S-11 1 d711130ds11.htm S-11 S-11
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As filed with the Securities and Exchange Commission on August 27, 2014

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-11

FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

 

 

Paramount Group, Inc.

(Exact name of registrant as specified in governing instruments)

 

 

1633 Broadway, Suite 1801

New York, NY 10019

(212) 237-3100

(Address, including Zip Code and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

 

 

Albert Behler

Chairman,

Chief Executive Officer and President

Paramount Group, Inc.

1633 Broadway, Suite 1801

New York, NY 10019

(212) 237-3100

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

Gilbert G. Menna

Daniel P. Adams

Goodwin Procter LLP

Exchange Place

Boston, Massachusetts 02109

Tel: (617) 570-1000

Fax: (617) 523-1231

 

Stuart A. Barr

Bruce W. Gilchrist

Hogan Lovells US LLP
555 Thirteenth Street, NW

Washington, DC 20004
Tel: (202) 637-5600
Fax: (202) 637-5910

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

Large accelerated filer   ¨      Accelerated filer   ¨
Non-accelerated filer   þ    (Do not check if a smaller reporting company)   Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of

Securities to be Registered

 

Proposed Maximum
Aggregate

Offering Price(1)

  Amount of
Registration Fee(2)

Common Stock, par value $0.01 per share

  $100,000,000   $12,880.00

 

 

(1) Estimated solely for the purpose of determining the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended. Includes additional shares of common stock that the underwriters have the option to purchase to cover over-allotments, if any. See “Underwriting.”
(2) Calculated in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

 

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated August 27, 2014

PROSPECTUS

             Shares

 

LOGO

Common Stock

 

 

This is the initial public offering of the common stock of Paramount Group, Inc. We are selling              shares of our common stock.

No public market currently exists for our common stock. We currently expect the initial public offering price of our common stock to be between $         and $         per share. We intend to apply for the listing of our common stock on the New York Stock Exchange, or NYSE, under the symbol “PGRE.”

We intend to elect to be treated and to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2014.

Shares of our common stock will be subject to the ownership and transfer limitations in our charter which are intended to assist us in qualifying and maintaining our qualification as a REIT, including, subject to certain exceptions, a     % ownership limit. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 22 of this prospectus to read about factors you should consider before buying shares of our common stock.

 

 

 

    

Per Share

      

Total

 

Public offering price

   $           $     

Underwriting discount

   $           $     

Proceeds, before expenses, to us

   $           $     

We have granted the underwriters an option for a period of 30 days after the date of this prospectus to purchase up to              additional shares of our common stock to cover over-allotments of shares, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of our common stock against payment in New York, New York on or about                     , 2014.

 

 

Joint Book-Running Managers

 

BofA Merrill Lynch   Morgan Stanley   Wells Fargo Securities

 

 

Prospectus dated                     , 2014


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[PICTURE, TEXT AND/OR GRAPHICS FOR INSIDE COVER]

 

 


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TABLE OF CONTENTS

 

    

Page

 

Prospectus Summary

     1   

Risk Factors

     22   

Cautionary Statement Regarding Forward-Looking Statements

     52   

Use of Proceeds

     54   

Distribution Policy

     56   

Capitalization

     61   

Dilution

     62   

Selected Historical and Pro Forma Financial Data

     64   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     67   

Industry and Market Data

     119   

Business and Properties

     142   

Management

     213   

Executive and Director Compensation

     220   

Principal Stockholders

     224   

Certain Relationships and Related Transactions

     226   

Policies with Respect to Certain Activities

     230   

Structure and Formation of Our Company

     235   

Description of Capital Stock

     239   

Description of the Partnership Agreement of Paramount Group Operating Partnership LP

     244   

Material Provisions of Maryland Law and Our Charter and Bylaws

     249   

Shares Eligible for Future Sale

     258   

U.S. Federal Income Tax Considerations

     261   

Underwriting

     282   

Legal Matters

     288   

Experts

     288   

Where You Can Find More Information

     288   

Index to Financial Statements

     F-1   

You should rely only on the information contained in this prospectus or in any free writing prospectus prepared by us. We have not, and the underwriters have not, authorized any other person to provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give to you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus or such other date as is specified in this prospectus.

 

 

Industry and Market Data

We use market data and industry forecasts and projections in this prospectus. Except as specifically noted otherwise, we have obtained all of the information, except for data regarding our company, under “Prospectus Summary—Market Information,” under “Industry and Market Data” and under “Business and Properties—Submarket and Building Overviews” and other market data and industry forecasts and projections contained in this prospectus under “Business and Properties—Our Competitive Strengths—Strong Internal Growth Prospects” and where otherwise indicated from market research prepared or obtained by Rosen Consulting Group, or RCG, a nationally recognized real estate consulting firm, in connection with this offering. Such information is included herein in reliance on RCG’s authority as an expert on such matters. See “Experts.” In addition, RCG in some cases has obtained market data and industry forecasts and projections

 

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from publicly available information and industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers’ experience in the industry, and there is no assurance that any of the projections or forecasts will be achieved. We believe that the surveys and market research others have performed are reliable, but we have not independently verified this information.

 

 

In this prospectus:

The term “annualized rent” refers to the annualized monthly contractual rent under commenced leases, and is calculated by multiplying cash base rent (before abatements) for a specified month by 12.

The term “fully diluted basis” assumes the exchange of all outstanding common units in our operating partnership, or common units, and all outstanding long-term incentive plan units in our operating partnership, or LTIP units, for shares of our common stock on a one-for-one basis, which is not the same as the meaning of “fully diluted” under GAAP.

The term “GAAP” refers to accounting principles generally accepted in the United States.

The term “gross levered IRR,” refers to the levered internal rate of return calculated by us for a fully divested property based on (i) equity invested and (ii) the value of total distributions from the property, less all sales costs, debt service and all other property-level fees where applicable, but before deduction of carried interests and asset management fees where applicable.

The term “gross unlevered IRR,” refers to the unlevered internal rate of return calculated by us for a fully divested property based on (i) the total amount invested, including both equity and debt, and (ii) the value of total distributions from the property plus interest payments on the debt, less all sales costs and all other property-level fees where applicable, but before deduction of carried interests and asset management fees where applicable.

The term “our markets” refers to New York City, Washington, D.C. and San Francisco.

The term “our predecessor” refers collectively to nine entities owned by the children and surviving former spouse of the late Professor Dr. h.c. Werner Otto of Hamburg, Germany, or the Otto family, that will be contributing substantially all of their assets to us in the formation transactions described in this prospectus, including Paramount Group, Inc., a Delaware corporation, or our management company.

The term “Washington, D.C.” refers, except as otherwise specified herein, to the metropolitan area of Washington, D.C.

 

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PROSPECTUS SUMMARY

You should read the following summary together with the more detailed information regarding our company and the historical and pro forma combined consolidated financial statements appearing elsewhere in this prospectus. You should carefully review the entire prospectus, including the risk factors, the combined consolidated financial statements and the notes thereto and the other documents to which this prospectus refers before making an investment decision. References in this prospectus to “we,” “our,” “us” and “our company” refer to (i) Paramount Group, Inc., a Maryland corporation, together with our consolidated subsidiaries including Paramount Group Operating Partnership LP, a Delaware limited partnership, which we refer to in this prospectus as “our operating partnership,” after giving effect to the formation transactions described in this prospectus and (ii) our predecessor. Unless the context otherwise requires or indicates, the information contained in this prospectus assumes (i) the formation transactions, as described under the caption “Structure and Formation of Our Company” beginning on page 235, have been completed, (ii) the              shares of our common stock to be sold in this offering are sold at $         per share, which is the midpoint of the price range set forth on the front cover of this prospectus, (iii) no exercise by the underwriters of their option to purchase up to an additional              shares of our common stock to cover over-allotments, if any, (iv) all property information is as of June 30, 2014, and (v) all pro forma financial or other information set forth in this prospectus is presented on the basis, and after making the adjustments, described in our unaudited pro forma combined consolidated financial statements and related notes thereto appearing elsewhere in this prospectus.

Our Company

We are one of the largest vertically-integrated real estate companies focused on owning, operating and managing high-quality, Class A office properties in select central business district, or CBD, submarkets of New York City, Washington, D.C. and San Francisco. As of June 30, 2014, our portfolio consisted of 12 Class A office properties with an aggregate of approximately 10.4 million rentable square feet that was 90.7% leased to 253 tenants. Our New York City portfolio accounted for 75.5% of our annualized rent as of June 30, 2014, while our Washington, D.C. and San Francisco portfolios accounted for 11.3% and 13.2%, respectively.

Our portfolio reflects our strategy, which has been consistent for nearly 20 years, of concentrating on select submarkets within leading gateway cities in the U.S. that have high barriers to entry, are supply constrained, exhibit strong economic characteristics and have a deep pool of prospective tenants in various industries with a strong demand for high-quality office space. Our properties are located in premier submarkets within midtown Manhattan, Washington, D.C. and San Francisco. Within these submarkets, our portfolio includes Class A office properties that are consistently among the most sought after addresses in the business community. As a result of the strong underlying fundamentals in our submarkets, the location and high-quality of our assets and our proven management capabilities, we believe that our portfolio is well positioned to provide continued cash flow growth and value creation.

We have a demonstrated expertise in asset management, property management, leasing, acquisitions, repositioning, redevelopment, investment management and financing. Since 1995, we have acquired 27 high-quality office properties with a total value of approximately $11.1 billion primarily in our markets. We have a well established reputation as a value-enhancing owner of Class A office properties in our markets and have a proven ability to redevelop and reposition acquired office properties to appeal to the most discerning tenants. Our organization brings an international understanding and sophistication to the marketing and management of our properties that resonates with our tenants, which include many of the world’s leading companies. We have an unwavering commitment to superior tenant service, which helps us attract and retain high-quality tenants. We believe our recognized commitment to excellence and demonstrated expertise in the ownership, acquisition, redevelopment and management of Class A office properties will enable us to maximize the operating performance and growth of our portfolio.

 

 

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Our senior management team is led by Albert Behler, our Chairman, Chief Executive Officer and President, who joined our predecessor in 1991 and has over 34 years of experience in the commercial real estate industry. When Mr. Behler joined our predecessor, he repositioned our diverse portfolio of real estate assets to focus primarily on Class A office properties in select submarkets of New York City. Since 1995, we have expanded our investment focus to include Class A office properties in select submarkets of Washington, D.C. and San Francisco that exhibit investment characteristics similar to those in our New York City submarkets. Overall, our senior management team has an average of 29 years of commercial real estate experience and has been with our company for an average of 14 years. Our senior management team members are proven stewards of investor capital with a remarkable track record through numerous economic cycles and have raised approximately $3.6 billion in equity capital from institutions and high-net-worth individuals since 1995. From the beginning of 1995 through June 30, 2014, we have generated an aggregate gross unlevered IRR of 18.6% and an aggregate gross levered IRR of 28.4% on our 15 realized property investments, which represents a total of $2.2 billion of proceeds.

Our predecessor was originally established in 1978 by Professor Dr. h.c. Werner Otto of Hamburg, Germany to invest in U.S. real estate as part of a distinguished international group of companies he founded. Today, these companies include: (i) the Otto Group, which is the world’s second largest online consumer retail vendor, one of the world’s leading retail mail order companies and the owner of Crate and Barrel; (ii) ECE Projektmanagement G.m.b.H. & Co. KG, which is the leading company in the development, planning, construction, leasing and management of shopping centers in Europe; and (iii) Park Property Management, which is a recognized owner and operator of apartment properties in Canada. In addition, the Otto family successfully made a significant investment in DDR Corp. in 2009 during the height of the financial crisis.

Upon completion of the formation transactions, substantially all of our assets will be held by, and substantially all of our operations will be conducted through, our operating partnership, either directly or through its subsidiaries, and we will be the sole general partner of our operating partnership.

 

 

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Our Properties

Our Portfolio Summary

The following table provides information about our portfolio as of June 30, 2014.

 

Property

 

Submarket

 

   Rentable   
Square
Feet (1)

   

Percent
Leased (2)

   

    Annualized    
Rent (3)

   

Annualized
Rent Per
Leased Square
Foot (4)

 

New York City:

         

1633 Broadway

  West Side     2,643,065        97.7%      $ 150,578,576      $   63.68   

1301 Avenue of the Americas

  Sixth Ave./Rock Center     1,767,992        81.8            101,254,990        70.71   

31 West 52nd Street (5)

  Sixth Ave./Rock Center     786,647        100.0            51,799,920        68.61   

1325 Avenue of the Americas

  Sixth Ave./Rock Center     814,892        91.0            37,960,898        58.80   

900 Third Avenue

  East Side     596,270        95.2            37,782,401        68.05   

712 Fifth Avenue (6)

  Madison/Fifth Avenue     543,341        96.4            48,381,051        96.60   
   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal / Weighted Average

      7,152,207        92.9%      $ 427,757,836      $   68.49   

Washington, D.C.:

         

425 Eye Street

  East End     380,090        87.4%      $ 13,553,608      $   42.93   

Liberty Place (7)

  East End     174,201        82.2            9,790,498        70.17   

1899 Pennsylvania Avenue (8)

  CBD     192,481        71.9            10,714,999        79.50   

2099 Pennsylvania Avenue

  CBD     208,636        29.3            171,894 (9)      —   (10) 

Waterview

  Rosslyn, VA     647,243        98.9            29,598,492        47.09   
   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal / Weighted Average

      1,602,651        82.1%      $ 63,829,491      $   52.20   

San Francisco:

         

One Market Plaza (11)

  South Financial District     1,611,125        89.4%      $ 74,469,239      $   60.43   
   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal / Weighted Average

      1,611,125        89.4%      $ 74,469,239      $   60.43   
   

 

 

   

 

 

   

 

 

   

 

 

 

Portfolio Total / Weighted Average

      10,365,983        90.7%      $ 566,056,566      $   65.06   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Each of the properties in our portfolio has been measured or remeasured in accordance with either Real Estate Board of New York, or REBNY, or the Building Owners and Managers Association, or BOMA, 2010 measurement guidelines, and the square footages in the charts in this prospectus are shown on this basis. Total rentable square feet consists of 8,831,462 leased square feet, 319,544 square feet with respect to signed leases not commenced, 963,355 square feet available for lease, 29,010 building management use square feet, and 222,612 square feet from REBNY or BOMA 2010 remeasurement adjustments that are not reflected in current leases.

 

(2)  Based on leases signed as of June 30, 2014 and calculated as total rentable square feet less square feet available for lease divided by total rentable square feet.

 

(3) Represents annualized monthly contractual rent under leases commenced as of June 30, 2014, including percentage rent received from our theater and retail space at 1633 Broadway for the 12 months ended June 30, 2014. This amount reflects total cash and percentage rent before abatements. Abatements committed to for leases that commenced as of June 30, 2014 for the 12 months ending June 30, 2015 were $21.8 million.

 

(4)

Represents annualized rent (less $3,892,786 for parking space, $1,819,808 for storage space, $4,046,589 for theater space, $42,630 for signage revenue and $368,347 for roof revenue) divided by leased square feet

 

 

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  (excluding 319,544 square feet with respect to signed leases not commenced, 73,209 square feet for parking space, 64,209 square feet for storage space, 145,192 square feet for theater space, 4,449 square feet for roof space and 29,010 square feet for building management space) as set forth in note (1) above for the total.

 

(5) We own a 64.2% aggregate interest in this property through two joint ventures.

 

(6) We own a 50.0% interest in a joint venture that owns a fee interest in a portion of the property and a ground leasehold interest in a portion of the property with a remaining term of approximately 11 years (expiring January 1, 2025). The ground lease features an installment sales contract to purchase the fee interest in the property covered by the lease from the ground lessor on January 2, 2015, subject to certain terms and conditions, for $12.1 million. We have an option to postpone the closing date until January 2, 2025, and if so exercised, the purchase price at closing will be $13.1 million.

 

(7) Annualized rent is converted from triple net to gross basis by adding expense reimbursements to base rent. Figures include $2,290,871 of reimbursement revenue attributable to tenants as of June 30, 2014.

 

(8) Annualized rent is converted from triple net to gross basis by adding expense reimbursements to base rent. Figures include $4,027,324 of reimbursement revenue attributable to tenants as of June 30, 2014.

 

(9) Represents rent received for parking space.

 

(10) Does not reflect a lease signed for 59,133 rentable square feet that commenced in July 2014, which will provide starting annualized rent of $2,854,191, or $48.27 per leased square foot.

 

(11)  An independent third party global investment and advisory firm purchased a 49.0% interest in the joint venture that owns One Market Plaza on July 23, 2014. Upon completion of the formation transactions, we will own a 49.0% interest in the joint venture that owns One Market Plaza and we will indirectly wholly own the general partner of a limited partnership that owns a 2.0% interest in the joint venture that holds the property. As a result, we will effectively have 51.0% voting power in connection with the property.

In addition to our portfolio, we will own interests in and manage certain existing private equity real estate funds and other assets following the consummation of the formation transactions. For further details see “Business and Properties—Real Estate Funds, Property Management and Other Assets” on page 206.

Our Competitive Strengths

We believe that we distinguish ourselves from other owners and operators of office properties through the following competitive strengths:

 

   

Premier Portfolio of High-Quality Office Properties in Most Desirable Submarkets. We have assembled a premier portfolio of Class A office properties located exclusively in carefully selected submarkets of New York City, Washington, D.C. and San Francisco. Our submarkets are among the strongest commercial real estate submarkets in the United States for office properties due to a combination of their high barriers to entry, constrained supply, strong economic characteristics and a deep pool of prospective tenants in various industries that have demonstrated a strong demand for high-quality office space. Our markets are international business centers, characterized by a broad tenant base with a highly educated workforce, a mature and functional transportation infrastructure and an overall amenity rich environment. These markets are home to a diverse range of large and growing enterprises in a variety of industries, including financial services, media and entertainment, consulting, legal and other professional services, technology, as well as federal government agencies. As a result of the above factors, the submarkets in which we are invested have generally outperformed the broader markets in which they are located. Within our targeted submarkets, we have assembled a portfolio of Class A office properties that are consistently among the most sought after addresses in the business community. According to RCG, given current market rents, construction costs and the

 

 

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lack of competitive development sites, most of our portfolio could not be replicated today on a cost-competitive basis, if at all. We believe the high-quality of our buildings, services and amenities, and their desirable locations should allow us to increase rents and occupancy to generate positive cash flow and growth.

 

    Deep Relationships with Diverse, High Credit-Quality Tenant Base. We have long-standing relationships with high-quality tenants, including Allianz, Bank of America Corporation, Barclays plc, Clifford Chance US LLP, Commerzbank AG, Crédit Agricole Corporate & Investment Bank, Corporate Executive Board Company, Deloitte & Touche LLP, Showtime Networks Inc., TD Bank, N.A., Warner Music Group and the U.S. Federal Government. Approximately 58.1% of our annualized rent is derived from investment grade or nationally recognized tenants in their respective industries. As of June 30, 2014, our nearly 300 commercial tenant leases across our 253 tenants had an average size of approximately 31,300 rentable square feet. No tenant accounted for more than 5.2% of our annualized rent as of June 30, 2014.

 

    Strong Internal Growth Prospects. We have substantial embedded rent growth within our portfolio as a result of the strong historical and projected future rental rate growth within our submarkets, contractual fixed rental rate increases included in our leases and incremental rent from the lease-up of our portfolio. As of June 30, 2014, the market rents for the office space in our portfolio for which leases had commenced were 16.2% higher than the annualized rent from the in-place leases for this space based on our internal estimates used for budgeting purposes. In addition, RCG projects average increases in Class A office rents in midtown Manhattan, Washington, D.C. and San Francisco ranging from 2.6% to 5.3% per year through 2018. As a result, as our leases expire, we expect to realize significant rent growth as we mark these leases to market. As of June 30, 2014, the average duration of our leases, excluding month-to-month leases, is 11.4 years with an average remaining term of 7.6 years. Over the term of these leases, we also have embedded rent growth resulting from the fixed rental rate increases, which typically range from 2.0% to 3.0% per year. Our portfolio is also 90.7% leased as of June 30, 2014; we believe this presents us with a meaningful growth opportunity as we lease-up our portfolio given the strong office market fundamentals in our target markets. In addition, we expect incremental rental revenue from two in-process renovation projects that are expected to add space for retail tenants, whose asking rents are generally above those of office tenants in our markets.

 

    Demonstrated Acquisition and Operational Expertise. Over the past nearly 20 years, we have developed and refined our highly successful real estate investment strategy. We have a proven reputation as a value-enhancing, hands-on operator of Class A office properties. We target opportunities with a value-add component, where we can leverage our operating expertise, deep tenant relationships, and proactive approach to asset and property management. In certain instances, we may acquire properties with existing or expected future vacancy or with significant value embedded in existing below-market leases, which we will be able to mark-to-market over time. Even fully leased properties from time to time present us with value-enhancing opportunities which we have been able to capitalize on in the past.

 

   

Value-Add Renovation and Repositioning and Development Capabilities. We have expertise in renovating, repositioning and developing office properties, having made significant investments of over $100.0 million (excluding tenant improvement costs and leasing commissions) in four of our office properties since 1995. We have historically acquired well-located assets that have either suffered from a need for physical improvement to upgrade the property to Class A space, have been underperforming due to a lack of a coherent leasing and branding strategy or have been under-managed and could be immediately enhanced by our hands-on approach. We are experienced in upgrading, renovating and modernizing building lobbies, corridors, bathrooms, elevator cabs and base building systems and updating antiquated spaces to include new ceilings, lighting and other

 

 

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amenities. We have also successfully aggregated and are continuing to combine smaller spaces to offer larger blocks of space, including multiple floors, which are attractive to larger, higher credit-quality tenants. We believe that the post-renovation quality of our buildings and our hands-on asset and property management approach attract higher credit-quality tenants and allows us to grow cash flow.

 

    Seasoned and Committed Management Team with Proven Track Record. Our senior management team, led by Albert Behler, our Chairman, Chief Executive Officer and President, has been in the commercial real estate industry for an average of 29 years, and has worked at our company for an average of 14 years. Our senior management team is highly regarded in the real estate community and has extensive relationships with a broad range of brokers, owners, tenants and lenders. We have developed relationships that enable us to secure high credit-quality tenants on attractive terms and provide us with potential off-market acquisition opportunities. We believe that our proven acquisition and operating expertise enables us to gain advantages over our competitors through superior acquisition sourcing, focused leasing programs, active asset and property management and first-class tenant service. Since 1995, members of our senior management team have raised approximately $3.6 billion in equity capital from institutional and high-net-worth investors. From the beginning of 1995 through June 30, 2014, we have generated an aggregate gross unlevered IRR of 18.6% and an aggregate gross levered IRR of 28.4% on our 15 realized property investments, which represents a total of $2.2 billion of proceeds. Upon completion of this offering, our senior management team is expected to own a significant amount of our common stock on a fully diluted basis, aligning their interests with those of our stockholders, and incentivizing them to maximize returns for our stockholders.

 

    Strong Balance Sheet Well Positioned for Growth. Over the past several decades, we have built strong relationships with numerous lenders, investors and other capital providers. Our financing track record and depth of relationships provide us with significant financial flexibility and capacity to fund future growth in both good and bad economic environments. As of June 30, 2014, we had a strong pro forma capital structure that supports this flexibility and growth. Our pro forma net debt to total enterprise value is     % and pro forma net debt to Adjusted EBITDA is     x, each calculated on a pro rata basis. On a pro forma basis as of June 30, 2014, approximately     % of our debt will be fixed rate, we will have no debt maturities prior to     and the weighted average maturity of our pro forma indebtedness will be     years. Upon completion of this offering, we expect we will have an undrawn $         million senior unsecured revolving credit facility and $         million of Adjusted EBITDA from          unencumbered properties totaling     million rentable square feet.

 

    Proven Investment Management Business. We have a successful investment management business, where we serve as the general partner and property manager of private equity real estate funds for institutional investors and high-net-worth individuals with combined assets aggregating approximately $8.2 billion as of June 30, 2014. We have also entered into a number of joint ventures with institutional investors, high-net-worth individuals and other sophisticated real estate investors through which we and our funds have invested in real estate properties. As part of the formation transactions, we will acquire most of the assets held by our private equity real estate funds while also retaining our investment management platform pursuant to which we will continue to manage our existing funds and joint ventures that will continue holding assets following the formation transactions. The continuing fees that we will earn in connection with this business will enhance our potential for higher overall returns. Additionally, although we intend to directly fund our future real estate investments following deployment of our existing funds’ remaining committed equity capital, our existing investment management platform should enable us to more easily supplement our direct capital sources through strategic joint ventures or pursue opportunities through new private equity real estate funds where advantageous.

 

 

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Business and Growth Strategies

Our primary business objective is to enhance stockholder value by increasing cash flow from operations. The strategies we intend to execute to achieve this goal include:

 

    Lease-up of Currently Available Space. Given current demand for high-quality Class A office space in our submarkets, we believe that we are well positioned to achieve significant internal growth through the lease-up of existing space in our portfolio. As of June 30, 2014, we had approximately 963,355 rentable square feet available to lease in our portfolio. Approximately 321,708 rentable square feet, or 33.4% of the total available rentable square feet, is highly attractive space in our 1301 Avenue of the Americas property in the Sixth Avenue/Rockefeller Center submarket of midtown Manhattan, and approximately 201,671 square feet, or 20.9% of the total available rentable square feet, is highly desirable space in our 2099 and 1899 Pennsylvania Avenue properties in the CBD submarket of Washington, D.C. A large portion of the space we are currently marketing relates to one recent lease terminating at our 1301 Avenue of the Americas property, vacancy at our 2099 Pennsylvania Avenue property that was expected and underwritten at the time of acquisition in 2012 and recently vacated space in our 1899 Pennsylvania Avenue property, as we have aggregated available space to target a higher-caliber tenant commensurate with the quality and location of this property. We are well positioned to continue our predecessor’s leasing momentum at these three properties and to increase revenue significantly over time. For example, if we were to achieve the submarket lease percentage at our asking rents for these three properties, we would generate potential incremental annualized rent of approximately $24.4 million per year. If we were to achieve average historical submarket lease percentages since 1999 at our 2015 asking rents for these properties, we would generate potential incremental annualized rent of approximately $29.4 million per year.

 

    Increase Existing Below-Market Rents. We believe we can capitalize on our high-profile institutional-quality portfolio by realizing the substantial embedded rent growth within our portfolio resulting from the combination of the strong historical market rental rate growth in our submarkets and the long term nature of our existing office leases. For example, we expect to benefit from the re-leasing of approximately 2.9 million square feet, or 29.1%, of our office leases, through 2018, which we believe are currently at below-market rates. These expiring office leases represent weighted average rent at expiration of $72.78 per square foot, as compared to a weighted average estimated market rent at expiration of $85.97 per square foot based on our internal estimates used for budgeting purposes. Assuming we could re-lease the approximately 2.9 million square feet expiring through 2018 at the weighted average estimated market rent at expiration of $85.97 per square foot, we would generate potential incremental annual rental revenues of approximately $38.0 million per year. Overall, 80.1% of these expiring leases are from our midtown Manhattan properties. As older leases expire, we expect to generate additional rental revenue by (i) continuing to upgrade certain space to further increase its value and (ii) increasing the total rentable square footage of such space as a result of remeasurements and application of market loss factors to the space.

 

   

Disciplined Acquisition Strategy Focused on Premier Submarkets and Assets. Since 1995, we have acquired 27 high-quality office properties with a total value of approximately $11.1 billion primarily in our targeted submarkets of New York City, Washington, D.C. and San Francisco. We intend to continue our core strategy of acquiring, owning and operating Class A office properties within submarkets that have high barriers to entry, are supply constrained, exhibit strong economic characteristics and have a pool of prospective tenants in various industries that have a strong demand for high-quality office space. We believe that owning the right assets within the leading submarkets of the best office markets in the United States will allow us to generate strong cash flow growth and attractive long-term returns. We seek to acquire properties that will command premium

 

 

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rental rates and maintain higher occupancy levels than other properties in our markets. We will pursue opportunities to acquire office properties, but will maintain a disciplined approach to ensure that our acquisitions meet our core strategy. We are a highly active market participant that reviews numerous acquisition opportunities annually; however, we are highly selective in the properties that we ultimately acquire. We intend to strategically increase our market share in our existing submarkets and selectively enter into other submarkets with similar characteristics. Our acquisition strategy will focus primarily on long-term growth and total return potential rather than short-term cash returns. We believe we can utilize our deep industry relationships and our expertise in redeveloping and repositioning office properties to identify acquisition opportunities where we believe we can increase occupancy and rental rates. Many of our predecessor’s acquisitions have been sourced on an off-market basis. Additionally, we believe that our investment management platform will provide us access to valuable market intelligence via select debt investments, further supplementing our ability to identify attractive acquisition opportunities.

