Essex Property Trust 424b5 4-27-2007
EXPLANATORY
NOTE: THIS PROSPECTUS IS BEING FILED IN ORDER TO REVISE THE DISCLOSURE UNDER
THE
CAPTIONS “DESCRIPTION
OF
CAPITAL STOCK -- STOCKHOLDER RIGHTS PLAN”, “DESCRIPTION
OF DEBT SECURITIES”, “RISK FACTORS -- DEBT FINANCING ON PROPERTY MAY RESULT IN
INSUFFICIENT CASH FLOWS” AND “INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE”
Filed
Pursuant to
Rule
424(b)(5)
Registration
No. 333-141726
PROSPECTUS
ESSEX
PROPERTY TRUST, INC.
COMMON
STOCK
PREFERRED
STOCK
DEPOSITARY
SHARES
WARRANTS
AND OTHER RIGHTS
STOCK
PURCHASE CONTRACTS
UNITS
GUARANTEES
OF DEBT SECURITIES
and
ESSEX
PORTFOLIO, L.P.
DEBT
SECURITIES
Essex
Property Trust, Inc., a Maryland corporation (“Essex” or the “Company”), may
from time to time offer: (i) common stock; (ii) preferred stock; (iii) preferred
stock represented by depositary shares; (iv) warrants and other rights to
purchase common stock; (v) stock purchase contracts; and (vi) units representing
an interest in two or more other securities; and
Essex
Portfolio L.P., a California partnership (the “Operating Partnership”), may from
time to time offer in one or more series debt securities, which may be either
senior debt securities (“Senior Securities”) or subordinated debt securities
(“Subordinated Securities” and, together with the Senior Securities, the “Debt
Securities”), guaranteed by Essex through unconditional guarantees (the
“Guarantees”) of the Debt Securities. The Debt Securities may be non-convertible
or convertible into or exercisable or exchangeable for securities of the Company
or the Operating Partnership.
The
securities listed above (collectively, the “Offered Securities”) may be offered,
separately or together, in separate series, in amounts, at prices and on terms
to be set forth in one or more prospectus supplements to this prospectus (each
a
“Prospectus Supplement”); provided that Essex will unconditionally guarantee the
payment of principal and a premium, if any, and interest on the debt securities,
to the extent and on the terms described herein and in any accompanying
Prospectus Supplement to this prospectus. Under this Registration Statement,
Essex can issue equity securities and debt guarantees, but not debt securities,
and the Operating Partnership can issue only debt securities.
This
prospectus describes some of the general terms that may apply to these
securities. The specific terms of any securities to be offered will be described
in a Prospectus Supplement. The specific terms may include limitations on direct
or beneficial ownership and restrictions on transfer, in each case as may be
appropriate to preserve our status as a real estate investment trust (“REIT”)
for federal income tax purposes.
The
applicable Prospectus Supplement also will contain information, where
applicable, about material United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered by such Prospectus Supplement.
The
Offered Securities may be offered directly, through agents designated from
time
to time by Essex, or to or through underwriters or dealers. If any agents or
underwriters are involved in the sale of any of the Offered Securities, their
names, and any applicable purchase price, fee, commission or discount
arrangement between or among them, will be set forth, or will be calculable
from
the information set forth, in the applicable Prospectus Supplement. See “Plan of
Distribution.” No Offered Securities may be sold without delivery of the
applicable Prospectus Supplement describing the method and terms of the offering
of such series of Offered Securities.
Essex’s
common stock is traded on the New York Stock Exchange under the symbol
“ESS.”
You
should consider the risks discussed in “Risk Factors” beginning on page 6
of the prospectus before you invest in our securities.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OF THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL
OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date
of this prospectus is April 27, 2007
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________________________
Neither
Essex Property Trust, Inc. nor Essex Portfolio, L.P. have authorized any person
to give any information or to make any representation not contained or
incorporated by reference in this prospectus. You must not rely upon any
information or representation not contained or incorporated by reference in
this
prospectus as if we had authorized it. This prospectus is not an offer to sell
or the solicitation of an offer to buy any securities other than the registered
securities to which it relates and this prospectus is not an offer to sell
or
the solicitation of an offer to buy securities in any jurisdiction where, or
to
any person to whom, it is unlawful to make such offer or solicitation. You
should not assume that the information contained in this prospectus is correct
on any date after the date of this prospectus, even though this prospectus
is
delivered or shares are sold pursuant to this prospectus on a later date.
WHERE
YOU CAN FIND MORE INFORMATION
We
file
annual, quarterly and special reports, proxy statements and other information
with the Securities and Exchange Commission (the “SEC”). You may read and copy
any document we file with the SEC at the SEC’s public reference room at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room. The SEC also maintains a web site that contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the SEC (http://www.sec.gov). You can inspect reports and
other information we file at the offices of the New York Stock Exchange, Inc.,
20 Broad Street, New York, New York 10005.
We
have
filed a Registration Statement of which this prospectus is a part and related
exhibits with the SEC under the Securities Act of 1933, as amended (the
“Securities Act”). The Registration Statement contains additional information
about us. You may inspect the Registration Statement and exhibits without charge
at the office of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549,
and
you may obtain copies from the SEC at prescribed rates.
INCORPORATION
OF CERTAIN DOCUMENTS BY
REFERENCE
The
SEC
allows us to “incorporate by reference” the information we file with the SEC,
which means that we can disclose important information to you by referring
to
those documents. The information incorporated by reference is an important
part
of this prospectus. Any statement contained in a document which is incorporated
by reference in this prospectus is automatically updated and superseded
if
information contained in this prospectus, or information that we later
file with
the SEC, modifies or replaces this information. We incorporate by reference
the
following documents we filed with the SEC:
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The
Operating Partnership’s Annual Report on Form 10-K for the year ended
December 31, 2006;
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Essex’s
Annual Report on Form 10-K for the year ended December 31,
2006;
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Essex’s
Current Reports on Form 8-K filed on February 7, 2007 and March 30,
2007;
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The
description of Essex’s common stock contained in a Registration Statement
on Form 8-A filed with the SEC on May 27, 1994, as amended on
September 19, 2003;
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The
Rights Agreement dated as of November 11, 1998, between Essex
Property Trust, Inc. and BankBoston, N.A., as Rights Agent, including
all
exhibits thereto, attached as Exhibit 1 to the Company’s
Form 8-A, filed November 12, 1998; and the amendments to the
Rights Agreement dated December 13, 2000 and February 28, 2002
included as exhibits 4.2 and 4.3 to the Annual Report on Form 10-K of
Essex Property Trust, Inc. and for the year ended December 31, 2005;
and
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All
documents filed by us with the SEC pursuant to Sections 13(a), 13(c),
14
or 15(d) of the Securities Exchange Act of 1934, as amended (the
“Exchange
Act”) (other than current reports furnished under Item 9 of Form 8-K)
after the date of this prospectus and prior to the termination of
the
offering;
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except
that unless otherwise specified in the applicable prospectus supplement,
we do
not incorporate any Operating Partnership documents into this prospectus
when
this prospectus is only being used to offer securities issued by Essex and
we do
not incorporate any Essex documents into this prospectus when this prospectus
is
only being used to offer securities issued by the Operating
Partnership.
To
receive a free copy of any of the documents incorporated by reference in this
prospectus (other than exhibits, unless they are specifically incorporated
by
reference in the documents), call or write Essex Property Trust, Inc., 925
East
Meadow Drive, Palo Alto, California 94303, Attention: Secretary (650) 494-3700.
Unless
we
indicate otherwise or unless the context requires otherwise, all references
in
this prospectus to “Essex” mean Essex Property Trust, Inc. and all references to
the “Operating Partnership” mean Essex Portfolio, L.P. Unless we indicate
otherwise or unless the context requires otherwise, all references in this
prospectus to “we,” “us,” or “our” mean Essex and its subsidiaries, including
the Operating Partnership and its subsidiaries. When we refer to Essex’s
“Charter,” we mean Essex’s articles of incorporation, as amended and
supplemented from time to time.
FORWARD-LOOKING
STATEMENTS
This
prospectus contains or incorporates by reference forward-looking statements
within the meaning of Section 27A of the Securities Act, and Section 21E of
the
Exchange Act, and are subject to the “safe harbor” provisions created by these
statutes. All statements, other than statements of historical facts, that
address activities, events or developments that we intend, expect, project,
believe or anticipate will or may occur in the future are forward-looking
statements. Such statements are characterized by terminology such as
“anticipates,” “believes,” “expects,” “future,” “intends,” “assuming,”
“projects,” “plans” and similar expressions or the negative of those terms or
other comparable terminology. These forward-looking statements, which include
statements about our expectations, objectives, anticipations, intentions and
strategies regarding the future, expected operation results, revenues and
earnings, reflect only management’s current expectations and are not guarantees
of future performance and are subject to risks and uncertainties, including
those risks described under the heading “Risk Factors” in this prospectus, or in
the documents incorporated by reference in this prospectus, that could cause
actual results to differ materially from the results contemplated by the
forward-looking statements. Some of these forward-looking statements include
statements regarding our expectations as to:
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The
timing of completion of current development and redevelopment projects
and
the stabilization dates of such
projects;
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The
total projected costs and rental rates of development and redevelopment
projects;
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The
adequacy of future cash flows to meet operating requirements and
to
provide for dividend payments in accordance with real estate investment
trust (“REIT”) requirements;
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The
amount of capital expenditures and non-revenue generating capital
expenditures;
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Future
acquisitions and anticipated development projects in 2007and
thereafter;
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The
anticipated performance of second Essex Apartment Value Fund (“Fund
II”);
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The
anticipated performance of existing properties;
and
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The
anticipated results from various geographic regions and our investment
focus in such regions.
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All
forward-looking statements included or incorporated by reference in this
prospectus are made as of the date hereof, based on information available to
us
as of the date hereof, and we assume no obligation to update any forward-looking
statement or statements. It is important to note that such forward-looking
statements are subject to risks and uncertainties and that our actual results
could differ materially from those in such forward-looking statements. The
foregoing factors, as well as those under the heading “Risk Factors” in this
prospectus and in the section entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our most recent Annual Reports
on Form 10-K and Quarterly Reports on Form 10-Q that we file with the SEC from
time to time, among others, in some cases have affected, and in the future
could
affect, our actual operating results and could cause our actual consolidated
operating results to differ materially from those expressed in any
forward-looking statement made by us. You are cautioned not to place undue
reliance on forward-looking statements contained in this prospectus.
ESSEX
AND THE OPERATING PARTNERSHIP
Essex
Property Trust, Inc. (“Essex” or the “Company”) is a self-administered and
self-managed equity real estate investment trust (“REIT”) engaged in the
ownership, acquisition, development and management of apartment communities.
As
of December 31, 2006, the Company operated and had ownership interests in 130
apartment communities (totaling 27,553 units), two recreational vehicle parks
(comprising 338 spaces), three office buildings (aggregating to approximately
166,340 square feet), and one manufactured housing community (containing 157
sites) (collectively, the “Properties”). The Properties are located in Southern
California (Los Angeles, Ventura, Orange, Riverside and San Diego counties),
Northern California (the San Francisco Bay Area), Seattle, Washington and other
regions (Portland, Oregon metropolitan area, Houston, Texas).
Essex
was
incorporated in the state of Maryland in March 1994. On June 13, 1994, Essex
commenced operations with the completion of an initial public offering (“the
Offering”) in which Essex issued 6,275,000 shares of common stock at $19.50 per
share.
Essex
Portfolio, L.P. (the “Operating Partnership”) was formed in March 1994 and
commenced operations on June 13, 1994, when Essex, the general partner of
the Operating Partnership, completed its Offering.
Essex
conducts substantially all of its activities through the Operating Partnership.
Essex currently owns an approximate 90.4% general partnership interest and
members of Essex’s Board of Directors, senior management and certain outside
investors own limited partnership interests of approximately 9.6% in the
Operating Partnership. As the sole general partner of the Operating Partnership,
Essex has control over the management of the Operating Partnership and over
each
of the properties.
Unless
otherwise indicated in the applicable Prospectus Supplement, we intend to use
the net proceeds of any sale of Offered Securities for general corporate
purposes and to invest in the Operating Partnership. Unless otherwise indicated
in the applicable Prospectus Supplement, the Operating Partnership intends
to
use any net proceeds to fund the acquisition and development of apartment
communities and to repay indebtedness. Net proceeds from the sale of the Offered
Securities initially may be temporarily invested in short-term securities.
Our
business, operating results, cash flows and financial conditions are subject
to
various risks and uncertainties, including, without limitation, those set forth
below, any one of which could cause our actual results to vary materially from
recent results or from our anticipated future results.
We
depend on our key personnel
Our
success depends on our ability to attract and retain executive officers, senior
officers and company managers. There is substantial competition for qualified
personnel in the real estate industry and the loss of several of our key
personnel could have an adverse effect on us.
Debt
financing
At
December 31, 2006, we had approximately $1.41 billion of indebtedness (including
$186.3 million of variable rate indebtedness, of which $182.8 million is subject
to interest rate protection agreements). We are subject to the risks normally
associated with debt financing, including the following:
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cash
flow may not be sufficient to meet required payments of principal
and
interest;
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inability
to refinance maturing indebtedness on encumbered properties;
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the
terms of any refinancing may not be as favorable as the terms of
existing
indebtedness;
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inability
to comply with debt covenants could cause an acceleration of the
maturity
date; and
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repaying
debt before the scheduled maturity date could result in prepayment
penalties.
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Uncertainty
of our ability to refinance balloon payments
As
of
December 31, 2006, we had approximately $1.41 billion of mortgage debt,
exchangeable bonds and line of credit borrowings, most of which are subject
to
balloon payments. We do not expect to have sufficient cash flows from operations
to make all of these balloon payments. These mortgages, bonds and lines of
credit borrowings have the following scheduled principal and balloon payments:
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2007--$69.1
million;
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2008--$179.5
million;
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2009--$117.6
million;
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2010--$156.9
million;
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2011--$155.5
million;
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Thereafter--$733.0
million.
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We
may
not be able to refinance such mortgage indebtedness, bonds, or lines of credit.
The Properties subject to these mortgages could be foreclosed upon or otherwise
transferred to the lender. This could cause us to lose income and asset value.
We may be required to refinance the debt at higher interest rates or the terms
of such refinancing may not be as favorable as the terms of existing
indebtedness.
Debt
financing on properties may result in insufficient cash
flow
Where
possible, we intend to continue to use leverage to increase the rate of return
on our investments and to provide for additional investments that we could
not
otherwise make. There is a risk that the cash flow from the properties will
be
insufficient to meet both debt payment obligations and the distribution
requirements of the real estate investment trust provisions of the Internal
Revenue Code. We may obtain additional debt financing in the future through
mortgages on some or all of the properties. These mortgages may be recourse,
non-recourse, or cross-collateralized.
As
of
December 31, 2006, Essex had 69 of its 116 consolidated apartment communities
encumbered by debt. Of the 69 properties, 50 are secured by deeds of trust
relating solely to those properties. With respect to the remaining 19
properties, there are 4 cross-collateralized mortgages secured by 8 properties,
6 properties, 3 properties and 2 properties, respectively. The holders of this
indebtedness will have a claim against these properties and, to the extent
indebtedness is cross-collateralized, lenders may seek to foreclose upon
properties which are not the primary collateral for their loan. This may
accelerate other indebtedness secured by properties. Foreclosure of properties
would reduce our income and asset value.
Risk
of rising interest rates
Current
interest rates are at historic lows and could potentially increase rapidly,
which could result in higher interest expense on our variable rate indebtedness.
Prolonged interest rate increases could negatively impact our ability to make
acquisitions and develop properties at economic returns on investment and our
ability to refinance existing borrowings at acceptable rates.
As
of
December 31, 2006, we had approximately $186.3 million of long-term variable
rate indebtedness bearing interest at floating rates tied to the rate of
short-term tax-exempt revenue bonds (which mature at various dates from 2020
through 2034), and $93.0 million of variable rate indebtedness under our lines
of credit, bearing interest at the Freddie Mac Reference Rate plus from 0.55%
to
0.59%.
Approximately
$182.8 million of the long-term indebtedness is subject to interest rate cap
protection agreements, which may reduce the risks associated with fluctuations
in interest rates. The remaining $3.5 million of long-term variable rate
indebtedness was not subject to any interest rate cap protection agreements
as
of December 31, 2006. An increase in interest rates may have an adverse effect
on our net income and results of operations.
Risk
of losses on interest rate hedging arrangements
Periodically,
we have entered into agreements to reduce the risks associated with increases
in
interest rates and may continue to do so. Although these agreements may
partially protect against rising interest rates, they also may reduce the
benefits to us if interest rates decline. If a hedging arrangement is not
indexed to the same rate as the indebtedness that is hedged, we may be exposed
to losses to the extent that the rate governing the indebtedness and the rate
governing the hedging arrangement change independently of each other. Finally,
nonperformance by the other party to the hedging arrangement may subject us
to
increased credit risks. In order to minimize counterparty credit risk, our
policy is to enter into hedging arrangements only with large financial
institutions.
Bond
compliance requirements may limit income from certain properties
At
December 31, 2006, we had approximately $186.3 million of variable rate
tax-exempt financing relating to the Inglenook Court Apartments, Wandering
Creek
Apartments, Treetops Apartments, Huntington Breakers Apartments, Camarillo
Oaks
Apartments, Fountain Park, Anchor Village and Parker Ranch Apartments. This
tax-exempt financing subjects these properties to certain deed restrictions
and
restrictive covenants. We expect to engage in tax-exempt financings in the
future. In addition, the Internal Revenue Code and rules and regulations
thereunder impose various restrictions, conditions and requirements excluding
interest on qualified bond obligations from gross income for federal income
tax
purposes. The Internal Revenue Code also requires that at least 20% of apartment
units be made available to residents with gross incomes that do not exceed
a
specified percentage, generally 50%, of the median income for the applicable
family size as determined by the Housing and Urban Development Department of
the
federal government. In addition to federal requirements, certain state and
local
authorities may impose additional rental restrictions. These restrictions may
limit income from the tax-exempt financed properties if we are required to
lower
rental rates to attract residents who satisfy the median income test. If Essex
does not reserve the required number of apartment homes for residents satisfying
these income requirements, the tax-exempt status of the bonds may be terminated,
the obligations under the bond documents may be accelerated and we may be
subject to additional contractual liability.
Adverse
effect to property income and value due to general real estate investment risks
Real
property investments are subject to a variety of risks. The yields available
from equity investments in real estate depend on the amount of income generated
and expenses incurred. If the properties do not generate sufficient income
to
meet operating expenses, including debt service and capital expenditures, cash
flow and the ability to make distributions to stockholders will be adversely
affected. The performance of the economy in each of the areas in which the
properties are located affects occupancy, market rental rates and expenses.
Consequently, the income from the properties and their underlying values may
be
impacted. The financial results of major local employers may have an impact
on
the cash flow and value of certain of the properties as well.
Income
from the properties may be further adversely affected by, among other things,
the following factors:
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the
general economic climate;
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local
economic conditions in which the properties are located, such as
oversupply of housing or a reduction in demand for rental housing;
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the
attractiveness of the properties to tenants;
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competition
from other available space; and
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Essex’s
ability to provide for adequate maintenance and insurance.
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As
leases
on the properties expire, tenants may enter into new leases on terms that are
less favorable to us. Income and real estate values also may be adversely
affected by such factors as applicable laws (e.g.,
the
Americans With Disabilities Act of 1990 and tax laws), interest rate levels
and
the availability and terms of financing. Real estate investments are relatively
illiquid and, therefore, our ability to vary our portfolio promptly in response
to changes in economic or other conditions may be quite limited.
Economic
environment and impact on operating results
The
national economy and the economies of the western states in markets where we
operate can impact our operating results. Some of these markets are concentrated
in high-tech sectors, which have experienced economic downturns, and could
again
in the future. Our property type and diverse geographic locations provide some
degree of risk mitigation. However, we are not immune to prolonged economic
downturns. Although we believe we are well positioned to meet these challenges,
it is possible that a reduction in rental rates, occupancy levels, property
valuations and increases in operating costs such as advertising, turnover and
repair and maintenance expense could occur in the event of economic
uncertainty.
Risk
of inflation/deflation
Substantial
inflationary or deflationary pressures could have a negative effect on rental
rates and property operating expenses.
Risks
that acquisitions will fail to meet expectations
We
intend
to continue to acquire apartment communities. However, there are risks that
acquisitions will fail to meet our expectations. Our estimates of future income,
expenses and the costs of improvements or redevelopment that are necessary
to
allow us to market an acquired property as originally intended may prove to
be
inaccurate. We expect to finance future acquisitions, in whole or in part,
under
various forms of secured or unsecured financing or through the issuance of
partnership units by the Operating Partnership or related partnerships or
additional equity by Essex. The use of equity financing, rather than debt,
for
future developments or acquisitions could dilute the interest of Essex’s
existing stockholders. If we finance new acquisitions under existing lines
of
credit, there is a risk that, unless we obtain substitute financing, Essex
may
not be able to secure further lines of credit for new development or such lines
of credit may be not available on advantageous terms.
Risks
that development activities will be delayed, not completed, and/or not achieve
expected results
We
pursue
apartment community development projects and these projects generally require
various governmental and other approvals which have no assurance of being
received. Our development activities generally entail certain risks, including
the following:
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funds
may be expended and management’s time devoted to projects that may not be
completed;
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construction
costs of a project may exceed original estimates, possibly making
the
project economically unfeasible;
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development
projects may be delayed due to, without limitation, adverse weather
conditions, labor shortages, or unforeseen complications;
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occupancy
rates and rents at a completed project may be less than anticipated;
and
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the
operating expenses at a completed development may be higher than
anticipated.
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These
risks may reduce the funds available for distribution to Essex’s stockholders.
Further, the development of properties is also subject to the general risks
associated with real estate investments. For further information regarding
these
risks, please see “Adverse Effect to Property Income and Value Due to General
Real Estate Investment Risks.”
The
geographic concentration of our Properties and fluctuations in local markets
may
adversely impact our financial condition and operating results
We
generated significant amounts of rental revenues for the year ended December
31,
2006 from properties concentrated in Southern California (Los Angeles, Ventura,
Orange, San Diego and Riverside counties), Northern California (the San
Francisco Bay Area), and the Pacific Northwest (the Seattle, Washington and
Portland, Oregon metropolitan areas). As of December 31, 2006, more than half
(76%) of our Properties were located in California. This geographic
concentration could present risks if local property market performance falls
below expectations. The economic condition of these markets could affect
occupancy, market rental rates, and expenses, as well as impact the income
generated from the Properties and their underlying asset values. The financial
results of major local employers also may impact the cash flow and value of
certain of the Properties. This could have a negative impact on our financial
condition and operating results, which could affect our ability to pay expected
dividends to our stockholders.
Competition
in the apartment community market may adversely affect operations and the rental
demand for our Properties
There
are
numerous housing alternatives that compete with our apartment communities in
attracting residents. These include other apartment communities and
single-family homes that are available for rent in the markets in which the
Properties are located. Our Properties also compete for residents with new
and
existing homes and condominiums that are for sale. If the demand for our
Properties is reduced or if competitors develop and/or acquire competing
properties on a more cost-effective basis, rental rates may drop, which may
have
a material adverse affect on our financial condition and results of operations.
We also face competition from other real estate investment trusts, businesses
and other entities in the acquisition, development and operation of properties.
Some of the competitors are larger and have greater financial resources than
we
do. This competition may result in increased costs of properties we acquire
and/or develop.
