a decrease of $189,000 for 70 West 36th Street due to
refinancing at a lower interest rate.
Depreciation and amortization increased $193,000, or 47.5%, to $599,000 from
$406,000 for the six months ended June 30, 1997 compared to the six months ended
June 30, 1996. The increase was due primarily to the inclusion of 1414 Avenue of
the Americas.
Real estate taxes increased $250,000, or 107.8% to $482,000 from $232,000
for the six months ended June 30, 1997 compared to the six months ended June 30,
1996. The increase was due to the inclusion of $290,000 for 1414 Avenue of the
Americas, offset by a decrease of $40,000 for 70 West 36th St.
Marketing, general and administrative expenses decreased $194,000, or 9.6%,
to $1,835,000 from $2,029,000 for the six months ended June 30, 1997 compared to
the six months ended June 30, 1996. The decrease was primarily due to reduced
expenses at the corporations which provide management and leasing services,
offset by increased expenses associated with the increase in leasing commission
revenues.
As a result of the foregoing, net income increased $2,574,000, or 243.3%, to
$1,516,000 from a loss of $1,058,000 for the six months ended June 30, 1997
compared to the six months ended June 30, 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.
49
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 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.
Share of 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 $692,000, or 27.6%, to $3,197,000 from
$2,505,000 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 $145,000 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
$445,000 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.
50
Real estate taxes increased $207,000 or 41.7%, to $703,000 from $496,000 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.
Marketing, general and administrative expenses increased $198,000, or 6.5%,
to $3,250,000 from $3,052,000 for the year ended December 31, 1996 compared to
the year ended December 31, 1995, due primarily to staff increases for the
corporation which provided leasing services.
As a result of the foregoing, the loss before extraordinary item 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 5.5%, 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 $301,000, or 15.4%, to $2,260,000 from
$1,959,000 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 32.3%, 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.
Share of 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 $496,000, 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 $343,000 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.
51
Depreciation and amortization decreased $156,000, 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 leasing commissions and
tenant installation work related to vacated tenants during 1994 at 70 West 36th
Street.
Real estate taxes decreased $47,000, or 8.7%, to $496,000 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 $3,052,000 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 53.3%, 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
SIX MONTHS ENDED JUNE 30, 1997
On a pro forma basis, after giving effect to the Offering, income before
minority interest would have been $9,165,000 for the six months ended June 30,
1997, representing an increase of $7,649,000 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...................................................... $2,618,000
Additional income due to the acquisition of 1372 Broadway....... 3,720,000
Additional income due to the acquisition of 50 West 23rd
Street........................................................ 1,682,000
Additional income due to the inclusion of 1140 Avenue of the
Americas...................................................... 910,000
Straight line rent adjustments related to the acquisition of
other partners' interests..................................... 376,000
Net decrease in depreciation and amortization due to acquisition
of other partners' interests acquisition of new debt and
repayment or forgiveness of mortgage loans.................... 50,000
DECREASES TO INCOME:
Interest expense related to new mortgage loan................... (539,000)
Additional general and administrative expenses associated with a
public company................................................ (828,000)
Elimination of the Service Corporations' income under the equity
method of accounting.......................................... (188,000)
Other partners share of net losses for properties historically
accounted for under the equity method......................... (127,000)
Straight line adjustment to 673 First Avenue net lease due to
acquisition of non-continuing partners' interest.............. (25,000)
----------
$7,649,000
----------
----------
Further information regarding the effects of the Acquisition Properties on
the financial position and results of operations of the Company is set forth in
the historical financial statements of the Acquisition Properties and the pro
forma financial statements of the Company contained in this Prospectus.
YEAR ENDED DECEMBER 31, 1996
On a pro forma basis, after giving effect to the Offering, income before
minority interest would have been $12,733,000 for the year ended December 31,
1996, representing an increase of $13,441,000 over the
52
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..................................................... 1,693,000
Additional income due to inclusion of 50 W. 23rd St............ 3,054,000
Additional net income due to the inclusion of the Bar Building
for the full year............................................ 1,133,000
Straight line rent adjustments related to the acquisition of
other partners' interests.................................... 787,000
Net decrease in depreciation and amortization due to
acquisition of other partners' interests, acquisition of new
debt and repayment or forgiveness of mortgage loans.......... 63,000
DECREASES TO INCOME:
Interest expense related to new mortgage loans................. (1,078,000)
Additional general and administrative expenses associated with
a public company............................................. (1,657,000)
Other partners' share of net losses for properties historically
accounted for under the equity method........................ (427,000)
Elimination of the Service Corporations' income under the
equity method of accounting.................................. (270,000)
Straight line adjustment to 673 First Avenue net lease due to
acquisition of non-continuing partners' interest............. (100,000)
----------
$13,441,000
----------
----------
As indicated above, inclusion of the Acquisition Properties increased
income, on a pro forma basis, by approximately $10,291,000, with increased
interest expense on a pro forma basis associated with one Property of
approximately $1,078,000. Long term debt increased by $14 million on a pro forma
basis as a result of a mortgage loan on one of the Acquisition Properties.
Further information regarding the effects of the Acquisition Properties on the
financial position and results of operations of the Company is set forth in the
historical financial statements of the Acquisition Properties and the pro forma
financial statements of the Company contained in this Prospectus.
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 a new mortgage loan in the amount of $14 million, which will be
secured by 50 West 23rd Street, will be utilized to repay existing mortgage
loans, acquire properties, pay Offering and Formation Transaction expenses and
provide working capital. See "Use of Proceeds" and "The Properties--Mortgage
Indebtedness." 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 $32.5 million as a result of the repayment and
cancellation of certain mortgage loans. Total mortgage loans including the new
mortgage loan will amount to $46.5 million as a result of the Formation
Transactions. All mortgage loans encumbering the Core Portfolio 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 a fixed rate. Subsequent to the
Formation Transactions the mortgage loans would represent approximately 15.0% of
the Company's market capitalization based on an estimated total market
capitalization of $309.8 million.
53
The Company is currently negotiating with Lehman the terms of the Credit
Facility, which the Company expects to be in place shortly after 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 improvements and leasing commissions. After paying down
mortgage debt as well as expenses of the Offering and Formation Transactions,
the Company expects to have working capital of approximately $6.2 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
June 30, 1998, it will incur approximately $4.46 million of expenses
attributable to non-incremental revenue generating capital expenditures which
includes $2.18 million for the Acquisition Properties, $1.04 million for the Bar
Building and $1.24 million for the balance of the Core Portfolio.
The Company expects to make distributions to its stockholders primarily
based on its distributions received from the Operating Partnership or, if
necessary, from working capital or borrowings. 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.
Future property 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 and debt. The Company believes that it will have sufficient
capital resources to satisfy its obligations during the 12 month period
following completion of the Offering. Thereafter, 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 SIX MONTHS ENDED JUNE 30, 1997 TO SIX MONTHS ENDED JUNE 30,
1996
Net cash provided by operating activities increased $1,085,000 to $1,140,000
from $55,000 for the six months ended June 30, 1997 compared to the six months
ended June 30, 1996. The increase was due primarily to the acquisition of 1414
Avenue of the Americas and an increase in leasing commission income. Net cash
used in investing activities increased $6,497,000 to $(7,145,000) from
$(648,000) for the six months ended June 30, 1997 compared to the six months
ended June 30, 1996. The increase was due primarily to the purchase of the
remaining partnership interest in Praedium Bar Associates LLC offset by a
decrease in net cash contributions to the partnerships that own 29 West 35th
Street and 470 Park Avenue South. Net cash provided by financing activities
increased $6,292,000 to $6,575,000 from $283,000 for the six months ended June
30, 1997 compared to the six months ended June 30, 1996. The increase was due
primarily to financing obtained to purchase the remaining partnership interest
in Praedium Bar Associates LLC offset by a reduction of contributions from
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. Net
cash used in investing 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 $11,897,000 to $11,960,000 from $63,000 for the year ended December
31, 1996 compared to the year ended December 31, 1995. The increase was due
primarily to the financing of the acquisition of 1414 Avenue of the Americas,
the refinancing of the mortgage on 70 West 36th Street and net cash contribution
from owners.
54
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 operating expense increases related to the corporations which
provide management leasing and construction services and additional marketing,
general and administrative expenses for the corporations which provide
management leasing and construction services. 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 White Paper on Funds from Operations approved by the Board of Governors
of NAREIT in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. The Company believes that Funds from Operations is helpful to
investors as a measure of the performance of an equity REIT because, along with
cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes Funds from Operations in accordance with
standards established by NAREIT which may not be comparable to Funds from
Operations reported by other REITs that do not define the term in accordance
with the current NAREIT definition or that interpret the current NAREIT
definition differently than the Company. 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 (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make cash distributions.
On a pro forma basis after giving effect to the Offering, Funds from
Operations for the six months ended June 30, 1997 and for the year ended
December 31, 1996, respectively, are as follows:
PRO FORMA
---------------------------
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996
------------- ------------
Net income before minority interest and extraordinary item...... $ 9,165 $ 12,733
Add:
Depreciation and amortization................................. 3,630 6,979
Amortization of deferred financing costs and depreciation of
non-rental real estate assets............................... (93) (149)
------------- ------------
Funds from Operations........................................... $ 12,702 $ 19,563
------------- ------------
------------- ------------
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.
55
MARKET OVERVIEW
UNLESS INDICATED OTHERWISE, INFORMATION CONTAINED HEREIN CONCERNING THE NEW
YORK METROPOLITAN ECONOMY AND THE MANHATTAN OFFICE MARKET IS DERIVED FROM THE
ROSEN MARKET STUDY.
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 approximately 44,000 jobs
per year between 1994 and 1996 for an average annual growth rate of 1.4%;
between May of 1996 and 1997, private sector employment growth was an even
stronger 1.7%, 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 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.
56
The single fastest-growing employment sector in the New York metropolitan
economy is the services sector, which grew at a rate of 3.0% during the year
ended in May 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 290,000 jobs as of May 1997, representing 20% of total services
employment. Between 1992 and 1996, growth in business services employment
averaged 4% per year, and between May 1996 and May 1997, business services
employment grew 6.6%. 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 6,300 jobs during the 12 months
ended May 31, 1997, representing a 0.9% annual growth rate. Approximately 68% of
the metropolitan area's trade jobs are in the retail sector, where growth was an
even stronger 1.5% 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 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
57
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 has announced a budget surplus for
its fiscal year ended 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 1.4% per annum, or approximately 33,000 private sector jobs per
annum through 1998, and continue to increase at approximately 0.9% 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, midtown 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.
58
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 (000S)
- ----------- ------------------------------------------------ ---------
1......... New York, NY (includes all of Manhattan) 378,313
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 May 31, 1997
existing in such markets:
MANHATTAN OFFICE MARKET OVERVIEW
% OF CLASS A 2ND QUARTER 1997 2ND 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% 10.1% 11.3% $ 37.42 $ 24.44
Midtown................................. 67.9% 48.3% 10.0% 11.4% $ 37.88 $ 26.57
Midtown South........................... 2.4% 25.7% 13.3% 11.2% $ 27.40 $ 20.35
Downtown................................ 29.8% 26.1% 13.5% 18.8% $ 28.19 $ 22.42
Total................................... 54.3%(2) 45.7%(2) 11.1% 13.3% $ 34.08 $ 23.70
- ------------------------
(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.
59
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.
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
60
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 47% 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 in the Midtown Markets is forecasted to reach
almost 2.3 million square feet for 1997. An average of 30,200 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 1.5 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
1995 1.5
1996 1.7
1997 proj. 2.3
1998 proj. 1.7
1999 proj. 1.3
2000 proj. 1
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 10.1% as of June 30, 1997 from its 1990s high of 17.8% in
1991 and the Class B office vacancy rate in the Midtown Markets had fallen to
11.3% 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 7.6% in 1998 and
further to 5.9% in 2001; similarly, Rosen Consulting Group projects that the
Class B vacancy rate in the Midtown Markets will fall to 8.4% in 1998 and
further to 5.7% 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.
61
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 optimal 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--The Company's Dependence on the Midtown
Markets Due to Limited Geographic Diversification Could Adversely Affect the
Company's Financial Performance."
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
62
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.
DOWNTOWN SUBMARKET. The downtown submarket of the Manhattan office market,
where the Option Property is located, has been the subject of significant
revitalization efforts in recent years. The Downtown Commercial Revitalization
Program offers a mix of commercial rent tax, real estate tax and energy expense
relief to tenants who sign new or renew leases in buildings constructed before
1975. These efforts appear to be yielding results, as the vacancy rate for
downtown Class B office space had declined to 18.8% as of June 30, 1997 from its
1990s high of 21.3% at the end of 1995 (although such rate represents an
increase from the vacancy rate of 17.8% at the end of 1996). In addition,
average asking rents per square foot for Class B office space in the downtown
submarket rose to $22.42 as of June 30, 1997 from its 1990s low of $21.53 at the
end of 1995. Rosen Consulting Group projects the vacancy rate for downtown Class
B office space to decrease to 14.7% by the end of 1998 and to continue to
decline to below 12% by the end of 2001. In addition, Rosen Consulting Group
estimates that average asking rents per square foot for Class B office space in
the downtown submarket will increase to $23.15 by the end of 1998 and continue
rising to $26.56 by the end of 2001.
63
THE PROPERTIES
THE PORTFOLIO
GENERAL. Upon the completion of the Offering, the Company will own or have
contracted to acquire interests in nine Class B office Properties located in
midtown Manhattan which contain approximately 2.2 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 three office
properties encompassing approximately 1.0 million 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 will own
options to acquire interests in 110 East 42nd Street, an office building
containing approximately 250,000 rentable square feet in midtown Manhattan and
17 Battery Place, a property containing approximately 800,000 rentable square
feet of office space in downtown Manhattan. See "--The Option Properties" 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 June 30, 1997:
PERCENTAGE
OF PERCENTAGE
APPROXIMATE PORTFOLIO OF
YEAR RENTABLE RENTABLE PORTFOLIO NUMBER
BUILT/ SQUARE SQUARE PERCENT ANNUALIZED ANNUALIZED OF
RENOVATED SUBMARKET FEET FEET LEASED RENT(1) RENT LEASES
---------- ---------------- ------------ ------------- ----------- ----------- ------------- -----------
CORE PORTFOLIO
- -----------------
673 First 1928/1990 Grand Central 422,000 19.0% 100% $10,837,482 22.1% 15
Avenue......... South
470 Park Avenue 1912/1994 Park Avenue 260,000(4) 11.7 99 5,853,720 12.0 27
South(4)....... South/Flatiron
Bar Building 1922/1985 Rockefeller 165,000(5) 7.4 89(5) 4,139,704 8.5 58
(5)............ Center
70 W. 36th 1923/1994 151,000 6.8 98 2,795,986 5.7 38
Street......... Garment
1414 Avenue of 1923/1990 Rockefeller 111,000 5.0 98 3,370,001 6.9 31
the Americas... Center
29 W. 35th 1911/1985 78,000 3.5 92 1,393,135 2.8 8
Street......... Garment
------------ ----- --- ----------- ----- ---
1,187,000 53.5 97 28,390,028 58.0 177
ACQUISITION
PROPERTIES
- -----------------
1372 Broadway.... 1914/1985 Garment 508,000 22.9 84 9,631,140 19.7 32
1140 Avenue of 1926/1951 Rockfeller 191,000 8.6 98 4,917,520 10.0 39
the Americas... Center
50 W. 23rd 1892/1992 333,000 15.0 91 5,995,608 12.3 16
Street......... Chelsea
------------ ----- --- ----------- ----- ---
Total/Weighted 2,219,000(6) 100.0% 94% $48,934,296 100.0% 264
Average........ ------------ ----- --- ----------- ----- ---
------------ ----- --- ----------- ----- ---
ANNUAL
NET
ANNUALIZED EFFECTIVE
RENT RENT
PER PER
LEASED LEASED
SQUARE SQUARE
FOOT(2) FOOT(3)
----------- -----------
CORE PORTFOLIO
- -----------------
673 First $ 25.68 $ 21.79
Avenue.........
470 Park Avenue 22.66 19.43
South(4).......
Bar Building 28.33 24.74
(5)............
70 W. 36th 18.90 16.13
Street.........
1414 Avenue of 30.85 30.87
the Americas...
29 W. 35th 19.53 16.23
Street.........
----------- -----------
24.65 21.43
ACQUISITION
PROPERTIES
- -----------------
1372 Broadway.... 22.47 21.57
1140 Avenue of 26.30 24.70
the Americas...
50 W. 23rd 19.58 17.09
Street.........
----------- -----------
Total/Weighted $ 23.58 $ 21.11
Average........ ----------- -----------
----------- -----------
(FOOTNOTES ON FOLLOWING PAGE)
64
(FOOTNOTES FOR PRECEDING PAGE)
- ----------------------------------
(1) As used throughout this Prospectus, Annualized Rent represents the monthly
contractual rent under existing leases as of June 30, 1997 multiplied by 12.
This amount reflects total rent before any rent abatements and includes
expense reimbursements, which may be estimated as of such date. Total rent
abatements for leases in effect as of June 30, 1997 for the 12 months ending
June 30, 1998 are approximately $815,000.
(2) Annualized Rent Per Leased Square Foot, as used throughout this Prospectus,
represents Annualized 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 excluding "free rent" and operating expense
pass-throughs, if any, 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 excluding "free
rent" and operating expense pass-throughs, if any, divided by the number of
months in the lease multiplied by 12, and, in the case of both (a) and (b),
minus tenant improvement costs and leasing commissions, if any, paid or
payable by SL Green and presented on a per leased square foot basis. Annual
Net Effective Rent Per Leased Square Foot includes future contractual
increases in rental payments and therefore, in certain cases, may exceed
Annualized 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
July 15, 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 2,043,000 square feet of rentable office space,
146,000 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)
----------------- -----------------------------
June 30, 1997....................................... 97% 89%
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 June 30, 1997, SL Green renewed approximately 78% 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
80% 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 110,280 square feet, representing an average
annual expiration of 5.3% 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).
65
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 June 30, 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):
ANNUALIZED ANNUALIZED
RENT RENT PER
PERCENTAGE PER LEASED
SQUARE OF ANNUALIZED 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)
- --------------------------------------- ----------- ---------- ----------- ------------- --------------- -----------
June 30 through December 31, 1997...... 22 47,979 2.3% $ 1,378,363 $ 28.73 $ 28.81
1998................................... 26 71,514 3.4 2,058,149 28.78 29.31
1999................................... 30 114,207 5.5 3,063,842 26.83 27.24
2000................................... 26 148,161 7.1 3,851,078 25.99 27.32
2001................................... 28 85,417 4.1 2,269,226 26.57 28.56
2002................................... 31 139,260 6.7 2,970,971 21.33 22.68
2003................................... 25 250,439 12.1 5,808,334 23.19 28.83
2004................................... 22 346,424 16.7 8,176,306 23.60 27.67
2005................................... 13 327,111 15.8 7,510,196 22.96 25.09
2006................................... 16 179,893 8.7 4,571,056 25.41 29.75
2007................................... 25 364,855 17.6 7,276,775 19.94 24.92
--- ---------- ----- ------------- ------ -----------
TOTAL/Weighted Average............. 264 2,075,260 100.0% $ 48,934,296 $ 23.58(4) $ 26.85(4)
--- ---------- ----- ------------- ------ -----------
--- ---------- ----- ------------- ------ -----------
- ------------------------
(1) Annualized Rent of Expiring Leases, as used throughout this Prospectus,
represents the monthly contractual rent under existing leases as of June 30,
1997 multiplied by 12. This amount reflects total rent before any rent
abatements and includes expense reimbursements, which may be estimated as of
such date. Total rent abatements for leases in effect as of June 30, 1997
for the 12 months ending June 30, 1998 are approximately $815,000.
(2) Annualized Rent Per Leased Square Foot of Expiring Leases, as used
throughout this Prospectus, represents Annualized Rent of Expiring Leases,
as described in footnote (1) above, presented on a per leased square foot
basis.
(3) Annualized Rent Per Leased Square Foot of Expiring Leases With Future
Step-Ups represents Annualized 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 June 30, 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 Chelsea, Grand Central
South, Garment, Park Avenue South/Flatiron and Rockefeller Center
submarkets), was $24.64 per square foot as of June 30, 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.
Additionally, the Annualized Rent Per Leased Square Foot of Expiring Leases
includes the effect of retail rental rates at the Properties, which are
generally higher than office rental rates. Excluding rental payments
attributable to retail space at the Properties, the Weighted Average
Annualized Rent Per Leased Square Foot of Expiring Leases would be $22.72.
TENANT DIVERSIFICATION. The Properties (including the Acquisition
Properties) currently are leased to over 250 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
66
largest tenants at the Properties, based on the amount of square footage leased
by such tenants as of June 30, 1997:
PERCENTAGE
OF PERCENTAGE
AGGREGATE OF
PORTFOLIO AGGREGATE
REMAINING LEASED PORTFOLIO
LEASE TERM TOTAL LEASED SQUARE ANNUALIZED ANNUALIZED
TENANT(1) PROPERTY IN MONTHS SQUARE FEET FEET RENT RENT
- ------------------------------- ---------------------- ------------- ------------ ------------- ------------- -------------
Kallir, Philips, Ross Inc...... 673 First Avenue 84 80,000 3.9% $ 1,913,449 3.9%
New York Hospital(2)........... 673 First Avenue 110 76,000 3.7 1,906,829 3.9
Gibbs & Cox.................... 50 West 23rd Street 96 66,700 3.2 1,604,402 3.3
Capital-Mercury................ 1372 Broadway 97 64,122 3.1 1,292,732 2.6
Board of Education of the City
of New York.................. 50 West 23rd Street 156 64,000 3.1 722,475 1.5
Ann Taylor..................... 1372 Broadway 157 58,975 2.8 1,169,118 2.4
NationsBank.................... 1372 Broadway 33 55,238 2.7 1,364,343 2.8
Vollmer Associates............. 50 West 23rd Street 96 53,577 2.6 1,252,154 2.6
Newbridge Communications(3).... 673 First Avenue 100 49,000 2.4 1,456,155 3.0
Ross Stores.................... 1372 Broadway 116 48,604 2.3 939,346 1.9
Cygne.......................... 1372 Broadway 157 46,392 2.2 775,808 1.6
UNICEF......................... 673 First Avenue 78 40,300 1.9 1,070,667 2.2
Franklin Strategic............. 673 First Avenue 82 40,000 1.9 1,404,425 2.9
U.S. Committee for UNICEF...... 673 First Avenue 78 40,000 1.9 1,071,161 2.2
Republic of South Africa....... 673 First Avenue 82 40,000 1.9 1,108,913 2.3
Henry Siegel................... 1372 Broadway 98 34,045 1.6 578,765 1.2
Meredith Garage Corp. ......... 673 First Avenue 85 30,000 1.4 372,058 0.8
AJ Contracting................. 470 Park Ave. So. 150 27,870 1.3 635,803 1.3
Cowles Business Media.......... 470 Park Ave. So. 69 24,767 1.2 589,117 1.2
Work Bench..................... 470 Park Ave. So. 66 22,000 1.1 375,000 0.8
----- ------------ --- ------------- ---
TOTAL/Weighted Average(4)...... 100 961,590 46.3% $ 21,602,720 44.1%
----- ------------ --- ------------- ---
----- ------------ --- ------------- ---
- ------------------------
(1) This list is not intended to be representative of the Company's tenants as a
whole.
(2) 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.
(3) This tenant occupies an additional 13,000 square feet of space at 673 First
Avenue pursuant to a sublease expiring April 29, 2004.
