| BOSTON PROPERTIES INC Item 1A Risk Factors |
| We refer to the shares of our common stock and the units of limited partnership interest in BPLP together as our “securities,” and the investors who own shares or units, or both, as our “securityholders |
| You should refer to the explanation of the qualifications and limitations on forward-looking statements beginning on page 34 |
| Our performance and value are subject to risks associated with our real estate assets and with the real estate industry |
| Our economic performance and the value of our real estate assets, and consequently the value of our securities, are subject to the risk that if our office and hotel properties do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to our securityholders will be adversely affected |
| The following factors, among others, may adversely affect the income generated by our office and hotel properties: • downturns in the national, regional and local economic conditions (particularly increases in unemployment); • competition from other office, hotel and commercial buildings; • local real estate market conditions, such as oversupply or reduction in demand for office, hotel or other commercial space; • changes in interest rates and availability of attractive financing; • vacancies, changes in market rental rates and the need to periodically repair, renovate and re-let space; • increased operating costs, including insurance expense, utilities, real estate taxes, state and local taxes and heightened security costs; • civil disturbances, earthquakes and other natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses; • significant expenditures associated with each investment, such as debt service payments, real estate taxes, insurance and maintenance costs which are generally not reduced when circumstances cause a reduction in revenues from a property; • declines in the financial condition of our tenants and our ability to collect rents from our tenants; and • decreases in the underlying value of our real estate |
| We are dependent upon the economic climates of our markets—Boston, Washington, DC, midtown Manhattan, San Francisco and Princeton, NJ Our revenue is derived from properties located in five markets: Boston, Washington, DC, midtown Manhattan, San Francisco and Princeton, NJ A downturn in the economies of these markets, or the impact that a downturn in the overall national economy may have upon these economies, could result in reduced demand for office space |
| Because our portfolio consists primarily of office buildings (as compared to a more diversified real estate portfolio), a decrease in demand for office space in turn could adversely affect our results of operations |
| Additionally, there are submarkets within our core markets that are dependent upon a limited number of industries |
| For example, in our Washington, DC market we are primarily dependent on leasing office properties to governmental agencies and contractors, as well as legal firms |
| In our midtown Manhattan market we have historically leased properties to financial, legal and other professional firms |
| A significant downturn in one or more of these sectors could adversely affect our results of operations |
| 12 ______________________________________________________________________ [39]Table of Contents Our investment in property development may be more costly than anticipated |
| We intend to continue to develop and substantially renovate office properties |
| Our current and future development and construction activities may be exposed to the following risks: • we may be unable to proceed with the development of properties because we cannot obtain financing on favorable terms or at all; • we may incur construction costs for a development project which exceed our original estimates due to increases in interest rates and increased materials, labor, leasing or other costs, which could make completion of the project less profitable because market rents may not increase sufficiently to compensate for the increase in construction costs; • we may be unable to obtain, or face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in increased costs and could require us to abandon our activities entirely with respect to a project; • we may abandon development opportunities after we begin to explore them and as a result we may lose deposits or fail to recover expenses already incurred; • we may expend funds on and devote management’s time to projects which we do not complete; and • we may be unable to complete construction and/or leasing of a property on schedule |
| Investment returns from our developed properties may be lower than anticipated |
| Our developed properties may be exposed to the following risks: • we may lease developed properties at rental rates that are less than the rates projected at the time we decide to undertake the development; and • occupancy rates and rents at newly developed properties may fluctuate depending on a number of factors, including market and economic conditions, and may result in our investments being less profitable than we expected or not profitable at all |
| Our use of joint ventures may limit our flexibility with jointly owned investments |
| In appropriate circumstances, we intend to develop and acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures |
| We currently have seven joint ventures that are not consolidated with our financial statements |
| Our share of the aggregate revenue of these joint ventures represented approximately 3prca of our total revenue (the sum of our total consolidated revenue and our share of such joint venture revenue) for the year ended December 31, 2005 |
| Our participation in joint ventures is subject to the risks that: • we could become engaged in a dispute with any of our joint venture partners that might affect our ability to develop or operate a property; • our joint venture partners may have different objectives than we have regarding the appropriate timing and terms of any sale or refinancing of properties; and • our joint venture partners may have competing interests in our markets that could create conflict of interest issues |
| In addition, our ability to enter into other joint ventures with third parties to pursue the acquisition of value-added investments similar to those being pursued by the Value-Added Fund is limited by the terms of the Value-Added Fund’s partnership agreement |
| 13 ______________________________________________________________________ [40]Table of Contents We face risks associated with property acquisitions |
| We have acquired in the past and intend to continue to pursue the acquisition of properties and portfolios of properties, including large portfolios that could increase our size and result in alterations to our capital structure |