Dividend
requirements as a result of preferred stock may lead to a possible inability
to
sustain dividends
We
have
Series F Cumulative Redeemable Preferred Stock (“Series F Preferred Stock”) with
an aggregate liquidation preference of approximately $25 million outstanding
and
Series G Cumulative Convertible Preferred Stock (“Series G Preferred Stock”)
with an aggregate liquidation preference of approximately $149.5 million
outstanding. In addition, we are required under limited conditions to issue
Series B Cumulative Redeemable Preferred Stock (“Series B Preferred Stock”) with
an aggregate liquidation preference of $80 million and Series D Cumulative
Redeemable Preferred Stock (“Series D Preferred Stock”) with an aggregate
liquidation preference of $50 million in each case in exchange for outstanding
preferred interests in the Operating Partnership. The terms of the Series B,
D,
F and G Preferred Stock provide for certain cumulative preferential cash
distributions per each share of preferred stock.
These
terms also provide that while such preferred stock is outstanding, we cannot
authorize, declare, or pay any distributions on our common stock, unless all
distributions accumulated on all shares of such preferred stock have been paid
in full. Our failure to pay distributions on such preferred stock would impair
our ability to pay dividends on our common stock. Our credit agreement limits
our ability to pay dividends on our preferred stock if we fail to satisfy a
fixed charge coverage ratio.
If
Essex
wishes to issue any common stock in the future (including upon exercise of
stock
options), the funds required to continue to pay cash dividends at current levels
will be increased. Essex’s ability to pay dividends will depend largely upon the
performance of our current properties and other properties that may be acquired
or developed in the future.
If
Essex
cannot pay dividends on its common stock, Essex’s status as a real estate
investment trust may be jeopardized. Our ability to pay dividends on our common
stock is further limited by the Maryland General Corporation Law. Under the
Maryland General Corporation Law, Essex may not make a distribution on stock
if,
after giving effect to such distribution, either:
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we
would not be able to pay our indebtedness as it becomes due in the
usual
course of business; or
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our
total assets would be less than our total liabilities, including
the
liquidation preference on our outstanding shares of Series B,
Series D, Series F, and Series G preferred stock.
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Resale
of shares pursuant to our effective registration statements or that are issued
upon conversion of our convertible preferred stock may have an adverse effect
on
the market price of the shares
Essex
has
the following effective registration statements, which allows for the resale
into the public stock of common stock held by stockholders, as specified in
the
registration statements:
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A
registration statement, declared effective in 2003, which covers
the
resale of up to 6,513,490 shares, including (i) up to 2,769,875 shares
issued, or potentially issuable, in connection with the acquisition
of
John M. Sachs, Inc., a real estate company, (ii) up to 2,270,490
shares of
common stock that are issuable upon exchange of limited partnership
interests in the Operating Partnership, and (iii) up to 1,473,125
shares
that are issuable upon exchange of limited partnership interests
in
certain other real estate partnerships;
and
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Registration
statements, declared effective in 2006, that cover (i) the resale
of up to
142,076 shares issuable in connection with our Waterford and Vista
Belvedere acquisitions and (ii) the resale of shares issuable in
connection with the exchange rights of our 3.625% Exchangeable Senior
Notes, as to which there is a principal amount of $225 million
outstanding.
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During
the third quarter of 2006, we issued, pursuant to a registration statement,
5,980,000 million shares of 4.875% Series G Cumulative Preferred Stock for
estimated gross proceeds of $149.5 million; such shares are convertible, subject
to certain conditions, into common stock, which could be resold into the public
market.
The
resale of the shares of common stock pursuant to these various registration
statements or that are issued upon conversion of our outstanding convertible
preferred stock may have an adverse effect on the market price of our
shares.
The
exchange and repurchase rights of Exchangeable Senior Notes and Series G
Preferred Stock may be detrimental to holders of common stock
The
Operating Partnership has $225 million principal amount of 3.625% Exchangeable
Senior Notes (the “Notes”) outstanding which mature on November 1, 2025. The
Notes are exchangeable into the Company's common stock on or after November
1,
2020 or prior to November 1, 2020 under certain circumstances. The Notes are
redeemable at the Company's option for cash at any time on or after November
4,
2010 and are subject to repurchase for cash at the option of the holder on
November 1st
in the
years 2010, 2015 and 2020, or upon the occurrence of certain events. The Notes
are senior unsecured and unsubordinated obligations of the Operating
Partnership.
In
2006,
the Company sold 5,980,000 million shares of 4.875% Series G Cumulative
Convertible Preferred Stock (the “Series G Preferred Stock”) for gross proceeds
of $149.5 million. Holders may convert Series G Preferred Stock into shares
of
the Company’s common stock subject to certain conditions. The conversion rate
will initially be .1830 shares of common stock per $25 share liquidation
preference, which is equivalent to an initial conversion price of $136.62 per
share of common stock (the conversion rate will be subject to adjustment upon
the occurrence of specified events). On or after July 31, 2011, the Company
may,
under certain circumstances cause some or all of the Series G Preferred Stock
to
be converted into shares of common stock at the then prevailing conversion
rate.
Further, if a fundamental change occurs, as defined in the articles
supplementary for the Series G Preferred Stock, then the holders may require
Essex to repurchase all or part of their Series G Preferred Stock subject to
certain conditions.
The
exchange of the Notes and/or Series G Preferred Stock for common stock would
dilute stockholder ownership in the Company, and such exchange could adversely
affect the market price of our common stock and our ability to raise capital
through the sale of additional equity securities. If the Notes and Series G
Preferred Stock are not exchanged, the repurchase price of the Notes and Series
G Preferred Stock may discourage or impede transactions that might otherwise
be
in the interest of the holders of common stock. Further, these repurchase rights
may be triggered in situations where Essex needs to conserve its cash reserves,
in which event such repurchase might adversely affect Essex and its common
stockholders.
Our
future issuances of common stock, preferred stock or convertible debt securities
could adversely affect the market price of our common
stock.
In
order
to finance our property acquisition and development activities, we have issued
and sold common stock, preferred stock and convertible debt securities. For
example, in 2005, the Operating Partnership sold $225 million principal amount
of 3.625% Exchangeable Senior Notes, which are exchangeable into the Company’s
common stock under certain conditions. In 2006, the Company issued 5,980,000
million shares of 4.875% Series G Cumulative Convertible Preferred Stock for
gross proceeds of approximately $149.5 million. During 2006, pursuant to a
Controlled Equity Offering program that the Company entered into with Cantor
Fitzgerald & Co., the Company issued and sold approximately 427,700 shares
of Common Stock for $48.3 million, net of fees and commissions. The Company
may
in the future sell future shares of common stock pursuant to a Controlled Equity
Offering program with Cantor Fitzgerald & Co.
Future
sales of common stock, preferred stock or convertible debt securities may dilute
stockholder ownership in the Company and could adversely affect the market
price
of common stock.
Our
Chairman is involved in other real estate activities and investments, which
may
lead to conflicts of interest
Our
Chairman, George M. Marcus, is not an employee of Essex, and is involved in
other real estate activities and investments, which may lead to conflicts of
interest. Mr. Marcus owns interests in various other real estate-related
businesses and investments. He is the Chairman of The Marcus & Millichap
Company, or “TMMC”, which is a holding company for certain real estate brokerage
and services companies. TMMC has an interest in Pacific Property Company, a
company that invests in West Coast apartment communities.
Mr.
Marcus has agreed not to divulge any information that may be received by him
in
his capacity as Chairman of Essex to any of his affiliated companies and that
he
will abstain his vote on any and all resolutions by the Essex Board of Directors
regarding any proposed acquisition and/or development of an apartment community
where it appears that there may be a conflict of interest with any of his
affiliated companies.
Notwithstanding
this agreement, Mr. Marcus and his affiliated entities may potentially compete
with us in acquiring and/or developing apartment communities, which competition
may be detrimental to us. In addition, due to such potential competition for
real estate investments, Mr. Marcus and his affiliated entities may have a
conflict of interest with us, which may be detrimental to the interests of
Essex’s stockholders.
The
influence of executive officers, directors and significant stockholders may
be
detrimental to holders of common stock
As
of
March 28, 2007, George M. Marcus, the Chairman of our Board of Directors, wholly
or partially owned 1,759,267 shares of common stock (including shares
issuable upon exchange of limited partnership interests in the Operating
Partnership and certain other partnerships and assuming exercise of all vested
options). This represents approximately 7.1% of the outstanding shares of our
common stock. Mr. Marcus currently does not have majority control over us.
However, he currently has, and likely will continue to have, significant
influence with respect to the election of directors and approval or disapproval
of significant corporate actions. Consequently, his influence could result
in
decisions that do not reflect the interests of all of our stockholders.
Under
the
partnership agreement of the Operating Partnership, the consent of the holders
of limited partnership interests is generally required for any amendment of
the
agreement and for certain extraordinary actions. Through their ownership of
limited partnership interests and their positions with us, our directors and
executive officers, including Mr. Marcus, have substantial influence on us.
Consequently, their influence could result in decisions that do not reflect
the
interests of all stockholders.
The
voting rights of preferred stock may allow holders of preferred stock to impede
actions that otherwise benefit holders of common stock
In
general, the holders of our outstanding shares of preferred stock do not have
any voting rights. However, if full distributions are not made on any
outstanding preferred stock for six quarterly distributions periods, the holders
of preferred stock who have not received distributions, voting together as
a
single class, will have the right to elect two additional directors to serve
on
our Board of Directors. These voting rights continue until all distributions
in
arrears and distributions for the current quarterly period on the preferred
stock have been paid in full. At that time, the holders of the preferred stock
are divested of these voting rights, and the term and office of the directors
so
elected immediately terminates.
While
any
shares of our preferred stock are outstanding, Essex may not, without the
consent of the holders of two-thirds of the outstanding shares of each series
of
preferred stock, each voting separately as a single class:
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authorize
or create any class of series of stock that ranks senior to such
preferred
stock with respect to the payment of dividends, rights upon liquidation,
dissolution or winding-up of our business;
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amend,
alter or repeal the provisions of Essex’s Charter or Bylaws, including by
merger or consolidation, that would materially and adversely affect
the
rights of such series of preferred stock; or
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in
the case of the preferred stock into which our preferred units are
exchangeable, merge or consolidate with another entity or transfer
substantially all of its assets to another entity, except if such
preferred stock remains outstanding or is converted into or exchanged
for securities of the surviving entity with the same terms or in
certain other circumstances.
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These
voting rights of the preferred stock may allow holders of preferred stock to
impede or veto actions that would otherwise benefit the holders of our common
stock.
The
redemption rights of the Series B preferred units, Series D preferred units,
Series F preferred stock and Series G preferred stock may be detrimental to
holders of Essex common stock
Upon
the
occurrence of one of the following events, the terms of the Operating
Partnership’s Series B and D Preferred Units provide the holders of the
majority of such units the right to require Essex to redeem all of such units
and the terms of Essex’s Series F Preferred Stock and the Series G Preferred
Stock provide the holders of the majority of the outstanding Series F Preferred
Stock and Series G Preferred Stock the right to require Essex to redeem all
of
such stock:
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Essex
completes a “going private” transaction and its common stock is no longer
registered under the Securities Exchange Act of 1934, as amended;
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Essex
completes a consolidation or merger or sale of substantially all
of its
assets and the surviving entity’s debt securities do not possess an
investment grade rating; or
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Essex
fails to qualify as a REIT.
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The
aggregate redemption price of the Series B Preferred Units would be $80 million,
the aggregate redemption price of the Series D Preferred Units would be $50
million, the aggregate redemption price of the Series F Preferred Stock would
be
$25 million and the aggregate redemption price of the Series G Preferred Stock
would be $149.5 million, plus, in each case, any accumulated
distributions.
These
redemption rights may discourage or impede transactions that might otherwise
be
in the interest of holders of common stock. Further, these redemption rights
might trigger situations where Essex needs to conserve its cash reserves, in
which event such redemption might adversely affect Essex and its common
holders.
Maryland
business combination law may not allow certain transactions between Essex and
its affiliates to proceed without compliance with such law
Under
Maryland law, “business combinations” between a Maryland corporation and an
interested stockholder or an affiliate of an interested stockholder are
prohibited for five years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business combinations
include a merger, consolidation, share exchange, or, in circumstances specified
in the statute, an asset transfer or issuance or reclassification of equity
securities. An interested stockholder is defined as any person (and certain
affiliates of such person) who beneficially owns ten percent or more of the
voting power of the then-outstanding voting stock.
The
law
also requires a supermajority stockholder vote for such transactions. This
means
that the transaction must be approved by at least:
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80%
of the votes entitled to be cast by holders of outstanding voting
shares;
and
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Two-thirds
of the votes entitled to be cast by holders of outstanding voting
shares
other than shares held by the interested stockholder with whom the
business combination is to be effected.
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The
statute permits various exemptions from its provisions, including business
combinations that are exempted by the board of directors prior to the time
that
the interested stockholder becomes an interested stockholder. These voting
provisions do not apply if the stockholders receive a minimum price, as defined
under Maryland law. As permitted by the statute, the Board of Directors of
Essex
irrevocably has elected to exempt any business combination by us, George M.
Marcus, William A. Millichap, who are the chairman and a director of Essex,
respectively, and TMMC or any entity owned or controlled by Messrs. Marcus
and
Millichap and TMMC. Consequently, the five-year prohibition and supermajority
vote requirement described above will not apply to any business combination
between us and Mr. Marcus, Mr. Millichap, or TMMC. As a result, we may in the
future enter into business combinations with Messrs. Marcus and Millichap and
TMMC, without compliance with the supermajority vote requirements and other
provisions of the Maryland General Corporation Law.
Anti-takeover
provisions contained in the Operating Partnership agreement, Charter, Bylaws,
and certain provisions of Maryland law could delay, defer or prevent a change
in
control
While
Essex is the sole general partner of the Operating Partnership, and generally
has full and exclusive responsibility and discretion in the management and
control of the Operating Partnership, certain provisions of the Operating
Partnership agreement place limitations on Essex’s ability to act with respect
to the Operating Partnership. Such limitations could delay, defer or prevent
a
transaction or a change in control that might involve a premium price for our
stock or otherwise be in the best interest of the stockholders or that could
otherwise adversely affect the interest of Essex’s stockholders. The partnership
agreement provides that if the limited partners own at least 5% of the
outstanding units of limited partnership interest in the Operating Partnership,
Essex cannot, without first obtaining the consent of a majority-in-interest
of
the limited partners in the Operating Partnership, transfer all or any portion
of our general partner interest in the Operating Partnership to another entity.
Such limitations on Essex’s ability to act may result in our being precluded
from taking action that the Board of Directors believes is in the best interests
of Essex’s stockholders. As of December 31, 2006, the limited partners held or
controlled approximately 9.6% of the outstanding units of partnership interest
in the Operating Partnership, allowing such actions to be blocked by the limited
partners.
Essex’s
Charter authorizes the issuance of additional shares of common stock or
preferred stock and the setting of the preferences, rights and other terms
of
such preferred stock without the approval of the holders of the common stock.
We
may establish one or more series of preferred stock that could delay, defer
or
prevent a transaction or a change in control. Such a transaction might involve
a
premium price for our stock or otherwise be in the best interests of the holders
of common stock. Also, such a class of preferred stock could have dividend,
voting or other rights that could adversely affect the interest of holders
of
common stock.
Essex’s
Charter, as well as Essex’s stockholder rights plan, contains other provisions
that may delay, defer or prevent a transaction or a change in control that
might
be in the best interest of Essex’s stockholders. Essex’s stockholder rights plan
is designed, among other things, to prevent a person or group from gaining
control of us without offering a fair price to all of Essex’s stockholders. The
Bylaws may be amended by the Board of Directors to include provisions that
would
have a similar effect, although Essex presently has no such intention. The
Charter contains ownership provisions limiting the transferability and ownership
of shares of capital stock, which may have the effect of delaying, deferring
or
preventing a transaction or a change in control. For example, subject to
receiving an exemption from the Board of Directors, potential acquirers may
not
purchase more than 6% in value of the stock (other than qualified pension trusts
which can acquire 9.9%). This may discourage tender offers that may be
attractive to the holders of common stock and limit the opportunity for
stockholders to receive a premium for their shares of common stock.
The
Maryland General Corporations Law restricts the voting rights of shares deemed
to be “control shares.”
Under
the
Maryland General Corporations Law, “control shares” are those which, when
aggregated with any other shares held by the acquirer, entitle the acquirer
to
exercise voting power within specified ranges. Although the Bylaws exempt Essex
from the control share provisions of the Maryland General Corporations Law,
the
Board of Directors may amend or eliminate the provisions of the Bylaws at any
time in the future. Moreover, any such amendment or elimination of such
provision of the Bylaws may result in the application of the control share
provisions of the Maryland General Corporations Law not only to control shares
which may be acquired in the future, but also to control shares previously
acquired. If the provisions of the Bylaws are amended or eliminated, the control
share provisions of the Maryland General Corporations Law could delay, defer
or
prevent a transaction or change in control that might involve a premium price
for the stock or otherwise be in the best interests of Essex’s stockholders.
Essex’s
joint ventures and joint ownership of Properties and partial interests in
corporations and limited partnerships could limit Essex’s ability to control
such Properties and partial interests
Instead
of purchasing properties directly, we have invested and may continue to invest
as a co-venturer. Joint venturers often have shared control over the operation
of the joint venture assets. Therefore, it is possible that the co-venturer
in
an investment might become bankrupt, or have economic or business interests
or
goals that are inconsistent with our business interests or goals, or be in
a
position to take action contrary to our instructions or requests, or our
policies or objectives. Consequently, a co-venturer’s actions might subject
property owned by the joint venture to additional risk. Although we seek to
maintain sufficient influence of any joint venture to achieve its objectives,
we
may be unable to take action without our joint venture partners’ approval, or
joint venture partners could take actions binding on the joint venture without
our consent. Should a joint venture partner become bankrupt, we could become
liable for such partner’s share of joint venture liabilities.
From
time
to time, we, through the Operating Partnership, invest in corporations, limited
partnerships, limited liability companies or other entities that have been
formed for the purpose of acquiring, developing or managing real property.
In
certain circumstances, the Operating Partnership’s interest in a particular
entity may be less than a majority of the outstanding voting interests of that
entity. Therefore, the Operating Partnership’s ability to control the daily
operations of such an entity may be limited. Furthermore, the Operating
Partnership may not have the power to remove a majority of the board of
directors (in the case of a corporation) or the general partner or partners
(in
the case of a limited partnership) of such an entity in the event that its
operations conflict with the Operating Partnership’s objectives. The Operating
Partnership may not be able to dispose of its interests in such an entity.
In
the event that such an entity becomes insolvent, the Operating Partnership
may
lose up to its entire investment in and any advances to the entity. We have
and
in the future may enter into transactions that could require us to pay the
tax
liabilities of partners, which contribute assets into joint ventures or the
Operating Partnership, in the event that certain taxable events, which are
within our control, occur. Although we plan to hold the contributed assets
or
defer recognition of gain on their sale pursuant to the like-kind exchange
rules
under Section 1031 of the Internal Revenue Code, we can provide no assurance
that we will be able to do so and if such tax liabilities were incurred they
can
expect to have a material impact on our financial position.
Dedicated
investment activities and other factors specifically related to Fund
II
Fund
II
involves risks to us such as the following:
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our
partners in Fund II might remove Essex as the general partner of
Fund II;
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our
partners in Fund II might become bankrupt (in which event we might
become
generally liable for the liabilities of Fund
II);
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our
partners in Fund II have economic or business interests or goals
that are
inconsistent with our business interests or goals;
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our
partners in Fund II fail to fund capital commitments as contractually
required; or
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our
partners in Fund II fail to approve decisions regarding Fund II that
are
in our best interest.
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We
will,
however, generally seek to maintain sufficient influence over Fund II to permit
it to achieve its business objectives.
Investments
in mortgages and other real estate securities
We
may
invest in securities related to real estate, which could adversely affect our
ability to make distributions to stockholders. We may purchase securities issued
by entities, which own real estate and invest in mortgages or unsecured debt
obligations. These mortgages may be first, second or third mortgages that may
or
may not be insured or otherwise guaranteed. In general, investments in mortgages
include the following risks:
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that
the value of mortgaged property may be less than the amounts owed,
causing
realized or unrealized losses;
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the
borrower may not pay indebtedness under the mortgage when due, requiring
us to foreclose, and the amount recovered in connection with the
foreclosure may be less than the amount owed;
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that
interest rates payable on the mortgages may be lower than our cost
of
funds; and
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in
the case of junior mortgages, that foreclosure of a senior mortgage
would
eliminate the junior mortgage.
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If
any of
the above were to occur, cash flows from operations and our ability to make
expected dividends to stockholders could be adversely affected.
Possible
environmental liabilities
Under
various federal, state and local laws, ordinances and regulations, an owner
or
operator of real estate is liable for the costs of removal or remediation of
certain hazardous or toxic substances on, in, to or migrating from such
property. Such laws often impose liability without regard as to whether the
owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. The presence of such substances, or the failure
to properly remediate such substances, may adversely affect the owner’s or
operator’s ability to sell or rent such property or to borrow using such
property as collateral. Persons exposed to such substances, either through
soil
vapor or ingestion of the substances may claim personal injury damages. Persons
who arrange for the disposal or treatment of hazardous or toxic substances
or
wastes also may be liable for the costs of removal or remediation of such
substances at the disposal or treatment facility to which such substances or
wastes were sent, whether or not such facility is owned or operated by such
person. Certain environmental laws impose liability for release of
asbestos-containing materials (“ACMs”) into the air, and third parties may seek
recovery from owners or operators of real properties for personal injury
associated with ACMs. In connection with the ownership (direct or indirect),
operation, management and development of real properties, the Company could
be
considered an owner or operator of such properties or as having arranged for
the
disposal or treatment of hazardous or toxic substances and, therefore, may
be
potentially liable for removal or remediation costs, as well as certain other
costs, including governmental fines and costs related to injuries of persons
and
property.
Investments
in real property create a potential for environmental liabilities on the part
of
the owner of such real property. We carry certain limited insurance coverage
for
this type of environmental risk. We have conducted environmental studies which
revealed the presence of groundwater contamination at certain Properties. Such
contamination at certain of these properties was reported to have migrated
on-site from adjacent industrial manufacturing operations. The former industrial
users of the Properties were identified as the source of contamination. The
environmental studies noted that certain Properties are located adjacent to
any
possible down gradient from sites with known groundwater contamination, the
lateral limits of which may extend onto such Properties. The environmental
studies also noted that at certain of these properties, contamination existed
because of the presence of underground fuel storage tanks, which have been
removed. In general, in connection with the ownership, operation, financing,
management and development of real properties, we may be potentially liable
for
removal or clean-up costs, as well as certain other costs and environmental
liabilities. We may also be subject to governmental fines and costs related
to
injuries to persons and property.
Recently
there has been an increasing number of lawsuits against owners and managers
of
apartment communities alleging personal injury and property damage caused by
the
presence of mold in residential real estate. Some of these lawsuits have
resulted in substantial monetary judgments or settlements. Essex has been sued
for mold related matters and has settled some, but not all, such matters, which
matters remain unresolved and pending. Insurance carriers have reacted to mold
related liability awards by excluding mold related claims from standard policies
and pricing mold endorsements at prohibitively high rates. Essex has, however,
purchased pollution liability insurance, which includes limited coverage for
mold, although the insurance may not cover all pending or future mold claims.
Essex has adopted programs designed to manage the existence of mold in its
properties as well as guidelines for promptly addressing and resolving reports
of mold to minimize any impact mold might have on residents or the property.
Essex cannot assure you that it will not be sued in the future for mold related
matters and cannot assure you that the liabilities resulting from such current
or future mold related matters will not be substantial. The costs of carrying
insurance to address potential mold related claims may also be
substantial.
California
has enacted legislation commonly referred to as “Proposition 65” requiring that
“clear and reasonable” warnings be given to consumers who are exposed to
chemicals known to the State of California to cause cancer or reproductive
toxicity, including tobacco smoke. Although we have sought to comply with
Proposition 65 requirements, we cannot assure you that we will not be adversely
affected by litigation relating to Proposition 65.