 

    Redevelopment and Repositioning of Properties. We intend to redevelop or reposition certain properties that we currently own or that we acquire in the future, as needed. Prior to investment, we will apply rigorous underwriting analyses to determine whether additional investment in the property will improve occupancy and cash flow over the long term. By redeveloping and repositioning our properties, including creating additional amenities for our tenants, we endeavor to increase both occupancy and rental rates at these properties, thereby achieving superior risk-adjusted returns on our invested capital. We are currently embarking on redevelopment and repositioning projects at our One Market Plaza property in San Francisco and our 1633 Broadway property in New York. We estimate that the total cost for both of these projects will be approximately $40.0 million, of which $25.0 million relates to our One Market Plaza property and has been fully funded by us and our joint venture partner, and that we will achieve attractive risk-adjusted returns on this capital over time.

 

    Proactive Asset and Property Management. We intend to continue our proactive asset and property management in order to increase occupancy and rental rates. We provide our own, fully integrated asset and property management, which includes in-house legal, marketing, accounting, finance and leasing departments for our portfolio and our own tenant improvement construction services. Our property management program includes cross functional training for best practices with a foundation that is rooted in our “Property Management Standards,” a set of internal policies and procedures that is shared across the platform. The development and retention of top performing property management personnel have been critical to our success. Our leasing infrastructure includes a dedicated team of personnel that focuses on our target market of high credit-quality tenants that typically seek a larger footprint and a customized build-out from a reputable and reliable landlord. We utilize our comprehensive building management services and our strong commitment to tenant and broker relationships to negotiate attractive leasing deals and to attract and retain high credit-quality tenants. We proactively manage our rent roll, maintain continuous communication with our tenants and foster strong tenant relationships by being responsive to tenant needs.

Market Information

New York City Market

One of the world’s premier gateway cities, New York City is an international hub for business, politics, education and culture as well as a choice location for companies, residents and tourists alike. With a high concentration of tenants in finance, entertainment, advertising and many other industries, New York City is one of the most well-known office markets in the world. The market’s high barriers to entry, coupled with its wide array of industries with high demand for office space, provide stability through economic cycles and serve as a foundation for long-term growth. In addition, the lively, 24-7 environment attracts both domestic and

 

 

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international tourists, with more than 50 million visitors annually. New York’s tourism and high-income resident base also support its status as one of the most expensive retail markets in the country.

RCG believes that the midtown Manhattan office market fundamentals should continue to benefit from its status as a world class office location. The midtown Manhattan office market has the highest asking rental rates and among the highest occupancy rates in the United States and is characterized by high barriers-to-entry, limited new supply and strong prospects for continued job creation. As a result, RCG expects the midtown Manhattan office market to continue its strong recovery in rent growth and upward trends in occupancy. These trends are shown in the graphs below:

 

LOGO    LOGO

RCG expects the overall attractiveness of a midtown Manhattan location will lead to strong absorption of vacant Class A space through the expansion of tenants in industries such as professional services, technology, media and fashion. As the U.S. economy improves and the impact of a new regulatory environment is absorbed, following the implementation of the Dodd–Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank, RCG also expects increased office space demand from financial services firms. RCG projects a decline in the overall midtown Manhattan vacancy rate to 9.3% in 2018 from 11.0% in the second quarter of 2014. Already achieving the highest rents in the nation, midtown Manhattan office market rents are expected to grow 5.8% in 2015 and 6.5% in 2016. By the end of 2018, RCG expects midtown Manhattan office rents to reach an average of $88.53 per square foot. The weighted average Class A office rent in the second quarter of 2014 was $76.61 per square foot, and RCG expects this space to exhibit a comparable or stronger growth trend during the next five years. High-quality buildings in premier submarkets such as Madison/Fifth Avenue and Sixth Avenue/Rockefeller Center as well as other properties that can provide the flexibility of open floor plans should continue to command premium rents as tenants exhibit a sustained flight-to-quality trend in the coming years.

Washington, D.C. Market

As the capital of the United States, Washington, D.C. is a gateway city that is famous throughout the world. Washington, D.C. is home to the White House, Congress and numerous international embassies. The city has a well-developed infrastructure, world-class museums and other cultural attractions and a number of highly-regarded universities. A lack of land, the high cost of construction and a strict regulatory environment lead to high barriers to new supply, while a large government presence and strong demand from tenants in a variety of industries support stability in the local office market.

 

 

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While the District of Columbia already has some of the highest asking rental rates in the United States, RCG believes that, going forward, job growth and diminishing supply of available space in the District of Columbia office market will lead to increasing rent growth and occupancy, particularly in the most desirable submarkets and high-quality buildings. These trends are shown in the graphs below:

LOGO

RCG believes that the District of Columbia office market is on track to generate positive absorption during the next five years because employment is expected to grow while the pace of new construction has ebbed, with a majority of the space currently under construction pre-leased. In addition to the decreased pace of construction, other projected economic indicators forecast a strong future for office activity. The expansion of private sector employers, aided by the growth of the region’s technology cluster, should further stimulate office leasing activity through 2018. This growth will be enhanced with resolution of political gridlock and resumption of the historical pattern of public sector expansion. Relatively limited new supply and strong leasing activity should result in a gradual decline in the vacancy rate to 13.5% in 2018. Strong demand will drive overall rent growth at an average annual rate of 2.6% to $55.35 per square foot by 2018. Based on a continued flight-to-quality and a lower level of new supply coming online, RCG believes that Class A and trophy-class office rents should increase at an equivalent or faster pace. Also stemming from a flight-to-quality and more efficient space usage, highly desirable submarkets such as the CBD and East End, where our District of Columbia properties are located, should experience stronger demand than the overall District of Columbia office market.

San Francisco Market

The San Francisco Bay Area serves as a gateway city, the financial center of the West Coast of the United States and home to the high technology industry. A high-quality of life and plentiful job opportunities available in innovative industries attract talent from across the globe. Additionally, a cluster of top-tier research universities provides local employers with a steady pipeline of graduates. San Francisco’s unique attributes and attractions also draw visitors from around the world. The region’s advanced infrastructure, existing industry clusters and well-educated workforce support robust demand for office space throughout economic cycles, while high political and physical barriers to new supply limit the amount of new construction.

 

 

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The San Francisco metro office market has among the highest asking rents and occupancy rates in the United States. The highly developed nature of the San Francisco CBD office market, coupled with high barriers to entry in the form of restrictive permitting, neighborhood resistance and high construction costs, results in a persistently low level of supply. RCG believes that continued growth of technology and its supporting industries should support sustained healthy market conditions in the San Francisco CBD office market during the next five years, allowing for a strong pace of rent appreciation and continued high occupancy. These trends are illustrated by the graphs below:

LOGO

RCG forecasts extended tight market conditions through the next five years, although temporary upticks will likely result as new projects come online and are leased up gradually. From 2014 to 2018, the CBD vacancy rate is anticipated to remain in the 9% to 10% range. During this period, RCG projects that the average asking rental rate should increase at an average annual rate of 4.1%, reaching $70.11 per square foot in 2018. Based on shifting tenant preferences including a flight-to-quality, RCG expects that Class A space should record comparable or stronger rent appreciation during this time. Additionally, office landlords in the South Financial District submarket should disproportionately benefit from the propensity of tenants in the expanding technology industry to favor space south of Market Street, which is where our San Francisco property is located.

Summary Risk Factors

An investment in our common stock involves various risks, and prospective investors are urged to carefully consider the matters discussed under “Risk Factors” prior to making an investment in our common stock. The following is a list of some of these risks.

 

    Unfavorable market and economic conditions in the United States and globally and in the specific markets or submarkets where our properties are located could adversely affect occupancy levels, rental rates, rent collections, operating expenses and the overall market value of our assets, impair our ability to sell, recapitalize or refinance our assets and have an adverse effect on our results of operations, financial condition and our ability to make distributions to our stockholders.

 

    All of our properties are located in New York City, Washington, D.C. and San Francisco, and adverse economic or regulatory developments in these areas could negatively affect our results of operations, financial condition and ability to make distributions to our stockholders.

 

    We may be unable to renew leases, lease currently vacant space or vacating space on favorable terms or at all as leases expire, which could adversely affect our financial condition, results of operations and cash flow.

 

 

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    Competition could limit our ability to acquire attractive investment opportunities and increase the costs of those opportunities, which may adversely affect us, including our profitability, and impede our growth.

 

    We are subject to risks involved in conducting real estate activity through joint ventures and private equity real estate funds.

 

    Contractual commitments with existing private equity real estate funds may limit our ability to acquire properties directly in the near term.

 

    Failure to qualify or to maintain our qualification as a REIT would have significant adverse consequences to the value of our common stock.

 

    Capital and credit market conditions may adversely affect our access to various sources of capital or financing and/or the cost of capital, which could impact our business activities, dividends, earnings and common stock price, among other things.

 

    We may from time to time be subject to litigation, which could have an adverse effect on our financial condition, results of operations, cash flow and trading price of our common stock.

 

    We depend on key personnel, including Albert Behler, our Chairman, Chief Executive Officer and President and the loss of services of one or more members of our senior management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners and existing and prospective industry participants, which could negatively affect our financial condition, results of operations, cash flow and market value of our common stock.

 

    The ability of stockholders to control our policies and effect a change of control of our company is limited by certain provisions of our charter and bylaws and by Maryland law.

 

    Conflicts of interest may exist or could arise in the future between the interests of our stockholders and the interests of holders of common units, which may impede business decisions that could benefit our stockholders.

 

    We did not negotiate the value of the properties and assets of our predecessor and the private equity real estate funds controlled by our management company at arm’s-length as part of the formation transactions, and the consideration given by us in exchange for them may exceed their fair market value.

 

    We may assume unknown liabilities in connection with the formation transactions, which, if significant, could adversely affect our business.

 

    We have a substantial amount of indebtedness that may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs.

 

    High mortgage rates and/or unavailability of mortgage debt may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our net income and the amount of cash distributions we can make.

 

    We may be unable to make distributions at expected levels, which could result in a decrease in the market value of our common stock.

 

    We will owe certain taxes notwithstanding our qualification as a REIT.

 

    REIT distribution requirements could adversely affect our liquidity and ability to execute our business plan.

 

 

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Structure and Formation of Our Company

Our Company and the Formation Transactions

We were incorporated in Maryland as a corporation on April 14, 2014 to continue the business of our predecessor. Prior to or concurrently with the completion of this offering, we will engage in a series of transactions through which we will acquire our initial portfolio of properties, substantially all of the other assets of our predecessor and our other initial assets and liabilities in exchange for an aggregate of              shares of our common stock,              common units and              in cash. Upon completion of the formation transactions, substantially all of our assets will be held by, and substantially all of our operations will be conducted through, our operating partnership, Paramount Group Operating Partnership LP, a Delaware limited partnership, either directly or through its subsidiaries, and we will be the sole general partner of our operating partnership. Additionally, we will contribute the net proceeds from this offering to our operating partnership in exchange for common units.

 

 

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Our Structure

The following diagram depicts our expected ownership structure upon completion of the formation transactions and this offering. Our operating partnership will own the various properties in our portfolio directly or indirectly, and in some cases through special purpose entities that were created in connection with various financings. We refer to the persons and entities acquiring shares of our common stock or common units in the formation transactions as continuing investors.

 

LOGO

 

 

(1)  Excluding the Otto family and members of our management and directors.
(2)  Certain assets are held in joint ventures with third party investors.

 

 

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Benefits to Related Parties

In connection with the formation transactions and this offering, certain of our directors, director nominees, executive officers and our continuing investors will receive material financial and other benefits, including those set forth below.

 

    Certain of our executive officers will receive                  shares of our common stock and                  common units, representing in the aggregate approximately       % of our shares of outstanding common stock and        % of our shares of outstanding common stock on a fully diluted basis, excluding shares of restricted common stock and LTIP units issuable pursuant to the 2014 Equity Incentive Plan.

 

    Members of the Otto family, who own and control our predecessor, will receive                  shares of our common stock, representing in the aggregate approximately        % of our shares of outstanding common stock and        % of our shares of outstanding common stock on a fully diluted basis, and $                 in cash.

 

    We will enter into a stockholders agreement with Maren Otto, Katharina Otto-Bernstein and Alexander Otto providing these members of the Otto family with specified director nomination rights.

 

    We will enter into a registration rights agreement pursuant to which certain of our continuing investors will have the right to cause us to register with the Securities and Exchange Commission, or the SEC, the resale of the shares of our common stock that they receive in the formation transactions or the resale or primary issuance of the shares of our common stock that they may receive in exchange for the common units that they receive in the formation transactions and facilitate the offering and sale of such shares.

 

    We currently anticipate that we will enter into employment agreements with certain of our executive officers that will take effect upon completion of this offering.

 

    We will enter into indemnification agreements with each of our executive officers, directors and director nominees, whereby we will agree to indemnify our executive officers, directors and director nominees against all expenses and liabilities and pay or reimburse their reasonable expenses in advance of final disposition of a proceeding to the fullest extent permitted by Maryland law if they are made or threatened to be made a party to the proceeding by reason of their service to our company, subject to limited exceptions.

 

    We will issue an aggregate of             shares of restricted common stock and             LTIP units to our executive officers, directors, director nominees and other employees pursuant to the 2014 Equity Incentive Plan.

 

    In connection with the formation transactions, we will grant waivers from the ownership limit contained in our charter to certain of our continuing investors to own up to             shares of our outstanding common stock in the aggregate, which will be transferable subject to the transferee making certain representations and covenants to us relating to the preservation of our REIT status.

Distribution Policy

We intend to pay regular quarterly distributions to holders of our common stock. We intend to pay a pro rata initial distribution with respect to the period commencing on the completion of this offering and ending on the last day of the then current fiscal quarter, based on $         per share for a full quarter. On an annualized basis, this would be $         per share, or an annual distribution rate of approximately     % based on an assumed initial public offering price at the midpoint of the price range set forth on the front cover of this prospectus. We intend to maintain a distribution rate for the 12 month period following completion of this offering that is at or above

 

 

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our initial distribution rate unless actual results of operations, economic conditions or other factors differ materially from the assumptions used in our estimate. We do not intend to reduce the expected distributions per share if the underwriters’ option to purchase additional shares of our common stock to cover over-allotments is exercised. Any future distributions we make will be at the discretion of our board of directors and will be dependent upon a number of factors, including prohibitions or restrictions under financing agreements or applicable law and other factors described herein.

Our Tax Status

We intend to elect to be treated and to qualify as a REIT for U.S. federal income tax purposes beginning with our first taxable year ending December 31, 2014. We believe we have been organized, have operated and will operate in a manner that permits us to satisfy the requirements for taxation as a REIT under the applicable provisions of the Internal Revenue Code of 1986, as amended, or the Code. To maintain REIT status, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our taxable income to our stockholders, computed without regard to the dividends paid deduction and excluding our net capital gain, plus 90% of our net income after tax from foreclosure property (if any), minus the sum of various items of excess non-cash income.

In any year in which we qualify as a REIT, we generally will not be subject to U.S. federal income tax on that portion of our taxable income or capital gain that is distributed to stockholders. If we lose our REIT status, and the statutory relief provisions of the Code do not apply, we will be subject to entity-level income tax, including any applicable alternative minimum tax, on our taxable income at regular U.S. corporate tax rates. Even if we qualify as a REIT, we will be subject to certain U.S. federal, state and local taxes on our income and property and on taxable income that we do not distribute to our stockholders. See “U.S. Federal Income Tax Considerations.”

Restrictions on Ownership of Our Common Stock

Our charter prohibits any person or entity from actually or constructively owning shares in excess of     % (in value or in number of shares, whichever is more restrictive) of the outstanding shares of our common stock, or     % in value of the aggregate of the outstanding shares of all classes and series of our stock. In connection with the formation transactions, we will grant waivers from the ownership limit contained in our charter to certain of our continuing investors to own up to             shares of our outstanding common stock in the aggregate.

Restrictions on Transfer and Certain Indemnity Obligations for Holders of Common Stock and Units

We, our executive officers, directors and director nominees and the continuing investors that are receiving shares of our common stock or common units in the formation transactions have agreed not to sell or transfer any common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock, including common units, for 180 days after the date of this prospectus without first obtaining the written consent of             , subject to certain exceptions. In addition, each person or entity receiving shares of our common stock or common units will be subject to indemnification obligations relating to New York real property transfer tax if such person or entity transfers more than 50.0% of the shares of our common stock or common units received in the formation transactions within two years after this offering. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

Conflicts of Interest

Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any partner thereof, on the other. Our directors

 

 

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and officers have duties to our company under applicable Maryland law in connection with their management of our company. At the same time, we, as the general partner of our operating partnership, have fiduciary duties and obligations to our operating partnership and its other partners under Delaware law and the partnership agreement in connection with the management of our operating partnership. Our fiduciary duties and obligations, as the general partner of our operating partnership, may come into conflict with the duties of our directors and officers to our company and our stockholders. In particular, the consummation of certain business combinations, the sale of any properties or a reduction of indebtedness could have adverse tax consequences to holders of common units, which would make those transactions less desirable to them.

We intend to adopt policies that are designed to reduce certain potential conflicts of interests. See “Policies with Respect to Certain Activities—Conflict of Interest Policies.”

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We have not yet made a decision as to whether we will take advantage of any or all of these exemptions. If we do take advantage of any of these exemptions, we do not know if some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of this extended transition period, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for all public companies that are not emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenue equals or exceeds $1.0 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

Corporate Information

Our principal executive offices are located at 1633 Broadway, Suite 1801, New York, NY 10019. Our telephone number is (212) 237-3100. We maintain a website at                                         . Information contained on, or accessible through our website is not incorporated by reference into and does not constitute a part of this prospectus or any other report or documents we file with or furnish to the SEC.

 

 

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This Offering

 

Common stock offered by us

            shares

 

Common stock to be outstanding after this offering

            shares (1)

 

Common stock and common units to be outstanding after this offering

            shares and common units (1)(2)

 

Use of Proceeds

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, will be approximately $         billion ($         billion if the underwriters exercise in full their option to purchase up to an additional             shares of our common stock to cover over-allotments). We will contribute the net proceeds from this offering to our operating partnership in exchange for common units. We expect our operating partnership to use the net proceeds received from us to repay outstanding indebtedness and any applicable prepayment costs, exit fees, defeasance costs and settlement of interest rate swap liabilities associated with such repayment, and to pay cash consideration in connection with the formation transactions. We expect to use any remaining net proceeds for general corporate purposes, capital expenditures and potential future acquisitions. See “Use of Proceeds.”

 

Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under the heading “Risk Factors” beginning on page 22 and other information included in this prospectus before investing in our common stock.

 

Proposed NYSE Symbol

“PGRE”

 

(1)  Includes (a)            shares of our common stock to be issued in this offering, (b)            shares of our common stock to be issued in connection with the formation transactions, (c)            shares of restricted stock to be granted to our executive officers and employees concurrently with the completion of this offering and (d)            shares of restricted stock to be granted to our non-employee directors concurrently with the completion of this offering. Excludes (i)            shares of our common stock issuable upon the exercise in full of the underwriters’ option to purchase up to an additional             shares from us to cover over-allotments, (ii)            shares of our common stock available for future issuance under our 2014 Equity Incentive Plan and (iii)            shares of our common stock that may be issued, at our option, upon exchange of             common units to be issued in the formation transactions and             common units that, subject to the satisfaction of certain conditions, are issuable upon conversion of             LTIP units to be granted to our executive officers, non-employee directors and employees concurrently with the completion of this offering.

 

(2)  Includes             common units expected to be issued in the formation transactions and             LTIP units to be granted to our executive officers, non-employee directors and employees concurrently with the completion of this offering.

 

 

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Summary Historical and Pro Forma Financial Data

The following table sets forth selected historical combined consolidated financial information and other data as of the dates and for the periods presented. The selected financial information as of December 31, 2013 and for the year ended December 31, 2013 has been derived from Paramount Predecessor’s audited combined consolidated financial statements included elsewhere in this prospectus. The selected financial information as of June 30, 2014 and for the six months ended June 30, 2014 has been derived from Paramount Predecessor’s unaudited combined consolidated financial statements included elsewhere in this prospectus. This financial information and other data should be read in conjunction with the combined consolidated financial statements and notes thereto included in this prospectus.

The unaudited pro forma combined consolidated financial data for the six months ended June 30, 2014 and for the year ended December 31, 2013, is presented as if this offering, the formation transactions and the other adjustments described in the unaudited pro forma financial information beginning on page F-2 had occurred on June 30, 2014 for purposes of the pro forma combined consolidated balance sheet data, and as of January 1, 2013 for purposes of the pro forma combined consolidated statements of income. This pro forma financial information is not necessarily indicative of what Paramount Group, Inc.’s actual financial position and results of operations would have been as of the date and for the periods indicated, nor does it purport to represent Paramount Group, Inc.’s future financial position or results of operations.

The following table also sets forth combined property-level financial data based on financial information included in Paramount Predecessor’s combined consolidated financial statements and Notes 3 and 4 thereto, which is presented for our properties on a combined basis for the six months ended June 30, 2014 and 2013 and for the years ended December 31, 2013 and 2012. This property-level information does not purport to represent Paramount Predecessor’s historical combined consolidated financial information and it is not necessarily indicative of our future results of operations. For example, we will not own 100.0% of all of our properties or consolidate the results of operations of all of our properties and, as a result, our results of operations going forward will differ from the property-level financial information shown below. However, in light of the significant differences that will exist between our future financial information and Paramount Predecessor’s historical combined consolidated financial information and the fact that we will account for our investment in one property using the equity method of historical cost accounting, we believe that this presentation of property-level data will be useful to investors in understanding the historical performance of our properties on a property-level basis.

 

 

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You should read the following information in conjunction with the information contained in “Structure and Formation of Our Company,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the combined consolidated financial statements and unaudited pro forma combined consolidated financial statements and related notes thereto appearing elsewhere in this prospectus.

 

    

(Pro Forma)

    

(Historical)

   

(Pro Forma)

    

(Historical)

 

($ in thousands)

  

For the six
months ended
June 30, 2014

    

For the six
months ended
June 30, 2014

   

For the year

ended
December 31, 2013

    

For the year

ended
December 31, 2013

 

Statement of Operations Data:

          

Revenues

          

Rental income

   $                       $ 16,312      $                        $ 30,406   

Tenant reimbursement income

        896           1,821   

Distributions from real estate fund investments

        11,247           29,184   

Realized and unrealized gains, net

        79,917           332,053   

Fee income

        11,582           26,426   

Other income

        —             —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Revenues

        119,954           419,890   
  

 

 

    

 

 

   

 

 

    

 

 

 

Expenses

          

Operating

        7,753           16,195   

Depreciation and amortization

        5,566           10,582   

General and administrative

        12,448           33,504   

Profit sharing compensation

        8,232           23,385   

Other

        3,901           4,633   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Expenses

        37,900           88,299   
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating income

        82,054           331,591   

Income from partially owned entities

        2,035           1,062   

Unrealized gain (loss) on interest rate swaps

        (196        1,615   

Interest and other income

        1,706           9,407   

Interest expense

        (15,787        (29,807
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income before taxes

        69,812           313,868   

Provision for income taxes

        (7,105        (11,029
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Income

        62,707           302,839   

Net income attributable to non-controlling interests in:

          

Consolidated joint ventures and funds

        (53,133        (286,325

Operating partnership

          
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income attributable to equity owners

   $         $ 9,574      $         $ 16,514   
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance Sheet Data (As of End of Period):

          

Rental property, net

   $         $ 417,906         $ 357,309   

Total assets

        3,110,613           2,922,691   

Mortgage notes and loan payable

        497,982           499,859   

Preferred equity obligation

        111,879           109,650   

Total liabilities

        956,911           897,247   

Total equity

        2,153,702           2,025,444   

Other Data:

          

Cash NOI (1)

   $           $        

Pro Rata Share of Cash NOI (1)

          

Adjusted EBITDA (1)(2)

          

Pro Rata Share of Adjusted EBITDA (2)

          

FFO (1)

          

Core FFO (1)

          

 

 

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     For the six months ended
June 30,
     For the year ended
December 31,
 
     2014      2013      2013     2012  

Combined Property-Level Data:

          

Same Property Portfolio (3):

          

Cash NOI (1)

   $ 166,192       $ 145,832       $ 295,445 (4)    $ 321,166   

Total Portfolio

          

Net income

   $ 21,595       $ 58,257       $ 68,980      $ 63,471   

 

(1)  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a more detailed explanation of this metric and reconciliation of this metric to the most directly comparable GAAP number.
(2) Adjusted EBITDA and Pro Rata Share of Adjusted EBITDA does not include the effect of $             million and $             million, respectively, of incremental GAAP revenue from leases signed as of August 26, 2014 that had not commenced as of June 30, 2014.
(3)  The same property amounts for the years ended December 31, 2013 and 2012 include our 11 properties that were acquired or placed in service by our predecessor prior to January 1, 2012 and owned and in service through December 31, 2013, and as a result they exclude 2099 Pennsylvania Avenue which was acquired in January 2012. The same property amounts for the six months ended June 30, 2014 and 2013 include our 12 properties that were acquired or placed in service by our predecessor prior to January 1, 2013 and owned and in service through June 30, 2014.
(4)  Excluding the impact of the Dewey & LeBoeuf LLP lease termination at 1301 Avenue of the Americas, same property Cash NOI increased by $         million.

 

 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the following material risks, as well as the other information contained in this prospectus, before making an investment in our company. If any of the following risks actually occur, our business, financial condition and/or results of operations could be materially and adversely affected. In such an event, the trading price of our common stock could decline and you could lose part or all of your investment.

Risks Related to Real Estate

Unfavorable market and economic conditions in the United States and globally and in the specific markets or submarkets where our properties are located could adversely affect occupancy levels, rental rates, rent collections, operating expenses, and the overall market value of our assets, impair our ability to sell, recapitalize or refinance our assets and have an adverse effect on our results of operations, financial condition and our ability to make distributions to our stockholders.

Unfavorable market conditions in the areas in which we operate and unfavorable economic conditions in the United States and globally may significantly affect our occupancy levels, rental rates, rent collections, operating expenses, the market value of our assets and our ability to strategically acquire, dispose, recapitalize or refinance our properties on economically favorable terms or at all. Our ability to lease our properties at favorable rates may be adversely affected by increases in supply of office space in our markets and is dependent upon overall economic conditions, which are adversely affected by, among other things, job losses and unemployment levels, recession, stock market volatility and uncertainty about the future. Some of our major expenses, including mortgage payments and real estate taxes, generally do not decline when related rents decline. We expect that any declines in our occupancy levels, rental revenues and/or the values of our buildings would cause us to have less cash available to pay our indebtedness, fund necessary capital expenditures and to make distributions to our stockholders, which could negatively affect our financial condition and the market value of our securities. Our business may be affected by the volatility and illiquidity in the financial and credit markets, a general global economic recession and other market or economic challenges experienced by the real estate industry or the U.S. economy as a whole. Our business may also be adversely affected by local economic conditions, as all of our revenues are derived from properties located in New York City, Washington, D.C. and San Francisco. Factors that may affect our occupancy levels, our rental revenues, our net operating income, or NOI, our funds from operations and/or the value of our properties include the following, among others:

 

    downturns in global, national, regional and local economic conditions;

 

    declines in the financial condition of our tenants, many of which are financial, legal and other professional firms, which may result in tenant defaults under leases due to bankruptcy, lack of liquidity, operational failures or other reasons;

 

    the inability or unwillingness of our tenants to pay rent increases;

 

    significant job losses in the financial and professional services industries, which may decrease demand for our office space, causing market rental rates and property values to be impacted negatively;

 

    an oversupply of, or a reduced demand for, Class A office space;

 

    changes in market rental rates in our markets; and

 

    economic conditions that could cause an increase in our operating expenses, such as increases in property taxes (particularly as a result of increased local, state and national government budget deficits and debt and potentially reduced federal aid to state and local governments), utilities, insurance, compensation of on-site associates and routine maintenance.