| Our acquisition activities and their success are subject to the following risks: • even if we enter into an acquisition agreement for a property, we may be unable to complete that acquisition after making a non-refundable deposit and incurring certain other acquisition-related costs; • we may be unable to obtain financing for acquisitions on favorable terms or at all; • acquired properties may fail to perform as expected; • the actual costs of repositioning or redeveloping acquired properties may be greater than our estimates; • the acquisition agreement will likely contain conditions to closing, including completion of due diligence investigations to our satisfaction or other conditions that are not within our control, which may not be satisfied; • acquired properties may be located in new markets where we may face risks associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and unfamiliarity with local governmental and permitting procedures; and • we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations, and this could have an adverse effect on our results of operations and financial condition |
| We have acquired in the past and in the future may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in BPLP This acquisition structure has the effect, among others, of reducing the amount of tax depreciation we can deduct over the tax life of the acquired properties, and typically requires that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases |
| These restrictions on dispositions could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions |
| Acquired properties may expose us to unknown liability |
| We may acquire properties subject to liabilities and without any recourse, or with only limited recourse against the prior owners or other third parties, with respect to unknown liabilities |
| As a result, if a liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle or contest it, which could adversely affect our results of operations and cash flow |
| Unknown liabilities with respect to acquired properties might include: • liabilities for clean-up of undisclosed environmental contamination; • claims by tenants, vendors or other persons against the former owners of the properties; • liabilities incurred in the ordinary course of business; and • claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties |
| Competition for acquisitions may result in increased prices for properties |
| We plan to continue to acquire properties as we are presented with attractive opportunities |
| We may face competition for acquisition opportunities with other investors, particularly private investors who can incur more leverage, and this competition may adversely affect us by subjecting us to the following risks: • we may be unable to acquire a desired property because of competition from other well-capitalized real estate investors, including publicly traded and private REITs, institutional investment funds and other real estate investors; and 14 ______________________________________________________________________ [41]Table of Contents • even if we are able to acquire a desired property, competition from other real estate investors may significantly increase the purchase price |
| We face potential difficulties or delays renewing leases or re-leasing space |
| We derive most of our income from rent received from our tenants |
| If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments |
| Also, when our tenants decide not to renew their leases or terminate early, we may not be able to re-let the space |
| Even if tenants decide to renew or lease new space, the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, may be less favorable to us than current lease terms |
| As a result, our cash flow could decrease and our ability to make distributions to our securityholders could be adversely affected |
| We face potential adverse effects from major tenants’ bankruptcies or insolvencies |
| The bankruptcy or insolvency of a major tenant may adversely affect the income produced by our properties |
| Our tenants could file for bankruptcy protection or become insolvent in the future |
| We cannot evict a tenant solely because of its bankruptcy |
| On the other hand, a bankrupt tenant may reject and terminate its lease with us |
| In such case, our claim against the bankrupt tenant for unpaid and future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and, even so, our claim for unpaid rent would likely not be paid in full |
| This shortfall could adversely affect our cash flow and results of operations |
| We may have difficulty selling our properties, which may limit our flexibility |
| Large and high-quality office and hotel properties like the ones that we own could be difficult to sell |
| This may limit our ability to change our portfolio promptly in response to changes in economic or other conditions |
| In addition, federal tax laws limit our ability to sell properties and this may affect our ability to sell properties without adversely affecting returns to our securityholders |
| These restrictions reduce our ability to respond to changes in the performance of our investments and could adversely affect our financial condition and results of operations |
| Our ability to dispose of some of our properties is constrained by their tax attributes |
| Properties which we developed and have owned for a significant period of time or which we acquired through tax deferred contribution transactions in exchange for partnership interests in BPLP often have low tax bases |
| If we dispose of these properties outright in taxable transactions, we may be required to distribute a significant amount of the taxable gain to our securityholders under the requirements of the Internal Revenue Code for REITs, which in turn would impact our cash flow |
| In some cases, without incurring additional costs we may be restricted from disposing of properties contributed in exchange for our partnership interests under tax protection agreements with contributors |
| To dispose of low basis or tax-protected properties efficiently we often use like-kind exchanges, which qualify for non-recognition of taxable gain, but can be difficult to consummate and result in the property for which the disposed assets are exchanged inheriting their low tax bases and other tax attributes (including tax protection covenants) |
| Our properties face significant competition |
| We face significant competition from developers, owners and operators of office properties and other commercial real estate, including sublease space available from our tenants |
| Substantially all of our properties face competition from similar properties in the same market |
| This competition may affect our ability to attract and retain tenants and may reduce the rents we are able to charge |
| These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to lease available space at lower rates than the space in our properties |
| 15 ______________________________________________________________________ [42]Table of Contents Because we own two hotel properties, we face the risks associated with the hospitality industry |
| Because the lease payments we receive under the hotel leases are based on a participation in the gross receipts of the hotels, if the hotels do not generate sufficient receipts, our cash flow would be decreased, which could reduce the amount of cash available for distribution to our securityholders |