(4) Weighted average calculation based on total rentable square footage leased
by each tenant.
67
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 June 30, 1997:
PERCENTAGE PERCENTAGE
OF AGGREGATE OF
PORTFOLIO AGGREGATE
LEASED PORTFOLIO
SQUARE FEET NUMBER OF PERCENT OF TOTAL LEASED SQUARE ANNUALIZED ANNUALIZED
UNDER LEASE LEASES ALL LEASES SQUARE FEET FEET RENT RENT
------------- ------------- ----------- ------------ ------------- ------------- ---------------
2,500 or less........................... 114 43.0% 162,180 7.8% $ 4,829,621 9.9%
2,501-5,000............................. 59 22.3 205,151 9.9 5,830,629 11.9
5,001-7,500............................. 22 8.3 141,907 6.8 3,255,363 6.7
7,501-10,000............................ 22 8.3 201,681 9.7 4,822,277 9.8
10,001-20,000........................... 21 7.9 290,421 14.0 6,558,268 13.4
20,001-39,999........................... 11 4.1 251,012 12.1 4,845,592 9.9
40,000 +................................ 15 5.7 822,908 39.7 18,792,546 38.4
--- ----- ------------ ----- ------------- -----
TOTAL................................... 264 100.0% 2,075,260 100.0% $ 48,934,296 100.0%
--- ----- ------------ ----- ------------- -----
--- ----- ------------ ----- ------------- -----
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 June 30,
1997, SL Green renewed approximately 78% 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 80% 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
SIX AVERAGE
MONTHS JANUARY 1,
ENDED 1994-
JUNE 30, JUNE 30,
1994 1995 1996 1997 1997
--------- --------- --------- ----------- -----------
Number of leases expired during calendar year or
period............................................ 5 12 31 17 65
Number of leases renewed............................ 5 7 26 13 51
Percentage of leases renewed........................ 100.0% 58.3% 83.9% 76.5% 78.4%
Aggregate rentable square footage of expiring
leases............................................ 14,223 38,008 137,932 49,514 239,677
Aggregate rentable square footage of lease
renewals.......................................... 14,223 28,055 108,758 39,943 190,979
Percentage of expiring rentable square foot
renewed........................................... 100.0% 73.8% 78.9% 80.7% 79.7%
68
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 six months of 1997:
TOTAL/
WEIGHTED
SIX AVERAGE
MONTHS JANUARY 1,
ENDED 1994-JUNE
JUNE 30, 30,
1994 1995 1996 1997 1997
--------- --------- ---------- ---------- ------------
RENEWALS
Number of leases.......................................... 5 7 26 13 51
Square feet............................................... 14,223 28,055 108,758 39,943 190,979
Tenant improvement costs per square foot.................. $ 1.96 $ 0.00 $ 2.39 $ 1.84 $ 1.89
Leasing commission costs per square foot.................. $ 1.77 $ 1.99 $ 3.36 $ 2.40 $ 2.84
--------- --------- ---------- ---------- ------------
Total tenant improvement and leasing commission costs
per square foot....................................... $ 3.73 $ 1.99 $ 5.75 $ 4.24 $ 4.73
--------- --------- ---------- ---------- ------------
--------- --------- ---------- ---------- ------------
RE-TENANTED OR NEWLY TENANTED SPACE
Number of leases.......................................... 8 7 11 24 50
Square feet............................................... 42,632 25,787 36,911 70,721 176,051
Tenant improvement costs per square foot.................. $ 16.41 $ 22.73 $ 13.76 $ 17.99 $ 17.42
Leasing commission costs per square foot.................. $ 7.27 $ 4.55 $ 9.41 $ 6.24 $ 6.91
--------- --------- ---------- ---------- ------------
Total tenant improvement and leasing commission costs
per square foot....................................... $ 23.68 $ 27.28 $ 23.17 $ 24.23 $ 24.33
--------- --------- ---------- ---------- ------------
--------- --------- ---------- ---------- ------------
TOTAL
Number of leases.......................................... 13 14 37 37 101
Square feet............................................... 56,855 53,842 145,669 110,664 367,030
Tenant improvement costs per square foot.................. $ 12.80 $ 10.88 $ 5.27 $ 12.16 $ 9.34
Leasing commission costs per square foot.................. $ 5.90 $ 3.21 $ 4.90 $ 4.85 $ 4.79
--------- --------- ---------- ---------- ------------
Total tenant improvement and leasing commission costs
per square foot....................................... $ 18.70 $ 14.09 $ 10.17 $ 17.01 $ 14.13(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 June 30, 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 94% (the occupancy rate at the Properties as of June
30, 1997), such weighted average per square foot amount would be $9.63.
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 $6.2
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.
69
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(9)
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
- ------------------------
(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.
(9) Weighted average.
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 366,000 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. See "Risk
Factors--The Company's Performance and Value are Subject to Risks Associated
with the Real Estate Industry--The expiration of net leases could adversely
affect the Company's financial condition."
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).
70
As of June 30, 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
ANNUALIZED RENT
RENT PER LEASED PER LEASED
YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT
- ----------------------------------------------------------------- ----------------- ----------------- -------------
1997(1).......................................................... 100% $ 25.68 $ 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 June 30, 1997.
As of June 30, 1997, 673 First Avenue was leased to 15 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 76,000 square feet
(approximately 18% of the Property) under two leases expiring on August 31,
2006, that provide for an aggregate annualized base rent as of June 30, 1997 of
approximately $1.9 million (approximately $25.00 per square foot) and renewal
options for five years on the two direct leases. In addition, such tenant
occupies an additional 65,000 square feet under two subleases, one expiring on
December 31, 2003 and the other expiring on December 31, 2004. 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 June 30, 1997 of approximately $1.9
million (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.
Also, a publishing company occupied approximately 49,000 square feet
(approximately 11.6% of the Property) under two leases expiring on October 31,
2005 that provide for an aggregate annualized base rent as of June 30, 1997 of
approximately $1.5 million (approximately $30.00 per square foot). In addition,
such tenant occupies an additional 13,000 square feet under a sublease expiring
on April 30, 2004. In addition to annualized base rent, this tenant pays real
estate tax escalations and operating escalations in excess of a base year
payment.
71
The following table sets out a schedule of the annual lease expirations at
673 First Avenue for leases executed as of June 30, 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):
ANNUALIZED
RENT PER
PERCENTAGE ANNUALIZED LEASED
SQUARE OF ANNUALIZED 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
- ---------------------------------------------- ----------- --------- ----------- ------------- ----------- -----------
June 30 through December 31, 1997............. -- -- -- -- -- --
1998.......................................... -- -- -- -- -- --
1999.......................................... 1 1,018 0.2% $ 10,180 $ 10.00 $ 10.00
2000.......................................... 1 100 0 44,223 442.23(2) 511.94(2)
2001.......................................... -- -- -- -- -- --
2002.......................................... 1 1,046 0.3 23,986 22.93 24.57
2003.......................................... 2 80,300 19.4 2,141,828 26.67 36.16
2004.......................................... 6 203,944 48.0 4,989,147 24.46 28.63
2005.......................................... 1 49,000 11.6 1,456,155 29.72 32.47
2006.......................................... 1 76,000 18.0 1,906,829 25.09 27.35
2007 and thereafter........................... 2 10,659 2.5 265,134 24.87 35.55
--- --------- ----- ------------- ----------- -----------
SUBTOTAL/WEIGHTED AVERAGE..................... 15 422,067 100.0% $ 10,837,482 $ 25.68 $ 30.51(3)
Unleased at 6/30/97........................... 0
--- --------- ----- ------------- ----------- -----------
TOTAL..................................... 422,067 100.0%
--------- -----
--------- -----
- ------------------------
(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 $26.85 per square foot as of June
30, 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 Annualized Rent Per Leased Square Foot of Expiring
Leases and Annualized 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 $22,360,268 as of June 30,
1997. 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
$10.072 per $100 of assessed value. The total annual tax for 673 First Avenue at
this rate for the 1997-98 tax year is $1,225,561 (at a taxable assessed value of
$12,168,000).
72
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 June 30, 1997, 99% of the rentable square footage in 470 Park Avenue
South was leased (including space for leases that were executed as of June 30,
1997). The office space was 99% leased and the retail space was 100% leased. The
following table sets forth certain information with respect to the Property:
ANNUAL NET
EFFECTIVE
ANNUALIZED RENT RENT
PER LEASED PER LEASED
YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FEET
- ------------------------------------------------------------------ ------------------- --------------- -------------
1997(1)........................................................... 99% $ 22.66 $ 19.43
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 21.28 17.19
- ------------------------
(1) Information is as of June 30, 1997.
As of June 30, 1997, 470 Park Avenue South was leased to 27 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 June 30, 1997 of approximately
$621,000 (approximately $22.28 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.
73
The following table sets out a schedule of the annual lease expirations at
470 Park Avenue South with respect to leases executed as of June 30, 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):
ANNUALIZED
RENT PER
ANNUALIZED LEASED
PERCENTAGE RENT PER SQUARE FOOT
SQUARE OF ANNUALIZED 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
- --------------------------------------------- ----------- ----------- ---------- ---------- --------- -----------
June 30 through December 31, 1997............ -- -- -- -- -- --
1998......................................... 1 2,400 0.9 $ 54,000 $22.50 $23.23
1999......................................... 3 18,800 7.2 439,760 23.39 24.44
2000......................................... 2 18,135 7.0 417,091 23.00 27.43
2001......................................... 3 19,271 7.4 478,038 24.81 28.53
2002......................................... 6 53,520 20.6 1,182,058 22.09 23.98
2003......................................... 5 61,062 23.5 1,311,933 21.49 26.58
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......................................... 2 26,135 10.1 664,359 25.42 31.82
2007 and thereafter.......................... 2 30,870 11.9 791,803 25.65 33.90
--- ----------- ----- ---------- --------- -----------
SUBTOTAL/WEIGHTED AVERAGE.................... 27 258,292 99.4 $5,853,720 $22.66 $26.95(2)
Unleased at 6/30/97.......................... 1,637 0.6%
--- ----------- ----- ---------- --------- -----------
TOTAL.................................... 259,929 100.0%
----------- -----
----------- -----
- ------------------------
(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 $22.38 per square foot as of June 30, 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 Annualized Rent Per Leased Square Foot of Expiring
Leases and Annualized 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 $15,006,453 as of June 30,
1997. Depreciation and amortization are computed on the straight-line method
over 39 years.
74
The current real estate tax rate for all Manhattan office properties is
$10.072 per $100 of assessed value. The total annual tax for 470 Park Avenue
South at this rate for the 1997-98 tax year is $648,133 (at an assessed value of
$6,435,000).
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 with the intent of obtaining a 100%
economic interest in such Property. 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. See "Risk Factors--The Company's
Performance and Value are Subject to Risks Associated with the Real Estate
Industry--The expiration of net leases could adversely affect the Company's
financial condition."
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 July
15, 1997, approximately 14,000 square feet of space at the Property was vacant
and approximately 64% of the expiring leases were renewed.
As of June 30, 1997, approximately 89% of the rentable square footage in The
Bar Building was leased. The office space was 89% 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 July 15, 1997, approximately 93%
75
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
ANNUALIZED RENT
RENT PER LEASED PER LEASED
YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT
- ------------------------------------------------------------------ ------------------- --------------- -------------
1997(1)........................................................... 89% $ 28.33 $ 24.74
1996.............................................................. 78 29.28 25.98
- ------------------------
(1) Information is as of June 30, 1997.
As of June 30, 1997, the Bar Building was leased to 58 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 10.2% of the Property) under two leases expiring on September 30,
1999 that provide for an aggregate annualized base rent as of June 30, 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 June 30, 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):
ANNUALIZED
ANNUALIZED RENT PER
RENT LEASED
PERCENTAGE PER SQUARE FOOT
SQUARE OF ANNUALIZED 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
- --------------------------------------------- --------------- --------- --------------- ------------ ----------- -----------
June 30 through December 31, 1997............ 10 17,981 10.9 $ 535,370 $ 29.77 $ 29.83
1998......................................... 5 5,136 3.1 145,810 28.39 28.39
1999......................................... 5 22,176 13.5 871,169 39.28 39.59
2000......................................... 12 25,824 15.7 732,869 28.38 29.14
2001......................................... 8 16,906 10.3 479,040 28.34 30.85
2002......................................... 10 31,251 19.0 699,803 22.39 23.10
2003......................................... 3 8,069 4.9 157,210 19.48 21.55
2004......................................... 2 9,982 6.1 277,754 27.83 29.36
2005......................................... -- -- -- -- -- --
2006......................................... 2 8,095 4.9 209,407 25.87 28.74
2007 and thereafter.......................... 1 700 0.4 31,272 44.67 83.30
--
--------- ----- ------------ ----------- -----------
SUBTOTAL/WEIGHTED AVERAGE.................... 58 146,120 88.8% $ 4,139,704 $ 28.33 $ 29.52
--
------------ ----------- -----------
Unleased at 6/30/97.......................... 18,664 11.2%
--------- -----
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 $27.38 per square foot as of June 30, 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 the Bar Building.
Additionally, the
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
76
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
Annualized Rent Per Leased Square Foot of Expiring Leases includes the
effect of retail rental rates at this Property, which are generally higher
than office rental rates. Excluding rental payments attributable to retail
space at this Property, the weighted average Annualized Rent Per Leased
Square Foot of Expiring Leases would be $27.23.
The aggregate tax basis of the mortgage indebtedness encumbering The Bar
Building for Federal income tax purposes was $11,444,247 as of June 30, 1997.
The current real estate tax rate for all Manhattan office properties is
$10.072 per $100 of assessed value. The total annual tax for The Bar Building at
this rate for the 1997-98 tax year is $729,716 (at an assessed value of
$7,245,000).
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 151,000 rentable square feet (including
approximately 130,000 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 June 30, 1997, approximately 98% of the rentable square footage in 70
West 36th Street was leased (including space for leases that were executed as of
June 30, 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
ANNUALIZED RENT RENT
PER LEASED PER LEASED
YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT
- ---------------------------------------------- ------------------- --------------- -------------
1997(1)....................................... 98% $ 18.90 $ 16.13
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 20.55 15.18
- ------------------------
(1) Information is as of June 30, 1997.
As of June 30, 1997, 70 West 36th Street was leased to 38 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 June 30, 1997 of approximately $266,000
(approximately $16.40 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.
77
The following table sets out a schedule of the annual lease expirations at
70 West 36th Street with respect to leases executed as of June 30, 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):
ANNUALIZED
ANNUALIZED RENT PER
RENT LEASED
PERCENTAGE PER SQUARE FOOT
SQUARE OF ANNUALIZED 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
- ------------------------------------------------- ------------- --------- ----------- ------------ ----------- -----------
June 30 through December 31, 1997................ 2 2,227 1.5% $ 51,355 $ 23.06 $ 23.06
1998............................................. 7 24,314 16.2 494,338 20.33 20.68
1999............................................. 3 7,078 4.7 120,075 16.96 17.15
2000............................................. 2 7,245 4.8 141,864 19.58 19.95
2001............................................. 7 12,777 8.5 241,689 18.92 20.00
2002............................................. 5 16,011 10.7 298,838 18.66 19.59
2003............................................. 3 29,714 19.8 536,014 18.04 20.01
2004............................................. 1 2,589 1.7 57,585 22.24 22.24
2005............................................. 2 9,047 6.0 178,309 19.71 20.47
2006............................................. 3 18,356 12.4 328,461 17.89 23.42
2007 and thereafter.............................. 3 18,559 12.4 347,458 18.72 19.00
--
--------- ----- ------------ ----------- -----------
SUBTOTAL/WEIGHTED AVERAGE........................ 38 147,917 98.4% $ 2,795,986 $ 18.90 $ 20.34
--
------------ ----------- -----------
Unleased at 6/30/97 3,059 1.6%
--------- -----
TOTAL........................................ 150,976 100.0%
--------- -----
--------- -----
- ------------------------
(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 $23.32 per square foot as of June 30,
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
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.
78
The aggregate undepreciated tax basis of depreciable real property at 70
West 36th Street for Federal income tax purposes was $6,660,097 as of June 30,
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
$10.072 per $100 of assessed value. The total annual tax for 70 West 36th Street
at this rate for the 1997-98 tax year, including the applicable BID tax, is
$377,618 (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 June 30, 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 June 30, 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
ANNUALIZED RENT RENT
PER LEASED PER LEASED
YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT
- ---------------------------------------------- ------------------- --------------- -------------
1997(1)....................................... 98% $ 30.85 $ 30.87
1996.......................................... 97 30.40 31.14
- ------------------------
(1) Information is as of June 30, 1997.
As of June 30, 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 provides for annualized base rent as of June 30, 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.
79
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 12.6% of the Property) under a lease expiring
on May 31, 2004 that provides for annualized base rent as of June 30, 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 June 30, 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:
ANNUALIZED
ANNUALIZED RENT PER
RENT LEASED
PERCENTAGE PER SQUARE FOOT
SQUARE OF ANNUALIZED 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
- ------------------------------------------------- ------------- --------- ----------- ------------ ----------- -----------
June 30 through December 31, 1997................ 1 980 0.9% $ 20,409 $ 20.83 $ 23.83
1998............................................. 6 21,533(2) 19.3 854,107 39.67 40.45
1999............................................. 3 13,700 12.3 458,180 33.44 34.21
2000............................................. 3 5,300 4.8 141,968 26.79 30.30
2001............................................. 5 14,265 12.8 380,134 26.65 28.63
2002............................................. 2 4,400 4.0 98,349 22.35 26.26
2003............................................. 5 21,465 19.3 575,602 26.82 32.88
2004............................................. 1 13,975 12.6 355,950 25.47 30.35
2005............................................. 1 2,187 2.0 60,327 27.58 31.69
2006............................................. 2 3,100 2.8 82,600 26.65 38.73
2007 and thereafter.............................. 2 8,346 7.5 342,375 41.02 58.09
--
--------- ----- ------------ ----------- -----------
SUBTOTAL/WEIGHTED AVERAGE........................ 31 109,251 98.1% $ 3,370,001 $ 30.85 $ 35.26(3)
--
------------ ----------- -----------
Unleased at 6/30/97 2,100 1.9%
--------- -----
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 $27.38 per square foot as of June 30, 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. Additionally, the Annualized Rent Per Leased Square Foot of
Expiring Leases includes the effect of retail rental rates at this Property,
which are generally higher than office rental rates. Excluding rental
payments attributable to retail space at this Property, the weighted average
Annualized Rent Per Leased Square Foot of Expiring Leases would be $27.96.
(2) As noted above, 12,200 square feet of the space expiring during 1998 has
been released to two tenants.
(3) The differential between Annualized Rent Per Leased Square Foot of Expiring
Leases and Annualized 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 $11,830,680 as of
June 30, 1997. Depreciation and amortization are computed on the straight-line
method over 39 years.
80
The current real estate tax rate for all Manhattan office properties is
$10.072 per $100 of assessed value. The total annual tax for 1414 Avenue of the
Americas at this rate for the 1997-98 tax year is $484,967 (at an assessed value
of $4,815,000).
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 June 30, 1997, approximately 92% of the rentable square footage in 29
West 35th Street was leased (including space for leases executed as of June 30,
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
ANNUALIZED RENT
RENT PER LEASED PER LEASED
YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT
- ---------------------------------------------- ----------------- --------------- -------------
1997(1)....................................... 92% $ 19.53 $ 16.23
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 June 30, 1997.
As of June 30, 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 June 30, 1997 of
approximately $522,000 (approximately $26.77 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.
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 June 30, 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 June 30, 1997 of
approximately $191,000 (approximately $19.59 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 June 30, 1997 for each
of the next ten years and thereafter (assuming that
81
no tenants exercise renewal or cancellation options and that there are no tenant
bankruptcies or other tenant defaults):
ANNUALIZED
ANNUALIZED RENT PER
RENT LEASED
PERCENTAGE PER SQUARE FOOT
SQUARE OF ANNUALIZED 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
- ------------------------------------------------- ------------- ----------- ----------- ------------ ----------- -----------
June 30 through December 31, 1997................ -- -- -- -- -- --
1998............................................. 1 9,750 12.5% $ 191,475 $ 19.64 $ 20.42
1999............................................. 1 16,250 20.9 260,585 16.04 16.04
2000............................................. -- -- -- -- -- --
2001............................................. -- -- -- -- -- --
2002............................................. 1 3,835 4.9 66,000 17.21 19.57
2003............................................. -- -- -- -- -- --
2004............................................. 3 28,500 36.6 699,575 24.55 33.75
2005............................................. -- -- -- -- -- --
2006............................................. -- -- -- -- -- --
2007 and thereafter.............................. 2 13,000 16.7 175,500 13.50 17.56
--
----------- ----- ------------ ----------- -----------
SUBTOTAL/WEIGHTED AVERAGE........................ 8 71,335 91.6% $ 1,393,135 $ 19.53 $ 24.18(2)
--
--
------------ ----------- -----------
------------ ----------- -----------
Unleased at 6/30/97.............................. 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 $23.32 per square foot as of June 30,
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 Annualized Rent Per Leased Square Foot of Expiring
Leases and Annualized 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 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 $1,482,682 as of June 30,
1997. Depreciation and amortization are computed on the straight-line method
over 39 years.
82
The current real estate tax rate for all Manhattan office properties is
$10.072 per $100 of assessed value. The total annual tax for 29 West 35th Street
at this rate for the 1997-98 tax year, including the applicable BID tax, is
$176,689 (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 at
such time. The aggregate purchase price for such fee interest and such mortgage
indebtedness is approximately $54.14 million (including $440,000 in acquisition
costs and $1.2 million in capital improvements). SL Green has been the leasing
agent of this Property since June 1, 1997.
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.
As of June 30, 1997, approximately 84% of the rentable square footage in
1372 Broadway was leased (including space for leases that were executed as of
June 30, 1997). The following table sets forth certain information with respect
to the Property:
ANNUAL NET
ANNUALIZED EFFECTIVE
RENT RENT
PER LEASED PER LEASED
YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT
- --------------------------------------------------------------------- ------------------- ----------- -------------
1997(1).............................................................. 84% $ 22.47 $ 21.57
1996................................................................. 89 22.05 21.20
- ------------------------
(1) Information is as of June 30, 1997.
As of June 30, 1997, 1372 Broadway was leased to 32 tenants operating in
various industries including financial services, textiles and retailing, three
of whom occupied 10% or more of the rentable square footage at the Property. 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 June 30, 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.
83
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 June 30, 1997 of approximately
$1.17 million (approximately $19.84 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 June 30, 1997 of approximately
$1.24 million (approximately $22.45 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
1372 Broadway with respect to leases executed as of June 30, 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):
ANNUALIZED
RENT PER
PERCENTAGE ANNUALIZED LEASED
SQUARE OF ANNUALIZED 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
- ------------------------------------------------- ----------- --------- ----------- ------------ ----------- -----------
June 30 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 22.76 23.66
2000............................................. 4 78,157 15.4 1,996,071 25.54 26.14
2001............................................. -- -- -- -- -- --
2002............................................. 5 26,189 5.2 504,857 19.28 20.00
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.............................. 8 183,829 36.2 3,850,255 20.94 25.17
----------- --------- ----------- ------------ ----------- -----------
SUBTOTAL/WEIGHTED AVERAGE........................ 32 428,638 84.4% $ 9,631,140 $ 22.47 $ 25.31(2)
----------- ------------ ----------- -----------
Unleased at 6/30/97.............................. 79,300 15.6%
--------- -----------
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 $23.32 per square foot as of June 30,
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.