 

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All of our properties are located in New York City, Washington, D.C. and San Francisco, and adverse economic or regulatory developments in these areas could negatively affect our results of operations, financial condition and ability to make distributions to our stockholders.

All of our properties are located in New York City, in particular midtown Manhattan, as well as Washington, D.C. and San Francisco. As a result, our business is dependent on the condition of the economy in those cities, which may expose us to greater economic risks than if we owned a more geographically diverse portfolio. We are susceptible to adverse developments in the New York City, Washington, D.C. and San Francisco economic and regulatory environments (such as business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes, costs of complying with governmental regulations or increased regulation). Such adverse developments could materially reduce the value of our real estate portfolio and our rental revenues, and thus adversely affect our ability to service current debt and to pay dividends to stockholders.

We are subject to risks inherent in ownership of real estate.

Real estate cash flows and values are affected by a number of factors, including competition from other available properties and our ability to provide adequate property maintenance and insurance and to control operating costs. Real estate cash flows and values are also affected by such factors as government regulations (including zoning, usage and tax laws), interest rate levels, the availability of financing, property tax rates, utility expenses, potential liability under environmental and other laws and changes in environmental and other laws.

A significant portion of our portfolio’s annualized rent is generated from three properties.

As of June 30, 2014, three of our properties, 1633 Broadway, 1301 Avenue of the Americas and One Market Plaza, together accounted for approximately 57.6% of our portfolio’s annualized rent, and no other property accounted for more than approximately 10.0% of our portfolio’s annualized rent. Our results of operations and cash available for distribution to our stockholders would be adversely affected if 1633 Broadway, 1301 Avenue of the Americas or One Market Plaza were materially damaged or destroyed. Additionally, our results of operations and cash available for distribution to our stockholders would be adversely affected if a significant number of our tenants at these properties experienced a downturn in their business, which may weaken their financial condition and result in their failure to make timely rental payments, defaulting under their leases or filing for bankruptcy.

We may be unable to renew leases, lease currently vacant space or vacating space on favorable terms or at all as leases expire, which could adversely affect our financial condition, results of operations and cash flow.

As of June 30, 2014, we had approximately 963,355 rentable square feet of vacant space (excluding leases signed but not yet commenced) and leases representing 2.4% of the square footage of the properties in our portfolio will expire in 2014 (including month-to-month leases). We cannot assure you expiring leases will be renewed or that our properties will be re-leased at net effective rental rates equal to or above the current average net effective rental rates. If the rental rates of our properties decrease, our existing tenants do not renew their leases or we do not re-lease a significant portion of our available and soon-to-be-available space, our financial condition, results of operations, cash flow, per share trading price of our common stock and our ability to satisfy our principal and interest obligations and to make distributions to our stockholders would be adversely affected.

The actual rents we receive for the properties in our portfolio may be less than estimated market rents, and we may experience a decline in realized rental rates from time to time, which could adversely affect our financial condition, results of operations and cash flow.

Throughout this prospectus, we make certain comparisons between our in-place rents and our internal estimates of market rents for the office space in our portfolio used for budgeting purposes. As a result of potential factors, including competitive pricing pressure in our markets, a general economic downturn and the desirability

 

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of our properties compared to other properties in our markets, we may be unable to realize our estimated market rents across the properties in our portfolio. In addition, depending on market rental rates at any given time as compared to expiring leases in our portfolio, from time to time rental rates for expiring leases may be higher than starting rental rates for new leases. If we are unable to obtain sufficient rental rates across our portfolio, then our ability to generate cash flow growth will be negatively impacted.

We are exposed to risks associated with property redevelopment and repositioning that could adversely affect us, including our financial condition and results of operations.

To the extent that we continue to engage in redevelopment and repositioning activities with respect to our properties, we will be subject to certain risks, which could adversely affect us, including our financial condition and results of operations. These risks include, without limitation, (i) the availability and pricing of financing on favorable terms or at all; (ii) the availability and timely receipt of zoning and other regulatory approvals; (iii) the potential for the fluctuation of occupancy rates and rents at redeveloped properties, which may result in our investment not being profitable; (iv) start up, repositioning and redevelopment costs may be higher than anticipated; and (v) cost overruns and untimely completion of construction (including risks beyond our control, such as weather or labor conditions, or material shortages). These risks could result in substantial unanticipated delays or expenses and could prevent the initiation or the completion of redevelopment activities, any of which could have an adverse effect on our financial condition, results of operations, cash flow, the market value of our securities and ability to satisfy our principal and interest obligations and to make distributions to our stockholders.

We may be required to make rent or other concessions and/or significant capital expenditures to improve our properties in order to retain and attract tenants, which could adversely affect us, including our financial condition, results of operations and cash flow.

In the event that there are adverse economic conditions in the real estate market and demand for office space decreases, with respect to our current vacant space and upon expiration of leases at our properties, we may be required to increase tenant improvement allowances or concessions to tenants, accommodate increased requests for renovations, build-to-suit remodeling and other improvements or provide additional services to our tenants, all of which could negatively affect our cash flow. In addition, a few of our existing properties are pre-war office properties, which may require frequent and costly maintenance in order to retain existing tenants or attract new tenants in sufficient numbers. If the necessary capital is unavailable, we may be unable to make these significant capital expenditures. This could result in non-renewals by tenants upon expiration of their leases and our vacant space remaining untenanted, which could adversely affect our financial condition, results of operations, cash flow and per share trading price of our common stock.

We depend on significant tenants in our office portfolio, which could cause an adverse effect on us, including our results of operations and cash flow, if any of our significant tenants were adversely affected by a material business downturn or were to become bankrupt or insolvent.

Our rental revenue depends on entering into leases with and collecting rents from tenants. As of June 30, 2014, our six largest tenants together represented 26.3% of our total portfolio’s annualized rent. As of June 30, 2014, The Corporate Executive Board Company, Barclays Capital Inc., Allianz Global Investors L.P., Crédit Agricole Corporate & Investment Bank, Clifford Chance US LLP and Commerzbank AG leased an aggregate of 2,379,343 rentable square feet of office space at four of our office properties, representing approximately 22.9% of the total rentable square feet in our portfolio. General and regional economic conditions may adversely affect our major tenants and potential tenants in our markets. Our major tenants may experience a material business downturn, which could potentially result in a failure to make timely rental payments and/or a default under their leases. In many cases, through tenant improvement allowances and other concessions, we have made substantial up front investments in the applicable leases that we may not be able to recover. In the event of a tenant default, we may experience delays in enforcing our rights and may also incur substantial costs to protect our investments.

 

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The bankruptcy or insolvency of a major tenant or lease guarantor may adversely affect the income produced by our properties and may delay our efforts to collect past due balances under the relevant leases and could ultimately preclude collection of these sums altogether. If a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages that is limited in amount and which may only be paid to the extent that funds are available and in the same percentage as is paid to all other holders of unsecured claims.

If any of our significant tenants were to become bankrupt or insolvent, suffer a downturn in their business, default under their leases, fail to renew their leases or renew on terms less favorable to us than their current terms, our results of operations and cash flow could be adversely affected.

If our tenants are unable to secure the necessary financing to operate their businesses, we could be adversely affected.

Many of our tenants rely on external sources of financing to operate their businesses. The U.S. may experience significant liquidity disruptions, resulting in the unavailability of financing for many businesses. If our tenants are unable to secure the necessary financing to continue to operate their businesses, they may be unable to meet their rent obligations or be forced to declare bankruptcy and reject their leases, which could adversely affect us.

Our dependence on rental income may adversely affect us, including our profitability, our ability to meet our debt obligations and our ability to make distributions to our stockholders.

A substantial portion of our income is derived from rental income from real property. See “Business and Properties—Overview—Our Portfolio Summary.” As a result, our performance depends on our ability to collect rent from tenants. Our income and funds for distribution would be adversely affected if a significant number of our tenants, or any of our major tenants, (i) delay lease commencements, (ii) decline to extend or renew leases upon expiration, (iii) fail to make rental payments when due or (iv) declare bankruptcy. Any of these actions could result in the termination of the tenants’ leases with us and the loss of rental income attributable to the terminated leases. In these events, we cannot assure you that such tenants will renew those leases or that we will be able to re-lease spaces on economically advantageous terms or at all. The loss of rental revenues from our tenants and our inability to replace such tenants may adversely affect us, including our profitability, our ability to meet debt and other financial obligations and our ability to make distributions to our stockholders.

Real estate investments are relatively illiquid and may limit our flexibility.

Equity real estate investments are relatively illiquid, which may tend to limit our ability to react promptly to changes in economic or other market conditions. Our ability to dispose of assets in the future will depend on prevailing economic and market conditions. Our inability to sell our properties on favorable terms or at all could have an adverse effect on our sources of working capital and our ability to satisfy our debt obligations. In addition, real estate can at times be difficult to sell quickly at prices we find acceptable. The Code also imposes restrictions on REITs, which are not applicable to other types of real estate companies, on the disposal of properties. Furthermore, we will be subject to U.S. federal income tax at the highest regular corporate rate, which is currently 35%, on certain built-in gain recognized in connection with a taxable disposition of a number of our properties for a period of up to 10 years following the completion of the formation transactions, which may make an otherwise attractive disposition opportunity less attractive or even impractical. These potential difficulties in selling real estate in our markets may limit our ability to change or reduce the office buildings in our portfolio promptly in response to changes in economic or other conditions.

Competition could limit our ability to acquire attractive investment opportunities and increase the costs of those opportunities, which may adversely affect us, including our profitability and impede our growth.

We compete with numerous commercial developers, real estate companies and other owners of real estate for office buildings for acquisition and pursuing buyers for dispositions. We expect that other real estate

 

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investors, including insurance companies, private equity funds, sovereign wealth funds, pension funds, other REITs and other well-capitalized investors will compete with us to acquire existing properties and to develop new properties. Our markets are each generally characterized by high barriers-to-entry to construction and limited land on which to build new office space, which contributes to the competition we face to acquire existing properties and to develop new properties in these markets. This competition could increase prices for properties of the type we may pursue and adversely affect our profitability and impede our growth.

Competition may impede our ability to attract or retain tenants or re-lease space, which could adversely affect our results of operations and cash flow.

The leasing of real estate in our markets is highly competitive. The principal means of competition are rent charged, location, services provided and the nature and condition of the premises to be leased. If other lessors and developers of similar spaces in our markets offer leases at prices comparable to or less than the prices we offer, we may be unable to attract or retain tenants or re-lease space in our properties, which could adversely affect our results of operations and cash flow.

The historical levered and unlevered IRR attributable to performance of certain past investments may not be indicative of our future results and may not be comparable to levered or unlevered IRR information provided by other companies.

We have presented in this prospectus levered and unlevered IRR information relating to the historical performance of certain investments. When considering this information you should bear in mind that these historical results may not be indicative of the future results that you should expect from us. In particular, our results could vary significantly from the historical results. In addition, our levered and unlevered IRR may not be comparable to levered or unlevered IRR information provided by other companies that calculate this metric differently.

We are subject to losses that are either uninsurable, not economically insurable or that are in excess of our insurance coverage.

Our San Francisco properties are located in the general vicinity of active earthquake faults. Our New York City and Washington, D.C. properties are located in areas that could be subject to windstorm losses. Insurance coverage for earthquakes and windstorms can be costly because of limited industry capacity. As a result, we may experience shortages in desired coverage levels if market conditions are such that insurance is not available or the cost of insurance makes it, in our belief, economically impractical to maintain such coverage. In addition, our New York City, Washington, D.C. and other properties may be subject to a heightened risk of terrorist attacks. We carry commercial general liability insurance, property insurance and terrorism insurance with respect to our properties with limits and on terms we consider commercially reasonable. We cannot assure you, however, that our insurance coverage will be sufficient or that any uninsured loss or liability will not have an adverse effect on our business and our financial condition and results of operations.

We are subject to risks from natural disasters such as earthquakes and severe weather.

Natural disasters and severe weather such as earthquakes, tornadoes, hurricanes or floods may result in significant damage to our properties. The extent of our casualty losses and loss in operating income in connection with such events is a function of the severity of the event and the total amount of exposure in the affected area. When we have geographic concentration of exposures, a single catastrophe (such as an earthquake, especially in the San Francisco Bay Area) or destructive weather event (such as a hurricane, especially in New York City or Washington, D.C. area) affecting a region may have a significant negative effect on our financial condition and results of operations. As a result, our operating and financial results may vary significantly from one period to the next. Our financial results may be adversely affected by our exposure to losses arising from natural disasters or severe weather. We also are exposed to risks associated with inclement winter weather, particularly in the Northeast states in which many of our properties are located, including increased need for maintenance and repair of our buildings.

 

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Climate change may adversely affect our business.

To the extent that climate change does occur, we may experience extreme weather and changes in precipitation and temperature, all of which may result in physical damage or a decrease in demand for our properties located in the areas affected by these conditions. Should the impact of climate change be material in nature or occur for lengthy periods of time, our financial condition or results of operations would be adversely affected. In addition, changes in federal and state legislation and regulation on climate change could result in increased capital expenditures to improve the energy efficiency of our existing properties in order to comply with such regulations.

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 New York City, Washington, D.C. 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 “—We are subject to losses that are either uninsurable, not economically insurable or that are in excess of our insurance coverage.”

We may become subject to liability relating to environmental and health and safety matters, which could have an adverse effect on us, including our financial condition and results of operations.

Under various federal, state and/or local laws, ordinances and regulations, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from the presence or release of hazardous substances, waste, or petroleum products at, on, in, under or from such property, including costs for investigation or remediation, natural resource damages, or third-party liability for personal injury or property damage. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence or release of such materials, and the liability may be joint and several. Some of our properties have been or may be impacted by contamination arising from current or prior uses of the property or from adjacent properties used for commercial, industrial or other purposes. Such contamination may arise from spills of petroleum or hazardous substances or releases from tanks used to store such materials. We also may be liable for the costs of remediating contamination at off-site disposal or treatment facilities when we arrange for disposal or treatment of hazardous substances at such facilities, without regard to whether we comply with environmental laws in doing so. The presence of contamination or the failure to remediate contamination on our properties may adversely affect our ability to attract and/or retain tenants and our ability to develop or sell or borrow against those properties. In addition to potential liability for cleanup costs, private plaintiffs may bring claims for personal injury, property damage or for similar reasons. Environmental laws also may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which that property may be used or how businesses may be operated on that property. See “Business and Properties—Regulation—Environmental and Related Matters.”

In addition, our properties are subject to various federal, state and local environmental and health and safety laws and regulations. Noncompliance with these environmental and health and safety laws and regulations could subject us or our tenants to liability. These liabilities could affect a tenant’s ability to make rental payments to us. Moreover, changes in laws could increase the potential costs of compliance with such laws and regulations

 

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or increase liability for noncompliance. This may result in significant unanticipated expenditures or may otherwise adversely affect our operations, or those of our tenants, which could in turn have an adverse effect on us.

As the owner or operator of real property, we may also incur liability based on various building conditions. For example, buildings and other structures on properties that we currently own or operate or those we acquire or operate in the future contain, may contain, or may have contained, asbestos-containing material, or ACM. Environmental and health and safety laws require that ACM be properly managed and maintained and may impose fines or penalties on owners, operators or employers for non-compliance with those requirements. These requirements include special precautions, such as removal, abatement or air monitoring, if ACM would be disturbed during maintenance, renovation or demolition of a building, potentially resulting in substantial costs. In addition, we may be subject to liability for personal injury or property damage sustained as a result of exposure to ACM or releases of ACM into the environment.

In addition, our properties may contain or develop harmful mold or suffer from other indoor air quality issues. Indoor air quality issues also can stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants or to increase ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants or others if property damage or personal injury occurs.

We cannot assure you that costs or liabilities incurred as a result of environmental issues will not affect our ability to make distributions to our stockholders or that such costs, liabilities, or other remedial measures will not have an adverse effect on our financial condition and results of operations.

We may incur significant costs complying with the Americans with Disabilities Act of 1990, or the ADA, and similar laws, which could adversely affect us, including our future results of operations and cash flow.

Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. We have not conducted a recent audit or investigation of all of our properties to determine our compliance with the ADA. If one or more of our properties were not in compliance with the ADA, then we could be required to incur additional costs to bring the property into compliance. We cannot predict the ultimate amount of the cost of compliance with the ADA or similar laws. Substantial costs incurred to comply with the ADA and any other legislation could adversely affect us, including our future results of operations and cash flow.

Our breach of or the expiration of our ground lease could adversely affect our results of operations.

Our interest in one of our commercial office properties, 712 Fifth Avenue, New York, New York, is partially subject to a long-term leasehold of the land and the improvements, rather than a fee interest in the land and the improvements. If we are found to be in breach of this ground lease, we could lose the right to use part of the property. In addition, unless we purchase the underlying fee interest in the portion of the property covered by the lease or extend the terms of our lease for this portion of the property before expiration on terms significantly comparable to our current lease, we will lose our right to operate part of this property and our leasehold interest in part of this property or we will continue to operate it at much lower profitability, which would significantly adversely affect our results of operations. In addition, if we are perceived to have breached the terms of this lease, the fee owner may initiate proceedings to terminate the lease. The remaining term of this long-term lease, including unilateral extension rights available to us, is approximately 10 years (expiring January 1, 2025). The ground lease terms feature an installment sales contract to purchase the property on January 2, 2015, subject to certain terms and conditions, for $12.1 million. We have an option to postpone the closing date until January 2, 2025, and if so exercised, the purchase price at closing will be $13.1 million. Annualized rent from this property as of June 30, 2014 was approximately $48.4 million.

 

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Our option property is subject to various risks and we may not acquire it.

We have entered into an option to acquire 60 Wall Street, New York, New York. 60 Wall Street is exposed to many of the same risks that may affect the other properties in our portfolio. The terms of the option agreement relating to 60 Wall Street were not determined by arm’s-length negotiations, and such terms may be less favorable to us than those that may have been obtained through negotiations with third parties. It may become economically unattractive to exercise our option with respect to 60 Wall Street. These risks could cause us to decide not to exercise our option to purchase this property in the future.

We may be unable to identify and successfully complete acquisitions and, even if acquisitions are identified and completed, including potentially the option property, we may fail to successfully operate acquired properties, which could adversely affect us and impede our growth.

Our ability to identify and acquire properties on favorable terms and successfully operate or redevelop them may be exposed to significant risks. Agreements for the acquisition of properties are subject to customary conditions to closing, including completion of due diligence investigations and other conditions that are not within our control, which may not be satisfied. In this event, we may be unable to complete an acquisition after incurring certain acquisition-related costs. In addition, if mortgage debt is unavailable at reasonable rates, we may be unable to finance the acquisition on favorable terms in the time period we desire, or at all, including potentially the option property. We may spend more than budgeted to make necessary improvements or renovations to acquired properties and may not be able to obtain adequate insurance coverage for new properties. Further, 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. We may also be unable to integrate new acquisitions into our existing operations quickly and efficiently, and as a result, our results of operations and financial condition could be adversely affected. Any delay or failure on our part to identify, negotiate, finance and consummate such acquisitions in a timely manner and on favorable terms, or operate acquired properties to meet our financial expectations, could impede our growth and have an adverse effect on us, including our financial condition, results of operations, cash flow and the market value of our securities.

We may acquire properties or portfolios of properties through tax-deferred contribution transactions, which could result in stockholder dilution and limit our ability to sell such assets.

In the future we may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in our operating partnership, which may result in stockholder dilution. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require 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 could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions.

Should we decide at some point in the future to expand into new markets, we may not be successful, which could adversely affect our financial condition, results of operations, cash flow and market value of our securities.

If opportunities arise, we may explore acquisitions of properties in new markets. Each of the risks applicable to our ability to acquire and integrate successfully and operate properties in our current markets is also applicable in new markets. In addition, we will not possess the same level of familiarity with the dynamics and market conditions of the new markets we may enter, which could adversely affect the results of our expansion into those markets, and we may be unable to build a significant market share or achieve our desired return on our investments in new markets. If we are unsuccessful in expanding into new markets, it could adversely affect our financial condition, results of operations, cash flow, the market value of our securities and ability to satisfy our principal and interest obligations and to make distributions to our stockholders.

 

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We may experience a decline in the fair value of our assets, which may have a material impact on our financial condition, liquidity and results of operations and adversely impact the market value of our securities.

A decline in the fair market value of our assets may require us to recognize an other-than-temporary impairment against such assets under GAAP if we were to determine that we do not have the ability and intent to hold any assets in unrealized loss positions to maturity or for a period of time sufficient to allow for recovery to the amortized cost of such assets. In such event, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair value of such assets on the date they are considered to be other-than-temporarily impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale, which may adversely affect our financial condition, liquidity and results of operations.

We are subject to risks involved in real estate activity through joint ventures and private equity real estate funds.

We have in the past, are currently and may in the future acquire and own properties in joint ventures and private equity real estate funds with other persons or entities when we believe circumstances warrant the use of such structures. Upon closing of this offering, we will manage private equity real estate funds holding U.S. operating or development properties with combined assets aggregating $1.0 billion. Joint venture and fund investments involve risks, including: the possibility that our partners might refuse to make capital contributions when due; that we may be responsible to our partners for indemnifiable losses; that our partners might at any time have business or economic goals that are inconsistent with ours; and that our partners may be in a position to take action or withhold consent contrary to our recommendations, instructions or requests. We and our respective joint venture partners may each have the right to trigger a buy-sell or forced sale arrangement, which could cause us to sell our interest, or acquire our partner’s interest, or to sell the underlying asset, at a time when we otherwise would not have initiated such a transaction, without our consent or on unfavorable terms. In some instances, joint venture and fund partners may have competing interests in our markets that could create conflicts of interest. These conflicts may include compliance with the REIT requirements, and our REIT status could be jeopardized if any of our joint ventures or funds does not operate in compliance with the REIT requirements. Further, our joint venture and fund partners may fail to meet their obligations to the joint venture or fund as a result of financial distress or otherwise, and we may be forced to make contributions to maintain the value of the property. We will review the qualifications and previous experience of any co-venturers or partners, although we do not expect to obtain financial information from, or to undertake independent investigations with respect to, prospective co-venturers or partners. To the extent our partners do not meet their obligations to us or our joint ventures or funds or they take action inconsistent with the interests of the joint venture or fund, we may be adversely affected.

Our joint venture partners in 712 Fifth Avenue and One Market Plaza have forced sale rights as a result of which we may be forced to sell these assets to third parties at times or prices that may not be favorable to us.

Our partners in the joint ventures that own 712 Fifth Avenue and One Market Plaza have forced sale rights pursuant to which, after a specified period, each may require us either to purchase the property or attempt to sell the property to a third party. With respect to 712 Fifth Avenue, beginning six years after the completion of this offering, our joint venture partner may exercise a forced sale right by delivering a written notice to us designating the sales price and other material terms and conditions upon which our joint venture partner desires to cause a sale of the property. Upon receipt of such sales notice, we will have the obligation either to attempt to sell the property to a third party for not less than 95.0% of the designated sales price or to elect to purchase the interest of our joint venture partner for cash at a price equal to the amount our joint venture partner would have received if the property had been sold for the designated sales price (and the joint venture paid any applicable financing breakage costs, transfer taxes, brokerage fees and marketing costs, prepaid all liquidated liabilities of the joint venture and distributed the balance). With respect to One Market Plaza, at any time on or after March 31, 2021, our joint venture partner may exercise a forced sale right. Upon exercise of this right, we and

 

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our joint venture partner have 60 days to negotiate a mutually agreeable transaction regarding the property. If we cannot mutually agree upon a transaction, then we will work together in good faith to market the property in a commercially reasonable manner and neither we nor our joint venture partner will be allowed to bid on the property. If our joint venture partner, after consultation with us and a qualified broker, finds a third-party bid for the property acceptable, then the joint venture will cause the property to be sold. As a result of these forced sale rights, our joint venture partners could require us either to purchase their interests at an agreed upon price or to sell the properties held by our joint ventures to third parties. In the case of One Market Plaza, our joint venture partner could force us to sell this property to a third party on terms it deems acceptable. The exercise of these rights could adversely impact our company by requiring us to sell one or both of these properties to third parties at times or prices that may not be favorable to us.

Contractual commitments with existing private equity real estate funds may limit our ability to acquire properties directly in the near term.

Paramount Group Real Estate Fund VII, LP and its parallel fund, or Fund VII, is one of our private equity real estate funds and is actively engaged in acquisition activities. In connection with the formation of Fund VII, we agreed that we would make all investments that meet its stated investment objectives through Fund VII (provided that Fund VII is able to participate in the investment and subject to our ability to co-invest), until July 18, 2017, unless we, as the general partner of Fund VII, choose to extend it until July 18, 2018. Because of the exclusivity requirements of Fund VII, we may be required to acquire properties through this fund that we otherwise would have acquired through our operating partnership, which may prevent our operating partnership from acquiring attractive investment opportunities and adversely affect our growth prospects. Alternatively, we may choose to co-invest with Fund VII as a joint venture partner to the extent it is determined that it is in the best interest of Fund VII. In connection with any property that we co-invest in with Fund VII, Fund VII will have the authority, subject to our consent in limited circumstances, to make most of the decisions in connection with such property. Such authority in connection with a co-investment could subject us to the applicable risks described above. In July 2014, Fund VII entered into a contract to acquire its first property.

Paramount Group Real Estate Fund VIII, LP and its parallel funds, or Fund VIII, is one of our private equity real estate funds currently in formation. After it holds its initial closing, Fund VIII will be actively engaged in pursuing a diversified portfolio of real estate and real estate-related assets and companies primarily consisting of acquiring and/or issuing loans to real estate and real estate-related companies or investing in their preferred equity. We expect that, subject to certain prior rights granted to other of our private equity real estate funds, we would make all investments that meet Fund VIII’s stated investment objectives through Fund VIII (provided that Fund VIII is able to participate in the investment and subject to our right to co-invest), until the end of the fund’s investment period, which will end three years after the fund’s final closing. Assuming that the fund conducts an initial closing in the fourth quarter of 2014, and a final closing takes place approximately 18 months later, the fund’s investment period would end during mid-2019, unless we, as the general partner of Fund VIII, choose to extend it an additional year. However, we will have the option (but not the obligation) of participating in each of Fund VIII’s investments in debt and preferred equity for up to 25% of the total investment and in each of Fund VIII’s equity investments for up to 50% of the total investment, and may, where it is attractive to us and determined to be in the best interest of Fund VIII, acquire greater percentages of a given investment opportunity. Because of the limited exclusivity requirements of Fund VIII, we may be required to acquire assets partially through this fund that we otherwise would have acquired solely through our operating partnership, which may prevent our operating partnership from acquiring attractive investment opportunities and adversely affect our growth prospects. In connection with certain assets that we co-invest in with Fund VIII—specifically those where Fund VIII owns a majority of the joint venture—it is expected that Fund VIII will have the authority, subject to our consent in limited circumstances, to make most of the decisions in connection with such asset. Such authority in connection with a co-investment could subject us to the applicable risks described above.

 

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We share control of some of our properties with other investors and may have conflicts of interest with those investors.

While we make all operating decisions for certain of our joint ventures and private equity real estate funds, we are required to make other decisions jointly with other investors who have interests in the relevant property or properties. For example, the approval of certain of the other investors may be required with respect to operating budgets and refinancing, encumbering, expanding or selling any of these properties, as well as bankruptcy decisions. We might not have the same interests as the other investors in relation to these decisions or transactions. Accordingly, we might not be able to favorably resolve any of these issues, or we might have to provide financial or other inducements to the other investors to obtain a favorable resolution.