| The following factors, among others, are common to the hotel industry, and may reduce the receipts generated by our hotel properties: • our hotel properties compete for guests with other hotels, a number of which have greater marketing and financial resources than our hotel-operating business partners; • if there is an increase in operating costs resulting from inflation and other factors, our hotel-operating business partners may not be able to offset such increase by increasing room rates; • our hotel properties are subject to the fluctuating and seasonal demands of business travelers and tourism; and • our hotel properties are subject to general and local economic and social conditions that may affect demand for travel in general, including war and terrorism |
| In addition, because our hotel properties are located within two miles of each other in downtown Boston and Cambridge, they are subject to the Boston market’s fluctuations in demand, increases in operating costs and increased competition from additions in supply |
| Because of the ownership structure of our two hotel properties, we face potential adverse effects from changes to the applicable tax laws |
| We own two hotel properties |
| However, under the Internal Revenue Code, REITs like us are not allowed to operate hotels directly or indirectly |
| Accordingly, we lease our hotel properties to one of our taxable REIT subsidiaries, or TRS As lessor, we are entitled to a percentage of the gross receipts from the operation of the hotel properties |
| manages the hotels under the Marriott^® name pursuant to a management contract with the TRS as lessee |
| While the TRS structure allows the economic benefits of ownership to flow to us, the TRS is subject to tax on its income from the operations of the hotels at the federal and state level |
| In addition, the TRS is subject to detailed tax regulations that affect how it may be capitalized and operated |
| If the tax laws applicable to TRSs are modified, we may be forced to modify the structure for owning our hotel properties, and such changes may adversely affect the cash flows from our hotels |
| In addition, the Internal Revenue Service, the United States Treasury Department and Congress frequently review federal income tax legislation, and we cannot predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted |
| Any of such actions may prospectively or retroactively modify the tax treatment of the TRS and, therefore, may adversely affect our after-tax returns from our hotel properties |
| Compliance or failure to comply with the Americans with Disabilities Act or other safety regulations and requirements could result in substantial costs |
| The Americans with Disabilities Act generally requires that public buildings, including office buildings and hotels, be made accessible to disabled persons |
| Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants |
| If, under the Americans with Disabilities Act, we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our financial condition and results of operations, as well as the amount of cash available for distribution to our securityholders |
| Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements |
| If we fail to comply with these requirements, we could incur fines or private damage awards |
| We do not know whether existing requirements will change or whether compliance with future requirements will require significant unanticipated expenditures that will affect our cash flow and results of operations |
| 16 ______________________________________________________________________ [43]Table of Contents Some potential losses are not covered by insurance |
| We carry insurance coverage on our properties of types and in amounts and with deductibles that we believe are in line with coverage customarily obtained by owners of similar properties |
| In response to the uncertainty in the insurance market following the terrorist attacks of September 11, 2001, the Federal Terrorism Risk Insurance Act, or TRIA, was enacted in November 2002 to require regulated insurers to make available coverage for certified acts of terrorism (as defined by the statute) through December 31, 2004, which date was extended to December 31, 2005 by the United States Department of Treasury on June 18, 2004 and which date was further extended to December 31, 2007 by the Terrorism Risk Insurance Extension Act of 2005 (the “TRIA Extension Act”) |
| TRIA expires on December 31, 2007, and we cannot currently anticipate whether it will be extended |
| Effective as of March 1, 2006, our property insurance program per occurrence limits were decreased from dlra1 billion to dlra800 million, including coverage for both “certified” and “non-certified” acts of terrorism by TRIA The amount of such insurance available in the market has decreased because of the natural disasters which occurred during 2005 |
| We also carry nuclear, biological and chemical terrorism insurance coverage (“NBC Coverage”) for “certified” acts of terrorism as defined by TRIA, which is provided by IXP, Inc |
| Effective as of March 1, 2006, we extended the NBC Coverage to March 1, 2007, excluding our Value-Added Fund properties |
| Effective as of March 1, 2006, the per occurrence limit for NBC Coverage was decreased from dlra1 billion to dlra800 million |
| Under TRIA, after the payment of the required deductible and coinsurance the NBC Coverage is backstopped by the Federal Government if the aggregate industry insured losses resulting from a certified act of terrorism exceed a “program trigger |
| ” Under the TRIA Extension Act (a) the program trigger is dlra5 million through March 31, 2006, dlra50 million from April 1, 2006 through December 31, 2006 and dlra100 million from January 1, 2007 through December 31, 2007 and (b) the coinsurance is 10prca through December 31, 2006 and 15prca through December 31, 2007 |
| We may elect to terminate the NBC Coverage when the program trigger increases on January 1, 2007, if there is a change in our portfolio or for any other reason |
| We intend to continue to monitor the scope, nature and cost of available terrorism insurance and maintain insurance in amounts and on terms that are commercially reasonable |
| We also currently carry earthquake insurance on our properties located in areas known to be subject to earthquakes in an amount and subject to self-insurance that we believe are commercially reasonable |
| In addition, this insurance is subject to a deductible in the amount of 5prca of the value of the affected property |
| Specifically, we currently carry earthquake insurance which covers our San Francisco portfolio with a dlra120 million per occurrence limit and a dlra120 million aggregate limit, dlra20 million of which is provided by IXP, Inc, as a direct insurer |
| The amount of our earthquake insurance coverage may not be sufficient to cover losses from earthquakes |
| As a result of increased costs of coverage and limited availability, the amount of third-party earthquake insurance that we may be able to purchase on commercially reasonable terms may be reduced |