Additionally, the Annualized Rent Per Leased Square Foot of Expiring Leases
includes the effect of retail rental rates at this Property, which are
generally higher than office rental rates. Excluding rental payments
attributable to retail space at this Property, the weighted average
Annualized Rent Per Leased Square Foot of Expiring Leases would be $20.36.
(2) The differential between Annualized Rent Per Leased Square Foot of Expiring
Leases and Annualized 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
84
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 1372
Broadway for Federal income tax purposes was $52.5 million as of June 30, 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
$10.072 per $100 of assessed value. The total annual tax for 1372 Broadway at
this rate for the 1997-98 tax year, including the applicable BID tax, is
$2,258,107 (at an assessed value of $21,793,000).
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 $21.3
million (including $50,000 of acquisition costs). The remaining term of the
leasehold is in excess of 19 years, with an option to extend for a further 50
year term. See "Risk Factors--The Company's Performance and Value are Subject to
Risks Associated with the Real Estate Industry--The expiration of net leases
could adversely affect the Company's financial condition." 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 June 30, 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 June 30, 1997). The following table sets forth certain
information with respect to the Property:
ANNUAL NET
ANNUALIZED EFFECTIVE
RENT RENT
PER LEASED PER LEASED
YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT
- --------------------------------------------------------------------- ------------------- ----------- -------------
1997(1).............................................................. 98% $ 26.30 $ 24.72
1996................................................................. 99 26.57 24.78
- ------------------------
(1) Information is as of June 30, 1997.
As of June 30, 1997, 1140 Avenue of the Americas was leased to 39 tenants
operating in various industries including executive placement, financial
services and precious stones, one of whom occupied 10% or more of the rentable
square footage at the Property. An executive placement firm occupied
approximately 28,200 square feet (approximately 14.8% of the Property) under two
leases expiring on September 30, 2005 and September 30, 2006, respectively, that
provide for aggregate annualized base rent as of June 30, 1997 of approximately
$714,000 (approximately $25.32 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.
85
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 June 30, 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):
ANNUALIZED
RENT PER
PERCENTAGE ANNUALIZED LEASED
SQUARE OF ANNUALIZED 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
- ------------------------------------------------- ----------- --------- ----------- ------------ ----------- -----------
June 30 through December 31, 1997................ 4 12,676 6.6% $ 319,419 $ 25.20 $ 25.20
1998............................................. 4 5,534 2.9 180,291 32.58 33.04
1999............................................. 8 22,119 11.6 541,252 24.47 24.47
2000............................................. 2 13,400 7.0 376,992 28.13 29.73
2001............................................. 5 22,198 11.6 690,325 31.10 31.50
2002............................................. -- -- -- -- -- --
2003............................................. 5 17,819 9.3 449,036 25.20 29.30
2004............................................. 5 40,370 21.1 972,060 24.08 27.20
2005............................................. 3 17,498 9.2 425,385 24.31 29.08
2006............................................. 1 18,800 9.8 486,638 25.89 32.39
2007 and thereafter.............................. 2 16,575 8.7 476,122 28.73 34.16
--- --------- ----------- ------------ ----------- -----------
SUBTOTAL/WEIGHTED AVERAGE........................ 39 186,989 97.9% $ 4,917,520 $ 26.30 $ 29.12(2)
--- ------------ ----------- -----------
Unleased at 6/30/97.............................. 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 $27.38 per square foot as of June 30, 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. Additionally, the Annualized Rent Per Leased Square Foot of
Expiring Leases includes the effect of retail rental rates at this Property,
which are generally higher than office rental rates. Excluding rental
payments attributable to retail space at this Property, the weighted average
Annualized Rent Per Leased Square Foot of Expiring Leases would be $24.96.
(2) The differential between Annualized Rent Per Leased Square Foot of Expiring
Leases and Annualized 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 1140
Avenue of the Americas for Federal income tax purposes was $21.2 million as of
June 30, 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
$10.072 per $100 of assessed value. The total annual tax for 1140 Avenue of the
Americas at this rate for the 1997-98 tax year is $974,466 (at an assessed value
of $9,675,000).
50 WEST 23RD STREET. In June 1997, SL Green obtained an option from an
unaffiliated seller to acquire a 100% fee interest in 50 West 23rd Street, a
333,000 rentable square foot 13-story Class B office building located on West
23rd Street between 5th Avenue and Avenue of the Americas in the Chelsea
submarket of Manhattan. The cost of obtaining the option was $500,000 (to be
credited against the purchase price) and the purchase price for the Property is
approximately $36.0 million (including $50,000 of acquisition costs).
86
In connection with the Formation Transactions, the option will be assigned to
the Operating Partnership at cost and will be exercisable through July 31, 1997.
The term of the option is extendable for up to three successive one month
periods (I.E., through October 31, 1997) at a cost of $100,000 per extension.
Under the option terms, the closing must occur within 30 days after exercise of
such option. Management of the Company intends to exercise the option and
acquire the Property at the closing of the Offering. The Company intends to
encumber the Property with an approximately $14 million first mortgage loan from
LBHI at the time of closing of the Offering. See "The Properties--Mortgage
Indebtedness."
In addition to the foregoing, the contract of sale will provide that if, by
the date 50 West 23rd Street is acquired by the Company, there has not been
enacted into law a reduction in the federal income tax rate on capital gains in
effect on the contract date, the Company will deposit in an escrow account the
sum of $1.56 million. In the event there is enacted into law by April 16, 1998 a
reduction in such rate applicable to gains recognized on or before January 2,
1998, a portion of such escrowed amount approximately equal to the differential
between (i) the income tax payable by the seller on its capital gains
attributable to the sale of this Property and (ii) the income tax that would
have been payable on such gain in the event such reduction had been in effect at
the time of sale, will be paid to the seller and the balance will be refunded to
the Company.
50 West 23rd Street was completed in 1892 and substantially renovated in
1992. The property contains approximately 333,000 rentable square feet
(including approximately 324,000 square feet of office space and approximately
9,000 square feet of retail space), with floor plates ranging from 32,000 square
feet to 6,500 square feet. The substantial renovation of 50 West 23rd Street in
1992, completed by the prior owner of the building at a cost of approximately
$15.4 million, included (i) construction of a new lobby, (ii) overhaul of
elevator mechanical systems, (iii) enhancement of electrical capacity, (iv)
replacement of HVAC and plumbing systems, (v) installation of new windows, (vi)
facade restoration and (vii) asbestos abatement.
As of June 30, 1997, approximately 91% of the rentable square footage in 50
West 23rd Street was leased (including space for leases that were executed as of
June 30, 1997). The office space was 91% leased and the retail space was 100%
leased. The following table sets forth certain information with respect to the
Property:
ANNUAL NET
ANNUALIZED EFFECTIVE
RENT RENT
PER LEASED PER LEASED
YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT
- --------------------------------------------------------------------- ------------------- ----------- -------------
1997(1).............................................................. 91% $ 19.58 $ 17.09
1996................................................................. 91 19.68 17.09
- ------------------------
(1) Information is as of June 30, 1997.
As of June 30, 1997, 50 West 23rd Street was leased to 16 tenants operating
in various industries including engineering, architecture and aerospace, three
of whom occupied 10% or more of the rentable square footage at the Property. A
naval architecture firm occupied approximately 64,700 square feet (approximately
19.3% of the Property) under a lease expiring on August 31, 2005, that provides
for annualized base rent as of June 30, 1997 of approximately $1.25 million
(approximately $19.39 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 New York City agency occupied approximately 64,000 square
feet (approximately 19.2% of the Property) under a lease expiring on June 30,
2010, that provides for annualized base rent as of June 30, 1997 of
approximately $700,000 (approximately $10.94 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, an engineering firm occupied approximately 53,600 square feet
(approximately 16.1% of the Property) under a lease expiring on June 30, 2005,
that provides for annualized base rent as of June 30,
87
1997 of approximately $1.1 million (approximately $20.02 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
50 West 23rd Street with respect to leases executed as of June 30, 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):
ANNUALIZED
RENT PER
ANNUALIZED LEASED
PERCENTAGE RENT PER SQUARE FOOT
SQUARE OF ANNUALIZED 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
- --------------------------------------- ------------- --------- ----------- ------------ ----------- ------------
June 30 through December 31, 1997...... 4 13,609 4.1% $ 440,691 $ 32.38 $ 32.39
1998................................... -- -- -- -- -- --
1999................................... 1 2,800 0.8 128,958 46.06 46.06
2000................................... -- -- -- -- -- --
2001................................... -- -- -- -- -- --
2002................................... 1 3,008 0.9 97,080 32.27 39.05
2003................................... 1 11,510 3.4 206,724 17.96 21.31
2004................................... 2 28,700 8.6 507,653 17.69 17.95
2005................................... 3 141,477 42.4 3,320,426 23.47 24.98
2006................................... 1 21,230 6.4 297,220 14.00 16.00
2007 and thereafter.................... 3 82,317 24.7 996,856 12.11 16.41
--
--------- ----- ------------ ----------- ------------
Subtotal/Weighted Average.............. 16 304,651 91.3% $ 5,995,608 $ 19.68 $ 21.90(2)
--
------------ ----------- ------------
Unleased at 6/30/97.................... 28,979 8.7%
--------- -----
TOTAL.................................. 333,630 100.0%
--------- -----
--------- -----
- ------------------------
(1) For comparison purposes, according to RELocate the Direct Weighted Average
Rental Rate for the direct Class B Chelsea submarket (which, according to
RELocate, is the area from 14th Street to 33rd Street between 5th Avenue,
from 14th Street to 23rd Street, and Broadway from 23rd Street to 33rd
Street and the Hudson River), was $20.41 per square foot as of June 30,
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 50 West 23rd Street.
(2) The differential between Annualized Rent Per Leased Square Foot of Expiring
Leases and Annualized 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 50
West 23rd Street for Federal income tax purposes was $36.0 million as of June
30, 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
$10.072 per $100 of assessed value. The total annual tax for 50 West 23rd Street
at this rate for the 1997-98 tax year is $969,027 (at an assessed value of
$9,621,000).
THE OPTION PROPERTIES
17 BATTERY PLACE. In July 1997, 17 Battery LLC, a limited liability company
owned by Stephen L. Green, contracted to acquire from an unaffiliated seller an
interest in 17 Battery Place for an aggregate purchase price of $59 million. 17
Battery Place contains 1.2 million rentable square feet and is comprised of two
Class B office buildings, 17 Battery Place North, a 22-story building
encompassing approximately
88
423,000 rentable square feet (the "North Building"), and 17 Battery Place South,
a 31-story building (the "South Building") encompassing approximately 799,000
rentable square feet located at the intersection of Battery Place and West
Street in the financial district of downtown Manhattan. SL Green has been
leasing agent and property manager at 17 Battery Place since January 2, 1996.
During the contract period, the seller of 17 Battery Place, with the
assistance of 17 Battery LLC, will convert the South Building into two
condominium units. One unit will be comprised of portions of the basement and
the ground floor and floors 2 through 13 and will continue to function as office
space (the "Office Unit"). The second unit will be comprised of floors 14
through 31 and will be redeveloped by the seller into a residential/hotel
facility (the "Hotel Unit"). In addition, the North Building will continue to
function as office space. Pursuant to the contract of sale, 17 Battery LLC,
subject to the satisfactory completion of the condominium conversion, will
acquire all of the North Building and the Office Unit (an aggregate of
approximately 800,000 rentable square feet) but will have no interest in the
Hotel Unit.
As of June 30, 1997, the North Building and the South Building were 71% and
93% leased, respectively. Tenants include MCI Communications, the City of New
York and New York Association for New Americans. 17 Battery LLC has agreed to
keep vacant until December 31, 1998 an aggregate of 153,000 square feet of
office space in the North Building and the Office Unit in order to accommodate
the relocation of office tenants from the Hotel Unit.
The Operating Partnership has been granted an option, exercisable over a 10
year period, to acquire from 17 Battery LLC its interest in the North Building
and the Office Unit at a price equal to the aggregate of (i) sums paid by 17
Battery LLC for such interest, (ii) all financing and other costs and expenses
incurred in connection with the acquisition or ownership by 17 Battery LLC of
such interest and (iii) interest on all such sums from the date of incurrence.
In addition to the foregoing, 17 Battery LLC has agreed during the 10 year
option term, not to sell or otherwise transfer its interest in 17 Battery Place
to any third party without providing 30 days prior notice to the Operating
Partnership and offering to the Operating Partnership the right to (i) exercise
its option under the aforementioned terms and sell its interest to such third
party or (ii) retain such option following the sale to such third party. In the
event the Operating Partnership elects not to exercise its option and a third
party sale is consummated, 17 Battery LLC will pay to the Operating Partnership
its net after tax profit from such sale (defined as the excess of the gross
sales price for 17 Battery LLC's interest over the total of any outstanding
mortgage or other encumbrance, the federal income tax payable by the members of
17 Battery LLC as a result of the sale as well as other transaction costs
incurred in connection with such sale, including transfer taxes, closing
adjustments, brokerage commissions, legal fees and accounting fees).
110 EAST 42ND STREET. In August 1997, 110 Realty LLC, a limited liability
company owned by Stephen L. Green, contracted to acquire from an unaffiliated
seller the land and building located at 110 East 42nd Street for a purchase
price of $30 million.
110 East 42nd Street is an 18-story Class B office building containing
approximately 250,000 rentable square feet. The property is located in midtown
Manhattan on the south side of 42nd Street between Park and Lexington Avenues,
directly opposite the main entrance to Grand Central Terminal (with additional
frontage and entrances on the north side of 41st Street). As of June 30, 1997,
the building was 93% leased. Major tenants include Greenpoint Savings Bank,
Major League Soccer LLC and Morgan, Lewis & Bockius. The building was completed
in 1921 as the headquarters of the Bowery Savings Bank and has been designated
as a landmark structure by the Landmarks Commission of the City of New York.
The Operating Partnership has been granted an option, exercisable over a 10
year period, to acquire from 110 Realty LLC its interest in 110 East 42nd Street
at a price equal to the aggregate of (i) sums paid by 110 Realty LLC for such
interest, (ii) all financing and other costs and expenses incurred in connection
with the acquisition of ownership by 110 Realty LLC of such interest and (iii)
interest on all such sums from the date of incurrence.
In addition to the foregoing, 110 Realty LLC has agreed to substantially the
same restrictions on and effects of a sale or transfer of its interest as
described above with respect to 17 Battery LLC. Also, in the
89
event that 110 Realty LLC or an entity in which it owns an interest acquires 110
East 42nd Street and at such time the Operating Partnership has not exercised
its option, at any time prior to the expiration of the option period 110 Realty
LLC shall, at the request of the Operating Partnership, enter into an option
agreement containing commercially reasonable terms to sell 110 Realty LLC's
interest in the property to the Operating Partnership for a purchase price equal
to that set forth in (i), (ii) and (iii) of the paragraph above.
Exercise of each of the options to acquire 17 Battery Place and 110 East
42nd Street by the Company is subject to approval by the independent Directors
of the Company. Accordingly, there can be no assurance that either of such
Properties will be acquired by the Company.
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.
90
MORTGAGE INDEBTEDNESS TO BE OUTSTANDING AFTER THE COMPLETION OF THE OFFERING (1)
ESTIMATED EXPECTED ESTIMATED ESTIMATED ESTIMATED
INTEREST PRINCIPAL ANNUAL MATURITY BALANCE AT
PROPERTY RATE BALANCE(1) DEBT SERVICE DATE MATURITY
- ---------------------------------------------- ----------- ------------- ------------ --------- -------------
673 First Avenue.............................. 9.00% $ 18,618,630 $ 3,151,579 12/13/03 $ 2,020,021
470 Park Avenue South......................... 8.25 10,934,798 1,208,572 04/01/04 8,284,863
29 West 35th Street........................... 8.46 2,996,606 324,368 02/01/01 2,717,903
50 West 23rd Street (3)....................... 7.50(4) 14,000,000 1,050,000 08/30/07 12,842,560
------------- ------------ -------------
Total....................................... $ 46,550,034 $ 5,734,519 $ 25,865,347
------------- ------------ -------------
------------- ------------ -------------
- ------------------------
(1) As noted above under "Use of Proceeds," it is currently expected that
certain mortgage indebtedness described therein will be acquired and
modified by LBHI at the closing of the Offering.
(2) As of August 1, 1997.
(3) The Company expects to encumber this Acquistion Property with a first
mortgage loan from LBHI upon approximately the terms set forth in this
table, with no amortization during the first five years.
(4) Estimated based upon current market interest rates.
CREDIT FACILITY
Subject to negotiation of mutually satisfactory covenants and other terms,
LBHI has agreed to provide the Company with a revolving $75 million 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 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.
91
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 29 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 as well as leasing
services for a portion of the properties in which the Company will own no
interest. In addition, it is anticipated that the Company (through the
Management Corporation and the Leasing Corporation) will provide management and
tenant representation services for properties in which the Company owns no
interest and leasing services for a portion of such properties.
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 2.5% 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 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
92
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 $20 million 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
$20 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 and the Option Properties, 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 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
93
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) and (v)
an 89% interest in a warehouse/distribution center in Bethlehem, Pennsylvania.
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 in its Marketplace Could Have an Adverse Impact on the
Company's Results of Operations."
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
94
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-- Liability for
Environmental Matters Could Adversely Affect the Company's Financial Condition."
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.
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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)
David J. Nettina............................. 44 Executive Vice President, Chief Operating Officer and Chief
Financial Officer
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, Secretary and
Director (term will expire in 1999)
Gerard Nocera................................ 40 Executive Vice President--Leasing
Louis A. Olsen............................... 53 Senior Vice President--Finance
John H. Alschuler, Jr. ...................... 49 Director Nominee (term will expire in 2000)
Edwin Thomas Burton, III..................... 54 Director Nominee (term will expire in 1998)
John S. Levy................................. 61 Director Nominee (term will expire in 1999)
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.
DAVID J. NETTINA will serve as Executive Vice President, Chief Operating
Officer and Chief Financial Officer of the Company. Prior to joining SL Green,
Mr. Nettina worked for The Pyramid Companies ("Pyramid"), based in Syracuse, NY,
in various positions from March 1986 to June, 1997. From 1990 to 1997, Mr.
Nettina was a partner and Chief Financial Officer of Pyramid. From 1989 to 1990,
Mr. Nettina was a development partner at the Boston, MA office of Pyramid. Mr.
Nettina was the Director of Corporate Finance of the Pyramid Development Group
from 1987 to 1989. From 1986 to 1987, Mr.
96
Nettina was Chief Operating Officer of the Pyramid Management Group. Mr. Nettina
served as President of Citibank (Maine), N.A. from 1983 to 1986. From 1980 to
1983, Mr. Nettina was Assistant Vice President of Citibank (NYS), N.A. in
Rochester, NY. Mr. Nettina was in the U.S. Army from 1976 until he completed
service as a Captain in 1980. Mr. Nettina received a B.S. degree in 1974 and a
MBA in 1976 from Canisius College.
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 in excess 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
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 School. 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 leads 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 Senior Vice President--Finance 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.
JOHN H. ALSCHULER, JR. has served as President and the Partner-in-Charge of
the New York office of Hamilton, Rabinowitz & Alschuler, Inc., ("HRA") a
nationally recognized real estate and management consulting firm since 1996 and
1983, respectively. Mr. Alschuler has also been an Adjunct Assistant Professor
in the Graduate Program in Real Estate at Columbia University since 1987. As
President of HRA, Mr. Alschuler is currently advising the Government of Kuwait
on the redevelopment of the main commercial district of Kuwait City. Mr.
Alschuler is also advising the Governor of Massachusetts and the Board of the
MBTA on the restructuring and privatization of the nation's second largest mass
transit system. Mr. Alschuler also serves as the real estate advisor to the
Guggenheim family and their foundation. Mr. Alschuler has advised a wide range
of development clients, including Olympia & York, Maguire
97
Thomas Partners, Queens West Development Corporation and the Empire State
Development Corporation. Mr. Alschuler has also advised many public
organizations and elected officials, including the Mayor of New York City and
the Governor of New York. Mr. Alschuler received a B.A. degree from Wesleyan
University and Ed.D. degree from the University of Massachusetts of Amherst.
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 $570 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 data 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 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.
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
98
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.
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 five 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
David J. Nettina......................... Executive Vice President, Chief Operating $ 200,000 75,000
Officer and Chief Financial Officer
Nancy A. Peck............................ Executive Vice President-- Development $ 150,000 50,000
and Operations
Steven H. Klein.......................... Executive Vice President-- Acquisitions $ 175,000 50,000
Benjamin P. Feldman...................... Executive Vice President and General $ 150,000 50,000
Counsel
Gerard Nocera............................ Executive Vice President--Leasing $ 175,000 50,000
- ------------------------
(1) Does not include bonuses that may be paid to the above individuals. See
"--Incentive Compensation Plan" 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 and
Incentive Plan" below."
99
OPTION GRANTS IN FISCAL YEAR 1997
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF SHARE
OPTIONS TO PRICE APPRECIATION FOR
OPTIONS BE GRANTED EXERCISE OPTION TERM
TO BE TO EMPLOYEES PRICE EXPIRATION --------------------------
NAME GRANTED(1) IN FISCAL YEAR PER SHARE(2) DATE 5% 10%
- ----------------------------------------- ----------- ----------------- ------------- ----------- ------------ ------------
Stephen L. Green......................... -- -- -- -- -- --
David J. Nettina......................... 75,000 7.6% $ 20.00 -/-/07 $ 628,895 $ 1,593,742
Nancy A. Peck............................ 50,000 7.6% $ 20.00 -/-/07 $ 628,895 $ 1,593,742
Benjamin P. Feldman...................... 50,000 7.6% $ 20.00 -/-/07 $ 628,895 $ 1,593,742
Steven H. Klein.......................... 50,000 7.6% $ 20.00 -/-/07 $ 628,895 $ 1,593,742
Gerard Nocera............................ 50,000 7.6% $ 20.00 -/-/07 $ 628,895 $ 1,593,742
- ------------------------
(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, except that Mr.
Olsen's agreement will expire on the first anniversary of the closing of the
Offering, unless extended. Employment under the agreements may be terminated for
"cause" by the Company for: (i) engagement in conduct that constitutes a felony,
(ii) breach of fiduciary duty, gross negligence or willful misconduct or other
conduct against the best interests of the Company, (iii) a breach of material
obligations or covenants under the agreement, or (iv) an uncured failure to
substantially perform the duties provided for in such agreement. The employee
may terminate his or her employment for "good reason," which includes (i)
failure to be elected to offices with the same or substantially the same duties
as provided for in the agreement, (ii) an uncured breach by the Company of its
material obligations under the agreement, or (iii) a substantial adverse change
in the nature or scope of the responsibility and authority provided in the
agreement following a change-in-control of the Company. If employment is
terminated by the Company "without cause" or by the employee "with good reason,"
then the employee is entitled to severance benefits for the remaining period of
the agreement including (i) base salary paid on the same periodic payment dates
provided for in the agreement, (ii) continuation of benefits provided for in the
agreement and (iii) continuation of any rights of the employee under the
Company's Stock Option Plan.
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"). The exceptions include investments listed under "The
Properties--Assets Not Being Transferred to the Company" and any investments in
publicly traded real-estate entities representing less than 1% of the equity
ownership of such entity. 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
100
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.
David J. Nettina has entered into a similar employment and noncompetition
agreement with the Company. Mr. Nettina's agreement also provides for a minimum
yearly bonus of $100,000, the award of options to purchase at least 50,000
shares of Common Stock upon completion of the Offering (exercisable at the
initial public offering price), the award of $200,000 worth of shares of Common
Stock on each of the first, second and third anniversaries of his employment and
customary relocation expenses. The definition of "good reason" in Mr. Nettina's
agreement includes a change-in-control of the Company.