Methane
gas is a naturally-occurring gas that is commonly found below the surface in
several areas, particularly in the Southern California coastal areas. Methane
is
a non-toxic gas, but can be ignitable in confined spaces. Although
naturally-occurring, methane gas is not regulated at the state or federal level,
some local governments, such as the County of Los Angeles, have imposed
requirements that new buildings install detection systems in areas where methane
gas is known to be located.
Methane
gas is also associated with certain industrial activities, such as former
municipal waste landfills. Radon is also a naturally-occurring gas that is
found
below the surface. Essex cannot assure you that it will not be adversely
affected by costs related to its compliance with methane gas related
requirements or litigation costs related to methane or radon gas.
The
Company has almost no indemnification agreements from third parties for
potential environmental clean-up costs at its Properties. The Company has no
way
of determining at this time the magnitude of any potential liability to which
it
may be subject arising out of unknown environmental conditions or violations
with respect to the properties formerly owned by the Company. No assurance
can
be given that existing environmental studies with respect to any of the
Properties reveal all environmental liabilities, that any prior owner or
operator of a Property did not create any material environmental condition
not
known to the Company, or that a material environmental condition does not exist
as to any one or more of the Properties. The Company has limited insurance
coverage for the types of environmental liabilities described above.
General
uninsured losses
The
Company carries comprehensive liability, fire, extended coverage and rental
loss
insurance for each of the Properties. There are, however, certain types of
extraordinary losses, such as, for example, losses for terrorism or earthquake,
for which the Company does not have insurance coverage. Substantially all of
the
Properties are located in areas that are subject to earthquake activity. In
January 2007, the Company canceled its earthquake policy and established a
wholly owned insurance subsidiary. Through this subsidiary, the Company is
self-insured as it relates to earthquake related losses. Although
the Company may carry insurance for potential losses associated with its
Properties, employees, residents, and in compliance with applicable laws, it
may
still incur losses due to uninsured risks, deductibles, co-payments or losses
in
excess of applicable insurance coverage and those losses may be
material.
Changes
in real estate tax and other laws
Generally
we do not directly pass through costs resulting from changes in real estate
tax
laws to residential property tenants. We also do not generally pass through
increases in income, service or other taxes, to tenants under leases. These
costs may adversely affect funds from operations and the ability to make
distributions to stockholders. Similarly, compliance with changes in (i) laws
increasing the potential liability for environmental conditions existing on
properties or the restrictions on discharges or other conditions or (ii) rent
control or rent stabilization laws or other laws regulating housing may result
in significant unanticipated expenditures, which would adversely affect funds
from operations and the ability to make distributions to
stockholders.
Changes
in financing policy; no limitation on debt
We
have
adopted a policy of maintaining a debt-to-total-market-capitalization ratio
of
less than 50%. The calculation of debt-to-total-market-capitalization is as
follows: total indebtedness divided by the sum of total indebtedness plus total
equity market capitalization. As used in this calculation, total equity market
capitalization is equal to the aggregate market value of the outstanding shares
of common stock (based on the greater of current market price or the gross
proceeds per share from public offerings of the outstanding shares plus any
undistributed net cash flow), assuming the conversion of all limited partnership
interests in the Operating Partnership into shares of common stock and the
gross
proceeds of the preferred units. Based on this calculation (including the
current market price and excluding undistributed net cash flow), our
debt-to-total-market-capitalization ratio was approximately 28% as of December
31, 2006.
Our
organizational documents do not limit the amount or percentage of indebtedness
that may be incurred. Accordingly, the Board of Directors of Essex could change
current policies and the policies of the Operating Partnership regarding
indebtedness. If we changed these policies, we could incur more debt, resulting
in an increased risk of default on our obligations and the obligations of the
Operating Partnership, and an increase in debt service requirements that could
adversely affect our financial condition and results of operations. Such
increased debt could exceed the underlying value of the Properties.
We
are subject to certain tax risks
Essex
has
elected to be taxed as a REIT under the Internal Revenue Code. Essex’s
qualification as a REIT requires it to satisfy numerous requirements (some
on an
annual and quarterly basis) established under highly technical and complex
Internal Revenue Code provisions for which there are only limited judicial
or
administrative interpretations, and involves the determination of various
factual matters and circumstances not entirely within Essex’s control. Although
Essex intends that its current organization and method of operation enable
it to
qualify as a REIT, it cannot assure you that it so qualifies or that it will
be
able to remain so qualified in the future. Future legislation, new regulations,
administrative interpretations or court decisions (any of which could have
retroactive effect) could adversely affect Essex’s ability to qualify as a REIT
or adversely affect its stockholders. If it fails to qualify as a REIT in any
taxable year, Essex would be subject to U.S. federal income tax (including
any
applicable alternative minimum tax) on its taxable income at corporate rates,
and would not be allowed to deduct dividends paid to its shareholders in
computing its taxable income. Essex may also be disqualified from treatment
as a
REIT for the four taxable years following the year in which it failed to
qualify. The additional tax liability would reduce its net earnings available
for investment or distribution to stockholders, and it would no longer be
required to make distributions to its stockholders. Even if Essex continues
to
qualify as a REIT, it will continue to be subject to certain federal, state
and
local taxes on its income and property.
Essex
has
established several taxable REIT subsidiaries (“TRSs”). Despite Essex’s
qualification as a REIT, its TRSs must pay U.S. federal income tax on their
taxable income. While Essex will attempt to ensure that its dealings with its
TRSs does not adversely affect its REIT qualification, it cannot provide
assurance that it will successfully achieve that result. Furthermore, Essex
may
be subject to a 100% penalty tax, or its TRSs may be denied deductions, to
the
extent its dealings with its TRSs are not deemed to be arm’s length in nature.
No assurances can be given that Essex’s dealings with its TRSs will be arm’s
length in nature.
From
time
to time, we may transfer or otherwise dispose of some of our Properties. Under
the Internal Revenue Code, any gain resulting from transfers of Properties
that
we hold as inventory or primarily for sale to customers in the ordinary course
of business would be treated as income from a prohibited transaction subject
to
a 100% penalty tax. Since we acquire properties for investment purposes, we
do
not believe that our occasional transfers or disposals of property are
prohibited transactions. However, whether property is held for investment
purposes is a question of fact that depends on all the facts and circumstances
surrounding the particular transaction. The Internal Revenue Service may contend
that certain transfers or disposals of properties by us are prohibited
transactions. If the Internal Revenue Service were to argue successfully that
a
transfer or disposition of property constituted a prohibited transaction, then
Essex would be required to pay a 100% penalty tax on any gain allocable to
Essex
from the prohibited transaction and Essex’s ability to retain future gains on
real property sales may be jeopardized. Income from a prohibited transaction
might adversely affect Essex’s ability to satisfy the income tests for
qualification as a REIT for U.S. federal income tax purposes. Therefore, no
assurances can be given that Essex will be able to satisfy the income tests
for
qualification as a REIT.
U.S.
FEDERAL INCOME TAX STATUS
Essex
has
elected to be taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code, commencing with its taxable year ended December 31, 1994. As
a
REIT, in general, Essex is not subject to U.S. federal income tax on our net
income that Essex distributes to its stockholders. See “Certain Material Federal
Income Tax Considerations.”
DESCRIPTION
OF CAPITAL STOCK
General
As
of
December 31, 2006, the total number of shares of all classes of capital stock
that Essex had authority to issue was 1,000,000,000 shares, consisting of
649,702,178 shares of common stock, par value $0.0001 per share, 20,297,822
shares of preferred stock, par value $0.0001 per share, and 330,000,000 shares
of excess stock, par value $0.0001 per share.
As
of
December 31, 2006, there were 23,416,295 shares of common stock issued and
outstanding. Up to 1,200,000 shares of common stock have been reserved for
issuance under the Essex Property Trust, Inc. 2004 Stock Incentive Plan, and
there were 74,349 options outstanding under the Essex Property Trust, Inc.
1994
Stock Incentive Plan. In addition, an aggregate of 2,294,591 shares of common
stock may be issued upon the conversion of limited partnership interests in
the
Operating Partnership and an additional 179,981 shares of common stock would
be
issuable in exchange for non-forfeitable Series Z and Series Z-1 Incentive
Units
in the Operating Partnership, subject to meeting certain requirements with
respect to the Series Z and Series Z-1 Incentive Units program. In addition,
certain partners in limited partnerships in which the Operating Partnership
have
invested, have the right to have their limited partnership interests in such
partnership redeemed for cash or, at our option, for an aggregate of 1,256,787
shares of common stock. In addition, as of December 31, 2006, there were
1,000,000 shares of Essex’s 7.8125% Series F Cumulative Redeemable Preferred
Stock, and 5,980,000 shares of Essex’s 4.875% Series G Cumulative Convertible
Preferred Stock, issued and outstanding.
Common
Stock
The
following description of the common stock sets forth certain general terms
and
provisions of the common stock. This description is in all respects subject
to
and qualified in its entirety by reference to the applicable provisions of
Essex’s Charter and Bylaws. The common stock is listed on the New York Stock
Exchange under the symbol “ESS.” Computershare Investor Services, LLC is Essex’s
transfer agent.
The
holders of the outstanding common stock are entitled to one vote per share
on
all matters voted on by stockholders, including elections of directors. The
Charter provides that shares of common stock do not have cumulative voting
rights.
The
shares of common stock offered hereby are fully paid and nonassessable and
will
not be subject to preemptive or similar rights. Subject to the preferential
rights of any outstanding series of capital stock, the holders of common stock
are entitled to such distributions as may be authorized from time to time by
the
Board of Directors and declared by Essex from funds available for distribution
to such holders. Essex currently pays regular quarterly dividends to holders
of
common stock out of funds legally available for distribution when, and if,
authorized by the Board of Directors and declared by Essex.
In
the
event of a liquidation, dissolution or winding up of Essex, the holders of
common stock are entitled to receive ratably the assets remaining after
satisfaction of all liabilities and payment of liquidation preferences and
accrued dividends, if any, on any series of capital stock that has a liquidation
preference. The rights of holders of common stock are subject to the rights
and
preferences established by the Board of Directors for any capital stock that
may
subsequently be issued by Essex.
We
are
required to seek certain information from all persons who own, directly or
by
virtue of the attribution provisions of the Internal Revenue Code, more than
a
certain percentage of our outstanding stock. Stockholders who do not provide
us
with the information requested are required to submit such information with
their U.S. federal income tax returns. See “Certain Material Federal Income Tax
Considerations — Requirements for Qualification.”
Restrictions
on Transfer
In
order
for Essex to qualify as a REIT under the Internal Revenue Code, among other
requirements (see “Certain Material Federal Income Tax Considerations —
Requirements for Qualification”), no more than 50% of the value of the
outstanding shares of our stock may be owned, directly or indirectly, by five
or
fewer individuals, as defined in the Internal Revenue Code, during the last
half
of a taxable year (other than the first year) or during a proportionate part
of
a shorter taxable year. In addition, our stock must be owned by 100 or more
persons during at least 335 days of a taxable year of 12 months (other than
our
first year as a REIT) or during a proportionate part of a shorter taxable year.
The
Charter, subject to certain exceptions, provides an “ownership limit” under
which no stockholder, other than George M. Marcus (and his wife and children,
trusts for the benefit of his descendants and, upon his death, his heirs),
may
own, or be deemed to own by virtue of the attribution provisions of the Internal
Revenue Code, more than 6.0% of the value of the issued and outstanding shares
of our stock (not including any shares of excess stock). However, the ownership
limit provisions provide that a qualified trust, as defined in the Charter,
generally may own up to 9.9% of the value of the outstanding shares of our
stock. If George M. Marcus converts his limited partnership interests in the
Operating Partnership into shares of common stock, he may exceed the ownership
limit. The ownership limit provisions therefore provide that George M. Marcus
(and his wife and children, trusts for the benefit of his descendants and,
upon
his death, his heirs) may own up to 25% of the value of the outstanding shares
of our stock. The Board of Directors may also exempt an underwriter of a public
offering of our stock or a person who is not an “individual” (as defined under
the Internal Revenue Code to include certain entities) from the ownership limit
if it received satisfactory evidence that such stockholder’s ownership of
Essex’s shares in excess of the ownership limit will not jeopardize Essex’s
status as a REIT. As a condition to providing such an exemption, the Board
of
Directors must receive an opinion of counsel or ruling of the Internal Revenue
Service and representations and agreements from the applicant with respect
to
preserving Essex’s REIT status. However, the Board of Directors cannot grant an
exemption to the ownership limit if the applicant would own more than 25% of
the
value of the outstanding shares of Essex’s stock, unless, in addition to the
foregoing, the Board of Directors receives a ruling from the Internal Revenue
Service to the effect that such an exemption will not jeopardize Essex’s status
as a REIT. The Board of Directors has granted an exemption to the ownership
limit to the trusts that were shareholders of John M. Sachs, Inc. in connection
with the issuance of common stock of Essex to such trusts for the acquisition
of
John M. Sachs, Inc. The Board of Directors may also increase the ownership
limit
to a maximum of 9.9% and, in connection therewith, require opinions of counsel,
affidavits, undertakings or agreements as it may deem necessary or advisable
in
order to preserve Essex’s REIT status. If the Board of Directors and Essex’s
stockholders determine that it is no longer in our best interests to attempt
to
qualify, or to continue to qualify, as a REIT, the ownership limit provisions
of
the Charter can be terminated.
If
a
stockholder attempts to transfer shares of stock that would (i) create a direct
or indirect ownership of Essex’s shares in excess of the ownership limit absent
a Board exemption, (ii) result in the ownership of Essex’s stock by fewer than
100 persons, or (iii) result in the ownership of more than 50% of the value
of
Essex’s stock (other than excess stock), directly or indirectly, by five or
fewer individuals, as defined in the Internal Revenue Code, the transfer shall
be null and void, and the intended transferee will acquire no rights to the
shares. In addition, in the event of a transfer or attempted transfer, or other
event, that would result in any person owning directly or indirectly, shares
of
Essex stock in excess of the ownership limit (or any limit created in connection
with an exemption from the ownership limit) or that would result in the
ownership of more than 50% of the value of Essex’s stock, directly or
indirectly, by five or fewer persons, such shares of our stock will
automatically be exchanged for shares of “excess stock.” All shares of excess
stock will be automatically transferred, without action by the purported holder,
to a person who is unaffiliated with us or the intended transferee, as trustee
for the exclusive benefit of one or more organizations described in Sections
170(b), 170(c) or 501(c)(3) of the Internal Revenue Code as charitable
beneficiary and designated by resolution of the Board of Directors. Such shares
of excess stock held in trust are considered issued and outstanding shares
of
Essex’s stock. In general, the trustee of such shares is deemed to own the
shares of excess stock held in trust for the exclusive benefit of the charitable
beneficiary on the day prior to the date of the purported transfer or change
in
capital structure which resulted in the automatic transfer and has all voting
rights and all right to receive distributions payable with respect to the excess
shares. Any dividend or other distribution paid prior to the discovery by Essex
that shares exchanged for excess stock will be repaid by the recipient to Essex
upon demand or, if Essex elects, offset against any future dividends of
distributions payable to the recipient. Subject to Maryland law, any vote cast
by the purported owner of excess shares will be rescinded and recast in
accordance with the direction of the trustee acting for the benefit of the
charitable beneficiary.
Essex
may
cause the trustee to transfer a beneficial interest in the trust representing
a
number of shares of excess stock if the shares of excess stock would not be
excess stock in the hands of the identified transferee. In the event of such
a
transfer, the purported transferee of the shares exchanged for excess stock
may
receive a price for its interest in such shares that is the lesser of (i) the
price paid by the purported transferee or, if the purported transferee did
not
give value for the shares in connection with the event causing shares to be
exchanged for excess stock (e.g.,
a gift,
devise or other similar transaction), the Market Price (as defined in Essex’s
Charter) of the shares on the day of the event causing the shares to be
exchanged for excess stock and (ii) the price received by the trustee from
the
sale or other disposition of the shares of excess stock. Upon any such a
transfer, the shares of excess stock will automatically be exchanged for an
equal number of shares of stock of the class and series originally exchanged
for
such shares of excess stock.
Shares
of
excess stock held in the trust will be deemed to have been offered for sale
to
Essex, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that resulted in the exchange for shares
of
excess stock (or, in the case of a devise or gift, the Market Price at the
time
of the devise or gift) and (ii) the Market Price on the date that Essex, or
its
designee, accepts the offer. Essex will have the right to accept the offer for a
period of ninety days after the later of the date of the transaction that
resulted in the exchange for shares of excess stock and, if Essex does not
receive prior notice of such transaction, the date that the board of directors
determines in good faith that a transaction resulting in excess stock has
occurred.
Even
if
the provisions of the Internal Revenue Code regarding REITs are changed to
eliminate any ownership concentration limitation or increase the limitation,
the
ownership limitations in the Charter will not be automatically eliminated or
modified. Except as described above, any change to such limitations would
require an amendment to the Charter, which in turn would require the affirmative
vote of holders owning a majority of the outstanding shares of Essex’s common
stock. In addition to preserving Essex’s status as a REIT, the ownership limit
provisions in the Charter may have the effect of precluding an acquisition
of
our control without the approval of the Board of Directors.
All
certificates representing shares of equity stock will bear a legend referring
to
the restrictions described above.
Stockholder
Rights Plan
On
October 13, 1998, the Board of Directors of Essex adopted a Stockholder Rights
Plan and declared a dividend distribution of one “Right” for each outstanding
share of its common stock to stockholders of record at the close of business
on
November 21, 1998, and authorized the issuance of one Right with each share
of
common stock issued thereafter. Each Right entitles the registered holder to
purchase from Essex one one-hundredth of a share (a “Unit”) of Series A Junior
Participating Preferred Stock at a purchase price of $99.13 per Unit, subject
to
adjustment. In certain circumstances the Rights will entitle holders to purchase
shares of common stock or the common stock of an Acquiring Person (as defined
below). The description and terms of the Rights are set forth in a Rights
Agreement between Essex and BankBoston, N.A., as Rights Agent, dated as of
November 11, 1998, and as amended December 13, 2000 and February 28, 2002.
The
Rights will separate from the common stock and the “Distribution Date” will
occur upon the earlier of (i) ten (10) days following a public announcement
that
a person or group of affiliated or associated persons (an “Acquiring Person”)
has acquired, or obtained the right to acquire, beneficial ownership of fifteen
percent (15%) or more of the outstanding shares of common stock (unless such
person is or becomes the beneficial owner of fifteen percent (15%) or more
of
Essex’s outstanding common stock and had a contractual right or the approval of
Essex’s Board of Directors; provided that such percentage shall not be greater
than nineteen and nine-tenths percent (19.9%)) (the “Stock Acquisition Date”),
other than as a result of repurchases of stock by the Essex or (ii) ten (10)
business days (or such later date as the Board shall determine) following the
commencement of a tender offer or exchange offer that would result in a person
or group becoming an Acquiring Person. Certain persons, including us, are exempt
from the definition of Acquiring Person.
The
Rights are not exercisable until the Distribution Date and will expire at the
close of business on November 11, 2008 unless earlier redeemed or exchanged
by
Essex or terminated pursuant to a merger or other acquisition transaction
involving Essex approved by Essex’s Board of Directors. In general, at any time
until ten (10) days following the Stock Acquisition Date, a majority of the
Board of Directors may redeem the Rights in whole, but not in part, at a price
of $.01 per Right (subject to adjustment in certain events).
Description
of Series B, Series D, Series F and Series G Preferred Stock and Exchangeable
Senior Notes
General
On
February 6, 1998 and April 20, 1998, the Operating Partnership completed private
placements of 1,200,000 and 400,000 units, respectively, of Series B Preferred
Units (the “Series B Preferred Units”), representing a limited partnership
interest in the Operating Partnership, to an institutional investor in return
for contributions to the Operating Partnership of $60 million and $20 million,
respectively. The Series B Preferred Units will become exchangeable on a one
for
one basis, in whole or in part at any time on or after January 1, 2014 for
shares of Essex’s Series B Cumulative Redeemable Preferred Stock, par value
$.0001 per share (the “Series B Preferred Stock”); provided, however, that the
Series B Preferred Units will become immediately exchangeable if (i) full
distributions for such Units with respect to six quarterly distribution periods
have not been fully paid, (ii) the holders of such Units are notified that
the
Operating Partnership will become a “publicly traded partnership” (a “PTP”)
within the meaning of Section 7704 of the Internal Revenue Code, or (iii) after
the third anniversary of the private placement, the holders are notified that
such exchange at such earlier date would not cause the Series B Preferred Units
to be considered “stock and securities” within the meaning of Section 351(e) of
the Internal Revenue Code. Pursuant to the terms of a registration rights
agreement, entered into in connection with this private placement, the holders
of Series B Preferred Stock will have certain rights to cause Essex to register
such shares of Series B Preferred Stock. Subject to the rights of holders of
any
other parity preferred stock as to the payment of distributions, the holders
of
Series B Preferred Stock are entitled to receive, when, as and if declared
by
Essex, out of funds legally available for the payment of distributions,
cumulative preferential cash distributions at the rate per annum of 7.875%
of
the $50.00 liquidation preference per share of Series B Preferred Stock.
2,000,000 shares of Essex’s stock, par value $.0001 per share, are classified as
shares of Series B Preferred Stock. Presently, no shares of Series B Preferred
Stock are outstanding. Upon the exchange of all the Series B Preferred Units,
there would be 1,600,000 shares of Series B Preferred Stock outstanding.
On
July
28, 1999, the Operating Partnership completed a private placement of 2,000,000
units, of Cumulative Redeemable Series D Preferred Units (the “Series D
Preferred Units”), representing a limited partnership interest in the Operating
Partnership, to institutional investors in return for contributions to the
Operating Partnership of $50 million. The Series D Preferred Units will become
exchangeable, on a one for one basis, in whole or in part at any time on or
after January 1, 2014 for shares of Essex’s Series D Cumulative Redeemable
Preferred Stock, par value $.0001 per share (the “Series D Preferred Stock”);
provided, however, that the Series D Preferred Units will become immediately
exchangeable if (i) full distributions for such Units with respect to six
quarterly distribution periods have not been fully paid, (ii) the holders of
such Units are notified that the Operating Partnership will become a PTP, (iii)
the Operating Partnership cannot satisfy the income and asset tests of Section
856 of the Internal Revenue Code, or (iv) after the third anniversary of the
private placement, the holders are notified that such exchange at such earlier
date would not cause the Series D Preferred Units to be considered “stock and
securities” within the meaning of Section 351(e) of the Internal Revenue Code.
Pursuant to the terms of a registration rights agreement, entered into in
connection with this private placement, the holders of Series D Preferred Stock
will have certain rights to cause Essex to register such shares of Series D
Preferred Stock. The holders of Series D Preferred Stock are entitled to
receive, when, as and if declared by Essex, out of funds legally available
for
the payment of distributions, cumulative preferential cash distributions at
the
rate of 7.875% of $25.00 liquidation preference per share of Series D Preferred
Stock. 2,000,000 shares of Essex’s stock, par value $.0001 per share, are
classified as shares of Series D Preferred Stock. Presently, no shares of Series
D Preferred Stock are outstanding. Upon the exchange of all the Series D
Preferred Units, there would be 2,000,000 shares of Series D Preferred Stock
outstanding.