| In addition, we may discontinue earthquake insurance on some or all of our properties in the future if the premiums exceed our estimation of the value of the coverage |
| In January 2002, we formed a wholly-owned taxable REIT subsidiary, IXP, Inc, or IXP, to act as a captive insurance company and be one of the elements of our overall insurance program |
| IXP acts as a direct insurer with respect to a portion of our earthquake insurance coverage for our Greater San Francisco properties and our NBC Coverage for “certified acts of terrorism” under TRIA Insofar as we own IXP, we are responsible for its liquidity and capital resources, and the accounts of IXP are part of our consolidated financial statements |
| In particular, if a loss occurs which is covered by our NBC Coverage but is less than the applicable program trigger under TRIA, IXP would be responsible for the full amount of the loss without any backstop by the Federal Government |
| If we experience a loss and IXP is required to pay under our insurance policy, we would ultimately record the loss to the extent of IXP’s required payment |
| Therefore, insurance coverage provided by IXP should not be considered as the equivalent of third-party insurance, but rather as a modified form of self-insurance |
| We continue to monitor the state of the insurance market in general, and the scope and costs of coverage for acts of terrorism in particular, but we cannot anticipate what coverage will be available on commercially reasonable terms in future policy years |
| There are other types of losses, such as from wars or the presence of mold at our properties, for which we cannot obtain insurance at all or at a reasonable cost |
| With respect to such 17 ______________________________________________________________________ [44]Table of Contents losses and losses from acts of terrorism, earthquakes or other catastrophic events, if we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged properties, as well as the anticipated future revenues from those properties |
| Depending on the specific circumstances of each affected property, it is possible that we could be liable for mortgage indebtedness or other obligations related to the property |
| Any such loss could materially and adversely affect our business and financial condition and results of operations |
| Actual or threatened terrorist attacks may adversely affect our ability to generate revenues and the value of our properties |
| We have significant investments in large metropolitan markets that have been or may be in the future the targets of actual or threatened terrorism attacks, including midtown Manhattan, Washington, DC, Boston and San Francisco |
| As a result, some tenants in these markets may choose to relocate their businesses to other markets or to lower-profile office buildings within these markets that may be perceived to be less likely targets of future terrorist activity |
| This could result in an overall decrease in the demand for office space in these markets generally or in our properties in particular, which could increase vacancies in our properties or necessitate that we lease our properties on less favorable terms or both |
| In addition, future terrorist attacks in these markets could directly or indirectly damage our properties, both physically and financially, or cause losses that materially exceed our insurance coverage |
| As a result of the foregoing, our ability to generate revenues and the value of our properties could decline materially |
| See also “—Some potential losses are not covered by insurance |
| ” Potential liability for environmental contamination could result in substantial costs |
| Under federal, state and local environmental laws, ordinances and regulations, we may be required to investigate and clean up the effects of releases of hazardous or toxic substances or petroleum products at our properties simply because of our current or past ownership or operation of the real estate |
| If unidentified environmental problems arise, we may have to make substantial payments, which could adversely affect our cash flow and our ability to make distributions to our securityholders, because: • as owner or operator we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination; • the law typically imposes clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination; • even if more than one person may be responsible for the contamination, each person who shares legal liability under the environmental laws may be held responsible for all of the clean-up costs; and • governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs |
| These costs could be substantial and in extreme cases could exceed the amount of our insurance or the value of the contaminated property |
| We currently carry environmental insurance in an amount and subject to deductibles that we believe are commercially reasonable |
| Specifically, we carry a pollution legal liability policy with a dlra10 million limit per incident and a policy aggregate limit of dlra25 million |
| The presence of hazardous or toxic substances or petroleum products or the failure to properly remediate contamination may materially and adversely affect our ability to borrow against, sell or rent an affected property |
| In addition, applicable environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination |
| Changes in laws increasing the potential liability for environmental conditions existing at our properties, or increasing the restrictions on the handling, storage or discharge of hazardous or toxic substances or petroleum products or other actions may result in significant unanticipated expenditures |
| Environmental laws also govern the presence, maintenance and removal of asbestos |
| Such laws require that owners or operators of buildings containing asbestos: • properly manage and maintain the asbestos; 18 ______________________________________________________________________ [45]Table of Contents • notify and train those who may come into contact with asbestos; and • undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building |
| Such laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers |
| Some of our properties are located in urban and previously developed areas where fill or current or historic industrial uses of the areas have caused site contamination |
| It is our policy to retain independent environmental consultants to conduct Phase I environmental site assessments and asbestos surveys with respect to our acquisition of properties |
| These assessments generally include a visual inspection of the properties and the surrounding areas, an examination of current and historical uses of the properties and the surrounding areas and a review of relevant state, federal and historical documents, but do not involve invasive techniques such as soil and ground water sampling |
| Where appropriate, on a property-by-property basis, our practice is to have these consultants conduct additional testing, including sampling for asbestos, for lead in drinking water, for soil contamination where underground storage tanks are or were located or where other past site usage creates a potential environmental problem, and for contamination in groundwater |