In addition, pursuant to the terms of Mr. Nettina's employment agreement,
Mr. Nettina will receive a loan from the Company to purchase shares of Common
Stock to be issued under the Stock Option and Incentive Plan ("Stock Loan"). The
principal amount of the Stock Loan will be $300,000. The Stock Loan will have a
term of three years, accrue interest at the Federal mid-term "Applicable Federal
Rate" ("AFR") as in effect from time to time, and will be secured by the Common
Stock purchased and will otherwise be non-recourse. One-third of the Stock Loan
(together with accrued interest on the Stock Loan) will be forgiven each year
during the term of the Stock Loan provided that Mr. Nettina is then employed by
the Company. In the event of a change-in-control of the Company, Mr. Nettina's
death or permanent disability or termination of his employment by the Company
without cause, the outstanding principal amounts of the Stock Loan will be
forgiven in full. In the event Mr. Nettina leaves the employ of the Company or
is terminated with cause, the outstanding amount of the Stock Loan will be
immediately due and payable. The outstanding amount shall be equal to the amount
then due and owing, pro rated for the number of months elapsed for the year in
which termination occurs. Mr. Klein will receive a similar Stock Loan from the
Company in the principal amount of $500,000, with a term of five years.
STOCK OPTION AND INCENTIVE PLAN
Prior to the Offering, the Board of Directors will adopt, and the
stockholders will approve, the 1997 Stock Option and Incentive Plan (the "Stock
Option Plan"). On and after the closing of the Offering, the 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 Stock Option Plan. Non-employee
Directors of the Company are eligible to receive stock options under the Stock
Option Plan on a limited basis. See "--Compensation of Directors."
The following summary of the Stock Option Plan is qualified in its entirety
by reference to the full text of the 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 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 ("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 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
101
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
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
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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."
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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 81.9% 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 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
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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 the Service Corporation LLC. This controlling interest will give
The Service Corporation LLC the power to elect all directors of the Management
Corporation.
THE MANAGEMENT LLC. All of the management and leasing operations with
respect to the Properties and properties to be acquired by the Company, as well
as leasing operations with respect to a portion of the properties not owned 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, leasing operations with respect to a portion of the
properties in which the Company will not own 100% of the interest, as well as
tenant representation services for all of such properties, 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 the
Service Corporation LLC. This controlling interest will give the Service
Corporation LLC 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
the Service Corporation LLC. This controlling interest will give the Service
Corporation LLC 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.
In connection with the formation of the Company, certain members of SL
Green management (Nancy A. Peck, Steven H. Klein, Benjamin P. Feldman,
Gerard Nocera and Louis A. Olsen) were issued an aggregate of 553,616
shares of Common Stock for total consideration of $3,831 in cash (the
aggregate par value amount of such stock at the time of issuance).
- LBHI entered into the LBHI Loan with Green Realty LLC pursuant to which
LBHI agreed to loan up to $46 million 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 is secured by partnership
interests in certain Property-owning entities and the Treasury Securities.
- The Company will sell 10,100,000 shares of Common Stock in the Offering
and will contribute the net proceeds therefrom to the Operating
Partnership in exchange for 10,100,000 Units (which, including the
issuance of Common Stock to Victor Capital and to the members of SL Green
management referred to herein, will represent approximately an 81.9%
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 100% of the non-voting common stock of
(representing 95% of the economic interest in) the
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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 2,383,284 Units
(having an aggregate value of approximately $47.7 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% ownership interest and
the tenant representation business with respect to certain properties not
owned by the Company will be transferred to the Management LLC.
- The Operating Partnership will be granted (i) an option from 17 Battery
LLC to acquire its interest in 17 Battery Place, a property containing
approximately 800,000 rentable square feet of office space in downtown
Manhattan from an unaffiliated seller for a purchase price of
approximately $59 million in cash and (ii) an option from 110 Realty LLC
to acquire its interest in 110 East 42nd Street, an office building
containing approximately 250,000 rentable square feet in midtown Manhattan
from an unaffiliated seller for a purchase price of approximately $30
million in cash. See "The Properties--The Option Properties."
- The Operating Partnership will acquire interests in the Acquisition
Properties for an aggregate purchase price of approximately $113.0 million
(including a $1.6 million escrow account established in connection with
the acquisition of 50 West 23rd Street), to be funded with net proceeds
from the Offering and mortgage financing.
- The Operating Partnership will use approximately $82.3 million of net
proceeds from the Offering to repay mortgage debt encumbering the Core
Portfolio and the LBHI Loan (including approximately $9.4 million in
proceeds drawn under the LBHI Loan to fund purchase of the Acquisition
Properties).
- The Company will issue to Victor Capital 85,600 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.
No independent third-party appraisals, valuations or fairness opinions have
been obtained by the Company in connection with the Formation Transactions.
Accordingly, there can be no assurance that the value of the Units and other
consideration received in the Formation Transactions by persons or entities
contributing interests in the Core Portfolio and the Service Corporations to the
Operating Partnership is equivalent to the fair market value of such interests.
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 93.7% of the outstanding Common Stock.
- The Company will be the general partner of, and will own approximately
81.9% of the ownership interests in, the Operating Partnership and 95% of
the equity 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 18.1% of the outstanding
shares of Common Stock.
See "Risk Factors--Conflicts of Interest in the Formation Transactions and
the Business of the Company Could Adversely Affect the Company" and "Principal
Stockholders."
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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 continuing investors (including Stephen L. Green, members of his
immediate family and unaffiliated partners in the Property-owning
entities) will receive 2,383,284 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 $47.7 million, based on the assumed initial public offering
price (representing approximately 18.1% 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 Green Realty LLC and invested in Treasury
Securities pledged as collateral therefor (which, upon repayment of the
LBHI Loan, will be released for the benefit of Stephen L. Green).
- Certain members of SL Green management (Nancy A. Peck, Steven H. Klein,
Benjamin P. Feldman, Gerard Nocera and Louis A. Olsen) own an aggregate of
553,616 shares of restricted Common Stock (purchased for an aggregate of
$3,831) that initially will have a value of $11.1 million, based on the
assumed initial public offering price.
- Certain members of SL Green management (Stephen L. Green, David J.
Nettina, 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 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 and incentive plan, subject to certain vesting
requirements (50,000 of such options will be granted to each of Ms. Peck
and Messrs. Klein, Feldman, Nocera and Olsen; 75,000 of such options will
be granted to Mr. Nettina). In addition, pursuant to the terms of their
employment agreements, Messrs. Nettina and Klein will receive forgivable
loans to purchase Common Stock to be issued under such plan in the
principal amount of $300,000 and $500,000, respectively. See "Management."
- The interests in the Properties, Property-owning entities and Service
Corporations being contributed to the Operating Partnership have a
negative book value of approximately $7.2 million. As a result of the
foregoing transactions, continuing investors, members of management and
affiliates of the Company will receive benefits with an aggregate value of
$79.6 million, consisting of (i) Units with an aggregate value of $47.7
million, based on the assumed initial public offering price, (ii) $20
million in Treasury Securities, (iii) shares of restricted Common Stock of
the Company valued at $11.1 million, based on the assumed initial offering
price and (iv) forgivable loans to purchase Common Stock in the aggregate
principal amount of $800,000.
- The structure of the Formation Transactions will provide the Unit
recipients (including Stephen L. Green, members of his immediate family
and unaffiliated partners in the Property-owning entities) 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.
- The Service Corporation LLC 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 Stephen L. Green,
members of his immediate family and unaffiliated partners in the
Property-owning entities) to defer certain tax consequences associated
with the Formation Transactions.
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- 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 Could Adversely Affect 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.
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." In general, it is the Company's policy to
acquire assets primarily for income.
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
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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 "Material Federal Income Tax
Consequences--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 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 Could Adversely Affect the Company" and "--Limitations
on Ability to Sell or Reduce the Mortgage Indebtedness on Certain Properties
Could Adverseley Affect the Value of the Common Stock."
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 15.0%. 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
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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 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
Certain holders of Units, including Stephen L. Green, will incur adverse tax
consequences upon the sale of certain of the Properties to be owned by the
Company at the completion of the Formation Transactions and on the repayment of
indebtedness which are different from the tax consequences to the Company and
persons who purchase shares of Common Stock in the Offering. Consequently, such
holders may have different objectives regarding the appropriate pricing and
timing of any such sale or repayment of indebtedness. In addition, pursuant to
the Lock-out Provisions, the Operating Partnership may not sell or reduce the
mortgage indebtedness on 673 First Avenue and 470 Park Avenue South for up to 12
years following completion of the Offering, even if such sale or reduction in
mortgage indebtedness would be in the best interests of the Company's
stockholders. Subject to the Lock-out Provisions, the limited partners of the
Operating Partnership have agreed that in the event of a conflict in the
fiduciary duties owed by the Company to its stockholders and by the General
Partner to such limited partners, the General Partner will fulfill its fiduciary
duties to such limited partnership by acting in the best interest of the
Company's stockholders. See "Partnership Agreement."
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.
See "Risk Factors--Conflicts of Interest in the Formation Transactions and
the Business of the Company Could Adversely Affect the Company."
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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.
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.
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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--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. 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
Classic 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.
RELATED PARTY TRANSACTIONS
During 1996, HRA, a real estate and management consulting firm of which John
H. Alschuler, Jr., a director nominee of the Company, is the President provided
consulting services for the Leasing Corporation. HRA negotiated certain New York
City benefit programs for Information Builders, Inc., a tenant that was
represented by the Leasing Corporation in connection with its relocation from
1250 Broadway to 2 Penn Plaza. For such services, HRA was paid a total of
$128,962.99 by the Leasing Corporation.
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
112
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.
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
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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 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
114
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.
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
115
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.
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
116
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.
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.
FIDUCIARY DUTY
The limited partners have agreed, subject to the Lock-out Provisions, that
in the event of a conflict in the fiduciary duties owed by the Company to its
stockholders and by the General Partner to such limited partners, the General
Partner will fulfill its fiduciary duties to such limited partnership by acting
in the best interests of the Company's stockholders.
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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).............................................. 2,140,784 16.6% 16.3%
David Nettina (4)(5).............................................. 15,000 0.1% 0.1%
Nancy A. Peck (4)................................................. 197,720 1.8% 1.5%
Steven H. Klein (4)(6)............................................ 104,088 1.0% 0.8%
Benjamin P. Feldman (4)(7)........................................ 118,632 1.1% 0.9%
Gerard Nocera (4)................................................. 79,088 0.7% 0.6%
Louis A. Olsen (4)................................................ 79,088 0.7% 0.6%
Edwin Thomas Burton, III.......................................... 0 N/A N/A
John S. Levy...................................................... 0 N/A N/A
John H. Alschuler, Jr............................................. 0 N/A N/A
All directors, director nominees and executive officers as a group
(10 persons).................................................... 2,734,400 21.2% 20.8%
- ------------------------
(1) Assumes 10,779,216 shares of Common Stock outstanding immediately following
the Offering. Assumes that all Units held by the person (and no other
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 13,162,500 shares of Common Stock and Units outstanding
immediately following the Offering (10,779,216 shares of Common Stock and
2,383,284 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.
(5) Represents the number of shares of restricted Common Stock estimated, based
on the assumed initial offering price, to be purchased by Mr. Nettina
pursuant to his Stock Loan. See "Management."
(6) Certain of such shares are held by Mr. Klein through family trusts of which
he is the managing member. Includes an estimate, based on the assumed
initial offering price, of the number of shares of restricted Common Stock
to be purchased by Mr. Klein pursuant to his Stock Loan. See "Management."
(7) All of such shares are held by Mr. Feldman through a family trust of which
he is the managing member.
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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, 10,779,216 shares of Common Stock will be issued and
outstanding (12,294,216 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.
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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 "Material 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.
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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.
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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 American Stock
Transfer & Trust Company.
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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.
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.
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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. 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
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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.
125
SHARES AVAILABLE FOR FUTURE SALE
GENERAL
Upon the completion of the Offering, the Company will have outstanding
10,779,216 shares of Common Stock (12,294,216 shares if the Underwriters'
overallotment option is exercised in full). In addition, 2,383,284 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 and Incentive 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 Could
Adversely Affect the Trading Price of the Common Stock" and "Partnership
Agreement--Transfers 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.
126
MATERIAL 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 and the
proposed method of operation of the Company will enable the Company to meet the
requirements for qualification and taxation as a REIT. This opinion is based on
127
various assumptions relating to the organization and operation of the Company,
the Operating Partnership, the Management LLC, the 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 dispositions of foreclosure property and, as a result of the Taxpayer
Relief Act of 1997, enacted on August 5, 1997 (the "Taxpayer Relief Act"),
effective for the Company's taxable year ending December 31, 1998, dispositions
of property that occur due to an involuntary conversion) 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
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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 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 intends to comply with Treasury
regulations requiring it to ascertain the actual ownership of its outstanding
shares. The Taxpayer Relief Act eliminates the rule that a failure to comply
with these regulations will result in a loss of REIT status. Instead, a failure
to comply with the regulations will result in a fine. This provision will be
effective for the Company's taxable year ending December 31, 1998. 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. The Taxpayer Relief
Act eliminates the requirement that a REIT own a qualified REIT subsidiary from
the commencement of its corporate existence. This change will be effective for
the Company's taxable year ending December 31, 1998.) 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
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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. The Taxpayer Relief Act repeals the 30% gross income test for
taxable years beginning after its enactment on August 5, 1997. Thus, the 30%
gross income test will apply only to the Company's taxable year ending December
31, 1997.
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 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 Taxpayer Relief Act provides a DE MINIMIS rule
for non-customary services which is effective for taxable years beginning after
August 5, 1997. If the value of the non-customary service income with respect to
a property (valued at no less than 150% of the Company's direct costs of
performing such services) is 1% or less of the total income derived from the
property, then all rental income except the non-customary service income will
qualify as "rents from real property." This provision will be effective for the
Company's taxable year ending December 31, 1998.
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.
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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. 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
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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 (including, as a result of the Taxpayer Relief Act of 1997, INTER
ALIA cancellation of indebtedness and original issue discount 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 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.
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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. The Taxpayer Relief Act provides that, beginning
with the Company's taxable year ending December 31, 1998, if the Company elects
to retain and pay income tax on any net long term capital gain, domestic
stockholders of the Company would include in their income as long term capital
gain their proportionate share of such net long term capital gain. A domestic
stockholder would also receive a refundable tax credit for such stockholder's
proportionate share of the tax paid by the REIT on such retained capital gains
and an increase in its basis in the stock of the REIT in an amount equal to the
difference between the undistributed long term capital gains and the amount of
tax paid by the REIT. Distributions in excess of current and accumulated
earnings and profits will not be taxable to a stockholder to the extent that
they do not exceed the adjusted basis of the stockholder's shares 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 his 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
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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 the 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 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
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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 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
135
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 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").
136
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 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 REITs and thus will pay Federal, state and local income
taxes on their 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 jurisdictions may differ
from the Federal income tax treatment described above.
137
UNDERWRITING
The underwriters of the Offering (the "Underwriters"), for whom Lehman
Brothers Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Legg Mason
Wood Walker, Incorporated 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.............................................................
Donaldson, Lufkin & Jenrette Securities Corporation.............................
Legg Mason Wood Walker, Incorporated............................................
Prudential Securities Incorporated..............................................
------------
Total....................................................................... 10,100,000
------------
------------
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 1,515,000 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 or securities
convertible into or exercisable or exchangeable for Common Stock (other than
shares offered hereby, shares issued pursuant to the 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 Stock Option Plan), for a period of 180 days after the date of this
Prospectus.
138
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 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.
The shares of Common Stock have been approved for listing on the NYSE,
subject to official notice of issuance, 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
139
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 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 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
$39.6 million of the net proceeds in repayment of amounts outstanding under the
LBHI Loan. In addition, LBHI is expected to provide the Operating Partnership
with a $14 million mortgage loan secured by 50 West 23rd Street and will receive
an administrative fee of up to .02% in connection with a line of credit being
arranged for the Company in anticipation of the establishment of the Credit
Facility by the Company and LBHI. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "The Properties--Credit Facility"
and "Certain Relationships and Transactions."
Although the Conduct Rules of the National Association of Securities
Dealers, Inc. exempt REITs from the conflict of interest provisions thereof,
because Lehman Brothers Inc. and certain of its affiliates will receive more
than 10% of the net proceeds of the Offering in payment of the financial
advisory fee and in repayment of currently outstanding indebtedness, the
Underwriters have determined to conduct the Offering in accordance with the
applicable provisions of Rule 2720 of the Conduct Rules. In accordance with
these requirements, Prudential Securities Incorporated (the "Independent
Underwriter") is assuming the responsibilities of acting as "qualified
independent underwriter," and will recommend the maximum initial public offering
price for the Common Stock in compliance with the requirements of the Conduct
Rules. In connection with the Offering, the Independent Underwriter is
performing due diligence investigations and is reviewing and participating in
the preparation of this Prospectus and the Registration Statement of which this
Prospectus forms a part. The initial public offering price of the Common Stock
will be no higher than the price recommended by the Independent Underwriter.
The Underwriters have reserved for sale at the public offering price up to
505,000 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, (iii) 1140 Avenue of the Americas and (iv) 50 West 23rd Street 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
140
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 "Material 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.
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.
141
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 three office properties described under
"The Properties--Acquisition Properties" which the Company has contracted to
acquire on or after completion of the Offering.
"BIDS" 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 Emerald City Construction Corp., 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.
142
"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 S.L. Green Leasing, Inc. (formerly S.L. Green
Realty, Inc.), 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 S.L. Green Management Corp., 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 as well as the tenant representation business with respect
to certain properties not 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.
143
"REIT" means a real estate investment trust as defined by Sections 856
through 860 of the Code and applicable Treasury Regulations.
"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.
"STOCK OPTION PLAN" means the 1997 Stock Option and Incentive Plan.
"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., Donaldson, Lufkin & Jenrette Securities Corporation, Legg Mason
Wood Walker, Incorported 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.
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INDEX TO FINANCIAL STATEMENTS
SL GREEN REALTY CORP.
Pro Forma Combined Financial Statements (unaudited).................................. F-3
Pro Forma Combined Balance Sheet as of June 30, 1997............................. F-4
Pro Forma Combined Statement of Income for the Six Months Ended
June 30, 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-20
Balance Sheet as of June 12, 1997................................................ F-21
Notes to Balance Sheet........................................................... F-22
THE SL GREEN PREDECESSOR
Combined Financial Statements
Report of Independent Auditors................................................... F-25
Combined Balance Sheets as of June 30, 1997 (unaudited) and
December 31, 1996 and 1995..................................................... F-26
Combined Statements of Operations for the Six Months Ended June 30, 1997 and 1996
(unaudited) and the Years Ended December 31, 1996, 1995, and 1994............... F-27
Combined Statements of Owners' Deficit for the Six Months Ended June 30, 1997
(unaudited) and the Years Ended December 31, 1996, 1995, and 1994............... F-28
Combined Statements of Cash Flows for the Six Months Ended June 30, 1997
and 1996 (unaudited) and the Years Ended December 31, 1996, 1995, and 1994..... F-29
Notes to the Combined Financial Statements....................................... F-30
Schedule III
Real Estate and Accumulated Depreciation as of December 31, 1996................. F-40
Uncombined Joint Ventures--Combined Financial Statements
Report of Independent Auditors................................................... F-42
Combined Balance Sheets as of June 30, 1997 (unaudited) and
December 31, 1996 and 1995..................................................... F-43
Combined Statements of Operations for the Six Months Ended June 30, 1997 and 1996
(unaudited) and the Years Ended December 31, 1996, 1995, and 1994............... F-44
Combined Statements of Owners' Deficit for the Six Months Ended June 30, 1997
(unaudited) and Years Ended December 31, 1996, 1995, and 1994................... F-45
Combined Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996
(unaudited) and the Years Ended December 31, 1996, 1995, and 1994............... F-46
Notes to the Combined Financial Statements....................................... F-47
Schedule III
Real Estate and Accumulated Depreciation as of December 31, 1996................. F-57
F-1
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
1414 AVENUE OF THE AMERICAS
Report of Independent Auditors................................................ F-59
Statement of Revenues and Certain Expenses for the Six Months Ended
June 30, 1996 (unaudited) and the Year Ended December 31, 1995.............. F-60
Notes to Statement of Revenues and Certain Expenses........................... F-61
36 WEST 44TH STREET
Report of Independent Auditors................................................ F-63
Statement of Revenues and Certain Expenses for the Six Months Ended
June 30, 1997 (unaudited) and the Year Ended December 31, 1996.............. F-64
Notes to Statement of Revenues and Certain Expenses........................... F-65
1372 BROADWAY
Report of Independent Auditors................................................ F-67
Statement of Revenues and Certain Expenses for the Six Months Ended
June 30, 1997 (unaudited) and the Year Ended December 31, 1996.............. F-68
Notes to Statement of Revenues and Certain Expenses........................... F-69
1140 AVENUE OF THE AMERICAS
Report of Independent Auditors................................................ F-71
Statement of Revenues and Certain Expenses for the Six Months Ended
June 30, 1997 (unaudited) and the Year Ended December 31, 1996.............. F-72
Notes to Statement of Revenues and Certain Expenses........................... F-73
50 WEST 23RD STREET
Report of Independent Auditors................................................ F-75
Statement of Revenues and Certain Expenses for the Six Months Ended
June 30, 1997 (unaudited) and the Year Ended December 31, 1996.............. F-76
Notes to Statement of Revenues and Certain Expenses........................... F-77
F-2
SL GREEN REALTY CORP.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The pro forma balance sheet of the Company as of June 30, 1997 has been
prepared as if the Offering and Formation Transactions had been consummated on
June 30, 1997. The pro forma statements of income for the six months ended June
30, 1997 and for the year ended December 31, 1996 are presented as if the
completion of the Offering and the Formation Transactions occurred at January 1,
1996 and the effect thereof was carried foward through the six month period
ended June 30, 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. The pro forma combined financial statements should be read in
conjunction with the combined financial statements of SL Green Predecessor
included elsewhere herein.
F-3
SL GREEN REALTY CORP.
PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ACQUISITION EQUITY
SL GREEN OF CONVERSION OF
PREDECESSOR PARNERSHIPS' SERVICE ACQUISITION FINANCING PRO FORMA
HISTORICAL INTERESTS CORPORATIONS THE OFFERING PROPERTIES ADJUSTMENTS ADJUSTMENTS
(A) (B) (C) (D) (E) (F) (G)
------------ ------------- ------------- ------------ ----------- ----------- -----------
ASSETS :
Commercial real estate
property at cost............
