Prospectus
Filed
Pursuant to Rule 424(b)(3)
Registration
No. 333-131178
PROSPECTUS
ESSEX
PROPERTY TRUST, INC.
142,076
SHARES OF COMMON STOCK
This
prospectus relates to 142,076 shares of our common stock. None of these shares
of common stock are currently outstanding. All 142,076 shares of our common
stock may be issued by us upon the exchange of outstanding partnership units
on
a one-for-one basis and offered and resold from time to time by selling
stockholders named in this prospectus. We have registered the shares of common
stock to provide the selling stockholders with freely tradeable securities,
but
such registration does not necessarily mean that the selling stockholders will
offer or sell the shares.
We
have
filed the registration statement, of which this prospectus is a part, pursuant
to contractual obligations. We will not receive any proceeds from the sale
of
the shares by the selling stockholders but we have agreed to pay certain
registration expenses.
To
facilitate maintenance of our qualification as a real estate investment trust
for federal income tax purposes, subject to certain exceptions, we prohibit
the
ownership, actually or constructively, by any single person of more than 6.0%
of
the value of the outstanding shares of our stock.
Our
common stock is listed on the New York Stock Exchange under the symbol “ESS.” On
March 6, 2006 the last reported sales price of our common stock on the New
York
Stock Exchange was $101.41 per share.
INVESTING
IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE “RISK FACTORS” BEGINNING ON PAGE
4.
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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 March 7, 2006.
Neither
Essex Property Trust, Inc. nor the selling stockholders 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. 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.
TABLE
OF CONTENTS
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PAGE
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1
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INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE
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1
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RISK
FACTORS
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4
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ESSEX
PROPERTY TRUST, INC.
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17
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USE
OF PROCEEDS
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18
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DESCRIPTION
OF CAPITAL STOCK
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18
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SELLING
STOCKHOLDERS
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21
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CERTAIN
PROVISIONS OF ESSEX’S CHARTER AND BYLAWS
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22
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MATERIAL
U.S. FEDERAL INCOME TAX CONSIDERATIONS
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22
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PLAN
OF DISTRIBUTION
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37
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LEGAL
MATTERS
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37
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EXPERTS
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37
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WHERE
YOU CAN FIND MORE INFORMATION
We
file
annual, quarterly and special reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy any document
we file with the SEC at the SEC’s public reference room at Room 1580, 100 F
Street, N.E., 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 100 F Street, N.E., 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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Annual
Report on Form 10-K for the year ended December 31, 2004; and as
amended on Form 8-K dated January 20, 2006.
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Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2005, June
30, 2005 and September 30, 2005;
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Current
Reports on Form 8-K filed on February 14, 2005, April 13, 2005,
October 25, 2005, November 2, 2005 (other than the current report
furnished on such date under Item 2.02 of Form 8-K), December 1,
2005, January 4, 2006, January 9, 2006, January 20, 2006, February
1,
2006, February 2, 2006 and February 6, 2006;
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the
description of our common stock contained in our Registration Statement
on
Form 8-A filed with the SEC on May 27, 1994, as amended on September
19, 2003; 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 2.02 or 7.01
of Form 8-K) after the date of this prospectus and prior to the
termination of the offering.
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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” or the “Company” 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. Forward-looking statements in this prospectus
include, without limitation:
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Our
expectations regarding our ability to finance all of our balloon
payments
when due under our mortgages and our line of credit borrowings;
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Our
intent to continue to acquire multifamily residential properties;
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Our
expectation 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 additional equity;
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Our
intent 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;
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Our
ability to obtain additional debt financing in the future through
mortgages on some or all of our properties;
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Our
ability to enter into business combinations with Messrs. Marcus and
Millichap and The Marcus & Millichap Company, without compliance
with the super-majority vote requirements and other provisions of
the
Maryland General Corporation Law;
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Our
ability to establish one or more series of preferred stock that could
delay, defer or prevent a transaction or a change in control;
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Our
expectation to engage in tax-exempt financings in the future;
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Our
anticipation to maintain sufficient influence over any joint venture
to
achieve its objectives;
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Our
plan to hold contributed assets or defer recognition of taxable gain
on
their sale pursuant to like-kind exchanges under Section 1031 of the
Internal Revenue Code and their impact on our financial
position;
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Essex’s
expectation to continue to be a domestically controlled
REIT;
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Our
belief that the amount of our assets that are not qualifying assets
for
purposes of the 75% asset test will continue to represent less than
25% of
our total assets and will satisfy the 5% and both 10% asset
tests;
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Essex’s
belief that it is not, and it does not expect to become, a “pension-held
REIT”;
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Our
intention to structure any hedging transactions in a manner that
does not
jeopardize our status as a REIT;
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Our
anticipation to maintain sufficient influence over the Essex Apartment
Value Fund, L.P. to permit it to achieve its business objectives;
and
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Our
belief that Essex will continue to qualify as a REIT.
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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 Report on Form 10-K and Quarterly Report 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.
RISK
FACTORS
Our
operations involve various risks that could have adverse consequences including,
without limitation, reductions in funds from operations, impairing our ability
to make distributions to shareholders, and failure to qualify as a REIT. These
risks include, among others, the following:
We
depend on our key personnel
Our
success depends on our ability to attract and retain the services of 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
September 30, 2005, we had approximately $1.31 billion of indebtedness
(including $344.6 million of variable rate indebtedness, of which $138.9 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 existing indebtedness, including 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 which 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 Ability to Refinance Balloon Payments
At
September 30, 2005, we had an aggregate of approximately $1.31 billion of
mortgage debt and line of credit borrowings, most of which are subject to
balloon payments of principal. We do not expect to have sufficient cash flows
from operations to make all of such balloon payments when due under these
mortgages and the line of credit borrowings. At September 30, 2005, these
mortgages and lines of credit borrowings had the following scheduled principal
payments:
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October
1 to December 31, 2005 — $6.5
million;
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2007
— $182.4 million (includes lines of credit balance of $56 million as
of
September 30, 2005);
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2009
— $147.7 million (includes lines of credit balance of $93.7 million
as of
September 30, 2005);
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2010
and thereafter — $795.3 million.
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We
may
not be able to refinance such mortgage indebtedness or lines of credit. The
properties subject to these mortgages could be foreclosed upon or otherwise
transferred to the mortgagee. This could cause us to lose income and asset
value. Alternatively, we may be required to refinance the debt at higher
interest rates. If we are unable to make such payments when due, a mortgage
lender could foreclose on the property securing the mortgage, which could have
a
material adverse effect on our financial condition and results of
operations.
The
price of our common stock may fluctuate significantly.
The
market price of our common stock may fluctuate significantly in response to
many
factors, including:
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actual
or anticipated changes in operating results or business
prospects;
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changes
in financial estimates by securities
analysts;
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an
inability to meet or exceed securities analysts’ estimates or
expectations;
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conditions
or trends in our industry or
sector;
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the
performance of other multifamily residential REITs and related market
valuations;
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announcements
by us or our competitors of significant acquisitions, strategic
partnerships,
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divestitures,
joint ventures or other strategic
initiatives;
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hedging
or arbitrage trading activity in our common
stock;
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changes
in interest rates;
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additions
or departures of key personnel; and
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future
sales of our common stock or securities convertible into, or exchangeable
or
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exercisable for, our common stock.
Holders
of our common stock are subject to the risk of volatile and depressed market
prices of our common stock. In addition, many of the factors listed above are
beyond our control. These factors may cause the market price of our common
stock
to decline, regardless of our financial condition, results of operations,
business or prospects. It is impossible to assure holders of our common stock
that the market prices of our common stock will not fall in the
future.