| Even though these environmental assessments are conducted, there is still the risk that: • the environmental assessments and updates did not identify all potential environmental liabilities; • a prior owner created a material environmental condition that is not known to us or the independent consultants preparing the assessments; • new environmental liabilities have developed since the environmental assessments were conducted; and • future uses or conditions such as changes in applicable environmental laws and regulations could result in environmental liability for us |
| Inquiries about indoor air quality may necessitate special investigation and, depending on the results, remediation beyond our regular indoor air quality testing and maintenance programs |
| Indoor air quality issues can stem from inadequate ventilation, chemical contaminants from indoor or outdoor sources, and biological contaminants such as molds, pollen, viruses and bacteria |
| Indoor exposure to chemical or biological contaminants above certain levels can be alleged to be connected to allergic reactions or other health effects and symptoms in susceptible individuals |
| If these conditions were to occur at one of our properties, we may need to undertake a targeted remediation program, including without limitation, steps to increase indoor ventilation rates and eliminate sources of contaminants |
| Such remediation programs could be costly, necessitate the temporary relocation of some or all of the property’s tenants or require rehabilitation of the affected property |
| We face risks associated with the use of debt to fund acquisitions and developments, including refinancing risk |
| We are subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest |
| We anticipate that only a small portion of the principal of our debt will be repaid prior to maturity |
| Therefore, we are likely to need to refinance at least a portion of our outstanding debt as it matures |
| There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of our existing debt |
| If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as new equity capital, our cash flow may not be sufficient to repay all maturing debt in years when significant “balloon” payments come due |
| We have agreements with a number of limited partners of BPLP who contributed properties in exchange for partnership interests that require BPLP to maintain for specified periods of time secured debt on certain of our 19 ______________________________________________________________________ [46]Table of Contents assets and/or allocate partnership debt to such limited partners to enable them to continue to defer recognition of their taxable gain with respect to the contributed property |
| These tax protection and debt allocation agreements may restrict our ability to repay or refinance debt |
| An increase in interest rates would increase our interest costs on variable rate debt and could adversely impact our ability to refinance existing debt or sell assets |
| As of December 31, 2005, we had approximately dlra874dtta1 million of indebtedness that bears interest at variable rates, and we may incur more of such indebtedness in the future |
| Accordingly, if interest rates increase, so will our interest costs, which could adversely affect our cash flow and our ability to pay principal and interest on our debt and our ability to make distributions to our securityholders |
| Further, rising interest rates could limit our ability to refinance existing debt when it matures |
| We have entered into interest rate swap agreements with respect to a portion of our variable rate debt, and we may in the future enter into similar agreements, including swaps, caps, floors and other interest rate hedging contracts |
| While these agreements are intended to lessen the impact of rising interest rates on us, they also expose us to the risk that the other parties to the agreements will not perform, the agreements will be unenforceable and the underlying transactions will fail to qualify as highly-effective cash flow hedges under SFAS Nodtta 133, “Accounting for Derivative Instruments and Hedging Activities, as amended” (See Note 6 to the Consolidated Financial Statements) |
| In addition, an increase in interest rates could decrease the amount third-parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in response to changes in economic or other conditions |
| Covenants in our debt agreements could adversely affect our financial condition |
| The mortgages on our properties contain customary covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable property or to discontinue insurance coverage |
| Our unsecured credit facility, unsecured debt securities and secured construction loans contain customary restrictions, requirements and other limitations on our ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios and minimum ratios of unencumbered assets to unsecured debt, which we must maintain |
| Our continued ability to borrow under our credit facilities is subject to compliance with our financial and other covenants |
| In addition, our failure to comply with such covenants could cause a default under the applicable debt agreement, and we may then be required to repay such debt with capital from other sources |
| Under those circumstances, other sources of capital may not be available to us, or be available only on unattractive terms |
| Additionally, in the future our ability to satisfy current or prospective lenders’ insurance requirements may be adversely affected if lenders generally insist upon greater insurance coverage against acts of terrorism than is available to us in the marketplace or on commercially reasonable terms, particularly if TRIA is not extended beyond December 31, 2007 |
| We rely on debt financing, including borrowings under our unsecured credit facility, issuances of unsecured debt securities and debt secured by individual properties, to finance our acquisition and development activities and for working capital |
| If we are unable to obtain debt financing from these or other sources, or to refinance existing indebtedness upon maturity, our financial condition and results of operations would likely be adversely affected |
| If we breach covenants in our debt agreements, the lenders can declare a default and, if the debt is secured, can take possession of the property securing the defaulted loan |
| In addition, our unsecured debt agreements contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other loans in some circumstances |
| Defaults under our debt agreements could materially and adversely affect our financial condition and results of operations |
| Our degree of leverage could limit our ability to obtain additional financing or affect the market price of our common stock or debt securities |
| On March 1, 2006, we had approximately dlra4dtta7 billion in total indebtedness outstanding on a consolidated basis (ie, excluding unconsolidated joint venture debt) |
