8-KMaterial AgreementsExhibits & Filings

ESSEX PROPERTY TRUST, INC. 8-K Report, Material Agreement (Apr 8, 2009)

Filed April 8, 2009For Securities:ESS

Summary

Essex Property Trust, Inc. (ESS) has filed an 8-K report detailing a Sixteenth Amendment to its Partnership Agreement for Essex Portfolio, L.P. The primary purpose of this amendment is to ensure the Partnership avoids being classified as a "publicly traded partnership" for federal tax purposes. Such a classification could result in the Partnership being taxed as a corporation, potentially jeopardizing ESS's status as a Real Estate Investment Trust (REIT). The amendment incorporates specific "safe harbor" provisions, initially relying on the "private placement safe harbor" which requires fewer than 100 partners and non-registered unit issuances. If this safe harbor is no longer applicable, stricter transfer restrictions on Partnership units will be implemented to maintain the desired tax status. In addition to tax compliance, the Sixteenth Amendment also clarifies provisions related to allocations, distributions, and capital accounts within the Partnership. These clarifications primarily affect partners holding specific incentive units (LTIP Units, Series Z Incentive Units, Series Z-1 Incentive Units) and aim to align income recognition and distributions with capital account balances. These changes are designed to provide greater clarity and potentially manage tax implications for these specific unit holders, especially concerning capital account adjustments and conversions into common stock or cash redemptions.

Key Highlights

  • 1Essex Property Trust (ESS) amended its Partnership Agreement to avoid "publicly traded partnership" tax status, which could harm its REIT status.
  • 2The amendment incorporates federal tax law "safe harbor" provisions to maintain the Partnership's status as a partnership.
  • 3Initially, the Partnership relies on the "private placement safe harbor" (under 100 partners, unregistered issuances).
  • 4If the private placement safe harbor is lost, significant restrictions on the transfer of Partnership units will be imposed to comply with other safe harbors.
  • 5Key transfer restrictions include limits on percentage of units transferred annually and specific categories like family transfers, exchanges for ESS stock, or cash redemptions.
  • 6The amendment clarifies allocation and distribution rules, particularly for holders of LTIP Units and incentive units, linking them to capital account balances and cash flow.
  • 7Capital account adjustments are clarified for events like new partner admissions, unit issuances, and unit conversions/exchanges.

Frequently Asked Questions

The primary reason is to ensure that Essex Portfolio, L.P. does not become classified as a "publicly traded partnership" for federal tax purposes. This classification could lead to adverse tax consequences, including being taxed as a corporation, which could jeopardize Essex Property Trust's status as a Real Estate Investment Trust (REIT).

These are provisions based on federal tax laws that, if met, allow the Partnership to avoid being treated as a publicly traded partnership. The amendment initially relies on the "private placement safe harbor," which requires the Partnership to have no more than 100 partners and all units to be issued in unregistered transactions. If this safe harbor is no longer available, other safe harbors with specific transfer restrictions will be applied.

If the Partnership exceeds 100 partners, it must rely on other safe harbors. This will impose significant restrictions on the transfer of Partnership units. Transfers will generally be limited to family members, or specific percentages (e.g., over 2% of total units in a 30-day period or 2% annually for general transfers, and up to 10% annually for exchanges into ESS stock or cash redemptions) to remain within the safe harbor categories.

The amendment clarifies how income and losses are allocated and how distributions are made to holders of LTIP Units, Series Z Incentive Units, and Series Z-1 Incentive Units. Generally, income will only be allocated to these partners when cash flow is distributed, and gains will be allocated upon a sale of substantially all assets, tied to the value of common units they could convert into. Distributions are also tied to allocated income, and conversions or redemptions are linked to capital account balances and specific timelines.