Economic
Environment and Impact on Operating Results
Both
the
national economy and the economies of the western states in which we own, manage
and develop properties, some of which are concentrated in high-tech sectors,
are
subject to economic downturns. The impact of such downturns on our operating
results can include, without limitation, reduction in rental rates, occupancy
levels, property valuations and increases in operating costs such as
advertising, turnover and repair and maintenance expenses. Reductions in
occupancy and market rental rates could result in a reduction of rental
revenues, operating income, cash flows, and the market value of our common
stock. A prolonged downturn could also affect our ability to obtain financing
at
acceptable rates of interest and to access funds from the disposition of
properties at acceptable prices.
Risk
of Rising Interest Rates
At
September 30, 2005, we had approximately $194.9 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 2006
through 2034), and $149.7 million of variable rate indebtedness under our lines
of credit, of which $56 million bears interest at 1.0% over LIBOR and $93.7
million bearing interest at the Freddie Mac Reference Rate plus from 0.55%
to
0.59%. At September 30, 2005, approximately $205.7 million of our long-term
variable rate indebtedness was not subject to any interest rate protection
agreements. Accordingly, an increase in interest rates may have an adverse
effect on our net income and results of operations.
Current
interest rates are at historic lows and could potentially increase rapidly.
Significant and rapid interest rate increases would 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.
Risk
of Inflation/Deflation
Substantial
inflationary or deflationary pressures could have a negative effect on rental
rates and property operating expenses, which would adversely affect our
financial position and our results of operations.
Risk
of Losses on Interest Rate Hedging Arrangements
We
have,
from time to time, 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, these agreements
also may reduce the benefits to us when interest rates decline. We cannot assure
you that we can refinance any such hedging arrangements or that we will be
able
to enter into other hedging arrangements to replace existing ones if interest
rates decline. Furthermore, interest rate movements during the term of interest
rate hedging arrangements may result in a gain or loss on our investment in
the
hedging arrangement. In addition, 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.
On
February 16, 2005, the Company entered into a $50.0 million notional
forward-starting swap with a commercial bank at a fixed rate of 4.927% and
a
settlement date on or around October 1, 2007. This 10-year forward starting
interest rate swap issued to hedge the cash flows associated with the forecasted
issuance of debt expected to occur in 2007.
On
August
18, 2005, the Company entered into a $50.0 million notional forward-starting
swap with a commercial bank as a fixed rate of 4.869% and a settlement date
between January 1, and December 1, 2008. This 10-year forward starting
interest rate swap is used to hedge the cash flows associated with the
forecasted issuance of debt expected to occur in 2008.
At
September 30, 2005, derivative instruments designated as cash flow hedges were
recorded as a net derivative asset of $91,000 and were included in prepaid
expenses and other assets. The net change in fair value of the derivative
instruments for the nine months was a net unrealized gain of $91,000.
Derivatives designated as cash flow hedges are separately disclosed in the
statement of changes in shareholders’ equity accumulated other comprehensive
income. No hedge ineffectiveness on cash flow hedges was recognized during
2005.
The Company did not have accumulated other comprehensive income in 2004.
Acquisition
Activities: Risks that Acquisitions Will Fail to Meet
Expectations
We
intend
to continue to acquire multifamily residential properties. There are risks
that
acquired properties will fail to perform as expected.
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.
Further,
acquisitions of properties are 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.’’
Risks
that Development Activities Will Be Delayed, not Completed, and/or Fail to
Achieve Expected Results
We
pursue
multifamily residential property development projects and these projects
generally require various governmental and other approvals, which we cannot
assure you that we will receive. 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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| · |
operating
costs 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 the Properties and Fluctuations in Local Markets
May
Adversely Impact Our Financial Conditions and Results of
Operations
We
derived significant amounts of rental revenues for the nine months ended
September 30, 2005 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 September 30, 2005, of our
125
ownership interests in multifamily residential properties, 91 are located in
California. As a result of this geographic concentration, if a local property
market performs poorly, the income from the properties in that market could
decrease. As a result of such a decrease in income, we may be unable to pay
expected dividends to our stockholders. The performance of the economy in each
of these areas affects occupancy, market rental rates and expenses and,
consequently, impacts the income generated from the properties and their
underlying values. The financial results of major local employers also may
impact the cash flow and value of certain of the properties. Economic downturns
in the local markets in which we own properties could have a negative impact
on
our financial condition and results of operations.
Competition
in the Multifamily Residential Market May Adversely Affect Operations and the
Rental Demand for Our Properties
There
are
numerous housing alternatives that compete with our multifamily properties
in
attracting residents. These include other multifamily rental apartments and
single-family homes that are available for rent in the markets in which the
properties are located. The 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 and occupancy 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.
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 September 30, 2005, Essex had
81 of
its 115 consolidated multifamily properties encumbered by debt. Of the 81
properties, 62 are secured by deeds of trust relating solely to those
properties, and with respect to the remaining 19 properties, 4
cross-collateralized mortgages are 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, in turn, may accelerate other
indebtedness secured by properties. Foreclosure of properties would reduce
our
income and asset value.
Dividend
Requirements as a Result of Preferred Stock May Lead to a Possible Inability
to
Sustain Dividends
The
Operating Partnership currently has $130 million in aggregate of Series B
Cumulative Redeemable Preferred Units (the ‘‘Series B Preferred Units’’) and
Series D Cumulative Redeemable Preferred Units (the ‘‘Series D Preferred
Units’’) outstanding. In addition, Essex has approximately $25 million of Series
F Cumulative Redeemable Preferred Stock (the ‘‘Series F Preferred Stock’’)
outstanding. The Series B Preferred Units, the Series D Preferred Units, and
the
Series F Preferred Stock are collectively referred to as the ‘‘Preferred
Equity’’.
The
terms
of the Series F Preferred Stock and of the preferred stock into which each
series of Preferred Units are exchangeable provide for certain cumulative
preferential cash distributions per each share of preferred stock. These terms
also provide that while such preferred stock is outstanding, Essex cannot
authorize, declare, or pay any distributions on Essex common stock, unless
all
distributions accumulated on all shares of such preferred stock have been paid
in full. The distributions payable on such preferred stock may impair Essex’s
ability to pay dividends on its common stock.
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 the properties currently owned by us and other
properties that may be acquired in the future.
Essex’s
ability to pay dividends on its 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:
| · |
Essex
would not be able to pay its indebtedness as it becomes due in the
usual
course of business; or
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| · |
Essex
total assets would be less than its total
liabilities.
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If
Essex
cannot pay dividends on its stock, Essex’s status as a real estate investment
trust for U.S. federal income tax purposes may be jeopardized.
Resale
of Shares Pursuant to Current and Future Registration Statements May Have an
Adverse Effect on the Market Price of the Shares
Pursuant
to the acquisition of John M. Sachs, Inc., a real estate company, in December
2002, we issued 2,719,875 shares of common stock, as partial consideration
for
the acquisition, to the trusts that were the shareholders of that company.