| Debt to market capitalization ratio, which measures total 20 ______________________________________________________________________ [47]Table of Contents debt as a percentage of the aggregate of total debt plus the market value of outstanding equity securities, is often used by analysts to gauge leverage for equity REITs such as us |
| Our market value is calculated using the price per share of our common stock |
| Using the closing stock price of dlra84dtta75 per share of our common stock of Boston Properties, Inc |
| on March 1, 2006, multiplied by the sum of (1) the actual aggregate number of outstanding common partnership units of BPLP (including common partnership units held by us), (2) the number of common partnership units available upon conversion of all outstanding preferred partnership units of BPLP and (3) the number of common units issuable upon conversion of all outstanding LTIP units assuming all conditions have been met for conversion of the LTIP units, our debt to market capitalization ratio was approximately 28dtta49prca as of March 1, 2006 |
| Our degree of leverage could affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes |
| Our senior unsecured debt is currently rated investment grade by the three major rating agencies |
| However, there can be no assurance we will be able to maintain this rating, and in the event our senior debt is downgraded from its current rating, we would likely incur higher borrowing costs and/or difficulty in obtaining additional financing |
| Our degree of leverage could also make us more vulnerable to a downturn in business or the economy generally |
| There is a risk that changes in our debt to market capitalization ratio, which is in part a function of our stock price, or our ratio of indebtedness to other measures of asset value used by financial analysts may have an adverse effect on the market price of our equity or debt securities |
| Further issuances of equity securities may be dilutive to current securityholders |
| The interests of our existing securityholders could be diluted if additional equity securities are issued to finance future developments, acquisitions, or repay indebtedness |
| Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity |
| Failure to qualify as a real estate investment trust would cause us to be taxed as a corporation, which would substantially reduce funds available for payment of dividends |
| If we fail to qualify as a real estate investment trust, or REIT, for federal income tax purposes, we will be taxed as a corporation |
| We believe that we are organized and qualified as a REIT and intend to operate in a manner that will allow us to continue to qualify as a REIT However, we cannot assure you that we are qualified as such, or that we will remain qualified as such in the future |
| This is because qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code as to which there are only limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control |
| Future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of such qualification |
| In addition, we currently hold certain of our properties, and the Value-Added Fund holds its properties, through a subsidiary that has elected to be taxed as a REIT and we may in the future determine that it is in our best interests to hold one or more of our other properties through one or more subsidiaries that elect to be taxed as REITs |
| If any of these subsidiaries fails to qualify as a REIT for federal income tax purposes, then we may also fail to qualify as a REIT for federal income tax purposes |
| If we fail to qualify as a REIT we will face serious tax consequences that will substantially reduce the funds available for payment of dividends for each of the years involved because: • we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates; • we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; 21 ______________________________________________________________________ [48]Table of Contents • unless we are entitled to relief under statutory provisions, we could not elect to be subject to tax as a REIT for four taxable years following the year during which we were disqualified; and • all dividends will be subject to tax as ordinary income to the extent of our current and accumulated earnings and profits |
| In addition, if we fail to qualify as a REIT, we will no longer be required to pay dividends |
| As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our common stock |
| In order to maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions |
| In order to maintain our REIT status, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements, even if the then-prevailing market conditions are not favorable for these borrowings |
| To qualify as REIT, we generally must distribute to our stockholders at least 90prca of our net taxable income each year, excluding capital gains |
| In addition, we will be subject to a 4prca nondeductible excise tax on the amount, if any, by which dividends paid by us in any calendar year are less than the sum of 85prca of our ordinary income, 95prca of our capital gain net income and 100prca of our undistributed income from prior years |
| We may need short-term debt or long-term debt or proceeds from asset sales, creation of joint ventures or sales of common stock to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments |
| The inability of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short and long-term debt or sell equity securities in order to fund distributions required to maintain our REIT status |
| Limits on changes in control may discourage takeover attempts beneficial to stockholders |
| Provisions in our certificate of incorporation and bylaws, our shareholder rights agreement and the limited partnership agreement of BPLP, as well as provisions of the Internal Revenue Code and Delaware corporate law, may: • delay or prevent a change of control over us or a tender offer, even if such action might be beneficial to our stockholders; and • limit our stockholders’ opportunity to receive a potential premium for their shares of common stock over then-prevailing market prices |
| Stock Ownership Limit To facilitate maintenance of our qualification as a REIT and to otherwise address concerns relating to concentration of capital stock ownership, our certificate of incorporation generally prohibits ownership, directly, indirectly or beneficially, by any single stockholder of more than 6dtta6prca of the number of outstanding shares of any class or series of our equity stock |
| We refer to this limitation as the “ownership limit |
| ” Our board of directors may waive or modify the ownership limit with respect to one or more persons if it is satisfied that ownership in excess of this limit will not jeopardize our status as a REIT for federal income tax purposes |
| In addition, under our certificate of incorporation each of Mortimer B Zuckerman and Edward H Linde, along with their respective families and affiliates, as well as, in general, pension plans and mutual funds, may actually and beneficially own up to 15prca of the number of outstanding shares of any class or series of our equity common stock |
| Shares owned in violation of the ownership limit will be subject to the loss of rights to distributions and voting and other penalties |