In addition, various restrictive provisions and third-party rights provisions, such as consent rights to certain transactions, apply to sales or transfers of interests in our properties owned in joint ventures. Consequently, decisions to buy or sell interests in properties relating to our joint ventures may be subject to the prior consent of other investors. These restrictive provisions and third-party rights may preclude us from achieving full value of these properties because of our inability to obtain the necessary consents to sell or transfer these interests.

Risks Related to Our Business and Operations

Capital and credit market conditions may adversely affect our access to various sources of capital or financing and/or the cost of capital, which could impact our business activities, dividends, earnings and common stock price, among other things.

In periods when the capital and credit markets experience significant volatility, the amounts, sources and cost of capital available to us may be adversely affected. We primarily use third-party financing to fund acquisitions and to refinance indebtedness as it matures. As of June 30, 2014, on a pro forma basis, we had no corporate debt and $        billion in asset-level debt, and we expect to have approximately $        million of available borrowing capacity under the new revolving credit facility that we intend to enter into in connection with this offering. If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our acquisition, development and redevelopment activity and/or take other actions to fund our business activities and repayment of debt, such as selling assets, reducing our cash dividend or paying out less than 100% of our taxable income. To the extent that we are able and/or choose to access capital at a higher cost than we have experienced in recent years (reflected in higher interest rates for debt financing or a lower stock price for equity financing) our earnings per share and cash flow could be adversely affected. In addition, the price of our common stock may fluctuate significantly and/or decline in a high interest rate or volatile economic environment. If economic conditions deteriorate, the ability of lenders to fulfill their obligations under working capital or other credit facilities that we may have in the future may be adversely impacted.

The form, timing and/or amount of dividend distributions in future periods may vary and be impacted by economic and other considerations.

The form, timing and/or amount of dividend distributions will be declared at the discretion of our board of directors and will depend on actual cash from operations, our financial condition, capital requirements, the annual distribution requirements applicable to REITs under the Code and other factors as our board of directors may consider relevant.

We may from time to time be subject to litigation, including litigation arising from the formation transactions, which could have an adverse effect on our financial condition, results of operations, cash flow and trading price of our common stock.

We are a party to various claims and routine litigation arising in the ordinary course of business. Some of these claims or others to which we may be subject from time to time, including claims arising from the

 

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formation transactions, may result in defense costs, settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance. Payment of any such costs, settlements, fines or judgments that are not insured could have an adverse impact on our financial position and results of operations. In addition, certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flow, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.

We may be subject to unknown or contingent liabilities related to properties or businesses that we acquire for which we may have limited or no recourse against the sellers.

Assets and entities that we have acquired or may acquire in the future may be subject to unknown or contingent liabilities for which we may have limited or no recourse against the sellers. Unknown or contingent liabilities might include liabilities for clean-up or remediation of environmental conditions, claims of customers, vendors or other persons dealing with the acquired entities, tax liabilities and other liabilities whether incurred in the ordinary course of business or otherwise. In the future we may enter into transactions with limited representations and warranties or with representations and warranties that do not survive the closing of the transactions, in which event we would have no or limited recourse against the sellers of such properties. While we usually require the sellers to indemnify us with respect to breaches of representations and warranties that survive, such indemnification is often limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses.

As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that we may incur with respect to liabilities associated with acquired properties and entities may exceed our expectations, which may adversely affect our business, financial condition and results of operations. Finally, indemnification agreements between us and the sellers typically provide that the sellers will retain certain specified liabilities relating to the assets and entities acquired by us. While the sellers are generally contractually obligated to pay all losses and other expenses relating to such retained liabilities, there can be no guarantee that such arrangements will not require us to incur losses or other expenses as well.

We depend on key personnel, including Albert Behler, our Chairman, Chief Executive Officer and President, and the loss of services of one or more members of our senior management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners and existing and prospective industry participants, which could negatively affect our financial condition, results of operations, cash flow and market value of our common stock.

There is substantial competition for qualified personnel in the real estate industry and the loss of our key personnel could have an adverse effect on us. Our continued success and our ability to manage anticipated future growth depend, in large part, upon the efforts of key personnel, particularly Albert Behler, our Chairman, Chief Executive Officer and President, who has extensive market knowledge and relationships and exercises substantial influence over our acquisition, redevelopment, financing, operational and disposition activity. Among the reasons that Albert Behler is important to our success is that he has a national, regional and local industry reputation that attracts business and investment opportunities and assists us in negotiations with financing sources and industry personnel. If we lose his services, our business and investment opportunities and our relationships with such financing sources and industry personnel could diminish.

Many of our other senior executives also have extensive experience and strong reputations in the real estate industry, which aid us in identifying or attracting investment opportunities and negotiating with sellers of properties. The loss of services of one or more members of our senior management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners and industry participants, which could negatively affect our financial condition, results of operations and cash flow.

 

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Breaches of our data security could adversely affect our business, including our financial performance and reputation.

We collect and retain certain personal information provided by our tenants and employees. While we have implemented a variety of security measures to protect the confidentiality of this information and periodically review and improve our security measures, we can provide no assurance that we will be able to prevent unauthorized access to this information. Any breach of our data security measures and/or loss of this information may result in legal liability and costs (including damages and penalties) that could adversely affect our business, including our financial performance and reputation.

Our subsidiaries may be prohibited from making distributions and other payments to us.

All of our properties are owned, and all of our operations are conducted, by our operating partnership and our other subsidiaries, joint ventures and private equity real estate funds. As a result, we depend on distributions and other payments from our operating partnership and our other subsidiaries in order to satisfy our financial obligations and make payments to our investors. The ability of our subsidiaries to make such distributions and other payments depends on their earnings and cash flow and may be subject to statutory or contractual limitations. As an equity investor in our subsidiaries, our right to receive assets upon their liquidation or reorganization will be effectively subordinated to the claims of their creditors. To the extent that we are recognized as a creditor of such subsidiaries, our claims may still be subordinate to any security interest in or other lien on their assets and to any of such subsidiaries’ debt or other obligations that are senior to our claims.

Risks Related to Our Organization and Structure

The ability of stockholders to control our policies and effect a change of control of our company is limited by certain provisions of our charter and bylaws and by Maryland law.

There are provisions in our charter and bylaws that may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:

Our charter authorizes our board of directors to, without stockholder approval, amend our charter to increase or decrease the aggregate number of authorized shares of stock, to authorize us to issue additional shares of our common stock or preferred stock and to classify or reclassify unissued shares of our common stock or preferred stock and thereafter to authorize us to issue such classified or reclassified shares of stock. We believe these charter provisions will provide us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs that might arise. The additional classes or series, as well as the additional authorized shares of our common stock, will be available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although our board of directors does not currently intend to do so, it could authorize us to issue a class or series of stock that could, depending upon the terms of the particular class or series, delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for holders of our common stock or that our common stockholders otherwise believe to be in their best interests.

In order to qualify as a REIT, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by or for five or fewer individuals (as defined in the Code to include certain entities such as private foundations) at any time during the last half of any taxable year (beginning with our second taxable year as a REIT). In order to help us qualify as a REIT, our charter generally prohibits any person or entity from actually owning or being deemed to own by virtue of the applicable constructive ownership provisions, (i) more than     % (in value or in number of shares, whichever is more restrictive) of the outstanding shares of our common stock or (ii) more than     % in value of the aggregate of the outstanding shares of all classes and series

 

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of our stock, in each case, excluding any shares of our stock not treated as outstanding for U.S. federal income tax purposes. We refer to these restrictions as the “ownership limits.” These ownership limits may prevent or delay a change in control and, as a result, could adversely affect our stockholders’ ability to realize a premium for their shares of our common stock. In connection with the formation transactions, our board of directors will grant waivers to             and certain of their affiliates to own up to             shares of our outstanding common stock in the aggregate.

In addition, certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including the Maryland business combination and control share provisions. See “Material Provisions of Maryland Law and Our Charter and Bylaws.”

As permitted by the MGCL, our board of directors has adopted a resolution exempting any business combinations between us and any other person or entity from the business combination provisions of the MGCL. Our bylaws provide that this resolution or any other resolution of our board of directors exempting any business combination from the business combination provisions of the MGCL may only be revoked, altered or amended, and our board of directors may only adopt any resolution inconsistent with any such resolution (including an amendment to that bylaw provision), which we refer to as an opt in to the business combination provisions, with the affirmative vote of a majority of the votes cast on the matter by holders of outstanding shares of our common stock. In addition, as permitted by the MGCL, our bylaws contain a provision exempting from the control share acquisition provisions of the MGCL any and all acquisitions by any person of shares of our stock. This bylaw provision may be amended, which we refer to as an opt in to the control share acquisition provisions, only with the affirmative vote of a majority of the votes cast on such an amendment by holders of outstanding shares of our common stock.

Title 3, Subtitle 8 of the MGCL permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain takeover defenses, including adopting a classified board or increasing the vote required to remove a director. Such takeover defenses may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then current market price.

In addition, the provisions of our charter on the removal of directors and the advance notice provisions of our bylaws, among others, could delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interest.

Each item discussed above may delay, deter or prevent a change in control of our company, even if a proposed transaction is at a premium over the then-current market price for our common stock. Further, these provisions may apply in instances where some stockholders consider a transaction beneficial to them. As a result, our stock price may be negatively affected by these provisions.

Our board of directors may change our policies without stockholder approval.

Our policies, including any policies with respect to investments, leverage, financing, growth, debt and capitalization, will be determined by our board of directors or those committees or officers to whom our board of directors may delegate such authority. Our board of directors will also establish the amount of any dividends or other distributions that we may pay to our stockholders. Our board of directors or the committees or officers to which such decisions are delegated will have the ability to amend or revise these and our other policies at any time without stockholder vote. Accordingly, our stockholders will not be entitled to approve changes in our policies, and, while not intending to do so, we may adopt policies that may have an adverse effect on our financial condition and results of operations.

 

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Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions that you do not believe are in your best interests.

Maryland law provides that a director has no liability in that capacity if he or she satisfies his or her duties to us and our stockholders. Upon completion of this offering, as permitted by the MGCL, our charter will limit the liability of our directors and officers to us and our stockholders for money damages to the maximum extent permitted by Maryland law. Under current Maryland law and our charter, our directors and officers will not have any liability to us or our stockholders for money damages, except for liability resulting from:

 

    actual receipt of an improper benefit or profit in money, property or services; or

 

    a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

In addition, our charter will authorize us to obligate us, and our bylaws will require us, to indemnify our directors for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our charter and bylaws will also authorize us to indemnify our officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law and indemnification agreements that we have entered into with our executive officers will require us to indemnify such officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist. Accordingly, in the event that actions taken in good faith by any of our directors or officers impede the performance of our company, your ability to recover damages from such director or officer will be limited with respect to directors and may be limited with respect to officers. In addition, we will be obligated to advance the defense costs incurred by our directors and our executive officers pursuant to indemnification agreements, and may, in the discretion of our board of directors, advance the defense costs incurred by our officers, our employees and other agents, in connection with legal proceedings.

Conflicts of interest may exist or could arise in the future between the interests of our stockholders and the interests of holders of common units, which may impede business decisions that could benefit our stockholders.

Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any of its partners, on the other. Our directors and officers have duties to our company under Maryland law in connection with their management of our company. At the same time, we will have duties and obligations to our operating partnership and its limited partners under Delaware law as modified by the partnership agreement of our operating partnership in connection with the management of our operating partnership as the sole general partner. The limited partners of our operating partnership expressly will acknowledge that the general partner of our operating partnership will be acting for the benefit of our operating partnership, the limited partners and our stockholders collectively. When deciding whether to cause our operating partnership to take or decline to take any actions, the general partner will be under no obligation to give priority to the separate interests of (i) the limited partners of our operating partnership (including, without limitation, the tax interests of our limited partners, except as provided in a separate written agreement) or (ii) our stockholders. Nevertheless, the duties and obligations of the general partner of our operating partnership may come into conflict with the duties of our directors and officers to our company and our stockholders.

If there are deficiencies in our disclosure controls and procedures or internal control over financial reporting, we may be unable to accurately present our financial statements, which could materially and adversely affect us, including our business, reputation, results of operations, financial condition or liquidity.

As a publicly-traded company, we will be required to report our financial statements on a consolidated basis. Effective internal controls are necessary for us to accurately report our financial results. Section 404 of the Sarbanes-Oxley Act of 2002 will require us to evaluate and report on our internal control over financial reporting

 

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and have our independent registered public accounting firm issue an opinion with respect to the effectiveness of our internal control over financial reporting. There can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Furthermore, as we grow our business, our internal controls will become more complex, and we may require significantly more resources to ensure our internal controls remain effective. Deficiencies, including any material weakness, in our internal control over financial reporting which may occur in the future could result in misstatements of our results of operations that could require a restatement, failing to meet our public company reporting obligations and causing investors to lose confidence in our reported financial information. These events could materially and adversely affect us, including our business, reputation, results of operations, financial condition or liquidity.

We did not negotiate the value of the properties and assets of our predecessor and the private equity real estate funds controlled by our management company at arm’s-length as part of the formation transactions, and the consideration given by us in exchange for them may exceed their fair market value.

We did not negotiate the value of the properties and assets of our predecessor and the private equity real estate funds controlled by our management company at arm’s-length as part of the formation transactions. In addition, the value of the shares of our common stock and the common units that we will issue in exchange for these properties and assets will increase or decrease if our common stock price increases or decreases. The initial public offering price of shares of our common stock will be determined in consultation with the underwriters. As a result, the value of the consideration given by us for the properties and assets of our predecessor and the private real estate funds controlled by our management company may exceed their fair market value or the value that a third party would have paid for these properties and assets.

We may assume unknown liabilities in connection with the formation transactions, which, if significant, could adversely affect our business.

As part of the formation transactions, we (through corporate acquisitions and contributions to our operating partnership) will acquire the properties and assets of our predecessor and certain other assets, subject to existing liabilities, some of which may be unknown at the time this offering is consummated. As part of the formation transactions, each of the entities comprising our predecessor and the private equity real estate funds controlled by our management company that are contributing assets to us will make representations, warranties and covenants to us regarding the entities and assets that we are acquiring in the formation transactions and we will be indemnified in an amount up to $        for claims made with respect to breaches of such representations, warranties or covenants following the completion of this offering. Because many liabilities, including tax liabilities, may not be identified within such period, we may have no recourse for such liabilities. Any unknown or unquantifiable liabilities that we assume in connection with the formation transactions for which we have no or limited recourse could adversely affect us. See “—We may become subject to liability relating to environmental and health and safety matters, which could have an adverse effect on us, including our financial condition and results of operations” as to the possibility of undisclosed environmental conditions potentially affecting the value of the properties in our portfolio.

Certain members of our senior management team exercised significant influence with respect to the terms of the formation transactions, including the economic benefits they will receive, as a result of which the consideration given by us may exceed the fair market value of the properties.

We did not conduct arm’s-length negotiations with the continuing investors that are members of our senior management team with respect to all of the terms of the formation transactions. In the course of structuring the formation transactions, certain members of our senior management team had the ability to influence the type and level of benefits that they and our other officers will receive from us. In addition, certain members of our senior management team had substantial pre-existing ownership interests in our predecessor and will receive substantial economic benefits as a result of the formation transactions. As a result, the terms of the formation transactions may not be as favorable to us as if all of the terms were negotiated at arm’s-length. In addition, the terms of the option agreement relating to the option property also were not determined by arm’s-length negotiations, and such terms may be less favorable to us than those that may have been obtained through negotiations with third parties.

 

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We may pursue less vigorous enforcement of terms of certain formation transaction agreements because of conflicts of interest with certain members of our senior management team and our board of directors, which could have an adverse effect on our business.

Certain members of our senior management team and our board of directors have ownership interests in our predecessor and the private equity real estate funds controlled by our management company that we will acquire in the formation transactions upon completion of this offering. As part of the formation transactions, we will be indemnified for certain claims made with respect to breaches of such representations, warranties or covenants by certain contributing entities following the completion of this offering. Such indemnification is limited, however, and we are not entitled to any other indemnification in connection with the formation transactions. See “—We may assume unknown liabilities in connection with the formation transactions, which, if significant, could adversely affect our business” above. We may choose not to enforce, or to enforce less vigorously, our rights under these agreements because of our desire to maintain our ongoing relationship with our executive officers given their significant knowledge of our business, relationships with our customers and significant equity ownership in us and members of our board of directors, and this could have an adverse effect on our business.

Risks Related to Our Indebtedness and Financing

We have a substantial amount of indebtedness that may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs.

As of June 30, 2014, on a pro forma basis, we had approximately $         billion of total combined indebtedness. As of June 30, 2014, on a pro forma basis, we had no corporate debt and $        billion in asset-level debt, and we expect to have approximately $         million of available borrowing capacity under the new senior unsecured revolving credit facility that we intend to enter into in connection with this offering.

Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our properties, fully implement our capital expenditure, acquisition and redevelopment activities, or meet the REIT distribution requirements imposed by the Code. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:

 

    require us to dedicate a substantial portion of cash flow from operations to the payment of principal, and interest on, indebtedness, thereby reducing the funds available for other purposes;

 

    make it more difficult for us to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to meet operational needs;

 

    force us to dispose of one or more of our properties, possibly on unfavorable terms (including the possible application of the 100% tax on income from prohibited transactions, discussed below in “U.S. Federal Income Tax Considerations”) or in violation of certain covenants to which we may be subject;

 

    subject us to increased sensitivity to interest rate increases;

 

    make us more vulnerable to economic downturns, adverse industry conditions or catastrophic external events;

 

    limit our ability to withstand competitive pressures;

 

    limit our ability to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;

 

    reduce our flexibility in planning for or responding to changing business, industry and economic conditions; and/or

 

    place us at a competitive disadvantage to competitors that have relatively less debt than we have.

 

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If any one of these events were to occur, our financial condition, results of operations, cash flow and trading price of our common stock could be adversely affected. Furthermore, foreclosures could create taxable income without accompanying cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code, and, in the case of some of our properties, expose us to entity-level sting tax. See “U.S. Federal Income Tax Considerations—Classification and Taxation of Paramount Group, Inc. as a REIT—Sting Tax on Built-in Gains of Former C Corporation Assets.”

As leases expire, we may be unable to refinance current or future indebtedness on favorable terms, if at all.

We may not be able to refinance existing debt on terms as favorable as the terms of existing indebtedness, or at all, including as a result of increases in interest rates or a decline in the value of our portfolio or portions thereof. If principal payments due at maturity cannot be refinanced, extended or paid with proceeds from other capital transactions, such as new equity capital, our operating cash flow will not be sufficient in all years to repay all maturing debt. As a result, certain of our other debt may cross default, we may be forced to postpone capital expenditures necessary for the maintenance of our properties, we may have to dispose of one or more properties on terms that would otherwise be unacceptable to us or we may be forced to allow the mortgage holder to foreclose on a property. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness to be Outstanding After this Offering.” We also may be forced to limit distributions and may be unable to meet the REIT distribution requirements imposed by the Code. Foreclosure on mortgaged properties or an inability to refinance existing indebtedness would likely have a negative impact on our financial condition and results of operations and could adversely affect our ability to make distributions to our stockholders.

We may not have sufficient cash flow to meet the required payments of principal and interest on our debt or to pay distributions on our shares at expected levels.

In the future, our cash flow could be insufficient to meet required payments of principal and interest or to pay distributions on our shares at expected levels. In this regard, we note that in order for us to continue to qualify as a REIT, we are required to make annual distributions generally equal to at least 90% of our taxable income, computed without regard to the dividends paid deduction and excluding net capital gain. In addition, as a REIT, we will be subject to U.S. federal income tax to the extent that we distribute less than 100% of our taxable income (including capital gains) and will be subject to a 4% nondeductible excise tax on the amount by which our distributions in any calendar year are less than a minimum amount specified by the Code. These requirements and considerations may limit the amount of our cash flow available to meet required principal and interest payments.

If we are unable to make required payments on indebtedness that is secured by a mortgage on our property, the asset may be transferred to the lender with a consequent loss of income and value to us, including adverse tax consequences related to such a transfer.

Our debt agreements include restrictive covenants, requirements to maintain financial ratios and default provisions which could limit our flexibility, our ability to make distributions and require us to repay the indebtedness prior to its maturity.

The mortgages on our properties contain customary negative covenants that, among other things, limit our ability, without the prior consent of the lender, to further mortgage the property and to reduce or change insurance coverage. As of June 30, 2014, on a pro forma basis, we had $         billion of combined U.S. property mortgages and other secured debt. Additionally, our debt agreements contain customary covenants that, among other things, restrict our ability to incur additional indebtedness and, in certain instances, restrict our ability to engage in material asset sales, mergers, consolidations and acquisitions, and restrict our ability to make capital expenditures. These debt agreements, in some cases, also subject us to guarantor and liquidity covenants and our future senior unsecured revolving credit facility will, and other future debt may, require us to maintain various financial ratios. Some of our debt agreements contain certain cash flow sweep requirements and mandatory escrows, and our property mortgages generally require certain mandatory prepayments upon disposition of underlying collateral. Early repayment of certain mortgages may be subject to prepayment penalties.

 

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Variable rate debt is subject to interest rate risk that could increase our interest expense, increase the cost to refinance and increase the cost of issuing new debt.

As of June 30, 2014, on a pro forma basis, $         billion of our outstanding consolidated debt was subject to instruments which bear interest at variable rates, and we may also borrow additional money at variable interest rates in the future. Unless we have made arrangements that hedge against the risk of rising interest rates, increases in interest rates would increase our interest expense under these instruments, increase the cost of refinancing these instruments or issuing new debt, and adversely affect cash flow and our ability to service our indebtedness and make distributions to our stockholders, which could adversely affect the market price of our common stock. Based on our aggregate variable rate debt outstanding as of June 30, 2014, on a pro forma basis, an increase of 100 basis points in interest rates would result in a hypothetical increase of approximately $     million in interest expense on an annual basis. The amount of this change includes the benefit of swaps and caps we currently have in place.

Hedging activity may expose us to risks, including the risks that a counterparty will not perform and that the hedge will not yield the economic benefits we anticipate, which could adversely affect us.

We may, in a manner consistent with our qualification as a REIT, seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements that involve risk, such as the risk that counterparties may fail to honor their obligations under these arrangements, and that these arrangements may not be effective in reducing our exposure to interest rate changes. Moreover, there can be no assurance that our hedging arrangements will qualify for hedge accounting or that our hedging activities will have the desired beneficial impact on our results of operations. Should we desire to terminate a hedging agreement, there could be significant costs and cash requirements involved to fulfill our obligation under the hedging agreement. Failure to hedge effectively against interest rate changes may adversely affect our results of operations.

When a hedging agreement is required under the terms of a mortgage loan, it is often a condition that the hedge counterparty maintains a specified credit rating. With the current volatility in the financial markets, there is an increased risk that hedge counterparties could have their credit rating downgraded to a level that would not be acceptable under the loan provisions. If we were unable to renegotiate the credit rating condition with the lender or find an alternative counterparty with acceptable credit rating, we could be in default under the loan and the lender could seize that property through foreclosure, which could adversely affect us.

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Code limit our ability to hedge our liabilities. Generally, income from a hedging transaction we enter into either to manage risk of interest rate changes with respect to borrowings incurred or to be incurred to acquire or carry real estate assets, or to manage the risk of currency fluctuations with respect to any item of income or gain (or any property which generates such income or gain) that constitutes “qualifying income” for purposes of the 75% or 95% gross income tests applicable to REITs, does not constitute “gross income” for purposes of the 75% or 95% gross income tests, provided that we properly identify the hedging transaction pursuant to the applicable sections of the Code and Treasury Regulations. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both gross income tests. As a result of these rules, we may need to limit our use of otherwise advantageous hedging techniques or implement those hedges through a TRS. The use of a TRS could increase the cost of our hedging activities (because our TRS would be subject to tax on income or gain resulting from hedges entered into by it) or expose us to greater risks than we would otherwise want to bear. In addition, net losses in any of our TRSs will generally not provide any tax benefit except for being carried forward for use against future taxable income in the TRSs.

 

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Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a property or group of properties subject to mortgage debt.

Incurring mortgage and other secured debt obligations increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall value of our portfolio of properties. For tax purposes, a foreclosure of any of our properties that is subject to a nonrecourse mortgage loan would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hinder our ability to meet the distribution requirements applicable to REITs under the Code and, in the case of some of our properties, expose us to entity-level sting tax. See “U.S. Federal Income Tax Considerations—Classification and Taxation of Paramount Group, Inc. as a REIT—Sting Tax on Built-in Gains of Former C Corporation Assets.”

High mortgage rates and/or unavailability of mortgage debt may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our net income and the amount of cash distributions we can make.

If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. If we place mortgage debt on properties, we may be unable to refinance the properties when the loans become due, or to refinance on favorable terms. If interest rates are higher when we refinance our properties, our income could be reduced. If any of these events occur, our cash flow could be reduced. This, in turn, could reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to make distributions necessary to meet the distribution requirements imposed on REITs under the Code.

Risks Related to this Offering and Our Common Stock

There has been no public market for our common stock and an active trading market for our common stock may not develop or be sustained following this offering.

There has not been any public market for our common stock, and an active trading market may not develop or be sustained. Shares of our common stock may not be able to be resold at or above the initial public offering price. We intend to apply to have our common stock listed on the NYSE under the symbol “PGRE.” The initial public offering price of our common stock has been determined by agreement among us and the underwriters, but our common stock may trade below the initial public offering price following the completion of this offering. See “Underwriting.” The market value of our common stock could be substantially affected by general market conditions, including the extent to which a secondary market develops for our common stock following the completion of this offering, the extent of institutional investor interest in us, the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate-based companies), our financial performance and general stock and bond market conditions.

The market price and trading volume of our common stock may be volatile following this offering.

Even if an active trading market develops for our common stock, the trading price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the trading price of our common stock declines significantly, you may be unable to resell your shares at or above the public offering price.

Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

 

    actual or anticipated variations in our quarterly operating results or dividends;

 

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    changes in our funds from operations, NOI or income estimates;

 

    publication of research reports about us or the real estate industry;

 

    increases in market interest rates that lead purchasers of our shares to demand a higher yield;

 

    changes in market valuations of similar companies;

 

    adverse market reaction to any additional debt we incur in the future;

 

    additions or departures of key management personnel;

 

    actions by institutional stockholders;

 

    speculation in the press or investment community;

 

    the realization of any of the other risk factors presented in this prospectus;

 

    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;

 

    changes in tax laws;

 

    future equity issuances;

 

    failure to meet income estimates;

 

    failure to meet and maintain REIT qualifications; and

 

    general market and economic conditions.

In the past, securities class-action litigation has often been instituted against companies following periods of volatility in the price of their common stock. This type of litigation could result in substantial costs and divert our management’s attention and resources, which could have an adverse effect on our financial condition, results of operations, cash flow and trading price of our common stock.

We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenue equals or exceeds $1 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions and benefits under the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the market price of our common stock may be more volatile and decline significantly.

 

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If you invest in this offering, you will experience immediate dilution.

We expect the initial public offering price of shares of our common stock to be higher than the pro forma net tangible book value per share of the outstanding shares of our common stock. Purchasers of our common stock in this offering will experience immediate dilution of approximately $         in the pro forma net tangible book value per share of common stock. This means that investors who purchase shares of our common stock will pay a price per share that exceeds the pro forma net tangible book value of our assets after subtracting our liabilities. See “Dilution.”

The market value of our common stock may decline due to the large number of our shares eligible for future sale.

The market value of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering or upon exchange of common units, or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell shares of our common stock in the future at a time and at a price that we deem appropriate. Upon completion of this offering, we will have a total of             shares of our common stock outstanding (or             shares of our common stock assuming the underwriters exercise in full their option to purchase additional shares of our common stock to cover over-allotments), excluding             shares of restricted common stock intended to be granted to our executive officers, directors and other employees pursuant to the 2014 Equity Incentive Plan. The             shares of our common stock sold in this offering (or             shares of our common stock assuming the underwriters exercise in full their option to purchase additional shares of our common stock to cover over-allotments) will be freely transferable without restriction or further registration under the Securities Act, by persons other than our directors, director nominees and executive officers and the continuing investors. See “Shares Eligible for Future Sale.”