In
connection with the acquisition, Essex entered into a registration rights
agreement with these trusts, pursuant to which in January 2003 we filed a
registration statement on Form S-3 in order to enable the resale of these shares
of common stock. In an amendment to such registration statement filed in April
2003, Essex also registered, pursuant to certain registration rights, 50,000
shares of common stock which are issuable to the trusts in connection with
certain contractual obligations and 2,270,490 shares of common stock which
are
issuable upon exchange of limited partnership interests in the Operating
Partnership. These limited partnership interests are held by senior members
of
our management, certain members of our Board of Directors and certain outside
investors, or the Operating Partnership holders, and comprise approximately
9.5%
of the limited partnership interests of the Operating Partnership as of December
31, 2005. In addition, the Operating Partnership has invested in certain real
estate partnerships. In the 2003 registration statement, we also registered,
pursuant to certain registration rights, 1,473,125 shares of common stock,
which
are issuable upon redemption of all of the limited partnership interests in
such
real estate partnerships. In sum, the 2003 registration statement covers in
aggregate 6,513,490 shares of our common stock. In addition, on March 31, 2004,
the Operating Partnership issued 109,874 operating partnership units in
connection with the acquisition of Waterford Place, a 238-unit apartment
community located in San Jose, California. Essex has redeemed certain of these
operating partnership units for cash. As to the remaining operating partnership
units, Essex granted certain registration rights to the holders of such units
with respect to the shares of Essex common stock that are issuable upon exchange
of such units. Also, on August 6, 2004, the Operating Partnership issued 73,088
operating partnership units in connection with the acquisition of Vista
Belvedere, a 76- unit apartment community located in the Marin County town
of
Tiburon, California. Essex granted certain registration rights to the holders
of
such units with respect to the shares of Essex common stock that are issuable
upon exchange of such units. This prospectus covers the resale of the shares
of
Essex common stock issuable in connection with the Waterford Place and Vista
Belvedere acquisitions. Furthermore, on November 29, 2005, the Operating
Partnership completed a transaction in which it issued a total of $225 million
aggregate principal amount of 3.625% Exchangeable Senior Notes, which are
exchangeable under certain conditions for shares of Essex common stock. We
have
filed a registration statement, which has been declared effective, with respect
to the resale of the shares of Essex common stock that may be issued upon the
exchange of such notes. The resale of the shares of common stock pursuant to
current and future registration statements may have an adverse effect on the
market price of Essex common shares.
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. Mr. Marcus owns
interests in various other real estate-related businesses and investments.
He is
the Chairman of The Marcus & Millichap Company, or ‘‘MM’’, which is a
holding company for certain real estate brokerage, services and real estate
investment companies. MM has an interest in Pacific Property Company, a company
that invests in West Coast multifamily residential properties. In 1999, we
sold
an office building to MM, which Essex previously occupied as its corporate
headquarters.
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 recuse himself from any and all discussions by the Essex Board of Directors
regarding any proposed acquisition and/or development of a multifamily property
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 multifamily properties, 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
September 30, 2005, George M. Marcus, the Chairman of Essex’s Board of
Directors, directly or indirectly owned 1,752,111 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 represented approximately 7.6% of the outstanding
Essex common stock at such time. 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 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 and Mr. William A. Millichap, a
director of Essex, have substantial influence on us. Consequently, their
influence could result in decisions that do not reflect the interests of all
stockholders.
Further
pursuant to the acquisition of John M. Sachs, Inc. in December 2002, we issued,
as partial consideration for the acquisition, 2,719,875 shares of Essex common
stock and an additional 35,860 shares of Essex common stock in July 2003 to
the
trusts that were the shareholders of that company. As a result of this issuance,
these trusts owned, as of September 30, 2005, in aggregate, approximately
5% of Essex’s outstanding common stock. Pursuant to their ownership interest in
Essex, these trusts may have significant influence over us. Such influence
could
result in decisions that do not reflect the interest of all our
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 Series F Preferred Stock and of the preferred stock
into
which our preferred units are exchangeable 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 Essex’s 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. In addition, while any shares of Series F Preferred
Stock or shares of preferred stock into which the preferred units are
exchangeable 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 or 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;
|
| · |
amend,
alter or repeal the provisions of Essex’s charter or bylaws, that would
materially and adversely affect the rights of such preferred stock;
or
|
| · |
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 with the surviving entity and
has the
same terms and in certain other
circumstances.
|
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 Essex’s
common stock.
The
Redemption Rights of the Series B Preferred Units, Series D Preferred Units
and
Series F 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 require it to redeem all of
such units and the terms of Essex’s Series F Preferred Stock provide the holders
of the majority of the outstanding Series F 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 are no
longer registered under the Securities Exchange Act of 1934, as
amended:
|
| · |
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
|
| · |
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 and the aggregate redemption price of the Series F Preferred Stock
would
be $25 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 Essex common stock. Further, these redemption
rights might trigger in 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
The
Maryland General Corporation Law establishes special requirements for ‘‘business
combinations’’ between a Maryland corporation and ‘‘interested stockholders’’
unless exemptions are applicable. An interested stockholder is any 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
|
| · |
66%
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.
|
However,
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
MM or
any entity owned or controlled by Messrs. Marcus and Millichap and MM.
Consequently, the supermajority vote requirement described above will not apply
to any business combination between us and Mr. Marcus, Mr. Millichap, or MM.
As
a result, we may in the future enter into business combinations with Messrs.
Marcus
and Millichap and MM, without compliance with the super-majority 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’s 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 shares of Essex common 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 Essex’s general partner interest in
the Operating Partnership to another entity. Such limitations on Essex’s ability
to act may result in it being precluded from taking action that the board of
directors believes is in the best interests of Essex’s stockholders. In
addition, as of September 30, 2005, one individual, George M. Marcus, held
or
controlled more than 50% of the outstanding units of limited partnership
interest in the Operating Partnership, allowing such actions to be blocked
by a
small number of limited partners.
Essex’s
charter authorizes the issuance of additional shares of Essex 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 shares 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, also 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. Also, Essex’s bylaws may be amended by its board of directors
(upon which no assurance can be given) 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.
In
addition, 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 Essex Bylaws exempt Essex from the control share
provisions of the Maryland General Corporations Law, the Essex 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.
Bond
Compliance Requirements May Limit Income From Certain
Properties
At
September 30, 2005, we had approximately $187 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 and
$15
million of fixed rate tax-exempt financing related to Meadowood 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 relating
to
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;
|
| · |
local
economic conditions in which the properties are located, such as
oversupply of housing or a reduction in demand for rental
housing;
|
| · |
the
attractiveness of the properties to
tenants;
|
| · |
competition
from other available space;
|
| · |
Essex’s
ability to provide for adequate maintenance and insurance;
and
|
| · |
increased
operating expenses.
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Also,
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. In addition, 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.
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
consent. Additionally, 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. In addition,
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. In addition, 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 could have a material impact on our financial
position.
Dedicated
Investment Activities and Other Factors Specifically Related to Essex Apartment
Value Fund II, L.P.
In
2004,
we organized an investment fund, Essex Apartment Value Fund II, LP. (‘‘Fund
II’’), which subject to specific exceptions, is our exclusive investment vehicle
for new investment until at least 90% of Fund II’s committed capital has been
invested or committed for investments, or if earlier, October 31, 2006. We
are
committed to invest 28.2% of the aggregate capital committed to Fund II. Fund
II
involves risks to us such as the following: our partners in Fund II might remove
Essex as the general partner of Fund II; become bankrupt (in which event we
might become generally liable for the liabilities of Fund II); have economic
or
business interests or goals that are inconsistent with our business interests
or
goals; fail to fund capital commitments as contractually required; or fail
to
approve decisions regarding Fund II that are in our best interest. 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 that own real estate and may also 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 its 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. In addition, 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. In addition, 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,
Essex 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 could carry certain limited insurance
coverage for this type of environmental risk. We have conducted environmental
studies which revealed the presence of soil and groundwater contamination at
certain properties. Such contamination at certain of these properties was
reported to have migrated on-site from adjacent industrial manufacturing
operations, and in some cases, from on-site sources. The former industrial
users
of the properties were identified as the source of contamination. The
environmental studies noted that certain properties are located 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
multifamily properties 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, of 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. We have,
however, purchased pollution liability insurance, which includes limited
coverage for mold, although the insurance may not cover all pending or future
mold claims. We have adopted programs designed to manage the existence of mold
in our 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.