| The ownership limit may have the effect of inhibiting or impeding a change in control |
| BPLP’s Partnership Agreement We have agreed in the limited partnership agreement of BPLP not to engage in specified extraordinary transactions, including, among others, business combinations, unless limited partners of BPLP other than Boston 22 ______________________________________________________________________ [49]Table of Contents Properties, Inc |
| receive, or have the opportunity to receive, either (1) the same consideration for their partnership interests as holders of our common stock in the transaction or (2) limited partnership units that, among other things, would entitle the holders, upon redemption of these units, to receive shares of common equity of a publicly traded company or the same consideration as holders of our common stock received in the transaction |
| If these limited partners would not receive such consideration, we cannot engage in the transaction unless limited partners holding at least 75prca of the common units of limited partnership interest, other than those held by Boston Properties, Inc |
| or its affiliates, consent to the transaction |
| In addition, we have agreed in the limited partnership agreement of BPLP that we will not complete specified extraordinary transactions, including among others, business combinations, in which we receive the approval of our common stockholders unless (1) limited partners holding at least 75prca of the common units of limited partnership interest, other than those held by Boston Properties, Inc |
| or its affiliates, consent to the transaction or (2) the limited partners of BPLP are also allowed to vote and the transaction would have been approved had these limited partners been able to vote as common stockholders on the transaction |
| Therefore, if our common stockholders approve a specified extraordinary transaction, the partnership agreement requires the following before we can complete the transaction: • holders of partnership interests in BPLP, including Boston Properties, Inc, must vote on the matter; • Boston Properties, Inc |
| must vote its partnership interests in the same proportion as our stockholders voted on the transaction; and • the result of the vote of holders of partnership interests in BPLP must be such that had such vote been a vote of stockholders, the business combination would have been approved |
| As a result of these provisions, a potential acquirer may be deterred from making an acquisition proposal, and we may be prohibited by contract from engaging in a proposed extraordinary transaction, including a proposed business combination, even though our stockholders approve of the transaction |
| Shareholder Rights Plan We have a shareholder rights plan |
| Under the terms of this plan, we can in effect prevent a person or group from acquiring more than 15prca of the outstanding shares of our common stock because, unless we approve of the acquisition, after the person acquires more than 15prca of our outstanding common stock, all other stockholders will have the right to purchase securities from us at a price that is less than their then fair market value |
| This would substantially reduce the value and influence of the stock owned by the acquiring person |
| Our board of directors can prevent the plan from operating by approving the transaction in advance, which gives us significant power to approve or disapprove of the efforts of a person or group to acquire a large interest in our company |
| We may change our policies without obtaining the approval of our stockholders |
| Our operating and financial policies, including our policies with respect to acquisitions of real estate, growth, operations, indebtedness, capitalization and dividends, are exclusively determined by our Board of Directors |
| Accordingly, our stockholders do not control these policies |
| Our success depends on key personnel whose continued service is not guaranteed |
| We depend on the efforts of key personnel, particularly Mortimer B Zuckerman, Chairman of our Board of Directors, and Edward H Linde, our President and Chief Executive Officer |
| Zuckerman and Linde are important to our success is that each has a national reputation, which attracts business and investment opportunities and assists us in negotiations with lenders |
| If we lost their services, our relationships with lenders, potential tenants and industry personnel could diminish |
| Zuckerman has substantial outside business interests that could interfere with his ability to devote his full time to our business and affairs |
| Our three Executive Vice Presidents and other executive officers that serve as managers of our regional offices also have strong reputations |
| Their reputations aid us in identifying opportunities, having opportunities 23 ______________________________________________________________________ [50]Table of Contents brought to us, and negotiating with tenants and build-to-suit prospects |
| While we believe that we could find replacements for these key personnel, the loss of their services could materially and adversely affect our operations because of diminished relationships with lenders, prospective tenants and industry personnel |
| Conflicts of interest exist with holders of interests in BPLP Sales of properties and repayment of related indebtedness will have different effects on holders of interests in BPLP than on our stockholders |
| Zuckerman and Linde, would incur adverse tax consequences upon the sale of certain of our properties and on the repayment of related debt which differ from the tax consequences to us and our stockholders |
| Consequently, these holders of partnership interests in BPLP may have different objectives regarding the appropriate pricing and timing of any such sale or repayment of debt |
| While we have exclusive authority under the limited partnership agreement of BPLP to determine when to refinance or repay debt or whether, when, and on what terms to sell a property, subject, in the case of certain properties, to the contractual commitments described below, any such decision would require the approval of our Board of Directors |
| While the Board of Directors has a policy with respect to these matters, as directors and executive officers, Messrs |
| Zuckerman and Linde could exercise their influence in a manner inconsistent with the interests of some, or a majority, of our stockholders, including in a manner which could prevent completion of a sale of a property or the repayment of indebtedness |
| Agreement not to sell some properties |
| Under the terms of the limited partnership agreement of BPLP, we have agreed not to sell or otherwise transfer some of our properties, prior to specified dates, in any transaction that would trigger taxable income, without first obtaining the consent of Messrs |
| Zuckerman and Linde |
| However, we are not required to obtain their consent if, during the applicable period, each of them does not hold at least 30prca of his original interests in BPLP, or if those properties are transferred in a nontaxable transaction |