Land.......................... $ 7,719 $ 4,079 $ 22,267 $ 60
Buildings and improvements.... 35,186 70,523 89,170 229
Property under capital lease.. 12,208 4,592
------------ ------------- ------------- ------------ ----------- ----------- -----------
42,905 86,810 116,029 289
Less accumulated
depreciation............ (6,251) (14,638)
------------ ------------- ------------- ------------ ----------- ----------- -----------
36,654 72,172 116,029 289
Cash and cash equivalents..... 1,221 (6,434) $ (529) $ 183,711 (103,597) $ (45,678) (21,691)
Restricted cash............... 1,685 2,305
Receivables................... 1,107 12 (944)
Related party receivables..... 1,658 26 (783)
Deferred rents receivable..... 1,383 9,690
Investment in
Partnerships................ 1,176 (1,176)
Service corporations........ 1,008
Deferred lease fees and loan
costs....................... 1,561 2,887 (214) (107)
Other assets.................. 2,319 2,792 (657) 1,560
------------ ------------- ------------- ------------ ----------- ----------- -----------
Total assets.............. $ 48,764 $ 82,274 $ (2,119) $ 183,711 $ 13,992 $ (45,785) $ (21,402)
------------ ------------- ------------- ------------ ----------- ----------- -----------
------------ ------------- ------------- ------------ ----------- ----------- -----------
LIABILITIES AND EQUITY :
Mortgage loans payable........ $ 26,646 $ 57,725 $ (37,638)
Accrued interest payable...... 109 10,851 (10,863)
LBHI loan payable............. 7,000 530 $ 9,400 (16,930)
Capitalized lease
obligations................. 14,374 4,592
Deferred land lease payable... 12,021
Accrued expenses and accounts
payable..................... 1,171 576 $ (768)
Accounts payable to related
parties..................... 1,298 503 (1,298)
Excess of distributions and
share of losses over amounts
invested in:
Partnerships............ 18,007 (18,007)
Security deposits............. 1,683 2,390
------------ ------------- ------------- ------------ ----------- ----------- -----------
Total liabilities......... 55,914 80,963 (2,066) 13,992 (65,431)
------------ ------------- ------------- ------------ ----------- ----------- -----------
Minority interest in Operating
Partnership.................
Common stock.................. $ 108 $ 1
Additional paid-in capital....
Owners' equity (deficit)...... (7,150) 1,311 (53) 183,603 19,646 (21,403)
------------ ------------- ------------- ------------ ----------- ----------- -----------
Total equity.............. (7,150) 1,311 (53) 183,711 19,646 (21,402)
------------ ------------- ------------- ------------ ----------- ----------- -----------
Total liabilities and
equity.................. $ 48,764 $ 82,274 $ (2,119) $ 183,711 $ 13,992 $ (45,785) $ (21,402)
------------ ------------- ------------- ------------ ----------- ----------- -----------
------------ ------------- ------------- ------------ ----------- ----------- -----------
MINORITY
INTEREST
IN OPERATING
PARTNERSHIP
ADJUSTMENT COMPANY
(H) PRO FORMA
------------ -----------
ASSETS :
Commercial real estate
property at cost............
Land.......................... $ 34,125
Buildings and improvements.... 195,108
Property under capital lease.. 16,800
------------ -----------
246,033
Less accumulated
depreciation............ (20,889)
------------ -----------
225,144
Cash and cash equivalents..... 7,003
Restricted cash............... 3,990
Receivables................... 175
Related party receivables..... 901
Deferred rents receivable..... 11,073
Investment in
Partnerships................ 0
Service corporations........ 1,008
Deferred lease fees and loan
costs....................... 4,127
Other assets.................. 6,014
------------ -----------
Total assets.............. $ 259,435
------------ -----------
------------ -----------
LIABILITIES AND EQUITY :
Mortgage loans payable........ $ 46,733
Accrued interest payable...... 97
LBHI loan payable............. 0
Capitalized lease
obligations................. 18,966
Deferred land lease payable... 12,021
Accrued expenses and accounts
payable..................... 979
Accounts payable to related
parties..................... 503
Excess of distributions and
share of losses over amounts
invested in:
Partnerships............ 0
Security deposits............. 4,073
------------ -----------
Total liabilities......... 83,372
------------ -----------
Minority interest in Operating
Partnership................. $ 31,848 31,848
Common stock.................. 109
Additional paid-in capital.... 144,106 144,106
Owners' equity (deficit)...... (175,954) 0
------------ -----------
Total equity.............. (31,848) 144,215
------------ -----------
Total liabilities and
equity.................. $ 0 $ 259,435
------------ -----------
------------ -----------
F-4
SL GREEN REALTY CORP.
PRO FORMA COMBINED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
EQUITY
SL GREEN ACQUISITION OF CONVERSION
PREDECESSOR PARTNERSHIPS' SERVICE ACQUISITION FINANCING PRO
HISTORICAL INTERESTS CORPORATIONS PROPERTIES ADJUSTMENTS FORMA
(I) (J) (K) (L) (M) ADJUSTMENTS
------------- --------------- --------------- ------------- ------------- -------------
REVENUES:
Rental revenue...................... $ 2,800 $ 10,579 $ 9,639
Escalations and reimbursement
revenues.......................... 456 725 1,293
Management revenues................. 966 $ (966)
Leasing commissions................. 3,088 (1,563)
Construction revenues............... 8 (8)
Investment income...................
Other income........................ 16 (11) 1,532
Equity in Service Corporations
income............................ 382
------ ------- ------ ------ ------------- -------------
Total revenues.................. 7,334 11,304 (2,166) 12,464
------ ------- ------ ------ ------------- -------------
Share of net loss from uncombined
joint ventures.................... 564 (564)
------ ------- ------ ------ ------------- -------------
EXPENSES:
Operating expenses.................. 1,625 2,099 (696) 2,683
Ground rent......................... 1,938
Interest............................ 713 4,163 189 $ (2,079)
Depreciation and amortization....... 599 1,939 (47) 1,146 (10) $ 3(N)
Real estate taxes................... 482 1,461 2,135
Marketing, general and
administrative.................... 1,835 (1,235) 828(O)
------ ------- ------ ------ ------------- -------------
Total expenses.................. 5,254 11,600 (1,978) 6,153 (2,089) 831
------ ------- ------ ------ ------------- -------------
Income (loss) before minority
interest and extraordinary
item............................ 1,516 268 (188) 6,311 2,089 (831)
Minority interest in operating
partnership....................... (1,659)(P)
------ ------- ------ ------ ------------- -------------
Income (loss) before extraordinary
item............................ $ 1,516 $ 268 ($188) $ 6,311 $ 2,089 $ (2,490 )
------ ------- ------ ------ ------------- -------------
------ ------- ------ ------ ------------- -------------
Income per common share (Q).......
COMPANY PRO
FORMA
-----------
REVENUES:
Rental revenue...................... $ 23,018
Escalations and reimbursement
revenues.......................... 2,474
Management revenues................. 0
Leasing commissions................. 1,525
Construction revenues............... 0
Investment income...................
Other income........................ 1,537
Equity in Service Corporations
income............................ 382
-----------
Total revenues.................. 28,936
-----------
Share of net loss from uncombined
joint ventures....................
-----------
EXPENSES:
Operating expenses.................. 5,711
Ground rent......................... 1,938
Interest............................ 2,986
Depreciation and amortization....... 3,630
Real estate taxes................... 4,078
Marketing, general and
administrative.................... 1,428
-----------
Total expenses.................. 19,771
-----------
Income (loss) before minority
interest and extraordinary
item............................ 9,165
Minority interest in operating
partnership....................... (1,659)
-----------
Income (loss) before extraordinary
item............................ $ 7,506
-----------
-----------
Income per common share (Q)....... $ 0.70
-----------
-----------
F-5
SL GREEN REALTY CORP.
PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED
DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ACQUISITION EQUITY
SL GREEN OF CONVERION OF
PREDECESSOR PARTNERSHIPS' SERVICE ACQUISITION FINANCING PRO FORMA
HISTORICAL INTERESTS CORPORATIONS PROPERTIES ADJUSTMENTS ADJUSTMENTS
(A) (B) (C) (D) (E) (F)
------------- --------------- --------------- ----------- ------------- -------------
REVENUES:
Rental revenue........................ $ 4,199 $ 20,985 $ 19,154
Escalations and reimbursement
revenues............................ 1,051 2,304 3,274
Management revenues................... 2,336 $ (2,336)
Leasing commissions................... 2,372 (1,115)
Construction revenues................. 101 (101)
Investment income..................... 15
Other income.......................... 123 13 (92) 906
Equity in Service Corporations
income..............................
------------- ------- ------- ----------- ------------- -------------
Total revenues...................... 10,182 23,317 (3,644) 23,334
------------- ------- ------- ----------- ------------- -------------
Share of net loss from uncombined
joint ventures...................... 1,408 (1,408) 504
------------- ------- ------- ----------- ------------- -------------
EXPENSES:
Operating expenses.................... 3,197 4,608 (1,522) 6,016
Ground rent........................... 3,925
Interest.............................. 1,357 7,743 379 $ (3,621)
Depreciation and amortization......... 975 3,812 (92) 2,292 (13) $ 5
Real estate taxes..................... 703 3,189 4,356
Marketing, general and
administrative...................... 3,250 (2,264) 1,657
------------- ------- ------- ----------- ------------- -------------
Total expenses...................... 9,482 23,277 (3,878) 13,043 (3,634) 1,662
------------- ------- ------- ----------- ------------- -------------
Income (loss) before minority
interest and extraordinary item... (708) 1,448 (270) 10,291 3,634 (1,662)
Minority interest
in Operating Partnership (G)........ (2,305)
------------- ------- ------- ----------- ------------- -------------
Income (loss)
before extraordinary item......... ($ 708) $ 1,448 ($ 270) $ 10,291 $ 3,634 $ (3,967)
------------- ------- ------- ----------- ------------- -------------
------------- ------- ------- ----------- ------------- -------------
Income per common share(H)..........
COMPANY
PRO FORMA
-----------
REVENUES:
Rental revenue........................ $ 44,338
Escalations and reimbursement
revenues............................ 6,629
Management revenues...................
Leasing commissions................... 1,257
Construction revenues................. 0
Investment income..................... 15
Other income.......................... 950
Equity in Service Corporations
income..............................
-----------
Total revenues...................... 53,189
-----------
Share of net loss from uncombined
joint ventures...................... 504
-----------
EXPENSES:
Operating expenses.................... 12,299
Ground rent........................... 3,925
Interest.............................. 5,858
Depreciation and amortization......... 6,979
Real estate taxes..................... 8,248
Marketing, general and
administrative...................... 2,643
-----------
Total expenses...................... 39,952
-----------
Income (loss) before minority
interest and extraordinary item... 12,733
Minority interest
in Operating Partnership (G)........ (2,305)
-----------
Income (loss)
before extraordinary item......... $ 10,428
-----------
-----------
Income per common share(H).......... $ 0.97
-----------
-----------
F-6
SL GREEN REALTY CORP.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ADJUSTMENTS TO THE PRO FORMA COMBINED BALANCE SHEET
(A) To reflect the SL Green Predecessor historical combined balance sheet as
of June 30, 1997. The real estate and other assets and the assumption of
liabilities and deficit of the SL Green Predecessor will be transferred at their
historical amounts to the Operating Partnership.
(B) To reflect 673 First Avenue, 470 Park Avenue South and 29 West 35th
Street (the "Equity Properties") as consolidated entities rather than as
uncombined joint ventures as a result of the acquisition of 100% of the
partnerships' interests and to record payment of transfer costs on the transfer
of the properties to the Operating Partnership. The Company will account for
interests acquired from third parties (the other partners), by the purchase
method.
ACQUISITION OF THIRD PARTY
PARTNERSHIP INTERESTS
ELIMINATE -------------------------------------
HISTORICAL UNCOMBINED RECLASSIFY 673 470 29
AMOUNTS TOTAL AND OTHER FIRST AVE PARK AVE WEST 35TH
----------- ----------- --------------- ----------- ----------- -----------
ASSETS:
Commercial real estate property at cost,
net...................................... $ 57,955 $ 8,859 $ 3,106 $ 2,252
Cash and cash equivalents.................. 1,663 (5,449) (260) (2,388)
Restricted cash............................ 1,305 1,000
Receivables................................ $ 12
Related party receivables.................. 26
Deferred rents receivable.................. 14,881 (2,880) (1,458) (853)
Investment in partnerships................. $ (1,176)
Deferred lease fees and loan costs......... 4,337 (900) (395) (155)
Other assets............................... 2,300 492
----------- ----------- --- ----------- ----------- -----------
Total assets............................. $ (1,176) $ 82,441 $ 530 $ 630 $ 993 $ (1,144)
----------- ----------- --- ----------- ----------- -----------
----------- ----------- --- ----------- ----------- -----------
LIABILITIES AND EQUITY:......................
Mortgage loans payable..................... $ 63,724 $ (5,649) $ (350)
Accrued interest payable................... 16,329 (1,834) (3,644)
LBHI Loan payable.......................... $ 530
Capitalized lease obligations.............. 14,374
Deferred land lease payable................ 11,996 25
Accrued expenses and accounts payable...... 576
Accounts payable to related parties........ 628 (125)
Excess of distributions and share of losses
over amounts invested in partnerships.... $ (18,007)
Security deposits.......................... 2,390
----------- ----------- --- ----------- ----------- -----------
Total liabilities........................ (18,007) 110,017 530 (7,458) (4,119)
----------- ----------- --- ----------- ----------- -----------
Total equity (deficit)..................... 16,831 (27,576) 8,088 5,112 $ (1,144)
----------- ----------- --- ----------- ----------- -----------
Total liabilities and equity............. $ (1,176) $ 82,441 $ 530 $ 630 $ 993 $ (1,144)
----------- ----------- --- ----------- ----------- -----------
----------- ----------- --- ----------- ----------- -----------
TOTAL
ADJUSTMENTS
-----------
ASSETS:
Commercial real estate property at cost,
net...................................... $ 72,172
Cash and cash equivalents.................. (6,434)
Restricted cash............................ 2,305
Receivables................................ 12
Related party receivables.................. 26
Deferred rents receivable.................. 9,690
Investment in partnerships................. (1,176)
Deferred lease fees and loan costs......... 2,887
Other assets............................... 2,792
-----------
Total assets............................. $ 82,274
-----------
-----------
LIABILITIES AND EQUITY:......................
Mortgage loans payable..................... $ 57,725
Accrued interest payable................... 10,851
LBHI Loan payable.......................... 530
Capitalized lease obligations.............. 14,374
Deferred land lease payable................ 12,021
Accrued expenses and accounts payable...... 576
Accounts payable to related parties........ 503
Excess of distributions and share of losses
over amounts invested in partnerships.... (18,007)
Security deposits.......................... 2,390
-----------
Total liabilities........................ 80,963
-----------
Total equity (deficit)..................... 1,311
-----------
Total liabilities and equity............. 82,274
-----------
-----------
The purchase price for each third party interest acquired is as follows:
UNITS
CASH IN DOLLARS TOTAL
--------- ----------- ---------
673 First Avenue..................................... $ 4,033 $ 4,033
470 Park Avenue South................................ 25 $ 450 475
29 West 35th Street.................................. 2,326 2,326
--------- ----- ---------
$ 6,384 $ 450 $ 6,834
--------- ----- ---------
--------- ----- ---------
F-7
SL GREEN REALTY CORP.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(C) To reflect adjustments required to record the Company's investments in
the Service Corporations pursuant to the equity method of accounting. As a
result of the Formation Transactions the Company will not own the majority of
the voting stock of the Service Corporations but will continue to exercise
significant influence due to the following:
--Substantially all of the economic benefits flow to the Company (who
will own 100% of the non-voting common stock representing 95% of the total
equity).
--The Company and the Service Corporations have common officers and
employees.
--The owners of a majority of the voting stock of the Service
Corporations have not contributed substantial equity to the Service
Corporations.
--The views of the Company's management influence the operations of the
Service Corporations.
The adjustment is as follows:
HISTORICAL
SERVICE EQUITY TOTAL
CORPORATIONS CONVERSION ADJUSTMENT
------------- ------------- -----------
ASSETS:
Cash and cash equivalents............................................... $ 529 $ (529)
Receivables............................................................. 944 (944)
Related party receivables............................................... 783 (783)
Deferred lease fees and loan costs...................................... 214 (214)
Other assets............................................................ 657 (657)
Investment in service corporations...................................... $ 1,008 1,008
------ ------------- -----------
Total Assets.......................................................... $ 3,127 $ 1,008 $ (2,119)
------ ------------- -----------
------ ------------- -----------
LIABILITIES AND EQUITY:
Accrued expenses and accounts payable................................... $ 768 $ (768)
Accounts payable to related parties..................................... 1,298 (1,298)
Excess share of losses over amounts invested in Service Corporations....
------ ------------- -----------
Total liabilities..................................................... 2,066 (2,066)
Equity.................................................................. 1,061 $ (1,008) (53)
------ ------------- -----------
Total liabilities and equity.......................................... $ 3,127 $ (1,008) $ (2,119)
------ ------------- -----------
------ ------------- -----------
Historical equity of service corporations.......................... $ 1,061
---------
Investment in service corporations at 95 percent interest........ $ 1,008
---------
---------
F-8
SL GREEN REALTY CORP.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(D) To reflect the issuance of 10,100,000 shares of common stock at an
assumed price of $20 per share which is reduced by the underwriting discount of
$12,625, an advisory fee of $1,514 payable to Lehman Brothers Inc. and estimated
other costs of the Offering of $4,150.
(E) To reflect the acquisition of the respective properties at cost which
represents the purchase price plus estimated closing costs of 1372 Broadway,
1140 Avenue of the Americas and 50 West 23rd Street as follows:
1140 50 TOTAL
1372 AVENUE OF WEST ACQUISITION
BROADWAY THE AMERICAS 23RD STREET PROPERTIES
----------- ------------- ----------- -----------
ASSETS ACQUIRED
Land.......................................................... $ 10,828 $ 4,242 $ 7,197 $ 22,267
Building...................................................... 43,312 17,023 28,835 89,170
Property under capital lease.................................. 4,592 4,592
----------- ------------- ----------- -----------
Net Property.............................................. 54,140 25,857 36,032 116,029
Other assets-escrow........................................... 1,560 1,560
----------- ------------- ----------- -----------
$ 54,140 $ 25,857 $ 37,592 $ 117,589
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
SOURCES OF FUNDS
Cash.......................................................... $ 47,440 $ 19,265 $ 36,892 $ 103,597
Capitalized lease obligations................................. 4,592 4,592
LBHI loan payable............................................. 6,700 2,000 700 9,400
----------- ------------- ----------- -----------
$ 54,140 $ 25,857 $ 37,592 $ 117,589
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
(F) To reflect the following financing transactions:
- Repayment of certain mortgage loans, payment of prepayment penalties and
write off of deferred financing costs.
- Cancellation of portions of mortgage loans and accrued interest due to
negotiations with the mortgage holders regarding the value of the
collateral and the likelihood of repayment at par of the entire principal
amount together with accrued interest.
- Payment of mortgage fees which are capitalized and amortized over the
remaining lives of the loans transferred from the SL Green Predecessor to
the Company.
- Repayment of portions of the LBHI Loan which were borrowed in connection
with the purchase of additional partnership interests and the Acquisition
Properties.
- Borrowings under the LBHI Loan to pay a portion of the prepayment penalty
on the 1414 Avenue of the Americas mortgage.
F-9
SL GREEN REALTY CORP.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
- Borrowings under a new mortgage loan and the payment of loan fees which
will be capitalized and amortized over the life of the loan are summarized
as follows.
470 29 36 70 1414
673 PARK WEST WEST WEST AVENUE NEW
FIRST AVENUE 35TH 44TH 36TH OF THE MORTGAGE LBHI
AVENUE SOUTH STREET STREET STREET AMERICAS LOAN LOAN
--------- --------- ----------- --------- --------- ----------- ----------- ---------
Cash and cash equivalents..... $ (1,389) $ (13,162) $ (30) $ (10,200) $ (6,568) $ (11,059) $ 13,860 $ (17,130)
--------- --------- --- --------- --------- ----------- ----------- ---------
--------- --------- --- --------- --------- ----------- ----------- ---------
Deferred lease fees and loan
costs:.......................
Financing costs capitalized... $ 390 $ 111 $ 30 $ 140
Amortization of deferred
financing costs.............. (25) (7) (4) (14)
Deferred financing costs
written off.................. $ (260) $ (468)
--------- --------- --- --------- --------- ----------- ----------- ---------
Net deferred lease fees
and loan costs.......... $ 365 $ 104 $ 26 $ $ (260) $ (468) $ 126
--------- --------- --- --------- --------- ----------- -----------
--------- --------- --- --------- --------- ----------- -----------
Mortgage loans payable:
Loans funded.................. $ 14,000
Loans repaid (A).............. $ (1,000) $ (13,042) $ (10,200) $ (6,568) $ (9,878)
Loans forgiven (B)............ (10,300) (650)
--------- --------- --------- --------- ----------- -----------
Net mortgage loans
payable................. $ (11,300) $ (13,692) $ (10,200) $ (6,568) $ (9,878) $ 14,000
--------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- ----------- -----------
Accrued interest payable:
Accrued interest paid....... $ (9) $ (109)
Accrued interest forgiven
(B)....................... $ (3,771) (6,974)
--------- --------- -----------
Net accrued interest
payable................. $ (3,771) $ (6,983) $ (109)
--------- --------- -----------
--------- --------- -----------
LBHI loan payable:
funded...................... $ 200
repaid...................... $ (17,130)
----------- ---------
Net LBHI Loan............. $ 200 $ (17,130)
----------- ---------
----------- ---------
Equity:
Increase for forgiveness of
debt...................... $ 14,072 $ 7,624
Decrease due to buyout of
profit participation...... $ (1,272)
Decrease due to deferred
loan costs................ $ (260) (468)
Decrease due to amortization
of loan costs............. (25) (7) $ (4) $ (14)
--------- --------- --- --------- ----------- -----------
Net equity................ $ 14,047 $ 7,617 $ (4) $ (260) $ (1,740) $ (14)
--------- --------- --- --------- ----------- -----------
--------- --------- --- --------- ----------- -----------
TOTAL
PRO FORMA
ADJUSTMENT
-----------
Cash and cash equivalents..... $ 45,678
-----------
-----------
Deferred lease fees and loan
costs:.......................
Financing costs capitalized... $ 671
Amortization of deferred
financing costs.............. (50)
Deferred financing costs
written off.................. (728)
-----------
Net deferred lease fees
and loan costs.......... $ (107)
-----------
-----------
Mortgage loans payable:
Loans funded.................. $ 14,000
Loans repaid (A).............. (40,688)
Loans forgiven (B)............ (10,950)
-----------
Net mortgage loans
payable................. $ (37,638)
-----------
-----------
Accrued interest payable:
Accrued interest paid....... $ (118)
Accrued interest forgiven
(B)....................... (10,745)
-----------
Net accrued interest
payable................. $ (10,863)
-----------
-----------
LBHI loan payable:
funded...................... $ 200
repaid...................... (17,130)
-----------
Net LBHI Loan............. $ (16,930)
-----------
-----------
Equity:
Increase for forgiveness of
debt...................... $ 21,696
Decrease due to buyout of
profit participation...... (1,272)
Decrease due to deferred
loan costs................ (728)
Decrease due to amortization
of loan costs............. (50)
-----------
Net equity................ $ 19,646
-----------
-----------
- ------------------------
(A) In anticipation of the establishment of the Credit Facility and in order to
satisfy all New York State Tax requirements and to mitigate costs to the
Company, it is currently expected that Lehman Brothers Holdings Inc. will
acquire certain of the mortgage indebtedness and the proceeds from the
Offering intended to repay such indebtedness will be deposited into an
escrow account.
(B) In connection with the Formation Transactions, the Company will recognize an
extraordinary gain on the forgiveness of the debt of approximately $20,000.
F-10
SL GREEN REALTY CORP.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(G) To reflect the following pro forma transaction:
--Distribution of excess working capital from the building accounts to
partners.
--$20,000 of the offering proceeds will be used by the Operating
Partnership to repay a portion of a loan made to a company indirectly owned
by Stephen L. Green, which loan was transferred to the Operating Partnership
in connection with the transfer thereto by Stephen L. Green of his ownership
interests, which has been accounted for as a distribution to Stephen L.