We
cannot
assure you that we will not be sued in the future for mold related matters
nor
can we 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. 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. We cannot assure you
that we will not be adversely affected by costs related to our compliance with
methane gas related requirements or litigation costs related to methane or
radon
gas.
Except
with respect to a few properties, Essex has no indemnification agreements from
third parties for potential environmental clean-up costs at its properties.
Essex 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 Essex.
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 Essex, or that a material environmental condition does not exist
as
to anyone or more of the properties. Essex has limited insurance coverage for
the types of environmental liabilities described above.
General
Uninsured Losses
Essex
has
a comprehensive insurance program covering its property and operating
activities. There are, however, certain types of extraordinary losses for which
Essex may not have sufficient insurance. Accordingly, Essex may sustain
uninsured losses due to insurance deductibles, self-insured retention, uninsured
claims or casualties, or losses in excess of applicable coverage.
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 property indebtedness divided by the sum of total property
indebtedness plus total equity market capitalization. As used in the above
formula, total equity market capitalization is equal to the aggregate market
value of the outstanding shares of Essex 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 Essex common stock and the gross proceeds of the preferred units
of the Operating Partnership. Based on this calculation (including the current
market price and excluding undistributed net cash flow), our
debt-to-total-market-capitalization ratio was approximately 34.7% as of
September 30, 2005.
Essex’s
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 Essex changed these policies, it could incur more debt,
resulting in an increased risk of default on its obligations and the obligations
of the Operating Partnership, and an increase in debt service requirements
that
could adversely affect its 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. In addition, 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. Despite Essex’s qualification as
a REIT, its taxable REIT subsidiaries must pay U.S. federal income tax on their
taxable income. While Essex will attempt to ensure that its dealings with its
taxable REIT subsidiaries will 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 taxable REIT
subsidiaries may be denied deductions, to the extent its dealings with its
taxable REIT subsidiaries are not deemed to be arm’s length in nature. No
assurances can be given that Essex’s dealings with its taxable REIT subsidiaries
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. In addition, 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.
ESSEX
PROPERTY TRUST, INC.
Essex
is
a self-administered and self-managed equity real estate investment trust that
was formed in 1994 to continue and expand the real estate investment and
management operations conducted by Essex Property Corporation since 1971.
The
Company’s multifamily portfolio as of September 30, 2005 consists of ownership
interests in 125 properties (comprising 25,950 apartment units), of which
13,382
units are located in Southern California (Los Angeles, Ventura, Orange, San
Diego and Riverside counties), 5,920 units are located in Northern California
(the San Francisco Bay Area), 6,346 are located in the Pacific Northwest
(5,471
units in the Seattle metropolitan area and 875 units in the Portland, Oregon
metropolitan area), and 302 units are located in Houston, Texas. In addition,
at
September 30, 2005, the Company has an ownership interest in other real estate
assets consisting of three recreational vehicle parks (comprising 562 spaces),
three office buildings (totaling approximately 166,340 square feet) and one
manufactured housing communities (containing 157 sites), (collectively, together
with the Company’s multifamily residential properties, the “Properties”). One of
the office buildings located in Northern California (Palo Alto) has
approximately 17,400 square feet and houses the Company’s headquarters and
another office building located in Southern California (Woodland Hills) has
approximately 38,940 square feet, of which the Company occupies approximately
11,200 square feet. The Woodland Hills office building has nine third-party
tenants occupying approximately 27,400 feet. The Company along with its
affiliated entities and joint ventures also has entered into commitments
for the
development of 505 units in three multifamily communities; of which one is
in
Northern California and two are in Southern California.
Essex
conducts substantially all of its activities through the Operating Partnership.
Essex currently owns an approximate 90.5% general partnership interest and
members of the Company’s Board of Directors, senior management and certain
third-party investors own limited partnership interests of approximately 9.5%
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. The description of Essex’s business and
properties, set forth herein, and in documents incorporated by reference herein,
would apply, without material differences, to the Operating Partnership’s
business and properties.
Essex’s
common stock is listed on the New York Stock Exchange under the Symbol “ESS.”
Essex is a Maryland corporation. Essex’s executive offices are located at 925
East Meadow Drive, Palo Alto, California 94303.
USE
OF PROCEEDS
We
will
not receive any of the proceeds from the sale of shares of common stock by
the
selling stockholders but have agreed to bear certain expenses of registration
of
the shares under federal and state securities laws.
DESCRIPTION
OF CAPITAL STOCK
General
As
of
September 30, 2005, 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
655,682,178 Essex common shares of common stock, par value $0.0001 per share,
14,317,822 shares of preferred stock, par value $0.0001 per share, and
330,000,000 shares of excess stock.
As
of
September 30, 2005, there were 23,139,876 Essex common shares issued and
outstanding. Up to 1,375,400 shares of common stock have been reserved for
issuance under Essex Property Trust, Inc. 1994 Stock Incentive Plan and up
to
406,500 shares of common stock have been reserved for issuance under Essex
Property Trust, Inc. 1994 Employee Stock Purchase Plan. In addition, as of
September 30, 2005, an aggregate of 2,299,361 shares of common stock may be
issued upon the exchange of outstanding limited partnership interests in the
Operating Partnership and an additional 119,786 shares of common stock would
be
issuable in exchange for non-forfeitable Series Z and Z-1Incentive Units in
the
Operating Partnership, subject to meeting certain requirements with respect
to
the Series Z and Z-1 Incentive Units program. In addition, certain partners
in
limited partnerships in which the Operating Partnership has invested, have
the
right to have their limited partnership interests in such partnership redeemed
for cash or, at our option, for an aggregate of 1,303,051 shares of common
stock. In addition, as of September 30, 2005, there were 1,000,000 shares of
Essex’s 7.8125% Series F Cumulative Preferred Stock issued and
outstanding.
Common
Stock of Essex Property Trust
The
following description of the Essex common shares 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 its 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.
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 declared
from time to time by the board of directors of 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, declared by Essex’s board of directors.
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.
Essex
is
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 “Material U.S. Federal Income Tax
Considerations — Taxation of Essex as a REIT — Requirements for
Qualification.”
Restrictions
on Transfer
In
order
for Essex to qualify as a REIT under the Internal Revenue Code, among other
requirements (see ‘‘Material U.S. Federal Income Tax Considerations — Taxation
of Essex as a REIT — Requirements for Qualification’’), no more than 50% of the
value of the outstanding shares of its 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, the Essex
stock must be owned by 100 or more persons during at least 335 days of a taxable
year of 12 months (other than its first year as a REIT) or during a
proportionate part of a shorter taxable year.
Because
it is essential for Essex to continue to qualify as a REIT, its charter, subject
to certain exceptions, provides an “ownership limit” under which no stockholder,
other than George M. Marcus or his wife and children, trusts for the benefit
of
his descendants and, in the case of his death, his heirs (collectively, the
“Successors”), 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 Essex 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 Essex stock. If
George M. Marcus or the Successors convert his or their limited partnership
interests in the Operating Partnership into shares of common stock, he may
exceed the ownership limit. The ownership limit provisions therefore provides
that George M. Marcus or the Successors may acquire additional shares (up to
25%
of the value of the outstanding shares of Essex common stock) pursuant to
conversion rights or from other sources so long as the acquisition does not
result in the five largest beneficial owners of Essex common stock holding
more
than 50% of the value of the outstanding shares of Essex stock. The Board of
Directors may also exempt a stockholder from the ownership limit if it received
satisfactory evidence that such stockholder’s ownership of shares in excess of
the ownership limit will not jeopardize Essex’s status as a REIT. There can be
no assurance, however, that such an exemption will be granted. As a condition
to
providing such an exemption, the Board of Directors must receive an opinion
of
counsel 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 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
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 its best interests to attempt to qualify, or to continue to qualify,
as a REIT, the ownership limit provisions of the Essex charter can be
terminated.