| In addition, we have entered into similar agreements with respect to other properties that we have acquired in exchange for partnership interests in BPLP Pursuant to those agreements, we are responsible for the reimbursement of certain tax-related costs to the prior owners if the subject properties are sold in a taxable sale |
| In general, our obligations to the prior owners are limited in time and only apply to actual damages suffered |
| As of December 31, 2005, there were a total of 27 wholly-owned properties subject to these restrictions, and those properties are estimated to have accounted for approximately 40prca of our total revenue for the year ended December 31, 2005 |
| BPLP has also entered into agreements providing prior owners of properties with the right to guarantee specific amounts of indebtedness and, in the event that the specific indebtedness they guarantee is repaid or reduced, additional and/or substitute indebtedness |
| These agreements may hinder actions that we may otherwise desire to take to repay or refinance guaranteed indebtedness because we would be required to make payments to the beneficiaries of such agreements if we violate these agreements |
| Zuckerman and Linde will continue to engage in other activities |
| Zuckerman and Linde have a broad and varied range of investment interests |
| Either one could acquire an interest in a company which is not currently involved in real estate investment activities but which may acquire real property in the future |
| However, pursuant to each of their employment agreements, Messrs |
| Zuckerman and Linde will not, in general, have management control over such companies and, therefore, they may not be able to prevent one or more of such companies from engaging in activities that are in competition with our activities |
| 24 ______________________________________________________________________ [51]Table of Contents Changes in market conditions could adversely affect the market price of our common stock |
| As with other publicly traded equity securities, the value of our common stock depends on various market conditions that may change from time to time |
| Among the market conditions that may affect the value of our common stock are the following: • the extent of investor interest in our securities; • the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based companies; • our underlying asset value; • investor confidence in the stock and bond markets, generally; • national economic conditions; • changes in tax laws; • our financial performance; • change in our credit rating; and • general stock and bond market conditions |
| The market value of our common stock is based primarily upon the market’s perception of our growth potential and our current and potential future earnings and cash dividends |
| Consequently, our common stock may trade at prices that are greater or less than our net asset value per share of common stock |
| If our future earnings or cash dividends are less than expected, it is likely that the market price of our common stock will diminish |
| The number of shares available for future sale could adversely affect the market price of our stock |
| In connection with and subsequent to our initial public offering, we have completed many private placement transactions in which shares of capital stock of Boston Properties, Inc |
| or partnership interests in BPLP were issued to owners of properties we acquired or to institutional investors |
| This common stock, or common stock issuable in exchange for such partnership interests in BPLP, may be sold in the public securities markets over time under registration rights we granted to these investors |
| Additional common stock issuable under our employee benefit and other incentive plans, including as a result of the grant of stock options and restricted equity securities, may also be sold in the market at some time in the future |
| Future sales of our common stock in the market could adversely affect the price of our common stock |
| We cannot predict the effect the perception in the market that such sales may occur will have on the market price of our common stock |
| We did not obtain new owner’s title insurance policies in connection with properties acquired during our initial public offering |
| We acquired many of our properties from our predecessors at the completion of our initial public offering in June 1997 |
| Before we acquired these properties, each of them was insured by a title insurance policy |
| We did not obtain new owner’s title insurance policies in connection with the acquisition of these properties |
| However, to the extent we have financed properties after acquiring them in connection with the IPO, we have obtained new title insurance policies |
| Nevertheless, because in many instances we acquired these properties indirectly by acquiring ownership of the entity that owned the property and those owners remain in existence as our subsidiaries, some of these title insurance policies may continue to benefit us |
| Many of these title insurance policies may be for amounts less than the current or future values of the applicable properties |
| If there was a title defect related to any of these properties, or to any of the properties acquired at the time of our initial public offering, that is no longer covered by a title insurance policy, we could lose both our capital invested in and our anticipated profits from such property |
| We have obtained title insurance policies for all properties that we have acquired after our initial public offering, however, these policies may be for amounts less than the current or future values of the applicable properties |
| 25 ______________________________________________________________________ [52]Table of Contents We face possible adverse changes in tax laws |
| From time to time changes in state and local tax laws or regulations are enacted, which may result in an increase in our tax liability |
| A shortfall in tax revenues for states and municipalities in which we operate may lead to an increase in the frequency and size of such changes |
| If such changes occur, we may be required to pay additional taxes on our assets or income |
| These increased tax costs could adversely affect our financial condition and results of operations and the amount of cash available for payment of dividends |
| We face possible state and local tax audits |
| Because we are organized and qualify as a REIT, we are generally not subject to federal income taxes, but are subject to certain state and local taxes |
| Although we believe that we have substantial arguments in favor of our positions in the ongoing audits, in some instances there is no controlling precedent or interpretive guidance on the specific point at issue |
| Collectively, tax deficiency notices received to date from the jurisdictions conducting the ongoing audits have not been material |
| However, there can be no assurance that future audits will not occur with increased frequency or that the ultimate result of such audits will not have a material adverse effect on our results of operations |