On
September 23, 2003, Essex completed an offering of 1,000,000 shares of its
7.8125% Series F Cumulative Redeemable Preferred Stock (“Series F Preferred
Stock”) at a price of $24.664 per share. The holders of Series F Preferred Stock
will be entitled to receive cumulative cash dividends on the Series F Preferred
Stock at a rate of 7.8125% per year of the $25.00 liquidation preference. If
at
any time full distributions have not been made on any Series F Preferred Stock
with respect to six prior quarterly distribution periods, whether or not
consecutive, such that distributions for such six distribution periods have
not
been fully paid and are outstanding in whole or in part at any time (which
we
refer to as a “Series F Default”), the distributions payable on Series F
Preferred Stock will be increased to a rate of 8.3125% of the $25.00 liquidation
preference per year, until all accumulated distributions and the distribution
of
the current distribution period has been paid in full or irrevocably set aside
for payment in full. If a second Series F Default occurs, distributions to
holders of Series F Preferred Stock will remain payable at the increased rate,
regardless of whether such accumulated distributions are subsequently paid
or
set aside for payment. The Series F Preferred Stock is not convertible or
exchangeable, except that the Series F Preferred Shares may be exchanged
automatically into “excess shares” in accordance with the Company’s Charter. The
Series F Preferred Stock has no maturity date. On September 23, 2003, Essex
filed Articles Supplementary reclassifying 1,000,000 shares of its Common Stock,
par value $.0001 per share, as 1,000,000 shares of Series F Preferred Stock
and
setting forth the rights, preferences and privileges of the Series F Preferred
Stock. Presently, there are 1,000,000 shares of Series F Preferred Stock
outstanding.
On
October 28, 2005 and November 29, 2005, the Operating Partnership issued
$190,000,000 and $35,000,000, respectively, of the Operating Partnership’s
3.625% Exchangeable Senior Notes due on November 1, 2025 (the “Senior Notes”).
The Senior Notes are senior unsecured obligations of the Operating Partnership
and are fully and unconditionally guaranteed by Essex. On or after November
1,
2020, the Senior Notes will be exchangeable at the option of the holder into
cash and, in certain circumstances at Essex’s option, shares of Essex common
stock at an initial exchange rate of 9.6852 shares of Essex’s common stock per
$1,000 principal amount of Senior Notes, which represents an exchange price
of
$103.25 per share, subject to certain adjustments. The Senior Notes will also
be
exchangeable prior to November 1, 2020, but only upon the occurrence of certain
specified events. On or after November 4, 2010, the Operating Partnership may
redeem all or a portion of the Exchangeable Notes at a redemption price equal
to
the principal amount plus accrued and unpaid interest (including additional
interest, if any). Holders of the Senior Notes may require the Operating
Partnership to repurchase all or a portion of the Senior Notes at a purchase
price equal to the principal amount plus accrued and unpaid interest (including
additional interest, if any), on the Senior Notes on November 1, 2010, November
1, 2015 and November 1, 2020, or after the occurrence of certain specified
events.
On
July
31, 2006, Essex completed an offering of 5,980,000 shares of its 4.875% Series
G
Cumulative Convertible Preferred Stock (“Series G Preferred Stock”) at a price
of $24.75 per share. The holders of Series G Preferred Stock are entitled to
receive cumulative cash dividends on the Series G Preferred Stock at a rate
of
4.875% per year of the $25.00 liquidation preference. The Series G Preferred
Stock may be converted by the holder at an initial conversion rate of 0.1830
shares of common stock per $25.00 liquidation preference (subject to adjustment
in certain events), which is equivalent to an initial conversion price of
$136.62 per share of common stock. The Series G Preferred Stock has no maturity
date. On July 26, 2006, Essex filed Articles Supplementary reclassifying
5,980,000 shares of its Common Stock, par value $.0001 per share, as 5,980,000
shares of Series G Preferred Stock and setting forth the rights, preferences
and
privileges of the Series G Preferred Stock. Presently, there are 5,980,000
shares of Series G Preferred Stock outstanding.
Upon
the
occurrence of certain events, holders of the Series B Preferred Units, the
Series D Preferred Units, the Series F Preferred Stock and the Series G
Preferred Stock may require the redemption for cash of all outstanding shares
of
such preferred stock or all outstanding units, as the case may be, provided,
as
to such series of preferred stock or units, a majority of holders elect such
redemption. With respect to the Series G Preferred Stock, if a fundamental
change (as defined in the articles supplementary for the Series G Preferred
Stock) occurs, holders will have the right to require the redemption for cash
of
some or all of their Series G Preferred Stock.
The
description of the Series B Preferred Stock, Series D Preferred Stock, Series
F
Preferred Stock and Series G Preferred Stock is in all respects subject to
and
qualified in its entirety by reference to the applicable provisions of the
Charter, including the respective Articles Supplementary applicable to the
Series B Preferred Stock, Series D Preferred Stock, Series F Preferred Stock
and
Series G Preferred Stock, and Bylaws. The description of the Series B Preferred
Units and the Series D Preferred Units is in all respects subject to and
qualified in its entirety by reference to the applicable provisions of the
partnership agreement of the Operating Partnership. The description of the
Senior Notes is in all respects subject to and qualified by reference to the
applicable provisions of the Indenture, including the form of the Senior Note,
relating to such Senior Notes.
Series
C Preferred Stock and Series E Preferred Stock
Essex
has
also authorized, and filed articles supplementary with respect to, 500,000
shares of Series C Cumulative Redeemable Preferred Stock, par value $.0001
per
share (“Series C Preferred Stock”), and 2,200,000 shares of 9.25% Series E
Cumulative Redeemable Preferred Stock, par value $.0001 per share (“Series E
Preferred Stock”). Such Series C and Series E Preferred Stock were issuable upon
the exchange of certain 9 1/8% Cumulative Redeemable Series C Preferred Units
(“Series C Preferred Units”) and 9.25% Cumulative Redeemable Series E Preferred
Units (“Series E Preferred Units”), respectively, previously issued by the
Operating Partnership. All of such Series C Preferred Units and Series E
Preferred Units have been redeemed by the Operating Partnership and Essex has
no
current plans to issue the Series C Preferred Stock or the Series E Preferred
Stock.
Optional
Redemption and Optional Conversion
The
Series B Preferred Stock may be redeemed, at Essex’s option, on and after
December 31, 2009, from time to time, at a redemption price payable in cash
equal to $50.00 per share of Series B Preferred Stock, plus any accumulated
and
unpaid dividends to the date of redemption.
The
Series D Preferred Stock may be redeemed, at Essex’s option, on and after July
28, 2010, from time to time, at a redemption price payable in cash equal to
$25.00 per share of Series D Preferred Stock, plus any accumulated and unpaid
dividends to the date of redemption.
The
Series F Preferred Stock may be redeemed, at Essex's option, on and after
September 23, 2008, from time to time, at a redemption price payable in cash
equal to $25.00 per share of Series F Preferred Stock, plus any accumulated
and unpaid dividends to the date of redemption.
The
Series G Preferred Stock may be converted, at the Company’s option on and after
July 31, 2011, at the then prevailing conversion rate, only if the closing
sale
price of the Company’s common stock equals or exceeds 130% of the then
prevailing conversion price of the Series G Preferred Stock for at least 20
trading days in a period of 30 consecutive trading days.
The
Series B Preferred Units may be redeemed, at the Operating Partnership’s option
on and after December 31, 2009, from time to time, at a redemption price payable
in cash equal to the capital account balance of such holders of Series B
Preferred Units; provided however that such redemption price shall not be
permitted if such redemption price is less than the original capital
contribution of such holder of Series B Preferred Units and the cumulative
priority return to the redemption date to the extent not previously distributed.
The
Series D Preferred Units may be redeemed, at the Operating Partnership’s option
on and after July 28, 2010, from time to time, at a redemption price payable
in
cash equal to the capital account balance of such holders of Series D Preferred
Units; provided however that such redemption price shall not be permitted if
such redemption price is less than the original capital contribution of such
holder of Series D Preferred Units and the cumulative priority return to the
redemption date to the extent not previously distributed.
We
may
not redeem fewer than all of the outstanding shares of Series B, Series D or
Series F Preferred Stock or the Series B or Series D Preferred Units unless
all
accumulated and unpaid distributions have been paid on all Series B, Series
D
and Series F Preferred Stock or Series B or D Preferred Units, as the case
may
be, for all quarterly distribution periods terminating on or prior to the date
of redemption.
Prior
to
November 4, 2010, the Senior Notes may not be redeemed by the Operating
Partnership, except to preserve the status of Essex as a REIT. After November
4,
2010, the Operating Partnership may redeem all or a portion of the Senior Notes
at a redemption price equal to the principal amount plus accrued and unpaid
interest (including additional interest, if any).
Limited
Voting Rights
If
at any
time full distributions shall not have been timely made on any Series B, Series
D, Series F or Series G Preferred Stock with respect to any six (6) prior
quarterly distribution periods, whether or not consecutive, and, with respect
to
Series F Preferred Stock, in lieu of the right to increase the rate at which
distributions on Series F Preferred Stock are payable, the holders of such
Series B, Series D, Series F and Series G Preferred Stock, voting together
as a
single class with the holders of each class or series of parity preferred stock
upon which similar voting rights have been conferred and are exercisable (except
holders of outstanding shares of Series B, Series D or Series F Preferred Stock
who are affiliates of Essex) will have the right to elect two additional
directors to the Board of Directors at a special meeting called by the holders
of record of at least 10% of the then outstanding shares of Series B, Series
D,
Series F or Series G Preferred Stock, or any other class or series of parity
preferred stock upon which similar voting rights have been conferred and are
exercisable, or at the next annual meeting of stockholders, and at each
subsequent annual meeting of stockholders or special meeting held in place
thereof, until all such distributions in arrears and distributions for the
current quarter have been paid in full. Thereafter, upon such payment in full,
the holders of such class or series of preferred stock will be divested of
their
voting rights and the term of any member of the Board of Directors elected
by
the holders of such class or series of preferred stock shall terminate. Holders
of Series D, Series F and Series G Preferred Stock are entitled to one vote
per
$50.00 of liquidation preference to which such series of preferred stock is
entitled by its terms (excluding amounts in respect of accumulated and unpaid
dividends). Holders of Series B Preferred Stock are entitled to one vote per
share.
In
addition, while any shares of the Series B, Series D, Series F or Series G
Preferred Stock are outstanding, Essex shall not, without the affirmative vote
of the holders of at least two-thirds (2/3) of the Series B, Series D, Series
F
and Series G Preferred Stock outstanding at the time, each class or series
voting separately: (i) authorize or create, or increase the authorized or issued
amount of, any class or series of shares ranking prior to the Series B, Series
D, Series F and Series G Preferred Stock with respect to payment of
distributions or rights upon liquidation, dissolution or winding-up or
reclassify any authorized shares of Essex into any such shares, or create,
authorize or issue any obligations or security convertible into or evidencing
the right to purchase any such shares or (ii) either amend, alter or repeal
the
provisions of Essex’s Charter (including the Articles Supplementary pertaining
to the Series B, Series D, Series F or Series G Preferred Stock) or Bylaws,
including by merger or consolidation, that would materially and adversely affect
the preferences, other rights, voting powers, restrictions, limitations as
to
dividends and other distributions, qualifications, or terms and conditions
of
redemption, of any outstanding shares of the Series B, Series D, Series F or
Series G Preferred Stock.
While
any
shares of the Series B or Series D Preferred Stock are outstanding, Essex shall
not, without the affirmative vote of the holders of at least two-thirds (2/3)
of
the Series B and Series D Preferred Stock outstanding at the time, each class or
series voting separately, consolidate, amalgamate, merge with or into, or
convey, transfer or lease its assets substantially as an entirety to, any
corporation or other entity, unless (a) Essex is the surviving entity and the
shares of the Series B and Series D Preferred Stock remain outstanding with
the
terms thereof unchanged, (b) the resulting, surviving or transferee entity
is a
corporation or other entity organized under the laws of any state and
substitutes for the Series B and Series D Preferred Stock other preferred stock
having substantially the same terms and same rights as Series B and Series
D
Preferred Stock, as applicable, including with respect to distributions, voting
rights and rights upon liquidation, dissolution or winding-up, or (c) such
merger, consolidation, amalgamation or asset transfer does not adversely affect
the powers, special rights, preferences and privileges of the holders of the
Series B or Series D Preferred Stock in any material respect. No merger,
consolidation or amendment to Essex’s Charter involving the issuance, creation
or increase in the authorized amount of any series of Preferred Stock ranking
on
parity with or junior to the Series B Preferred Stock or Series D Preferred
Stock with respect to the payment of distributions or the distribution of assets
upon liquidation, dissolution or winding up will be deemed to materially and
adversely affect the rights, preferences, privileges or voting powers of the
Series B Preferred Stock or Series D Preferred Stock (and no consent of the
holders of Series B Preferred Stock or Series D Preferred Stock will be
required), provided that the issuance of any such shares of such parity
preferred stock to an affiliate of Essex is, with respect to the holders of
Series D Preferred Stock, approved by a majority of the independent directors
of
Essex.
The
Series B, Series D, Series F and Series G Preferred Stock will have no voting
rights other than as discussed above and as otherwise provided by applicable
law.
Liquidation
Preference
Subject
to the rights of the holders of any other parity preferred stock, each share
of
Series B Preferred Stock is entitled to a liquidation preference of $50.00
per
share, plus any accrued and unpaid dividends, in preference to any other class
or series of capital stock of Essex, and each share of Series D, Series F and
Series G Preferred Stock is entitled to a liquidation preference of $25.00
per
share, plus any accrued and unpaid dividends, in preference to any other class
or series of capital stock of Essex.
DESCRIPTION
OF PREFERRED STOCK
General
Subject
to limitations prescribed by Maryland law and Essex’s Charter, the Board of
Directors is authorized to issue, from the authorized but unissued shares of
capital stock of Essex, Preferred Stock in such classes or series as the Board
of Directors may determine and to establish from time to time the number of
shares of Preferred Stock to be included in any such class or series and to
fix
the designation and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the shares of any such class or series, and such
other subjects or matters as may be fixed by resolution of the Board of
Directors. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of Essex.
Preferred
Stock, upon filing with, and acceptance for record by, the State Department
of
Assessments and Taxation of Maryland of articles supplementary setting forth
the
terms of the class or series of Preferred Stock, and issuance against full
payment of the purchase price therefor, will be fully paid and nonassessable.
The specific terms of a particular class or series of Preferred Stock will
be
described in the Prospectus Supplement relating to that class or series,
including a Prospectus Supplement providing that Preferred Stock may be issuable
upon the exercise of Warrants issued by Essex. The description of Preferred
Stock set forth below and the description of the terms of a particular class
or
series of Preferred Stock set forth in a Prospectus Supplement do not purport
to
be complete and are qualified in their entirety by reference to the articles
supplementary relating to that class or series.
The
preferences and other terms of the Preferred Stock of each class or series
will
be fixed by the articles supplementary relating to such class or series. A
Prospectus Supplement, relating to each class or series, will specify the terms
of the Preferred Stock as follows:
(1)
The
title and par value of such Preferred Stock;
(2)
The
number of shares of such Preferred Stock offered, the liquidation preference
per
share and the offering price of such Preferred Stock;
(3)
The
dividend rate(s), period(s), and/or payment date(s) or method(s) of calculation
thereof applicable to such Preferred Stock;
(4)
Whether such Preferred Stock is cumulative or not and, if cumulative, the date
from which dividends on such Preferred Stock shall accumulate;
(5)
The
provision for a sinking fund, if any, for such Preferred Stock;
(6)
The
provision for redemption, if applicable, of such Preferred Stock;
(7)
Any
listing of such Preferred Stock on any securities exchange;
(8)
The
terms and conditions, if applicable, upon which such Preferred Stock will be
converted into Common Stock of Essex, including the conversion price (or manner
of calculation thereof);
(9)
A
discussion of any material federal income tax considerations applicable to
such
Preferred Stock;
(10)
Any
limitations on direct or beneficial ownership and restrictions on transfer,
in
each case as may be appropriate to preserve the status of Essex as a REIT;
(11)
The
relative ranking and preferences of such Preferred Stock as to dividend rights
and rights upon liquidation, dissolution or winding up of the affairs of Essex;
(12)
Any
limitations on issuance of any class or series of Preferred Stock ranking senior
to or on a parity with such class or series of Preferred Stock as to dividend
rights and rights upon liquidation, dissolution or winding up of the affairs
of
Essex;
(13)
Any
other specific terms, preferences, rights, limitations or restrictions of such
Preferred Stock; and
(14)
Any
voting rights of such Preferred Stock.
Rank
Unless
otherwise specified in the Prospectus Supplement, the Preferred Stock will,
with
respect to dividend rights and rights upon liquidation, dissolution or winding
up of Essex, rank (i) senior to all classes or series of Common Stock and excess
stock of Essex, and to all equity securities ranking junior to such Preferred
Stock with respect to dividend rights and rights upon liquidation, dissolution
or winding up of Essex; (ii) on a parity with all equity securities issued
by
Essex the terms of which specifically provide that such equity securities rank
on a parity with the Preferred Stock with respect to dividends rights or rights
upon liquidation, dissolution or winding up of Essex; and (iii) junior to all
equity securities issued by Essex the terms of which specifically provide that
such equity securities rank senior to the Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of Essex.
Conversion
Rights
The
terms
and conditions, if any, upon which any shares of any class or series of
Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
the
number of shares of Common Stock into which the shares of Preferred Stock are
convertible, the conversion price (or manner of calculation thereof), the
conversion period, provisions as to whether conversion will be at the option
of
the holders of such class or series of Preferred Stock or Essex, the events
requiring an adjustment of the conversion price and provisions affecting
conversion in the event of the redemption of such class or series of Preferred
Stock.
Restrictions
on Transfer
For
Essex
to qualify as a REIT under the Internal Revenue Code, not more than 50% in
value
of its outstanding stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Internal Revenue Code) during the last half
of a
taxable year, the stock must be beneficially owned by 100 or more persons during
at least 335 days of a taxable year of 12 months or during a proportionate
part
of a shorter taxable year. To enable Essex to continue to qualify as a REIT,
the
Charter restricts the acquisition of shares of common stock and preferred stock.
The Charter provides that, subject to certain exceptions specified in the
Charter, no stockholder may own, or be deemed to own by virtue of the
attribution provisions of the Internal Revenue Code, more than 6.0% of the
value
of the outstanding common stock and preferred stock of Essex. See “Description
of Capital Stock — Restrictions on Transfer.” The applicable Prospectus
Supplement will also specify any additional ownership limitation relating to
a
series of preferred stock.
DESCRIPTION
OF DEPOSITARY SHARES
This
section outlines some of the provisions of the deposit agreement to govern
any
depositary shares, the depositary shares themselves and the depositary receipts.
This information may not be complete in all respects and is qualified entirely
by reference to the relevant deposit agreement and depositary receipts with
respect to the depositary shares related to any particular series of preferred
stock. The specific terms of any series of depositary shares will be described
in the applicable prospectus supplement. If so described in the prospectus
supplement, the terms of that series of depositary shares may differ from the
general description of terms presented below.
Interest
in a Fractional Share, or Multiple Shares, of Preferred
Stock
We
may,
at our option, elect to offer depositary shares, each of which would represent
an interest in a fractional share, or multiple shares, of our preferred stock
instead of whole shares of preferred stock. If so, we will allow a depositary
to
issue to the public depositary shares, each of which will represent an interest
in a fractional share, or multiple shares, of preferred stock as described
in
the prospectus supplement.
Deposit
Agreement
The
shares of the preferred stock underlying any depositary shares will be deposited
under a separate deposit agreement between us and a bank or trust company acting
as depositary with respect to those shares of preferred stock. The prospectus
supplement relating to a series of depositary shares will specify the name
and
address of the depositary. Under the deposit agreement, each owner of a
depositary share will be entitled, in proportion of its interest in a fractional
share, or multiple shares, of the preferred stock underlying that depositary
share, to all the rights and preferences of that preferred stock, including
dividend, voting, redemption, conversion, exchange and liquidation
rights.
Depositary
shares will be evidenced by one or more depositary receipts issued under the
deposit agreement. We will distribute depositary receipts to those persons
purchasing such depositary shares in accordance with the terms of the offering
made by the related prospectus supplement.
Dividends
and Other Distributions
The
depositary will distribute all cash dividends or other cash distributions in
respect of the preferred stock underlying the depositary shares to each record
depositary shareholder based on the number of the depositary shares owned by
that holder on the relevant record date. The depositary will distribute only
that amount which can be distributed without attributing to any depositary
shareholders a fraction of one cent, and any balance not so distributed will
be
added to and treated as part of the next sum received by the depositary for
distribution to record depositary shareholders.
If
there
is a distribution other than in cash, the depositary will distribute property
to
the entitled record depositary shareholders, unless the depositary determines
that it is not feasible to make that distribution. In that case the depositary
may, with our approval, adopt the method it deems equitable and practicable
for
making that distribution, including any sale of property and the distribution
of
the net proceeds from this sale to the concerned holders.
Each
deposit agreement will also contain provisions relating to the manner in which
any subscription or similar rights we offer to holders of the relevant series
of
preferred stock will be made available to depositary shareholders.
The
amount distributed in all of the foregoing cases will be reduced by any amounts
required to be withheld by us or the depositary on account of taxes and
governmental charges.
Withdrawal
of Stock
Upon
surrender of depositary receipts at the office of the depositary and upon
payment of the charges provided in the deposit agreement and subject to the
terms thereof, a holder of depositary receipts is entitled to have the
depositary deliver to such holder the applicable number of shares of preferred
stock underlying the depositary shares evidenced by the surrendered depositary
receipts. There may be no market, however, for the underlying preferred stock
and once the underlying preferred stock is withdrawn from the depositary, it
may
not be redeposited.
Redemption
and Liquidation
The
terms
on which the depositary shares relating to the preferred stock of any series
may
be redeemed, and any amounts distributable upon our liquidation, dissolution
or
winding up, will be described in the applicable prospectus
supplement.
Voting
Upon
receiving notice of any meeting at which preferred stockholders of any series
are entitled to vote, the depositary will mail the information contained in
that
notice to the record depositary shareholders relating to those series of
preferred stock. Each depositary shareholder on the record date will be entitled
to instruct the depositary on how to vote the shares of preferred stock
underlying that holder’s depositary shares. The depositary will vote the shares
of preferred stock underlying those depositary shares according to those
instructions, and we will take reasonably necessary actions to enable the
depositary to do so. If the depositary does not receive specific instructions
from the depositary shareholders relating to that preferred stock, it will
abstain from voting those shares of preferred stock, unless otherwise discussed
in the prospectus supplement.
Charges
of Depositary
We
will
pay all transfer and other taxes and governmental charges arising solely from
the existence of the depositary arrangements. We will also pay all charges
of
each depositary in connection with the initial deposit and any redemption of
the
preferred stock. Depositary shareholders will be required to pay any other
transfer and other taxes and governmental charges and any other charges
expressly provided in the deposit agreement to be for their
accounts.
Miscellaneous
Each
depositary will forward to the relevant depositary shareholders all our reports
and communications that we are required to furnish to preferred stockholders
of
any series.
The
deposit agreement will contain provisions relating to adjustments in the
fraction of a share of preferred stock represented by a depositary share in
the
event of a change in par value, split-up, combination or other reclassification
of the preferred stock or upon any recapitalization, merger or sale of
substantially all of our assets.
Neither
the depositary nor Essex will be liable if it is prevented or delayed by law
or
any circumstance beyond its control in performing its obligations under any
deposit agreement, or subject to any liability under the deposit agreement
to
holders of depositary receipts other than for the relevant party’s gross
negligence or willful misconduct. The obligations of Essex and each depositary
under any deposit agreement will be limited to performance in good faith of
their duties under that agreement, and they will not be obligated to prosecute
or defend any legal proceeding in respect of any depositary shares or preferred
stock unless they are provided with satisfactory indemnity. They may rely upon
written advice of counsel or accountants, or information provided by persons
presenting preferred stock for deposit, depositary shareholders or other persons
believed to be competent and on documents believed to be genuine.