If
a
stockholder attempts to transfer shares of Essex stock that would (i) create
a
direct ownership of Essex’s shares in excess of the ownership limit absent a
Board exemption, (ii) result in the ownership of Essex by fewer than 100 persons
or (iii) result in the ownership of more than 50% of the value of Essex’s 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, such shares of Essex stock
will automatically be exchanged for shares of “excess stock.” Shares of Essex’s
outstanding stock will also be so exchanged if, as a result of a change in
Essex’s capital structure, such shares violate any of the foregoing limitations.
All excess stock will be automatically transferred, without action by the
purported holder, to a person who is unaffiliated with Essex 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 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.
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 Essex charter will not be automatically eliminated
or modified. Except as described above, any change to such limitations would
require an amendment to the Essex charter, which in turn would require the
affirmative vote of holders owning a majority of the outstanding shares of
Essex
common stock. In addition to preserving Essex’s status as a REIT, the ownership
limit provisions in the Essex charter may have the effect of precluding an
acquisition of Essex’s control without the approval of the Board of
Directors.
All
certificates representing shares of Essex’s equity stock will bear a legend
referring to the restrictions described above.
Stockholder
Rights Plan
On
October 13, 1998, the Board of Directors 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 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 Essex and its subsidiaries 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); provided, however,
that the Rights generally may not be redeemed for one hundred eighty (180)
days
following a change in a majority of the Board as a result of a proxy
contest.
SELLING
STOCKHOLDERS
The
following table sets forth, to our knowledge, information about the selling
stockholders as of March 6, 2006. The share amounts set forth in the table
are
based upon information provided to us by these selling stockholders or their
representatives as of recent dates, or our records, and such amounts are
accurate to the best of our knowledge. It is possible, however, that the selling
stockholders may acquire or dispose of additional shares of common stock from
time to time after the date of this prospectus.
Beneficial
ownership in the following table is determined in accordance with the rules
of
the Securities and Exchange Commission (“SEC”). In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options held by that person that
are
currently exercisable or exercisable within 60 days of March 6, 2006 are deemed
outstanding. Such shares, however, are not deemed outstanding for the purposes
of computing the percentage ownership of each other person. To the Company’s
knowledge, except as set forth in the footnotes to this table and subject to
applicable community property laws, each person named in the table below has
sole voting and investment power with respect to the shares set forth opposite
such person’s name.
Since
the
selling stockholders may sell all, some or none of their shares, we cannot
estimate the number or percentage of shares of common stock that each selling
stockholder will own upon completion of the offering to which this prospectus
relates. For purposes of this table, however, we have assumed that, after
completion of this offering, none of the shares covered by this prospectus
will
be held by the selling stockholders.
In
the
registration statement, of which this prospectus is a part, we have registered,
pursuant to certain registration rights, an aggregate of 142,076 shares of
common stock, which are issuable upon exchange of certain currently outstanding
limited partnership interests in the Operating Partnership.
The
selling stockholders named below may from time to time offer all, some or none
of their shares of common stock offered by this prospectus. The term “Selling
Stockholder” includes donees, pledgees, transferees or other
successors-in-interest selling shares received after the date of this prospectus
from the selling stockholders as a gift, pledge, partnership distribution or
other non-sale related transfer.
Each
selling stockholder set forth in the table below owns (assuming the exchange
of
all the limited partnership interests held by such stockholder into common
stock) less than 1% of the outstanding common stock of Essex.
|
Name
of Selling Stockholder
|
Shares
of Common Stock Beneficially Owned Prior to Offering
|
Shares
of Common Stock That May Be Sold in This Offering
|
Shares
of Common Stock Beneficially Owned After the Offering(1)
|
Percentage
of Common Stock Beneficially Owned After the
Offering
|
|
Preston
Butcher
|
79,659
|
26,736
|
52,923
|
*
|
|
Jeffrey
K. Byrd
|
60,474
|
16,975
|
43,499
|
*
|
|
W.
Dean Henry
|
26,830
|
736
|
26,094
|
*
|
|
Stuart
and Sandy Leeder
|
3,274
|
1,099
|
2,175
|
*
|
|
Mack
Pogue
|
74,737
|
23,442
|
51,295
|
*
|
|
Peter
John Andersen, Jr. and Janet Irene Andersen, as trustees of the Peter
John
Andersen, Jr. and Janet Irene Andersen 1987 Trust.
|
73,088
|
73,088
|
0
|
*
|
(1)
Such
shares of common stock beneficially owned after this offering may be covered
by
a prior registration statement (Registration Statement No. 333-102552), which
has been declared effective.
*Less
than one (1) percent of the outstanding common stock of Essex.
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.
MATERIAL
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The
following discussion describes the material U.S. federal income tax
considerations relating to our qualification and taxation as a REIT, our
investment in entities treated as partnerships for U.S. federal income tax
purposes and the ownership and disposition of our common stock. Because this
is
a summary that is intended to address only material U.S. federal income tax
consequences generally relevant to all stockholders relating to the ownership
and disposition of our common stock, it may not contain all the information
that
may be important to you. The discussion does not cover state or local tax laws
or any U.S. federal tax laws other than income tax laws.
We
urge you to consult your own tax advisor regarding the specific tax consequences
to you of the acquisition, ownership, and disposition of our common stock and
of
our election to be taxed as a REIT. Specifically, you should consult your own
tax advisor regarding the U.S. federal, state, local, foreign, and other tax
consequences of such acquisition, ownership, disposition, and election, and
regarding potential changes in applicable tax laws.
General
We
elected to be taxed as a REIT commencing with our taxable year ended
December 31, 1994. We believe that we have been organized and operated in a
manner that permits us 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 our 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 we intend to continue to operate to satisfy such requirements,
no assurance can be given that the actual results of our operations for any
particular taxable year will satisfy such requirements. See “-- 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 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.
Morrison
& Foerster LLP has acted as our tax counsel in connection with the filing of
this prospectus. In connection with this filing, Morrison & Foerster LLP
will opine that we have been organized and have operated in conformity with
the
requirements for qualification and taxation as a REIT under the Internal Revenue
Code for each of our taxable years beginning with the taxable year ended
December 31, 1994 through our taxable year ended December 31, 2005,
and if we continue to be organized and operated after December 31, 2005 in
the same manner as we have prior to that date, we will continue to qualify
as a
REIT. The opinion of Morrison & Foerster LLP will be based on various
assumptions and representations made by us as to factual matters, including
representations made by us in this prospectus and a factual certificate provided
by one of our officers. Moreover, our qualification and taxation as a REIT
depends upon our ability to meet the various qualification tests imposed under
the Internal Revenue Code and discussed below, relating to our 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
Morrison & Foerster LLP. Accordingly, neither Morrison & Foerster LLP
nor we can assure you that the actual results of our operations for any
particular taxable year will satisfy these requirements. See “--Failure to
Qualify.”
In
brief,
if certain detailed conditions imposed by the REIT provisions of the Internal
Revenue Code are satisfied, entities, such as us, 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. This treatment
substantially eliminates the “double taxation” (i.e.,
taxation at both the corporate and stockholder levels) that generally results
from investing in corporations under current law.
If
we
fail to qualify as a REIT in any year, however, we will be subject to U.S.
federal income tax as if we were an ordinary corporation and our stockholders
will be taxed in the same manner as stockholders of ordinary corporations.
In
that event, we could be subject to potentially significant tax liabilities,
the
amount of cash available for distribution to our stockholders could be reduced
and we would not be obligated to make any distributions. Moreover, we could
be
disqualified from taxation as a REIT for four taxable years. See “—Failure to
Qualify.”
