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LOS ANGELES-The pending sale of $350 million in nontraded stock by Pacific Office Properties Trust will provide funds to buy office buildings that may well include assets acquired from owners in distress, according to a prospectus filed by the L.A.-based REIT last week. The REIT’s registration statement with the SEC says it believes that “existing adverse conditions in the global financial markets, coupled with a slowing economy,” will ultimately create “exceptional investing opportunities,” beginning this year as owners of highly leveraged office properties face difficulties when their loans come due over the next two to three years.<The prospectus says that the proceeds of the $350 million stock offering will be used primarily to buy office buildings in the Western US. Company officials declined to comment on the offering because of SEC regulations regarding comment on pending offerings, but the REIT's prospectus outlines how events on the horizon could produce some investment opportunities for the company.

The Pacific prospectus states that the global financial troubles and the slowing economy “will result in distress and operating challenges for many highly leveraged owners and operators of commercial office properties over the next two to three years.” Many of the owners of those properties financed them via high loan-to-value levels and low levels of debt service coverage that “will result in substantial increases in delinquency rates and foreclosures in the commercial office sector,” the prospectus points out. “We believe that these market conditions will specifically benefit us because we have the skill and experience to minimize downside operational risk and maximize upside financial potential,” it states.

Although Pacific Properties is a publicly held REIT whose shares trade on the New York Stock Exchange, the new shares will be similar to those of nontraded REITs. The shares of a nontraded REIT are offered publicly, but the stock is not listed or traded on an exchange.

Nontraded REITS typically establish a date by which they will either list their stock on an exchange or liquidate their assets, but in the case of Pacific Office there is no need for a “list or liquidate” date because the REIT will allow owners of the nontraded stock to exchange it for the company’s common stock after seven years. The new nontraded stock will also differ in certain other respects from the shares of typical nontraded REITs, according to the Pacific Office prospectus. For example, its new nontraded stock will begin earning dividends immediately.

The $350 million of new nontraded stock will be called “senior common stock,” means that the dividend on the senior common stock will be paid before any distributions or dividends are paid on the company’s common stock or its preferred and common units. The $350 million will include 30 million shares to be sold at $10 per share and 5.2 million shares to be sold at $9.50 per share under a dividend reinvestment plan.

The Pacific Office business strategy focuses on acquiring assets with institutional investors as equity partners. Pacific and its partners own and operate 40 office buildings totaling more than 4.3 million square feet in Los Angeles, San Diego, Phoenix and Honolulu. It expects to expand beyond these four markets “as conditions develop and opportunities present themselves,” the prospectus says.

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