Title
Essex,
each depositary and any of their agents may treat the registered owner of any
depositary share as the absolute owner of that share, whether or not any payment
in respect of that depositary share is overdue and despite any notice to the
contrary, for any purpose.
Resignation
and Removal of Depositary
A
depositary may resign at any time by issuing us a notice of resignation, and
we
may remove any depositary at any time by issuing it a notice of removal.
Resignation or removal will take effect upon the appointment of a successor
depositary and its acceptance of appointment. That successor depositary must
be
appointed within 60 days after delivery of the notice of resignation or
removal.
Essex
has
no Warrants outstanding (other than options issued under Essex’s stock option
plans). Essex may issue Warrants for the purchase of Common Stock. Essex may
issue warrants independently or together with any other Offered Securities
offered by any Prospectus Supplement and may be attached to or separated from
such Offered Securities. Each series of Warrants will be issued under a separate
warrant agreement (each, a “Warrant Agreement”) to be entered into between Essex
and a warrant agent specified in the applicable Prospectus Supplement (the
“Warrant Agent”). The Warrant Agent will act solely as an agent of Essex in
connection with the Warrants of such series and will not assume any obligation
or relationship of agency or trust for or with any provisions of the Warrants
offered hereby. Further terms of the Warrants and the applicable Warrant
Agreements will be set forth in the applicable Prospectus Supplement.
The
applicable Prospectus Supplement will describe the terms of the Warrants in
respect of which this prospectus is being delivered, including, where
applicable, the following: (1) the title of such Warrants; (2) the aggregate
number of such Warrants; (3) the price or prices at which such Warrants will
be
issued; (4) the designation, terms and number of shares of Common Stock
purchasable upon exercise of such Warrants; (5) the designation and terms of
the
Offered Securities, if any, with which such Warrants are issued and the number
of such Warrants issued with each such Offered Security; (6) the date, if any,
on and after which such Warrants and the related Common Stock will be separately
transferable; (7) the price at which each share of Common Stock purchasable
upon
exercise of such Warrants may be purchased; (8) the date on which the right
to
exercise such Warrants shall commence and the date on which such right shall
expire; (9) the minimum or maximum amount of such Warrants which may be
exercised at any one time; (10) information with respect to book-entry
procedures, if any; (11) a discussion of certain federal income tax
considerations; and (12) any other terms of such Warrants, including terms,
procedures and limitations relating to the exchange and exercise of such
Warrants.
DESCRIPTION
OF STOCK PURCHASE
CONTRACTS
This
section outlines some of the provisions of the stock purchase contracts, the
stock purchase contract agreement and the pledge agreement. This information
is
not complete in all respects and is qualified entirely by reference to the
stock
purchase contract agreement and pledge agreement with respect to the stock
purchase contracts of any particular series. The specific terms of any series
of
stock purchase contracts will be described in the applicable prospectus
supplement. If so described in a prospectus supplement, the specific terms
of
any series of stock purchase contracts may differ from the general description
of terms presented below.
Unless
otherwise specified in the applicable prospectus supplement, we may issue stock
purchase contracts, including contracts obligating holders to purchase from
us
and us to sell to the holders, a specified number of shares of common stock,
preferred stock, depositary shares or other security or property at a future
date or dates. Alternatively, the stock purchase contracts may obligate us
to
purchase from holders, and obligate holders to sell to us, a specified or
varying number of shares of common stock, preferred stock, depositary shares
or
other security or property. The consideration per share of common stock or
preferred stock or per depositary share or other security or property may be
fixed at the time the stock purchase contracts are issued or may be determined
by a specific reference to a formula set forth in the stock purchase contracts.
The stock purchase contracts may provide for settlement by delivery by or on
behalf of Essex of shares of the underlying security or property or, they may
provide for settlement by reference or linkage to the value, performance or
trading price of the underlying security or property. The stock purchase
contracts may be issued separately or as part of stock purchase units consisting
of a stock purchase contract and debt securities, preferred stock or debt
obligations of third parties, including U.S. treasury securities, other stock
purchase contracts or common stock, or other securities or property, securing
the holders’ obligations to purchase or sell, as the case may be, the common
stock or the preferred stock under the stock purchase contracts. The stock
purchase contracts may require us to make periodic payments to the holders
of
the stock purchase units or vice versa, and such payments may be unsecured
or
prefunded on some basis and may be paid on a current or on a deferred basis.
The
stock purchase contracts may require holders to secure their obligations
thereunder in a specified manner and may provide for the prepayment of all
or
part of the consideration payable by holders in connection with the purchase
of
the underlying security or other property pursuant to the stock purchase
contracts.
The
securities related to the stock purchase contracts may be pledged to a
collateral agent for Essex’s benefit pursuant to a pledge agreement to secure
the obligations of holders of stock purchase contracts to purchase the
underlying security or property under the related stock purchase contracts.
The
rights of holders of stock purchase contracts to the related pledged securities
will be subject to Essex’s security interest therein created by the pledge
agreement. No holder of stock purchase contracts will be permitted to withdraw
the pledged securities related to such stock purchase contracts from the pledge
arrangement except upon the termination or early settlement of the related
stock
purchase contracts or in the event other securities, cash or property is made
subject to the pledge agreement in lieu of the pledged securities, if permitted
by the pledge agreement, or as otherwise provided in the pledge agreement.
Subject to such security interest and the terms of the stock purchase contract
agreement and the pledge agreement, each holder of a stock purchase contract
will retain full beneficial ownership of the related pledged
securities.
Except
as
described in the applicable prospectus supplement, the collateral agent will,
upon receipt of distributions on the pledged securities, distribute such
payments to Essex or the stock purchase contract agent, as provided in the
pledge agreement. The purchase agent will in turn distribute payments it
receives as provided in the stock purchase contract agreement.
This
section outlines some of the provisions of the units and the unit agreements.
This information may not be complete in all respects and is qualified entirely
by reference to the unit agreement with respect to the units of any particular
series. The specific terms of any series of units will be described in the
applicable prospectus supplement. If so described in a particular supplement,
the specific terms of any series of units may differ from the general
description of terms presented below.
We
may
issue units comprised of two or more of debt securities, shares of common stock,
shares of preferred stock, stock purchase contracts, warrants, rights and other
securities in any combination. Each unit will be issued so that the holder
of
the unit is also the holder of each security included in the unit. Thus, the
holder of a unit will have the rights and obligations of a holder of each
included security. The unit agreement under which a unit is issued may provide
that the securities included in the unit may not be held or transferred
separately, at any time or at any time before a specified date.
The
applicable prospectus supplement may describe:
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·
|
the
designation and terms of the units and of the securities comprising
the
units, including whether and under what circumstances those securities
may
be held or transferred separately;
|
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·
|
any
provisions of the governing unit agreement that differ from those
described below;
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·
|
the
price or prices at which such units will be
issued;
|
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·
|
information
with respect to book-entry procedures, if
any;
|
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·
|
the
applicable United States federal income tax considerations relating
to the
units;
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·
|
any
provisions for the issuance, payment, settlement, transfer or exchange
of
the units or of the securities comprising the units;
and
|
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·
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any
other terms of the units and of the securities comprising the
units.
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The
provisions described in this section, as well as those described under
“Description of the Debt Securities,” “Description of Warrants,” “Description of
Stock Purchase Contracts,” “Description of Capital Stock” and “Description of
Preferred Stock” will apply to the securities included in each unit, to the
extent relevant.
Issuance
in Series
We
may
issue units in such amounts and in as many distinct series as we wish. This
section summarizes terms of the units that apply generally to all series. Most
of the financial and other specific terms of your series will be described
in
the applicable prospectus supplement.
Unit
Agreements
We
will
issue the units under one or more unit agreements to be entered into between
us
and a bank or other financial institution, as unit agent. We may add, replace
or
terminate unit agents from time to time. We will identify the unit agreement
under which each series of units will be issued and the unit agent under that
agreement in the applicable prospectus supplement.
The
following provisions will generally apply to all unit agreements unless
otherwise stated in the applicable prospectus supplement.
Enforcement
of Rights
The
unit
agent under a unit agreement will act solely as our agent in connection with
the
units issued under that agreement. The unit agent will not assume any obligation
or relationship of agency or trust for or with any holders of those units or
of
the securities comprising those units. The unit agent will not be obligated
to
take any action on behalf of those holders to enforce or protect their rights
under the units or the included securities.
Except
as
indicated in the next paragraph, a holder of a unit may, without the consent
of
the unit agent or any other holder, enforce its rights as holder under any
security included in the unit, in accordance with the terms of that security
and
the indenture, warrant agreement, rights agreement or other instrument under
which that security is issued. Those terms are described elsewhere in this
prospectus under the sections relating to debt securities, warrants, stock
purchase contracts, common stock and preferred stock, as relevant.
Notwithstanding
the foregoing, a unit agreement may limit or otherwise affect the ability of
a
holder of units issued under that agreement to enforce its rights, including
any
right to bring a legal action, with respect to those units or any securities,
other than debt securities, that are included in those units. Limitations of
this kind will be described in the applicable prospectus
supplement.
Unit
Agreements Will Not Be Qualified Under Trust Indenture Act
No
unit
agreement will be qualified as an indenture, and no unit agent will be required
to qualify as a trustee, under the Trust Indenture Act. Therefore, holders
of
units issued under unit agreements will not have the protections of the Trust
Indenture Act with respect to their units.
Mergers
and Similar Transactions Permitted; No Restrictive Covenants or Events of
Default
The
unit
agreements will not restrict our ability to merge or consolidate with, or sell
our assets to, another corporation or other entity or to engage in any other
transactions. If at any time we merge or consolidate with, or sell our assets
substantially as an entirety to, another corporation or other entity, the
successor entity will succeed to and assume our obligations under the unit
agreements. We will then be relieved of any further obligation under these
agreements.
The
unit
agreements will not include any restrictions on our ability to put liens on
our
assets, including our interests in our subsidiaries, nor will they restrict
our
ability to sell our assets. The unit agreements also will not provide for any
events of default or remedies upon the occurrence of any events of
default.
Governing
Law
The
unit
agreements and the units will be governed by California law.
Form,
Exchange and Transfer
We
will
issue each unit in global—i.e.,
book-entry—form only. Units in book-entry form will be represented by a global
security registered in the name of a depositary, which will be the holder of
all
the units represented by the global security. Those who own beneficial interests
in a unit will do so through participants in the depositary’s system, and the
rights of these indirect owners will be governed solely by the applicable
procedures of the depositary and its participants.
Each
unit
and all securities comprising the unit will be issued in the same
form.
If
we
issue any units in registered, non-global form, the following will apply to
them.
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The
units will be issued in the denominations stated in the applicable
prospectus supplement. Holders may exchange their units for units
of
smaller denominations or combined into fewer units of larger
denominations, as long as the total amount is not
changed.
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Holders
may exchange or transfer their units at the office of the unit agent.
Holders may also replace lost, stolen, destroyed or mutilated units
at
that office. We may appoint another entity to perform these functions
or
perform them ourselves.
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Holders
will not be required to pay a service charge to transfer or exchange
their
units, but they may be required to pay for any tax or other governmental
charge associated with the transfer or exchange. The transfer or
exchange,
and any replacement, will be made only if our transfer agent is satisfied
with the holder’s proof of legal ownership. The transfer agent may also
require an indemnity before replacing any
units.
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If
we have the right to redeem, accelerate or settle any units before
their
maturity, and we exercise our right as to less than all those units
or
other securities, we may block the exchange or transfer of those
units
during the period beginning 15 days before the day we mail the notice
of
exercise and ending on the day of that mailing, in order to freeze
the
list of holders to prepare the mailing. We may also refuse to register
transfers of or exchange any unit selected for early settlement,
except
that we will continue to permit transfers and exchanges of the unsettled
portion of any unit being partially settled. We may also block the
transfer or exchange of any unit in this manner if the unit includes
securities that are or may be selected for early
settlement.
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Only
the
depositary will be entitled to transfer or exchange a unit in global form,
since
it will be the sole holder of the unit.
Payments
and Notices
In
making
payments and giving notices with respect to our units, we will follow the
procedures we plan to use with respect to our debt securities, where applicable.
We describe those procedures below under “Description of Debt Securities.”
DESCRIPTION
OF DEBT SECURITIES
The
following description summarizes the material provisions of our Debt Securities.
Unless otherwise specified in the applicable Prospectus Supplement, the Debt
Securities are to be issued under an existing indenture dated as of October
28,
2005 (the “Indenture”), between Essex Portfolio, L.P., as issuer (the “Issuer”),
Essex Property Trust, Inc. as guarantor (the “Guarantor”) and Wells Fargo Bank,
N.A., as trustee (the “Trustee”), which has been filed with the SEC and
incorporated by reference in the registration statement of which this prospectus
is a part. This description is not complete and is subject to, and is qualified
in its entirety by reference to, the Indenture and the Trust Indenture Act
of
1939 (the “Trust Indenture Act”). The specific terms of any series of Debt
Securities will be described in the applicable Prospectus Supplement, and
may
differ from the general description of the terms presented below. All section
references appearing herein are to sections of the Indenture, and capitalized
terms used but not defined herein shall have the respective meanings set
forth
in the Indenture.
General
The
Debt
Securities may be non-convertible or convertible into or exercisable or
exchangeable for securities of Essex or the Operating Partnership. The Debt
Securities will be direct, unsecured obligations of the Operating Partnership.
Except for any series of Debt Securities which is specifically subordinated
to
other indebtedness of the Operating Partnership, the Debt Securities will
rank
pari passu with all other unsecured and unsubordinated indebtedness of the
Operating Partnership. Under the Indenture, the Debt Securities may be issued
without limit as to aggregate principal amount, in one or more series, in
each
case as established from time to time in or pursuant to authority granted
by a
resolution of the Board of Directors of Essex as sole general partner of
the
Operating Partnership or as established in one or more indentures supplemental
to the Indenture. All Debt Securities of any one series need not be issued
at
the same time and, unless otherwise provided, a series may be reopened, without
the consent of the holders of the Debt Securities of such series, for issuances
of additional Debt Securities of such series.
The
Debt
Securities may be unconditionally guaranteed by Essex as to payment of
principal, premium, if any, and interest (Section 14.01).
The
Trustee under the Indenture may resign at any time by giving written notice
and,
upon such resignation, the Issuer shall promptly appoint a successor trustee.
(Section 7.10).
Terms
Reference
is made to the Prospectus Supplement relating to the series of Debt Securities
being offered for the specific terms thereof, including, but not limited
to:
(1)
the
title
of such Debt Securities, whether such Debt Securities are senior securities
or
subordinated securities and whether such Debt Securities are guaranteed by
a
guarantee;
(2)
the
aggregate principal amount of such Debt Securities and any limit on such
aggregate principal amount;
(3)
the
percentage of the principal amount at which such Debt Securities will be
issued
and, if other than the principal amount thereof, the portion of the principal
amount thereof payable upon declaration of acceleration of the maturity thereof;
(4)
the
date
or dates, or the method for determining such date or dates, on which the
principal of such Debt Securities will be payable;
(5)
the
rate
or rates (which may be fixed or variable), or the method by which such rate
or
rates shall be determined, at which such Debt Securities will bear interest,
if
any;
(6)
the
date
or dates, or the method for determining such date or dates, from which any
such
interest will accrue, the interest payment dates on which any such interest
will
be payable, the regular record dates for such interest payment dates, or
the
method by which such date shall be determined, the person to whom such interest
shall be payable, and the basis upon which interest shall be calculated if
other
than that of a 360-day year of twelve 30-day months;
(7) the
place
or places where (i) the principal of (and premium, if any) and interest,
if any,
on such Debt Securities will be payable, (ii) such Debt Securities may be
surrendered for registration of transfer or exchange, and (iii) notices or
demands to or upon the Issuer in respect of such Debt Securities, any applicable
Guarantees and the Indenture may be served;
(8)
the
period or periods within which, or the date or dates on which, the price
or
prices at which and the other terms and conditions upon which such Debt
Securities may be redeemed, as a whole or in part, at the option of the Issuer,
if the Issuer is to have such an option;
(9)
the
obligation, if any, of the Issuer to redeem, repay or repurchase such Debt
Securities pursuant to any sinking fund or analogous provisions or at the
option
of a holder thereof, and the period or periods within which, or the date
or
dates on which, the price or prices at which and the terms and conditions
upon
which such Debt Securities are required to be redeemed, repaid or purchased,
as
a whole or in part, pursuant to such obligation;
(10)
if other
than U.S. dollars, the currency or currencies in which such Debt Securities
are
denominated and/or payable, which may be a foreign currency or units of two
or
more foreign currencies or a composite currency or currencies, and the terms
and
conditions relating thereto;
(11)
whether
the amount of payments of principal of (and premium, if any) or interest,
if
any, on such Debt Securities may be determined with reference to an index,
formula or other method (which index, formula or method may, but need not
be,
based on a currency, currencies, currency unit or units or composite currency
or
currencies) and the manner in which such amounts shall be determined;
(12)
any
additions to, modifications of or deletions from the terms of such Debt
Securities with respect to the Events of Default or covenants or other
provisions set forth in the Indenture;
(13)
whether
such Debt Securities will be issued in certificated and/or book-entry form;
(14)
whether
such Debt Securities will be in registered or bearer form and, if in registered
form, the denominations thereof if other than $1,000 and any integral multiple
thereof and, if in bearer form, the denominations thereof and terms and
conditions relating thereto;
(15)
the
applicability, if any, of the defeasance and covenant defeasance provisions
of
the Indenture, or any modification thereof;
(16)
the
terms and conditions, if any, upon which such Debt Securities may be
subordinated to other indebtedness of the Issuer;
(17)
whether
and under what circumstances the Issuer will pay additional amounts as
contemplated in the Indenture on such Debt Securities in respect of any tax,
assessment or governmental charge and, if so, whether the Issuer will have
the
option to redeem such Debt Securities in lieu of making such payment; and
(18)
any
other terms of such Debt Securities not inconsistent with the provisions
of the
Indenture. The Debt Securities may provide for less than the entire principal
amount thereof to be payable upon declaration of acceleration of the maturity
thereof (“Original Issue Discount Securities”). Special U.S. federal income tax,
accounting and other considerations applicable to the Original Issue Discount
Securities will be described in the applicable Prospectus Supplement.
The
Indenture does not contain any provisions that would limit the ability of
the
Issuer to incur indebtedness or that would afford holders of the Debt Securities
protection in the event of a highly leveraged or similar transaction involving
the Issuer. However, such provisions may be provided with respect to a
particular series of Debt Securities.
Guarantees
As
provided in the Indenture and unless otherwise specified in the applicable
Prospectus Supplement, the Guarantor unconditionally guarantees to each holder
of a Note that (i) the principal of, premium, if any, and interest and
Additional Interest, if any, on the Debt Securities shall be duly and punctually
paid in full when due, whether at maturity, by acceleration, call for
redemption, upon a repurchase, upon repurchase due to a Fundamental Change
or
otherwise, and interest on overdue principal, premium, if any, Additional
Interest, if any, and interest on any interest, if any, on the Debt Securities
and all other obligations of the Issuer to the holders of the Debt Securities
or
the Trustee under the Indenture or under the Debt Securities (including fees,
expenses or other) shall be promptly paid in full or performed, all in
accordance with the terms of the Indenture; and (ii) in case of any extension
of
time of payment or renewal of any Debt Securities or any of such other
obligations, the same shall be promptly paid in full when due or performed
in
accordance with the terms of the extension or renewal, whether at stated
maturity, by acceleration, call for redemption, upon repurchase, upon repurchase
due to a Fundamental Change or otherwise, subject, however, in the case of
clauses (i) and (ii) above, to the limitations set forth in the Indenture
(Section 14.01). The applicability and terms of any such Guarantee relating
to a
series of Debt Securities will be set forth in the Prospectus Supplement
relating to such Debt Securities.
Denominations,
Interest, Registration and Transfer
Unless
otherwise described in the applicable Prospectus Supplement, the Debt Securities
shall be issuable in registered form without coupons in denominations of
$1,000
and integral multiples thereof (Section 2.03).
Unless
otherwise specified in the applicable Prospectus Supplement, interest on
the
Debt Securities shall be computed on the basis of a 360-day year comprised
of
twelve 30-day months. Interest shall be payable at the office of the Issuer
maintained by the Issuer for such purposes in the Borough of Manhattan, The
City
of New York, which shall initially be an office or agency of the Trustee.
The
Issuer shall pay interest on any Debt Securities in certificated form by
check
mailed to the address of the Person entitled thereto as it appears in the
Note
Register; provided, however, that a holder of any Debt Securities in
certificated form in the aggregate principal amount of more than $5.0 million
may specify by written notice to the Issuer that it pay interest by wire
transfer of immediately available funds to the account specified by the Holder
of the Debt Securities (Section 2.03).
The
Trustee and each Paying Agent shall pay to the Issuer upon request any money
held by them for the payment of principal or interest that remains unclaimed
for
two years after a right to such money has matured. After payment to the Issuer,
holders of the Debt Securities entitled to money must look to the Issuer
for
payment as general creditors unless an applicable abandoned property law
designates another person, and the Trustee and each Paying Agent shall be
relieved of all liability with respect to such money (Section 11.04).
Consolidation,
Merger, Sale, Conveyance and Lease
The
Issuer may not consolidate, merge with or into, sell, convey, transfer or
lease
the Issuer’s assets substantially as an entirety to any person unless the Issuer
is the continuing corporation or the successor corporation or person to which
the assets are transferred or leased is organized under the laws of the United
States, or any state of the United States or the District of Columbia and
expressly assumes the Issuer’s obligations on the Debt Securities and under the
Indenture, and after giving effect to the transaction no Event of Default
under
the Indenture has occurred and is continuing, and certain other conditions
are
met.
Global
Debt Securities
Unless
we
specify otherwise in the applicable Prospectus Supplement, the registered
Debt
Securities of a series will be issued only in the form of one or more fully
registered global—i.e.,
book-entry—securities that will be deposited with a depositary or with a nominee
for a depositary identified in the Prospectus Supplement relating to the
series
and registered in the name of the depositary or a nominee of the depositary.
Ownership of beneficial interest in a registered global security will be
limited
to persons, or participants, that have accounts with the depositary for the
registered global security or persons that may hold interests through
participants.
Those
who
own beneficial interest in a global debt security will do so through
participants in the depositary’s securities clearance system, and the rights of
those indirect owners will be governed solely by the applicable procedures
of
the depositary and its participants.
Certain
Covenants
Payment
of Principal, Premium and Interest. The
Issuer covenants and agrees that it will duly and punctually pay or cause
to be
paid when due the principal of (including the redemption price upon redemption
or the repurchase price upon repurchase, in each case), and premium, if any,
and
interest on each of the Debt Securities at the places, at the respective
times
and in the manner provided in the Indenture and in the Debt Securities (Section
4.01).
Maintenance
of Office or Agency.
The
Issuer will maintain an office or agency in the Borough of Manhattan, The
City
of New York, where the Debt Securities may be surrendered for registration
of
transfer or exchange or for presentation for payment or for exchange, redemption
or repurchase and where notices and demands to or upon the Issuer in respect
of
the Debt Securities and the Indenture may be served (Section 4.02).
Appointments
to Fill Vacancies in Trustee’s Office.
The
Issuer, whenever necessary to avoid or fill a vacancy in the office of Trustee,
will appoint a Trustee, so that there shall at all times be a Trustee under
the
Indenture (Section 4.03).
Reports
by Issuer.