Taxation
of Essex
In
any
year in which we qualify as a REIT, in general, we will not be subject to U.S.
federal income tax on that portion of our net income that we distribute to
stockholders, except as follows:
| · |
First,
we will be taxed at regular corporate rates on any undistributed
REIT
taxable income, including undistributed net capital gain. (However,
we can
elect to “pass through” any of our taxes paid on our undistributed net
capital gain income to our stockholders on a pro rata basis.)
|
| · |
Second,
under certain circumstances, we may be subject to the “alternative minimum
tax” on our items of tax preference.
|
| · |
Third,
if we have (a) net income from the sale or other disposition of
“foreclosure property” which is held primarily for sale to customers in
the ordinary course of business or (b) other nonqualifying income
from
foreclosure property, we will be subject to tax at the highest corporate
rate on such income.
|
| · |
Fourth,
if we have 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.
|
| · |
Fifth,
as discussed in detail below, if we should fail to satisfy the gross
income tests or the asset tests, and nonetheless maintain our
qualification as a REIT because certain other requirements have been
satisfied, we ordinarily will be subject to a penalty tax relating
to such
failure, computed as described below. Similarly, if we maintain our
REIT
status despite our failure to satisfy one or more requirements for
REIT
qualification, other than the gross income tests and asset tests,
we must
pay a penalty of $50,000 for each such failure.
|
| · |
Sixth,
if we should fail to distribute during each calendar year at least
the sum
of (1) 85% of our ordinary income for such year, (2) 95% of our net
capital gain income for such year, and (3) any undistributed taxable
income from prior periods, we will be subject to a 4% excise tax
on the
excess of such required distribution over the amounts distributed.
|
| · |
Seventh,
if we acquire any asset from a C corporation (i.e., generally a
corporation subject to full corporate-level tax) in a transaction
in which
the basis of the asset in our hands is determined by reference to
the
basis of the asset (or any other property) in the hands of the C
corporation, and we recognize gain on the disposition of such asset
during
the 10-year period beginning on the date on which we acquired such
asset,
then, to the extent of any built-in, unrealized gain at the time
of
acquisition, such gain generally will be subject to tax at the highest
regular corporate rate.
|
| · |
Eighth,
we may be subject to an excise tax if our dealings with our taxable
REIT
subsidiaries, defined below, are not at arm’s length.
|
| · |
Finally,
any earnings we derive through a taxable REIT subsidiary will effectively
be subject to a corporate-level
tax.
|
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; 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 we were to fail to satisfy condition (6) during
a taxable year, that failure would not result in our disqualification as a
REIT
under the Internal Revenue Code for such taxable year as long as (i) we
satisfied the stockholder demand statement requirements described in the
succeeding paragraph and (ii) we did not know, or exercising reasonable
diligence would not have known, whether we had failed condition
(6).
We
believe we have issued sufficient stock with sufficient diversity of ownership
to satisfy conditions (5) and (6) above. In order to ensure compliance with
the
ownership tests described above, we also have certain restrictions on the
transfer of our stock to prevent further concentration of stock ownership.
Moreover,
to evidence compliance with these requirements, we must maintain records
which
disclose the actual ownership of our outstanding stock. In fulfilling our
obligations to maintain records, we must and will demand written statements
each
year from the record holders of designated percentages of our stock disclosing
the actual owners of our stock. A list of those persons failing or refusing
to
comply with such demand must be maintained as part of our records. A stockholder
failing or refusing to comply with our written demand must submit with his
federal income tax returns a similar statement disclosing the actual ownership
of our stock and certain other information. In addition, our charter restricts
the transfer of our shares in order to assist in satisfying the share ownership
requirements. See “Description of Common Stock--Restrictions on
Transfer.”
Although
we intend to satisfy the shareholder demand letter rules described in the
preceding paragraph, our failure to satisfy these requirements will not result
in our disqualification as a REIT but may result in the imposition of Internal
Revenue Service penalties against us.
We
currently have several direct corporate subsidiaries and may have additional
corporate subsidiaries in the future. Certain of our corporate subsidiaries
will
be treated as “qualified REIT subsidiaries” under the Internal Revenue Code. A
corporation will qualify as a qualified REIT subsidiary if we own 100% of its
outstanding stock and we and the 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 we own 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 our assets, liabilities and items of
income, deduction and credit. A qualified REIT subsidiary is not subject to
U.S.
federal income tax and our ownership of the stock of such a subsidiary will
not
violate the REIT asset tests, described below under “--Asset Tests.”
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, our proportionate share of the assets, liabilities
and items of income of the Operating Partnership will be treated as our assets,
liabilities and items of income for purposes of applying the requirements
described below. See “--Investments in Partnerships.”
Asset
Tests
At
the
close of each quarter of our taxable year, we generally must satisfy three
tests
relating to the nature of our assets. First, at least 75% of the value of our
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 us). Second,
although the remaining 25% of our assets generally may be invested without
restriction, securities in this class generally may not exceed either (1) 5%
of
the value of our total assets as to any one nongovernment issuer, (2) 10% of
the
outstanding voting securities of any one issuer, or (3) 10% of the value of
the
outstanding securities of any one issuer. Third, not more than 20% of the total
value of our assets can be represented by securities of one or more “taxable
REIT subsidiaries” (described below). Securities for purposes of the above 5%
and 10% asset tests may include debt securities, including debt issued by a
partnership. However, 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
exceptions applicable, for example, to “straight debt,” as specially defined for
this purpose, to certain debt issued by partnerships, and to certain other
debt
that is not considered to be abusive and that presents minimal opportunity
to
share in the business profits of the issuer. Beginning in 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.
We
and a
corporation in which we own 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 to or rental, service or other
agreements with its taxable REIT subsidiary 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 our earnings derived through a
taxable REIT subsidiary are effectively subject to a corporate level tax
notwithstanding our status as a REIT. To the extent that a taxable REIT
subsidiary pays dividends to us in a particular calendar year, we may designate
a corresponding portion of dividends we pay to our stockholders during that
year
as “qualified dividend income” eligible to be taxed at reduced rates to
noncorporate recipients. See “--Taxation of Taxable U.S. Holders.”
We
have
made elections to treat several of our corporate subsidiaries as taxable REIT
subsidiaries. We believe that the value of the securities we hold of our taxable
REIT subsidiaries does not and will not represent more than 20% of our total
assets, and that all transactions between us and our taxable REIT subsidiaries
are conducted on arm’s length terms. In addition, we believe that the amount of
our assets that are not qualifying assets for purposes of the 75% asset test
will continue to represent less than 25% of our total assets and will satisfy
the 5% and both 10% asset tests.
Beginning
in 2005, if we fail to satisfy the 5% and/or 10% asset tests for a particular
quarter, we will not lose our 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 we come into compliance with the asset tests within
six
months after the last day of the quarter in which we identify the failure.
In
addition, beginning in 2005, other failures to satisfy the asset tests generally
will not result in a loss of REIT status if (i) following our identification
of
the failure, we file a schedule with the Internal Revenue Service describing
each asset that caused the failure; (ii) the failure was due to reasonable
cause
and not to willful neglect; (iii) we come into compliance with the asset tests
within six months after the last day of the quarter in which the failure was
identified; and (iv) we pay 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 we come into compliance with the
asset tests.
Gross
Income Tests
We
must
satisfy two separate percentage tests relating to the sources of our gross
income for each taxable year. For purposes of these tests, where we invest
in a
partnership, we will be treated as receiving our pro rata share based on our
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 our hands as it has in the hands of the partnership. See “--
Investments in Partnerships”.
The
75% Test
At
least
75% of our 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 our 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 us.