Green.
--Payment of real property transfer taxes which are capitalized and
amortized over the life of the commercial property.
--Initial capitalization of SL Green Realty Corp.
INITIAL
470 PARK 70 WEST 1414 AVENUE CAPITALIZATION TOTAL PRO
673 FIRST AVENUE 36TH OF THE OF SL GREEN FORMA
AVENUE SOUTH STREET AMERICAS LBHI LOAN REALTY CORP. ADJUSTMENT
----------- --------- --------- ----------- ---------- ------------- -----------
Cash and cash equivalents:
Preformation distributions to
partners...................... $ (403) $ (1,000) $ (1,403)
Repayment of LBHI loan.......... $ (20,000) (20,000)
Payment of real property
transfer costs................ $ (124) $ (165) (289)
Initial Company
capitalization................ $ 1 1
----- --------- --------- ----- ---------- ------------- -----------
Net (decrease) in cash and cash
equivalents...................... $ (403) $ (1,000) $ (124) $ (165) $ (20,000) $ 1 $ (21,691)
----- --------- --------- ----- ---------- ------------- -----------
----- --------- --------- ----- ---------- ------------- -----------
Land.............................. $ 11 $ 49 $ 60
Buildings and improvements........ 113 116 229
--------- ----- -----------
124 165 289
--------- ----- -----------
Equity:
Decreases for distributions to
partners......................... $ (403) $ (1,000) (1,403)
Decrease for distribution......... $ (20,000) (20,000)
Common stock...................... $ 1 1
----- --------- ---------- ------------- -----------
(Decrease) increase to equity..... (403) (1,000) (20,000) (21,402)
----- --------- --------- ----- ---------- ------------- -----------
Net adjustment.................... $ (403) $ (1,000) $ (124) $ (165) $ (20,000) $ 1 $ (21,691)
----- --------- --------- ----- ---------- ------------- -----------
----- --------- --------- ----- ---------- ------------- -----------
In connection with the formation of the Company a financial advisor will receive
85,600 shares of common stock at a value of $20 per share which will be
accounted for as Offering costs in the amount of $1,712. The accounting is as
follows:
Common stock/additional paid-in-capital..................... $ 1,712
Offering costs.............................................. (1,712)
---------
$ 0
---------
---------
F-11
SL GREEN REALTY CORP.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(H) Reflects the elimination of accumulated deficit against additional paid in
capital and the establishment of limited partners' interest (18.1%) in the
Operating Partnership as follows:
Total owners' equity...................................... $ 175,954
Limited partners' percentage ownership interest in the net
assets of the Operating Partnership...................... 18.1%
---------
Limited partners' interest in the Operating Partnership... $ 31,848
---------
---------
ADJUSTMENTS TO THE PRO FORMA COMBINED INCOME STATEMENT FOR THE SIX MONTHS ENDED
JUNE 30, 1997
(I) To reflect the SL Green Predecessor historical combined statement of
operations for the six months ended June 30, 1997.
(J) To reflect the six months ended June 30, 1997 operations of 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 acquistion 100% of the partnership interests.
ACQUISITION OF PARTNERSHIP INTERESTS AND FAIR
MARKET VALUE ADJUSTMENTS
ELIMINATE --------------------------------------------------
HISTORICAL UNCOMBINED 673 470 29 36 TOTAL
AMOUNTS TOTAL FIRST AVE PARK AVE WEST 35TH WEST 44TH ADJUSTMENTS
----------- ----------- ----------- ----------- ----------- ----------- -----------
REVENUES:
Rental revenue(a)............. $ 10,203 $ 194 $ 120 $ 50 $ 12 $ 10,579
Escalations and reimbursement
revenues..................... 725 725
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues............ 10,928 194 120 50 12 11,304
----------- ----------- ----------- ----------- ----------- ----------- -----------
Equity in net loss of
investees.................... $ (564) (564)
----------- ----------- ----------- ----------- ----------- ----------- -----------
EXPENSES:
Operating expenses(b)......... 2,448 (162) (98) (27) (62) 2,099
Real estate taxes 1,461 1,461
Ground rent(c)................ 1,913 25 1,938
Interest...................... 4,163 4,163
Depreciation and
amortization(c).............. 1,982 19 (51) (9) (2) 1,939
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses............ 11,967 (118) (149) (36) (64) 11,600
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before minority
interest................ $ 564 $ (1,039) $ 312 $ 269 $ 86 $ 76 $ 268
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
- ------------------------
(a) Rental income is adjusted to reflect straight line amounts as of the
acquisition date.
(b) Operating expenses are adjusted to eliminate management fees paid to the
Service Corporations (Management fee income received by the Service
Corporations was also eliminated.)
(c) Ground rent and depreciation and amortization were adjusted to reflect the
purchase of the assets.
F-12
SL GREEN REALTY CORP.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(K) To reflect the six months operations of the Service Corporations
pursuant to the equity method of accounting.
LEASING EXPENSES
HISTORICAL COMMISSIONS ATTRIBUTABLE EQUITY
SERVICE ATTRIBUTABLE TO REIT CONVERSION TOTAL
CORPORATIONS TO LLC (A) (B) ADJUSTMENT
------------ ------------ ------------- --------------- -----------
STATEMENT OF OPERATIONS:
Management revenue......................... $ 966 $ (966)
Leasing commissions........................ 3,088 $ (1,525) (1,563)
Construction revenues...................... 8 (8)
Equity in net income of Service
Corporations.............................. $ (382) 382
Other income............................... 11 (11)
------------ ------------ ----- ----- -----------
Total revenue............................ 4,073 (1,525) (382) (2,166)
------------ ------------ ----- ----- -----------
EXPENSES
Operating expenses......................... 696 (696)
Depreciation and amortization.............. 47 (47)
Marketing, general and administrative...... 1,835 $ (600) (1,235)
------------ ------------ ----- ----- -----------
Total expenses........................... 2,578 (600) (1,978)
------------ ------------ ----- ----- -----------
Income (loss)............................ $ 1,495 $ (1,525) $ 600 $ (382) $ (188)
------------ ------------ ----- ----- -----------
------------ ------------ ----- ----- -----------
- ------------------------
(a) Expenses are allocated to the Service Corporations and the Management LLC
based upon the job functions of the employees.
(b) The Equity in net income of the Service Corporations is computed as follows:
Historical Service Corporations income..................... $ 1,495
Adjustment for management fees eliminated in the combined
historical financial statements due to acquisition of
partnerships interests................................... (169)
Leasing commissions attributable to Management LLC......... (1,525)
Expenses attributable to REIT.............................. 600
---------
Income..................................................... $ 401
---------
---------
Equity in net income of Service Corporations at 95
percent.................................................. $ 382
---------
---------
(L) To reflect the operations of 1372 Broadway, 1140 Avenue of the Americas
and 50 West 23rd Street for the six months ended June 30, 1997. Historical
rental revenue was adjusted for straight line rents as of the acquisition date,
historical operating expenses were reduced for management fees, the capitalized
land
F-13
SL GREEN REALTY CORP.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
lease on 1140 Avenue of the Americas was recorded, and depreciation and
amortization based on cost was recorded.
1372 BROADWAY 1140 AVENUE OF THE AMERICAS 50 WEST 23RD STREET
--------------------------------------- --------------------------------------- --------------------------
HISTORICAL ADJUSTMENT PRO FORMA HISTORICAL ADJUSTMENT PRO FORMA HISTORICAL ADJUSTMENT
----------- ------------- ----------- ----------- ------------- ----------- ----------- -------------
Revenues:
Rental revenue.. $ 4,054 $ 455 $ 4,509 $ 2,178 $ 181 $ 2,359 $ 2,597 $ 174
Escalations &
reimbursement
revenue....... 561 561 346 346 386
Other income.... 1,483 1,483 48 48 1
----------- ----- ----------- ----------- ----- ----------- ----------- -----
Total
revenue..... 6,098 455 6,553 2,572 181 2,753 2,984 174
----------- ----- ----------- ----------- ----- ----------- ----------- -----
Expenses:
Operating
expenses...... 1,337 (142) 1,195 992 (102) 890 689 (91)
Interest on
capital
lease......... 189 189
Depreciation &
amortization.. 541 541 245 245 360
Real estate
taxes......... 1,098 1,098 519 519 518
----------- ----- ----------- ----------- ----- ----------- ----------- -----
Total
expenses.... 2,435 399 2,834 1,511 332 1,843 1,207 269
----------- ----- ----------- ----------- ----- ----------- ----------- -----
Income before
minority
interest...... $ 3,663 $ 56 $ 3,719 $ 1,061 $ (151) $ 910 $ 1,777 $ (95)
----------- ----- ----------- ----------- ----- ----------- ----------- -----
----------- ----- ----------- ----------- ----- ----------- ----------- -----
TOTAL
PRO FORMA PRO FORMA
----------- -----------
Revenues:
Rental revenue.. $ 2,771 $ 9,639
Escalations &
reimbursement
revenue....... 386 1,293
Other income.... 1 1,532
----------- -----------
Total
revenue..... 3,158 12,464
----------- -----------
Expenses:
Operating
expenses...... 598 2,683
Interest on
capital
lease......... 189
Depreciation &
amortization.. 360 1,146
Real estate
taxes......... 518 2,135
----------- -----------
Total
expenses.... 1,476 6,153
----------- -----------
Income before
minority
interest...... $ 1,682 $ 6,311
----------- -----------
----------- -----------
(M) To reflect the changes in interest expense as the result of financing
transactions and the related adjustments to deferred financing expense (see note
(F)).
NEW
470 29 36 70 1414 MORTGAGE
673 1ST AVE PAS W 35TH W 44TH W 36TH AVE. AMERICAS LOAN
----------- --------- ----------- ----------- ----------- --------------- -----------
Interest....................... $ (799) $ (645) $ (461) $ (253) $ (460) $ 539
Depreciation and
amortization................. 25 6 $ 4 (36) (23) 14
--
----- --------- ----- ----- ----- -----
Total expenses............. (774) (639) 4 (461) (289) (483) 553
--
----- --------- ----- ----- ----- -----
Income before minority
interest................. $ 774 $ 639 $ (4) $ 461 $ 289 $ 483 $ (553)
--
--
----- --------- ----- ----- ----- -----
----- --------- ----- ----- ----- -----
TOTAL
---------
Interest....................... $ (2,079)
Depreciation and
amortization................. (10)
---------
Total expenses............. (2,089)
---------
Income before minority
interest................. $ 2,089
---------
---------
(N) To reflect for 70 West 36th Street and 1414 Avenue of the Americas,
depreciation expense adjustments for real property transfer taxes capitalized
which are amortized over the remaining life of the commercial property (see note
(G)).
F-14
SL GREEN REALTY CORP.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(O) To reflect the net increase in marketing, general and administrative
expenses related to operations of a public company which include the following:
Officers' compensation and related costs..................... $ 384
Professional fees............................................ 175
Directors' fees and insurance................................ 150
Printing and distribution costs.............................. 75
Other........................................................ 44
---------
$ 828
---------
---------
The additional officers' compensation and related costs are attributable
primarily to Employment Agreements with the officers as further described under
the caption "Employment and Non Competition Agreement."
(P) Represents the 18.1% interest of the minority in the Operating
Partnership.
(Q) Pro Forma net income per common share is based upon 10,779,216 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
SL GREEN REALTY CORP.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ADJUSTMENTS TO THE PRO FORMA COMBINED INCOME STATEMENT FOR THE YEAR ENDED
DECEMBER 31, 1996
(A) To reflect the SL Green Predecessor historical combined statement of
operations for the year ended December 31, 1996.
(B) 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 as uncombined joint ventures due to the acquisition of 100% of the
partnerships' interests.
ELIMINATE
HISTORICAL UNCOMBINED 673 470 29 36
AMOUNTS TOTAL FIRST AVE PARK AVE WEST 35TH WEST 44TH
----------- ----------- ----------- ----------- ----------- -----------
Revenues
Rental revenue................................. $ 17,386 $ 334 $ 183 $ 146 $ 2,936
Escalations and reimbursement revenues......... 1,488 816
Investment income.............................. 15
Other income................................... 13
----------- ----------- ----------- ----- ----- -----------
Total revenues............................. 18,902 334 183 146 3,752
----------- ----------- ----------- ----- ----- -----------
Equity in net loss of uncombined joint
ventures...................................... $ (1,408)
----------- ----------- ----------- ----- ----- -----------
Expenses
Operating expenses............................. 3,964 (316) (206) (68) 1,234
Real estate taxes.............................. 2,316 873
Ground rent.................................... 3,756 100 69
Interest....................................... 7,743
Depreciation and amortization.................. 3,580 40 (99) (22) 313
----------- ----------- ----------- ----- ----- -----------
Total expenses............................. 21,359 (176) (305) (90) 2,489
----------- ----------- ----------- ----- ----- -----------
Income (loss).............................. $ (2,457) $ 1,408 $ 510 $ 488 $ 236 $ 1,263
----------- ----------- ----------- ----- ----- -----------
----------- ----------- ----------- ----- ----- -----------
TOTAL
ADJUSTMENTS
-------------
Revenues
Rental revenue................................. $ 20,985
Escalations and reimbursement revenues......... 2,304
Investment income.............................. 15
Other income................................... 13
-------------
Total revenues............................. 23,317
-------------
Equity in net loss of uncombined joint
ventures...................................... (1,408)
-------------
Expenses
Operating expenses............................. 4,608
Real estate taxes.............................. 3,189
Ground rent.................................... 3,925
Interest....................................... 7,743
Depreciation and amortization.................. 3,812
-------------
Total expenses............................. 23,277
-------------
Income (loss).............................. $ 1,448
-------------
-------------
(C) To reflect adjustments to record the Company's share in the net income
of the Service Corporations pursuant to the equity method of accounting for the
year ended December 31, 1996. As a result of the Formation Transactions the
Company will not own any voting stock of the Service Corporations but will
continue to exercise significant influence due to the following:
- Substantially all of the economic benefits flow to the Company (who will
own 100% of the non-voting common stock representing 95% of the total
equity)
- The Company and the Service Corporations have common officers and
employees
- The owners of a majority of the voting stock of the Service Corporations
have not contributed substantial equity to the Service Corporations
- The views of the Company's management influence the operations of the
Service Corporations
F-16
SL GREEN REALTY CORP.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
The adjustment is as follows:
LEASING
COMMISSIONS EXPENSES
HISTORICAL ATTRIBUTABLE ATTRIBUTABLE EQUITY
SERVICE TO TO CONVERSION TOTAL
CORPORATIONS LLC REIT (A) ADJUSTMENTS
------------- ------------- --------------- ----------- -----------
REVENUE:
Management revenue........................ $ 2,336 $ (2,336)
Leasing commissions....................... 2,372 $ (1,257) (1,115)
Construction revenue...................... 101 (101)
Other income.............................. 92 (92)
------------- ------------- ------ ----------- -----------
Total revenue......................... 4,901 (1,257) (3,644)
Equity in net loss of Service
Corporations............................. $ 504 504
------------- ------------- ------ ----------- -----------
EXPENSES:
Operating expenses........................ 1,522 (1,522)
Depreciation and amortization............. 92 (92)
Marketing, general and administration..... 3,250 $ (986) (2,264)
------------- ------------- ------ ----------- -----------
Total expenses........................ 4,864 (986) (3,878)
------------- ------------- ------ ----------- -----------
Income (loss)......................... $ 37 $ (1,257) $ 986 $ 504 $ (270)
------------- ------------- ------ ----------- -----------
------------- ------------- ------ ----------- -----------
(a) The equity in net loss of Service Corporations is computed as follows:
Historical Service Corporations income............................. $ 37
Adjustment for management fees eliminated in the combined
historical financial statements due to acquisition of
partnerships' interests........................................... (297)
Leasing commissions attributable to Management LLC................. (1,257)
Expenses attributable to REIT...................................... 986
---------
Loss............................................................. $ (531)
---------
---------
Equity in net loss of investees at 95 percent...................... $ (504)
---------
---------
(D) To reflect the operations of 1372 Broadway, 1140 Avenue of the Americas
and 50 West 23rd Street for the year ended December 31, 1996. Historical rental
revenue was adjusted for straight line rents as of the acquisition date,
historical operating expenses were reduced for management fees, the capitalized
land lease on 1140 Avenue of the Americas and depreciation and amortization are
based on cost.
F-17
SL GREEN REALTY CORP.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1372 BROADWAY 1140 AVENUE OF THE AMERICAS 50 WEST 23RD STREET
--------------------------------------- --------------------------------------- --------------------------
HISTORICAL ADJUSTMENT PRO FORMA HISTORICAL ADJUSTMENT PRO FORMA HISTORICAL ADJUSTMENT
----------- ------------- ----------- ----------- ------------- ----------- ----------- -------------
REVENUES:
Rental revenue..... $ 8,580 $ 656 $ 9,236 $ 4,265 $ 286 $ 4,551 $ 5,357 $ 10
Escalations &
reimbursement
revenue........... 1,842 1,842 716 716 716
Other income....... 690 690 204 204 12
----------- ------ ----------- ----------- ----- ----------- ----------- -----
Total revenue.. 11,112 656 11,768 5,185 286 5,471 6,085 10
----------- ------ ----------- ----------- ----- ----------- ----------- -----
EXPENSES:
Operating
expenses.......... 3,257 (459) 2,798 2,177 (275) 1,902 1,511 (195)
Interest on capital
lease............. 379 379
Depreciation &
amortization...... 1,082 1,082 490 490 720
Real estate taxes.. 2,343 2,343 1,007 1,007 1,006
----------- ------ ----------- ----------- ----- ----------- ----------- -----
Total
expenses..... 5,600 623 6,223 3,184 594 3,778 2,517 525
----------- ------ ----------- ----------- ----- ----------- ----------- -----
Income before
minority
interest.......... $ 5,512 $ 33 $ 5,545 $ 2,001 $ (308) $ 1,693 $ 3,568 $ (515)
----------- ------ ----------- ----------- ----- ----------- ----------- -----
----------- ------ ----------- ----------- ----- ----------- ----------- -----
TOTAL PRO
PRO FORMA FORMA
----------- -----------
REVENUES:
Rental revenue..... $ 5,367 $ 19,154
Escalations &
reimbursement
revenue........... 716 3,274
Other income....... 12 906
----------- -----------
Total revenue.. 6,095 23,334
----------- -----------
EXPENSES:
Operating
expenses.......... 1,316 6,016
Interest on capital
lease............. 379
Depreciation &
amortization...... 720 2,292
Real estate taxes.. 1,006 4,356
----------- -----------
Total
expenses..... 3,042 13,043
----------- -----------
Income before
minority
interest.......... $ 3,053 $ 10,291
----------- -----------
----------- -----------
(E) To eliminate interest expense and amortization of deferred financing
costs related to mortgage loans paid off or forgiven, to reflect amortization of
deferred financing cost related to the transfer of mortgage debt to the Company
and to record interest and amortization of deferred finance costs related to the
new mortgage.
AMORTIZATION OF
INTEREST DEFERRED
EXPENSE FINANCING COSTS
--------- -----------------
673 First Avenue................................................... $ (1,571) $ 49
470 Park Avenue South.............................................. (1,537) 13
29 West 35th Street................................................ 8
36 West 44th Street................................................ (234)
70 West 36th Street................................................ (911) (62)
1414 Avenue of the Americas........................................ (446) (28)
New mortgage interest.............................................. 1,078 7
--------- ---
$ (3,621) $ (13)
--------- ---
--------- ---
(F) To reflect depreciation and amortization expense related to the real
property transfer taxes incurred to transfer title of 70 West 36th Street and
1414 Avenue of the Americas to the Company and to reflect the net increase in
marketing, general and administrative expenses related to operations of a public
company.
F-18
SL GREEN REALTY CORP.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
The additional marketing, general and adminsitrative expenses consist of the
following:
Officers' compensation and related costs............................ $ 768
Professional fees................................................... 350
Directors' fees and insurance....................................... 300
Printing and distribution costs..................................... 150
Other............................................................... 89
---------
$ 1,657
---------
---------
The additional officers' compensation and related costs are attributable
primarilty to employment agreements with the officers as further described under
the caption "Employment and Non-Competition Agreement."
(G) Represents the 18.1% interest of the minority in the Operating
Partnership.
(H) Pro Forma net income per common share is based upon 10,779,216 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-19
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-20
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-21
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 10,100,000 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 553,616 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 18.1% 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 on the basis that it will have significant influence with respect to
management and operations. For further description, see the caption "Structure
and Formation of the Company".
F-22
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 $189.4
million. Of this amount the Company expects that approximately $42.7 million to
repay mortgage indebtedness encumbering the properties, including $1.9 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
$99.0 million to acquire properties (including a $1.6 million escrow account
established in connection with the acquisition of 50 W. 23rd Street),
approximately $6.1 million to pay certain expenses incurred in the Formation
Transactions, $27.5 million to repay the LBH Inc. Loan (excluding $2.5 million
and $200,000 borrowed under the loan to fund offering expenses and prepayment
penalties, respectively), and $9.4 million to acquire properties), $1.5 million
to fund the advisory fee payment to Lehman Brothers, Inc. and $6.2 million to
fund capital expenditures and general working capital needs.
If the underwriters' over-allotment option to purchase 1.515 million shares
of Common Stock is exercised, the Company will use the additional net proceeds
(estimated to be approximately $28.2 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.
F-23
SL GREEN REALTY CORP.
NOTES TO BALANCE SHEET
JUNE 12, 1997
2. STOCKHOLDER'S EQUITY (CONTINUED)
RETAINED EARNINGS
The Company has not engaged in any operations from inception in 1997.
3. COMMITMENTS AND CONTINGENCIES
STOCK OPTION AND INCENTIVE 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 and
Incentive 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
Subject to negotiation of mutually satisfactory covenants and other terms,
Lehman Brothers Holdings Inc. has agreed to provide the Company a revolving $75
million 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-24
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-25
SL GREEN PREDECESSOR
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
--------------------
1996 1995
JUNE 30, 1997 --------- ---------
-------------------------------------
HISTORICAL PRO FORMA PRO FORMA
----------- ADJUSTMENT -----------
(UNAUDITED) ----------- (UNAUDITED)
(UNAUDITED)
ASSETS
Commercial real estate properties, at cost (NOTE 4)
Land............................................... $ 7,719 $ 7,719 $ 4,465 $ 1,517
Buildings and improvements......................... 35,186 35,186 21,819 14,042
----------- ----------- --------- ---------
42,905 42,905 26,284 15,559
Less accumulated depreciation...................... (6,251) (6,251) (5,721) (5,025)
----------- ----------- --------- ---------
36,654 36,654 20,563 10,534
Cash and cash equivalents.......................... 1,221 1,221 476 619
Restricted cash.................................... 1,685 1,685 1,227 664
Receivables........................................ 1,107 1,107 914 383
Related party receivables (NOTE 7)................. 1,658 1,658 1,186 1,016
Deferred rents receivable.......................... 1,383 1,383 1,265 904
Investment in uncombined joint venture (NOTE 2).... 1,176 1,176 1,730 369
Deferred costs, net (NOTE 3)....................... 1,561 1,561 1,371 449
Other assets....................................... 2,319 2,319 1,340 1,146
----------- ----------- --------- ---------
Total assets....................................... $ 48,764 $ 48,764 $ 30,072 $ 16,084
----------- ----------- --------- ---------
----------- ----------- --------- ---------
LIABILITIES AND OWNERS' DEFICIT
Mortgage notes payable (NOTE 4).................... $ 33,646 $ 33,646 $ 16,610 $ 12,700
Accrued interest payable (NOTE 4).................. 109 109 90 2,894
Accounts payable and accrued expenses.............. 1,171 $ 20,000 21,171 1,037 756
Accounts payable to related parties (NOTE 7)....... 1,298 1,298 2,213 2,092
Excess of distributions and share of losses over
investments in uncombined joint ventures (NOTE
2)............................................... 18,007 18,007 17,300 15,826
Security deposits.................................. 1,683 1,683 1,227 664
----------- ----------- --------- ---------
Total liabilities.................................. 55,914 75,914 38,477 34,932
Commitments, contingencies and other matters (NOTES
6, 8, 9 AND 10)
Owners' deficit.................................... (7,150) (20,000) (27,150) (8,405) (18,848)
----------- ----------- ----------- --------- ---------
Total liabilities and owners' deficit.............. $ 48,764 $ 0 $ 48,764 $ 30,072 $ 16,084
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
See accompanying notes.