Whether
or not the Issuer is subject to Section 13 or 15(d) of the Exchange Act and
for
so long as any Debt Securities are outstanding, within the time periods required
by the applicable rules and regulations of the Commission, the Issuer will
furnish to the holders of the Debt Securities, or cause the Trustee to furnish
to the holders of the Debt Securities, (1) all quarterly and annual reports
that
would be required to be filed with the Commission on Forms 10-Q and 10-K
if the
Issuer or the Guarantor were required to file such reports; and (2) all current
reports that would be required to be filed with the Commission on Form 8-K
if
the Issuer or the Guarantor were required to file such reports. Delivery
of such
reports, information and documents to the Trustee is for informational purposes
only and the Trustee’s receipt of such shall not constitute constructive notice
of any information contained therein or determinable from information contained
therein, including the Issuer’s compliance with any of its covenants under the
Indenture (as to which the Trustee is entitled to rely exclusively on an
Officers’ Certificate) (Section 5.04).
Additional
Covenants.
Reference is made to the applicable Prospectus Supplement for information
with
respect to any additional covenants specific to a particular series of Debt
Securities.
Events
of Default
Events
of Default.
The
following are events of default under the Indenture with respect to the Debt
Securities of any series:
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failure
to pay principal of or any premium on any Note of any series when
due; or
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failure
to pay any interest on any Note of the series when due, continued
for 30
days; or
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failure
to pay the Exchange Value when due; or
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failure
to provide an Issuer Repurchase Notice on a timely basis after
the
occurrence of a Fundamental Change; or
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failure
to perform any other term, covenant or agreement in the Debt Securities
or
in the Indenture (other than a covenant or agreement included in
the
Indenture solely for the benefit of one or more series of Debt
Securities
other than that series) continued for 30 days after written notice
by the
Trustee to the Issuer, or by the holders of at least 25% in aggregate
principal amount of the outstanding Debt Securities of the series
to the
Issuer and the Trustee as provided in the Indenture;
or
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failure
to pay principal when due, resulting in acceleration of other indebtedness
of the Issuer, the Guarantor or any Significant Subsidiary of the
Issuer
for borrowed money in an aggregate principal amount exceeding $50.0
million with respect to such indebtedness secured by real property
and
$25.0 million with respect to all other indebtedness and, in either
case,
such indebtedness has not been discharged, or such default in payment
or
acceleration has not been cured or rescinded, prior to written
notice of
such failure; or
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failure
by the Issuer or any of its Subsidiaries to pay final judgments
entered by
a court or courts of competent jurisdiction aggregating in excess
of $5.0
million, which judgments continue for a period of 60 calendar days
after
such judgments become final and non-appealable;
or
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certain
events in bankruptcy, liquidation or reorganization of Issuer;
or
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the
occurrence of any other event of default provided with respect
to the Debt
Securities of that series.
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If
an
Event of Default with respect to the outstanding Debt Securities of any series
occurs and is continuing, either the Trustee or the holders of at least 25%
in
aggregate principal amount of the outstanding Debt Securities of that series
may
declare the principal of and premium, if any, and interest accrued and unpaid
on
all the Debt Securities of that series to be immediately due and payable.
Notice
of Defaults.
The
Indenture provides that the Trustee will, within 90 days after the occurrence
of
a default with respect to a series of Debt Securities, give to all holders
of
the Debt Securities of the outstanding Debt Securities of the series notice
of
all uncured defaults known to it. Except in the case of default in the payment
of the principal, premium, if any, or interest on any of the Debt Securities
of
a series, the Trustee shall be protected in withholding such notice if the
Trustee in good faith determines that the withholding of such notice is in
the
interest of the holders of the Debt Securities of the outstanding Debt
Securities of the series (Section 6.08).
Compliance
Certificate.
The
Issuer shall deliver to the Trustee annually a statement as to whether or
not
the Issuer is in default of any terms of the Indenture (Section
4.09).
Modification
of the Indenture
Supplemental
Indentures Without Consent of Holders of the Debt Securities.
The
Indenture provides that modifications and amendments may be made by the Issuer
and the Trustee to the Indenture without the consent of the holders of the
Debt
Securities:
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to
provide for a successor to the Issuer to assume the Indenture;
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to
provide for exchange right of holders of the Debt
Securities;
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to
add to the covenants of the Issuer or the Guarantor for the benefit
of the
holders of the Debt Securities or to surrender any right or power
conferred upon the Issuer;
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to
secure the obligations of the Issuer and the Guarantor in respect
of the
Debt Securities;
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to
provide for a successor Trustee;
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to
maintain the qualification of the Indenture under the Trust Indenture
Act;
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to
cure any ambiguity, omission, defect or inconsistency in the Indenture;
or
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to
make other changes specified in the Indenture (Section
9.01).
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Supplemental
Indenture With Consent of Holders of the Debt Securities.
The
Indenture provides that modifications and amendments may be made by the Issuer
and the Trustee to the Indenture with the consent of the holders of not less
than a majority in aggregate principal amount of the outstanding Debt Securities
affected by the modification or amendment. However, no such modification
or
amendment may, without the consent of the holder of each outstanding Debt
Security affected thereby:
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impair
or adversely affect the manner of calculation or rate of accrual
of
interest on the Debt Securities or change the time of payment thereof;
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make
the Note payable in money or securities other than that stated
in the
note;
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change
the Maturity Date;
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reduce
the principal amount, redemption price, repurchase price or fundamental
change repurchase price with respect to the Debt Securities;
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make
any change that impairs or adversely affects the exchange rights
of the
holders of the Debt Securities;
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make
any change that impairs or adversely affects the right to require
the
Issuer to repurchase the Debt Securities;
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impair
the right to institute suit for the enforcement of any payment
with
respect to the Debt Securities or with respect to exchange of the
Debt
Securities;
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change
the obligation of the Issuer to redeem any Debt Securities called for
redemption on a redemption date in a manner adverse to the holders;
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change
the obligation of the Issuer to maintain an office or agency in
New York
City;
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make
the Debt Securities subordinate in right of payment to any other
indebtedness; or
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reduce
the percentage in aggregate principal amount of outstanding Debt
Securities required to modify or amend certain sections as set
forth in
the Indenture (Section 9.02).
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Satisfaction
and Discharge of Indenture
The
Indenture, with respect to any and all series of Debt Securities (except
for
certain specified surviving obligations as specified in the Indenture), will
be
discharged and shall cease to be of further effect upon the satisfaction
of
certain conditions, including (i) the payment in full of the entire indebtedness
on such Debt Securities, (ii) the payment in full of all other sums payable
by
the Issuer under the Indenture, and (iii) delivery by the Issuer to the Trustee
of an Officers’ Certificate and Opinion of Counsel, as described in the
Indenture.
Governing
Law and Consent to Jurisdiction
The
Indenture is and the Debt Securities issued thereunder will be governed by
and
construed in accordance with the laws of the State of New York.
CERTAIN
PROVISIONS OF ESSEX’S CHARTER AND
BYLAWS
Certain
provisions of Essex’s Charter and Bylaws might discourage certain types of
transactions that involve an actual or threatened change of control of Essex.
The ownership limit may delay or impede a transaction or a change in control
of
Essex that might involve a premium price for Essex’s capital stock or otherwise
be in the best interest of the stockholders. See “Description of Capital Stock —
Restrictions on Transfer.” Pursuant to Essex’s Charter and Bylaws, Essex’s Board
of Directors is divided into three classes of directors, each class serving
staggered three-year terms. The staggered terms of directors may reduce the
possibility of a tender offer or an attempt to change control of Essex. Also,
Essex’s Stockholder Rights Plan may deter or prevent a change in control of
Essex. See “Description of Capital Stock — Stockholder Rights Plan.” The
issuance of Preferred Stock by the Board of Directors may also have the effect
of delaying, deferring or preventing a change in control of Essex. See
“Description of Capital Stock — Description of Series B, Series D, Series F and
Series G Preferred Stock — General.”
CERTAIN
MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS
The
following is a summary of certain material federal income tax considerations
relating to the qualification and taxation of Essex as a REIT which may be
material to purchasers of its securities. This summary is based on current
law,
is for general information only and is not tax advice. The tax treatment of
a
holder of Essex’s debt or equity securities will vary depending upon the terms
of the specific securities acquired by such holder, as well as the holder’s
particular situation. Because this is a summary that is intended to address
only
the material federal income tax consequences generally relevant to purchaser
of
Essex’s securities, it may not contain all of the information that may be
pertinent to you. This discussion does not attempt to address all aspects of
U.S. federal income taxation relating to holders of Essex’s securities.
Additional material federal income tax considerations relevant to holders of
particular offerings of Essex’s debt or equity securities will be addressed in
the applicable Prospectus Supplement for those securities. This discussion
does
not cover state or local tax laws or any U.S. federal tax laws other than income
tax laws. You are urged to review the applicable Prospectus Supplement in
connection with the purchase of any of Essex’s securities, and to consult your
own tax advisor regarding the specific tax consequences to you of investing
in
Essex’s securities, of Essex’s election to be taxed as a REIT and regarding
potential changes in the applicable tax laws.
General
Essex
elected to be taxed as a REIT commencing with its taxable year ended December
31, 1994. Essex believes that it has operated in a manner that permits it to
satisfy the requirements for taxation as a REIT under the applicable provisions
of the Internal Revenue Code. Qualification and taxation as a REIT depends
upon
Essex’s ability to meet, through actual annual operating results, distribution
levels and diversity of stock ownership, the various qualification tests imposed
under the Internal Revenue Code discussed below. Although Essex intends to
continue to operate to satisfy such requirements, no assurance can be given
that
the actual results of Essex’s operations for any particular taxable year will
satisfy such requirements. See “Certain Material Federal Income Tax
Considerations — Failure to Qualify.”
The
provisions of the Internal Revenue Code, U.S. Treasury regulations promulgated
thereunder, and other U.S. federal income tax laws relating to qualification
and
operation as a REIT, are highly technical and complex. The following discussion
sets forth the material aspects of the laws that govern the U.S. federal income
tax treatment of a REIT. This summary is qualified in its entirety by the
applicable Internal Revenue Code provisions, rules and U.S. Treasury regulations
thereunder, and administrative and judicial interpretations thereof. Further,
the anticipated income tax treatment described in this prospectus may be
changed, perhaps retroactively, by legislative, administrative or judicial
action at any time.
Baker
& McKenzie LLP has acted as Essex’s tax counsel in connection with the
filing of this prospectus. In connection with this filing, Baker & McKenzie
LLP will opine that Essex has been organized and has operated in conformity
with
the requirements for qualification and taxation as a REIT under the Internal
Revenue Code for each of Essex’s taxable years beginning with the taxable year
ended December 31, 1994 through Essex’s taxable year ended December 31, 2006. If
Essex continues to be organized and operated after December 31, 2006 in the
same
manner as it has prior to that date, Essex will continue to qualify as a REIT.
The opinion of Baker & McKenzie LLP will be based on various assumptions and
representations made by Essex as to factual matters, including representations
made by Essex in this prospectus and a factual certificate provided by one
of
Essex’s officers. Moreover, Essex’s qualification and taxation as a REIT depends
upon its ability to meet the various qualification tests imposed under the
Internal Revenue Code and discussed below, relating to its actual annual
operating results, asset diversification, distribution levels, and diversity
of
stock ownership, the results of which have not been and will not be reviewed
by
Baker & McKenzie LLP. Accordingly, neither Baker & McKenzie LLP nor
Essex can assure you that the actual results of Essex’s operations for any
particular taxable year will satisfy these requirements. See “Certain Material
Federal Income Tax Considerations — Failure to Qualify.”
In
brief,
if certain detailed conditions imposed by the REIT provisions of the Internal
Revenue Code are satisfied, entities, such as Essex, that invest primarily
in
real estate and that otherwise would be treated for U.S. federal income tax
purposes as corporations, generally are not taxed at the corporate level on
their “REIT taxable income” that is distributed currently to stockholders. If
Essex fails to qualify as a REIT in any year, however, it will be subject to
U.S. federal income tax as if it were an ordinary corporation and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. In that event, Essex could be subject to potentially significant
tax liabilities, the amount of cash available for distribution to its
stockholders could be reduced and Essex would not be obligated to make any
distributions. Moreover, Essex could be disqualified from taxation as a REIT
for
four taxable years. See “Certain Material Federal Income Tax Considerations —
Failure to Qualify.”
Taxation
of Essex
The
following is a general summary of the Internal Revenue Code provisions that
govern the federal income tax treatment of a REIT and its
stockholders.
In
any
year in which Essex qualifies as a REIT, it generally will not be subject to
U.S. federal income tax on that portion of its net income that it distributes
to
stockholders. This treatment substantially eliminates the “double taxation” (at
the corporate and stockholder levels) that generally results from investment
in
a corporation. However, Essex will be subject to U.S. federal income tax as
follows;
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First,
Essex will be taxed at regular corporate rates on any undistributed
REIT
taxable income, including undistributed net capital gain. (However,
Essex
can elect to “pass through” any of its taxes paid on its undistributed net
capital gain income to its stockholders on a pro rata basis in which
case,
as explained further below, such taxes would be credited or refunded
to
the stockholder.)
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Second,
under certain circumstances, Essex may be subject to the “alternative
minimum tax” on its items of tax
preference.
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Third,
if Essex has (a) net income from the sale or other disposition of
“foreclosure property,” which is, in general, property acquired on
foreclosure or otherwise on default on a loan secured by such real
property or a lease of such property, which is held primarily for
sale to
customers in the ordinary course of business or (b) other nonqualifying
income from foreclosure property, Essex will be subject to tax at
the
highest corporate rate on such
income.
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Fourth,
if Essex has net income from “prohibited transactions,” which are, in
general, sales or other dispositions of property held primarily for
sale
to customers in the ordinary course of business, generally other
than
foreclosure property and property involuntarily converted, such income
will be subject to a 100% penalty
tax.
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Fifth,
if Essex should fail to satisfy the 75% gross income test or the
95% gross
income test (as discussed below), but nonetheless maintains its
qualification as a REIT because certain other requirements have been
met,
Essex will be subject to a 100% tax on an amount equal to (a) the
gross
income attributable to the greater of the amount by which Essex fails
the
75% gross income test or the amount by which 95% of its gross income
exceeds the amount of income qualifying under the 95% gross income
test
multiplied by (b) a fraction intended to reflect its
profitability.
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Sixth,
if Essex should fail to satisfy the asset test (as discussed below)
but
nonetheless maintains its qualification as a REIT because certain
other
requirements have been met, Essex may be subject to a tax that would
be
the greater of (a) $50,000; or (b) an amount determined by multiplying
the
highest rate of tax for corporations by the net income generated
by the
assets for the period beginning on the first date of the failure
and
ending on the day Essex disposes of the assets (or otherwise satisfy
the
requirements for maintaining REIT
qualification).
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Seventh,
if Essex should fail to satisfy one or more requirements for REIT
qualification, other than the 95% and 75% gross income tests and
other
than the asset test, but nonetheless maintains its qualification
as a REIT
because certain other requirements have been met, Essex may be subject
to
a $50,000 penalty for each failure.
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Eighth,
if Essex should fail to distribute during each calendar year at least
the
sum of (1) 85% of its ordinary income for such year, (2) 95% of its
net
capital gain income for such year, and (3) any undistributed taxable
income from prior periods, Essex will be subject to a nondeductible
4%
excise tax on the excess of such required distribution over the amounts
distributed.
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Ninth,
assuming Essex does not elect to instead be taxed at the time of
the
acquisition, if Essex 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 Essex’s hands is determined
by reference to the basis of the asset (or any other property) in
the
hands of the C corporation, Essex would be subject to tax at the
highest
corporate rate if it disposes of such asset during the 10-year period
beginning on the date that Essex acquired that asset, to the extent
of
such property’s “built-in gain” (the excess of the fair market value of
such property at the time of Essex’s acquisition over the adjusted basis
of such property at such time). This tax is referred to as the “Built-in
Gains Tax.” The Built-in Gains Tax would not apply if the asset acquired
in such manner was exchanged for a replacement property in a qualifying
exchange under Section 1031. However, a sale of the replacement within
that same 10-year period would be subject to the Build in Gains
Tax.
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Tenth,
Essex may be subject to a 100% excise tax if Essex’s dealings with its
taxable REIT subsidiaries, defined below, are not at arm’s
length.
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Finally,
any earnings that Essex derives through a taxable REIT subsidiary
will
effectively be subject to a corporate-level
tax.
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Requirements
for Qualification
The
Internal Revenue Code defines a REIT as a corporation, trust or association
(1)
which is managed by one or more trustees or directors; (2) the beneficial
ownership of which is evidenced by transferable shares, or by transferable
certificates of beneficial interest; (3) which would be taxable as a domestic
corporation, but for Sections 856 through 860 of the Internal Revenue Code;
(4)
which is neither a financial institution nor an insurance company subject to
certain provisions of the Internal Revenue Code; (5) the beneficial ownership
of
which is held by 100 or more persons; (6) 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 Internal Revenue Code, at any time during the
last half of each taxable year (the “5/50 Rule”); and (7) which meets certain
other tests, described below, regarding the nature of its income and assets.
The
Internal Revenue Code provides that conditions (1) to (4), inclusive, must
be
met during the entire taxable year and that condition (5) must be met during
at
least 335 days of a taxable year of 12 months, or during a proportionate part
of
a taxable year of less than 12 months. If Essex were to fail to satisfy
condition (6) during a taxable year, that failure would not result in Essex’s
disqualification as a REIT under the Internal Revenue Code for such taxable
year
as long as (i) it satisfied the stockholder demand statement requirements
described in the succeeding paragraph and (ii) it did not know, or exercising
reasonable diligence would not have known, whether it had failed condition
(6).
Essex
believes that it has issued sufficient stock with sufficient diversity of
ownership to satisfy conditions (5) and (6) above. Essex may redeem, at its
option, a sufficient number of shares or restrict the transfer thereof to bring
or maintain the ownership of the shares in conformity with the requirements
of
the Internal Revenue Code. In order to ensure compliance with the ownership
tests described above, Essex also has certain restrictions on the transfer
of
its stock to prevent further concentration of stock ownership. Essex’s Charter
restricts the transfer of its shares in order to assist in satisfying the share
ownership requirements.
Moreover,
to evidence compliance with these requirements, Essex must maintain records
which disclose the actual ownership of its outstanding stock. In fulfilling
Essex’s obligations to maintain records, it must and will demand written
statements each year from the record holders of designated percentages of Essex
stock which disclose the actual owners of such stock. A list of those persons
failing or refusing to comply with such demand must be maintained as part of
Essex’s records. A stockholder failing or refusing to comply with Essex’s
written demand must submit with his federal income tax returns a similar
statement disclosing the actual ownership of Essex’s stock and certain other
information. Although Essex intends to satisfy the stockholder demand letter
rules described in this paragraph, Essex’s failure to satisfy these requirements
will not result in its disqualification as a REIT, but may result in the
imposition of Internal Revenue Service penalties against it.
Essex
currently has several direct corporate subsidiaries and may have additional
corporate subsidiaries in the future. Certain of these corporate subsidiaries
will be treated as “qualified REIT subsidiaries” under the Internal Revenue
Code. A corporation will qualify as a qualified REIT subsidiary of Essex if
Essex owns 100% of its outstanding stock and Essex and such subsidiary do not
jointly elect to treat it as a “taxable REIT subsidiary,” as described below. A
corporation that is a qualified REIT subsidiary is not treated as a separate
corporation, and all assets, liabilities and items of income, deduction and
credit of a qualified REIT subsidiary are treated as assets, liabilities and
items of income, deduction and credit (as the case may be) of the parent REIT
for all purposes under the Internal Revenue Code (including all REIT
qualification tests). Thus, in applying the requirements described in this
prospectus, the subsidiaries in which Essex owns a 100% interest (other than
taxable REIT subsidiaries) will be ignored, and all assets, liabilities and
items of income, deduction and credit of such subsidiaries will be treated
as
the assets, liabilities and items of income, deduction and credit of Essex.
A
qualified REIT subsidiary is not subject to U.S. federal income tax and Essex’s
ownership of the stock of such a subsidiary will not violate the REIT asset
tests, described below under “ — Asset Tests.”
A
REIT
may also hold any direct or indirect interest in a corporation that qualifies
as
a taxable REIT subsidiary, as long as the REIT’s aggregate holdings of taxable
REIT subsidiary securities do not exceed 20% of the value of the REIT’s total
assets. A taxable REIT subsidiary is a fully taxable corporation that generally
is permitted to engage in businesses, own assets, and earn income that, if
engaged in, owned, or earned by the REIT, might jeopardize REIT status or result
in the imposition of penalty taxes on the REIT. To qualify as a taxable REIT
subsidiary, the subsidiary and the REIT must make a joint election to treat
the
subsidiary as a taxable REIT subsidiary. A taxable REIT subsidiary also includes
any corporation (other than a REIT or a qualified REIT subsidiary) in which
a
taxable REIT subsidiary directly or indirectly owns more than 35% of the total
voting power or value. See “ — Asset Tests,” below. A taxable REIT subsidiary
will pay tax at regular corporate income rates on any taxable income it earns.
Moreover, the Internal Revenue Code contains rules, including rules requiring
the imposition of taxes on a REIT at the rate of 100% on certain reallocated
income and expenses, to ensure that contractual arrangements between a taxable
REIT subsidiary and its parent REIT are at arm’s length.
In
the
case of a REIT that is a partner in a partnership, U.S. Treasury regulations
provide that the REIT will be deemed to own its proportionate share, generally
based on its pro rata share of capital interest in the partnership, of the
assets of the partnership and will be deemed to be entitled to the gross income
of the partnership attributable to such share. In addition, the character of
the
assets and gross income of the partnership shall retain the same character
in
the hands of the REIT for purposes of the gross income tests and the asset
tests, described below. Thus, Essex’s proportionate share of the assets,
liabilities and items of income of its Operating Partnership will be treated
as
Essex’s assets, liabilities and items of income for purposes of applying the
requirements described below. See “Certain Material Federal Income Tax
Considerations — Investments in Partnerships.”
Asset
Tests
At
the
close of each quarter of Essex’s taxable year, Essex generally must satisfy
three tests relating to the nature of its assets. First, at least 75% of the
value of Essex’s total assets must be represented by interests in real property,
interests in mortgages on real property, shares in other REITs, cash, cash
items
and government securities (as well as certain temporary investments in stock
or
debt instruments purchased with the proceeds of new capital raised by Essex).
Second, although the remaining 25% of Essex’s assets generally may be invested
without restriction, securities in this class generally may not exceed either
(1) 5% of the value of its total assets as to any one nongovernment issuer
(the
“5% asset test”), (2) 10% of the outstanding voting securities of any one issuer
(the “10% voting securities test”), or (3) 10% of the value of the outstanding
securities of any one issuer (the “10% value test”). Third, not more than 20% of
the total value of Essex’s assets can be represented by securities of one or
more taxable REIT subsidiaries. Securities for purposes of the above 5% and
10%
asset tests may include debt securities, including debt issued by a
partnership.
Debt
of
an issuer will not count as a security for purposes of the 10% value test if
the
security qualifies for any of a number of applicable exceptions, for example,
as
“straight debt,” as specially defined for this purpose to include certain debt
issued by partnerships, and to include certain other debt that is not considered
to be abusive and that presents minimal opportunity to share in the business
profits of the issuer. For tax years beginning on or after January 1, 2005,
solely for purposes of the 10% value test, a REIT’s interest in the assets of a
partnership will be based upon the REIT’s proportionate interest in any
securities issued by the partnership (including, for this purpose, the REIT’s
interest as a partner in the partnership and any debt securities issued by
the
partnership, but excluding any securities qualifying for the “straight debt” or
other exceptions described above), valuing any debt instrument at its adjusted
issue price.