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 we, or an owner
of
10% or more of our equity securities, directly or constructively owns (i) 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
(ii) 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 (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,
we
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 we derive no revenue or through a taxable
REIT subsidiary. The “independent contractor” or taxable REIT subsidiary
requirement, however, does not apply to the extent that the services provided
by
us 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.
We
do not
receive any rent that is based on the income or profits of any person. In
addition, we do 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, we believe that any personal property
rented in connection with our apartment facilities is well within the 15%
restriction. Finally, we do not believe that we provide services, other than
within the 1% de minimis exception described above, to our 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 our gross income from the sources listed above,
at
least 95% of our 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 we comply
with
the 75% and 95% tests, gross income does not include income from “prohibited
transactions” (discussed below).
From
time
to time, we may enter into hedging transactions with respect to one or more
of
our assets or liabilities. Our 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 our 2004 tax year,
to the extent we entered into an interest rate swap or cap contract, option,
futures contract, forward rate agreement or any similar financial instrument
to
hedge our 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. Beginning in 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 we hedge 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. We intend to structure any hedging transactions in a manner
that does not jeopardize our status as a REIT.
Our
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 our interest in a partnership generally will be
qualifying income for purposes of the 75% and 95% gross income tests. We
anticipate that income on our other investments will not result in our failing
the 75% or 95% gross income test for any year.
Even
if
we fail to satisfy one or both of the 75% or 95% tests for any taxable year,
we
may still qualify as a REIT for such year if we are entitled to relief under
certain provisions of the Internal Revenue Code. These relief provisions will
generally be available if our failure to comply was due to reasonable cause
and
not to willful neglect, and we timely comply with requirements for reporting
each item of our income to the Internal Revenue Service. It is not possible,
however, to state whether in all circumstances we would be entitled to the
benefit of these relief provisions. Even if these relief provisions apply,
we
will still be subject to a special tax upon the greater of either (1) the amount
by which 75% of our gross income exceeds the amount of our income qualifying
under the 75% test for the taxable year or (2) the amount by which 90% (95%
for
2005 and later taxable years) of our gross income exceeds the amount of our
income qualifying for the 95% income test for the taxable year, multiplied
by a
fraction intended to reflect our profitability.
Annual
Distribution Requirements
To
qualify as a REIT, we are required to distribute dividends (other than capital
gain dividends) to our stockholders each year in an amount equal to at least
(A)
the sum of (i) 90% of our REIT taxable income (computed without regard to
the dividends paid deduction and our 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 our 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 we timely file our tax return for
such
year and if paid on or before the first regular dividend payment after such
declaration, provided 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 our prior
taxable year for purposes of the 90% distribution requirement. To the extent
that we do not distribute all of our net capital gain or distribute at least
90%, but less than 100%, of our REIT taxable income, as adjusted, we will be
subject to tax on the undistributed amount at regular corporate tax rates,
as
the case may be. (However, we can elect to “pass through” any of our taxes paid
on our undistributed net capital gain income to our stockholders on a pro rata
basis.)
28
Furthermore,
if we should fail to distribute during each calendar year at least the sum
of
(1) 85% of our ordinary income for such year, (2) 95% of our net capital
gain
income for such year, and (3) any undistributed taxable income from prior
periods, we would be subject to a 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 we elected to retain and pay tax on. For these and
other
purposes, dividends declared by us 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 us and received by the
stockholder during such taxable year, provided that the dividend is actually
paid by us by January 31 of the following taxable year.
We
believe that we have made timely distributions sufficient to satisfy the annual
distribution requirements. It is possible that in the future we 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 our REIT taxable income on the other
hand. Further, as described below, it is possible that, from time to time,
we
may be allocated a share of net capital gain attributable to the sale of
depreciated property that exceeds our allocable share of cash attributable
to
that sale. To avoid any problem with the distribution requirements, we will
closely monitor the relationship between our REIT taxable income and cash flow
and, if necessary, will borrow funds or issue preferred or common stock to
satisfy the distribution requirement. We may be required to borrow funds at
times when market conditions are not favorable.
If
we
fail to meet the distribution requirements as a result of an adjustment to
our
tax return by the Internal Revenue Service or we determine that we understated
our income on a filed return, we may retroactively cure the failure by paying
a
“deficiency dividend” (plus applicable penalties and interest) within a
specified period.
Beginning
in 2005, if we should fail to satisfy one or more requirements for REIT
qualification, other than the gross income tests and asset tests, we may retain
our REIT qualification if the failures are due to reasonable cause and not
willful neglect, and if we pay a penalty of $50,000 for each such
failure.
Certain
Loss Limitations
The
American Jobs Creation Act of 2004, or the 2004 Act, added Section 470 to the
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 the 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 the operating partnership. However, the IRS issued a notice
stating that it will not apply Section 470 to partnerships for taxable years
beginning before January 1, 2006 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 the operating partnership’s taxable year ending December 31,
2005 only. Accordingly, commencing with our taxable year beginning January
1,
2006, unless Congress passes corrective legislation which addresses this issue
or some other form of relief, certain losses generated with respect to
properties owned by the Operating Partnership may be disallowed until future
years. This could increase the amount of distributions we are required to make
in a particular year in order to meet the REIT distribution requirements and
also could increase the portion of distributions to our stockholders that are
taxable as dividends.
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 we will attempt to ensure that none of our
sales
of property will constitute a prohibited transaction, we cannot assure you
that
none of such sales will be so treated.
Like-Kind
Exchanges
We
may
dispose of properties in transactions intended to qualify as like-kind exchanges
under the 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 us to federal income tax, possibly
including the 100% prohibited transaction tax, depending on the facts and
circumstances surrounding the particular transaction.
Failure
to Qualify
If
we
fail to qualify for taxation as a REIT in any taxable year and the relief
provisions do not apply, we will be subject to tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate rates.
Distributions to stockholders in any year in which we fail to qualify will
not
be deductible by us, nor will they be required to be made. In such event, to
the
extent of our 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 “--Taxation of Taxable U.S. Holders.” Unless entitled to
relief under specific statutory provisions, we 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 we would be entitled
to such statutory relief.
Investments
in Partnerships
General
We
hold 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.
The 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. We include our allocable share of
items of partnership income, gain, loss deduction and credit in the computation
of our REIT taxable income. Moreover, we include our proportionate share, based
on our capital interest in a partnership, of the foregoing partnership items
for
purposes of the various REIT income tests. See "--Taxation of Essex" and
"--Gross Income Tests." Any resultant increase in our REIT taxable income
increases our distribution requirements, but is not subject to U.S. federal
income tax in our hands provided that such income is distributed to our
stockholders. See "--Annual Distribution Requirements." In addition, for
purposes of the REIT asset tests, we include our proportionate share, generally
based on our capital interest in assets held by the partnerships. See "--Asset
Tests."
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 our 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 our 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 us 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 us
as
a result of such sale. This may cause us to recognize taxable income in excess
of cash proceeds, which might adversely affect our ability to comply with the
REIT distribution requirements. See “--Annual Distribution Requirements.” In
addition, the application of Section 704(c) of the Internal Revenue Code is
not entirely clear and may be affected by authority that may be promulgated
in
the future.
Investment
in Our Common Stock
The
following summary describes certain U.S. federal income tax consequences
relating to the purchase, ownership, and disposition of our common stock as
of
the date hereof. Except where noted, this summary deals only with common stock
held as a capital asset and does not deal with special situations, such as
those
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 our common 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
our
common stock, the tax treatment of a partner in the 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 our common stock, you should consult
your tax advisor regarding the tax consequences of the ownership and disposition
of our common stock.
U.S.
Holders.