The remaining             shares of our common stock that will be held by our continuing investors immediately following the completion of the offering and the formation transactions will be “restricted securities” within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemptions contained in Rule 144. All of these shares of our common stock will be eligible for future sale following the expiration of the 180-day lock-up period and certain of such shares held by our continuing investors will have registration rights pursuant to a registration rights agreement that we will enter into with those investors. When the restrictions under the lock-up arrangements expire or are waived, the related shares of common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock will be available for sale or resale, as the case may be, and such sales or resales, or the perception of such sales or resales, could depress the market price for our common stock. In addition, from and after 14 months following the closing of this offering, limited partners of our operating partnership, other than us, will have the right to require our operating partnership to redeem part or all of their             common units for cash, based upon the value of an equivalent number of shares of our common stock at the time of the election to redeem, or, at our election, shares of our common stock on a one-for-one basis, and to the extent a holder of common units transfers more than 50% of the common units that it receives in connection with the formation transactions within two years of the completion of this offering, the holder will be required (i) to bear any incremental New York City and State real property transfer taxes attributable to such holder based on the holder’s transfer and (ii) to indemnify the company and the operating partnership for any of these amounts (including any penalties, interest or other additions thereto). See “Shares Eligible For Future Sale—Registration Rights” and “Certain Relationships and Related Transactions—Registration Rights.”

Future issuances of debt securities and equity securities may negatively affect the market price of shares of our common stock and, in the case of equity securities, may be dilutive to existing stockholders.

Upon completion of this offering, our charter will provide that we may issue up to             shares of our common stock, $0.01 par value per share, and up to             shares of preferred stock, $0.01 par value per share. Moreover, under Maryland law and our charter, our board of directors has the power to increase the aggregate

 

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number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue without stockholder approval. See “Description of Capital Stock.” Similarly, the partnership agreement of our operating partnership authorizes us to issue an unlimited number of additional common units, which may be exchangeable for shares of our common stock. In addition, upon completion of this offering,             shares of our common stock will be available for future issuance under the 2014 Equity Incentive Plan.

In the future, we may issue debt or equity securities or incur other financial obligations, including stock dividends and shares that may be issued in exchange for common units and equity plan shares/units. Upon liquidation, holders of our debt securities and other loans and preferred stock will receive a distribution of our available assets before common stockholders. We are not required to offer any such additional debt or equity securities to existing stockholders on a preemptive basis. Therefore, additional common stock issuances, directly or through convertible or exchangeable securities (including common units and convertible preferred units), warrants or options, will dilute the holdings of our existing common stockholders and such issuances or the perception of such issuances may reduce the market price of shares of our common stock. Any convertible preferred units would have, and any series or class of our preferred stock would likely have, a preference on distribution payments, periodically or upon liquidation, which could eliminate or otherwise limit our ability to make distributions to common stockholders.

Increases in market interest rates may have an adverse effect on the value of our common stock as prospective purchasers of our common stock may expect a higher dividend yield and increased borrowing costs may decrease our funds available for distribution.

The market price of our common stock will generally be influenced by the dividend yield on our common stock (as a percentage of the price of our common stock) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of shares of our common stock to expect a higher dividend yield and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common stock to decrease.

We may be unable to make distributions at expected levels, which could result in a decrease in the market value of our common stock.

Our estimated initial annual distributions represent     % of our pro forma cash available for distribution for the 12 months ended December 31, 2013, as adjusted, as calculated in “Distribution Policy.” Accordingly, we may be unable to pay our estimated initial annual distribution to stockholders out of cash available for distribution. If sufficient cash is not available for distribution from our operations, we may have to fund distributions from working capital, borrow to provide funds for such distributions, reduce the amount of such distributions, or issue stock dividends. To the extent we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been. If cash available for distribution generated by our assets is less than we expect, our inability to make the expected distributions could result in a decrease in the market price of our common stock. In addition, if we make stock dividends in lieu of cash distributions it may have a dilutive effect on the holdings of our stockholders. In the event the underwriters’ option to purchase additional shares of our common stock to cover over-allotments is exercised, pending investment of the proceeds from this offering, our ability to pay such distributions out of cash from our operations may be further adversely affected. In addition, we may not be able to make distributions in the future, and our inability to make distributions, or to make distributions at expected levels, could result in a decrease in the market value of our common stock.

A portion of our distributions may be treated as a return of capital for U.S. federal income tax purposes, which could reduce the basis of a stockholder’s investment in shares of our common stock and may trigger taxable gain.

A portion of our distributions may be treated as a return of capital for U.S. federal income tax purposes. As a general matter, a portion of our distributions will be treated as a return of capital for U.S. federal income tax

 

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purposes if the aggregate amount of our distributions for a year exceeds our current and accumulated earnings and profits for that year. To the extent that a distribution is treated as a return of capital for U.S. federal income tax purposes, it will reduce a holder’s adjusted tax basis in the holder’s shares, and to the extent that it exceeds the holder’s adjusted tax basis will be treated as gain resulting from a sale or exchange of such shares. See “U.S. Federal Income Tax Considerations.”

Your investment has various tax risks.

Although provisions of the Code generally relevant to an investment in shares of our common stock are described in “U.S. Federal Income Tax Considerations,” you should consult your tax advisor concerning the effects of U.S. federal, state, local and foreign tax laws to you with regard to an investment in shares of our common stock.

Risks Related to Our Status as a REIT

Failure to qualify or to maintain our qualification as a REIT would have significant adverse consequences to the value of our common stock.

We intend to elect and to qualify to be treated as a REIT commencing with our taxable year ending December 31, 2014. The Code generally requires that a REIT distribute at least 90% of its taxable income (without regard to the dividends paid deduction and excluding net capital gains) to stockholders annually, and a REIT must pay tax at regular corporate rates to the extent that it distributes less than 100% of its taxable income (including capital gains) in a given year. In addition, a REIT is required to pay a 4% nondeductible excise tax on the amount, if any, by which the distributions it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income and 100% of its undistributed income from prior years. To avoid entity-level U.S. federal income and excise taxes, we anticipate distributing at least 100% of our taxable income.

We believe that we have been and are organized, and have operated and will operate, in a manner that will allow us to qualify as a REIT commencing with our taxable year ending December 31, 2014. However, we cannot assure you that we have been and are organized and have operated or will operate as such. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there may only be limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control. We have not requested and do not intend to request a ruling from the Internal Revenue Service, or the IRS, that we qualify as a REIT. The complexity of these provisions and of the applicable Treasury Regulations is greater in the case of a REIT that, like us, will acquire assets from taxable C corporations in tax-deferred transactions and holds its assets through one or more partnerships. Moreover, in order to qualify as a REIT, we must meet, on an ongoing basis, various tests regarding the nature and diversification of our assets and our income, the ownership of our outstanding stock, the absence of inherited retained earnings from non-REIT periods and the amount of our distributions. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT gross income and quarterly asset requirements also depends upon our ability to manage successfully the composition of our gross income and assets on an ongoing basis. 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 U.S. federal income tax purposes or the U.S. federal income tax consequences of such qualification. Accordingly, it is possible that we may not meet the requirements for qualification as a REIT.

If, with respect to any taxable year, we fail to maintain our qualification as a REIT, we would not be allowed to deduct distributions to stockholders in computing our taxable income. If we were not entitled to relief under the relevant statutory provisions, we would also be disqualified from treatment as a REIT for the four subsequent taxable years. If we fail to qualify as a REIT, we would be subject to entity-level income tax, including

 

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any applicable alternative minimum tax, on our taxable income at regular corporate tax rates. As a result, the amount available for distribution to holders of our common stock would be reduced for the year or years involved, and we would no longer be required to make distributions. In addition, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and adversely affect the value of our common stock.

The opinion of our tax counsel regarding our status as a REIT does not guarantee our ability to qualify as a REIT.

Our tax counsel, Goodwin Procter LLP, will render an opinion to us to the effect that (i) commencing with our taxable year ending December 31, 2014 we have been organized in conformity with the requirements for qualification as a REIT and (ii) our prior and proposed organization, ownership and method of operation as represented by management have enabled and will enable us to satisfy the requirements for qualification and taxation as a REIT commencing with our taxable year ending December 31, 2014. This opinion will be based on representations made by us as to certain factual matters relating to our organization and our prior and intended or expected manner of operation. Goodwin Procter LLP will not verify those representations, and their opinion will assume that such representations and covenants are accurate and complete, that we have operated and will operate in accordance with such representations and covenants and that we will take no action inconsistent with our status as a REIT. In addition, this opinion will be based on the law existing and in effect as of its date and will not cover subsequent periods. Our qualification and taxation as a REIT will depend on our ability to meet on a continuing basis, through actual operating results, asset composition, distribution levels, diversity of share ownership and the various qualification tests imposed under the Code discussed below. Goodwin Procter LLP has not reviewed and will not review our compliance with these tests on a continuing basis. Accordingly, the opinion of our tax counsel does not guarantee our ability to qualify as or remain a REIT, and no assurance can be given that we will satisfy such tests for our taxable year ending December 31, 2014 or for any future period. Also, the opinion of Goodwin Procter LLP is not binding on the U.S. Internal Revenue Service, or the IRS, or any court, and could be subject to modification or withdrawal based on future legislative, judicial or administrative changes to U.S. federal income tax laws, any of which could be applied retroactively. Goodwin Procter LLP will have no obligation to advise us or the holders of our stock of any subsequent change in the matters stated, represented or assumed in its opinion or of any subsequent change in applicable law.

We may owe certain taxes notwithstanding our qualification as a REIT.

Even if we qualify as a REIT, we will be subject to certain U.S. federal, state and local taxes on our income and property, on taxable income that we do not distribute to our stockholders, on net income from certain “prohibited transactions,” and on income from certain activities conducted as a result of foreclosure. We may, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our qualification as a REIT. In addition, we may provide services that are not customarily provided by a landlord, hold properties for sale and engage in other activities (such as a management business) through taxable REIT subsidiaries, or TRSs, and the income of those subsidiaries will be subject to U.S. federal income tax at regular corporate rates. Furthermore, to the extent that we conduct operations outside of the United States, our operations would subject us to applicable foreign taxes, regardless of our status as a REIT for U.S. tax purposes.

In the case of assets we acquire on a tax-deferred basis from certain corporations controlled by the Otto family and another investor (which we collectively refer to as the “family corporations”) as part of the formation transactions, we also will be subject to U.S. federal income tax, sometimes called the “sting tax,” at the highest regular corporate tax rate, which is currently 35%, on all or a portion of the gain recognized from a taxable disposition of any such assets occurring within the 10-year period following the acquisition date, to the extent of the asset’s built-in gain based on the fair market value of the asset on the acquisition date in excess of our initial tax basis in the asset. Gain from a sale of such an asset occurring after the 10-year period ends will not be subject to this sting tax. We currently do not expect to dispose of any asset if the disposition would result in the imposition of a material sting tax liability under the above rules. We cannot, however, assure you that we will not

 

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change our plans in this regard. We estimate the maximum amount of built-in gain potentially subject to the sting tax is approximately $        , which corresponds to a maximum potential tax of approximately $        .

As part of the formation transactions, we intend to acquire assets of the family corporations through mergers, stock acquisition and similar transactions. As a result of those acquisitions, we will inherit any liability for the unpaid taxes of the family corporations for periods prior to the acquisitions. In each case, our acquisition of assets is intended to qualify as a tax-deferred acquisition for the family corporation. As a result, none of the corporations is expected to recognize gain or loss for U.S. federal income tax purposes in the formation transactions. If for any reason our acquisition of a family corporation’s assets failed to qualify for tax-deferred treatment, the corporation generally would recognize gain for U.S. federal income tax purposes to the extent that the fair market value of our stock (and any cash) issued in exchange for the stock of the family corporation or the corporation’s assets, plus debt assumed, exceeded the corporation’s adjusted tax basis in its assets. We would inherit the resulting tax liability of the family corporation. In several of the formation transactions, the acquired family corporation will recognize gain for U.S. federal income tax purposes unless the acquisition qualifies as a tax-deferred “reorganization” within the meaning of Section 368(a) of Code. The requirements of tax-deferred reorganizations are complex, and it is possible that the IRS could interpret the applicable law differently and assert that one or more of the acquisitions failed to qualify as a reorganization under Section 368(a) of the Code. Moreover, under the “investment company” rules under Section 368 of the Code, certain of the acquisitions could be taxable if the acquired corporation is an “investment company” under such rules. If any such acquisition failed to qualify for tax-free reorganization treatment we could incur significant U.S. federal income tax liability.

Our operating partnership will have, and various predecessor partnerships whose assets will be acquired in the formation transactions, have, limited partners that are non-U.S. persons. Such non-U.S. persons are subject to a variety of U.S. withholding taxes, including with respect to certain aspects of the formation transactions, that the relevant partnership must remit to the U.S. Treasury. A partnership that fails to remit the full amount of withholding taxes is liable for the amount of the under withholding, as well as interest and potential penalties. As a potential successor to certain of the private equity real estate funds controlled by our predecessor, our operating partnership could be responsible if the private equity real estate funds failed to properly withhold for prior periods. Although we believe that we and our predecessor partnerships have complied and will comply with the applicable withholding requirements, the determination of the amounts to be withheld is a complex legal determination, depends on provisions of the Code and the applicable Treasury Regulations that have little guidance and the treatment of certain aspects of the formation transactions under the withholding rules may be uncertain. Accordingly, we may interpret the applicable law differently from the IRS and the IRS may seek to recover additional withholding taxes from us.

If our operating partnership is treated as a corporation for U.S. federal income tax purposes, we will cease to qualify as a REIT.

We believe our operating partnership qualifies and will continue to qualify as a partnership for U.S. federal income tax purposes. Assuming that it qualifies as a partnership for U.S. federal income tax purposes, our operating partnership will not be subject to U.S. federal income tax on its income. Instead, its partners, including us, generally are required to pay tax on their respective allocable share of our operating partnership’s income. No assurance can be provided, however, that the IRS will not challenge our operating partnership’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our operating partnership as a corporation for U.S. federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, therefore, cease to qualify as a REIT, and our operating partnership would become subject to U.S. federal, state and local income tax. The payment by our operating partnership of income tax would reduce significantly the amount of cash available to our partnership to satisfy obligations to make principal and interest payments on its debt and to make distribution to its partners, including us.

 

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There are uncertainties relating to our distribution of non-REIT earnings and profits.

To qualify as a REIT, we must not have any non-REIT accumulated earnings and profits, as measured for U.S. federal income tax purposes, at the end of any REIT taxable year. Such non-REIT earnings and profits generally will include any accumulated earnings and profits of the family corporations acquired by us (or whose assets we acquire) in the formation transactions. Thus, we will have to distribute any such non-REIT accumulated earnings and profits that we inherit from the family corporations in the formation transactions prior to the end of our first taxable year as a REIT, which we expect will be the taxable year ending December 31, 2014. We believe that the family corporations will have made sufficient distributions prior to the formation transactions and that we will make sufficient distributions in 2014 following the formation transactions so that we do not have any undistributed non-REIT earnings and profits at the end of 2014. However, the determination of the amounts of any such non-REIT earnings and profits is a complex factual and legal determination, especially in the case of corporations, such as the family corporations, that have been in operation for many years. If it is subsequently determined that we had undistributed non-REIT earnings and profits as of the end of our first taxable year as a REIT or at the end of any subsequent taxable year, we could fail to qualify as a REIT.

Dividends payable by REITs generally do not qualify for reduced tax rates.

The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are individuals, trusts and estates generally is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore may be subject to a 39.6% maximum U.S. federal income tax rate on ordinary income when paid to such stockholders. Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates or are otherwise sensitive to these lower rates to perceive investments in REITs to be relatively less attractive than investments in the stock of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.

Complying with the REIT requirements may cause us to forego otherwise attractive opportunities or liquidate certain of our investments.

To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to our stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may, for instance, hinder our ability to make certain otherwise attractive investments or undertake other activities that might otherwise be beneficial to us and our stockholders, or may require us to borrow or liquidate investments in unfavorable market conditions and, therefore, may hinder our investment performance.

As a REIT, at the end of each calendar quarter, at least 75% of the value of our assets must consist of cash, cash items, government securities and qualified real estate assets. The remainder of our investments in securities (other than cash, cash items, government securities, securities issued by a TRS and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets (other than cash, cash items, government securities, securities issued by a TRS and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total securities can be represented by securities of one or more TRSs. After meeting these requirements at the close of a calendar quarter, if we fail to comply with these requirements at the end of any subsequent calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification. As a result, we may be required to liquidate from our portfolio otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

 

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We may be subject to a 100% penalty tax on any prohibited transactions that we enter into, or may be required to forego certain otherwise beneficial opportunities in order to avoid the penalty tax on prohibited transactions.

If we are found to have held, acquired or developed property primarily for sale to customers in the ordinary course of business, we may be subject to a 100% “prohibited transactions” tax under U.S. federal tax laws on the gain from disposition of the property unless the disposition qualifies for one or more safe harbor exceptions for properties that have been held by us for at least two years and satisfy certain additional requirements (or the disposition is made through a TRS and, therefore, is subject to corporate U.S. federal income tax).

Under existing law, whether property is held primarily for sale to customers in the ordinary course of a trade or business is a question of fact that depends on all the facts and circumstances. We intend to hold, and, to the extent within our control, to have any joint venture to which our operating partnership is a partner hold, properties for investment with a view to long-term appreciation, to engage in the business of acquiring, owning, operating and developing the properties, and to make sales of our properties and other properties acquired subsequent to the date hereof as are consistent with our investment objectives. Based upon our investment objectives, we believe that overall, our properties should not be considered property held primarily for sale to customers in the ordinary course of business. However, it may not always be practical for us to comply with one of the safe harbors, and, therefore, we may be subject to the 100% penalty tax on the gain from dispositions of property if we otherwise are deemed to have held the property primarily for sale to customers in the ordinary course of business.

The potential application of the prohibited transactions tax could cause us to forego potential dispositions of other property or to forego other opportunities that might otherwise be attractive to us, or to hold investments or undertake such dispositions or other opportunities through a TRS, which would generally result in corporate income taxes being incurred.

REIT distribution requirements could adversely affect our liquidity and adversely affect our ability to execute our business plan.

In order to maintain our qualification as a REIT and to meet the REIT distribution requirements, we may need to modify our business plans. Our cash flow from operations may be insufficient to fund required distributions, for example, as a result of differences in timing between our cash flow, the receipt of income for GAAP purposes and the recognition of income for U.S. federal income tax purposes, the effect of non-deductible capital expenditures, the creation of reserves, payment of required debt service or amortization payments, or the need to make additional investments in qualifying real estate assets. The insufficiency of our cash flow to cover our distribution requirements could require us to (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions or capital expenditures or used for the repayment of debt, (iv) pay dividends in the form of “taxable stock dividends” or (v) use cash reserves, in order to comply with the REIT distribution requirements. As a result, compliance with the REIT distribution requirements could adversely affect the market value of our common stock. The inability of our cash flow 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 addition, if we are compelled to liquidate our assets to repay obligations to our lenders or make distributions to our stockholders, we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as property held primarily for sale to customers in the ordinary course of business, and, in the case of some of our properties, we may be subject to an entity-level sting tax. See “U.S. Federal Income Tax Considerations—Classification and Taxation of Paramount Group, Inc. as a REIT—Sting Tax on Built-in Gains of Former C Corporation Assets.”

The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.

Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to

 

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qualify as a REIT. If we cease to be a REIT, we will not be allowed a deduction for dividends paid to stockholders in computing our taxable income and will be subject to U.S. federal income tax at regular corporate rates and state and local taxes, which may have adverse consequences on our total return to our stockholders.

Our ability to provide certain services to our tenants may be limited by the REIT rules, or may have to be provided through a TRS.

As a REIT, we generally cannot provide services to our tenants other than those that are customarily provided by landlords, nor can we derive income from a third party that provides such services. If we forego providing such services to our tenants, we may be at disadvantage to competitors who are not subject to the same restrictions. However, we can provide such non-customary services to tenants or share in the revenue from such services if we do so through a TRS, though income earned through the TRS will be subject to corporate income taxes.

Although our use of TRSs may partially mitigate the impact of meeting certain requirements necessary to maintain our qualification as a REIT, there are limits on our ability to own TRSs, and a failure to comply with the limits would jeopardize our REIT qualification and may result in the application of a 100% excise tax.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% of the value of a REIT’s assets may consist of securities of one or more TRSs. In addition, rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. Rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are treated as not being conducted on an arm’s-length basis.

We intend to jointly elect with one or more companies for those companies to be treated as a TRS under the Code for U.S. federal income tax purposes. These companies and any other TRSs that we form will pay U.S. federal, state and local income tax on their taxable income, and their after-tax net income will be available for distribution to us but is not required to be distributed to us unless necessary to maintain our REIT qualification. Although we will monitor the aggregate value of the securities of such TRSs and intend to conduct our affairs so that such securities will represent less than 25% of the value of our total assets, there can be no assurance that we will be able to comply with the TRS limitation in all market conditions.

Possible legislative, regulatory or other actions could adversely affect our stockholders and us.

The rules dealing with U.S. federal, state and local income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive application) could adversely affect our stockholders or us. In recent years, many such changes have been made and changes are likely to continue to occur in the future. We cannot predict whether, when, in what form, or with what effective dates, tax laws, regulations and rulings may be enacted, promulgated or decided, which could result in an increase in our, or our stockholders’, tax liability or require changes in the manner in which we operate in order to minimize increases 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 and/or be subject to additional restrictions. These increased tax costs could, among other things, adversely affect our financial condition, the results of operations and the amount of cash available for the payment of dividends. Stockholders are urged to consult with their own tax advisors with respect to the impact that recent legislation may have on their investment and the status of legislative, regulatory or administrative developments and proposals and their potential effect on their investment in our shares. In particular, certain members of Congress recently circulated a draft of proposed legislative changes to the REIT rules that, if ultimately adopted, could adversely affect our REIT status, including reducing the maximum amount of our gross asset value in TRSs from

 

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25% to 20%. That discussion draft also included provisions that, if enacted in their current form (and with the proposed retroactive effective dates), would make our acquisitions of the Otto family corporations taxable events, subjecting us to material corporate tax liability.

Our property taxes could increase due to property tax rate changes or reassessment, which could impact our cash flow.

Even if we qualify as a REIT for U.S. federal income tax purposes, we will be required to pay state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing authorities. In particular, our portfolio of properties may be reassessed as a result of this offering. Therefore, the amount of property taxes we pay in the future may increase substantially from what we have paid in the past and such increases may not be covered by tenants pursuant to our lease agreements. If the property taxes we pay increase, our financial condition, results of operations, cash flow, per share trading price of our common stock and our ability to satisfy our principal and interest obligations and to make distributions to our stockholders could be adversely affected.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are subject to risks and uncertainties. In particular, statements relating to our liquidity and capital resources, portfolio performance and results of operations contain forward-looking statements. Furthermore, all of the statements regarding future financial performance (including market conditions and demographics) are forward-looking statements. We caution investors that any forward-looking statements presented in this prospectus are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “would,” “result” and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Forward-looking statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you therefore against relying on any of these forward-looking statements.

Some of the risks and uncertainties that may cause our actual results, performance, liquidity or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

 

    unfavorable market and economic conditions in the United States and globally and in New York City, Washington, D.C. and San Francisco;

 

    risks associated with our high concentrations of properties in New York City, Washington, D.C., and San Francisco;

 

    risks associated with ownership of real estate;

 

    decreased rental rates or increased vacancy rates;

 

    the risk we may lose a major tenant;

 

    limited ability to dispose of assets because of the relative illiquidity of real estate investments;

 

    intense competition in the real estate market that may limit our ability to attract or retain tenants or re-lease space;

 

    insufficient amounts of insurance;

 

    uncertainties and risks related to adverse weather conditions, natural disasters and climate change;

 

    risks associated with actual or threatened terrorist attacks;

 

    exposure to liability relating to environmental and health and safety matters;

 

    high costs associated with compliance with the ADA;

 

    the risk associated with potential breach or expiration of our ground lease;

 

    failure of acquisitions to yield anticipated results;

 

    risks associated with real estate activity through our joint ventures and private equity real estate funds;

 

    general volatility of the capital and credit markets and the market price of our common stock;

 

    exposure to litigation or other claims;

 

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    loss of key personnel;

 

    risks associated with breaches of our data security;

 

    risks associated with our substantial indebtedness;

 

    failure to refinance current or future indebtedness on favorable terms, or at all;

 

    failure to meet the restrictive covenants and requirements in our existing debt agreements;

 

    fluctuations in interest rates and increased costs to refinance or issue new debt;

 

    risks associated with derivatives or hedging activity;

 

    risks associated with high mortgage rates or the unavailability of mortgage debt which make it difficult to finance or refinance properties and could subject us to foreclosure;

 

    risks associated with future sales of our common stock by our continuing investors or the perception that our continuing investors intend to sell substantially all of the shares of our common stock that they hold;

 

    risks associated with the market for our common stock;

 

    failure to qualify as a REIT;

 

    compliance with REIT requirements, which may cause us to forgo otherwise attractive opportunities or liquidate certain of our investments; or

 

    any of the other risks included in this prospectus, including those set forth under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business and Properties.”

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. They are based on estimates and assumptions only as of the date of this prospectus. We undertake no obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by applicable law.

 

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USE OF PROCEEDS

We estimate that we will receive gross proceeds from this offering of approximately $         billion, or approximately $         billion if the underwriters’ option to purchase additional shares of our common stock to cover over-allotments is exercised in full, in each case assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the front cover of this prospectus. After deducting the underwriting discount and commissions and estimated offering expenses, we expect to receive net proceeds from this offering of approximately $         billion, or approximately $         billion if the underwriters’ option to purchase additional shares of our common stock to cover over-allotments is exercised in full.

We will contribute the net proceeds from this offering to our operating partnership in exchange for common units. The following table sets forth the estimated sources and estimated uses of funds by our operating partnership that we expect in connection with this offering and the formation transactions. Exact payment amounts may differ from estimates due to amortization of principal, additional borrowings and incurrence of additional transaction expenses.

 

Sources (in thousands)

          Uses (in thousands)      
Gross proceeds from this offering    $                Repayment of outstanding indebtedness
(including applicable debt prepayment
costs, exit fees, defeasance costs and
settlement of interest rate swap
liabilities)(1)
  $            
Cash and cash equivalents       Cash consideration in connection with
the formation transactions
 
      Transaction expenses (including
underwriters’ discount and
commissions of $       , transfer taxes of
$       and other costs of $       incurred
in connection with this offering and the
formation transactions)
 
       
  

 

 

      

 

 

 

Total Sources

   $         Total Uses   $     
  

 

 

      

 

 

 

 

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(1) The following table describes the indebtedness that we would intend to repay (based on June 30, 2014 balances) with the net proceeds from this offering.