F-26
SL GREEN PREDECESSOR
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
Revenues
Rental revenue............................... $ 2,800 $ 1,315 $ 4,199 $ 2,416 $ 2,605
Escalation and reimbursement revenues........ 456 285 1,051 758 802
Management revenues, including $299 (June
1997 (unaudited)), $447 (1996), $449
(1995), and $531 (1994) from affiliates
(NOTE 7)................................... 966 1,063 2,336 2,260 1,959
Leasing commissions.......................... 3,088 1,282 2,372 897 890
Construction revenues, net, including $6
(June 1997 (unaudited)), $35 (1996), $82
(1995), and $134 (1994) from affiliates
(NOTE 7)................................... 8 39 101 233 344
Other income................................. 16 114 123 -- --
--------- --------- --------- --------- ---------
Total revenues................................. 7,334 4,098 10,182 6,564 6,600
--------- --------- --------- --------- ---------
Share of net loss from uncombined joint
ventures (NOTE 2)............................ 564 817 1,408 1,914 1,423
--------- --------- --------- --------- ---------
Expenses
Operating expenses........................... 1,625 1,230 3,197 2,505 2,009
Interest (NOTE 4)............................ 713 442 1,357 1,212 1,555
Depreciation and amortization................ 599 406 975 775 931
Real estate taxes............................ 482 232 703 496 543
Marketing, general and administrative........ 1,835 2,029 3,250 3,052 2,351
--------- --------- --------- --------- ---------
Total expenses................................. 5,254 4,339 9,482 8,040 7,389
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item........ 1,516 (1,058) (708) (3,390) (2,212)
Extraordinary income on forgiveness of debt
(NOTE 4)..................................... -- -- 8,961 -- --
--------- --------- --------- --------- ---------
Net income (loss).............................. $ 1,516 $ (1,058) $ 8,253 $ (3,390) $ (2,212)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
See accompanying notes.
F-27
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)....................................................... 25
Net income for the six months ended June 30, 1997 (Unaudited)................... 1,516
---------
BALANCE AT JUNE 30, 1997 (UNAUDITED).............................................. $ (7,150)
---------
---------
See accompanying notes.
F-28
SL GREEN PREDECESSOR
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)................................................... $ 1,516 $ (1,058) $ 8,253 $ (3,390) $ (2,212)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Depreciation and amortization..................................... 599 406 975 775 931
Share of net loss from uncombined joint ventures.................. 744 992 1,763 2,249 1,800
Deferred rents receivable......................................... (80) (334) (362) 87 (424)
Extraordinary gain on the forgiveness of debt..................... -- -- (8,961) -- --
Changes in operating assets and liabilities:
Restricted cash................................................... (42) 64 (563) (38) (64)
Receivables....................................................... (112) (96) (531) 47 (117)
Related party receivables......................................... (472) (131) (170) (299) 157
Deferred costs.................................................... (191) (25) (1,108) (465) 171
Other assets...................................................... 12 96 (287) (858) 1,253
Accounts payable and accrued expenses............................. 22 (417) 280 (180) (1,034)
Accounts payable to related parties............................... (915) 629 121 948 (69)
Security deposits payable 40 (64) 564 29 90
Accrued interest payable.......................................... 19 (7) 298 861 457
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities................. 1,140 55 272 (234) 939
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Additions to land, buildings and improvements....................... (7,206) (111) (10,725) (369) (389)
Contributions to partnership investments............................ (25) (537) (1,650) (63) (178)
Distributions from partnership investments.......................... 86 -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in investing activities............................... (7,145) (648) (12,375) (432) (567)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Proceeds from mortgage notes payable................................ 7,000 -- 16,680 -- --
Payments of mortgage notes payable.................................. (164) (80) (6,910) -- --
Cash distributions to owners........................................ (286) (175) (552) -- --
Cash contributions from owners...................................... 25 538 2,742 63 178
--------- --------- --------- --------- ---------
Net cash provided by financing activities........................... 6,575 283 11,960 63 178
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents................ 570 (310) (143) (603) 550
Cash transfer related to Praedium Bar Associates, LLC presented as a
combined entity................................................... 185 -- -- -- --
Cash and cash equivalents at beginning of period.................... 476 619 619 1,222 672
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period.......................... $ 1,231 $ 309 $ 476 $ 619 $ 1,222
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental cash flow disclosures
Interest paid....................................................... $ 694 $ 449 $ 1,059 $ 351 $ 1,098
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income taxes paid $ -- $ -- $ -- $ 35 $ 31
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental schedule of non cash investing and financing activities:
(unaudited)
On June 30, 1997 the remaining interest of Praedium Bar Associates, LLC
("Praedium Bar") was purchased by an affiliate of Stephen L. Green. In
connection with the purchase, as of June 30, 1997, the investment in Praedium
Bar has been presented as a combined entity (see note 1). The assets,
liabilities and owners' equity of Praedium Bar as of June 30, 1997 are as
follows:
Commercial real estate properties, net................................................... $ 14,383
Total assets............................................................................. 16,174
Mortgage notes payable................................................................... 10,200
Total liabilities........................................................................ 10,831
Owners' equity........................................................................... 5,343
See accompanying notes.
F-29
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 management of Stephen L. Green; and
interests owned and managed by Stephen L. Green in entities accounted for on the
equity method (see note 2) that are organized as partnerships and a limited
liability company. The entities included in this financial statement have been
combined for only the periods that they were under common control and
management. 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-30
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:
STEPHEN L. GREEN
ENTITY PROPERTY/SERVICE PERCENTAGE OWNERSHIP OWNERSHIP TYPE
- ---------------------------------- -------------------------- ------------------------- ------------------
Office Property Entities
64-36 Realty Associates 70 West 36th Street 95%(A) General partner
1414 Management Associates, LP 1414 Avenue of the 100%
Americas General partner
Service Corporations
SL Green Management, Corp. Management 100% Sole shareholder
SL Green Leasing, Inc. Management and leasing 100% Sole shareholder
Emerald City Construction Corp. Construction 100% Sole shareholder
(A) The minority interest is not material.
On June 30, 1997, the majority owner of SL Green Predecessor purchased the
remaining 90% interest in Praedium Bar Associates LLC, which was funded by a
loan from Lehman Brothers Holdings Inc., which as of that date is included in
the combined financial statements (unaudited) (see note 2).
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.
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.
F-31
SL GREEN PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 June 30, 1997 depreciation
expense amounted to $488.
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.
F-32
SL GREEN PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
CAPITALIZATION
The Service Corporations (three) each have 200 shares of no par value common
stock authorized and issued for $1,000, with no related additional 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
June 30, 1997 and for the six month periods ended June 30, 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.
The June 30, 1997 financial statements reflects a pro forma adjustment, with
respect to the proposed formation of the REIT. The pro forma adjustments reflect
$20,000 of the Offering proceeds will be used by the Operating Partnership to
repay a portion of a loan made to a company indirectly owned by Stephen L.
Green, which loan will be transferred to the Operating Partnership in connection
with the transfer thereto by Stephen L. Green of his ownership interests, which
has been accounted for as a distribution to Stephen L. Green.
F-33
SL GREEN PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
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:
GREEN GROUP
PARTNERSHIPS/LIMITED PERCENTAGE
LIABILITY COMPANY PROPERTY OWNERSHIP OWNERSHIP TYPE
- ----------------------------------------- --------------------- ------------------------- -----------------
673 First Realty Company................. 673 First Avenue 67% Co-general
partner
470 Park South Associates, LP............ 470 Park Avenue South 65% Co-general
partner
29/35 Realty Associates, LP.............. 29 West 35th Street 21.5% Co-general
partner
Praedium Bar Associates, LLC............. 36 West 44th Street 10%(A) Has veto rights
("Praedium Bar") relating to sale
and financing
- ------------------------
(A) Praedium Bar acquired the first mortgage related to the property in October,
1996 which provides for substantially all the economic interest in the
property 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. On June 30, 1997, the majority owner of SL Green Predecessor
purchased the remaining 90% interest in Praedium Bar Associates, LLC for
$6.3 million (unaudited).
Condensed combined financial statements of the partnerships and the limited
liability company, are as follows:
DECEMBER 31,
JUNE 30, --------------------
1997 1996 1995
----------- --------- ---------
(UNAUDITED)
CONDENSED BALANCE SHEETS
Commercial real estate property, net......................... $ 57,955 $ 72,958 $ 61,092
Deferred rent receivable..................................... 14,881 14,860 14,337
Cash and cash equivalents, including restricted cash of
$1,305 (June 1997 (unaudited)) $1,588 (1996) and $1,205
(1995)..................................................... 2,968 3,811 3,275
Deferred costs and other assets.............................. 6,637 7,271 6,196
----------- --------- ---------
Total assets................................................. $ 82,441 $ 98,900 $ 84,900
----------- --------- ---------
----------- --------- ---------
Mortgages and accrued interest payable....................... $ 80,053 $ 90,245 $ 80,750
Obligations under capital lease.............................. 14,374 14,265 14,060
Deferred rent payable........................................ 11,996 11,459 10,387
Accounts payable and other liabilities....................... 3,594 4,560 3,475
Owners' deficit
SL Green Predecessor....................................... (16,831) (15,570) (15,457)
Other partners............................................. (10,745) (6,059) (8,315)
----------- --------- ---------
Total owners' deficit........................................ (27,576) (21,629) (23,772)
----------- --------- ---------
Total liabilities and owner's deficit........................ $ 82,441 $ 98,900 $ 84,900
----------- --------- ---------
----------- --------- ---------
F-34
SL GREEN PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
2. INVESTMENT IN UNCOMBINED JOINT VENTURES (CONTINUED)
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
CONDENSED STATEMENTS OF OPERATIONS
Rental revenue and escalations.................. $ 10,928 $ 8,750 $ 18,874 $ 17,934 $ 18,235
Other revenue................................... -- -- 28 18 129
--------- --------- --------- --------- ---------
Total revenues.................................. 10,928 8,750 18,902 17,952 18,364
--------- --------- --------- --------- ---------
Interest........................................ 4,163 3,767 7,743 7,785 7,721
Depreciation and amortization................... 1,982 1,740 3,580 3,768 3,401
Operating and other expenses.................... 5,822 4,659 10,036 9,552 9,750
--------- --------- --------- --------- ---------
Total expenses.................................. 11,967 10,166 21,359 21,105 20,872
--------- --------- --------- --------- ---------
Loss before outside partner's interest.......... (1,039) (1,416) (2,457) (3,153) (2,508)
Elimination of inter-company management fees.... 180 175 355 335 377
Other partner share of the loss................. 295 424 694 904 708
--------- --------- --------- --------- ---------
Loss allocated to the SL Green Predecessor...... $ (564) $ (817) $ (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:
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
Management fee expenses............. $ 348 $ 293 $ 622 $ 563 $ 624
Leasing commission expenses......... 293 167 218 48 80
Construction fees................... 1,186 180 185 376 809
Maintenance expenses................ 151 122 227 132 164
F-35
SL GREEN PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
3. DEFERRED COSTS
Deferred costs consist of the following:
JUNE 30,
1997 1996 1995
----------- --------- ---------
(UNAUDITED)
Deferred financing......................................... $ 1,001 $ 982 $ 206
Deferred lease............................................. 1,709 1,613 1,365
Deferred offering.......................................... 214 87 --
----------- --------- ---------
2,924 2,682 1,571
Less accumulated amortization.............................. (1,363) (1,311) (1,122)
----------- --------- ---------
$ 1,561 $ 1,371 $ 449
----------- --------- ---------
----------- --------- ---------
4. MORTGAGE NOTES PAYABLE
The mortgage notes payable collateralized by the respective properties and
assignment of leases at June 30, 1997 and December 31, 1996 and 1995 are as
follows:
MORTGAGE ACCRUED
PAYABLE INTEREST MORTGAGE ACCRUED MORTGAGE
MORTGAGE NOTES JUNE 30, JUNE 30, 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).............................. $ 9,878 $ 109 $ 9,946 $ 90 $ --
----------- ----- ----------- --- -----------
Total Fixed Rate Notes............... 9,878 109 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............................. 6,568 -- 6,664 -- 12,700(B)
----------- ----- ----------- --- -----------
36 W 44th Street First mortgage note with interest
based on LIBOR plus 3.4%, due
September 30, 1998................... 10,200 -- -- -- --
----------- ----- ----------- --- -----------
Note payable to Lehman Brothers
Holdings Inc., with interest based on
LIBOR plus 2.75%, due at the close of
the Formation Transaction(C)......... 7,000 -- -- -- --
Total Variable Rate Notes............ 23,768 -- 6,664 -- 12,700
----------- ----- ----------- --- -----------
Total Mortgage Notes Payable......... $ 33,646 $ 109 $ 16,610 $ 90 $ 12,700
----------- ----- ----------- --- -----------
----------- ----- ----------- --- -----------
ACCRUED
INTEREST
PROPERTY 1995
- ------------------ -----------
1414 Avenue of the
Americas
$ --
-----------
--
-----------
70 W 36th Street
2,894(B)
-----------
36 W 44th Street
--
-----------
--
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 January, 1996, the first mortgage was bifurcated into a first and second
mortgage; the second mortgage was acquired by an unrelated entity for no
consideration. 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.
(C) The Lehman Brothers Holdings Inc. loan is secured by partnership interests
in certain Property-owning entities.
F-36
SL GREEN PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
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-37
SL GREEN PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
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, entities
owned by Stephen L. Green or relatives of Stephen L. Green 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:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
-------------------------------- -------------------------------
1997 1996 1996 1995 1994
--------------- --------------- --------- --------- ---------
(UNAUDITED)
Management revenues........................ $ 131 $ 65 $ 180 $ 221 $ 284
Leasing commission revenues................ 39 27 37 36 64
Construction fees.......................... 241 244 25 69 107
Rental income.............................. 42 14 33 25 --
Maintenance expense........................ 75 24 93 32 24
Amounts due from related parties consist of:
DECEMBER 31,
JUNE 30 --------------------
1997 1996 1995
----------- --------- ---------
(UNAUDITED)
SL Green Properties Inc...................................... $ 924 $ 507 $ 517
First Quality Maintenance.................................... 180 160 374
250 PAS, Associates, LP...................................... 373 363 --
Officers..................................................... 181 156 125
----------- --------- ---------
$ 1,658 $ 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,
F-38
SL GREEN PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
8. BENEFIT PLAN (CONTINUED)
$7 and $7 in 1996, 1995 and 1994, respectively; and $24 for the six months ended
June 30, 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.
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. In June 1997, SL Green Predecessor
acquired an option to acquire 50 West 23rd Street at a purchase price of
approximately $36.0 million. It is anticipated that SL Green Predecessor will
acquire the Property, within thirty days after the closing.
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. On June 25, 1997 the LBHI Loan
was increased up to $46 million (unaudited).
F-39
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-40
SL GREEN PREDECESSOR
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
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-41
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-42
UNCOMBINED JOINT VENTURES OF
SL GREEN PREDECESSOR
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
JUNE 30, --------------------
1997 1996 1995
----------- --------- ---------
(UNAUDITED)
ASSETS
Commercial real estate properties, at cost (NOTES 2 AND 5):
Land..................................................... $ 3,666 $ 6,366 $ 3,666
Buildings and improvements............................... 64,355 75,307 63,224
Property under capital lease............................. 12,208 12,208 12,208
----------- --------- ---------
80,229 93,881 79,098
Less accumulated depreciation............................ (22,274) (20,923) (18,006)
----------- --------- ---------
57,955 72,958 61,092
Cash and cash equivalents.................................... 1,663 2,223 2,070
Restricted cash.............................................. 1,305 1,588 1,205
Deferred rents receivable.................................... 14,881 14,860 14,337
Deferred costs, net (NOTE 3)................................. 4,337 4,812 4,771
Other assets................................................. 2,300 2,459 1,425
----------- --------- ---------
Total assets................................................. $ 82,441 $ 98,900 $ 84,900
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND OWNERS' DEFICIT
Mortgages and note payable (NOTE 2).......................... $ 63,724 $ 74,827 $ 66,301
Accrued interest payable (NOTE 2)............................ 16,329 15,418 14,449
Obligations under capital lease (NOTE 5)..................... 14,374 14,265 14,060
Deferred rent payable........................................ 11,996 11,459 10,387
Accounts payable and accrued expenses........................ 576 1,200 432
Accounts payable to related parties (NOTE 6)................. 628 688 779
Security deposits............................................ 2,390 2,672 2,264
----------- --------- ---------
Total liabilities............................................ 110,017 120,529 108,672
Commitments, contingencies and other comments
(NOTES 5, 7, 8 AND 9)
Owners' deficit:
SL Green Predecessor....................................... (16,831) (15,570) (15,457)
Other partners............................................. (10,745) (6,059) (8,315)
----------- --------- ---------
Total owners' deficit........................................ (27,576) (21,629) (23,772)
----------- --------- ---------
Total liabilities and owners' deficit........................ $ 82,441 $ 98,900 $ 84,900
----------- --------- ---------
----------- --------- ---------
See accompanying notes.
F-43
UNCOMBINED JOINT VENTURES OF
SL GREEN PREDECESSOR
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
Revenues:
Rental revenue (NOTE 5)................ $ 10,203 $ 8,239 $ 17,386 $ 16,519 $ 16,559
Escalation and reimbursement revenues
(NOTE 5)............................. 725 511 1,488 1,415 1,676
Other income........................... -- -- 28 18 129
--------- --------- --------- --------- ---------
Total revenues........................... 10,928 8,750 18,902 17,952 18,364
--------- --------- --------- --------- ---------
Expenses:
Operating expenses:
Other................................ 1,949 1,314 3,115 2,931 3,014
Related parties...................... 499 415 849 695 788
Real estate taxes...................... 1,461 1,064 2,316 2,183 2,215
Rent expense (NOTE 5).................. 1,913 1,866 3,756 3,743 3,733
Interest (NOTE 2)...................... 4,163 3,767 7,743 7,785 7,721
Depreciation and amortization.......... 1,982 1,740 3,580 3,768 3,401
--------- --------- --------- --------- ---------
Total expenses........................... 11,967 10,166 21,359 21,105 20,872
--------- --------- --------- --------- ---------
Net loss................................. $ (1,039) $ (1,416) $ (2,457) $ (3,153) $ (2,508)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
See accompanying notes.
F-44
UNCOMBINED JOINT VENTURES OF
SL GREEN PREDECESSOR
COMBINED STATEMENTS OF OWNERS' DEFICIT
(DOLLARS IN THOUSANDS)
SL GREEN &
RELATED ALL OTHER
ENTITIES PARTNERS
------------ ---------
BALANCE AT JANUARY 1, 1994................................. $(11,649) $ (7,384) $ (19,033)
Distributions............................................ -- -- --
Contributions............................................ 178 619 797
Net loss for the year ended December 31, 1994............ (1,800) (708) (2,508)
------------ --------- ---------
BALANCE AT DECEMBER 31, 1994............................... (13,271) (7,473) (20,744)
Distributions............................................ -- -- --
Contributions............................................ 63 62 125
Net loss for the year ended December 31, 1995............ (2,249) (904) (3,153)
------------ --------- ---------
BALANCE AT DECEMBER 31, 1995............................... (15,457) (8,315) (23,772)
Distributions............................................ -- (1,150) (1,150)
Contributions............................................ 1,650 4,100 5,750
Net loss for the year ended December 31, 1996............ (1,763) (694) (2,457)
------------ --------- ---------
BALANCE AT DECEMBER 31, 1996............................... (15,570) (6,059) (21,629)
Distributions (unaudited)................................ (86) (314) (400)
Other--reclassification of joint venture to combined
property (880) (4,463) (5,343)
Contributions (unaudited)................................ 450 385 835
Net loss for the six months ended June 30, 1997
(unaudited)............................................ (745) (294) (1,039)
------------ --------- ---------
BALANCE AT JUNE 30, 1997 (UNAUDITED)....................... $(16,831) $ (10,745) $ (27,576)
------------ --------- ---------
------------ --------- ---------
See accompanying notes.
F-45
UNCOMBINED JOINT VENTURES OF
SL GREEN PREDECESSOR
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
OPERATING ACTIVITIES
Net loss $ (1,039) $ (1,416) $ (2,457) $ (3,153) $ (2,508)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization.................................. 1,982 1,740 3,580 3,768 3,401
Deferred rents receivable...................................... (271) (217) (524) (370) (985)
Other.......................................................... 93 -- -- -- --
Changes in operating assets and liabilities:
Restricted cash................................................ (133) 49 (383) 70 90
Deferred costs................................................. (326) (261) (705) (54) (640)
Other assets................................................... (363) 171 (1,033) (75) 432
Accounts payable and accrued expenses.......................... (511) (55) 768 (192) (757)
Accounts payable to related parties............................ (60) (26) (91) (124) (353)
Security deposits.............................................. 133 104 409 (102) (315)
Accrued interest on mortgage notes payable..................... 911 702 969 1,781 1,585
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities.............. 416 791 533 1,549 (50)
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Additions to land, buildings and improvements.................... (969) (422) (4,583) (690) (1,963)
--------- --------- --------- --------- ---------
Net cash used in investing activities............................ (969) (422) (4,583) (690) (1,963)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Proceeds from mortgage notes payable............................. -- -- -- -- 11,899
Payments of mortgage notes payable............................... (903) (815) (1,674) (1,531) (13,176)
Cash distributions to owners..................................... (400) (1,150) (1,150) -- --
Cash contributions from owners................................... 835 550 5,750 125 797
Capitalized lease obligations.................................... 646 636 1,277 1,532 1,628
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities.............. 178 (779) 4,203 126 1,148
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents............. (375) (410) 153 985 (865)
Cash transfer related to Praedium Bar Associates, LLC presented
as a combined entity........................................... (185) -- -- -- --
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....................... $ 1,663 $ 1,660 $ 2,223 $ 2,070 $ 1,085
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental cash flow disclosures
Interest paid.................................................... $ 3,252 $ 3,065 $ 6,774 $ 6,004 $ 6,136
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental schedule of non cash investing and financing
activities: (unaudited)
Assumption of mortgage in connection with property
acquisition.................................................. -- -- $ 10,200 -- --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
On June 30, 1997 the remaining interest of Praedium Bar Associates, LLC
("Praedium Bar") was purchased by an affiliate of Stephen L. Green. In
connection with the purchase as of June 30, 1997, the assets and liabilities of
Praedium Bar have been excluded from the financial statements of the uncombined
joint ventures of SL Green Predecessor and have been presented in the combined
financial statements of SL Green Predecessor. The assets, liabilities and
owners' equity of Praedium Bar as of June 30, 1997 are as follows:
Commercial real estate property, net..................................................... $ 14,383
Total assets............................................................................. 16,174
Mortgage notes payable................................................................... 10,200
Total liabilities........................................................................ 10,831
Owners' equity........................................................................... 5,343
See accompanying notes.