Essex
and
a corporation in which it owns stock may make a joint election for such
subsidiary to be treated as a “taxable REIT subsidiary.” A taxable REIT
subsidiary also includes any corporation other than a REIT with respect to
which
a taxable REIT subsidiary owns securities possessing more than 35% of the total
voting power or value of the outstanding securities of such corporation. Other
than some activities relating to lodging and health care facilities, a taxable
REIT subsidiary may generally engage in any business, including the provision
of
customary or non-customary services to tenants of its parent REIT. The
securities of a taxable REIT subsidiary are not subject to the 5% asset test
and
the 10% vote and value tests described above. Instead, as discussed above,
a
separate asset test applies to taxable REIT subsidiaries. The rules regarding
taxable REIT subsidiaries contain provisions generally intended to insure that
transactions between a REIT and its taxable REIT subsidiary occur “at arm’s
length” and on commercially reasonable terms. These requirements include a
provision that prevents a taxable REIT subsidiary from deducting interest on
direct or indirect indebtedness to its parent REIT if, under a specified series
of tests, the taxable REIT subsidiary is considered to have an excessive
interest expense level or debt-to-equity ratio. In addition, a 100% penalty
tax
can be imposed on the REIT if its loans, or rental, service or other agreements
with its taxable REIT subsidiaries are determined not to be on arm’s length
terms. No assurances can be given that Essex’s loans to or rental, service or
other agreements with its taxable REIT subsidiary will be on arm’s length terms.
A taxable REIT subsidiary is subject to a corporate level tax on its net taxable
income, as a result of which Essex’s earnings derived through a taxable REIT
subsidiary are effectively subject to a corporate level tax notwithstanding
Essex’s status as a REIT. To the extent that a taxable REIT subsidiary pays
dividends to Essex in a particular calendar year, Essex may designate a
corresponding portion of the dividends that it pays to its stockholders during
that year as “qualified dividend income” eligible to be taxed at reduced rates
to noncorporate recipients. See “Certain Material Federal Income Tax
Considerations — Taxation of Taxable U.S. Holders.”
Essex
has
made elections to treat several of its corporate subsidiaries as taxable REIT
subsidiaries. Essex believes that the value of the securities that it holds
in
its taxable REIT subsidiaries does not, and will not, represent more than 20%
of
its total assets, and that all transactions between Essex and its taxable REIT
subsidiaries are conducted on arm’s length terms. In addition, Essex believes
that the amount of Essex’s assets that are not qualifying assets for purposes of
the 75% asset test will continue to represent less than 25% of Essex’s total
assets, and will satisfy the 5% and both 10% asset tests.
Essex
believes that substantially all of Essex’s assets consist of, and will continue
to consist of, (1) real properties, (2) stock or debt investments that earn
qualified temporary investment income, (3) other qualified real estate assets,
and (4) cash, cash items and government securities. Essex may also invest in
securities of other entities, provided that such investments will not prevent
it
from satisfying the asset and income tests for REIT qualification set forth
above.
For
tax
years beginning on or after January 1, 2005, if Essex fails to satisfy the
5%
and/or 10% asset tests for a particular quarter, Essex will not lose its REIT
status if the failure is due to the ownership of assets the total value of
which
does not exceed a specified de minimis threshold, provided that Essex comes
into
compliance with the asset tests within six months after the last day of the
quarter in which Essex identifies the failure. In addition, for tax years
beginning on or after January 1, 2005, other failures to satisfy the asset
tests
generally will not result in a loss of REIT status if (1) following Essex’s
identification of the failure, Essex files a schedule with the Internal Revenue
Service describing each asset that caused the failure; (2) the failure was
due
to reasonable cause and not to willful neglect; (3) Essex comes into compliance
with the asset tests within six months after the last day of the quarter in
which the failure was identified; and (4) Essex pays an excise tax equal to
the
greater of $50,000 or an amount determined by multiplying the highest corporate
tax rate by the net income generated by the prohibited assets for the period
beginning on the first date of the failure and ending on the date Essex comes
into compliance with the asset tests.
Gross
Income Tests
Essex
must satisfy two separate percentage tests relating to the sources of its gross
income for each taxable year. For purposes of these tests, where Essex invests
in a partnership, Essex will be treated as receiving its pro rata share based
on
its capital interest in the partnership of the gross income and loss of the
partnership, and the gross income of the partnership will retain the same
character in Essex’s hands as it has in the hands of the partnership. See
“Certain Material Federal Income Tax Considerations — Investments in
Partnerships.”
The
75% Test
At
least
75% of Essex’s gross income for a taxable year must be “qualifying income.”
Qualifying income generally includes (1) rents from real property (except as
modified below); (2) interest on obligations collateralized by mortgages on,
or
interests in, real property; (3) gains from the sale or other disposition of
interests in real property and real estate mortgages, other than gain from
property held primarily for sale to customers in the ordinary course of Essex’s
trade or business (“dealer property”); (4) dividends or other distributions on
shares in other REITs, as well as gain from the sale of such shares; (5)
abatements and refunds of real property taxes; (6) income from the operation,
and gain from the sale, of property acquired at or in lieu of a foreclosure
of
the mortgage collateralized by such property (“foreclosure property”); (7)
commitment fees received for agreeing to make loans collateralized by mortgages
on real property or to purchase or lease real property; and (8) income from
temporary investments in stock or debt instruments purchased with the proceeds
of new capital raised by Essex.
Rents
received from a tenant will not, however, qualify as rents from real property
in
satisfying the 75% test (or the 95% test described below) if Essex, or an owner
of 10% or more of Essex’s equity securities, directly or constructively owns (1)
in the case of any tenant that is a corporation, stock possessing 10% or more
of
the total combined voting power of all classes of stock entitled to vote, or
10%
or more of the total value of shares of all classes of stock of such tenant
or
(2) in the case of any tenant that is not a corporation, an interest of 10%
or
more in the assets or net profits of such tenant (such tenants that are
described under (1) or (2) being a “related party tenant”), unless the related
party tenant is a taxable REIT subsidiary and certain other requirements are
satisfied. In addition, if rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15% of the total
rent
received under the lease, then the portion of rent attributable to such personal
property will not qualify as rents from real property. Moreover, an amount
received or accrued generally will not qualify as rents from real property
(or
as interest income) for purposes of the 75% test and 95% test (described below)
if it is based in whole or in part on the income or profits of any person.
Rent
or interest will not be disqualified, however, solely by reason of being based
on a fixed percentage or percentages of receipts or sales. Finally, for rents
received to qualify as rents from real property, Essex generally must not
operate or manage the property or furnish or render certain services to tenants,
other than through an “independent contractor” who is adequately compensated and
from whom Essex derives no revenue or through a taxable REIT subsidiary. The
independent contractor and taxable REIT subsidiary requirements, however, do
not
apply to the extent that the services provided by Essex are “usually or
customarily rendered” in connection with the rental of space for occupancy only,
and are not otherwise considered “rendered to the occupant.” For both the
related party tenant rules and determining whether an entity qualifies as an
independent contractor of a REIT, certain attribution rules of the Internal
Revenue Code apply, pursuant to which ownership interests in certain entities
held by one entity are deemed held by certain other related
entities.
In
general, if a REIT provides impermissible services to its tenants, all of the
rent from that property will be disqualified from satisfying the 75% test and
95% test (described below). However, rents will not be disqualified if a REIT
provides de minimis impermissible services. For this purpose, services provided
to tenants of a property are considered de minimis where income derived from
the
services rendered equals 1% or less of all income derived from the property
(as
determined on a property-by-property basis). For purposes of the 1% threshold,
the amount treated as received for any service shall not be less than 150%
of
the direct cost incurred by the REIT in furnishing or rendering the
service.
Essex
does not receive any rent that is based on the income or profits of any person.
In addition, Essex does not own, directly or indirectly, 10% or more of any
tenant (other than, perhaps, a tenant that is a taxable REIT subsidiary where
other requirements are satisfied). Furthermore, Essex believes that any personal
property rented in connection with Essex’s apartment facilities is well within
the 15% restriction. Finally, Essex does not believe that it provides services,
other than within the 1% de minimis exception described above, to its tenants
that are not customarily furnished or rendered in connection with the rental
of
property, other than through an independent contractor or a taxable REIT
subsidiary. Essex does not intend to rent to any related party, to base any
rent
on the income or profits of any person (other than rents that are based on
a
fixed percentage or percentages of receipts or sales), or to charge rents that
would otherwise not qualify as rents from real property.
The
95% Test
In
addition to deriving 75% of its gross income from the sources listed above,
at
least 95% of Essex’s gross income for a taxable year must be derived from the
above-described qualifying income, or from dividends, interest or gains from
the
sale or disposition of stock or other securities that are not dealer property.
Dividends from a corporation (including a taxable REIT subsidiary) and interest
on any obligation not collateralized by an interest on real property are
included for purposes of the 95% test, but not (except with respect to dividends
from a REIT) for purposes of the 75% test. For purposes of determining whether
Essex complies with the 75% and 95% tests, gross income does not include income
from “prohibited transactions” (discussed below).
From
time
to time, Essex may enter into hedging transactions with respect to one or more
of Essex’s assets or liabilities. Essex’s hedging activities may include
entering into interest rate or other swaps, caps and floors, or options to
purchase such items, and futures and forward contracts. Through the end of
Essex’s 2004 tax year, to the extent Essex entered into an interest rate swap or
cap contract, option, futures contract, forward rate agreement or any similar
financial instrument to hedge Essex’s indebtedness incurred to acquire or carry
“real estate assets,” any periodic income or gain from the disposition of such
contract was qualifying income for purposes of the 95% gross income test, but
not the 75% gross income test. For tax years beginning on or after January
1,
2005, to the extent a transaction meets certain identification requirements
and
hedges any indebtedness incurred or to be incurred to acquire or carry “real
estate assets,” including interest rate hedges as well as other types of hedges,
any income or gain from the disposition of such a hedging transaction will
be
disregarded in applying the 95% gross income test, but will continue to be
taken
into account as nonqualifying income for purposes of the 75% gross income test.
To the extent that Essex hedges with other types of financial instruments,
or in
other situations, it is not entirely clear how the income from those
transactions will be treated for purposes of the gross income tests. Essex
intends to structure any hedging transactions in a manner that does not
jeopardize Essex’s status as a REIT.
Essex’s
investment in apartment communities generally gives rise to rental income that
is qualifying income for purposes of the 75% and 95% gross income tests. Gains
on sales of apartment communities, other than from prohibited transactions,
as
described below, or of Essex’s interest in a partnership, generally will be
qualifying income for purposes of the 75% and 95% gross income tests. Essex
anticipates that income on its other investments will not cause it to fail
the
75% or 95% gross income test for any year.
Even
if
Essex fails to satisfy one or both of the 75% or 95% tests for any taxable
year,
it may still qualify as a REIT for such year if it is entitled to relief under
certain provisions of the Internal Revenue Code. These relief provisions will
generally be available if Essex’s failure to comply was due to reasonable cause
and not to willful neglect, and Essex timely complies with requirements for
reporting each item of its income to the Internal Revenue Service. It is not
possible, however, to state whether in all circumstances Essex would be entitled
to the benefit of these relief provisions. Even if these relief provisions
applied, a 100% penalty tax would be imposed on the amount by which Essex failed
the 75% gross income test or the amount by which 95% of Essex’s gross income
exceeds the amount of income qualifying under the 95% gross income test
(whichever amount is greater), multiplied by a fraction intended to reflect
Essex’s profitability.
Subject
to certain safe harbor exceptions, any gain realized by Essex on the sale of
any
property held as inventory or other property held primarily for sale to
customers in the ordinary course of business will be treated as income from
a
prohibited transaction that is subject to a 100% penalty tax. Such prohibited
transaction income may also have an adverse effect upon Essex’s ability to
qualify as a REIT. Under existing law, whether property is held as inventory
or
primarily for sale to customers in the ordinary course of a trade or business
is
a question of fact that depends on all the facts and circumstances with respect
to the particular transaction.
Annual
Distribution Requirements
To
qualify as a REIT, Essex is required to distribute dividends (other than capital
gain dividends) to its stockholders each year in an amount equal to at least
(A)
the sum of (i) 90% of Essex’s REIT taxable income (computed without regard to
the dividends paid deduction and Essex’s net capital gain) and (ii) 90% of the
net income (after tax), if any, from foreclosure property, minus (B) the sum
of
certain items of non-cash income over 5% of Essex’s REIT taxable income. Such
distributions must be paid in the taxable year to which they relate, or in
the
following taxable year if declared before Essex timely files its tax return
for
such year and if paid on or before the first regular dividend payment after
such
declaration, provided that such payment is made during the 12-month period
following the close of such taxable year. These distributions are taxable to
stockholders in the year in which paid, even though the distributions relate
to
Essex’s prior taxable year for purposes of the 90% distribution
requirement.
To
the
extent that Essex does not distribute all of its net capital gain, or does
not
distribute at least 90%, but less than 100%, of its REIT taxable income, as
adjusted, Essex will be subject to tax on the undistributed amount at regular
corporate tax rates, as the case may be. (However, Essex can elect to “pass
through” any of the taxes paid on Essex’s undistributed net capital gain income
to its stockholders on a pro rata basis.) Furthermore, if Essex should fail
to
distribute during each calendar year at least the sum of (1) 85% of its ordinary
income for such year, (2) 95% of its net capital gain income for such year,
and
(3) any undistributed taxable income from prior periods, Essex would be subject
to a non-deductible 4% excise tax on the excess of such required distribution
over the sum of the amounts actually distributed and the amount of any net
capital gains Essex elected to retain and pay tax on. For these and other
purposes, dividends declared by Essex in October, November or December of one
taxable year and payable to a stockholder of record on a specific date in any
such month shall be treated as both paid by Essex and received by the
stockholder during such taxable year, provided that the dividend is actually
paid by Essex by January 31 of the following taxable year.
If
Essex
fails to meet the distribution requirements as a result of an adjustment to
its
tax return by the Internal Revenue Service or Essex determines that it
understated its income on a filed return, Essex may retroactively cure the
failure by paying a “deficiency dividend” (plus applicable penalties and
interest) within a specified period.
Essex
believes that it has made timely distributions sufficient to satisfy the annual
distribution requirements. It is possible that in the future Essex may not
have
sufficient cash or other liquid assets to meet the distribution requirements,
due to timing differences between the actual receipt of income and actual
payment of expenses on the one hand, and the inclusion of such income and
deduction of such expenses in computing Essex’s REIT taxable income on the other
hand Further, as described below, it is possible that, from time to time, Essex
may be allocated a share of net capital gain attributable to the sale of
depreciated property that exceeds Essex’s allocable share of cash attributable
to that sale. To avoid any problem with the distribution requirements, Essex
will closely monitor the relationship between its REIT taxable income and cash
flow and, if necessary, will borrow funds or issue preferred or common stock
to
satisfy the distribution requirement. Essex may be required to borrow funds
at
times when market conditions are not favorable.
Prohibited
Transaction Rules
A
REIT
will incur a 100% penalty tax on the net income derived from a sale or other
disposition of property, other than foreclosure property, that the REIT holds
primarily for sale to customers in the ordinary course of a trade or business
(a
“prohibited transaction”). Under a safe harbor provision in the Internal Revenue
Code, however, income from certain sales of real property held by the REIT
for
at least four years at the time of the disposition will not be treated as income
from a prohibited transaction. Whether a REIT holds an asset “primarily for sale
to customers in the ordinary course of a trade or business” depends, however, on
the facts and circumstances in effect from time to time, including those related
to a particular asset. Although Essex will attempt to ensure that none of its
sales of property will constitute a prohibited transaction, it cannot assure
you
that none of such sales will be so treated.
Failure
to Qualify
For
tax
years beginning on or after January 1, 2005, if Essex should fail to satisfy
one
or more requirements for REIT qualification, other than the gross income tests
and asset tests, Essex may retain its REIT qualification if the failures are
due
to reasonable cause and not willful neglect, and if it pays a penalty of $50,000
for each such failure.
If
Essex
fails to qualify for taxation as a REIT in any taxable year and the relief
provisions do not apply, Essex will be subject to tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates.
Distributions to stockholders in any year in which Essex fails to qualify will
not be deductible by Essex, nor will they be required to be made. In such event,
to the extent of Essex’s current and accumulated earnings and profits, all
distributions to stockholders will be taxable as ordinary income, and, subject
to certain limitations in the Internal Revenue Code, corporate distributees
may
be eligible for the dividends received deduction and noncorporate distributees
may be eligible to treat the dividends as “qualified dividend income” taxable at
capital gain rates. See “Certain Material Federal Income Tax Considerations —
Taxation of Taxable U.S. Holders.” Unless entitled to relief under specific
statutory provisions, Essex will also be disqualified from taxation as a REIT
for the four taxable years following the year during which qualification was
lost. It is not possible to state whether Essex would be entitled to such
statutory relief.
Investments
in Partnerships
General
Essex
holds a direct ownership interest in the Operating Partnership. In
general, partnerships are “pass-through” entities which are not subject to U.S.
federal income tax. Rather, partners are allocated their proportionate shares
of
the items of income, gain, loss, deduction and credit of a partnership, and
are
potentially subject to tax thereon, without regard to whether the partners
receive a distribution from the partnership. The allocation of partnership
income or loss must comply with rules for allocating partnership income or
loss
under Section 704(b) of the Internal Revenue Code and U.S. Treasury regulations
thereunder. Essex’s Operating Partnership’s allocations of taxable income and
loss are intended to comply with the requirements of Section 704(b) of the
Internal Revenue Code and U.S. Treasury regulations thereunder. Essex includes
its allocable share of items of partnership income, gain, loss deduction and
credit in the computation of its REIT taxable income. Moreover, Essex includes
its proportionate share, based on its capital interest in a partnership, of
the
foregoing partnership items for purposes of the various REIT income tests.
See
“Certain Material Federal Income Tax Considerations — Taxation of Essex” and “ —
Gross Income Tests,” above. Any resultant increase in Essex’s REIT taxable
income increases its distribution requirements, but is not subject to U.S.
federal income tax in Essex’s hands provided that such income is distributed to
its stockholders. See “Certain Material Federal Income Tax Considerations —
Annual Distribution Requirements.” In addition, for purposes of the REIT asset
tests, Essex includes its proportionate share, generally based on its capital
interest in the partnership, of the assets held by the partnerships. See “—
Asset Tests,” above.
Tax
Allocations with Respect to the Properties
Pursuant
to Section 704(c) of the Internal Revenue Code, income, gain, loss and deduction
attributable to appreciated or depreciated property that is contributed to
a
partnership in exchange for an interest in the partnership (such as some of
Essex’s properties), 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 generally is equal to
the
difference between the fair market value of contributed property at the time
of
contribution, and the adjusted tax basis of such property at the time of
contribution (a “book-tax difference”). Such allocations are solely for U.S.
federal income tax purposes and do not affect the book capital accounts or
other
economic or legal arrangements among the partners. The Operating Partnership
has
property subject to book-tax differences. Consequently, the partnership
agreement of the Operating Partnership requires such allocations to be made
in a
manner consistent with Section 704(c) of the Internal Revenue Code.
In
general, the partners who contributed appreciated assets to the Operating
Partnership will be allocated lower amounts of depreciation deductions for
tax
purposes and increased taxable income and gain on sale by the Operating
Partnership of the contributed assets (including some of Essex’s properties).
This will tend to eliminate the book-tax difference over time. However, the
special allocation rules under Section 704(c) of the Internal Revenue Code
do
not always entirely rectify the book-tax difference on an annual basis or with
respect to a specific taxable transaction, such as a sale. Thus, the carryover
basis of the contributed assets in the hands of the Operating Partnership can
be
expected to cause Essex to be allocated lower depreciation and other deductions,
and possibly greater amounts of taxable income in the event of a sale of such
contributed assets, in excess of the economic or book income allocated to Essex
as a result of such sale. This may cause Essex to recognize taxable income
in
excess of cash proceeds, which might adversely affect its ability to comply
with
the REIT distribution requirements. See “Certain Material Federal Income Tax
Considerations — Annual Distribution Requirements.”
Certain
Loss Limitations
The
American Jobs Creation Act of 2004, or the “2004 Act,” added new Section 470 to
the Internal Revenue Code, which provides certain limitations on the utilization
of losses allocable to leased property owned by a partnership having both
taxable and tax-exempt partners, such as Essex’s Operating Partnership.
Currently, it is unclear how the transition rules and effective dates set forth
in the 2004 Act will apply to entities such as Essex’s Operating Partnership.
Moreover, it is uncertain how the general rules of this provision will apply.
However, the IRS issued a notice stating that it will not apply Section 470
to
partnerships for taxable years beginning before January 1, 2007 based solely
on
the fact that a partnership had both taxable and tax-exempt partners. It is
important to note that this notice provides relief for Essex’s Operating
Partnership’s taxable years ending December 31, 2005 and December 31,
2006 only. Accordingly, commencing with Essex’s taxable year beginning
January 1, 2007, unless Congress passes corrective legislation which addresses
this issue or some other form of relief, certain losses generated with respect
to properties owned by Essex’s Operating Partnership may be disallowed until
future years. This could increase the amount of distributions Essex is required
to make in a particular year in order to meet the REIT distribution
requirements, and also could increase the portion of distributions to its
stockholders that are taxable as dividends.
Like-Kind
Exchanges
Essex
may
dispose of properties in transactions intended to qualify as like-kind exchanges
under the Internal Revenue Code. Such like-kind exchanges are intended to result
in the deferral of gain for federal income tax purposes. The failure of any
such
transaction to qualify as a like-kind exchange could subject Essex to federal
income tax, possibly including the 100% prohibited transaction tax, depending
on
the facts and circumstances surrounding the particular transaction.
Possible
Legislative or Other Actions Affecting Tax Considerations
Prospective
investors should recognize that the present U.S. federal income tax treatment
of
an investment in Essex may be modified by legislative, judicial or
administrative action at any time, and that any such action may affect
investments and commitments previously made. The rules dealing with U.S. federal
income taxation are constantly under review by persons involved in the
legislative process and by the Internal Revenue Service and the U.S. Treasury
Department, resulting in revisions of the U.S. Treasury regulations and revised
interpretations of established concepts as well as statutory changes. Revisions
in U.S. federal tax laws and interpretations thereof could adversely affect
the
tax consequences of an investment in Essex.
Investment
in Essex’s Stock
The
following summary describes certain U.S. federal income tax consequences
relating to the purchase, ownership, and disposition of Essex’s stock as of the
date hereof. Except where noted, this summary deals only with stock held as
a
capital asset and does not deal with special situations, such as those persons
whose functional currency for U.S. federal income tax purposes is not the U.S.
dollar, persons liable for the alternative minimum tax, of dealers in securities
or currencies, tax-exempt organizations, individual retirement accounts and
other tax deferred accounts, financial institutions, life insurance companies,
or persons holding Essex’s stock as a part of a hedging or conversion
transaction or a straddle. Furthermore, the discussion below is based upon
the
current U.S. federal income tax laws and interpretations thereof as of the
date
hereof. Such authorities may be repealed, revoked, or modified (possibly with
retroactive effect) so as to result in U.S. federal income tax consequences
different from those discussed below. In addition, except as otherwise
indicated, the following summary does not consider the effect of any applicable
foreign, state, local, or other tax laws or estate or gift tax
considerations.
If
an
entity treated as a partnership for U.S. federal income tax purposes holds
Essex’s stock, the tax treatment of a partner in that partnership will generally
depend upon the status of the partner and the activities of the partnership.
If
you are a partner of a partnership holding Essex’s stock, you should consult
your tax advisor regarding the tax consequences of the ownership and disposition
of Essex’s stock.
U.S.
Holders
As
used
herein, a “U.S. Holder” of Essex’s stock means a holder that for U.S. federal
income tax purposes is:
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a
citizen or resident of the United
States;
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a
corporation or other entity treated as a corporation for U.S. federal
income tax purposes that is created or organized in or under the
laws of
the United States or any political subdivision
thereof;
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an
estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
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a
trust if (a) a U.S. court is able to exercise primary supervision
over the
administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust or (b)
it has
a valid election in place to be treated as a U.S. person or otherwise
is
treated as a U.S. person.