 

Property

  Fixed / Floating
Rate
    Current
Annual
Interest
Rate
    Maturity
Date
    Principal
Balance
    Repayment     Remaining
Principal
Balance
 
                      (in thousands)     (in thousands)     (in thousands)  

900 Third Avenue

           

First lien mortgage

    LIBOR + 80bps        1.35%        11/27/2017      $                   $                   $                

Line of credit

    LIBOR + 150bps        2.57%        11/27/2017         

1301 Avenue of the Americas

           

First lien mortgage

    5.37%        5.37%        1/11/2016         

Senior mezzanine

    LIBOR + 175bps        1.94%        1/11/2016         

Junior mezzanine

    LIBOR + 220bps        5.27%        1/11/2016         

Zero coupon

    8.00%        8.00%        1/11/2016         

Line of credit

    LIBOR + 220bps        2.39%        1/11/2016         

2099 Pennsylvania Avenue

    LIBOR + 450bps        4.65%        11/30/2015         

425 Eye Street

    LIBOR + 335bps        3.50%        5/1/2018         

Fund I

           

Fund-level loan

    LIBOR + 130bps        1.74%        11/5/2016         

Fund-level loan

    LIBOR + 150bps        2.78%        11/5/2016         

Fund III

           

Fund-level loan

    LIBOR + 130bps        1.77%        7/3/2017         

Fund-level loan

    LIBOR + 150bps        1.73%        6/12/2017         

Fund-level loan

    LIBOR + 150bps        3.01%        12/12/2015         

1325 Avenue of the Americas

    4.95%        4.95%        5/1/2026         

1633 Broadway

           

First lien mortgage

    LIBOR + 70bps        1.31%        12/7/2016         

Line of credit

    LIBOR + 150bps        2.11%        12/7/2016         

Preferred Equity

    8.50%        8.50%        7/27/2016         
         

 

 

   

Total Principal Repayment

           

Settlement of interest rate swap liabilities

           

Debt repayment fees

           
         

 

 

   

TOTAL:

          $       
         

 

 

   

We expect to use any remaining net proceeds, including any proceeds from the exercise of the underwriters’ over-allotment option, for general working capital purposes, capital expenditures and potential future acquisitions. Pending the application of the net proceeds, we will invest the net proceeds in interest-bearing accounts and short-term, interest-bearing securities in a manner that is consistent with our qualification as a REIT.

 

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DISTRIBUTION POLICY

We intend to pay regular quarterly distributions to holders of our common stock. We intend to pay a pro rata initial distribution with respect to the period commencing on the completion of this offering and ending on the last day of the then current fiscal quarter, based on $         per share for a full quarter. On an annualized basis, this would be $         per share, or an annual distribution rate of approximately     % based on an assumed initial public offering price at the midpoint of the price range set forth on the front cover of this prospectus. This initial annual distribution rate will represent approximately     % of estimated cash available for distribution for the 12 month period ending June 30, 2015, as adjusted to exclude certain items we do not expect to recur during the 12 month period following June 30, 2014, and reflect certain assumptions regarding our future cash flows during this period as presented in the table and footnotes below.

Estimated cash available for distribution for the 12 month period ending June 30, 2015, as adjusted, does not include the effect of any changes in our working capital. This number also does not reflect the amount of cash to be used for investing, acquisition and other activities during the 12 month period following June 30, 2014, other than a reserve for recurring capital expenditures. It also does not reflect the amount of cash to be used for financing activities during the 12 month period following June 30, 2014, other than scheduled loan principal amortization payments on mortgage and other indebtedness that will be outstanding upon completion of this offering. Any such investing and/or financing activities may have a material effect on our cash available for distribution. Because we have made the assumptions set forth above in calculating cash available for distribution for the 12 month period ending June 30, 2015, as adjusted, we do not intend this number to be a projection or forecast of our actual results of operations, FFO or our liquidity, and have calculated this number for the sole purpose of determining our estimated initial annual distribution rate. Our estimated cash available for distribution for the 12 month period ending June 30, 2015, as adjusted, should not be considered as an alternative to cash flow from operating activities (computed in accordance with GAAP) or as an indicator of our liquidity or our ability to pay dividends or make other distributions. In addition, the methodology upon which we made the adjustments described below is not necessarily intended to be a basis for determining future dividends or other distributions.

We intend to maintain a distribution rate for the 12 month period following completion of this offering that is at or above our initial distribution rate unless actual results of operations, economic conditions or other factors differ materially from the assumptions used in determining our initial distribution rate. Any future distributions we make will be at the discretion of our board of directors and will be dependent upon a number of factors, including prohibitions or restrictions under financing agreements or applicable law and other factors described below. We do not intend to reduce the expected distributions per share if the underwriters’ option to purchase additional shares of our common stock to cover over-allotments is exercised. We will be subject to prohibitions if we are in default under the senior unsecured revolving credit facility we intend to enter into in connection with this offering as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Overview.”

We cannot assure you that our estimated distributions will be made or sustained or that our board of directors will not change our distribution policy in the future. Any distributions we pay in the future will depend upon our actual results of operations, liquidity, cash flows, financial conditions, economic conditions, debt service requirements and other factors that could differ materially from our current expectations. Our actual results of operations, liquidity, cash flows and financial conditions will be affected by a number of factors, including the revenue we receive from our properties, our operating expenses, interest expense, the ability of our tenants to meet their obligations and unanticipated expenditures. For more information regarding risk factors that could materially adversely affect our ability to pay dividends and make other distributions to our stockholders, please see “Risk Factors.”

U.S. federal income tax law requires that a REIT distribute annually at least 90% of its taxable income (without regard to the dividends paid deduction and excluding net capital gains) and that it pay U.S. federal

 

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income tax at regular corporate rates to the extent that it distributes annually less than 100% of its taxable income (including capital gains). In addition, a REIT is required to pay a 4% nondeductible excise tax on the amount, if any, by which the distributions it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income and 100% of its undistributed income from prior years. For more information, please see “U.S. Federal Income Tax Considerations.” We anticipate that our cash available for distribution will be sufficient to enable us to meet the annual distribution requirements applicable to REITs and to avoid or minimize the imposition of U.S. federal income and excise taxes. However, under some circumstances, we may be required to pay distributions in excess of cash available for distribution in order to meet these distribution requirements or to avoid or minimize the imposition of tax, and we may need to borrow funds or dispose of assets to make such distributions.

It is possible that, at least initially, our distributions will exceed our then current and accumulated earnings and profits as determined for U.S. federal income tax purposes. Therefore, a portion of our distributions may represent a return of capital for U.S. federal income tax purposes. That portion of our distributions in excess of our current and accumulated earnings and profits will not be taxable to a taxable U.S. stockholder under current U.S. federal income tax law to the extent that portion of our distributions do not exceed the stockholder’s adjusted tax basis in the stockholder’s common stock, but rather will reduce the adjusted basis of the common stock. As a result, the gain recognized on a subsequent sale of that common stock or upon our liquidation will be increased (or a loss decreased) accordingly. To the extent those distributions exceed a taxable U.S. stockholder’s adjusted tax basis in his or her common stock, they generally will be treated as a capital gain realized from the taxable disposition of those shares. The percentage of our stockholder distributions that exceeds our current and accumulated earnings and profits may vary substantially from year to year. For a more complete discussion of the tax treatment of distributions to holders of our common stock, see “U.S. Federal Income Tax Considerations.”

 

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The following table describes our pro forma net income for the 12 month period ended June 30, 2014, and the adjustments we have made to calculate our estimated cash available for distribution for the 12 month period ending June 30, 2015, as adjusted (amounts in thousands, except per share amounts):

 

Pro forma income before non-controlling interest for the 12 months ended December 31, 2013

   $                    

Less: pro forma net income before non-controlling interest for the six months ended June 30, 2013

  

Add: pro forma net income before non-controlling interest for the six months ended June 30, 2014

  

Pro forma income before non-controlling interest for the 12 months ended June 30, 2014

  

Add: Pro forma real estate depreciation and amortization

  

Add: Net increases in contractual rent income in our portfolio(1)

  

Less: Net decreases in contractual rent income due to lease expirations in our portfolio, assuming renewals consistent with historical data(2)

  

Add: Net effects of straight-lining rental income(3)

  

Add: Non-cash compensation expense

  

Less: Unrealized gain from real estate fund investments(4)

  

Less: Unrealized gain on interest rate swaps(5)

  

Add: Amortization of deferred financing charges and non-cash interest expense (6)

  
  

 

 

 

Estimated cash flow from operating activities for the 12 months ending June 30, 2015

  

Less: Estimated annual provision for recurring tenant improvements and leasing commissions(7)

  

Less: Estimated annual provision for recurring capital expenditures(8)

  

Less: Scheduled debt principal payments(9)

  
  

 

 

 

Estimated cash available for distribution for the 12 months ending June 30, 2015

   $     
  

 

 

 

Our share of estimated cash available for distribution(10)

  

Non-controlling interests’ share of estimated cash available for distribution

  

Total estimated initial annual distributions to stockholders

   $     
  

 

 

 

Estimated initial annual distributions per share(11)

  

Payout ratio based on our share of estimated cash available for distribution(12)

  

 

(1)  Represents the sum of (i) rent income from contractual rent increases and renewals of $                , less (ii) rent abatements of $                 associated with in-place leases, plus (iii) contractual rent income from uncommenced leases of $                 , less (iv) rent abatements totaling $                 associated with uncommenced leases, all for the period from July 1, 2014 through June 30, 2015.
(2)  Represents estimated net decreases in contractual rent revenue during the 12 months ending June 30, 2015 due to lease expirations, assuming a renewal rate of 55.5% based on expiring square feet, which was our historical renewal rate during the periods set forth below, and rental rates on renewed leases equal to the in-place rates for such leases at expiration. This adjustment gives effect only to expirations net of estimated renewals, and does not take into account new leasing.

 

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     Total
Expirations
(Sq. Ft.)
     Bankruptcy /
Terminated

Leases (Sq. Ft.)
     Available to
be Renewed
(Sq. Ft.)
     Renewed
Leases

(Sq. Ft.)
     Renewal Rate
(%)
    New Leases
(Sq. Ft.)
     Total Amount
Leased

(Sq. Ft.)
 

Q2 2014

   80,258         8,803         71,455         28,621         40.1     44,715         73,336   

Q1 2014

   154,657         15,309         139,348         33,746         24.2        403,803         437,549   

Q4 2013

   69,304         —           69,304         6,145         8.9        79,485         85,630   

Q3 2013

   164,622         29,037         135,585         100,100         73.8        197,976         298,076   

Q2 2013

   436,689         37,521         399,168         94,480         23.7        92,130         186,610   

Q1 2013

   801,118         17,424         783,694         489,333         62.4        154,163         643,496   

Q4 2012

   40,324         —           40,324         34,341         85.2        33,276         67,617   

Q3 2012

   290,529         19,477         271,052         245,094         90.4        285,557         530,651   

Q2 2012

   456,843         428,237         28,606         25,475         89.1        140,578         166,053   

Q1 2012

   172,581         62,535         110,046         79,168         71.9        104,599         183,767   
  

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     2,666,925         618,343         2,048,582         1,136,503         55.5     1,536,282         2,672,785   

 

(3)  Represents the conversion of estimated rental revenues for the 12 months ended June 30, 2014 from a straight-line accrual basis, which includes amortization of lease intangibles, to a cash basis recognition.
(4)  Represents the pro forma non-cash unrealized appreciation in the fair value of our private equity real estate fund investments for the 12 months ended June 30, 2014.
(5)  Represents the pro forma non-cash unrealized appreciation in the fair value of our interest rate swaps that are not designated as hedges for the 12 months ended June 30, 2014.
(6)  Represents pro forma non-cash amortization of financing costs and non-cash interest expense for the 12 months ended June 30, 2014.
(7) Provision for tenant improvements and leasing commissions includes (i) $             in contractually committed tenant improvement or leasing commission costs to be paid or incurred in the 12 months ending June 30, 2015 related to any new leases or lease renewals entered into as of June 30, 2014 and (ii) estimated tenant improvements and leasing commissions of $             for the estimated lease renewals described in footnote (2) above based on tenant improvements and leasing commissions for renewal leases across our portfolio in the years ended December 31, 2011, 2012 and 2013 and the six months ended June 30, 2014. During the 12 months ending June 30, 2015, we expect to have additional tenant improvement and leasing commission expenditures related to new leasing that occurs after June 30, 2014. Any increases in such expenditures would be directly related to such new leasing in that such expenditures would only be committed to when a new lease is signed. Except for the estimate of tenant improvements and leasing commissions for the estimated lease renewals described in footnote (2) above, increases in expenditures for tenant improvements and leasing commissions for new and renewal leases are not included herein.

 

    Year Ended December 31,      Six Months
Ended
June 30, 2014
     Weighted
Average
January 1, 2011 -
June 30, 2014
 
    2011      2012      2013        

Total average tenant improvements and leasing commissions per square foot

  $ 75.94       $ 12.45       $ 36.25       $ 18.14       $       37.69   

 

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(8)  Represents weighted average recurring capital expenditures per square foot for the years ended December 31, 2011, 2012 and 2013 and the six months ended June 30, 2014 multiplied by the square footage in our initial portfolio. Recurring capital expenditures is defined as expenditures made in respect of a property for maintenance of such property and replacement of items due to ordinary wear and tear including, but not limited to, mechanical systems, HVAC systems, roof replacements and other structural systems. The following table sets forth our pro forma recurring capital expenditures (dollar amounts in thousands, except per square amounts):

 

   

 

Year Ended December 31,

    Six Months
Ended
June 30, 2014
    Weighted
Average
January 1, 2011 -
June 30, 2014
 
    2011     2012     2013      

Average recurring capital expenditures per square foot

  $ 0.20      $ 0.51      $ 0.53      $ 0.16      $ 0.40   

 

(9)  Represents scheduled principal amortization during the 12 month period ending June 30, 2015 after giving effect to the repayment of              million of debt that we intend to repay using net proceeds from this offering.
(10)  Our share of estimated cash available for distribution and estimated initial annual cash distributions to our stockholders is based on an estimated approximately         % aggregate partnership interest in our operating partnership.
(11)  Based on a total of                 shares of our common stock to be outstanding after this offering, including                 shares to be sold in this offering.
(12)  Calculated as estimated initial annual distribution per share divided by our share of estimated cash available for distribution per share for the 12 months ending June 30, 2015.

 

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CAPITALIZATION

The following table sets forth as of June 30, 2014:

 

    the actual capitalization of our predecessor;

 

    our pro forma capitalization as of June 30, 2014, adjusted to give effect to the formation transactions and the other adjustments described in the unaudited pro forma financial information beginning on page F-2 but before this offering and the use of net proceeds from this offering as set forth in “Use of Proceeds”; and

 

    our capitalization on a pro forma basis as of June 30, 2014, adjusted to give effect to the formation transactions, this offering, the use of net proceeds from this offering as set forth in “Use of Proceeds” and the other adjustments described in the unaudited pro forma financial information beginning on page F-2.

You should read this table in conjunction with “Use of Proceeds,” “Selected Historical and Pro Forma Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined consolidated financial statements and unaudited pro forma combined consolidated financial statements and related notes thereto appearing elsewhere in this prospectus (in thousands, except per share).

 

     As of June 30, 2014  
    

Paramount
Predecessor
Historical

    

Company
Pro Forma
Prior to this
Offering

    

Company
Pro Forma

 

Debt:

        

Mortgage notes and loans payable

   $     497,982       $         $     

Preferred equity obligation

     111,879         

Loans payable to non-controlling interests

     40,602         
  

 

 

    

 

 

    

 

 

 
     650,463         

Equity:

        

Shareholders’ equity

     310,273         

Non-controlling interests—joint ventures and funds

     1,843,429         

Non-controlling interests—operating partnership

     —           
  

 

 

    

 

 

    

 

 

 

Total equity

     2,153,702         
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $ 2,804,165       $                    $                
  

 

 

    

 

 

    

 

 

 

 

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DILUTION

Purchasers of our common stock offered in this prospectus will experience an immediate and substantial dilution of the net tangible book value of their common stock from the initial public offering price. At June 30, 2014, we had a consolidated net tangible book value of approximately $         billion, or $         per share of our common stock held by continuing investors. After giving effect to this offering, the formation transactions and the other adjustments described in the unaudited pro forma financial information beginning on page F-2, the pro forma net tangible book value at June 30, 2014 attributable to common stockholders would have been $         billion, or $         per share of our common stock. This amount represents an immediate increase in net tangible book value of $         per share to continuing investors and an immediate dilution in pro forma net tangible book value of $         per share from the assumed initial public offering price of $         per share of our common stock to new public investors. The following table illustrates this per-share dilution:

 

Assumed initial public offering price per share

  $     

Net tangible book value per share before the formation transactions and this offering (1)

  $                

Net increase in pro forma net tangible book value per share attributable to the formation transactions and this offering

  $     

Pro forma net tangible book value per share after the formation transactions and this offering (2)

  $     

Dilution in pro forma net tangible book value per share to new investors (3)

  $     

 

(1) Net tangible book value per share of our common stock before the formation transactions and this offering is determined by dividing net tangible book value based on June 30, 2014 net book value of the tangible assets (consisting of total assets less intangible assets, which comprises goodwill (if applicable), deferred financing and leasing costs, acquired above-market leases and acquired in place lease value, net of liabilities to be assumed, excluding acquired below-market leases and acquired above-market ground leases) of our predecessor, less the portion attributable to non-controlling interests, by the number of shares of our common stock received by continuing investors in the formation transactions in exchange for their equity interests in our predecessor, assuming the conversion into shares of our common stock on a one-for-one basis of the common units to be issued in connection with the formation transactions.

 

(2) Based on pro forma net tangible book value of approximately $         billion, less $             attributable to non-controlling interests in joint ventures and funds, divided by the sum of shares of our common stock and common units to be outstanding after this offering, not including shares of our common stock issuable upon the conversion of unvested LTIP units to be granted under our 2014 Equity Incentive Plan.

 

(3) Dilution is determined by subtracting pro forma net tangible book value per share of our common stock after giving effect to the formation transactions, this offering and other pro forma adjustments from the initial public offering price paid by a new investor for a share of our common stock.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus) would increase (decrease) our pro forma net tangible book value by $         million and (decrease) increase the dilution to new investors by $         per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The table below summarizes (i) the difference between the number of shares of common stock and common units in our operating partnership to be received by continuing investors in the formation transactions and the number of shares to be received by new investors purchasing shares in this offering, and (ii) the difference between our pro forma net tangible book value as of June 30, 2014 after giving effect to the formation transactions and other pro forma adjustments but prior to this offering and the total consideration paid in cash by the new investors purchasing shares in this offering (based on the midpoint of the range set forth on the cover of this prospectus) on an aggregate and per share/unit basis.

 

     Shares/Common
Units Issued
   Pro Forma Net Tangible
Book Value of
Contribution/Cash
    Average
Price Per

Share/Unit
     Number    Percentage    Amount    Percentage    

Shares of common stock and common units in our operating partnership issued in connection with the formation transactions

              (1 )   

LTIP units/shares of restricted stock to be granted to executive officers, non-employee directors and employees in connection with this offering

             

New investors in this offering

             
  

 

  

 

  

 

  

 

 

   

 

Total

             
  

 

  

 

  

 

  

 

 

   

 

 

(1)  Represents our pro forma net tangible book value as of June 30, 2014 after giving effect to the formation transactions and other pro forma adjustments but prior to this offering.

 

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SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

The following table sets forth selected historical combined consolidated financial information and other data as of the dates and for the periods presented. The selected financial information as of December 31, 2013 and 2012 and for each of the three years in the period ended December 31, 2013 has been derived from Paramount Predecessor’s audited combined consolidated financial statements included elsewhere in this prospectus. The selected financial information as of June 30, 2014 and 2013 has been derived from Paramount Predecessor’s unaudited combined consolidated financial statements included elsewhere in this prospectus. This financial information and other data should be read in conjunction with the audited combined consolidated financial statements and notes thereto included in this prospectus.

The unaudited pro forma combined consolidated financial data for the six months ended June 30, 2014 and for the year ended December 31, 2013, is presented as if this offering, the formation transactions and the other adjustments described in the unaudited pro forma financial information beginning on page F-2 had occurred on June 30, 2014 for purposes of the pro forma combined consolidated balance sheet data and as of January 1, 2013 for purposes of the pro forma combined consolidated statements of income. This pro forma financial information is not necessarily indicative of what Paramount Group, Inc.’s actual financial position and results of operations would have been as of the date and for the periods indicated, nor does it purport to represent Paramount Group, Inc.’s future financial position or results of operations.

The following table also sets forth combined property-level financial data based on financial information included in Paramount Predecessor’s combined consolidated financial statements and Notes 3 and 4 thereto, which is presented for our properties on a combined basis for the six months ended June 30, 2014 and 2013 and for the years ended December 31, 2013 and 2012. This property-level information does not purport to represent Paramount Predecessor’s historical combined consolidated financial information and it is not necessarily indicative of our future results of operations. For example, we will not own 100.0% of all of our properties or consolidate the results of operations of all of our properties and, as a result, our results of operations going forward will differ from the property-level financial information shown below. However, in light of the significant differences that will exist between our future financial information and Paramount Predecessor’s historical combined consolidated financial information and the fact that we will account for our investment in one property using the equity method of historical cost accounting, we believe that this presentation of property-level data will be useful to investors in understanding the historical performance of our properties on a property-level basis.

 

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You should read the following summary selected historical and pro forma financial information in conjunction with the information contained in “Structure and Formation of Our Company,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the combined consolidated financial statements and the unaudited pro forma combined consolidated financial statements and related notes thereto appearing elsewhere in this prospectus.

 

    (Pro Forma)     (Historical)     (Pro Forma)     (Historical)  
    For the six
months ended
June 30,
    For the six
months ended
June 30,
    For the year
ended
December 31,
    For the year
ended
December 31,
 

($ in thousands)

  2014     2014     2013     2013     2013     2012     2011  

Statement of Operations Data:

             

Revenues

             

Rental income

  $                    $ 16,312      $ 15,171      $                    $ 30,406     $ 29,773     $ 29,187  

Tenant reimbursement income

      896        819          1,821       1,543       1,004  

Distributions from real estate fund investments

      11,247        13,006          29,184       31,326       15,128  

Realized and unrealized gains, net

      79,917        127,234          332,053       161,199       533,819  

Fee income

      11,582        9,375          26,426       22,974       26,802  

Other income

      —         —           —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

      119,954        165,605          419,890       246,815       605,940  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

             

Operating

      7,753        7,094          16,195       15,402       14,656  

Depreciation and amortization

      5,566        5,252          10,582       10,104       10,701  

General and administrative

      12,448        12,205          33,504       28,374       25,556  

Profit sharing compensation

      8,232        7,885          23,385       17,554       78,354  

Other

      3,901        2,320          4,633       6,569       5,312  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Expenses

      37,900        34,756          88,299       78,003       134,579  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

      82,054        130,849          331,591       168,812       471,361  

Income from partially owned entities

      2,035        345          1,062       3,852       5,448  

Unrealized gain (loss) on interest rate swaps

      (196     530          1,615       6,969       (273

Interest and other income

      1,706        4,223          9,407       4,431       1,887  

Interest expense

      (15,787     (14,845       (29,807     (37,342     (34,497
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before taxes

      69,812        121,102          313,868       146,722       443,926  

Provision for income taxes

      (7,105)        (4,056       (11,029     (6,984     (42,973
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

      62,707        117,046          302,839       139,738       400,953  

Net (income) loss attributable to non-controlling interests in:

             

Consolidated joint ventures and funds

      (53,133     (111,581       (286,325     (137,443     (347,075

Operating partnership

             
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to equity owners

  $                    $ 9,574      $ 5,465      $                    $ 16,514     $ 2,295     $ 53,878  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Data

             

(As of End of Period):

             

Rental property, net

  $                    $ 417,906        $                    $ 357,309      $ 366,430    

Total assets

      3,110,613            2,922,691        2,611,727    

Mortgage notes and loan payable

      497,982            499,859        517,494    

Preferred equity obligation

      111,879            109,650        105,433    

Total liabilities

      956,911            897,247        873,501    

Total equity

      2,153,702            2,025,444        1,738,226    

Other Data:

             

Cash NOI (1)

  $                             

Pro Rata share of Cash NOI (1)

             

Adjusted EBITDA (1)(2)

             

Pro Rata Share of Adjusted EBITDA (2)

             

FFO (1)

             

Core FFO (1)

             

 

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     For the six months ended
June 30,
     For the year ended
December 31,
      
     2014      2013      2013     2012       

Combined Property-Level Data:

             

Same Property Portfolio (3)

             

Cash NOI (1)

   $ 166,192       $ 145,832       $ 295,445 (4)    $ 321,166      

Total Portfolio

             

Net income

   $ 21,595       $ 58,257       $ 68,980      $ 63,471      

 

(1)  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more detailed explanation of this metric and reconciliation of this metric to the most directly comparable GAAP numbers.
(2) Adjusted EBITDA and Pro Rata Share of Adjusted EBITDA do not include the effect of $     million and $     million, respectively, of incremental GAAP revenue from leases signed as of August 26, 2014 that had not commenced as of June 30, 2014.
(3) The same property amounts for the years ended December 31, 2013 and 2012 include our 11 properties that were acquired or placed in service by our predecessor prior to January 1, 2012 and owned and in service through December 31, 2013, and as a result they exclude 2099 Pennsylvania Avenue which was acquired in January 2012. The same property amounts for the six months ended June 30, 2014 and 2013 include our 12 properties that were acquired or placed in service by our predecessor prior to January 1, 2013 and owned and in service through June 30, 2014.
(4)  Excluding the impact of the Dewey & LeBoeuf LLP lease termination at 1301 Avenue of the Americas, same property Cash NOI increased by $         million.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition in conjunction with Paramount Predecessor’s historical combined consolidated financial statements and related notes, our unaudited pro forma combined consolidated financial statements and related notes, “Risk Factors,” “Selected Historical and Pro Forma Financial Data,” and “Business and Properties” included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this prospectus entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” As used in this section, when used in a historical context, “we,” “us,” and “our” refers to Paramount Predecessor.

Overview

We are one of the largest vertically-integrated real estate companies focused on owning, operating and managing high-quality, Class A office properties in select CBD submarkets of New York City, Washington, D.C. and San Francisco. As of June 30, 2014, our portfolio consisted of 12 Class A office properties with an aggregate of approximately 10.4 million rentable square feet that was 90.7% leased to 253 tenants. Our New York City portfolio accounted for 75.5% of annualized rent as of June 30, 2014, while our Washington, D.C. and San Francisco portfolios accounted for 11.3% and 13.2%, respectively.

Paramount Group, Inc. was incorporated in Maryland as a corporation on April 14, 2014 to continue the business of our predecessor, which was originally established in 1978 by Professor Dr. h.c. Werner Otto of Hamburg, Germany. We will conduct all of our business activities through our operating partnership, of which we are the sole general partner. We intend to elect and to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2014.

Our Predecessor

Paramount Predecessor is a combination of entities controlled by members of the Otto family that hold various assets, including interests in the following 12 properties which will be contributed to us in connection with the formation transactions: (i) one wholly owned property (Waterview), (ii) two partially owned properties (1325 Avenue of the Americas and 712 Fifth Avenue), and (iii) nine properties wholly or partially owned by private equity real estate funds controlled by these entities, including one property (900 Third Avenue) that is also partially owned directly by these entities. Paramount Predecessor controls nine primary private equity real estate funds, including the funds that will contribute their interests in properties described above to us, as well as their associated parallel funds. Paramount Predecessor also includes the management business that sponsored these funds and manages their real estate interests. In connection with the formation transactions, Paramount Predecessor will contribute to us the general partner interests in all of the private equity real estate funds that will continue holding assets following the formation transactions and its management business.

The results of the private equity real estate funds controlled by Paramount Predecessor are included in Paramount Predecessor’s historical combined consolidated financial statements, with the interests of third-party investors in these funds reflected as non-controlling interests. Historically, with one exception, these funds have qualified as investment companies pursuant to Accounting Standards Codification 946 Financial Services—Investment Companies, or ASC 946, and, as a result, Paramount Predecessor’s historical combined consolidated financial statements have accounted for these funds using the specialized accounting applicable to investment companies. In accordance with investment company accounting, the investments of the funds that qualify as investment companies are reflected on Paramount Predecessor’s combined consolidated balance sheets at fair value as opposed to historical cost, less accumulated depreciation and impairments, if any. In addition,

 

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Paramount Predecessor’s combined consolidated statements of income do not reflect revenues and other income or operating and other expenses from the operations underlying these investments. Instead, these statements of income reflect the change in fair value of these funds’ investments, whether realized or unrealized, and distributions received by these funds from their investments.