F-46
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
and management. 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-47
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
managed but not controlled by the SL Green Predecessor, are as follows:
PARTNERSHIPS/LIMITED SL GREEN PREDECESSOR
LIABILITY COMPANY PROPERTY PERCENTAGE OWNERSHIP OWNERSHIP TYPE
- -------------------------------------------- ---------------------- --------------------- ---------------------
673 First Realty Company.................... 673 First Avenue 67.0% Co-general partner
29/35 Realty Associates, LP................. 29 West 35th Street 21.5% Co-general partner
470 Park South Associates, LP............... 470 Park Avenue South 65.0% Co-general partner
Praedium Bar Associates, LLC................ 36 West 44th Street 10.0%(A) Has veto rights
("Praedium Bar") relating to sale and
financing
(A) Praedium Bar acquired the first mortgage related to the property in October,
1996 which provides for substantially all the economic interest in the
property 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. On
June 30, 1997, the majority owner of SL Green Predecessor purchased the
remaining 90% interest in Praedium Bar Associates, LLC for $6.3 million
(unaudited).
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
June 30, 1997 (unaudited), December 31, 1996 no indicators of impairment were
present and no impairment losses have been recorded in any of the periods
presented.
F-48
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 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
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 six months ended June 30, 1997 depreciation expense amounted to
$1,594.
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.
F-49
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)
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.
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
June 30, 1997 and for the six months ended June 30, 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-50
UNCOMBINED JOINT VENTURES OF
SL GREEN PREDECESSOR
NOTES TO COMBINED STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
2. MORTGAGE NOTES PAYABLE
The mortgage notes payable collateralized by the respective properties and
assignment of leases at December 31, 1996 and 1995 and June 30, 1997 are as
follows:
MORTGAGE ACCRUED
PAYABLE INTEREST MORTGAGE ACCRUED MORTGAGE ACCRUED
MORTGAGE NOTES WITH FIXED JUNE 30, JUNE 30, 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 $ 3,008 $ 21 $ 3,040 $ 21 $ 3,096 $ 28
673 First Avenue First mortgage note with
interest payable at
9.0%, due December 13,
2003 18,740 -- 19,439 -- 20,736 --
470 Park Avenue South First mortgage note with
interest payable at
8.25%, due April 1,
2004 10,985 77 11,132 77 11,407 78
470 Park Avenue South Second mortgage note with
interest payable at
10.0%, due October 31,
1999 1,042 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 10,618 13,000 10,204 13,000 10,376
--------- --------- -------- ------- -------- -------
Total Fixed Rate Notes 46,775 10,724 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 -- -- --
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 5,107 15,180 4,574 15,180 --
--------- --------- -------- ------- --------
Total Variable Rate Notes 15,180 5,107 25,380 4,574 15,180 --
--------- --------- -------- ------- --------
UNSECURED NOTE
-------------------------
673 First Avenue Unsecured note with
interest based on Prime
plus1.0%, due January
1, 2014 1,769 498 1,769 533 1,769 3,967
--------- --------- -------- ------- -------- -------
Total Unsecured Note 1,769 498 1,769 533 1,769 3,967
--------- --------- -------- ------- -------- -------
Total Mortgage and Note
Payable $63,724 $16,329 $74,827 $15,418 $66,301 $14,449
--------- --------- -------- ------- -------- -------
--------- --------- -------- ------- -------- -------
F-51
UNCOMBINED JOINT VENTURES OF
SL GREEN PREDECESSOR
NOTES TO COMBINED STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
2. MORTGAGE NOTES PAYABLE (CONTINUED)
An analysis of the mortgages is as follows:
MORTGAGE ACCRUED
PAYABLE INTEREST MORTGAGE ACCRUED MORTGAGE ACCRUED
JUNE 30 JUNE 30 PAYABLE INTEREST PAYABLE INTEREST
MORTGAGE TYPE 1997 1997 1996 1996 1995 1995
- -------------------------------------------------- --------- --------- -------- ------- -------- -------
(UNAUDITED)
First mortgages $32,733 $ 98 $43,811 $ 98 $35,239 $ 106
Second mortgages 16,222 5,115 16,247 4,583 16,293 --
Third mortgage 13,000 10,618 13,000 10,204 13,000 10,376
Unsecured note 1,769 498 1,769 533 1,769 3,967
--------- --------- -------- ------- -------- -------
$63,724 $16,329 $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-52
UNCOMBINED JOINT VENTURES OF
SL GREEN PREDECESSOR
NOTES TO COMBINED STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
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:
JUNE 30,
1997 1996 1995
----------- --------- ---------
(UNAUDITED)
Deferred financing............................. $ 3,135 $ 3,372 $ 3,108
Deferred lease................................. 7,465 7,415 7,001
----------- --------- ---------
10,600 10,787 10,109
Less accumulated amortization.................. (6,263) (5,975) (5,338)
----------- --------- ---------
$ 4,337 $ 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-53
UNCOMBINED JOINT VENTURES OF
SL GREEN PREDECESSOR
NOTES TO COMBINED STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
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-54
UNCOMBINED JOINT VENTURES OF
SL GREEN PREDECESSOR
NOTES TO COMBINED STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
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 six months
ended June 30, 1997 rent expense amounted to approximately $1,913.
CAPITAL LEASE--BUILDING
Leased property consists of the following:
JUNE 30,
1997 1996 1995
----------- --------- ---------
(UNAUDITED)
Building....................................... $ 12,208 $ 12,208 $ 12,208
Less accumulation amortization................. 2,222 2,035 1,785
----------- --------- ---------
Leased property, net........................... $ 9,986 $ 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:
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- ------------- -------------
(UNAUDITED)
Management expenses.............. $ 348 $ 293 $ 622 $ 563 $ 624
Leasing commission's............. 293 167 218 48 80
Construction fees................ 1,186 180 185 376 809
Maintenance expenses............. 151 122 227 132 164
F-55
UNCOMBINED JOINT VENTURES OF
SL GREEN PREDECESSOR
NOTES TO COMBINED STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
6. RELATED PARTY TRANSACTIONS (CONTINUED)
Amounts due to related parties consist of:
DECEMBER 31,
JUNE 30, --------------------
1997 1996 1995
------------- --------- ---------
(UNAUDITED)
SL Green Management, Corp........................... $ 503 $ 512 $ 503
Other partners...................................... 125 176 276
----- --------- ---------
$ 628 $ 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 $27 for the six months ended June 30,
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-56
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-57
THE UNCOMBINED JOINT VENTURES OF
SL GREEN PREDECESSOR
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
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-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 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
New York, New York
May 2, 1997
F-59
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-60
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-61
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-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 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
New York, New York
May 7, 1997
F-63
36 WEST 44TH STREET
STATEMENT OF REVENUES AND CERTAIN EXPENSES
(DOLLARS IN THOUSANDS)
NOTE 1
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -----------------
(UNAUDITED)
Revenues
Rental revenue............................................................ $ 3,599 $ 1,547
Escalation and reimbursement revenue...................................... 980 471
Other income.............................................................. 53 30
------ ------
Total revenues.............................................................. 4,632 2,048
------ ------
Certain Expenses
Property taxes............................................................ 872 413
Cleaning and security..................................................... 838 250
Utilities................................................................. 358 165
Professional fees......................................................... 133 42
Payroll and expenses...................................................... 74 131
Management fees........................................................... 61 61
Repairs and maintenance................................................... 40 46
Ground rent............................................................... 93 46
Other operating expenses.................................................. 100 69
------ ------
Total certain expenses...................................................... 2,569 1,223
------ ------
Revenues in excess of certain expenses...................................... $ 2,063 $ 825
------ ------
------ ------
See accompanying notes.
F-64
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 Praedium Bar Associates, LLC ("Praedium") acquired the
mortgage secured by the property and SL Green Predecessor acquired its interest
in Praedium.
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 $29 (unaudited) for the year
ended December 31, 1996 and the six months ended June 30, 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 six months ended June 30, 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-65
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 SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
--------------------- ---------------------
(UNAUDITED)
Leasing commission's................................... $ 40 $ 98
Management fees........................................ 31 61
Cleaning and security.................................. 6 42
8. INTERIM UNAUDITED FINANCIAL INFORMATION
The financial statement for the six months ended June 30, 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-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 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
New York, New York
May 2, 1997
F-67
1372 BROADWAY
STATEMENT OF REVENUES AND CERTAIN EXPENSES
(DOLLARS IN THOUSANDS)
NOTE 1
SIX MONTHS ENDED
JUNE 30, 1997
YEAR ENDED -----------------
DECEMBER 31, 1996
----------------- (UNAUDITED)
Revenues
Rental revenue (net)...................................................... $ 8,580 $ 4,054
Escalations and reimbursement revenue..................................... 1,842 562
Other income.............................................................. 690 1,483
------ ------
Total revenues.............................................................. 11,112 6,099
------ ------
Certain Expenses
Property taxes............................................................ 2,343 1,098
Utilities................................................................. 1,287 491
Management fees........................................................... 459 142
Marketing, general, and administrative.................................... 335 144
Repairs and maintenance................................................... 950 462
Insurance................................................................. 77 32
Security.................................................................. 149 66
------ ------
Total certain expenses...................................................... 5,600 2,435
------ ------
Revenues in excess of certain expenses...................................... $ 5,512 $ 3,664
------ ------
------ ------
See accompanying notes.
F-68
1372 BROADWAY
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 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 $(117) (unaudited) for the
year ended December 31, 1996 and the six months ended June 30, 1997
respectively.
4. MANAGEMENT AGREEMENTS
The Property, as of July 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, 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-69
1372 BROADWAY
NOTES TO 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 42% and 40% of 1372 Broadway's revenue for the year ended
December 31, 1996 and for the six months ended June 30, 1997 were derived from
three 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 six months ended June 30, 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-70
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
New York, New York
May 23, 1997
F-71
1140 AVENUE OF THE AMERICAS
STATEMENT OF REVENUES AND CERTAIN EXPENSES
(DOLLARS IN THOUSANDS)
NOTE 1
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -----------------
(UNAUDITED)
Revenues
Rental revenue............................................................ $ 4,265 $ 2,178
Escalations and reimbursement revenue..................................... 716 346
Other income.............................................................. 204 48
------- -------
Total revenues.............................................................. 5,185 2,572
------- -------
Certain Expenses
Property taxes............................................................ 1,007 519
Utilities................................................................. 720 259
Cleaning and security..................................................... 551 281
Payroll and expenses...................................................... 241 137
Management fees........................................................... 205 102
Repairs and maintenance................................................... 180 69
Professional fees......................................................... 107 61
Interest--capital lease................................................... 56 28
Lease expense............................................................. 14 7
Insurance................................................................. 53 21
Other operating expenses.................................................. 50 27
------- -------
Total certain expenses...................................................... 3,184 1,511
------- -------
Revenues in excess of certain expenses...................................... $ 2,001 $ 1,061
------- -------
------- -------
See accompanying notes.
F-72
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 $54 (unaudited) for the year
ended December 31, 1996 and the six months ended June 30, 1997, respectively.
4. CONCENTRATION OF REVENUE
Approximately 10% of 1140 Avenue of the Americas' revenue for the year ended
December 31, 1996 and the six months ended June 30, 1997, respectively was
derived from one tenant.
5. MANAGEMENT AGREEMENTS
During 1996 and the period ended June 30, 1997 the Property was managed by
Murray Hill Property Management, Inc. During the period from January 1, 1996 to
June 30, 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-73
1140 AVENUE OF THE AMERICAS
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............................................................... $ 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 1/2%) of the fair and reasonable market value of
the unencumbered land. The ground lease requires that the tenant is responsible
for the payment for all expenses. The current annual rent for the period
commencing January 1, 1997 through December 31, 2016 was in arbitration due to a
disagreement relating to the market value of the land and has been recently
resolved in the amount of approximately $380 (unaudited).
7. INTERIM UNAUDITED FINANCIAL INFORMATION
The financial statement for the six months ended June 30, 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-74
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 50 West 23rd Street, as described in Note 1, for the year ended
December 31, 1996. The financial statement is the responsibility of management
of 50 West 23rd Street. 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 50 West 23rd Street'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 50 West 23rd
Street, as described in Note 1 for the year ended December 31, 1996 in
conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
New York, New York
May 29, 1997
F-75
50 WEST 23RD STREET
STATEMENTS OF REVENUES AND CERTAIN EXPENSES
(DOLLARS IN THOUSANDS)
(NOTE 1)
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, 1996 1997
----------------- ---------------
(UNAUDITED)
REVENUES
Rental revenue............................................................. $ 5,357 $ 2,597
Escalations and reimbursement revenue...................................... 716 386
Other income............................................................... 12 1
------ ------
Total revenues............................................................... 6,085 2,984
------ ------
CERTAIN EXPENSES
Property taxes............................................................. 1,006 518
Utilities.................................................................. 241 115
Management fees............................................................ 195 91
Marketing, general, and administrative..................................... 129 53
Repairs and maintenance.................................................... 808 362
Insurance.................................................................. 37 19
Security................................................................... 101 49
------ ------
Total certain expenses....................................................... 2,517 1,207
------ ------
Revenues in excess of certain expenses....................................... $ 3,568 $ 1,777
------ ------
------ ------
See accompanying notes.
F-76
50 WEST 23RD STREET
NOTES TO STATEMENTS 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 50 West 23rd Street (the "Property"), located in the
borough of Manhattan in New York City, which is principally leased by
government, professional, 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 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 $50 and $127 (unaudited) for the year ended
December 31, 1996 and the six months ended June 30, 1997 respectively.
4. MANAGEMENT AGREEMENTS
The Property has been managed by Montrose Realty Corp., a related party to
the seller, since May 1, 1989 for a fee of 3% of all rent, escalation rent and
additional rent, and any other proceeds received from the Property.
5. LEASE AGREEMENTS
The Property is being leased to tenants under operating leases with term
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 (in
thousands):
1997............................................... $ 5,097
1998............................................... 5,387
1999............................................... 4,735
2000............................................... 4,719
2001............................................... 3,986
Thereafter......................................... 13,845
---------
$ 37,769
---------
---------
F-77
50 WEST 23RD STREET
NOTES TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
6. CONCENTRATION OF REVENUE
Approximately 53% and 55% of 50 West 23rd Street's revenue for the year
ended December 31, 1996 and the six months ended June 30, 1997 was derived from
three tenants.
7. RELATED PARTY TRANSACTIONS
Legal fees of $120 were paid to a firm, certain partners of which are
affiliated with the general partner of the seller. Of such amount, $76 was
included in professional fees for the year ended December 31, 1996.
8. INTERIM UNAUDITED FINANCIAL INFORMATION
The statement of revenues and certain expenses 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 this financial statement for the interim period have been
included. The results of interim periods are not necessarily indicative of the
results to be obtained for a full fiscal year.
F-78
[PHOTOGRAPH OF 70 WEST 36TH STREET WITH
CAPTION NOTING THE ADDRESS]
[PHOTOGRAPH OF OFFICE SPACE LOBBY AT 470
PARK AVENUE SOUTH WITH CAPTION NOTING
THE ADDRESS]
[PHOTOGRAPH OF 50 WEST 23RD STREET WITH
CAPTION NOTING THE ADDRESS AND FOOTNOTE
IDENTIFYING THE PROPERTY AS AN ACQUISITION
PROPERTY]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.................................... 29
Business and Growth Strategies................. 31
Use of Proceeds................................ 37
Distributions.................................. 39
Capitalization................................. 43
Dilution....................................... 44
Selected Financial Information................. 46
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 48
Market Overview................................ 56
The Properties................................. 64
Management..................................... 96
Structure and Formation of the Company......... 104
Policies with Respect to Certain Activities.... 108
Certain Relationships and Transactions......... 112
Partnership Agreement.......................... 112
Principal Stockholders......................... 118
Capital Stock.................................. 119
Certain Provisions of Maryland Law and the
Company's Charter and Bylaws................. 123
Shares Available for Future Sale............... 126
Material Federal Income Tax Consequences....... 127
Underwriting................................... 138
Experts........................................ 140
Legal Matters.................................. 141
Additional Information......................... 141
Glossary of Selected Terms..................... 142
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.
10,100,000 SHARES
[LOGO]
SL GREEN REALTY CORP.
COMMON STOCK
---------------------
PROSPECTUS
, 1997
---------------------
LEHMAN BROTHERS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEGG MASON WOOD WALKER
INCORPORATED
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................................................ $ 70,394
NASD Fee........................................................ 23,730
New York Stock Exchange Listing Fee............................. 123,100
Printing and Engraving Expenses................................. 350,000
Legal Fees and Expenses......................................... 800,000
Accounting Fees and Expenses.................................... 650,000
Blue Sky Fees and Expenses...................................... 10,000
Financial Advisory Fee.......................................... 2,045,000
Environmental and Engineering Expenses.......................... 35,000
Miscellaneous................................................... 42,776
---------
Total................................................... $4,150,000
---------
---------
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 553,616 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.
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
II-1
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 June 30, 1997
Pro Forma Combined Statement of Income for the Six Months Ended
June 30, 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
THE SL GREEN PREDECESSOR
Combined Financial Statements
Report of Independent Auditors
Combined Balance Sheets as of June 30, 1997 (unaudited) and
II-2
December 31, 1996 and 1995
Combined Statements of Operations for the Six Months Ended June 30, 1997 and
1996 (unaudited) and the Years Ended December 31, 1996, 1995, and 1994
Combined Statements of Owners' Deficit for the Six Months Ended June 30,
1997
(unaudited) and the Years Ended December 31, 1996, 1995, and 1994
Combined Statements of Cash Flows for the Six Months Ended June 30, 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 June 30, 1997 (unaudited) and December 31,
1996
and 1995
Combined Statements of Operations for the Six Months Ended June 30, 1997 and
1996 (unaudited) and the Years Ended December 31, 1996, 1995, and 1994
Combined Statements of Owners' Deficit for the Six Months Ended June 30,
1997
(unaudited) and Years Ended December 31, 1996, 1995, and 1994
Combined Statements of Cash Flows for the Six Months Ended June 30, 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 Six Months Ended
June 30, 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 Six Months Ended
June 30, 1997 (unaudited) and the Year Ended December 31, 1996
Notes to Statement of Revenues and Certain Expenses
1140 AVENUE OF THE AMERICAS
Report of Independent Auditors
Statement of Revenues and Certain Expenses for the Six Months Ended June 30,
1997 (unaudited) and the Year Ended December 31, 1996
Notes to Statement of Revenues and Certain Expenses
II-3
50 WEST 23RD STREET
Report of Independent Auditors
Statement of Revenues and Certain Expenses for the Six Months Ended June 30,
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., Donaldson, Lufkin &
Jenrette Securities Corporation, Legg Mason Wood Walker, Incorporated 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*
4.1 Specimen Share Certificate*
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 Employment and Noncompetition Agreement between David J. Nettina and the Company*
10.7 Form of Registration Rights Agreement between the Company and the persons named
therein*
10.8 1997 Stock Option and Incentive Plan*
10.9 Supplemental Representations and Warranties Agreement among the Company, the Operating
Partnership, and certain SL Green entities*
10.10 Omnibus Contribution Agreement*
10.11 Contract of Sale for 29 West 35th Street*
10.12 Contract of Sale for 470 Park Avenue South*
10.13 Option Agreement relating to 17 Battery Place*
10.14 LBHI Loan Agreement*
10.15 Option Agreement relating to 110 East 42nd Street*
10.16 Form of Credit Facility documentation between the Company and LBHI*
10.17 Form of Loan Agreement documentation between the Company and LBHI*
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-6 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 H. Alschuler, Jr. to be named as a proposed director*
99.4 Rosen Market Study*
- ------------------------
* Previously filed.
II-4
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.
(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 14th day of August, 1997.
SL GREEN REALTY CORP.
*
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 14th day of August, 1997.
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------- ------------------
* Chief Executive Officer, President
------------------------------------------- and Chairman of the Board of
Stephen L. Green Directors (principal executive
officer)
* Executive Vice President, Chief
------------------------------------------- Financial Officer and Chief
David J. Nettina Operating Officer (principal
financial officer and principal
accounting officer)
/s/ BENJAMIN P. FELDMAN Director August 14, 1997
-------------------------------------------
Benjamin P. Feldman
* Director
-------------------------------------------
Steven H. Klein
*By: /s/ BENJAMIN P. FELDMAN August 14,
-------------------------------------- 1997
Benjamin P. Feldman
ATTORNEY-IN-FACT
II-6
INDEX TO EXHIBITS
EXHIBITS PAGE
- ----------- ---------
1.1 Form of Underwriting Agreement among Lehman Brothers Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, Legg Mason Wood Walker, Incorporated 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*
4.1 Specimen Share Certificate*
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 Employment and Noncompetition Agreement between David J. Nettina and the Company*
10.7 Form of Registration Rights Agreement between the Company and the persons named therein*
10.8 1997 Stock Option and Incentive Plan*
10.9 Supplemental Representations and Warranties Agreement among the Company, the Operating
Partnership, and certain SL Green entities*
10.10 Omnibus Contribution Agreement*
10.11 Contract of Sale for 29 West 35th Street*
10.12 Contract of Sale for 470 Park Avenue South*
10.13 Option Agreement relating to 17 Battery Place*
10.14 LBHI Loan Agreement*
10.15 Option Agreement relating to 110 East 42nd Street*
10.16 Form of Credit Facility documentation between the Company and LBHI*
10.17 Form of Loan Agreement documentation between the Company and LBHI*
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-6 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 H. Alschuler, Jr. to be named as a proposed director*
99.4 Rosen Market Study*
- ------------------------
* Previously filed.
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Amendment No. 4 to Form S-11) and related Prospectus of
SL Green Realty Corp. (the "Company") for the registration of 11,615,000 shares
and to the use of our reports dated (i) June 12, 1997 with respect to the
balance sheet of the Company as of June 12, 1997; (ii) April 16, 1997, except
for note 9, as to which the date is May 27, 1997 with respect to the combined
financial statements of SL Green Predecessor for each of the three years in the
period ended December 31, 1996; and (iii) April 16, 1997 with respect to the
combined financial statements of the uncombined joint ventures of SL Green
Predecessor for each of the three years in the period ended December 31, 1996.
We also consent to the use of our reports dated (i) May 2, 1997 with respect to
the Statement of Revenues and Certain Expenses of 1414 Avenue of the Americas
for the year ended December 31, 1995, (ii) May 7, 1997 with respect to the
Statement of Revenues and Certain Expenses of 36 West 44th Street for the year
ended December 31, 1996, (iii) May 2, 1997 with respect to the Statement of
Revenues and Certain Expenses of 1372 Broadway for the year ended December 31,
1996, (iv) May 23, 1997 with respect to the Statement of Revenues and Certain
Expenses of 1140 Avenue of the Americas for the year ended December 31, 1996,
and (v) May 29, 1997 with respect to the Statement of Revenues and Certain
Expenses of 50 West 23rd Street for the year ended December 31, 1996.
/s/ Ernst & Young LLP
New York, New York
August 13, 1997
EXHIBIT 23.3
CONSENT
Rosen Consulting Group hereby consents to the use of its report regarding
the New York metropolitan economy and Manhattan office market and the references
to the firm and such report under the caption "Market Overview" in the
Registration Statement on Form S-11 of SL Green Realty Corp.
Rosen Consulting Group
By: /s/ Kenneth T. Rosen
------------------------------------------------------------------------------
Name: Kenneth T. Rosen
Title: President
Date: August 14, 1997