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Taxation
of Taxable U.S. Holders
Distributions.
As long
as Essex qualifies as a REIT, distributions made to its taxable U.S. holders
out
of current or accumulated earnings and profits (and not designated as capital
gain dividends or “qualified dividend income”) will be taken into account by
them as ordinary income, and U.S. Holders that are corporations will not be
entitled to a dividends received deduction. “Qualified dividend income”
generally includes dividends received from ordinary U.S. corporations and from
certain qualified foreign corporations, provided that certain stock holding
period requirements are met. “Qualified dividend income” of noncorporate
taxpayers is currently taxed as net capital gain, thus reducing the maximum
tax
rate on such dividends to 15% for taxable years ending after December 31, 2002
and beginning before January 1, 2009. An extension was recently enacted,
maintaining the reduced rates for an additional two years.
In
general, dividends paid by REITs are not eligible for the 15% tax rate on
“qualified dividend income” and, as a result, Essex’s ordinary REIT dividends
will continue to be taxed at the ordinary income tax rate. Dividends received
by
a noncorporate stockholder could be treated as “qualified dividend income,”
however, to the extent that Essex has received dividend income from taxable
corporations (such as a taxable REIT subsidiary) and to the extent such
dividends are attributable to income that is subject to tax at the REIT level
(for example, if Essex distributed less than 100% of its taxable income). In
general, to qualify for the reduced tax rate on qualified dividend income,
a
stockholder must hold Essex’s stock for more than 60 days during the 121-day
period beginning on the date that is 60 days before the date on which Essex’s
stock becomes ex-dividend.
To
the
extent that Essex makes distributions in excess of its current and accumulated
earnings and profits, these distributions are treated first as a tax-free return
of capital to the U.S. Holder, reducing the tax basis of a U.S. Holder’s stock
by the amount of such distribution (but not below zero), with distributions
in
excess of the U.S. Holder’s tax basis treated as proceeds from a sale of stock,
the tax treatment of which is described below. Distributions will generally
be
taxable, if at all, in the year of the distribution. However, any dividend
declared by Essex in October, November or December of any year and payable
to a
U.S. Holder who held Essex’s stock on a specified record date in any such month
shall be treated as both paid by Essex and received by the U.S. Holder on
December 31 of such year, provided that the dividend is actually paid by Essex
during January of the following calendar year.
In
general, distributions which are designated by Essex as capital gain dividends
will be taxable to U.S. Holders as gain from the sale of assets held for greater
than one year, or “long-term term capital gain.” That treatment will apply
regardless of the period for which a U.S. Holder has held the stock upon which
the capital gain dividend is paid. However, corporate U.S. Holders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. Noncorporate taxpayers are generally taxable at a current maximum tax
rate of 15% for long-term capital gain attributable to sales or exchanges.
A
portion of any capital gain dividends received by noncorporate taxpayers might
be subject to tax at a 25% rate to the extent attributable to gains realized
on
the sale of real property that correspond to Essex’s “unrecaptured Section 1250
gain.”
Essex
may
elect to retain, rather than distribute as a capital gain dividend, its net
long-term capital gains. In such event, Essex would pay tax on such retained
net
long-term capital gains. In addition, to the extent designated by Essex, a
U.S.
Holder generally would (1) include his proportionate share of such undistributed
long-term capital gains in computing his long-term capital gains for his taxable
year in which the last day of Essex’s taxable year falls (subject to certain
limitations as to the amount so includable), (2) be deemed to have paid the
capital gains tax imposed on Essex on the designated amounts included in such
U.S. Holder’s long-term capital gains, (3) receive a credit or refund for such
amount of tax deemed paid by the U.S. Holder, (4) increase the adjusted basis
of
his stock by the difference between the amount of such includable gains and
the
tax deemed to have been paid by him, and (5) in the case of a U.S. Holder that
is a corporation, appropriately adjust its earnings and profits for the retained
capital gains in accordance with U.S. Treasury regulations (which have not
yet
been issued).
Distributions
made by Essex and gain arising from the sale or exchange by a U.S. Holder of
stock will not be treated as passive activity income, and as a result, U.S.
Holders generally will not be able to apply any “passive losses” against this
income or gain. U.S. Holders may not include in their individual income tax
returns any of Essex’s net operating losses or capital losses.
Disposition
of Stock.
Upon any
taxable sale or other disposition of Essex’s stock, a U.S. Holder will recognize
gain or loss for U.S. federal income tax purposes in an amount equal to the
difference between (1) the amount of cash and the fair market value of any
property received on the sale or other disposition except with respect to
amounts attributable to accrued but unpaid dividends and (2) the U.S. Holder’s
adjusted basis in the stock for tax purposes.
This
gain
or loss will be a capital gain or loss, and will be long-term capital gain
or
loss, respectively, if Essex’s stock has been held for more than one year at the
time of the disposition. Noncorporate U.S. Holders are generally taxable at
a
current maximum rate of 15% on long-term capital gain. The Internal Revenue
Service has the authority to prescribe, but has not yet prescribed, regulations
that would apply a capital gain tax rate of 25% to a portion of capital gain
realized by a noncorporate U.S. Holder on the sale of REIT stock that would
correspond to the REIT’s “unrecaptured Section 1250 gain.” U.S. Holders are
urged to consult with their own tax advisors with respect to their capital
gain
tax liability. A corporate U.S. Holder will be subject to tax at a maximum
rate
of 35% on capital gain from the sale of Essex’s stock regardless of its holding
period for the stock.
In
general, any loss upon a sale or exchange of Essex’s stock by a U.S. Holder who
has held such 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 (actually made or deemed made in accordance with the discussion
above) from Essex required to be treated by such U.S. Holder as long-term
capital gain.
Dividend
Reinvestment Program. Stockholders
participating in Essex’s dividend reinvestment program are treated as having
received the gross amount of any cash distributions which would have been paid
by Essex to such stockholders had they not elected to participate in the
program. These distributions will retain the character and tax effect applicable
to distributions from Essex generally. Participants in the dividend reinvestment
program are subject to U.S. federal income and withholding tax on the amount
of
the deemed distributions to the extent that such distributions represent
dividends or gains, even though they receive no cash. Shares of Essex’s stock
received under the program will have a holding period beginning with the day
after purchase, and a tax basis equal to their cost (which is the gross amount
of the distribution).
Information
Reporting and Backup Withholding. Payments
of dividends on Essex’s stock and proceeds received upon the sale, redemption or
other disposition of Essex’s stock may be subject to Internal Revenue Service
information reporting and backup withholding. Payments to certain U.S. Holders
(including, among others, corporations and certain tax-exempt organizations)
are
generally not subject to information reporting or backup withholding. Payments
to a non-corporate U.S. Holder generally will be subject to information
reporting. Such payments also generally will be subject to backup withholding
if
such holder:
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fails
to furnish its taxpayer identification number, which for an individual
is
ordinarily his or her social security
number;
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furnishes
an incorrect taxpayer identification
number;
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is
notified by the Internal Revenue Service that it has failed to properly
report payments of interest or dividends;
or
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fails
to certify, under penalties of perjury, that it has furnished a correct
taxpayer identification number and that the Internal Revenue Service
has
not notified the U.S. Holder that it is subject to backup
withholding.
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A
U.S.
Holder that does not provide Essex with its correct taxpayer identification
number may also be subject to penalties imposed by the Internal Revenue Service.
Any amount paid as backup withholding will be creditable against the U.S.
Holder’s U.S. federal income tax liability, if any, and otherwise will be
refundable, provided that the requisite procedures are followed.
You
should consult your tax advisor regarding your qualification for an exemption
from backup withholding and information reporting and the procedures for
obtaining such an exemption, if applicable.
Taxation
of Tax-Exempt U.S. Holders
Based
upon a published ruling by the Internal Revenue Service, a distribution by
Essex
to, and gain upon a disposition of Essex’s stock by, a U.S. Holder that is a
tax-exempt entity will not constitute “unrelated business taxable income”
(“UBTI”) provided that the tax-exempt entity has not financed the acquisition of
its stock with “acquisition indebtedness” within the meaning of the Internal
Revenue Code and the stock is not otherwise used in an unrelated trade or
business of the tax-exempt entity.
However,
for tax-exempt U.S. Holders that are social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts and qualified group
legal
services plans exempt from U.S. federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal Revenue Code,
respectively, income from an investment in Essex will constitute UBTI unless
the
organization properly sets aside or reserves such amounts for purposes specified
in the Internal Revenue Code. These tax-exempt U.S. Holders should consult
their
own tax advisers concerning these “set aside” and reserve
requirements.
Notwithstanding
the preceding paragraph, however, a portion of the dividends paid by Essex
may
be treated as UBTI to certain domestic private pension trusts if Essex is
treated as a “pension-held REIT.” Essex believes that it is not, and does not
expect to become, a “pension-held REIT.” If Essex were to become a pension-held
REIT, these rules generally would only apply to certain pension trusts that
held
more than 10% of Essex’s stock.
Taxation
of Non-U.S. Holders
The
following is a discussion of certain anticipated U.S. federal income tax
consequences of the ownership and disposition of Essex’s stock applicable to
non-U.S. Holders of such stock. A “non-U.S. Holder” is any person who is not a
U.S. Holder. The discussion is based on current law and is for general
information only. The discussion addresses only certain and not all aspects
of
U.S. federal income taxation. Special rules may apply to certain non-U.S.
Holders such as “controlled foreign corporations” and “passive foreign
investment companies.” Such entities should consult their own tax advisors to
determine the U.S. federal, state, local and other tax consequences that may
be
relevant to them.
Distributions
from the Company.
1. Ordinary
Dividends.
The
portion of dividends received by non-U.S. Holders payable out of Essex’s current
and accumulated earnings and profits which are not attributable to capital
gains
and which are not effectively connected with a U.S. trade or business of the
non-U.S. Holder will be subject to U.S. withholding tax at the rate of 30%
(unless reduced by an applicable income tax treaty). In general, non-U.S.
Holders will not be considered engaged in a U.S. trade or business solely as
a
result of their ownership of Essex’s stock. In cases where the dividend income
from a non-U.S. Holder’s investment in Essex’s stock is effectively connected
with the non-U.S. Holder’s conduct of a U.S. trade or business (or, if an income
tax treaty applies, is attributable to a U.S. permanent establishment of the
non-U.S. Holder), the non-U.S. Holder generally will be subject to U.S. tax
at
graduated rates, in the same manner as U.S. Holders are taxed with respect
to
such dividends (and may also be subject a tax at a rate of 30% or lower under
an
applicable treaty (the “branch profits tax”) in the case of a corporate non-U.S.
Holder).
Essex
expects to withhold U.S. income tax at the rate of 30% on the gross amount
of
any distributions of ordinary income made to a non-U.S. Holder unless (1) a
lower treaty rate applies and proper certification is provided on Internal
Revenue Service Form W-8BEN or (2) the non-U.S. Holder files an Internal Revenue
Service Form W-8ECI with Essex claiming that the distribution is effectively
connected with the non-U.S. Holder’s conduct of a U.S. trade or business (or, if
an income tax treaty applies, is attributable to a U.S. permanent establishment
of the non-U.S. Holder). However, the non-U.S. Holder may seek a refund of
such
amounts from the Internal Revenue Service if it is subsequently determined
that
such distribution was, in fact, in excess of Essex’s current and accumulated
earnings and profits.
2. Non-Dividend
Distributions.
Unless
Essex’s stock constitutes a USRPI (as defined below), distributions by Essex
which are not paid out of Essex’s current and accumulated earnings and profits
will not be subject to U.S. income or withholding tax. If it cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of current and accumulated earnings and profits, the
distribution will be subject to withholding at the rate applicable to dividends.
However, the non-U.S. Holder may seek a refund of such amounts from the Internal
Revenue Service if it is subsequently determined that such distribution was,
in
fact, in excess of Essex’s current and accumulated earnings and profits. If
Essex’s stock constitutes a USRPI, a distribution in excess of current and
accumulated earnings and profits will be subject to 10% withholding tax and
may
be subject to additional taxation under FIRPTA (as defined below). However,
the
10% withholding tax will not apply to distributions already subject to the
30%
dividend withholding.
3. Capital
Gain Dividends.
Under
the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), a
distribution made by Essex to a non-U.S. Holder, to the extent attributable
to
gains (“USRPI Capital Gains”) from dispositions of United States Real Property
Interests (“USRPIs”), will be considered effectively connected with a U.S. trade
or business of the non-U.S. Holder and therefore will be subject to U.S. income
tax at the rates applicable to U.S. Holders, without regard to whether such
distribution is designated as a capital gain dividend. (The properties owned
by
Essex’s Operating Partnership generally are USRPIs.) Distributions subject to
FIRPTA may also be subject to the branch profits tax in the hands of a corporate
non-U.S. Holder that is not entitled to treaty exemption. Notwithstanding the
preceding, distributions received on Essex’s stock, to the extent attributable
to USRPI Capital Gains, will not be treated as gain recognized by the non-U.S.
Holder from the sale or exchange of a USRPI if (1) Essex’s stock continues to be
regularly traded on an established securities market located in the United
States and (2) the selling non-U.S. Holder did not own more than 5% of such
class of stock at any time during the one year period ending on the date of
the
distribution. The distribution will instead be treated as an ordinary dividend
to the non-U.S. Holder, and the tax consequences to the non-U.S. Holder will
be
as described above under “ — Ordinary Dividends.”
Distributions
attributable to Essex’s capital gains which are not USRPI Capital Gains
generally will not be subject to income taxation, unless (1) investment in
the
stock is effectively connected with the non-U.S. Holder’s U.S. trade or business
(or, if an income tax treaty applies, is attributable to a U.S. permanent
establishment of the non-U.S. Holder), in which case the non-U.S. Holder will
be
subject to the same treatment as U.S. Holders with respect to such gain (except
that a corporate non-U.S. Holder may also be subject to the branch profits
tax)
or (2) the non-U.S. Holder is a non-resident alien individual who is present
in
the United States for 183 days or more during the taxable year and certain
other
conditions are present, in which case the nonresident alien individual will
be
subject to a 30% tax on the individual’s capital gains.
Essex
generally will be required to withhold and remit to the Internal Revenue Service
35% of any distributions to non-U.S. Holders that are designated as capital
gain
dividends, or, if greater, 35% of a distribution that could have been designated
as a capital gain dividend. Distributions can be designated as capital gains
to
the extent of Essex’s net capital gain for the taxable year of the distribution.
The amount withheld is creditable against the non-U.S. Holder’s U.S. federal
income tax liability. This withholding will not apply to any amounts paid to
a
holder of not more than 5% of Essex’s stock while such stock is regularly traded
on an established securities market. Instead, those amounts will be treated
as
described above under “ — Ordinary Dividends.”
Disposition
of Stock. Unless
Essex’s stock constitutes a USRPI, a sale of such stock by a non-U.S. Holder
generally will not be subject to U.S. taxation unless (1) the investment in
the
stock is effectively connected with the non-U.S. Holder’s U.S. trade or business
(or, if an income tax treaty applies, is attributable to a U.S. permanent
establishment of the non-U.S. Holder) or (2) the non-U.S. Holder is a
non-resident alien individual who is present in the United States for 183 days
or more during the taxable year and certain other conditions are
present.
The
stock
will not constitute a USRPI if Essex is a “domestically controlled REIT” A
domestically controlled REIT is a REIT in which, at all times during a specified
testing period, less than 50% in value of its shares is held directly or
indirectly by non-U.S. Holders. Essex believes that it is, and expects to
continue to be, a domestically controlled REIT, and therefore that the sale
of
Essex’s stock will not be subject to taxation under FIRPTA. Because Essex’s
stock will be publicly traded, however, no assurance can be given that Essex
will continue to be a domestically controlled REIT.
Even
if
Essex does not constitute a domestically controlled REIT, a non-U.S. Holder’s
sale of its stock generally will not be subject to tax under FIRPTA as a sale
of
a USRPI provided that (1) the stock continues to be regularly traded on an
established securities market located in the United States and (2) the selling
non-U.S. Holder did not own more than 5% of such class of stock at any time
during the one year period ending on the date of the distribution.
If
gain
on the sale of Essex’s stock were subject to taxation under FIRPTA, the non-U.S.
Holder would be subject to the same treatment as a U.S. Holder with respect
to
such gain (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien
individuals).
In
addition, the purchaser of the stock could be required to withhold 10% of the
purchase price and remit such amount to the Internal Revenue
Service.
Information
Reporting and Backup Withholding. Backup
withholding will apply to dividend payments made to a non-U.S. Holder of Essex’s
stock unless the holder has certified that it is not a U.S holder and the payer
has no actual knowledge that the owner is not a non-U.S. Holder. Information
reporting generally will apply with respect to dividend payments even if
certification is provided.
Payment
of the proceeds from a disposition of Essex’s stock by a non-U.S. Holder made to
or through the U.S. office of a broker is generally subject to information
reporting and backup withholding unless the holder or beneficial owner certifies
that it is not a U.S. Holder or otherwise establishes an exemption. Generally,
Internal Revenue Service information reporting and backup withholding will
not
apply to a payment of disposition proceeds if the payment is made outside the
United States through a foreign office of a foreign broker-dealer. If the
proceeds from a disposition of Essex’s stock are paid to or through a foreign
office of a U.S. broker-dealer or a non-U.S. office of a foreign broker-dealer
that is (1) a “controlled foreign corporation” for U.S. federal income tax
purposes, (2) a person 50% or more of whose gross income from all sources for
a
specified three-year period was effectively connected with a U.S. trade or
business, (3) a foreign partnership with one or more partners who are U.S.
persons and who in the aggregate hold more than 50% of the income or capital
interest in the partnership, or (4) a foreign partnership engaged in the conduct
of a trade or business in the United States, then backup withholding and
information reporting generally will apply unless the non-U.S. Holder satisfies
certification requirements regarding its status as a non-U.S. Holder and the
broker-dealer has no actual knowledge that the owner is not a non-U.S.
Holder.
A
non-U.S. Holder should consult its tax advisor regarding application of
withholding and backup withholding in its particular circumstance and the
availability of and procedure for obtaining an exemption from withholding and
backup withholding under current U.S. Treasury regulations.
State
and Local Taxes
Essex
and
it stockholders may be subject to state or local taxation in various
jurisdictions, including those in which Essex or they transact business or
reside. The state and local tax treatment of Essex and its stockholders may
not
conform to the U.S. federal income tax consequences discussed above.
Consequently, prospective stockholders should consult their own tax advisers
regarding the effect of state and local tax laws on an investment in Essex’s
stock.
We
may
sell the Offered Securities to one or more underwriters for public offering
and
sale by them or may sell the Offered Securities to investors directly or through
agents, which agents may be affiliated with us. We will name any such
underwriter or agent involved in the offer and sale of the Offered Securities
in
the applicable Prospectus Supplement.
We
may
effect from time to time sales of Offered Securities offered pursuant to any
applicable Prospectus Supplement in one or more transactions at a fixed price
or
prices, which may be changed, at prices related to the prevailing market prices
at the time of sale, or at negotiated prices. We also may, from time to time,
authorize underwriters acting as our agents to offer and sell the Offered
Securities upon the terms and conditions as set forth in the applicable
Prospectus Supplement. In connection with the sale of Offered Securities,
underwriters may be deemed to have received compensation from Essex or from
the
Operating Partnership in the form of underwriting discounts or commissions,
and
also may receive commissions from purchasers of Offered Securities for whom
they
may act as agent. Underwriters may sell Offered Securities to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agent.
We
may
enter into derivative transactions with third parties, or sell securities not
covered by this Prospectus to third parties in privately negotiated
transactions. If the applicable Prospectus Supplement indicates, in connection
with those derivatives, the third parties (or affiliates of such third parties)
may sell Offered Securities covered by this Prospectus and the applicable
Prospectus Supplement, including in short sale transactions. If so, the third
parties (or affiliates of such third parties) may use securities pledged by
us
or borrowed from us or others to settle those sales or to close out any related
open borrowings of stock, and may use securities received from us in settlement
of those derivatives to close out any related open borrowings of common shares.
The third parties (or affiliates of such third parties) in such sale
transactions will be underwriters and, if not identified in this Prospectus,
will be identified in the applicable Prospectus Supplement or a post-effective
amendment to this Registration Statement.
Any
underwriting compensation we pay to underwriters or agents in connection with
the offering of Offered Securities, and any discounts, concessions or
commissions underwriters allow to participating dealers, will be set forth
in
the applicable Prospectus Supplement. Underwriters, dealers and agents
participating in the distribution of the Offered Securities may be deemed to
be
underwriters, and any discounts and commissions they receive and any profit
they
realize on resale of the Offered Securities may be deemed to be underwriting
discounts and commissions under the Securities Act. Underwriters, dealers and
agents may be entitled, under agreements entered into with us, to
indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act. Any such indemnification
agreements will be described in the applicable Prospectus Supplement.
Unless
otherwise specified in the related Prospectus Supplement, each series of Offered
Securities will be a new issue with no established trading market, other than
Essex’s Common Stock which is listed on the New York Stock Exchange. Any shares
of Essex’s Common Stock sold pursuant to a Prospectus Supplement will be listed
on such exchange, subject to official notice of issuance. We may elect to list
any Preferred Stock, Warrants or Debt Securities on any exchange, but we are
not
obligated to do so. It is possible that one or more underwriters may make a
market in a series of Offered Securities, but will not be obligated to do so
and
may discontinue any market making at any time without notice. Therefore, we
cannot assure you of the liquidity of the trading market for the Offered
Securities.
If
so
indicated in the applicable Prospectus Supplement, we may authorize dealers,
acting as our agent, to solicit offers by certain institutions to purchase
Offered Securities from us at the public offering price set forth in such
Prospectus Supplement, pursuant to delayed delivery contracts (“Contracts”)
providing for payment and delivery on the date or dates stated in such
Prospectus Supplement. Each Contract will be for an amount not less than, and
the aggregate principal amount of Offered Securities sold pursuant to Contracts
shall be not less nor more than, the respective amounts stated in the applicable
Prospectus Supplement. Institutions with whom Contracts, when authorized, may
be
made include commercial and savings banks, insurance companies, pension funds,
investment companies, educational and charitable institutions, and other
institutions but will in all cases be subject to our approval. Contracts will
not be subject to any conditions except: (i) the purchase by an institution
of
the Offered Securities covered by its Contracts shall not, at the time of
delivery, be prohibited under the laws of any jurisdiction in the United States
to which such institution is subject and (ii) if the Offered Securities are
being sold to underwriters, we shall have sold to such underwriters the total
principal amount of the Offered Securities less the principal amount thereof
covered by Contracts.
Certain
of the underwriters and their affiliates may be customers of, engage in
transactions with and perform services for, us in the ordinary course of
business.
The
validity of the Offered Securities to be offered by Essex will be passed upon
for us by Venable LLP and the validity of the Offered Securities to be offered
by the Operating Partnership will be passed upon for us by Baker & McKenzie
LLP. Baker & McKenzie LLP has also issued an opinion to us
regarding certain tax matters described under “Certain Material Federal Income
Tax Considerations.”
The
consolidated financial statements and schedules of Essex Property Trust,
Inc. as
of December 31, 2006 and 2005, and for each of the years in the three-year
period ended December 31, 2006, and management's assessment of the effectiveness
of internal control over financial reporting as of December 31, 2006, and
the
consolidated financial statements and schedules of Essex Portfolio, L.P.
as of
December 31, 2006 and 2005, and for each of the years in the three-year period
ended December 31, 2006, and management’s assessment of the effectiveness of
internal control over financial reporting as of December 31, 2006 have been
incorporated by reference herein, in reliance upon the reports of KPMG LLP,
independent registered public accounting firm, incorporated by reference
herein,
and upon the authority of said firm as experts in accounting and
auditing.
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