Formation Transactions

Upon the consummation of the formation transactions and this offering, substantially all of the assets of Paramount Predecessor and all of the assets of four of the primary private equity real estate funds that it controls (and their associated parallel funds), other than their interests in 60 Wall Street and a residual 2.0% interest in One Market Plaza, will be contributed to us in exchange for a combination of shares of our common stock, common units and cash. These transactions will be accounted for as transactions among entities under common control. However, as the assets that we acquire from the private equity real estate funds that Paramount Predecessor controls will no longer be held by funds which qualify for investment company accounting, we will account for these assets following the formation transactions using consolidated historical cost accounting, including the fund investments that had previously been accounted for using fair market value accounting. Moving from investment company accounting to historical cost accounting will result in a significant change in the presentation of our consolidated financial statements following the formation transactions, and our future financial condition and results of operations will differ significantly from, and will not be comparable with, the historical financial position and results of operations of Paramount Predecessor. Additionally, as part of our formation transactions, we will also acquire the interests of certain unaffiliated third parties in 1633 Broadway, 31 West 52nd Street and 1301 Avenue of the Americas in exchange for a combination of shares of our common stock, common units and cash.

The following table sets forth information regarding our combined ownership percentage and accounting treatment for each of our properties before the formation transactions (on a historical combined consolidated basis as of June 30, 2014) and after the formation transactions.

 

Property

  

Rentable
Square
Feet

     Pre-Formation Transactions    Post-Formation Transactions
     

Ownership
Percentage

   

Accounting

Treatment (1)

  

Ownership
Percentage

   

Accounting

Treatment (1)

Wholly/Partially Owned Properties (Pre-Formation Transactions):

            

Waterview

     647,243         100.0   Historical Cost      100.0   Historical Cost

1325 Avenue of the Americas

     814,892         50.0      Equity Method      100.0     

Historical Cost

712 Fifth Avenue

     543,341         50.0      Equity Method      50.0      Equity Method

Fund Properties (Pre-Formation Transactions):

            

1633 Broadway

     2,643,065         75.5   Investment Company      100.0  

Historical Cost

900 Third Avenue

     596,270         100.0      Investment Company/ Equity Method(2)      100.0      Historical Cost

31 West 52nd Street

     786,647         62.3      Investment Company      64.2      Historical Cost

1301 Avenue of the Americas

     1,767,992         75.5      Investment Company      100.0      Historical Cost

One Market Plaza

     1,611,125         100.0      Investment Company      49.0 (3)   

Historical Cost

Liberty Place

     174,201         100.0      Investment Company      100.0      Historical Cost

1899 Pennsylvania Avenue

     192,481         100.0      Investment Company      100.0      Historical Cost

2099 Pennsylvania Avenue

     208,630         100.0      Investment Company      100.0      Historical Cost

425 Eye Street

     380,090         100.0      Investment Company      100.0      Historical Cost

 

(1)  “Historical Cost” refers to consolidated historical cost accounting; “Equity Method” refers to the equity method of historical cost accounting; “Investment Company” refers to consolidated fair market value accounting.

 

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(2)  900 Third Avenue is currently held in a joint venture between entities owned by the Otto family that are included in Paramount Predecessor, which own an approximately 11.8% interest in this joint venture, and private equity real estate funds controlled by Paramount Predecessor, which own the remaining approximately 88.2% of this joint venture. As a result, in Paramount Predecessor’s combined consolidated financial statements, the approximately 11.8% interest is accounted for using the equity method of historical cost accounting and the approximately 88.2% interest is accounted for using investment company accounting.

 

(3)  An independent third party global investment and advisory firm purchased a 49.0% interest in the joint venture that owns One Market Plaza on July 23, 2014. Upon completion of the formation transactions, we will own a 49.0% interest in the joint venture that owns One Market Plaza and we will indirectly wholly own the general partner of a limited partnership that will own a 2.0% interest in the joint venture that holds the property. As a result, we will effectively have 51.0% voting power in connection with the property.

In order to provide investors with more meaningful information regarding Paramount Predecessor’s historical results of operations, we are also presenting a discussion of the historical property-level results of operations of these properties on a combined basis based on the financial information included in Paramount Predecessor’s historical combined consolidated financial statements and Notes 3 and 4 thereto.

Following the formation transactions, our consolidated financial statements will continue to include the private equity real estate funds that we control that will continue holding assets following the formation transactions, which are described in detail in “Business and Properties—Real Estate Funds, Property Management and Other Assets.” We will continue to include these funds in our consolidated financial statements using investment company accounting, excluding Paramount Group Residential Development Fund, LP, or RDF, which is accounted for using consolidated historical cost accounting; however, as our actual economic interest in these funds is relatively small, most of the impact of these funds’ assets, liabilities and results of operations will be attributable to third-party investors and reflected as non-controlling interest. We will also continue to receive fee income from the property management and asset management services that we provide to these funds and joint ventures pursuant to which we will hold certain of our properties. We will also have the right to receive incentive distributions based on the performance of these funds and certain joint ventures. Following the completion of the formation transactions, we intend to directly fund our future real estate investments following deployment of our existing funds’ remaining committed equity capital.

Segments

We will operate, and Paramount Predecessor historically has operated, an integrated business that consists of three reportable segments: owned properties, managed funds and a management company. Each individual property and each individual fund represents a different operating segment. All owned properties and managed funds have been aggregated as reportable segments as the individual properties and funds do not meet the quantitative and qualitative requirements to be disclosed separately. Our owned properties segment consists of properties in which we directly or indirectly own an interest, other than properties that we own solely through an interest in our private equity real estate funds. Prior to the formation transactions, our interests in Waterview, 1325 Avenue of the Americas, 712 Fifth Avenue and a portion of our interest in 900 Third Avenue were the only interests in our properties reflected in this segment of Paramount Predecessor’s operations. Following the formation transactions, we will have 12 properties in this segment. Our managed funds segment consists of the results of our private equity real estate funds. Prior to the formation transactions, this segment included the results of all of the private equity real estate funds that we controlled. Following the formation transactions, this segment will only include the results of the private equity real estate funds that we control that will continue holding assets following the formation transactions. Our management company segment consists of our property management and asset management business and certain general and administrative level functions, including legal and accounting.

 

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Results of Operations—Paramount Predecessor

The following discussion is based on Paramount Predecessor’s combined consolidated statements of income for the six months ended June 30, 2014 and 2013 and the years ended December 31, 2013, 2012 and 2011.

Comparison of Results of Operations for the Six Months Ended June 30, 2014 and June 30, 2013

The following table summarizes the combined consolidated historical results of operations of our predecessor for the six months ended June 30, 2014 and June 30, 2013 and our combined consolidated pro forma results of operations for the six months ended June 30, 2014 (dollar amounts in thousands). As noted above, our future financial condition and results of operations will differ significantly from, and will not be comparable with, the historical financial position and results of operations of our predecessor. All pro forma financial information in this table is presented on the basis, and after making the adjustments, described in our unaudited pro forma combined consolidated financial statements and related notes thereto appearing elsewhere in this prospectus.

 

    Six Months Ended June 30,  
    Pro Forma     Historical    

 

   

 

 
    2014     2014     2013     Change     % Change  

Revenues:

         

Rental income

  $                $ 16,312      $ 15,171      $ 1,141        7.5%   

Tenant reimbursement income

      896        819        77        9.4%   

Distributions from real estate fund investments

      11,247        13,006        (1,759     (13.5%

Realized and unrealized gains, net

      79,917        127,234        (47,317     (37.2%

Fee income

      11,582        9,375        2,207        23.5%   

Other income

      —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

Total Revenues

      119,954        165,605        (45,651     (27.6%
 

 

 

   

 

 

   

 

 

   

 

 

   

Expenses:

         

Operating

      7,753        7,094        659        9.3%   

Depreciation and amortization

      5,566        5,252        314        6.0%   

General and administrative

      12,448        12,205        243        2.0%   

Profit sharing compensation

      8,232        7,885        347        4.4%   

Other

      3,901        2,320        1,581        68.1%   
 

 

 

   

 

 

   

 

 

   

 

 

   

Total Expenses

      37,900        34,756        3,144        9.0%   
 

 

 

   

 

 

   

 

 

   

 

 

   

Operating income

      82,054        130,849        (48,795     (37.3%

Income from partially owned entities

      2,035        345        1,690        489.9%   

Unrealized gain (loss) on interest rate swaps

      (196     530        (726     (137.0%

Interest and other income

      1,706        4,223        (2,517     (59.6%

Interest expense

      (15,787     (14,845     (942     6.3%   
 

 

 

   

 

 

   

 

 

   

 

 

   

Net income before taxes

      69,812        121,102        (51,290     (42.4%

Provision for income taxes

      (7,105     (4,056     (3,049     75.2%   
 

 

 

   

 

 

   

 

 

   

 

 

   

Net income

      62,707        117,046        (54,339     (46.4%

Net (income) loss attributable to non-controlling interests in:

         

Consolidated joint ventures and funds

      (53,133     (111,581     58,448        (52.4%)   

Operating partnership

      —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

Net income attributable to equity owners

  $                $ 9,574      $ 5,465      $ 4,109        75.2%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

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Rental Income

Rental income included in historical results is attributable to Waterview, which is the only property for which direct property operations are reflected in the historical condensed combined consolidated financial statements of our predecessor, as well as parking income received from a parking garage acquired by our residential development fund, RDF, in March 2014. Rental income increased by $1.1 million, or 7.5%, to $16.3 million for the six months ended June 30, 2014 from $15.2 million for the six months ended June 30, 2013. This increase was primarily attributable to rental income from the parking garage acquired by RDF in March 2014.

For the six months ended June 30, 2014, pro forma rental income was $             million, reflecting rental income from the 11 properties that we will account for using consolidated historical cost accounting upon the completion of the formation transactions.

Tenant Reimbursement Income

Tenant reimbursement income included in historical results is solely attributable to Waterview. Tenant reimbursement income increased by $0.1 million, or 9.4%, to $0.9 million for the six months ended June 30, 2014 from $0.8 million for the six months ended June 30, 2013. Generally, under our leases, we are entitled to reimbursement from our tenants for increases in real estate tax and operating expenses associated with the property over the amounts incurred for those expenses in the first, or base year, of the respective leases. This increase resulted primarily from increases in real estate taxes and utility costs at Waterview.

On a pro forma basis, for the six months ended June 30, 2014, tenant reimbursement income was $         million representing tenant reimbursement income from the 11 properties that we will account for using consolidated historical cost accounting upon the completion of the formation transactions.

Distributions from Real Estate Fund Investments

Distributions from real estate fund investments comprise distributions received by our private equity real estate funds from their underlying investments. Distributions from real estate fund investments decreased by $1.8 million, or 13.5%, to $11.2 million for the six months ended June 30, 2014 from $13.0 million for the six months ended June 30, 2013. This decrease was primarily attributable to the elimination of distributions from 1633 Broadway as cash was retained in 2014 in order to fund leasing costs at the property.

As we will acquire all of the assets of four primary private equity real estate funds (and their associated parallel funds), other than their interests in 60 Wall Street and a residual 2.0% interest in One Market Plaza, our future distributions from real estate fund investments will differ significantly from historical amounts. Future distributions from real estate fund investments will comprise distributions received from the private equity real estate funds that we will continue to manage following the formation transactions and any new funds that we may sponsor from time to time.

On a pro forma basis, for the six months ended June 30, 2014, distributions from real estate fund investments were $         million.

Realized and Unrealized Gains, Net

Realized and unrealized gains, net consist of the net realized and unrealized appreciation in the fair value of our private equity real estate fund investments. The value of our funds’ investments are impacted by a variety of factors including changes in existing and projected net operating incomes and cash flows, ongoing capital projects, leasing related expenditures, and changes in the key assumptions used in projecting likely prices achievable through third-party asset sales. These key assumptions, which vary from property to property, market to market and period to period, include indicators such as rental growth rates, leasing velocities and occupancy levels, as well as investment factors such as prevailing and projected investment capitalization and discount rates and likely holding periods. See Note 11 to Paramount Predecessor’s historical condensed combined consolidated financial statements.

 

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Realized and unrealized gains, net decreased by $47.3 million, or 37.2%, to $79.9 million for the six months ended June 30, 2014 from $127.2 million for the six months ended June 30, 2013. Real estate valuations continue to increase due to increases in existing and projected net operating income and cash flows from our funds’ investments attributable to a variety of factors including a reduction in the remaining free rent period for a large lease signed at 1301 Avenue of the Americas in July of 2012, improved portfolio wide leasing results and continued improvement in market fundamentals affecting our New York assets as well as One Market Plaza in San Francisco. Real estate valuations continued to increase in the first half of 2014, but at a slower pace as compared to the first half of 2013.

As we will acquire all of the assets of four of the primary private equity real estate funds that we control (and their associated parallel funds), other than their interests in 60 Wall Street and a residual 2.0% interest in One Market Plaza, our future net change in realized and unrealized gains will differ significantly from historical amounts as the accounting for the assets acquired from the funds that will contribute their property interests to us in connection with the formation transactions will change from investment company accounting to historical cost accounting. Future amounts will only reflect the realized and net change in unrealized gains or losses of the investments of the private equity real estate funds that we will continue to manage following the formation transactions and new funds that we may sponsor from time to time.

On a pro forma basis, for the six months ended June 30, 2014, realized and unrealized gains, net was $         million.

Fee Income

Fee income comprises income from acquisition and disposition fees, financing fees, property management fees, asset management fees, construction fees and leasing fees. Fee income increased by $2.2 million, or 23.5%, to $11.6 million for the six months ended June 30, 2014 from $9.4 million for the six months ended June 30, 2013. The increase was primarily attributable to higher acquisition and disposition fees of $1.0 million, due to an increase in the aggregate amount of transactions executed during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, as well as higher construction fees of $1.3 million due to increased leasing activity during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.

The amount of our fee income following the consummation of the formation transactions will be less than Paramount Predecessor’s historical fee income as we will cease earning fees from private equity real estate funds and other entities that will be dissolved and fee income will be eliminated from the 11 properties that we will account for using consolidated historical cost accounting upon completion of the formation transactions.

On a pro forma basis, for the six months ended June 30, 2014, fee income was $         million.

Other Income

Other income consists of charges to tenants for certain items such as overtime heating and cooling, freight elevator services and other similar items. Our historical results for the six months ended June 30, 2014 and 2013 include the results solely attributable to Waterview and the parking garage acquired by RDF in March 2014, which had no other income during these periods as there were no such charges to tenants.

Pro forma other income for the six months ended June 30, 2014, was $         million. This reflects the other income from the 11 properties that we will account for using the consolidated historical cost accounting upon completion of the formation transactions.

Operating Expenses

Operating expenses included in historical results are comprised of cleaning, security, repairs and maintenance, utilities, property administration, real estate taxes, management fees and other operating expenses

 

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at Waterview and the parking garage acquired by RDF in March 2014 as well as the costs of providing certain leasing, property and construction management services to the portfolio of properties owned by our predecessor and the private real estate funds that it controls. Operating expenses increased by $0.7 million, or 9.3%, to $7.8 million for the six months ended June 30, 2014 from $7.1 million for the six months ended June 30, 2013. This increase was due to a $0.4 increase in its cost of providing management services and a $0.3 million increase in operating expenses related to the parking garage acquired by RDF in March 2014.

For the six months ended June 30, 2014, pro forma operating expenses were $             million, reflecting the operating expenses from the 11 properties that we will account for using consolidated historical cost accounting upon completion of the formation transactions.

Depreciation and Amortization

Depreciation and amortization included in historical results was primarily attributable to Waterview as well as depreciation on the parking garage acquired by RDF in March 2014. Depreciation and amortization increased by $0.3 million, or 6.0%, to $5.6 million for the six months ended June 30, 2014 from $5.3 million for the six months ended June 30, 2013.

For the six months ended June 30, 2014, pro forma depreciation and amortization was $             million, reflecting the depreciation and amortization from the 11 properties that we will account for using consolidated historical cost accounting upon completion of the formation transactions.

General and Administrative

General and administrative consists of employee salaries, deferred compensation expenses and related costs, professional fees and other administrative costs. General and administrative expenses increased by $0.2 million, or 2.0%, to $12.4 million for the six months ended June 30, 2014 from $12.2 million for the six months ended June 30, 2013. The amounts for the six months ended June 30, 2014 and June 30, 2013 include approximately $1.2 million and $1.8 million, respectively, of expense related to the increased value of the marketable securities underlying deferred compensation plan obligations. Under this deferred compensation plan, participants are permitted to defer a portion of their income on a pre-tax basis and receive a tax-deferred return on these deferrals based on the performance of specific investments selected by the participants. We typically acquire, in a separate account that is not restricted as to its use, similar or identical investments as those selected by each participant. This enables us to generally match our liabilities to the participants under the deferred compensation plan with equivalent assets and thereby limit our market risk. The performance of these investments is recorded in interest and other income, which correspondingly includes income of approximately $1.2 million and $1.8 million related to this plan for the six months ended June 30, 2014 and June 30, 2013, respectively. General and administrative expenses, net of these costs, increased by $0.8 million, or 7.4%, to $11.2 million for the six months ended June 30, 2014 from $10.4 million for the six months ended June 30, 2013. This increase was primarily attributable to legal and other transaction costs as well as an increase in salaries and related costs.

On a pro forma basis, for the six months ended June 30, 2014, general and administrative expenses were $                 million.

Profit Sharing Compensation

Profit sharing compensation represents a portion of fee income and real estate appreciation attributable to our private equity real estate fund business which is payable to certain management employees through profit sharing arrangements. These arrangements will cease upon the completion of the formation transactions and our future compensation structure will differ significantly from historical practice. Profit sharing compensation

 

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increased by $0.3 million, or 4.4%, to $8.2 million for the six months ended June 30, 2014 from $7.9 million for the six months ended June 30, 2013. The increase was primarily attributable to unrealized gains on the real estate investments held by our funds.

Other Expenses

Other expenses includes acquisition pursuit costs, fund formation costs, capital raising costs and organization costs. Other expenses increased by $1.6 million, or 68.1%, to $3.9 million for the six months ended June 30, 2014 from $2.3 million for the six months ended June 30, 2013. This increase is primarily due to increased legal and other costs associated with the formation of a new private equity real estate fund as well as the residual capital raise for two existing funds.

On a pro forma basis, for the six months ended June 30, 2014, other expense was $             million.

Income from Partially Owned Entities

Income from partially owned entities comprises income from equity investments in 1325 Avenue of the Americas, 712 Fifth Avenue and 900 Third Avenue. We have included a detailed discussion of the results of operations of these properties, together with our other properties, under “—Results of Operations—Paramount Predecessor Property Level Performance.” Income from partially owned entities increased by $1.7 million, or 489.9%, to $2.0 million for the six months ended June 30, 2014 as compared to $0.3 million for the six months ended June 30, 2013. This increase is primarily due to a $1.0 million increase attributable to our investment in 1325 Avenue of the Americas and a $0.7 million increase attributable to our investment in 712 Fifth Avenue, due to increased property occupancy levels resulting in higher gross revenue for the six months ended June 30, 2014. See Note 4 to Paramount Predecessor’s historical condensed combined consolidated financial statements.

Following the formation transactions, we will own 100% of 1325 Avenue of the Americas and 900 Third Avenue. Accordingly, we will consolidate the results of operations of these properties rather than account for items under the equity method of historical cost accounting.

On a pro forma basis, income from partially owned entities, which will consist solely of our interest in 712 Fifth Avenue, was $             million for the six months ended June 30, 2014.

Unrealized Gain (Loss) on Interest Rate Swaps

Unrealized gain (loss) on interest rate swaps decreased by $0.7 million, or 137.0%, to a loss of $0.2 million for the six months ended June 30, 2014 from a gain of $0.5 million for the six months ended June 30, 2013. This decrease was primarily attributable to a decrease in the interest rate indexes to which rates are tied. These swaps all relate to the debt of certain private equity real estate funds that will contribute their property interests to us in connection with the formation transactions and will be repaid in full with the proceeds from this offering.

On a pro forma basis, for the six months ended June 30, 2014, we had a $                 million unrealized gain on interest rate swaps related to the 11 properties we will account for using consolidated historical cost accounting upon completion of the formation transactions.

Interest and Other Income

Interest and other income decreased by $2.5 million, or 59.6%, to $1.7 million for the six months ended June 30, 2014 from $4.2 million for the six months ended June 30, 2013, primarily due to a decrease of approximately $0.6 million of income related to the increased value of the marketable securities underlying the deferred compensation plan obligations, which corresponded to the decrease in expense in general and

 

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administrative expense relating to these plan obligations, and a decrease of approximately $2.1 million of interest income received in 2013 from new investors in one of our private equity real estate funds in connection with their initial capital contributions.

On a pro forma basis, for the six months ended June 30, 2014, interest and other income was $             million.

Interest Expense

Interest expense included in our historical results relates to interest incurred on the Waterview mortgage, the fund-level debt of the private equity real estate funds that we control, preferred equity in the joint venture holding 1633 Broadway, and a loan to a feeder vehicle for RDF. See Note 8 to Paramount Predecessor’s condensed combined consolidated financial statements and related notes thereto appearing elsewhere in this prospectus. Interest expense increased by $0.9 million, or 6.3%, to $15.8 million for the six months ended June 30, 2014 from $14.9 million for the six months ended June 30, 2013. This increase was primarily due to $1.5 million in interest on the loan to the feeder vehicle for RDF made in January 2014 for the six months ended June 30, 2014, partially offset by a $0.6 million decrease in the fund-level debt service due to reductions in floating interest rates during the six months ended June 30, 2014 from the six months ended June 30, 2013, and a reduction in average outstanding loan balances for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.

On a pro forma basis, for the six months ended June 30, 2014, interest expense was $                 million, reflecting interest on the mortgage debt that we will assume relating to the 11 properties that we will account for using consolidated historical cost accounting upon the completion of the formation transactions.

Provision for Income Taxes

Provision for income taxes increased by $3.0 million to $7.1 million for the six months ended June 30, 2014 compared to the provision of $4.1 million for the six months ended June 30, 2013.

On a pro forma basis, for the six months ended June 30, 2014, provision for income taxes was $             million.

 

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Comparison of Results of Operations for the Years Ended December 31, 2013 and December 31, 2012

The following table summarizes the combined consolidated historical results of operations of our predecessor for the years ended December 31, 2013 and December 31, 2012 and our combined consolidated pro forma results of operations for the year ended December 31, 2013 (dollar amounts in thousands). As noted above, our future financial condition and results of operations will differ significantly from, and will not be comparable with, the historical financial position and results of operations of our predecessor. All pro forma financial information in this table is presented on the basis, and after making the adjustments, described in our unaudited pro forma combined consolidated financial statements and related notes thereto appearing elsewhere in this prospectus.

 

    Year Ended December 31,  
   

Pro Forma

    Historical              
    2013     2013     2012     Change     % Change  

Revenues:

         

Rental income

  $                   $ 30,406      $ 29,773      $ 633        2.1%   

Tenant reimbursement income

      1,821        1,543        278        18.0%   

Distributions from real estate fund investments

      29,184        31,326        (2,142     (6.8%

Realized and unrealized gains, net

      332,053        161,199        170,854        106.0%   

Fee income

      26,426        22,974        3,452        15.0%   

Other income

      —          —          —          —        
 

 

 

   

 

 

   

 

 

   

 

 

   

Total Revenues

      419,890        246,815        173,075        70.1%   
 

 

 

   

 

 

   

 

 

   

 

 

   

Expenses:

         

Operating

      16,195        15,402        793        5.1%   

Depreciation and amortization

      10,582        10,104        478        4.7%   

General and administrative

      33,504        28,374        5,130        18.1%   

Profit sharing compensation

      23,385        17,554        5,831        33.2%   

Other

      4,633        6,569        (1,936     (29.5%
 

 

 

   

 

 

   

 

 

   

 

 

   

Total Expenses

      88,299        78,003        10,296        13.2%   
 

 

 

   

 

 

   

 

 

   

 

 

   

Operating income

      331,591        168,812        162,779        96.4%   

Income from partially owned entities

      1,062        3,852        (2,790     (72.4%

Unrealized gain on interest rate swaps

      1,615        6,969        (5,354     (76.8%

Interest and other income

      9,407        4,431        4,976        112.3%   

Interest expense

      (29,807     (37,342     7,535        (20.2%
 

 

 

   

 

 

   

 

 

   

 

 

   

Net income before taxes

      313,868        146,722        167,146        113.9%   

Provision for income taxes

      (11,029     (6,984     (4,045     57.9%   
 

 

 

   

 

 

   

 

 

   

 

 

   

Net income

      302,839        139,738        163,101        116.7%   

Net income attributable to non-controlling interests in:

         

Consolidated joint ventures and funds

      (286,325     (137,443     (148,882     108.3%   

Operating partnership

      —          —          —          —        
 

 

 

   

 

 

   

 

 

   

 

 

   

Net income attributable to equity owners

  $        $ 16,514      $ 2,295      $ 14,219        619.6%   
 

 

 

   

 

 

   

 

 

   

 

 

   

Rental Income

Rental income included in historical results is solely attributable to Waterview, which is the only property for which direct property operations are reflected in the historical combined consolidated financial statements of our predecessor. Rental income increased by $0.6 million, or 2.1%, to $30.4 million for the year ended December 31, 2013 from $29.8 million for the year ended December 31, 2012, due to consumer price index increases under the terms of the principal lease for space at Waterview.

 

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On a pro forma basis, for the year ended December 31, 2013, rental income was $             million, reflecting rental income from the 11 properties that we will account for using consolidated historical cost accounting upon completion of the formation transactions.

Tenant Reimbursement Income

Tenant reimbursement income included in historical results is solely attributable to Waterview. Tenant reimbursement income increased by $0.3 million, or 18.0%, to $1.8 million for the year ended December 31, 2013 from $1.5 million for the year ended December 31, 2012. This increase resulted primarily from an increase in real estate taxes at Waterview.

On a pro forma basis, for the year ended December 31, 2013, tenant reimbursement income was $             million, representing tenant reimbursement income for the 11 properties that we will account for using consolidated historical cost accounting upon completion of the formation transactions.

Distributions from Real Estate Fund Investments

Distributions from real estate fund investments decreased by $2.1 million, or 6.8%, to $29.2 million for the year ended December 31, 2013 from $31.3 million for the year ended December 31, 2012. This decrease was primarily due to a reduction in distributions from 1633 Broadway as cash was retained in 2013 in order to fund leasing costs at the property.

As we will acquire all of the assets of four primary private equity real estate funds (and their associated parallel funds), other than their interests in 60 Wall Street and a residual 2.0% interest in One Market Plaza, our future distributions from real estate fund investments will differ significantly from historical amounts. Future distributions from real estate fund investments will be comprised of distributions received from the private equity real estate funds that we will continue to manage following the formation transactions and any new funds that we may sponsor from time to time.

On a pro forma basis, for the year ended December 31, 2013, distributions from real estate fund investments were $             million.

Realized and Unrealized Gains, Net

Realized and unrealized gains, net increased by $170.9 million, or 106.0%, to $332.1 million for the year ended December 31, 2013 from $161.2 million for the year ended December 31, 2012 due primarily to an increase in the value of our funds’ investments. The value of our funds’ investments is impacted by a variety of factors including changes in existing and projected net operating incomes and cash flows, ongoing capital projects, leasing related expenditures, and changes in key assumptions used in projecting likely price achievable through third-party asset sales. These key assumptions include indicators such as rental growth rates, leasing velocity and occupancy levels, as well as investment factors such as prevailing and projected investment capitalization and discount rates. The increase in value was largely the result of increased net operating income resulting from improved leasing occupancy levels as well as a decrease in the assumed capitalization rates as real estate investment markets continued to recover from the impacts of the recession and sub-prime crisis. See Note 12 to Paramount Predecessor’s historical combined consolidated financial statements.

As we will acquire all of the assets of four of the primary private equity real estate funds that we control (and their associated parallel funds), other than their interests in 60 Wall Street and a residual 2.0% interest in One Market Plaza, our future net change in unrealized gains will differ significantly from historical amounts as the accounting for the assets acquired from the funds that will contribute their property interests to us in connection with the formation transactions will change from investment company accounting to historical cost accounting. Future amounts will only reflect the realized and unrealized gains or losses of the investments of the private equity real estate funds that we will continue to manage following the formation transactions and any new funds that we may sponsor from time to time.

 

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On a pro forma basis, for the year ended December 31, 2013, realized and unrealized gains, net was $                 million.