As used
herein, a “U.S. holder” of our common 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;
|
| · |
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
As
long
as we qualify as a REIT, distributions made to our 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.
In
general, dividends paid by REITs are not eligible for the 15% tax rate on
“qualified dividend income” and, as a result, our ordinary REIT dividends will
continue to be taxed at the higher ordinary income tax rate. Dividends received
by a noncorporate stockholder could be treated as “qualified dividend income,”
however, to the extent we have 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 we
distributed less than 100% of our taxable income). In general, to qualify for
the reduced tax rate on qualified dividend income, a stockholder must hold
our
stock for more than 60 days during the 121-day period beginning on the date
that
is 60 days before the date on which our common stock becomes ex-dividend.
To
the
extent we make distributions in excess of 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 common 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 common
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 us in October, November or December of any year
and payable to a U.S. holder who held our common stock on a specified record
date in any such month shall be treated as both paid by us and received by
the
U.S. holder on December 31 of such year, provided that the dividend is
actually paid by us during January of the following calendar year.
In
general, distributions which are designated by us 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 common 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 occurring
on
or after May 6, 2003. 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
our “unrecaptured Section 1250 gain.”
We
may
elect to retain, rather than distribute as a capital gain dividend, our net
long-term capital gains. In such event, we would pay tax on such retained net
long-term capital gains. In addition, to the extent designated by us, 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 our 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 us 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
common 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 us and gain arising from the sale or exchange by a U.S. holder of common
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 our net operating losses or capital losses.
Disposition
of Stock.
Upon
any taxable sale or other disposition of our common 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 and (2) the U.S. holder’s
adjusted basis in the common 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 our common 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% (which is generally higher
than
the long-term capital gain tax rates for noncorporate U.S. holders) 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 our common stock regardless
of its holding period for the stock.
In
general, any loss upon a sale or exchange of our common 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 us required to be treated by such U.S. holder as long-term capital
gain.
Information
Reporting and Backup Withholding.
Payments of dividends on our common stock and proceeds received upon the sale,
redemption or other disposition of our stock may be subject to Internal Revenue
Service information reporting and backup withholding tax. 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 tax 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 us 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
us
to, and gain upon a disposition of our common 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 common 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 us 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 us may
be
treated as UBTI to certain domestic private pension trusts if we are treated
as
a “pension-held REIT.” We believe that we are not, and we do not expect to
become, a “pension-held REIT.” If we were to become a pension- held REIT, these
rules generally would only apply to certain pension trusts that held more than
10% of our 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 our common stock applicable
to
non-U.S. holders of such stock. A “non-U.S. holder” is any person who or that 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 our 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 our common stock. In cases where the dividend
income from a non-U.S. holder’s investment in our common 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 to the 30% branch profits
tax
in the case of a corporate non-U.S. holder).
2. Non-Dividend
Distributions.
Unless
our stock constitutes a USRPI (as defined below), distributions by us which
are
not paid out of our 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 our current and accumulated earnings and profits. If our common 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.
We
expect
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 or (2) the non- U.S.
holder files an Internal Revenue Service Form W-8ECI with us 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 our current and accumulated earnings and profits.
3. Capital
Gain Dividends.
Under
the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), a
distribution made by us 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
the Operating Partnership generally are USRPIs.) Distributions subject to FIRPTA
may also be subject to a 30% 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 our common 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) our common
stock
is regularly traded on an established securities market located in the United
States and (2) the 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 our capital gains which are not USRPI Capital Gains generally
will not be subject to income taxation, unless (1) investment in the shares
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 30% 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.
We
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 our 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 our common shares while such shares are regularly traded
on an established securities market. Instead, those amounts will be treated
as
described above under “Ordinary Dividends.”
Disposition
of Stock.
Unless
our common 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
common 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
common stock will not constitute a USRPI if we are 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. We believe that we are, and we expect to
continue to be, a domestically controlled REIT, and therefore that the sale
of
our common stock will not be subject to taxation under FIRPTA. Because our
common stock will be publicly traded, however, no assurance can be given that
we
will continue to be a domestically controlled REIT.
Even
if
we do not constitute a domestically controlled REIT, a non-U.S. holder’s sale of
our common stock generally will not be subject to tax under FIRPTA as a sale
of
a USRPI provided that (1) the stock is “regularly traded” (as defined by
applicable U.S. Treasury regulations) on an established securities market and
(2) the selling non-U.S. holder held (taking into account constructive ownership
rules) 5% or less of our outstanding common stock at all times during a
specified testing period.
If
gain
on the sale of our common 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 common 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 our
common stock unless the holder has certified that it is not a U.S. holder and
the payor 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 our 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 our 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
(i) a “controlled foreign corporation” for U.S. federal income tax
purposes, (ii) 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, (iii) 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 (iv) 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.
Dividend
Reinvestment Program
Stockholders
participating in our dividend reinvestment program are treated as having
received the gross amount of any cash distributions which would have been paid
by us 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 us generally. See “Investment in Our Common Stock.”
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 our 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).
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 us 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 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 us.
State
and Local Taxes
We
and
our stockholders may be subject to state or local taxation in various
jurisdictions, including those in which we or they transact business or reside.
The state and local tax treatment of us and our 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 our common
stock.
PLAN
OF DISTRIBUTION
This
prospectus relates to the offer and sale from time to time by the selling
stockholders of up to 142,076 shares of common stock.
Essex
is
registering the shares of common stock to provide the selling stockholders
with
freely tradeable securities, but the registration of these shares does not
necessarily mean that the selling stockholders will offer or sell any of the
shares.
We
will
not receive any proceeds from the issuance of the shares of common stock to
the
selling stockholders or from the sale of the shares by the selling stockholders,
but we have agreed to pay certain expenses of the registration of the shares.
The selling stockholders may from time to time sell the shares directly to
purchasers. Alternatively, the selling stockholders may from time to time offer
the shares through dealers or agents, who may receive compensation in the
form of commissions from the selling stockholders and for the purchasers of
the shares for whom they may act as agent. The selling stockholders and any
dealers or agents that participate in the distribution of the shares may be
deemed to be “underwriters” within the meaning of the Securities Act and any
profit on the sale of the common stock by them and any commissions received
by
any such dealers or agents might be deemed to be underwriting commissions under
the Securities Act.
In
connection with distribution of the shares of common stock covered by this
prospectus, the selling stockholders may enter into hedging transactions with
broker-dealers, and the broker-dealers may engage in short sales of the common
stock in the course of hedging the positions they assume with the selling
stockholders. The selling stockholders also may sell the common stock short
and
deliver the common stock to close out such short positions. The selling
stockholders also may enter into option or other transactions with broker-
dealers that involve the delivery of the shares to the broker-dealers, who
may
then resell or otherwise transfer the shares.
The
selling stockholders may transfer the shares to a donee and any donee would
become a selling stockholder under this prospectus. The selling stockholders
also may loan or pledge the shares. If a selling stockholder defaults on a
loan
secured by the shares, the pledgee could obtain ownership of the shares and
would then become a selling stockholder under this prospectus.
LEGAL
MATTERS
The
validity of the shares of common stock that may be sold by the selling
stockholders pursuant to this prospectus has been passed upon for us by Morrison
& Foerster LLP. Morrison & Foerster LLP also issued an opinion to us
regarding certain tax matters described under “Material U.S. Federal Income Tax
Considerations.”
EXPERTS
The
consolidated financial statements and schedule of Essex Property Trust, Inc.
and
subsidiaries as of December 31, 2004 and 2003, and for each of the years in
the three-year period ended December 31, 2004, management’s assessment of
the effectiveness of internal control over financial reporting as of December
31, 2004, have been incorporated by reference in this prospectus and elsewhere
in the registration statement 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.