Fee Income

Fee income increased by $3.4 million, or 15.0%, to $26.4 million for the year ended December 31, 2013 from $23.0 million for the year ended December 31, 2012. This increase was primarily attributable to higher construction management fees and property management fees aggregating $5.3 million associated with increased leasing activity in 2013 and higher financing fees of $0.6 million, partially offset by lower acquisition and disposition fees of $2.7 million due to a reduction in the aggregate amount of transactions executed in 2013 from the prior year.

On a pro forma basis, for the year ended December 31, 2013, fee income was $             million.

Other Income

Other income consists of charges to tenants for certain items such as overtime heating and cooling, freight elevator services and other similar items. Since our historical results include the results solely attributable to Waterview, we had no other income in the years ended December 31, 2013 and December 31, 2012 as there were no such services provided to tenants at the property.

On a pro forma basis, for the year ended December 31, 2013, other income was $             million. This reflects the other income from the 11 properties that we will account for using consolidated historical cost accounting upon completion of the formation transactions.

Operating Expenses

Operating expenses included in historical results are comprised of the cleaning, security, repairs and maintenance, utilities, property administration, real estate taxes, management fees and other operating expenses at Waterview as well as costs of providing certain leasing, property and construction management services to the portfolio of properties owned by Paramount Predecessor and the private real estate funds that it controls. Operating expenses increased by $0.8 million, or 5.1%, to $16.2 million for the year ended December 31, 2013 from $15.4 million for the year ended December 31, 2012, primarily due to higher real estate taxes at Waterview and increases in the cost of providing leasing services to the portfolio.

On a pro forma basis, for the year ended December 31, 2013, operating expenses were $                 million, reflecting the operating expenses from the 11 properties that we will account for using consolidated historical cost accounting upon completion of the formation transactions.

Depreciation and Amortization

Depreciation and amortization included in historical results was primarily attributable to Waterview. Depreciation and amortization increased by $0.5 million, or 4.7%, to $10.6 million for the year ended December 31, 2013 from $10.1 million for the year ended December 31, 2012. The increase was primarily due to a reduction in depreciation expense in 2012 from an adjustment to the tenant improvements and accumulated depreciation balances due to a refund received at Waterview, which did not recur in 2013.

On a pro forma basis, for the year ended December 31, 2013, depreciation and amortization was $                 million, reflecting the depreciation and amortization from the 11 properties that we will account for using consolidated historical cost accounting upon the completion of its formation transactions.

General and Administrative

General and administrative expenses increased by $5.1 million, or 18.1%, to $33.5 million for the year ended December 31, 2013 from $28.4 million for the year ended December 31, 2012. The 2013 and 2012

 

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amounts include approximately $5.5 million and $2.1 million, respectively, of expense related to the increased value of the marketable securities underlying deferred compensation plan obligations. Under this deferred compensation plan, participants are permitted to defer a portion of their income on a pre-tax basis and receive a tax-deferred return on these deferrals based on the performance of specific investments selected by the participants. We typically acquire, in a separate account that is not restricted as to its use, similar or identical investments as those selected by each participant. This enables us to generally match our liabilities to the participants under the deferred compensation plan with equivalent assets and thereby limit our market risk. The performance of these investments is recorded in interest and other income, which correspondingly includes approximately $5.5 million and $2.1 million related to this plan in 2013 and 2012, respectively. General and administrative expenses, net of these costs, increased by $1.7 million, or 6.3%, to $28.0 million in 2013 from $26.3 million in 2012. This was primarily attributable to an increase in salaries and related costs.

On a pro forma basis, for the year ended December 31, 2013, general and administrative expense was $                 million. This amount includes $                 million of expense related to our deferred compensation plan, which is entirely offset by income from the mark-to-market of the assets in the plan that is included in “Interest and other income.” Excluding this item, general and administrative expenses for the year ended December 31, 2013 were $                 million on a pro forma basis.

Profit Sharing Compensation

Profit sharing compensation represents a portion of fee income and real estate appreciation attributable to our private equity real estate fund business which is payable to certain management employees through profit sharing arrangements. These arrangements will cease upon the completion of the formation transactions and our future compensation structure will differ significantly from historical practice. Profit sharing compensation increased by $5.8 million, or 33.2%, to $23.4 million for the year ended December 31, 2013 from $17.6 million for the year ended December 31, 2012. This increase was primarily attributable to increases in the unrealized gains on the real estate investments held by our funds.

Other Expenses

Other expenses includes acquisition pursuit costs, fund formation costs and capital raising costs. Other expenses decreased by $2.0 million, or 29.5%, to $4.6 million for the year ended December 31, 2013 from $6.6 million for the year ended December 31, 2012. This decrease was primarily due to reduced costs associated with the formation of and capital raising for private equity real estate funds.

On a pro forma basis, for the year ended December 31, 2013, other expenses was $                 million.

Income from Partially Owned Entities

Income from partially owned entities is comprised of income from equity investments in 1325 Avenue of the Americas, 712 Fifth Avenue and 900 Third Avenue. We have included a detailed discussion of the results of operations of these properties, together with our other properties, under “—Results of Operations—Paramount Predecessor Property-Level Performance.” Income from partially owned entities decreased by $2.8 million, or 72.4%, to $1.1 million for the year ended December 31, 2013 compared to $3.9 million for the year ended December 31, 2012. This reduction was primarily due to a $1.7 million decrease attributable to our investment in 1325 Avenue of the Americas and a $1.1 million decrease attributable to our investment in 900 Third Avenue. The reduction attributable to our investment in 1325 Avenue of the Americas is primarily due to reduced net income at the property as a result of a decrease in rental rates received in connection with the renewal of a large specialty convention space lease in the lower floors of the building. The decrease attributable to our investment in 900 Third Avenue is primarily due to a reduction in the amount of distributions that we received from the property. See Note 4 of Paramount Predecessor’s historical combined consolidated financial statements. Following the formation transactions, we will own 100% of 900 Third Avenue and 1325 Avenue of the Americas. Accordingly, the results of operations of these properties will be included in our consolidated financial statements using consolidated historical cost accounting rather than the equity method of historical cost accounting.

 

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On a pro forma basis, income from partially owned entities, which is primarily attributable to our interest in 712 Fifth Avenue, was $                 million for the year ended December 31, 2013.

Unrealized Gain on Interest Rate Swaps

Unrealized gain on interest rate swaps decreased by $5.4 million, or 76.8%, to $1.6 million for the year ended December 31, 2013 from $7.0 million for the year ended December 31, 2012. This decrease was primarily attributable to a decrease in the length of remaining terms of the various swap instruments and an increase in the interest rate indexes to which rates are tied. These swaps all relate to the debt of certain private equity real estate funds that will contribute their property interests to us in connection with the formation transactions and will be repaid in full with the proceeds from this offering.

On a pro forma basis, for the year ended December 31, 2013, we had a $                 million unrealized gain on interest rate swaps relating to the mortgage debt associated with the 11 properties we will account for using consolidated historical cost accounting and the anticipated settlement of interest rate swap liabilities in connection with this offering.

Interest and Other Income

Interest and other income increased by $5.0 million, or 112.3%, to $9.4 million for the year ended December 31, 2013 from $4.4 million for the year ended December 31, 2012, primarily due to an increase of approximately $3.4 million of income related to the increased value of the marketable securities underlying deferred compensation plan obligations, which corresponded to the increase in general and administrative expense relating to these plan obligations, and an increase of approximately $2.1 million of interest income received from new investors in one of our private equity real estate funds in connection with their initial capital contributions.

On a pro forma basis, for the year ended December 31, 2013, interest and other income was $                 million. This amount includes $                 million of income related to our deferred compensation plan, which is entirely offset by expense from the mark-to-market of the liabilities in the plan that is included in “General and administrative expenses.” Excluding this item, interest and other income for the year ended December 31, 2013 was $                 million on a pro forma basis.

Interest Expense

Interest expense included in our historical results relates to interest incurred on the Waterview mortgage, the fund-level debt of the private equity real estate funds that we control and preferred equity in the joint venture holding 1633 Broadway. Interest expense decreased by $7.5 million, or 20.2%, to $29.8 million for the year ended December 31, 2013 from $37.3 million for the year ended December 31, 2012. This decrease was primarily due to the maturity of fund swap contracts which were then converted to lower floating interest rates, and lower average outstanding loan balances for 2013 as compared to 2012.

On a pro forma basis, for the year ended December 31, 2013, interest expense was $                 million, reflecting interest on the mortgage debt associated with the 11 properties that we will account for using consolidated historical cost accounting.

Provision for Income Taxes

Provision for income taxes increased by $4.0 million, or 57.9%, to $11.0 million for the year ended December 31, 2013 from $7.0 million for the year ended December 31, 2012. This increase resulted primarily from higher taxable income in 2013 from certain contingent fees which had been deferred from prior years, and a taxable gain on the sale of a property in 2013.

On a pro forma basis, for the year ended December 31, 2013, the provision for income taxes was $                 million.

 

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Comparison of Results of Operations for the Years Ended December 31, 2012 and December 31, 2011

The following table summarizes the combined consolidated historical results of operations of Paramount Predecessor for the years ended December 31, 2012 and December 31, 2011 (dollar amounts in thousands). As noted above, our future financial condition and results of operations will differ significantly from, and will not be comparable with, the historical financial position and results of operations of Paramount Predecessor.

 

     Year Ended December 31,  
     2012     2011     Change     % Change  

Revenues:

        

Rental income

   $ 29,773      $ 29,187      $ 586        2.0%   

Tenant reimbursement income

     1,543        1,004        539        53.7%   

Distributions from real estate fund investments

     31,326        15,128        16,198        107.1%   

Realized and unrealized gains, net

     161,199        533,819        (372,620     (69.8%)   

Fee income

     22,974        26,802        (3,828     (14.3%)   
  

 

 

   

 

 

   

 

 

   

Total Revenues

     246,815        605,940        (359,125     (59.3%)   
  

 

 

   

 

 

   

 

 

   

Expenses:

        

Operating

     15,402        14,656        746        5.1%   

Depreciation and amortization

     10,104        10,701        (597     (5.6%)   

General and administrative

     28,374        25,556        2,818        11.0%   

Profit sharing compensation

     17,554        78,354        (60,800     (77.6%)   

Other

     6,569        5,312        1,257        23.7%   
  

 

 

   

 

 

   

 

 

   

Total Expenses

     78,003        134,579        (56,576     (42.0%)   
  

 

 

   

 

 

   

 

 

   

Operating income

     168,812        471,361        (302,549     (64.2%)   

Income from partially owned entities

     3,852        5,448        (1,596     (29.3%)   

Unrealized gain (loss) on interest rate swaps

     6,969        (273     7,242        (2652.7%)   

Interest and other income

     4,431        1,887        2,544        134.8%   

Interest expense

     (37,342     (34,497     (2,845     8.2%   
  

 

 

   

 

 

   

 

 

   

Net income before taxes

     146,722        443,926        (297,204     (66.9%)   

Provision for income taxes

     (6,984     (42,973     35,989        (83.7%)   
  

 

 

   

 

 

   

 

 

   

Net income

     139,738        400,953        (261,215     (65.1%)   

Net income attributable to non-controlling interests in consolidated joint ventures and funds

     (137,443     (347,075     209,632        (60.4%)   
  

 

 

   

 

 

   

 

 

   

Net income attributable to equity owners

   $ 2,295      $ 53,878      $ (51,583     (95.7%)   
  

 

 

   

 

 

   

 

 

   

Rental Income

Rental income included in historical results is solely attributable to Waterview, which is the only property for which direct property operations are reflected in the historical combined consolidated financial statements of our predecessor. Rental income increased by $0.6 million, or 2.0%, to $29.8 million for the year ended December 31, 2012 from $29.2 million for the year ended December 31, 2011, due to consumer price index increases under the terms of the principal lease for space at Waterview.

Tenant Reimbursement Income

Tenant reimbursement income included in historical results is solely attributable to Waterview. Tenant reimbursement income increased by $0.5 million, or 53.7%, to $1.5 million for the year ended December 31, 2012 from $1.0 million for the year ended December 31, 2011. This increase resulted primarily from increases in real estate taxes at Waterview.

 

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Distributions from Real Estate Fund Investments

Distributions from real estate fund investments increased by $16.2 million, or 107.1%, to $31.3 million for the year ended December 31, 2012 from $15.1 million for the year ended December 31, 2011. This increase was primarily due to increases in property distributions from 900 Third Avenue and 31 West 52nd Street due to higher rental income.

Realized and Unrealized Gains, Net

Realized and unrealized gains, net decreased by $372.6 million, or 69.8%, to $161.2 million for the year ended December 31, 2012 from $533.8 million for the year ended December 31, 2011. This decrease was primarily attributable to the fact that as the economy stabilized in 2010 and 2011 after the fiscal crisis of 2009, real estate values rebounded. This, along with stronger leasing activity, resulted in improved real estate valuations through 2011. While real estate valuations continued to increase in 2012, they did so at a reduced pace as compared to 2011.

Fee Income

Fee income decreased by $3.8 million, or 14.3%, to $23.0 million for the year ended December 31, 2012 from $26.8 million for the year ended December 31, 2011. This decrease was primarily attributable to lower acquisition and disposition fees of $1.1 million, due to a reduction in the aggregate amount of transactions executed in 2012 and lower construction and property management fees of $1.0 million, related to tenant improvement construction from the prior year. Additionally, in 2011 we recognized a significant leasing commission related to our management of 745 Fifth Avenue. A comparable fee was not earned in 2012.

Operating Expenses

Operating expenses included in historical results are attributable to the cleaning, security, repairs and maintenance, utilities, property administration, real estate taxes, management fees and other operating expenses at Waterview, as well as, the costs of providing certain leasing and property and construction management services to the portfolio of properties owned by our predecessor and the private real estate funds that it controls. Operating expenses increased by $0.7 million, or 5.1%, to $15.4 million for the year ended December 31, 2012 from $14.7 million for the year ended December 31, 2011, primarily due to an increase in real estate taxes.

Depreciation and Amortization

Depreciation and amortization included in historical results is primarily attributable to Waterview. Depreciation and amortization decreased by $0.6 million, or 5.6%, to $10.1 million for the year ended December 31, 2012 from $10.7 million for the year ended December 31, 2011. This decrease was primarily due to a reduction in depreciation expense in 2012 from an adjustment to the tenant improvements and accumulated depreciation balances due to a refund received at Waterview.

General and Administrative

General and administrative increased by $2.8 million, or 11.0%, to $28.4 million for the year ended December 31, 2012 from $25.6 million for the year ended December 31, 2011. The 2012 amount includes approximately $2.1 million of expense related to the increased value of the marketable securities underlying deferred compensation plan obligations while the 2011 amount was reduced by approximately $1.0 million for losses attributable to such plan obligations. These amounts directly correspond to an increase in 2012 and a decrease in 2011 in interest and other income relating to the increased value of investments we own corresponding to participants’ investment elections under this plan. General and administrative expenses, net of these amounts, decreased by $0.3 million, or 1.1%, to $26.3 million in 2012 from $26.6 million in 2011.

 

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Profit Sharing Compensation

Profit sharing compensation decreased by $60.8 million, or 77.6%, to $17.6 million for the year ended December 31, 2012 from $78.4 million for the year ended December 31, 2011. The decrease from the prior year is due to significant profit sharing compensation paid in the year ended December 31, 2011 related to the purchase and subsequent sale of two joint venture interests in 1633 Broadway.

Other Expenses

Other expenses increased by $1.3 million, or 23.7%, to $6.6 million for the year ended December 31, 2012 from $5.3 million for the year ended December 31, 2011. This increase was primarily due to increased costs associated with the formation of and capital raising for private equity real estate funds in 2012.

Income from Partially Owned Entities

Income from partially owned entities is primarily comprised of income from equity investments in 1325 Avenue of the Americas, 712 Fifth Avenue and 900 Third Avenue. We have included a detailed discussion of the results of operations of these properties, together with our other properties, under “—Results of Operations—Paramount Predecessor Property-Level Performance.” Income from partially owned entities decreased by $1.6 million, or 29.3%, to $3.9 million for the year ended December 31, 2012 from $5.5 million for the year ended December 31, 2011. This decrease was primarily due to a $3.2 million decrease attributable to our investment in 1325 Avenue of the Americas, partially offset by a $1.1 million increase attributable to our investment in 900 Third Avenue. The reduction attributable to our investment in 1325 Avenue of the Americas is primarily due to a reduction in net income as the building went through a releasing period after the expiration of various leases. The increase attributable to our investment in 900 Third Avenue is primarily due to an increase in the amount of distributions that we received from the property in 2012. See Note 4 of Paramount Predecessor’s historical combined consolidated financial statements.

Unrealized Gain (Loss) on Interest Rate Swaps

Unrealized gain (loss) on interest rate swaps increased by $7.3 million to $7.0 million for the year ended December 31, 2012 from a loss of $0.3 million for the year ended December 31, 2011. This increase was primarily attributable to a decrease in the length of remaining terms of the various swap instruments and an increase in the interest rate indexes to which rates are tied.

Interest and Other Income

Interest and other income increased by $2.5 million, or 134.8%, to $4.4 million for the year ended December 31, 2012 from $1.9 million for the year ended December 31, 2011, primarily due to increases in interest rates and to a $3.1 million increase in the value of the marketable securities underlying deferred compensation plan obligations, which corresponded to the increase in general and administrative expense relating to these plan obligations.

Interest Expense

Interest expense increased by $2.8 million, or 8.2%, to $37.3 million, for the year ended December 31, 2012 from $34.5 million for the year ended December 31, 2011. This increase is primarily due to the fact that we issued and began recognizing interest on the preferred equity in July 2011. Accordingly, interest expenses in 2011 reflect a partial year of preferred equity interest while interest expense in 2012 reflects a full year.

Provision for Income Taxes

Provision for income taxes decreased by $36.0 million, or 83.7%, to $7.0 million for the year ended December 31, 2012 from $43.0 million for the year ended December 31, 2011. In 2011, we recognized a $91.2 million gain on sale of a 49% interest in 1633 Broadway. A comparable transaction was not realized in 2012.

 

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Results of Operations—Paramount Predecessor Property-Level Performance

As noted above, our private real estate funds’ investments in the nine properties that will be contributed to us by these funds in connection with the formation transactions are reflected on Paramount Predecessor’s combined consolidated balance sheets at fair value as opposed to historical cost, less accumulated depreciation and impairments, if any. In addition, Paramount Predecessor’s combined consolidated statements of income do not reflect revenues and other income or operating and other expenses from these properties. Instead, these statements of income reflect the change in fair value of these properties, whether realized or unrealized, and distributions received by these funds from their investments in these properties. The nine properties are as follows:

 

    1633 Broadway, New York, NY

 

    900 Third Avenue, New York, NY

 

    31 West 52nd Street, New York, NY

 

    1301 Avenue of the Americas, New York, NY

 

    One Market Plaza, San Francisco, CA

 

    Liberty Place, Washington, D.C.

 

    1899 Pennsylvania Avenue, Washington, D.C.

 

    2099 Pennsylvania Avenue, Washington, D.C.

 

    425 Eye Street, Washington, D.C.

Upon the consummation of the formation transactions, Waterview and Paramount Predecessor’s interests in 1325 Avenue of Americas, 712 Fifth Avenue and 900 Third Avenue will also be contributed to us. The results of Waterview are included in Paramount Predecessor’s historical combined consolidated financial statements using consolidated historical cost accounting, and the results of 1325 Avenue of Americas, 712 Fifth Avenue and a portion of our interest in 900 Third Avenue are included in Paramount Predecessor’s historical combined consolidated financial statements using the equity method of historical cost accounting. Additionally, as part of the formation transactions, we will also acquire the interests of certain unaffiliated third parties in 1633 Broadway, 31 West 52nd Street and 1301 Avenue of the Americas. Following the formation transactions, all of the contributed properties, or the Paramount Predecessor Properties, will be accounted for using consolidated historical cost accounting, with the exception of 712 Fifth Avenue, which will be reflected in our financial statements using the equity method of historical cost accounting.

In order to provide investors with more meaningful information regarding Paramount Predecessor’s historical results of operations, the following supplemental tables in this section summarize the combined historical property-level results of operations of the Paramount Predecessor Properties for the six months ended June 30, 2014 and 2013 and for the years ended December 31, 2013, 2012 and 2011 based on financial information included in Paramount Predecessor’s combined consolidated financial statements and Notes 3 and 4 thereto. This information does not purport to represent Paramount Predecessor’s historical combined consolidated financial information and it is not necessarily indicative of our future results of operations. For example, we will not own 100% of all of the Paramount Predecessor Properties or consolidate the results of operations of all of these properties (as noted above under “—Overview—Formation Transactions”) and, as a result, our results of operations going forward will differ from the property-level financial information shown below. However, in light of the significant differences that will exist between our future financial information and Paramount Predecessor’s historical combined consolidated financial information and the fact that we will account for our investment in one property using the equity method of historical cost accounting, we believe that this presentation will be useful to investors in understanding the historical performance of our properties on a property-level basis.

 

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Table of Contents

Paramount Predecessor Property-Level Results of Operations for the Six Months Ended June 30, 2014 and June 30, 2013

The tables below present the historical results of operations for each of the Paramount Predecessor Properties (dollar amounts in thousands) for 100% of the property. The Paramount Predecessor Properties have been grouped by those properties which will be accounted for using the consolidated historical cost accounting following the formation transactions and those Paramount Predecessor Properties that will be reflected in our financial statements using the equity method of historical cost accounting following the formation transactions.

 

    For the six months ended June 30, 2014   
   

1633
Broadway

   

900
Third 

Avenue

   

31 West
52nd
Street

   

1301 Ave.
of the
Americas

   

One

Market

Plaza(2)

   

Liberty

Place

   

1899

Penn.

Avenue

   

2099

Penn.

Avenue

   

425

Eye

Street

   

Waterview

   

1325 Ave.
of the

Americas

   

Total
Consolidated
Portfolio

   

712 Fifth
Avenue(1)

   

Total
Portfolio

 

Revenues

                           

Rental income

  $ 72,970      $ 17,764      $ 36,221      $ 53,749      $ 35,329      $ 3,729      $ 4,044      $ 76      $ 5,300      $ 15,464      $ 18,214      $ 262,860      $ 22,689      $ 285,549   

Tenant reimbursement income

    5,913        1,514        2,489        4,434        661        1,184        2,107        3        827        896        2,505        22,533        2,269        24,802   

Other income

    1,224        612        2,615        1,657        2,044        23        56        10        —          40        970        9,251        638        9,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

    80,107        19,890        41,325        59,840        38,034        4,936        6,207        89        6,127        16,400        21,689        294,644        25,596        320,240   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Building operating expenses

    26,879        8,083        11,517        25,688        13,734        2,168        2,605        2,223        2,904        4,550        11,036        111,387        10,378        121,765   

Related party management fees

    1,485        525        655        837        394        132        141        2        184        412        784        5,551        947        6,498   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    28,364        8,608        12,172        26,525        14,128        2,300        2,746        2,225        3,088        4,962        11,820        116,938        11,325        128,263   

Depreciation and amortization

    5,567        3,731        11,074        18,555        17,454        —          1,923        —          2,793        5,215        4,189        70,501        5,525        76,026   

General and administrative

    10        31        34        51        292        16        16        399        114        133        83        1,179        55        1,234   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Expenses

    33,941        12,370        23,280        45,131        31,874        2,316        4,685        2,624        5,995        10,310        16,092        188,618        16,905        205,523   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

    46,166        7,520        18,045        14,709        6,160        2,620        1,522        (2,535     132        6,090        5,597        106,026        8,691        114,717   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gain on interest rate swaps

    12,945        2,935        4,288        6,125        10,444        —          —          —          —          —          —          36,737        2,645        39,382   

Interest expense

    (25,625     (7,353     (11,069     (30,549     (26,818     (1,890     (2,257     (2,208     (2,520     (6,176     (5,575     (122,040     (7,286     (129,326

Unrealized depreciation on investment in real estate

    —          —          —          —          —          (489     —          (530     —          —          —          (1,019     —          (1,019
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before taxes

    33,486        3,102        11,264        (9,715     (10,214     241        (735     (5,273     (2,388     (86     22        19,704        4,050        23,754   

Benefit (provision) for income taxes

    —          —          —          —          —          (26     182        —          (2,315     —          —          (2,159     —          (2,159
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (loss)

    33,486        3,102        11,264        (9,715     (10,214     215        (553     (5,273     (4,703     (86     22        17,545        4,050        21,595   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments:

                           

Straight-line rent

    (7,287     554        (336     (6,700     (443     —          (219     —          1,175        90        (1,190     (14,356     (1,003     (15,359

Amortization of above-and-below market leases

    —          —          (9,773     (5,923     (914     —          (314     —          —          —          —          (16,924     —          (16,924

Related party management fees

    1,485        525        655        837        394        132        141        2        184        412        784        5,551        947        6,498   

Depreciation and amortization

    5,567        3,731        11,074        18,555        17,454        —          1,923        —          2,793        5,215        4,189        70,501        5,525        76,026   

General and administrative

    10        31        34        51        292        16        16        399        114        133        83        1,179        55        1,234   

Unrealized gain on interest rate swaps

    (12,945     (2,935     (4,288     (6,125     (10,444     —          —          —          —          —          —          (36,737     (2,645     (39,382

Interest expense

    25,625        7,353        11,069        30,549        26,818        1,890        2,257        2,208        2,520        6,176        5,575        122,040        7,286        129,326   

Unrealized depreciation on investment in real estate

    —          —          —          —          —          489        —          530        —          —          —          1,019        —          1,019   

Benefit (provision) for income taxes

    —          —          —          —          —          26        (182     —          2,315        —          —          2,159        —          2,159   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Adjustments

    12,455        9,259        8,435        31,244        33,157        2,553        3,622        3,139        9,101        12,026        9,441        134,432        10,165        144,597   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash NOI

  $ 45,941      $ 12,361      $ 19,699      $ 21,529      $ 22,943      $ 2,768      $ 3,069      $ (2,134   $ 4,398      $ 11,940      $ 9,463      $ 151,977      $ 14,215      $ 166,192   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Ownership

    100.0%        100.0%        64.2%        100.0%        49.0%        100.0%        100.0%        100.0%        100.0%        100.0%        100.0%          50.0%     

 

(1) Represents properties which will be reflected in our financial statements using the equity method of historical cost accounting following the formation transactions.
(2)  In contrast to the Paramount Predecessor, the operations of 75 Howard were removed due to its sale to RDF on March 14, 2014. Net loss and Cash NOI of 75 Howard for the six months ended June 30, 2014 were $(2,577) and, $1,054, respectively.

 

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Table of Contents
    For the six months ended June 30, 2013  
    1633
Broadway
    900
Third 

Avenue
    31 West
52nd

Street
    1301 Ave.
of the
Americas
    One
Market
Plaza(2)
   

Liberty

Place

    1899
Penn.
Avenue
    2099
Penn.
Avenue
    425
Eye
Street
    Waterview     1325 Ave.
of the
Americas
    Total
Consolidated
Portfolio
    712  Fifth
Avenue(1)
    Total
Portfolio
 

Revenues

                           

Rental income

  $ 65,303      $ 16,477      $ 37,584      $ 49,059      $ 36,772      $ 4,401      $ 5,173      $ 468      $ 5,039      $ 15,171      $ 16,226      $ 251,673      $ 19,579      $ 271,252   

Tenant reimbursement income

    7,158        1,341        2,403        5,143        935        1,256        2,607        4        7        819        2,479        24,152        2,202        26,354   

Other income

    1,008        367        633        1,183        3,329        50        94        40        706        17        666        8,093        762        8,855   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

    73,469        18,185        40,620        55,385        41,036        5,707        7,874        512        5,752        16,007        19,371        283,918        22,543        306,461   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Building operating expenses

    27,519        8,016        11,212        25,232        13,880        2,094        3,268        2,283        2,647        4,495        10,996        111,642        10,078        121,720   

Related party management fees

    1,421        475        633        821        427        139        179        12        184        403        702        5,396        825        6,221